How Fannie Mae (FNM), Freddie Mac (FRE), Barney Frank, Wall Street created mortgage mess

Paul Gigot, the editor of The Wall Street Journal’s editorial page, documents how political and financial greed and lobbying by Fannie Mae (FNM) and Freddie Mac (FRE)  helped get us into the mortgage market mess that the same politicians are trying to fix but most likely are only making worse over the long term. His column is here and on the Journal’s free http://www.opinionjournal.com.

In “The Fannie Mae Gang,” Gigot recounts:

Fannie Mae and Mr. Mozilo weren’t competitors; they were partners. Fannie helped to make Countrywide as profitable as it once was by buying its mortgages in bulk. Mr. Raines—following predecessor Jim Johnson—and Mr. Mozilo made each other rich. Which explains why Mr. Johnson could feel so comfortable asking Sen. Kent Conrad (D., N.D.) to discuss a sweetheart mortgage with Mr. Mozilo, and also explains the Mozilo-Raines tag team in 2003.

I recount all this now because it illustrates the perverse nature of Fannie and Freddie that has made them such a relentless and untouchable political force. Their unique clout derives from a combination of liberal ideology and private profit. Fannie has been able to purchase political immunity for decades by disguising its vast profit-making machine in the cloak of “affordable housing.” To be more precise, Fan and Fred have been protected by an alliance of Capitol Hill and Wall Street, of Barney Frank and Angelo Mozilo.

I know this because for more than six years I’ve been one of their antagonists. Any editor worth his expense account makes enemies, and complaints from CEOs, politicians and World Bank presidents are common. But Fannie Mae and Freddie Mac are unique in their thuggery, and their response to critics may help readers appreciate why taxpayers are now explicitly on the hook to rescue companies that some of us have spent years warning about.

My battles with Fan and Fred began with no great expectations. In late 2001, I got a tip that Fannie’s derivatives accounting might be suspect. I asked Susan Lee to investigate, and the editorial she wrote in February 2002, “Fannie Mae Enron?”, sent Fannie’s shares down nearly 4% in a day. In retrospect, my only regret is the question mark.

Mr. Raines reacted with immediate fury, denouncing us in a letter to the editor as “glib, disingenuous, contorted, even irresponsible,” and that was the subtle part. He turned up on CNBC to say, in essence, that we had made it all up because we didn’t want poor people to own houses, while Freddie issued its own denunciation.

The companies also mobilized their Wall Street allies, who benefited both from promoting their shares and from selling their mortgage-backed securities, or MBSs. The latter is a beautiful racket, thanks to the previously implicit and now explicit government guarantee that the companies are too big to fail. The Street can hawk Fan and Fred MBSs as nearly as safe as Treasurys but with a higher yield. They make a bundle in fees.

The housing bill going through Congress, which President Bush promises to sign, is not a bailout for home owners. It’s a bail out for the politicians, lobbyists and Fannie Mae and Freddie Mac executives who’ve all gained tremendous power and wealth supporting the two government-backed companies.

Yes, the companies now are too big to fail, and the politicians who created them apparently are, too.

 

 

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