There's My Two Cents: Explaining The Fannie Mae And Freddie Mac Madness

Okay, so you've probably heard about Fannie Mae and Freddie Mac being taken over by the government by now. If you're like me, you didn't really understand how all that worked, but understood very clearly that it was a big deal. From what I've seen, read, and heard, here are the basics of what those two companies were, how they got into trouble, and where we go from here.

The short version is this: Congress, in an effort to allow more low-income people (many of whom were minorities) to get into nicer homes, essentially created conditions years ago where loans were granted to people who didn't qualify. This was primarily driven by Democrats, but Republicans were somewhat complicit, as well. For more details, I defer to Rush Limbaugh, who recently talked at length about this subject on his program. This is a bit long, but a great synopsis of what has brought us to the current problem:

Long before the subprime crisis, the Bush administration not only warned of impending calamity, they had a plan to avert it. Fannie Mae, under the leadership of Clinton appointee Franklin Raines, who's now an Obama insider, economic advisor, and Freddie Mac, had issued over one-and-a-half trillion dollars in loans, but their accounting was in shambles. The agency that Congress set up to monitor them had failed to rein them in, so on September 11, 2003 -- this is five years ago -- President Bush proposed the agency that Congress set up to monitor them. He proposed what the New York Times called the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis. The New York Times called it that. Central to Bush's proposal was creating a new agency to oversee Fannie and Freddie.

This is the New York Times, April 1997. "The chairman of the House Banking Committee called today for an investigation into the investment practices of Freddie Mac, the Congressional-chartered, shareholder-owned mortgage finance company, saying it had abused the preferential borrowing terms it enjoys through its ties to the Government. Representative Jim Leach, Republican of Iowa, said Freddie Mac -- short for the Federal Home Loan Mortgage Corporation -- had borrowed $125 million in the bond markets on Monday at 6.99 percent, an interest rate reflecting the market's belief that the Treasury had effectively guaranteed repayment. Freddie Mac, whose charter calls for it to invest primarily in mortgages and mortgage securities, then used the $125 million to buy corporate bonds issued by the Philip Morris Companies with identical 10-year maturities yielding 7.68 percent. Mr. Leach said that such an investment strategy might be legal, but that it was not appropriate. 'Freddie Mac was established by an act of Congress for a specific purpose: to advance home ownership, not to facilitate tobacco sales,' he said. 'What Freddie Mac's action amounts to is taxpayer subsidization of corporate arbitrage and, implicitly, the tobacco industry.'''

Even though Bush proposed a new oversight committee, the Democrats said no way. They cried foul. Barney Frank said these two entities, Fannie Mae, Freddie Mac, they're not facing any kind of financial crisis. Barney Frank, "They're not facing any kind of financial crisis." Melvin Watt, Democrat, North Carolina, he agreed. He accused Bush of wanting this oversight committee so he could weaken the bargaining power of poorer families.

Now, [here] is Daniel Mudd, and this is his swearing-in ceremony for the Congressional Black Caucus in 2005, and he's the interim CEO of Fannie Mae at the time, Daniel Mudd. Now, this is after Franklin Raines had been kicked out. He finally couldn't look the other way at all the corruption. He still walked out of there with a hundred million dollars in bonus and salary over seven or eight years. The point is, this problem started back in the nineties with the Clintons demanding the end of redlining. That's really where this starts, the end of redlining. Redlining was a bogus charge that lending institutions would look at the race of the applicant and just refuse on the basis of race, not on the basis of anything else, it was racist, redlining was racist, and I don't doubt that it happened in some cases. So the fix for it, always an overstep, it's always an overreach. So to extend the American dream to everybody, they said, "Get rid of redlining and loan money to people that can't pay it back. That's the way we're going to fix it." It's sort of like affirmative action. We're going to not only address the grievances of the past, we're going to go so far beyond addressing the grievances, we're going to create new ones on the other side of the stick. So here's the swearing-in ceremony for the Congressional Black Caucus, members of Congress and the Interim CEO of Fannie Mae shows up to speak to them.

Right Truth has a more complete set of those two Democrats quotes:

"These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis," said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. "The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing."

Representative Melvin L. Watt, Democrat of North Carolina, agreed. "I don't see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing," Mr. Watt said.

As you can plainly see, the main thrust of this effort was to allow low-income people (mostly minorities) to get loans for houses that they couldn't actually afford, and the Democrats were hell-bent on preserving that status quo. In an effort to be politically correct, Fannie Mae and Freddie Mac (and our elected leaders) engaged in irresponsible lending policies and practices. For more information on how Democrats and the Clinton administration, in particular, rammed these reckless policies into the financial system through the Community Reinvestment Act, check out this report on The Trillion-Dollar Bank Shakedown.

Michael Reagan breaks it down this way:

In saner days, banks designated certain areas as no-loan zones — depressed neighborhoods where lending money to potential home buyers was not just a risky investment, but a certain future foreclosure.

Critics of the practice called it "redlining," and President Clinton and his chums on Capitol Hill decided that banks should no longer act like banks and lend money only to home buyers who could afford to handle the monthly payments. Now all bets would be off and people not the least bit creditworthy — and speculators — would be entitled by law to obtain mortgages even when it was obvious they couldn't afford to handle them.

Enter those now infamous quasi-government banking instruments known as Fannie Mae and Freddie Mac, which poured fresh money into the banking system by buying mortgages from banks. Over the long haul, they managed to load up their portfolios with billions upon billions of dollars of risky mortgage paper that banks had been forced to offer and then dumped on them.

The scandal of Fannie Mae and Freddie Mac dwarfs the Enron debacle. In Enron, people went to jail. With the Fannies, some just walked away with millions.

The collapse of Lehman Brothers can be blamed on Fannie Mae and Freddie Mac, the two big mortgage banks that the Feds recently bailed out with big bucks. As Fox News has pointed out, they used huge lobbying budgets and political contributions to keep regulators off their backs.

In addition to setting up some dangerous precedents and ignoring basic economic warnings, a number of politicians (and their friends) got filthy rich off the backs of these low-income people through various corrupt means, which helped perpetuate the problem. Let's look at some of those who walked away with millions:

According to the Center for Responsive Politics, the top three U.S. senators getting big Fannie and Freddie political bucks were Democrats, and No. 2 was Sen. Barack Obama, who as Fox noted had only been in the Senate four years but still managed to grab that No. 2 spot ahead of longtime colleagues John Kerry and Chris Dodd, the chairman of the Senate Banking Committee.

According to Fox, Fannie and Freddie were where big-time Washington Democrats went to work and pocketed millions. Franklin Raines, Clinton's White House Budget Director, ran Fannie and collected $50 million.

Jamie Gorelick, an official in Clinton's Justice Department — the woman who built the "wall" that prevented the FBI from targeting terrorists before 9/11 — worked for Fannie Mae and took home $26 million. Big-time Democrat Jim Johnson, who headed Obama's VP search committee, also hauled in millions from running Fannie Mae.

Incidentally, Gorelick was also the person who devised that infamous wall preventing information sharing between law enforcement agencies that ultimately led to the 9/11 attacks being successfully carried out. She's a winner, isn't she?

Anyway, when Bush tried to correct the Fannie/Freddie situation in 2003 before it became an actual crisis, the Democrats in Congress killed his efforts because it was mostly Democrats who were the primary beneficiaries (both the leaders getting rich, and the poor people getting the sweetheart loans).

Now, fast-forward to today. The federal government is bailing out these two colossal failures based on liberal policies, and there's a lot of talk about more regulation. Larry Kudlow and Maurice Hank Greenberg point out the problem with simply adding more regulation in some recent interviews:

GREENBERG: What is regulation? You can't replace management with regulation. Management is still responsible in the final analysis. If you do the right risk management and you have the right controls, then regulation is not going to make a difference there. If you have poor management, you can have all the regulation in the world and that's not going to change anything. And so, you know, my guess is that the problems that have come about have been management problems more than regulatory.

KUDLOW: The Community Reinvestment Act, which was passed in the mid-nineties, which was extended in the early 2000s, pushed these lenders to make low-income loans --
SCARBOROUGH: You cannot blame this on low-income people --
KUDLOW: No, I'm --
SCARBOROUGH: -- that are getting a house. You say poor people have caused this crisis?
KUDLOW: I didn't say -- listen to what I'm saying. Not poor people. Members of Congress, who are rich people. But their liberal guilt consciences forced banks --
SCARBOROUGH: Okay.
KUDLOW: -- and lenders to make lousy substandard loans --
SCARBOROUGH: You're saying loans to poor people -- then let me rephrase --
KUDLOW: Not everybody is -- is -- can afford a home, Joe, some people --
BRZEZINSKI: And they should be told that.
KUDLOW: Thank you, Mika, thank you.

That was the problem. These organizations were already under a ton of regulation, and that didn't prevent this corruption from happening. There's no amount of regulation that will prevent this abuse if the people in power are willing to ignore those regulations.

The problem was government, and the problem remains government.

So, where does that leave us now? Well, logically speaking, one first has to understand the problem if one intends to fix it, right? Let's look at the two Presidential candidates to see how they fare.

Did Barack Obama see the impending crisis? Did he take steps to prevent it? No. Not only did he not help correct the problem, he benefitted mightily from it:

Senator Obama talks a tough game on the financial markets but the facts tell a different story. He took more money from Fannie and Freddie than any Senator but the Democratic chairman of the committee that regulates them. He put Fannie Mae's CEO who helped create this disaster in charge of finding his Vice President. Fannie's former General Counsel is a senior advisor to his campaign.

Following standard Democrat precedent, Obama utilized this corrupt system to its full extent. Remember, too, that he's been in the Senate for less than one term, and he's still managed to accept more money from Fannie/Freddie than all but one other Senator! Now, be honest...what do you think are the chances that he'll actually reform this system? Personally, I'm guessing it's a percentage somewhere between 1 and negative 1.

Another big bailout that happened recently was with the insurance giant, AIG. What did Obama think about that? First, he had no idea what to think about it. Then, he posted a position on his website that incorrectly identified the company, calling it "American Insurance Group" rather than its correct name, "American International Group". Now, it's no big deal for you and I to make that mistake, but when we're talking about a government action impacting hundreds of billions of dollars and millions of lives, don't you think that the President should at least know the name of the players involved? If he can't get that right, can we really trust him to get the hard stuff -- like actual solutions -- right? Nevertheless, he insists the problems are the result of Bush's failed policies, and points the finger of blame at Republicans, knowing that the media isn't likely to correct his bald-faced inaccuracies.

So what's Obama's plan for stabilizing our current financial shakiness in general? Democrat Senate Majority Leader Harry Reid recently confessed that Democrats didn't know what to do about this financial crisis, so they were heading out of town for vacation. Apparently, Obama doesn't know what to do, either, because...

...he doesn't have a plan. He said it himself.

He's going to take a few more days to think about it, and wait for the Fed and Treasury department to reveal their plans first. How's that for decisive action? But don't worry, he's assured us that his decision will be based on these four principles:

"First, we cannot lose sight that we are in the midst of a broad economic crisis that also requires immediate action to create jobs and help support distressed homeowners and communities.

Second, any taxpayer-funded support must have as its focus protecting our nation's long-term interest in a stable financial market and a growing economy rather than rewarding particular companies or the imprudent decisions of borrowers or lenders.

Third, this plan must be temporary and coupled with tough new oversight and regulations of our financial institutions.

Finally, this plan should be part of a globally coordinated effort with our partners in the G-20. We are facing a global financial crisis and the United States can take a leadership role in coordinating a global response to the present crisis, as well as greater regulatory cooperation and alignment to prevent future crises."

If anyone can find a shred of actionable planning in there, please point it out to me. In addition to shamelessly admitting he's going to copy someone else's plan, Obama again shows his stripes as a globalist rather than an America-first man. While it is undeniable that America's actions will have a global impact, I think it is way off base to suggest that we should hand over any regulatory authority to anyone outside our nation's borders. This guy is dangerous, for many reasons.

Now, let's examine John McCain.

John McCain joined a second attempt at correcting the building problem of Fannie Mae and Freddie Mac in 2005 by co-sponsoring the Federal Housing Enterprise Regulatory Reform Act of 2005, S. 190. At the time, he offered the following warning:

If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.

Who says McCain doesn't know anything about the economy? He was dead on with this. Also, it should be pointed out that this was the second time in two years that Republicans attempted to push through meaningful reform of this impending problem, but Democrats -- including Obama -- again stood in the way.

Also, McCain has called on the federal government to stop bailing out failed financial institutions, calling instead for "the Fed [to] get back to what he called 'its core business of responsibly managing our money supply and inflation.'" He offers this plan for economic recovery:

First, to deal with the immediate crisis, I will lead in the creation of the Mortgage and Financial Institutions trust — the MFI. The underlying principle of the MFI or any approach considered by Congress should be to keep people in their homes and safe guard the life savings of all Americans by protecting our financial system and capital markets. This trust will work with the private sector and regulators to identify institutions that are weak and fix them before they become insolvent.

Second, I will propose and sign into law reforms to prevent financial firms from concealing their bad practices.

Third, we need regulatory clarity. The lack of transparency in our financial markets went unnoticed by the regulatory agencies scattered throughout Washington charged with protecting the common good. We've got the SEC, the FDIC, the CFTC, the SIPC, the OCC, the Fed. At best, this confusing assortment of regulators and institutions was egregiously lax in carrying out their responsibilities. At worst, they engaged in the old Washington game of guarding their bureaucratic turf, instead of safeguarding the public interest and protecting investors.

Many in the financial services industry also either forgot or neglected their duty to act ethically and honorably. This shortcoming was aided and abetted by the creation of financial instruments that allowed lenders to escape any responsibility for the risk of their loans. In the past, lenders had to pay a price if they made a bad loan. Today, Fannie Mae and Freddie Mac worked with Wall Street to bundle together all these dicey subprime loans and then pushed them off on investors who didn't have the tools of transparency needed to assess or even understand the risk.

Fourth, we must ensure that consumers and investors are protected. Our regulatory system must protect consumers and investors by punishing individuals who engage in fraud, break contracts, or lie to customers — like the predatory lenders who know you can't afford an adjustable rate mortgage, but mislead you into signing one. These actions are criminal and the people who commit them should be behind bars.

Fifth, in cases where failing companies seek taxpayer bailouts, the Treasury Department will follow consistent policies in deciding whether to guarantee loans. It must have well developed remedies for a financial crisis. With billions of dollars in public money at stake, it will not do to keep making it up as we go along.

Finally, the Federal Reserve should get back to its core business of responsibly managing our money supply and inflation. It needs to get out of the business of bailouts. The Fed needs to return to protecting the purchasing power of the dollar. A strong dollar will reduce energy and food prices. It will stimulate sustainable economic growth and get this economy moving again.

While McCain is also calling for more regulation, that's only a part of his plan. He's actually proposing real actions that would have real impact on real situations. McCain also correctly ties America's overall financial stability with economic policies that encourage real growth:

I will not raise your taxes on income or investments. And we will simplify the tax code so people can understand it and do their tax returns themselves.

I will give every family a $5,000 credit to buy their own health insurance policy and let them chose their own doctor. This will make insurance affordable to every American.

I will double the child exemption from $3,500 to $7,000 to help families pay for the rising cost of living.

Under my plan, a married couple with two children making $35,000 will get $5,000 to pay for health insurance and additional medical expenses. This family would get another $1,050 from my child exemption. That adds up to over $6,000. That is a lot more than what any hardworking middle class family, gets under the Obama plan.

Business taxes will be cut from the second highest in the world at 35 percent to 25 percent. Tax incentives will spur investment in new plants and equipment. Research and development incentives will keep companies on the cutting edge of their industries. Healthcare costs will diminish. Companies will stop sending jobs overseas to low-cost, low-tax countries and start creating jobs here in America.

I will expand markets for our goods and services. A one in five of all jobs in this country are linked to world trade. In five states alone Pennsylvania, Ohio, Michigan, Wisconsin and Colorado over 5 million jobs depend on trade. My economic recovery plan will create millions of jobs in America instead of driving them overseas.

I will adopt an "all of the above" energy policy which expands our use of oil, natural gas, clean coal and nuclear facilities. We will embark on a national mission to build an alternative energy base, creating millions of new jobs. We will create the most diversified energy economy in the world. And, I will return to the American economy the $700 billion dollars we send overseas every year to buy oil.

My opponent offers a very different economic future. He has continuously shifted his position on taxes. At the beginning of this campaign he promised to raise taxes on your savings and investments. He said he won't raise taxes for most people but he has voted 94 times in his short Senate career for tax increases and against tax cuts. He said he would only tax the rich, but he voted this year to raise taxes on those making just $42,000. Senator Obama has simply not given Americans good reason to trust him with your tax dollars.

My opponent is against lowering taxes on businesses which are the second highest in the world. He will impose mandated health insurance on businesses that would cost up to $12,000 per employee. He opposes free trade. He also wants to take away the fundamental right of workers to have a secret ballot when voting to be part of a union.

Now is not the time for these destructive policies that will cripple business growth, destroy jobs and hurt the middle class. Now is the time to take action to address this crisis and take action to put our economy back on a path of growth.