Doom friend and former long-time Fannie Mae Chief Lobbyist Bill Maloni has once again given us permission to re-post his most recent blog article. New readers who may have been sent here through a certain e-mail spam campaign might like to vary their diet with a passionate piece by a knowledgeable observer with a different viewpoint. I happen to disagree with nearly all of these viewpoints, but I’ve come to appreciate his deep knowledge of the political background of this issue and he deserves Doomers’ close attention.
“Barack Obama was on Dallas’ grassy knoll–and not as a 2 year old kid–but in his current personage and holding a smoking rifle. He’s right there, look!”
Sounds pretty silly, right? But it is no less absurd than a ton of things being hard sold around the country linking Obama to Fannie Mae or trying to blame Obama and Fannie for the subprime mess which has sunk so many financial institutions and swirled and flushed our national economy downward.
Circulating these lies either is a group of diehard GSE haters–who don’t realize that they have succeeded in driving a wooden stake through Fannie’s and Freddie’s tickers–or, as is more likely, some “MMMs,” (Mischief Makers for McCain).
This fact came home to me this past week, when last Sunday I drove to Pittsburgh on some family matters, returning on Tuesday, and listened to a good bit of “talk radio,” mostly with conservative hosts from Limbaugh to a half dozen locals across Pennsylvania and in Maryland.
Again and again, I heard the same anti-Fannie slurs, the dated Maxine Waters and Barney Frank audio snippets, and the same erroneous charges, all winding up trying to lionize John McCain and blame Barack Obama and the Democrats for all things “Fannie Mae and Freddie Mac,” the failure of the residential real estate and everything else bad in the US markets.
ATTACKING THE GSEs
In the attack mode, these disparate voices complained about Fannie’s housing goals, linking them to subprime (not true), 100% down payments, growing minority homeownership rates, corporate earnings, excessive executive compensation, and much more. Even owning a home seemed to draw complaints and, in their conservative view, shouldn’t have been an option for some of “those people” whom the GSEs financed.
When I got back to town, coincidentally, friends sent a propaganda piece these groups are using, while a reporter–who regularly gets the front page of his national newspaper–told me that twice in the week, he had received emails inviting to go to websites carrying the same sort of trash. “Shot in the Fannie Mae”—a document holding many of these lies–was like reading the “Elders of Zion” or the “The best of Joseph Goebbels,” except the anti-GSE tome had tons of typos.
Today’s blog will push back at that garbage and try and show that, while Fannie Mae (and Freddie Mac) hardly are blameless regarding their own plight, “Democrats” had very little to do with the GSEs demise or the subprime woes which brought our national mortgage markets and the national economy to the point where it needed a $700 Billion red, white and blue cash infusion.
Fannie’s and Freddie’s problems were caused by Fannie and Freddie officials gobbling up subprime securities for their portfolios. Period, end of story. Everythign else is just “color.” (This crucial point now has been recorded in today’s Sunday New York Times, by reporter Charles Duhigg.[1] With pride, I’ll note, my largely unchanged blog draft was finished on Friday, Oct.3.)
EXIT FANNIE D’S, ENTER FANNIE R’S
The Right likes to blame the congressional Democrats for Fannie’s problems, noting also the high profile individual D’s, notably Jim Johnson, Frank Raines, and Jamie Gorelick, who held top jobs at Fannie Mae, as further evidence of some partisan evidence. The long time R culture at Freddie seems to earn a pass.
Let me throw a little rock salt on this snow.
In point of fact, one could point to subprime decisions made by Fannie “Republicans” and decisions made by the Bush Administration as causing much of Fannie’s financial ills and perpetuating other elements of it.
Suffice to say that Raines was the last one of those three individuals to leave Fannie Mae in December, 2004. The company then was turned over to Dan Mudd, a former GE Asian operations exec whom Raines had hired. Mudd, a life long Republican (and later a McCain supporter), firmly took hold of the company in 2005, introducing his own priorities, one of which later became voluminous subprime mortgage security purchases.
Indeed, in the Mudd inner circle, there was very little direct Democratic influence, as his top assistant and his number one legislative strategist and chief lobbyist both were long time R’s with extensive GOP networks on the Hill and inside the Administration.
But, it was Dan Mudd’s subprime business decisions which killed the company, not his and the company’s growing links with the GOP and dwindling ties with congressional Democrats.
Both the Wall Street Journal (9-9-2008) and the Washington Post (8-19-2008) point out that business decisions made specifically in 2006 and 2007, on Mudd’s watch, were the devastating catalyst.
The purchase of billions of dollars of low quality subprime securities and “Alt A” loans (below A quality) were the culprit. By the second quarter of 2008, those bad loans had gone so sour that the company reported these products produced 60% of Fannie’s credit losses, while only representing 11% of the company’s mortgage portfolio.
AND THEN THE BUSHIES DECREED…..
However, looking deeper, it is noteworthy to see what the Bush Administration did before they chose “conservatorship” two months ago for the GSEs.
In 2004, the Bush Administration pushed the “ownership society” and lauded Fannie’s and Freddie’s work to achieve those homeownership ends.
In 2005, via regulation, Bush’s HUD upped the Fannie and Freddie housing goals to further enhance homeownership. (Source: Bloomberg.)
In the 2005 rule making process leading to jacking up the goals, HUD wrote:
“The GSEs state of the art technology, staff resources, and share of the total conventional conforming market, and financial strength strongly suggest that they have the strength that they have the ability to lead the industry in making home purchase credit available for low-income families and underserved neighborhoods.” (Source: HUD regulation, during rulemaking process.)
Indeed, the Bush Administration, as recently as six month ago, pushed the companies to buy more mortgages and specifically more risky mortgages.
Here is what the solons at OFHEO wrote, this spring, when they lowered the capital requirements they recently had increased.
“Simply put, fully implemented will make available to the Enterprises sufficient capital to permit them to purchase or guarantee about $2 Trillion in mortgages and mortgage backed securities, That support will be there not just for the Enterprises’ traditional conventional market but also for loan modifications, the subprime market, and the temporary jumbo conforming market.” (Source: OFHEO statement, March 19, 2008.)
THE CORONER OPINED, “THE DNA IS GOP!”
But, it was the subprime toxic poisons–knowingly purchased by the GSEs– that killed them as privately owned companies.
Thoughtful or aggressive regulation could have stopped those purchases at Fannie/Freddie and other investors throughout the financial services community had there been anyone with enough guts to blow the regulatory whistle.
The Bush Administration affirmatively refused to regulate the mortgage bankers and mortgage brokers who generated the subprime loans. It raised no issue with heavily regulated banks which bought some of the worst mortgage companies.
Yet, it was the Bush SEC, Bush OFHEO, Bush nominee running the Fed, the Bush Counsel of Economic Advisors, and other Bush regulatory appointments who either missed Wall Street’s greedy subprime creations–which those same investment banks sold to financial institutions all over the world—or just saw them as divine GSE retribution since those loans were coming out of a set, had they been conventionally financed, would otherwise had gone to Fannie Mae or Freddie Mac.
Whatever the case, no official in the Bush loop said much about the subprime scourge. (Of course, much of that most of the Bushies were busy subverting if not shredding the Constitution.)
Officials at Indy Mac, WAMO, Wachovia, First National of Nevada, Bear Stearns, Merrill Lynch, Countrywide, Lehman, Fannie and Freddie and hundreds more bought the poison and most paid the price, unfortunately bringing down much of our economy with them.
How many Democrats walked those executive offices? And, unless the GOP wants to rewrite history, the Democrat didn’t control Congress in this decade, until 2006, and then the biggest thing they did was to approve legislation creating a stronger GSE regulator and giving Henry Paulson the tools to takedown both companies on “Smashdown Sunday.”
Fannie’s Board of Directors had several nationally prominent Republicans serving on it, during this time, including Ken Duberstein, former Reagan Chief of Staff and currently and adviser to John McCain (Duberstein recently resigned from the Fannie Board); Steve Friedman (Bush National Economic Adviser); Fred Malek; and Ann Korologos (Labor Secretary for Ronald Reagan).
Sorry, McCain Campaign, George W. Bush, WSJ, Peter Wallison, Chuck Calomiris, Rush Limbaugh, and hundreds of others with a media forum, you’re spinning,
Where can anyone—except the haters, the liars, and the right wing nuts–find the “Democrats” in all of this, whom the conservatives blame so much, in anything more than a cheerleading role? They just aren’t there for the blaming.
As I have written before, the GOP’s DNA is all over the subprime mess and the trillions of dollars and untold pain, suffering and dislocation, economically and spiritually that it is costing our nation.
I just hope that any voters as well as other thoughtful people–who encounter this hateful effort to politically scapegoat Fannie and Freddie–have the facts to refute it.
________________________
Notes and References
[1]: A link to the Duhigg article and some perspective can be found in my comment here.
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I realized a long time ago that the ambitions of any politician exceeded my pocketbook and that their dedicated attackers / defenders either have a few screws loose or bacon to save. Igor says: burn
Oh lovely — the chief lobbyist for Fannie Mae is defending Fannie Mae?
The “GSE” institutions never should have existed in the first place — they placed taxpayers on the hook for failed political machinations and for irresponsible borrowers.
Any doubts? Then youre not paying attention to the phrase “$700 billion bailout” that’s been in the headlines for 2 weeks.
profnickd -
Yes it’s all that, but …
I think the deeper story is that the GSEs represent America finally being on the hook for the Vietnam War. Lyndon Johnson helped finance the war by selling Fannie (then a New Deal legacy government department) to the private sector. The ambiguity of an “implicit guarantee” worked just like a monumental off-balance-sheet vehicle.
F&F had their own humongous off-balance-sheet vehicles — QSPEs. It was on July 7, 2008, after the Lehman analyst’s remarks on QSPE reform, that the markets realized that Fannie and Freddie would have to consolidate those back onto their balance sheets. Then foreign central banks started dumping agencies. That forced the F&F quasi-nationalization and what is now a quasi-explicit guarantee for agencies; however …
After the GSE bailout, some incautious OMB droid uttered the opinion, “Yeah, of course agencies are on the government’s books now.” That lasted about 10 minutes when it was denied, so that the consolidation / nationalization of Fannie & Freddie is still horribly ambiguous.
It’s as if agencies were a huge “SIV” and the government was a huge bank that is now “backing” the “SIV,” but has not yet consolidated the thing. Originally it contained the bill for Vietnam, but if you look at foreign central bank purchases of agencies between ’02 and now, you’ll see that this vehicle is bearing the expense of Afghanistan and Iraq, too.
Consolidate GSE debt back onto America and the full fiscal impact of 40 years of overseas military operations comes into clear focus on the government’s own balance sheet. This is why there is such a furious effort to try to unscramble the GSE egg without taking it back as the government department it was for the first 30 years of its existence.
I have to agree with profnickd, this guy is chief lobbyist and loves to use terms like “bushies”. Doesn’t sound like much of a credible source to me.
Not to mention, the whole post is written in a tone of desperation, and contradicts many things I’ve read for the past 4 years (across many different sources). Perhaps my memory is failing me today, but I think he needs a major fact check.
And, I had to laugh last night as the Maverick tried to blame democrats for this. The blame game is getting old, it’s really quite reactive and unproductive.
http://www.washingtonpost.com/wp-dyn/content/article/2008/02/13/AR2008021302783.html