Failing To Fix The Fannie And Freddie Fiasco

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The Senate continues to press forward with legislation to address the causes of the financial crisis. But, while lawmakers’ eyes have trained on the big banks in New York, they have overlooked two of the main culprits of the financial crisis within the Capital Beltway.

The legislation before the Senate does not address Fannie Mae and Freddie Mac, the “two government-sponsored enterprises” whose irresponsible practices helped set off the financial crisis. For years, the two GSEs recklessly took advantage of the government’s implicit guarantee to purchase trillions of dollars worth of mortgages, including those made to risky subprime borrowers.

This gamble reaped profits for Fannie and Freddie during the housing bubble; but when the housing market collapsed, the two GSEs were left with trillions of dollars of bad debt. Today, they hold a combined $8.1 trillion of total outstanding debt. Because the federal government has decided to cover this debt, both entities have recently asked taxpayers for billions to cover their rapidly mounting losses. Since the federal takeover of Fannie and Freddie, taxpayers have lost $145 billion propping them up.

For years, some of my colleagues and I have urged the Senate to impose stronger regulations on Fannie and Freddie. As chairman of the Senate Republican Policy Committee in 2003, I authored several papers on the threats posed by the size of their mortgage-backed-securities portfolios.

I was particularly concerned that the government’s guarantee of these institutions permitted them to operate without adequate capital, assume more risk than competing financial institutions, and borrow at a below market rate of interest. My committee also recommended reforms, including improved disclosure requirements and transparency, increased risk-based regulatory oversight, and ways to create a greater separation between the taxpayers and the business operations of these firms.

Moreover, Congress would have done well to support a bill adopted by the Banking Committee a few years later in 2005. As Peter Wallison, a scholar at the American Enterprise Institute and former counsel to President Reagan, recently wrote, “The bill would have established a new regulator for Fannie and Freddie and given it authority to ensure that they maintained adequate capital, properly managed their interest rate risk, had adequate liquidity and reserves, and controlled their asset and investment portfolio growth.”

But the legislation was filibustered; among its opponents was then-Senator Obama.

Wallison goes on to conclude, “If legislation along the lines of the Senate committee’s bill had been enacted in that year, many, if not all, the losses that Fannie and Freddie have suffered, and will suffer in the future, might have been avoided.”

We, of course, didn’t avoid that fate, but the Senate recently had another opportunity to target the problems caused by Fannie and Freddie. Senator McCain authored a measure that would end the federal government’s “conservatorship” of the two GSEs within two years and place both companies into receivership (a process to responsibly dissolve) if they are not viable. It would also reduce the companies’ mortgage holdings over the next three years, re-impose restrictions on the size of mortgages they can buy, and force them to pay state and local taxes, just as private companies do. Simply put, the measure would reform Fannie and Freddie so that they no longer would have the support of taxpayers.

Unfortunately, Senator McCain’s amendment was defeated. All 41 Republicans in the Senate supported the measure, but that unified front was not enough to overcome the 56 senators who voted against it.

If Fannie and Freddie are allowed to continue to consume taxpayer dollars, any attempt at financial reform will miss the mark and put to end the “Too Big To Fail” practice that has rightfully earned the scorn of Americans.

Comments

Dan Varnes 4 years, 7 months ago

Jon Kyl has guts.

He gladly tells us all about the massive, terminal problems ingrained in "Fannie and Freddie," but then conveniently forgets to mention how he voted against an audit of the (private, non-governmental, non-elected, unanswerable and deceitful to the core) Federal Reserve.

The Fed is the true root of the financial problems we face. Kyl knows this, but hopes you don't. I'd love to know how much he got paid for his "no" vote, but come November, it won't matter much, cuz' he'll be gone.

Vote 'em out!

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