U.S. PIRG Consumer Blog: What's next for Fannie and Freddie?

The papers are awash with stories about the imminent collapse of Fannie and Freddie and what that could mean for homeowners, taxpayers, investors and the financial system. Treasury Secretary Paulson, Senate Banking Chairman Dodd and other political leaders spent most of the end of last week propping up the firms with soundbites, because some investors and analysts had the long knives out and their stock prices were tanking. Things seem to have settled and there will likely be no bailouts tomorrow.

The two were, until recently, high-flying stocks that were once government-sponsored enterprises (GSEs) that went private yet managed to maintain the illusion that they were 100% backed by the government and too-big-to-fail. This allowed them to grow even faster and larger. At times in the past 20 years, Fannie Mae and Freddie Mac grew almost exponentially but their fiscal controls did not match either their diversification into riskier businesses or the growth of their political power. That political power was enough to keep most members of Congress, regulators and even outside groups from making an adequate critique.

Julie Creswell's New York Times story Protected by Washington, Fannie and Freddie Grew does a good job of explaining how the firms built unprecedented political power in Washington through sophisticated influence-peddling and strategic contributions to the hill and even to community groups to deter criticism. Importantly, the story also points out that "some of their longtime critics say the crisis has been building for years." Yet, the firms were so powerful very few people would criticize them, although Creswell quotes two: former House Banking Chairman Jim Leach (R-IA) and former Rep. Richard Baker (R-LA).

I attended a 1998 conference by Essential Information -- a Nader think tank -- called "Appraising Fannie and Freddie." As these minutes of the event from an industry analyst's newsletter point out:

Participants at the conference were reluctant to ask questions during the conference at the risk of being identified as criticizing the practices of Fannie and Freddie. None of the name badges of the participants listed company affiliations and some of the name badges only listed first names because according to conference organizers, some in attendance expressed concern ahead of time about being identified.

This is true. In fact, Ralph ended up reading "anonymous" questions to panelists sent up sub rosa from the audience on note cards. One of those panelists, Chuck Lewis, founder of the investigative reporting think tank, the Center for Public Integrity, said that in all their years of analyzing the strategies and contributions of powerful special interests, Fannie was the only one that not only hired the former Members and the former hill staffers, but "also hired their spouses and children" and as Creswell notes, "their friends." Fannie wanted blanket coverage of the political universe, and it could afford to pay for it.

Gretchen Morgenson's story The Fannie and Freddie Fallout, also in the New York Times also makes this important point:

The surprise is not that Fannie and Freddie grew too large for the taxpayers’ good. That was to be expected among companies run by executives whose pay is based on profit growth. Rather it is that Congress and the various financial regulators, especially the Fed and the Office of Federal Housing Enterprise Oversight, did little to keep the companies from getting out of control.

Other stories on Fannie and Freddie include Freddie Mac's Next Hurdle: Raise Cash by Jeffrey Birnbaum and Steve Mufson and Ripple Effects From Fannie And Freddie by Nancy Trejos, both in the Washington Post.