"Only two short years after Wall Street's fraud and gress
brought down the world's economy, a Beltway think tank is proposing to put
taxpayers
on the hook for mortgages written and administered by the same
corporate miscreants. And that's the Democratic
proposal.
The Republicans want
to double down on a failed strategy of 'privatizing'
government
mortgage financing, while at the same time cutting back on
regulation
and oversight
"... If we
don't see stronger proposals then these in the coming months,
this
will be remembered as ... the beginning of the end, the moment
when
the next wave of privatization began and the way was paved for
a
collapse that may be even grater than the one we're
in
today."
MCM
Fannie's
Scandalized, Freddie's Dead - And The Next Financial Meltdown
May Have
Already Started
By Richard (RJ)
Eskow
Here's an idea: Let's give hundreds of billions of dollars in
government-backed guarantees to private banks so they can make a
fortune writing mortgages without any risk to themselves. Hey,
what
could go wrong?
The FCIC's recent
report illustrated an important lesson from the economic
meltdown:
Privatization, not big government, ruined Fannie Mae and Freddie
Mac.
Running a government program like a private corporation leads to
the
worst excesses of executive self-indulgence. Fannie and Freddie
didn't
bring down the economy, as some have claimed, but they were
destroyed
by the same privatize-and-deregulate philosophy that led to the
crisis.
Now we're learning
that Washington may be preparing to take that destructive
philosophy
even further. Proposals to "reform" Fannie and Freddie by
privatizing them even more aren't just bad, dangerous ideas.
Worse,
they suggest that we're returning to the blind and mistaken
ideologies
of the past. If that's true, then it's only a matter of time
until the
next meltdown comes.
Doomsday
Mark your
calendars.
This may be remembered as the week our next financial crisis
began,
the moment when the Greenspan Republicans and Rubin Democrats
who
ruined the economy the last time around regained control ... and
the
cycle began all over again. Only two short years after Wall
Street's
fraud and greed brought down the world's economy, a Beltway
think tank
is proposing to put taxpayers on the hook for mortgages written
and
administered by the same corporate miscreants.
And that's the
Democratic proposal. The Republicans want to double down
on a
failed strategy of "privatizing" government mortgage
financing, while at the same time cutting back on regulation and
oversight. It all boils down to the same thing: bringing back
the same
sybaritic, taxpayer-backed greedfest that 's already shattered
the
economy more than once.
Fannie and Freddie
are "government-sponsored enterprises," or "GSEs."
But ideologues have learned exactly the wrong lesson from the
Great
Recession. It was the "E" part of these companies, not the
"G" part, that caused the problem. The real lesson is that
it's a mistake to mix government programs with
private-sector-style
get-rich-quick incentives. The GSEs failed because they treated
their
Federal mandate as if it was the key to Fort Knox.
SmokingFinancialGun.com
If the Financial
Crisis Inquiry Commission wants to publicize its work more,
maybe it
should set up a tabloid website like The Smoking Gun, or pitch a
TV
tell-all scandal show about badly-behaved executives ("VH1:
Behind the Mortgage"). Their first episode could feature Daniel
Mudd, the former Fannie Mae CEO who bragged that he wrote his
own
rules with regulators and boasted that "we always won, we took
no
prisoners." Regulators later concluded that Mudd ran a company
with an "arrogant and unethical corporate culture, where Fannie
Mae employees manipulated accounting and earnings to trigger
bonuses
for senior executives."
Mudd ran the
company
with so much materialistic self-absorption that he might have
been
starring in an 80's hair-metal video (presumably without Tawny
Kitaen
on the hood of a Jaguar, but who knows?) His tenure at Fannie
was
marked by lying, cheating, bullying, and the reckless pursuit of
a
fast buck. But then, why wouldn't it be? He was compensated like
a
private-sector executive, but backed by government authority and
coddled with taxpayer guarantees. It was all upside, baby, and
Mudd
liked his upside.
Regulators found
that Mudd and his colleagues "manipulated accounting" so
that they could keep paying themselves huge bonuses, even as
they ran
what one observer called "the worst-run financial institution"
he had seen in thirty years as a regulator. It worked, too. Mudd
made
$65 million between 2000 and 2008. (Hmm ... "manipulated
accounting" ... is that legal?)
Conservatives
should
be just as outraged as progressives. Executives like Mudd didn't
build
their businesses. They didn't even manage them competently. They
took
a free ride with government backing, yet paid themselves as if
they
were captains of industry. How did this perverse situation
develop?
Freddie's Dead
(Fannie, too)
Fannie Mae and
Freddie Mac are going to die, at least in their present form, as
victims of over-indulgence. But they didn't start that way.
Fannie Mae
was created in 1938 and functioned smoothly for thirty years,
all
through the postwar housing boom. It was turned into a separate
government-sponsored enterprise in 1968 in order to take its
large
debts off the Federal balance sheet, and Freddie Mac was created
shortly afterward (to create "competition"). They're
creatures of privatization, and they were encouraged to bring
"free market" aggression to their mission.
And man, did they. As FCIC testimony revealed, "The "Fannie
and Freddie political machine resisted any meaningful regulation
using
highly improper tactics ... OFHEO (their regulatory overseer)
was
constantly subjected to malicious political attacks and efforts
of
intimidation."
The companies
faced
a turning point in 2005, when the greed-addled private market
was
rushing into subprime mortgages and other high-risk loans. A
government-sponsored corporation that was true to its mission
wouldn't
have followed the lemmings, but privatization fever had taken
hold. As
a Fannie Mae executive told his colleagues back then: "We face
two stark choices: stay the course [or] meet the market where
the
market is." Ill-advised by architects of calamity like Citibank,
they jumped in with both feet despite dire warnings from people
inside
the organization.
Risk and
Reward
Alan Greenspan and
Robert Rubin both told the FCIC that better corporate risk
management
will help prevent the next financial crisis. The Fannie Mae
story
proves how naive that belief is. Like many financial executives,
Mudd's short-term wealth depended on writing more business,
whatever
the risk. So he humiliated, abused, and ignored Chief Risk
Officer
Enrico Dallevecchia when Dallevechia warned him of the dangers
of
writing substandard business. The frustrated Risk Officer
finally
wrote a memo to Mudd which said that Fannie had "one of the
weakest control processes" he had "ever witnessed in his
career," and that he was "upset" that he hadn't even
known told the company was taking on more risk until he saw the
announcement. A bellicose Mudd told Dellavecchia to "address it
(to him) man to man" and "face to face," rather than by
email.
CFO Robert Levin
bullied the company's chief analyst in a similar way when he was
told
that the company wasn't charging enough for its Alt-A mortgages.
That's called "buying business," and it should never happen
at a government-sponsored enterprise. It means that an
enterprise
created to complement the private sector is competing with it
instead.
Mudd and Levin did what many executives would do in a similar
situation: They lowered their underwriting standards, wrote a
lot of
bad mortgages, and walked away as rich men. Mudd now lives
comfortably
in Connecticut with $80 million in earnings, thanks to the
American
taxpayer, and is a director for an investment fund (Fortress
Investment Group - a name we're providing as a public service to
unwary investors).
Meltdown II:
The
Sequel
Arguments over
Fannie and Freddie are usually a proxy for ideological
differences
about the role of government. Conservatives who blame Fannie and
Freddie for the meltdown (which they didn't cause but certainly
made
worse) want to prove that government intervention in the economy
is a
bad idea. But this isn't a battle between right and left as much
as it
is between what works and what doesn't. We've now seen what
happens
when American-style bankers are given government-backed
guarantees and
Goldman Sachs-style bonuses. Privatizing to Wall Street is like
giving
your car keys to a pickpocket.
Nevertheless,
Capital Markets Subcommittee Chairman Scott Garrett is holding a
hearing today on "reforming" Fannie and Freddie, and
his witness
list
contains four names: someone from an anti-government,
anti-regulation
think tank
that's
funded by Citibank, the Koch Brothers, Chase, and American
Express,
along with a variety of oil refiners and pharmaceutical
companies;
someone from
another anti-government group which has received funding from
Bank of America,
Lehman Brothers, PriceWaterHouseCoopers, and the California
Realtors
Association; someone from a conservative think tank funded by Prudential and
American Express,
among others; and a Democrat ...
... from the Center for American Progress, the group that wrote
the
Democratic "privatize Fannie and Freddie" proposal. In other
words, the hearings have been stacked in the banks' favor.
Meanwhile,
the Administration's plan for reforming Fannie and Freddie is
overdue,
but the Center for American Progress is known to be close to the
White
House. If that means that its proposal is a preview of
Administration
thinking, we've got a big problem.
We're told that
the
White House plan will be released Friday and that it will
include
three options. One option would have the government withdraw
entirely
from the mortgage market, but that's likely to be politically
infeasible. Neither party wants to explain to voters why they
can't
get home loans and the price of their house has plummeted. And
while
specifics weren't provided for the other two, the Wall Street
Journal
reports that the others would "create a way for the government
to
backstop part of the secondary mortgage market" like Fannie and
Freddie, but gave no specifics.
The Journal also reports that "top administration
officials have publicly discussed the merits of a limited but
explicit
federal guarantee of securities backed by certain types of
mortgages,"
adding: "The housing and banking industries have advanced
proposals arguing that such a guarantee is needed to maintain a
healthy market, particularly for long-term, fixed-rate loans
that
remain a keystone of U.S. housing."
The short version:
There will be one proposal that's politically impossible, and
two
others that give banking and real estate lobbyists what they
want.
Care to bet which one won't make it through
Congress?
Yves Smith gave
the
CAP proposal the once-over, under the heading "Wall Street Co-Opting
Nominally
Liberal Think Tanks," but our one-sentence summary of their proposal
is this: They want to dismantle Fannie and Freddie and let
private
banks administer their programs backed by by government
guarantees.
And don't worry, says CAP. Our "chartered mortgage
institutions,"
though "fully private," will have to be "fully
transparent" and follow government rules. (They would never,
never "manipulate accounting," would they?)
The
End
Proposals like
CAP's
would make Fannie and Freddie's private-sector successors a
microcosm
for the entire economy under the failed policies of Democrats
like
Clinton, Rubin, and Summers, as well as Republicans like
Greenspan and
... well, all of them. Executives at these financial
institutions
would be motivated to cook the books and sell bad mortgages
while
taking advantage of taxpayer guarantees to consolidate their
already
too-big-to-fail institutions. And they'd be recruited from a
Wall
Street cohort with a documented record of deception and
criminality.
All of CAP's lofty and well-stated goals are undermined by the
identify of the folks doing the lending. As for the Republicans,
they
don't even bother stating lofty goals.
The government has
to work out a way to unwind itself from the mortgage market. The
Administration has a proposal to lower the size of mortgages it
will
guarantee, and that's a good first step. But the previews of
their
overall proposals seem uninspired and weak, if not outright
capitulation to Wall Street's whims and desires. And even
capitulation
is too mild for the Republicans, who appear to be setting the
stage
for fiscal anarchy and plunder.
The problem is
much
bigger than Fannie and Freddie. This real danger is that this
could be
a turning point, a return to the failed ways of the past. If we
don't
see stronger proposals than these in the coming months, this
will be
remembered as the week that the destructive policies of the
Greenspan/Rubin crowd came back from the dead. It will be
recalled as
the beginning of the end, the moment when the next wave of
privatization began and the way was paved for a collapse that
may be
even greater than the one we're in today.
______________________________________
This post was produced as part of the Curbing Wall Street project.