President Bush Tried to Rein In Fan and Fred

by Crocker on January 8, 2009, 4:08 pm

in Economics,Politics

That’s the title of an op-ed penned by the Evil Omnipresence himself, Karl Rove, in today’s Wall Street Journal. Rove provides a detailed chronology of administration attempts to impose regulatory discipline on the two GSEs. The poisonous irony, of course, is that it was the agencies themselves – in coordination with Congressional Democrats – who worked to derail any effective oversight, even though the two entites were, in effect, running a giant hedge fund.

The largely unreported story is that to fend off regulation, the GSEs engaged in a lobbying frenzy. They hired high-profile Democrats and Republicans and spent $170 million on lobbying over the past decade. They also constructed an elaborate network of state and local lobbyists to pressure members of Congress.

When Republican Richard Shelby of Alabama, then chairman of the Senate Banking Committee, pushed for comprehensive GSE reform in 2005, Democrat Sen. Chris Dodd of Connecticut successfully threatened a filibuster. Later, after Fannie and Freddie collapsed, Mr. Dodd asked, “Why weren’t we doing more?” He then voted for the Bush reforms that he once called “ill-advised.”

But Mr. Dodd wasn’t the only Democrat to heap abuse on the Bush reforms. Rep. Barney Frank of Massachusetts defended Fannie and Freddie as “fundamentally sound” and labeled the president’s proposals as “inane.” He later voted for the reforms. Sen. Charles Schumer of New York dismissed Mr. Bush’s “safety and soundness concerns” as “a straw man.” “If it ain’t broke, don’t fix it,” was the helpful advice of both Sen. Thomas Carper of Delaware and Rep. Maxine Waters of California. Rep. Gregory Meeks of New York berated a Bush official at a hearing, saying, “I am just pissed off” at the administration for raising the issue.

Democrats had ready allies among lenders accustomed to GSEs buying their risky mortgages. For example, Angelo Mozilo, CEO of Countrywide Financial, complained that “an overly cumbersome regulatory process” would “reduce, or even eliminate, the incentives for the GSEs and their primary market partners.”

And the more that the administration tried to impose discipline, the more debt Fred and Fan bought.

It took Fannie and Freddie over three decades to acquire $2 trillion in mortgages and mortgage-backed securities. Together, they held $2.1 trillion in 2000. By 2005, the two GSEs held $4 trillion, up 92% in just five years. By 2008, they’d grown another 24%, to nearly $5 trillion. They held almost half of all American mortgages.

The more the president pushed for reform, the more they bought. Peter Wallison of the American Enterprise Institute and Charles Calomiris of the Columbia Business School suggest $1 trillion of this debt was subprime and “liar loans,” almost all bought between 2005 and 2007. This bulk-up in risky paper made it possible for banks to lend imprudently on a massive scale.

And lest we forget, the same venal crowd who undermined the world financial system is now going to spend over $1 trillion to ‘stimulate’ our economy. Let’s take a look at some of them in action ‘overseeing’ Fred and Fan in 2004:

For a more musical – and far more entertaining – version of the story, here’s the ‘Burning Down the House’ video that made the rounds before the election. It’s the version with the better sound track.

Be sure to remember all this as the stimulus debate heats up. It’s only a trillion bucks at stake.

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