| Treasury Secretary Hank Paulson placed Fannie Mae and Freddie Mac into government conservatorship (9/7), making taxpayers liable for hundreds of billions' worth of troubled loans. The two "government-sponsored entities," which own half of the residential mortgages in the US, are supposed to make a profit for their stockholders but they operated with the understanding that the government guaranteed the securities. The alternative, in Paulson's view, was to allow the US mortgage market to collapse, possibly bringing down the global economy with it.
Fannie Mae-the Federal National Mortgage Association-originated during the New Deal in 1938 as a public agency to prop up the housing market. It created long-term, fixed-rate mortgages and allowed banks and savings-and-loans to write the mortgages and sell them to Fannie Mae, which allowed the banks and thrifts to write more mortgages. Home ownership rates soared and the mortgage industry remained a stable, if unspectacular, financial performer for decades. Fannie Mae was privatized in 1968 and Freddie Mac (Federal Home Loan Mortgage Corp.) was created two years later to give Fannie Mae competition.
The system sailed along until the 1980s, when bankers realized there was big money to be made from "thrifts." Reagan-era deregulation of S&Ls allowed them to get into more speculative deals, which fed a real-estate boom that busted in the late 1980s costing hundreds of billions in a taxpayer bailout. Sen. John McCain was caught in the "Keating Five" scandal after he tried to intervene with federal regulators on behalf of a campaign contributor with a failed S&L. He later adopted a reform agenda in part to reclaim his reputation.
McCain has said he doesn't know much about economics, but one of his mentors was former Sen. Phil Gramm (R-Texas), who wrote the Gramm-Bliley-Leach bill in 1999, which repealed New Deal laws that maintained barriers between commercial banks, investment banks and insurance companies. Gramm's bill deregulated the financial industry-and now is blamed by many economists for the epidemic of speculation and fraud. In December 2000 Gramm slipped the "Commodity Futures Modernization Act" into an 11,000-page government reauthorization with little notice. The bill allowed banks to use "credit default swaps" to pass mortgage risks to insurance companies and other investors.
Robert Kuttner wrote at Prospect.org (9/8) that Fannie Mae was perverted from a government-sponsored and well-managed agency that served the public interest into a privatized casino whose big bets enriched a few insiders and then helped crash the entire system.
"So now, the Bush administration is playing half-of-FDR. It is saving capitalism from itself as Roosevelt did-but without getting serious about regulatory standards going forward. The taxpayers will bail out Fannie, but the rules for regulation of the mortgage system have yet to be written. That will await the next administration. And if the next administration is led by John McCain, the top financial guy is likely to be former Sen. Phil Gramm, the Senate's biggest cheerleader for reckless deregulation."
See Dispatches at The Progressive Populist (Cross posted from DailyKos) |
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