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Treasury Secretary Henry Paulson
Treasury Secretary Henry Paulson
Fannie Mae and Freddie Mac: Finger-Pointing Season Begins
July 23, 2008 10:55 AM
by
Anne Szustek
Congress’s proposed bailout plan for the government-assisted home lenders may cost taxpayers $25 billion. Let the finger pointing begin.
30-Second Summary
After making a speech Tuesday morning in New York bolstering the cause of federal intervention to support the two mortgage companies, Treasury Secretary Henry Paulson pleaded with Republican senators during a closed-door lunch at the Capitol.
Sen. Judd Gregg, R-N.H., the highest-ranking Republican on the Budget Committee, concurred with Paulson: “Freddie and Fannie are important mainstays in the American economy, and we need to find solid footing for these enterprises.” Others in the GOP are not as approving. Kan. Sen. Jim Bunning said the Paulson proposal “smacks of socialism.”
The Federal Reserve and members of the office of the federal comptroller are examining Fannie and Freddie’s books for evidence of accounting impropriety—the findings of which Paulson is sure will provide market confidence.
The two lenders could very well bail themselves out of their current crisis and never need federal assistance. But the mere specter of a massive federal bailout has observers wondering why a debacle so widely predicted was nonetheless allowed to happen.
Accounting malfeasance was spotted by the Office of Federal Housing Oversight in September 2004. This was not widely covered by the press, and no meaningful reforms resulted. The Heritage Foundation says of the startling lack of strengthened oversight: “the two have built auras as invincible, all-knowing and essential parts of the economy.”
Former St. Louis Fed president William Poole argued in an interview with Foreign Policy magazine that the two lenders did not have the funds to endure gravely bearish housing markets. Of analysts, he said, “I can hold them to a standard of holding adequate capital to be able to withstand unforeseen circumstances. That’s what capital is for.”
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Sen. Judd Gregg, R-N.H., the highest-ranking Republican on the Budget Committee, concurred with Paulson: “Freddie and Fannie are important mainstays in the American economy, and we need to find solid footing for these enterprises.” Others in the GOP are not as approving. Kan. Sen. Jim Bunning said the Paulson proposal “smacks of socialism.”
The Federal Reserve and members of the office of the federal comptroller are examining Fannie and Freddie’s books for evidence of accounting impropriety—the findings of which Paulson is sure will provide market confidence.
The two lenders could very well bail themselves out of their current crisis and never need federal assistance. But the mere specter of a massive federal bailout has observers wondering why a debacle so widely predicted was nonetheless allowed to happen.
Accounting malfeasance was spotted by the Office of Federal Housing Oversight in September 2004. This was not widely covered by the press, and no meaningful reforms resulted. The Heritage Foundation says of the startling lack of strengthened oversight: “the two have built auras as invincible, all-knowing and essential parts of the economy.”
Former St. Louis Fed president William Poole argued in an interview with Foreign Policy magazine that the two lenders did not have the funds to endure gravely bearish housing markets. Of analysts, he said, “I can hold them to a standard of holding adequate capital to be able to withstand unforeseen circumstances. That’s what capital is for.”
See Wallstrip coverage
Headline Link: ‘Congressional Analysts Peg Cost of Propping up Fannie Mae and Freddie Mac as High as $25 Billion’
Paulson said during his speech at the New York Public Library on July 22, “Because of their size and scope, Fannie and Freddie’s stability is critical to financial market stability. Investors in our nation and around the world need to know that we understand how important these institutions are to our capital markets broadly and to the U.S. economy.”
Source: Newsday (AP)
Background: The decline of the state-supported lenders, Congress’s rescue plan
In 1999, The New York Times reported on an initiative by Fannie Mae to reduce the down payment requirements for many loans that it guarantees. Then-CEO Franklin Raines trumped the beneficial effect on home ownership, but the Times noted that “Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue.”
Source: The New York Times (free registration may be required)
A report issued by the Office of Federal Housing Oversight in September 2004 gave Fannie Mae a “fanny kicking,” writes Slate’s David Gross. The agency’s findings showed accounting malfeasance. Gross wrote that this “Enron-in-the making” situation was spurred on in part by a system that rewarded Fannie executives for hitting certain numbers. Fannie CEO Franklin Raines had to testify about the company in front of the House Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises on Oct. 6, 2004.
Source: Slate
Politico elaborates on the $200 billion Fannie Mae and Freddie Mac have spent on congressional lobbying and access to government perks over the past decade.
Source: Politico
Treasury Secretary Henry Paulson announced a plan earlier this month to rescue Fannie Mae and Freddie Mac from a potential financial calamity that many have warned of for years.
Source: findingDulcinea
Opinion & Analysis: Too little money, too few eyes
The troubles of Fannie Mae and Freddie Mac are indicative of a larger reality in America—the government’s expanded role as a lender to those who want to buy a home or go to college, writes The New York Times.
Source: The New York Times (free registration may be required)
Paulson stressed the urgency of the congressional relief package for the lenders, elaborating on the domino effect Fannie and Freddie’s collapse could have on global markets.
Source: Time (AP)
The Heritage Foundation blames a lack of an oversight function as the root cause of the mortgage lender’s tumble.
Source: Heritage Foundation
William Poole, former president of the St. Louis Fed, pins Fannie and Freddie’s current woes on a lack of sufficient capital to be able to weather severe market downturns. “I don’t know of anyone who early enough was saying that there would be a major national decline in house prices … but I can hold them to a standard of holding adequate capital to be able to withstand unforeseen circumstances. That’s what capital is for.”
Source: Foreign Policy
Bill Steigerwald of the Pittsburgh Tribune-Review interviewed Reagan-era Treasury Department staffer Peter J. Wallison about Fannie and Freddie’s duress. Regarding the two lenders, he said, “They never had very much capital because, as I said, they have been very powerful and they are able to influence Congress. So that what little regulation they had did not require them to hold much in the way of capital.”
Source: Pittsburgh Tribune-Review
The Washington Post’s Sebastian Mallaby scoffs at the notion that short-selling Fannie and Freddie stock is to blame for their market tumble: “Now the finger-pointing has climaxed with Fannie Mae and Freddie Mac. The shares of those housing-finance companies plummeted two weeks ago for a very good reason: If you valued their books in a way that reflected the decline in house prices, they were worth about zero. Ah, but never mind such details. Blame the short sellers.”
Source: The Washington Post (free registration may be required)
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