Shelving the GSE Reform Bills
December 12, 2003

Fannie Mae and Freddie Mac-the giant government sponsored housing finance corporations-apparently haven't lost any of their political clout despite the front page stories about their accounting scandals and mismanagement.

Members of Congress issued a blizzard of press releases of the standard "shock and dismay" variety last June when Freddie Mac's top executives were forced to resign in the wake of revelations that the company had misstated its income by $4.5 billion. Not to be outdone, Fannie Mae admitted in October that it had misstated its stockholder equity by $1.1 billion in a third quarter report.

Congress, which has always treated Fannie and Freddie with the softest of kid gloves finally was forced to look like it was taking its oversight responsibility of the Government Sponsored Enterprises seriously. For six months, members of Congress drafted a variety of reform proposals and the Senate and House Banking Committees dutifully conducted well-publicized hearings.

But, when Congress adjourned this month, the reform bills were still sitting in Committee. This means that reforms will have to wait until next year. Congress always moves at a snail's pace at the beginning of a new session. As a result it is likely that spring flowers will be in bloom in Washington before the Committees pick up the politically hot potato of GSE reform again.

The GSEs are not happy with proposals which would allow regulators to establish minimum capital standards, require prior approval of new products or put the companies in receivership in the event of a failure or a general tightening of ongoing oversight and greater transparency.

Despite the revelations of accounting problems and other shortcomings, the GSEs remain a potent political force and that fact is not lost on either the Bush Administration or Democrats and Republicans in the Congress. So while reforms may be politically necessary, Congress isn't inclined to step too hard on the GSE toes.

Congress, particularly the members of the two Banking Committees, are well aware that the GSEs have been adept at selling the idea that Fannie and Freddie are the keepers of the "American Dream of Home Ownership."And the GSEs are very solicitous of Members of Congress, never failing to include them in well-orchestrated press conferences called to announce housing finance projects in their home districts.

During the 2002 federal elections, Fannie Mae and Freddie Mac contributed $6.57 million to candidates, according to the Center for Responsive Politics. Astonishingly, Fannie hired 14 lobbying firms and Freddie Mac paid the tab for 26 other lobbying firms. Lobbying expenses for the two GSEs totaled $9.7 million in the first six months of this year, according to data compiled by FECInfo.com which monitors lobbying on Capitol Hill. The board of directors and the staff of Fannie and Freddie have always been populated by former officials and political activists from both the Republican and Democratic parties, who are given huge pay packages.

Part of the delay in moving the reform legislation has been the Bush Administration's insistence that the Office of Federal Housing Enterprise Oversight (OFHEO) be dissolved and the regulatory functions assigned to an office within the Treasury Department.

The Treasury Department is a mammoth bureaucracy with 160,000 employees carrying out duties ranging from the Secret Service to the management of the fiscal affairs of the federal government to the collectionof taxes, to mention just a few of the myriad of the department's assignments . GSE regulation would be buried in this bureaucracy and no one would judge the performance of the Secretary of the Treasury on how well the regulatory duties were carried out. Accountability for GSE regulation would suffer greatly.

Treasury Secretaries are part of the inner circle of any President's Administration, Democratic or Republican and they are often political confidants as well as well as Cabinet officers. Faced with cracking down on Fannie and Freddie for safety and soundness reasons versus letting the GSEs roar forward with a politically attractive finance scheme might prove to be a difficult dilemma for a Treasury Secretary. In addition, placing responsibility in Treasury for regulation of GSEs (which are major players in the money markets) increases the perception that Fannie and Freddie are quasi-governmental entities.

Fannie and Freddie each already have a $2.25 billion draw on the Treasury Department should they fall on bad times. This link, which gives the GSEs great benefits in raising funds in the market, should not be enhanced by assigning the Treasury Department direct responsibility for the safety and soundness of the corporations.

Rather than reinventing the wheel, Congress should leave the present agency-OFHEO-- in place with statutory assurances that it is an independent agency with the sole function of regulating Fannie and Freddie.

OFHEO, under the direction of Armando Falcon, has assembled a small, but capable staff. It has been handicapped, however, by lack of funds with both the Senate and House Appropriations Committees keeping a tight lid on the agency. The Office of Management and Budget has been less than courageous in pushing for more funding for fear of antagonizing key figures on the Appropriations Committees. The regulatory reforms need to includeassurances that OFHEO be given enough staffing and adequate money to carry out its job.

Fannie Mae is the nation's second largest corporation measured in terms of assets. Freddie Mac is the fifth largest. Not only do these two each have a draw of $2.25 billion from the Treasury, but they are obviously high on the list of corporations too big to be allowed to fail. That means they are candidates for taxpayer bailouts. Congress should not have left town this year without enacting the GSE reforms. When it gets back next month the legislation needs to be sent to the President on an expedited basis. It will be a great test of how much courage the Congress and the President can muster in an election year.