It’s interesting that the New York Times today has decided to start attacking the mismanagement/fraud/corruption at Fannie and Freddie. It’s interesting because it’s not just a regulatory issue, it’s a political issue that the politicians have carefully avoided discussing.

Republican View

The Republicans tend to say the Dems were the problem with the Fannie and Freddie meltdown because the Dems were in charge of Fannie and the Dems thwarted attempts by the Republicans to add more regulations to Fannie and Freddie.

It’s interesting that in this case the free market Republicans were the ones who wanted more regulation. Was that because the Republicans saw the financial train wreck coming, or was it because the Republicans saw that the Dems had captured control of Fannie and Freddie and they were using that power to promote Democratic political objectives over Republican political objectives?

Democratic View

The Dems have tended to frame the crisis as not being the fault of Fannie and Freddie but the fault of the other banks and Wall Street (e.g., Paul Krugman), or if they do blame Fannie and Freddie they stress “bipartisan” political manipulation by Fannie and Freddie corporations.


Fannie and Freddie worked both Democratic and Republican politicians, however, they leaned Democratic. For example, from 1991 to 2004 Fannie Mae was run by Democratic operatives James Johnson and Franklin Raines.

In addition to the usual ways of gaining political influence – large campaign donations and huge lobbying expenditures – one reporter has pointed out the revolving door technique used to string along bureaucrats into being cooperative, “For years, high-level jobs at Fannie Mae were lucrative prizes for lawyers, bankers and political operatives waiting for their next U.S. government post.”

It seems the political operatives were using Fannie and Freddie to promote their political and personal objectives, and Fannie and Freddie were using the political operatives to promote their business objectives. Nice symbiosis.

Even though the Democrats may have been doing the heavy lifting in the case of Fannie and Freddie, I’m certain the Republicans were carrying the water for other parts of the financial industry. We didn’t get near-total deregulation of the financial industry without strong bipartisan support over decades.

Fannie and Freddie “Capture” their Regulators

I think you could make a bipartisan case that the larger problem was that Fannie and Freddie “captured” their government regulators and politicians through their political influence, including the influence of their very political leadership teams and board members. (Board members got $160,000 a year for their part-time work on the board of directors – nice work if you can get it.)

Fannie and Freddie, I believe, were just an example of a larger issue, the financial industry had “captured” the regulators and politicians. (Just take a look at all the Wall Street guys we’ve had as Secretaries of the Treasury in recent decades.)

Quotes from New York Times article

Fannie and Freddie amplified the housing boom by buying mortgages from lenders, allowing them to originate even more loans. They grew into behemoths because they lobbied aggressively and played the Washington political game to a T. But after both companies bought boatloads of risky mortgages, they required a federal rescue.

Outwardly, Fannie and Freddie wrapped themselves in the American flag and the dream of homeownership. But internally, they were relentless in their pursuit of profits from partners in the mortgage boom. One of their biggest and most steadfast collaborators was Countrywide, the subprime lending machine run by Angelo R. Mozilo.

Countrywide was the biggest supplier of loans to Fannie during the mania; in 2004, it sold 26 percent of the loans Fannie bought. Three years later, it was selling 28 percent. What Countrywide got out of the relationship was clear “” a buyer for its dubious loans. Now the taxpayer is on the hook for those losses.

(Later in 2004, by the way, the Securities and Exchange Commission found that Fannie had used improper accounting and ordered it to restate its earnings for the previous four years. Some $6.3 billion in profit was wiped out.)

But Representative Darrell Issa, a California Republican and ranking member on the House Committee on Oversight and Government Reform, says he has concerns about such mating dances.

” Lost in the debate over how best to legislate the aftermath of the financial crisis has been the necessity to conduct an inward examination of the too-cozy relationship between government enterprises and private industry,” Mr. Issa said. ” The true nature of this strategic partnership between Countrywide and Fannie-Freddie should be exposed so we can measure the extent to which it fostered the conditions leading to the financial meltdown.”

Understanding how these companies operated is crucial if we want to avoid repeating the mistakes of our recent past. So, when you hear about Fannie and Freddie reform this fall, remember that we still don’t know the half of it.


I don’t quite understand the objective of the New York Times with this article but I think it has to do with them pitching it as “housing reform” instead of what it really should be, “banking reform.”

The recent Financial Regulatory Reform bill went easy on the banks and Wall Street and by taking Fannie and Freddie out of the FinReg bill, the banking industry succeeds in making it look more like “housing reform” was the real problem not, “banking reform.”

I can see the mega banks blaming the financial meltdown on Fannie and Freddie now. Maybe this New York Times article is part of that PR strategy. The big banks probably want to draw attention away from the fact that the Financial Regulatory Reform bill that just passed didn’t do nearly enough to prevent future financial crises.

Anyway, that’s my theory this afternoon.

ADDED: From HousingWire;

After years of favorable consideration by both Republican and Democrats “” the result of millions in lobbying expenses “” Fannie and Freddie find themselves personae non grata on Capitol Hill.