Shelving the GSE Reform Bills

Fannie Mae and Freddie Mac-the giant government sponsored housing finance corporations-apparently haven’t lost any of their political clout despite the front page stories about their accounting scandals and mismanagement.

Members of Congress issued a blizzard of press releases of the standard

“shock and dismay” variety last June when Freddie Mac’s top executives

were forced to resign in the wake of revelations that the company had

misstated its income by $4.5 billion. Not to be outdone, Fannie Mae

admitted in October that it had misstated its stockholder equity by

$1.1 billion in a third quarter report.

Congress, which has

always treated Fannie and Freddie with the softest of kid gloves

finally was forced to look like it was taking its oversight

responsibility of the Government Sponsored Enterprises seriously. For

six months, members of Congress drafted a variety of reform proposals

and the Senate and House Banking Committees dutifully conducted

well-publicized hearings.

But, when Congress adjourned this

month, the reform bills were still sitting in Committee. This means

that reforms will have to wait until next year. Congress always moves

at a snail’s pace at the beginning of a new session. As a result it is

likely that spring flowers will be in bloom in Washington before the

Committees pick up the politically hot potato of GSE reform again.

The

GSEs are not happy with proposals which would allow regulators to

establish minimum capital standards, require prior approval of new

products or put the companies in receivership in the event of a failure

or a general tightening of ongoing oversight and greater transparency.

Despite

the revelations of accounting problems and other shortcomings, the GSEs

remain a potent political force and that fact is not lost on either the

Bush Administration or Democrats and Republicans in the Congress. So

while reforms may be politically necessary, Congress isn’t inclined to

step too hard on the GSE toes.

Congress, particularly the

members of the two Banking Committees, are well aware that the GSEs

have been adept at selling the idea that Fannie and Freddie are the

keepers of the “American Dream of Home Ownership.”And the GSEs are very

solicitous of Members of Congress, never failing to include them in

well-orchestrated press conferences called to announce housing finance

projects in their home districts.

During the 2002 federal

elections, Fannie Mae and Freddie Mac contributed $6.57 million to

candidates, according to the Center for Responsive Politics.

Astonishingly, Fannie hired 14 lobbying firms and Freddie Mac paid the

tab for 26 other lobbying firms. Lobbying expenses for the two GSEs

totaled $9.7 million in the first six months of this year, according to

data compiled by FECInfo.com which monitors lobbying on Capitol Hill.

The board of directors and the staff of Fannie and Freddie have always

been populated by former officials and political activists from both

the Republican and Democratic parties, who are given huge pay packages.

Part

of the delay in moving the reform legislation has been the Bush

Administration’s insistence that the Office of Federal Housing

Enterprise Oversight (OFHEO) be dissolved and the regulatory functions

assigned to an office within the Treasury Department.

The

Treasury Department is a mammoth bureaucracy with 160,000 employees

carrying out duties ranging from the Secret Service to the management

of the fiscal affairs of the federal government to the collectionof

taxes, to mention just a few of the myriad of the department’s

assignments . GSE regulation would be buried in this bureaucracy and no

one would judge the performance of the Secretary of the Treasury on how

well the regulatory duties were carried out. Accountability for GSE

regulation would suffer greatly.

Treasury Secretaries are part

of the inner circle of any President’s Administration, Democratic or

Republican and they are often political confidants as well as well as

Cabinet officers. Faced with cracking down on Fannie and Freddie for

safety and soundness reasons versus letting the GSEs roar forward with

a politically attractive finance scheme might prove to be a difficult

dilemma for a Treasury Secretary. In addition, placing responsibility

in Treasury for regulation of GSEs (which are major players in the

money markets) increases the perception that Fannie and Freddie are

quasi-governmental entities.

Fannie and Freddie each already

have a $2.25 billion draw on the Treasury Department should they fall

on bad times. This link, which gives the GSEs great benefits in raising

funds in the market, should not be enhanced by assigning the Treasury

Department direct responsibility for the safety and soundness of the

corporations.

Rather than reinventing the wheel, Congress should

leave the present agency-OFHEO– in place with statutory assurances

that it is an independent agency with the sole function of regulating

Fannie and Freddie.

OFHEO, under the direction of Armando

Falcon, has assembled a small, but capable staff. It has been

handicapped, however, by lack of funds with both the Senate and House

Appropriations Committees keeping a tight lid on the agency. The Office

of Management and Budget has been less than courageous in pushing for

more funding for fear of antagonizing key figures on the Appropriations

Committees. The regulatory reforms need to includeassurances that OFHEO

be given enough staffing and adequate money to carry out its job.

Fannie

Mae is the nation’s second largest corporation measured in terms of

assets. Freddie Mac is the fifth largest. Not only do these two each

have a draw of $2.25 billion from the Treasury, but they are obviously

high on the list of corporations too big to be allowed to fail. That

means they are candidates for taxpayer bailouts. Congress should not

have left town this year without enacting the GSE reforms. When it gets

back next month the legislation needs to be sent to the President on an

expedited basis. It will be a great test of how much courage the

Congress and the President can muster in an election year