Fannie, Freddie & the Corruption of Congress

By Peter Bearse, Independent Candidate NH CD-1

China must be looking on the U.S.A. with ironic amusement, as they see our government taking over private enterprise while their public companies are put up for sale to private investors. Yes, dear readers, Fannie Mae and Freddie Mac are private companies. The fact that they are now placed under Federal government "conservator"-ship owes to years of corruption -- of the Congress by Fannie and Freddie and of the latter companies by Congress.

For years, the two private companies have corrupted the ability of Congress to honor the public trust -- by using portions of their excess profits to lobby against legislation to reform the companies and for moves that would enlarge them. The latest example was the recent housing bill. This contained a section that expanded their responsibility for affordable housing; that is, for increased investment in housing that carried higher risks; and this at a time when the two companies were already huge holders of mortgage assets showing signs of financial stress.

The term "excess profits" owes to the fact that Fannie and Freddie profited from leveraging their favorable access to private capital on favorable terms due to their public status as companies chartered by Congress. Thus, the large campaign contributions that many Members of Congress received from these companies corrupted the companies as well as Members. How? -- by rejecting reforms, lack of sufficient oversight and promotion of "bigger is better." They have also encouraged reactionary behavior. Companies and members both over-react to events with short-term expedients, rather than facing the long-term necessity of reforming or restructing the companies and revising their flawed business models. Again, the recent housing legislation is a prime example. It was rushed through Congress with many flaws -- mainly to give the American public the impression that Congress was doing something other than whistling past the graveyard while a financial hearse brought the housing sector to its knees.

The latest takeover is not a "bailout" because private investors in the companies' stock have seen, and will see more, losses on their stock holdings. Yet, taxpayers may end up holding the bag to cover big losses, estimated by the Office of Management and Budget to be about $25 billion, but maybe ranging as high as $125 billion -- the cost to taxpayers of resolving the last big financial crisis, the savings and loan crisis of the late '70's and early '80's.

Fannie and Freddie were allowed to become too big and too overcentralized. The next Congress should downsize, decentralize and privatize their functions. This is not likely to happen in a Congress under Democratic control. Chinese tea-for-two, anyone?

PETER BEARSE, Ph.D., International Consulting Economist and Independent Candidate for Congress, NH CD 1, Danville: 9/8/08.