Congress Remains Silent On The Modern Bank of The United States- Fannie & Freddie

Robert Wilmers, CEO of M&T Bank Corporation, wrote a hard-hitting editorial in yesterday's Wall Street Journal entitled, bluntly, "What About Fan and Fred Reform?"

In the past few weeks, much has occurred in Congress and the administration which smacks of trying to supercharge the rush to poorly-thought, badly-drafted finance so-called "reform."

The Dodd bill is, of course, quite far from real, effective reform. And that's if we actually believed that the Congressional panel formed to investigate the recent financial crisis had completed its job. And various pundits and officials had contributed credible, objective testimony, while meaningful, measurable criteria were advanced and adopted for assessing the US financial system's health and effectiveness.

Mr. Wilmers is the CEO of a rather quotidian commercial bank. It's not a former investment bank now reborn as a commercial bank. It's not a money center bank in New York.

Thus, Mr. Wilmers' observations have some credibility and a lack of obvious bias.

He wrote, at length, about how huge and problematic Congress has allowed the two GSEs to become,

"Congress may be making progress crafting new regulations for the financial-services industry, but it has yet to begin reforming two institutions that played a key role in the 2008 credit crisis—Fannie Mae and Freddie Mac.

We cannot reform these government-sponsored enterprises unless we fully confront the extent to which their outrageous behavior and reckless business practices have affected the entire commercial banking sector and the U.S. economy as a whole.

At the end of 2009, their total debt outstanding—either held directly on their balance sheets or as guarantees on mortgage securities they'd sold to investors—was $8.1 trillion. That compares to $7.8 trillion in total marketable debt outstanding for the entire U.S. government. The debt has the implicit guarantee of the federal government but is not reflected on the national balance sheet.

To date, the federal government has been forced to pump $126 billion into Fannie and Freddie. That's far more than AIG, which absorbed $70 billion of government largess, and General Motors and Chrysler, which shared $77 billion. Banks received $205 billion, of which $136 billion has been repaid.

Fannie and Freddie continue to operate deeply in the red, with no end in sight. The Congressional Budget Office estimated that if their operating costs and subsidies were included in our accounting of the overall federal deficit—as properly they should be—the 2009 deficit would be greater by $291 billion."

Does anyone seriously doubt that any attempt at effective regulatory change of this sector will fail without addressing- and fixing- Fannie and Freddie?

Then Mr. Wilmers concludes with this knockout blow,

"According to a 2004 Congressional Budget Office study, the two GSEs enjoyed $23 billion in subsidies in 2003—primarily in the form of lower borrowing costs and exemption from state and local taxation. But they passed on only $13 billion to home buyers. Nevertheless, one former Fannie Mae CEO, Franklin Raines, received $91 million in compensation from 1998 through 2003. In 2006, the top five Fannie Mae executives shared $34 million in compensation, while their counterparts at Freddie Mac shared $35 million. In 2009, even after the financial crash and as these two GSEs fell deeper into the red, the top five executives at Fannie Mae received $19 million in compensation and the CEO earned $6 million.

This is not private enterprise—it's crony capitalism, in which public subsidies are turned into private riches. From 2001 through 2006, Fannie and Freddie spent $123 million to lobby Congress—the second-highest lobbying total (after the U.S. Chamber of Commerce) in the country. That lobbying was complemented by sizable direct political contributions to members of Congress.

Changing this terrible situation will not be easy. The mortgage market has come to be structured around Fannie and Freddie and powerful interests are allied with the status quo. I recall a personal conversation with a member of Congress who, despite saying he understood my concerns about the two GSEs, admitted he would never push for significant change because "they've done so much for me, my colleagues and my staff." "

When I read these last three paragraphs, I was instantly reminded of President Andrew Jackson's campaign against Nicholas Biddle's Second Bank of the US. A quasi-governmental entity so entwined with the federal government's officials and Congress that the two could not wean themselves from the Bank.

Biddle contributed to many Congressional campaigns, calling to mind Wilmers' reference to his member of Congress friend.

The Second Bank of the US dominated politics for four years. Fannie and Freddie could do so, now. They are that powerful, corrupt, and entangled with the nation's financial troubles and system.