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
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.
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.
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.
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.
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
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
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.
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