The crisis faced by Freddie Mac and Fannie Mae — and the government that chartered them — is not a surprise. For decades, critics have warned about the potential for an event like this. But their warnings failed to gain traction on Capitol Hill, where Freddie and Fannie wielded enormous clout.
Since his days in the Reagan administration as a Treasury and White House counsel, Peter Wallison has been worrying about the growing power of Freddie and Fannie, both in the mortgage market and on Capitol Hill.
"They have over the years been able to put themselves in a position where there was a real question whether Congress was in charge of them or they were in charge of Congress," he says.
Wallison, who is now a fellow at the American Enterprise Institute, says among the things the entities managed to do was ensure weak regulation, access to a line of credit at the Treasury and presidential appointment of their board members.
Implied Government Backing
Their special status and their government-sponsored charters left the implicit impression the government stood behind their obligations even though they are shareholder-owned companies, he says.
"In situations like this, where the government is backing private companies with private managements, the result is the socialization of the risk — that is, all the taxpayers have to take the risk," Wallison says. "But there is a privatization of the profits. All the profits go to the shareholders and the management, while the taxpayers are taking the risk."
The profits and pay were huge. Former Rep. Richard Baker, a Republican from Louisiana and a longtime critic, brought to light the pay schedule of Fannie Mae managers during controversial Capitol Hill hearings in 2004.
"I noted that, of the top 20 officials of the company, none made less than $1 million a year," Baker says. "And during the course of a 5-year period, there were bonuses, not salaries ... bonuses paid out of $245 million. This, going to an entity that was supposed to be focused on helping first-time, low-income homebuyers getting access to housing credit."
But when Baker tried to lead reforms, he says he was stymied.
"Many in the political world were very cautious about leveling criticism, because the entities had enormous political allies and were always able to squash any reform effort that might look like it would go somewhere," Baker says.
Freddie and Fannie did this with political donations of their own. Here's just one example of their clout: During the 2008 election cycle, Fannie Mae has given more than $900,000 to candidates and political parties; Freddie Mac has made gifts topping $475,000. They also mustered donations and political pressure from homebuilders, Wall Street firms, Realtors and others who benefited from their business, according to Baker.
This happened despite efforts from critics, including former Federal Reserve Chairman Alan Greenspan, who expressed concern about the growth in Freddie and Fannie's balance sheets. The two entities own or guarantee about $5 trillion in mortgages, nearly half the mortgages in the country.
Doug Duvall, a spokesman for Freddie Mac, says the company was simply doing what its government charter required.
"We continue to finance mortgages for low- and moderate-income families," he says. "We're out there helping prop up the market, helping keep rates stable and low. And so anyone who ... qualifies for a Freddie Mac loan is still able to receive affordable financing today."
Both Baker and Wallison say the government had no choice but to step in and rescue Fannie Mae and Freddie Mac, because their failure would have caused chaos in the financial and housing markets.
Both critics said that after the situation stabilizes, the two mortgage giants should be gradually shrunk and made totally private.