How Washington Failed to Rein In Fannie, Freddie
Sunday, September 14, 2008
Gary Gensler, an undersecretary of the Treasury, went to Capitol Hill in March 2000 to testify in favor of a bill everyone knew would fail.
Fannie Mae and Freddie Mac were ascendant, giants of the mortgage finance business and key players in the Clinton administration's drive to expand homeownership. But Gensler and other Treasury officials feared the companies had grown so large that, if they stumbled, the damage to the U.S. economy could be staggering. Few officials had ever publicly criticized Fannie Mae and Freddie Mac, but Gensler concluded it was time to urge Congress to rein them in.
"We thought this was a hand-on-the Bible moment," he recalled.
The bill failed.
The companies kept growing, the dangers posed by their scale and financial practices kept mounting, critics kept warning of the consequences. Yet across official Washington, those who might have acted repeatedly failed to do so until it was too late. Last weekend, the federal government seized control of the two companies to protect the very mortgage market they were created to lubricate. The cost to taxpayers could run into the tens of billions of dollars.
As policymakers now set out to decide what role government, and the two companies, should play in the mortgage business, the failures of the past two decades offer a cautionary tale.
Blessed with the advantages of a government agency and a private company at the same time, Fannie Mae and Freddie Mac used their windfall profits to co-opt the politicians who were supposed to control them. The companies fought successfully against increased regulation by cultivating their friends and hounding their enemies.
The agencies that regulated the companies were outmatched: They lacked the money, the staff, the sophistication and the political support to serve as an effective check.
But most of all, the companies were protected by the belief widespread in Washington -- and aggressively promoted by Fannie Mae and Freddie Mac -- that their success was inseparable from the expansion of homeownership in America. That conviction was so strong that many lawmakers and regulators ignored the peril posed to that ideal by the failure of either company.
In October 1992, a brief debate unfolded on the floor of the House of Representatives over a bill to create a new regulator for Fannie Mae and Freddie Mac. On one side stood Jim Leach, an Iowa Republican concerned that Congress was "hamstringing" this new regulator at the behest of the companies.
He warned that the two companies were changing "from being agencies of the public at large to money machines for the stockholding few."
On the other side stood Barney Frank, a Massachusetts Democrat who said the companies served a public purpose. They were in the business of lowering the price of mortgage loans.