Fannie's Lesson: The Real Scandals Are Legal

I know the prospect of reading a column about Fannie Mae, the mortgage crisis and government bailouts is as appealing as a bowl of cough syrup. So let's consider the latest news about the giant company something young parents today call a "teaching moment."

The lesson is about this old and ignored government truism: The worst scandals are the ones that are perfectly legal.

The electorate and its press corps can get into an outraged lather about whether John McCain improperly took a ride on a crony's Gulfstream or whether Barack Obama is too close to a shady real estate operator. Congressional staffers are trained to know whether a gift basket of walnuts is kosher, and the difference between legal finger food and an illegal sandwich.

Fannie Mae is different. It is what is called a government-sponsored enterprise. It was established by Congress in the New Deal to buy mortgage loans from banks so they could unload some of the risk and make loans to homebuyers more safely. Wonderful.

So Fannie Mae was allowed to borrow money more cheaply than private mortgage security businesses and allowed to keep less emergency capital in the safe than competitors. As if that weren't enough, Fannie was made exempt from state and local taxes. Imagine if Goldman Sachs didn't have to pay New York City taxes.

There are strong arguments that Fannie Mae should have government backing to make home buying easier. There are strong arguments that the government should help stabilize Fannie Mae right now. I am agnostic on both points.

The ethical, as opposed to economic, fight is about whether the government-sanctioned benefits Fannie Mae has enjoyed should have been used to create the executive largess it did.

Fannie Mae was a quiet company that raised few financial eyebrows until the early 1990s.

Since then, however, Fannie Mae has been a government-sponsored wealth generator for its executives. That is wonderful, too, except for the small fact that this private wealth was gained by public support.

The man responsible for the change was James Johnson, a close aide to Vice President Walter Mondale who came to Fannie Mae in 1990. From 1990 to 2000, the company's stock grew 500 percent. Johnson earned scores of millions, and other executives earned money that was extraordinary for Washington at the time. It was extraordinary for a government-sponsored enterprise. That's when Fannie met controversy.

For example, the District of Columbia started wondering why, if Fannie was making so many people rich, it didn't pay the cash-strapped city any taxes. The nation's capital is still wondering, and local pols are trying to change the law and get at least a slice of the tax revenue, which was estimated to be around $300 million in 2007. That's a lot of cops on the street.

Johnson and Fannie responded by filling its executive row with former government bigwigs who were not there to manage money, but to twist congressional arms and protect Fannie's privileges. (A good list of those players can be found here.) They prevailed.

They still prevail. In just the first quarter of 2008, Fannie spent $1.39 million on lobbying. Those are huge numbers for Washington lobbying.

In 2004, Fannie was found to have misstated its finances. Thanks to its lobbying prowess, Congress trimmed no sails and added no regulation despite the obvious risks.

Lo and behold, the risks were real. Bad things happened. And now the government is pitching in and putting taxpayer funds at risk to stabilize Fannie Mae.

That is but another episode in a long-running legal scandal.

There are no hookers, embezzlers and slush funds. Just laws, lobbyists and pay packages.

In 1981, Congress passed the huge Reagan tax bill. The administration that declared its eternal fealty to the free-market made an exception for the tax code. The Reaganomics decided they, rather than the free market, should decide what specific industries should get special tax breaks to attract capital. Free marketers think otherwise, but never mind.

So capital flowed into oil exploration, real estate investment, llama ranching, jojoba bean cultivation and equipment leasing not because of profits, but because of paper tax losses that could offset real income. Those were the glory days of tax shelters, and for a spell, many of the wealthiest citizens paid no taxes at all. The tax breaks were protected by a cadre of the most swashbuckling.

That was a classic legal scandal.

Like the Fannie Mae saga, the scandal was intentionally sanctioned by government, perpetuated by professional lobbyists and of little interest to investigative reporters. The biggest scandals are the legal ones.

This piece was originally posted at NPR

Comments

[SisterAnn]

According to the history of Fannie Mae, it was started because the banks wouldn't loan money in 1938. FDR set it up to make housing loans. It was a wonderful program, but over the years it was changed. Now you buy stocks in it and can get a 6% dividend plus the growth of the price of the stock when it goes up. The CEOs are the highest paid in the country.

Fannie and Freddie managed to have enough regulation and oversight that they didn't get many bad loans or subprime loans. Paulson tried to push subprime onto Fannie and Freddie a few months ago and no one went along with it.

Fannie and Freddie are in good shape at this time.

Now, paulson is asking them to back all loans that the brokerages sold, which is in all reality the subprime loans. There are a lot of them overseas. They have polluted foreign countries with them.

It was horrifying to see our senators seeming to think that was a good idea.

It will almost double the deficit, it will weaken the dollar which will cause rampant inflation.

On the financial shows, they said when this is over, they will privatize Fannie and Freddie.

Housing is too high. Roll back everyone's mortgage. Have a lower rate for mortgages of those who make a certain amount of income. Just don't cover the subprime loans. We taxpayers have better things to spend our tax money on.

[Rule Of Law]

"Johnson and Fannie responded by filling its executive row with former government bigwigs who were not there to manage money, but to twist congressional arms and protect Fannie's privileges."

Would this be anything at all like Goldman-Sachs, the world's largest investment bank, acting as the Financial "Prep School" for the majority of the Federal Government's biggest economic players--Sec of Treasury, Head of the FED, etc? And not just in this administration, mind you, but for generations!

Turning FNM into their own piggy bank was a crime. The tenor of this article suggests that we should have our Government divest itself of these mortgage institutions because of the "scandal." I say, why let a few bad apples spoil a system that helped to regulate the nation's largest industry pretty darn well for at least 60 years? Let's take a look at some of the deregulation and rule changes that were pushed through by Johnson and company, take whatever action necessary to fix those, and prosecute anyone who has broken the law.

Because it would be a far greater Scandal to allow these institutions to fall into the hands of the private investment bankers, Like Goldman, that have been complicit in this subprime CDO scam that you and I are now paying for with bailouts and guarantees.

[Rule Of Law]

And I hate being right all the time, but:

"However, ideologues in the Bush administration and commercial competitors of Fannie and Freddie have skillfully manipulated the markets to undermine Fannie and Freddie for more than six years. The result has been a weakening of the two linchpins of the housing finance system just when they are needed most."

Did you get that? "Skillfully manipulated...to undermine..."

This from a man who was the Chairman and CEO of Fannie Mae!

I hate to say this as well, but this entire subprime, cdo fiasco may have been architected Just to arrive at this point! The sell off of FNM and Freddie to Wall Street and the FED! This last of the protections afforded us by FDR's policies to level the economic playing field and create a true Middle Class is in danger of being privatized out of existence. Don't fall for it!

[SisterAnn]

You are right. These men and companies are the brightest in the land. Where we think they have failed at so many things, they haven't. They may have failed us, but they have either made a lot of money for themselves or their cronies or have destroyed another part of FDR's New Deal.

[Rule Of Law]

Forgot the link to the Franklin Raines article, will also include a page that shows how many dozens of articles are bing written right now as PR for the campaign to sell off Fannie and Freddy.

http://www.washingtonpost.com/wp-dyn/content/article/2008/07/15/AR2008071502426.html

http://www.blogrunner.com/snapshot/t/news/business/companies/fannie_mae/

[Rule Of Law]

Imagine if Goldman Sachs didn't have to pay New York City taxes.

Do they?

[KillTheMessenger]

Oh, come on. For a whole generation you keep telling your kids that lawyer and MBA are better jobs than engineer or scientist. The "brightest" of those lawyers and MBAs prove it by gaming the system with what they have learned, making billions on the side, and now you are pi$$ed? What's this teapot tempest about?

[Henry]

Soo.... how can we be a banana republic if we don't act like one?

[PATina]

Working around the insurance industry... I learned that it is legal "extortion". It never ceases to amaze me the level of greed in mankind... and how they make "laws" to justify their greed.

A dark malevolent side of me wishes that America would "crash" so we could start all over again... but then I realize that we would just do the same all over again.