Since Fannie Mae and Freddie Mac, the government-sponsored housing enterprises (GSEs), were taken over by their regulator early in September, a lot of Monday-morning quarterbacks claim to have been members of the team trying to reform these two gigantic companies.
I assure you most of those folks were nowhere to be seen when the effort to reform was underway. For nearly six years, I chaired FM Policy Focus, a coalition of financial service trade associations that worked together from 1999 to 2008 to focus attention on Fannie Mae and Freddie Mac. The associations feared that without reform, a serious blip in the housing market would spill over to destabilize the broader economy.
For nine years, the coalition argued Fannie and Freddie were dangerously overextended, resting on a paper-thin capital base. Without stronger government oversight, we warned, taxpayers would be on the hook for billions if the housing market ran into trouble.
It was a lonely battle. No matter how much data and research we produced, our arguments fell on mostly deaf ears. Only a handful of Democrats and Republicans could be persuaded of the seriousness of the threat posed by the GSEs. And, too often to be mere coincidence, as our meetings in House and Senate offices ended, Fannie and Freddie lobbyists were ushered in, forewarned by the very offices we were visiting.
In the rare cases in which a staffer or member of Congress could be moved by our research to question Fannie or Freddie practices, the GSEs struck back immediately and with great force. The intensity was so overwhelming that few could withstand the withering criticism they would receive from the GSEs, their surrogates and their broad grass-roots network.
Finally, following the accounting debacle and subsequent failure of Enron, Reps. Chris Shays, R-Conn., and Ed Markey, D-Mass., took on the GSEs, introducing legislation to repeal the securities law exemption enjoyed by Fannie Mae and Freddie Mac that resulted in minimal disclosure about GSE equity and debt offerings. Both GSEs opposed the bill and lobbied aggressively to keep other House members off it while they simultaneously blocked Senate introduction of a bill.
Then, in a behind-the-scenes negotiation led by Freddie Mac, a deal was announced in which the White House, the Securities and Exchange Commission, the GSEs’ regulator, the Office of Federal Housing Enterprise Oversight, and Treasury agreed that the GSEs would "voluntarily comply with part" — only part — of SEC registration requirements. Fannie Mae opposed the deal and tried to derail it right up to the very day it was announced.
That deal still stands, so we know a lot less about their financial stability than we know about similar companies. You can see why a conservatorship was necessary.
It was the Shays-Markey bill that finally pierced the Fannie and Freddie armor. First, Freddie Mac missed the deadline for fulfilling its commitment, admitting that its accounting couldn’t be relied upon. Then, even though it filed with the SEC, Fannie Mae had to admit that its accounting had serious problems, too. Eventually, the CEOs of both companies were forced to resign.
The media finally took notice. Previously, FM Policy press briefings, eports and data on the problems Fannie and Freddie were facing were largely ignored. As with Congress, there were some exceptions: namely, The Wall Street Journal, Dow Jones News Services, National Mortgage News and The Washington Post. In meeting after meeting, we pointed out how little oversight Congress was interested in conducting.
One reporter’s question summed up the collective attitude: "If Congress doesn’t care, why should we?" It is astounding to me that several of those very reporters looking for scapegoats today would not return phone calls a few years ago.
Once the CEOs stepped down, Congress finally started to move. By spring 2005, the then-chairman of the House Financial Services Committee, Mike Oxley, R-Ohio, and then-ranking member, now chairman Barney Frank, D-Mass., wrote a bipartisan bill that was overwhelmingly approved and sent to the Senate. "Headway," we thought, "something will be done."
And then, nothing. The White House told Oxley the president would veto the bill instead of focusing on its many strengths. Senate Banking Committee Chairman Richard Shelby, R-Ala., wrote a tough bill which his committee approved on a party-line vote. Democrats had offered a weakened version of the Oxley-Frank bill, but it was defeated, again, on party lines. Each side blamed the other for the failure to negotiate a deal. The Senate bill died. No leadership. No bill.
We have grown accustomed in Washington to claims the sky is falling on issue after issue, year after year. In the case of the GSEs, our concern was well-founded. The collapse of Fannie and Freddie could have been avoided if Congress had acted sooner. Now, all have to pay for the bailout.
J.C. Watts (JCWatts01@jcwatts.com) is former chairman of the Republican Conference of the U.S. House, where he served as an Oklahoma representative from 1995 to 2002. He writes twice monthly for the Review-Journal.