Real Reform Requires Real Representation: Lessons from Fannie and Freddie

“Cost of Seizing Fannie and Freddie Surges for Taxpayers” screams one of the headlines on the front page of last Sunday’s New York Times.  Fannie Mae and Freddie Mac have already cost us taxpayers $145.9 billion since September 2008, and the Congressional Budget Office (CBO) predicts a “final” bill of $389 billion.

The CBO is not known for overestimating costs.  Quite the contrary.  So why aren’t the rest of us screaming? Where is the outrage?  Why aren’t these two Wards of the State part of Congress’s financial-reform plans with their highly symbolic  July 4 target for legislative passage?  How can we take any “financial reform” seriously that doesn’t even address these twin budget busters?  (See centermovement.org’s  “Financial Reform’: Partisan Politics and Lobbyist Study Buddies” for more discussion of this last question.)

People still rage about all those Big Banks on Wall Street getting TARP bailout funds. More than $700 billion approved for the fat cats who created the crisis?  How untoward!  Guess what.  They were loans, not gifts; nowhere near $700 billion went to Big Banks; and they’re paying back the funds they did get. Goldman Sachs even paid early, with interest of over 22%.  In addition to principal repayments, our federal government has earned  $23 billion in accumulated interest and dividends, and in May it sold for $6.18 billion the 1.5 billion shares of Citigroup stock it had acquired as part of its stimulus package.  The Treasury now estimates total TARP costs of $105 billion.  Most of that is because small banks on Main Street are still struggling and behind in their payments.  If TARP prevented recession from deepening into depression, the benefits of the bailout will have vastly exceeded its costs.

And yet, with people still angry at Big Banks, politicians win points for hating them as well.  President Obama reiterates how appalling but necessary it was to use taxpayer funds to bail out the very entities that allegedly caused the recession when a more ethical cause of action would have been to punish them.  It’s good politics to punish Wall Street now by legislating away their power to make billions with derivatives.  It may be good economics as well, but it’s also two-faced.  Fannie and Freddie should  be reined in as well.

Fannie and Freddie have also messed up, and taxpayers  are paying the price.  The twins are in big trouble because of all the sickly mortgages they acquired, packaged as securities, and guaranteed. In other words, they also created derivatives.  But their derivatives were safe – for the investors — not because of better intrinsic value but because the federal government backed the packages, basically insuring both interest payments and principal payback to those who purchased them.  Who bore the risk?  We taxpayers.  And we’re still bearing it, with the stakes growing ever higher.  Our government has been responding to Fannie’s and Freddie’s mistakes by giving them more money to continue on this costly course of action, while trying to take away or limit derivative creation by  private banks.

Acquiring forfeitures as part of their guarantee programs, Fannie and Freddie have become two of the nation’s largest landlords – or perhaps it’s more accurate to say that we the people have gone big time into residential real estate, because our Government now owns 79.9% of Fannie’s and Freddie’s  stock. The dividend on preferred shares is 10%.  Our loans to Goldman Sachs were a much better deal.

Meantime, Fannie’s and Freddie’s expenses mount.  Each house sale costs them an average of $10,000 and garners less than 60 percent of the money the borrower never repaid. Fannie and Freddie spent more than $1 billion on maintenance of their housing inventory in 2009.  Their lawn-mowing bill alone is $10 million a month.   People, behold our tax dollars at work.

Fortunately, the CBO is getting more honest, including Fannie and Freddie financial data in federal government budgets rather than continuing to segregate them as “off budget” items.   This decision took guts.  It was surely unpopular with most politicians.  We’re already voting against incumbents because of accelerating debt and deficits, and now the figures look even worse.

Unfortunately, the CBO record in analyzing other program costs indicates it is likely to have grossly underestimated Fannie’s and Freddie’s future losses.  (Oddly enough, our Government has actually been overestimating the cost of TARP.  As recently as last August, our President said we’d lose roughly $341 billion.)  Why are we getting set to legislate discipline of Moody’s and Standard & Poor’s for giving triple-A ratings to junk-mortgage packages without taking the CBO to task for all its endorsements of federal programs that go on to lose billions?  Why aren’t we reining in Freddie and Fannie?

Once again, it pays to see to whom Fannie and Freddie are giving campaign contributions.    Over the decade ending in our last election cycle, the twins contributed almost $200 million in lobbying and campaign contributions.  Who were the top two recipients from 1989 to 2008?  Number One is Senator Christopher Dodd, who served as general chairman of the Democratic National Committee  from 1995 to 1997 and now serves as Chairman of the Senate Banking Committee.   Number Two is President Barack Obama, who wasn’t even on the political radar scene for most of the period covered.  Senator and Republican Candidate for President John McCain, was only Number Sixty-Three, but his campaign manager, Rick Davis, was once a lobbyist for Fannie and Freddie, so dollars may underestimate influence in this case.

It’s ironic at best that July 4, the holiday we celebrate for our Declaration of Independence in 1776, may also be remembered for financial-reform legislation that implicitly declares  it’s okay to do nothing to eliminate the shackles imposed by Fannie and Freddie.  Absent action, these dependents of our state  will simply continue to contribute to burgeoning deficits and debts and to create dangerous derivatives.  Our Founding Fathers were courageous. Our people rebelled against taxation without representation. Where is our courage today?   Where’s our rebellion? Fannie and Freddie are being well represented by the politicians to whom they’ve contributed, while taxpayers are picking up the tab.  For most of us,  isn’t this also taxation without representation?