International Recession? Sorry About That
By: Stephen Brown
FrontPageMagazine.com | Wednesday, December 17, 2008
They caused a worldwide recession, a skyrocketing unemployment rate and cost American taxpayers $700 billion in bailout money to stabilize the nation’s financial institutions. But when the four former chief executive officers of collapsed mortgage finance giants Freddie Mac and Fannie Mae appeared last Tuesday before a congressional panel investigating the financial disaster, there were not only no apologies, they pleaded innocent.
CEOs Daniel Mudd of Fannie Mae, Richard Syron of Freddie Mac and their predecessors, Franklin Raines and Leland Brendsel, at times exasperated the House Finances and Services Committee, whose tone reportedly became angrier and louder as the hearing progressed. “All four of you seem to be in complete denial that Fannie Mae and Freddie Mac are in any ways responsible,” said Republican Congressman and committee member Darrell Issa. His Democratic counterpart, Stephen Lynch, also referred to the “the total denial going on here today” as well as to “the refusal to answer simple questions.”
Freddie Mac and Fannie Mae own or guarantee $5.2 trillion of the $12 trillion US home mortgage market. They experienced $14 billion in losses this year, primarily in loans to low-income borrowers, which triggered a worldwide financial crisis. Mudd and Syron were their companies’ CEOs when the federal government took them over last September. Franklin Raines headed Fannie Mae until 2004 and Brendsel led Freddie Mac until 2003. Both left because of accounting scandals.
In diverting blame away from themselves, the former mortgage company leaders cited several reasons for their firms’ disastrous performances. Among them were a lowering of borrowing standards, a desire to play catch-up with Wall Street, “pressure from government and advocacy groups” to guarantee housing loans for low-income people, investors who were “not natural holders of 30-year obligations” and federal regulators who failed to stop them.
While several of these excuses may have some merit, the last one, however, is outright ludicrous. Put forward by Franklin Raines, his “the police didn’t stop me, so I robbed the bank” complaint is especially misleading, since Freddie Mac and Fannie Mae, as it turns out, spent millions of dollars over the years to accomplish just opposite: prevent regulatory oversight. However, the four executives, it was noted, failed to mention this to the congressional committee.
Contrary to Barack Obama’s assertion in the first two political debates against John McCain that “Republican deregulation” was responsible for the financial crisis, it was actually the Republicans, and especially McCain, who tried to tighten regulatory control over the two mortgage finance companies. In 2005, the Senate Banking Committee, which was then controlled by the Republicans, produced a Freddie Mac regulatory bill, for which the Republican members voted and Democrats opposed.
Sponsored by Republican Senator Chuck Hagel and co-sponsored by Republicans McCain, John Sununu and Elizabeth Dole, the bill unfortunately died before it could reach the Senate floor for a vote. The chief culprit in the bill’s demise, according to Associated Press journalist Peter Yost, was the measure’s intended target: Freddie Mac.
In a story last October, Yost claims that Freddie Mac “secretly paid” the Republican consulting firm, DCI, $2 million to undermine the bill’s passage. To this end, DCI targeted 17 Republican senators in 13 states. According to Yost, only a “few dozen people” at Freddie Mac people knew what was afoot, calling it their “stealth lobbying campaign.” Freddie Mac executive Hollis McLoughlin apparently oversaw the year-long operation, for which his company paid $10,000 a month for each targeted state, DCI a monthly retainer fee of $40,000, and $20,000 a month for DCI regional managers.
“Hollis’s goal was not to have any Freddie Mac fingerprints on this project and DCI became the hidden hand behind the effort,” one anonymous source told AP.
At one point, desperate to get the bill passed, Hagel sent a letter to Republican Senate Majority Leader, Bill Frist, asking for a vote. Twenty-six Republican senators signed the letter, while nine of the CDI-targeted Republicans did not.
No Democratic senator, including Obama, signed Hagel’s missive either. For this, they shoulder much of the blame for killing this last chance to prevent the current economic crisis. Former president Bill Clinton admitted as much when he told ABC’s Chris Cuomo: “I think the responsibility the Democrats have may rest more in resisting any efforts by Republicans in the congress or by me when I was President to put some standards and tighten up a little on Fannie Mae and Freddie Mac.”
Freddie Mac’s efforts to block regulatory efforts did not stop in the Senate. In another AP story, Yost outlines how the company used its substantial lobbying budget, $11.7 million in 2006 alone, to treat two members of the regulatory House Financial Services Committee, Republican Bob Ney and Democrat Paul Kanjorski, to a Washington Nationals baseball game in 2005. Also present in the prime seats by the dugout were Hollis and four of Freddie Mac’s in-house lobbyists. Other House Finance members also received free baseball tickets.
One Washington observer notes such “gifts” from Freddie Mac probably also explain why most committee members did not criticize Barney Frank, the HSFC’s chairman, who was outspoken in his support of the two companies. In 2003, for example, Frank said: “These two entities – Fannie Mae and Freddie Mac – are not facing any kind of financial crisis. The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.” At least Frank got the less housing part right.
Yost called the free baseball tickets “part of a well-orchestrated, multi-million dollar campaign to preserve its largely regulatory-free environment.” As part of this campaign, Freddie Mac and Fannie Mae made donations to politicians, including $120,349 to Obama and $21,550 to McCain, and hired Washington heavyweights like Newt Gingrich for $300,000 to promote their virtues.
But in the end, the one thing the four former CEOs could not deny is that they walked away from their failed companies with millions in compensation, while leaving American taxpayers on the hook for billions.
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