Mother Of All Bailouts
IBD Editorials
Posted 10/21/2010 07:02 PM ET
Subprime Scandal: The price tag for bailing out Fannie and Freddie keeps rising. The latest figure nearly doubles earlier projections, making Washington's role in home finance even harder to defend.
The federally controlled mortgage giants will now need as much as $215 billion more from taxpayers in the next three years to stay solvent. That's on top of the $148 billion Treasury already has injected into Fannie and Freddie.
The Obama administration says the new infusion of cash should cover their losses. But it assumes housing prices will bounce back soon, even though private forecasters don't see a recovery for years.
With a key election approaching, and voters fed up with government bailouts and open-ended spending, the administration seems to be putting a happy face on an open-ended bailout.
Early on, it pledged $400 billion to keep Fannie and Freddie afloat — twice the $200 billion President Bush pledged after seizing the toxic twins. Then late last year it quietly pledged unlimited support.
Some estimates put the final price tag as high as $1 trillion.
Fannie and Freddie aren't just a major liability for taxpayers; they're a major political liability for Democrats. Fannie and Freddie are the chief cause of the financial crisis, and Democrats are the chief reason for that.
They pushed them to underwrite $1.8 trillion in subprime and other risky loans to help close the "mortgage gap" between minorities and whites.
Despite all the talk of reforming Fannie and Freddie, Democrats gave them a pass in the "most sweeping financial regulatory reforms since the Great Depression." In another punt, the administration says it'll address the issue in a report to Congress this January.
Truth is, they want to continue to use Fannie and Freddie as their off-budget piggy banks for social improvement. And they'll circle the wagons around them while paying lip service to reform.
It's no coincidence that several former Fannie and Freddie alumni — all Democrats — landed posts in the Obama administration.
Take Tom Donilon. Recently tapped as Obama's national security adviser, Donilon was the Fannie official in charge of "managing" its relations with Congress.
There's evidence Donilon's office actually blocked attempts to expose Fannie corruption during his 1999 to 2005 tenure, including:
• A 2006 Office of Federal Housing Enterprise Oversight report concluded: "Fannie Mae succeeded in creating a large volume of negative publicity about the OFHEO examination report . .. to distract attention from its multibillion-dollar accounting errors."
• Another 2006 report from Fannie's regulators reminding Congress "that Fannie Mae senior management presented an image of the Enterprise as one of the lowest-risk financial institutions in the world and as 'best-in-class' in terms of risk management, financial reporting, internal controls and corporate governance." That was "false," it said, and Fannie's risks "were greatly understated and senior management manipulated accounting and earnings."
The report was addressed to Rep. Barney Frank, D-Mass. The House banking panel chief told the media everything was fine.
Donilon was protecting another Democrat — Fannie CEO Franklin Raines, a Clinton appointee, who was busted for cooking the company's books. Raines looted Fannie for almost $100 million in pay by the time he left in early 2005 under an ethical cloud.
Raines is now an informal adviser to President Obama. So is his predecessor at Fannie's helm, Jim Johnson, another big Democrat. Other Obama advisers include: Ellen Seidman, a former senior Fannie official and Clinton appointee, and Wendy Sherman, who was president and CEO of the Fannie Mae Foundation and also a Clinton official. (And, of course, departing White House Chief of Staff Rahm Emanuel sat on Freddie Mac's board.)
As long as Fannie and Freddie kept underwriting politically correct mortgages, Democrats turned a blind eye to the rising risk. And they ignored the book-cooking and looting going on there.
In turn, Fannie and Freddie paid them protection money in the form of generous political donations through their foundations. In fact, Frank, Democratic Sen. Chris Dodd, and Obama himself were among the top recipients of their largesse in Congress.
If they want to pursue a social agenda in housing, they should fund it through the FHA — instead of continuing to abuse the secondary mortgage market (and taxpayers) by disguising it as subsidies to Fannie and Freddie.
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