Bush: More Regulation Needed! Dems: Nope!

[MKSheppard]

September 2003 NYT

September 11, 2003
New Agency Proposed to Oversee Freddie Mac and Fannie Mae
By STEPHEN LABATON

The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.

Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry.

The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios.

The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac -- which together have issued more than $1.5 trillion in outstanding debt -- is broken. A report by outside investigators in July concluded that Freddie Mac manipulated its accounting to mislead investors, and critics have said Fannie Mae does not adequately hedge against rising interest rates.

''There is a general recognition that the supervisory system for housing-related government-sponsored enterprises neither has the tools, nor the stature, to deal effectively with the current size, complexity and importance of these enterprises,'' Treasury Secretary John W. Snow told the House Financial Services Committee in an appearance with Housing Secretary Mel Martinez, who also backed the plan.

Mr. Snow said that Congress should eliminate the power of the president to appoint directors to the companies, a sign that the administration is less concerned about the perks of patronage than it is about the potential political problems associated with any new difficulties arising at the companies.

The administration's proposal, which was endorsed in large part today by Fannie Mae and Freddie Mac, would not repeal the significant government subsidies granted to the two companies. And it does not alter the implicit guarantee that Washington will bail the companies out if they run into financial difficulty; that perception enables them to issue debt at significantly lower rates than their competitors. Nor would it remove the companies' exemptions from taxes and antifraud provisions of federal securities laws.

The proposal is the opening act in one of the biggest and most significant lobbying battles of the Congressional session.

After the hearing, Representative Michael G. Oxley, chairman of the Financial Services Committee, and Senator Richard Shelby, chairman of the Senate Banking Committee, announced their intention to draft legislation based on the administration's proposal. Industry executives said Congress could complete action on legislation before leaving for recess in the fall.

''The current regulator does not have the tools, or the mandate, to adequately regulate these enterprises,'' Mr. Oxley said at the hearing. ''We have seen in recent months that mismanagement and questionable accounting practices went largely unnoticed by the Office of Federal Housing Enterprise Oversight,'' the independent agency that now regulates the companies.

''These irregularities, which have been going on for several years, should have been detected earlier by the regulator,'' he added.

The Office of Federal Housing Enterprise Oversight, which is part of the Department of Housing and Urban Development, was created by Congress in 1992 after the bailout of the savings and loan industry and concerns about regulation of Fannie Mae and Freddie Mac, which buy mortgages from lenders and repackage them as securities or hold them in their own portfolios.

At the time, the companies and their allies beat back efforts for tougher oversight by the Treasury Department, the Federal Deposit Insurance Corporation or the Federal Reserve. Supporters of the companies said efforts to regulate the lenders tightly under those agencies might diminish their ability to finance loans for lower-income families. This year, however, the chances of passing legislation to tighten the oversight are better than in the past.

Reflecting the changing political climate, both Fannie Mae and its leading rivals applauded the administration's package. The support from Fannie Mae came after a round of discussions between it and the administration and assurances from the Treasury that it would not seek to change the company's mission.

After those assurances, Franklin D. Raines, Fannie Mae's chief executive, endorsed the shift of regulatory oversight to the Treasury Department, as well as other elements of the plan.

''We welcome the administration's approach outlined today,'' Mr. Raines said. The company opposes some smaller elements of the package, like one that eliminates the authority of the president to appoint 5 of the company's 18 board members.

Company executives said that the company preferred having the president select some directors. The company is also likely to lobby against the efforts that give regulators too much authority to approve its products.

Freddie Mac, whose accounting is under investigation by the Securities and Exchange Commission and a United States attorney in Virginia, issued a statement calling the administration plan a ''responsible proposal.''

The stocks of Freddie Mac and Fannie Mae fell while the prices of their bonds generally rose. Shares of Freddie Mac fell $2.04, or 3.7 percent, to $53.40, while Fannie Mae was down $1.62, or 2.4 percent, to $66.74. The price of a Fannie Mae bond due in March 2013 rose to 97.337 from 96.525.Its yield fell to 4.726 percent from 4.835 percent on Tuesday.

Fannie Mae, which was previously known as the Federal National Mortgage Association, and Freddie Mac, which was the Federal Home Loan Mortgage Corporation, have been criticized by rivals for exerting too much influence over their regulators.

''The regulator has not only been outmanned, it has been outlobbied,'' said Representative Richard H. Baker, the Louisiana Republican who has proposed legislation similar to the administration proposal and who leads a subcommittee that oversees the companies. ''Being underfunded does not explain how a glowing report of Freddie's operations was released only hours before the managerial upheaval that followed. This is not world-class regulatory work.''

Significant details must still be worked out before Congress can approve a bill. Among the groups denouncing the proposal today were the National Association of Home Builders and Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing.

''These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''

Representative Melvin L. Watt, Democrat of North Carolina, agreed.

''I don't see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing,'' Mr. Watt said.

[MKSheppard]

Damn, forgot some commentary on this.

It's pretty much kind of weird looking back at this articul five years in the future, and knowing what a trainwreck is gonna come, and then going "what the fuck" at the blaiseness of leading Democrats, who were concerned that tighter regulations would limit the development of "affordable housing".

[Admiral Valdemar]

The repealing of the Glass-Steagall act was bipartisan, so anyone who thinks the Dems weren't accountable for a share of this clusterfuck too is deluding themselves. That said, some of the worst laissez faire economic proponents are neoliberal GOP card holders.

[ray245]

What is Obama's stance on the issue? There is really a need to notice the importance of regulation now...even if geroge bush said that first...

[Gerald Tarrant]

Fannie and Freddie have always been treated differently. Due to their implicit government support Fannie and Freddie have always been able to borrow at below market levels; the problem is that instead of lowering mortgage rates, they always lent at market levels. Alan Greenspan called this a big fat gap.

Two of the largest positions in the portfolio--Fannie Mae and Freddie
Mac--produced below-Index results for the year due to the controversy
surrounding their operations as Government Sponsored Enterprises (GSEs). Both
companies are stockholder-owned, but operate under Congressional charter to
promote home ownership by ensuring the adequate flow of money into the mortgage
lending market. The controversy stems from two separate issues. The first is the
implicit subsidy these entities receive in the form of lower borrowing costs,
which results from widespread belief that the federal government will stand
behind the obligations of its GSEs. Many analysts question how much of the
subsidy the GSEs capture and how much they pass on to homeowners. The second
issue involves determining the best regulatory framework necessary to ensure the
safety and soundness of these very large institutions. While these issues are
important, we believe that the controversy distracts investors' attention away
from the real risk to any leveraged financial institution--declining asset
quality. On that issue, we believe Fannie and Freddie have done a great job of
keeping losses low in their mortgage portfolios. We have chosen to hold these
currently controversial companies because we believe they are very good
businesses. Their efficient operations and implicit subsidy create "a big fat
gap" (Fed Chairman Alan Greenspan's accurate, albeit inelegant, description)
between borrowing costs and portfolio income that, in our view, translates into
high profitability. And they are cheap; both companies sell at about ten times
this year's earnings, barely more than half the multiple of the S&P 500.

SEC filings from some mutual fund or other

The GSE's have never been free market, and even Randroid Greenspan has acknowledged that.

They have in fact frequently used their large market share as a tool of political pressure.

The companies orchestrated a letter-writing campaign by traditional allies including real estate agents, home builders and mortgage lenders. Fannie Mae ran radio and television ads ahead of a key Senate committee meeting, depicting a Latino couple who fretted that if the bill passed, mortgage rates would go up.

WaPo

No one looks good coming out of this, not even Senator Obama, who has former CEO's of Fannie and Freddie on his staff. But blaming this on Laissez faire economics is stupid. This is an example of why business and government incest is a bad idea.

[SirNitram]

What is Obama's stance on the issue? There is really a need to notice the importance of regulation now...even if geroge bush said that first...

Comes out and calls it a failed philosophy of de-regulation at fault.

Link

This morning we woke up to some very serious and troubling news from Wall Street.

The situation with Lehman Brothers and other financial institutions is the latest in a wave of crises that are generating enormous uncertainty about the future of our financial markets. This turmoil is a major threat to our economy and its ability to create good-paying jobs and help working Americans pay their bills, save for their future, and make their mortgage payments.

The challenges facing our financial system today are more evidence that too many folks in Washington and on Wall Street weren’t minding the store. Eight years of policies that have shredded consumer protections, loosened oversight and regulation, and encouraged outsized bonuses to CEOs while ignoring middle-class Americans have brought us to the most serious financial crisis since the Great Depression.

I certainly don’t fault Senator McCain for these problems, but I do fault the economic philosophy he subscribes to. It’s a philosophy we’ve had for the last eight years – one that says we should give more and more to those with the most and hope that prosperity trickles down to everyone else. It’s a philosophy that says even common-sense regulations are unnecessary and unwise, and one that says we should just stick our heads in the sand and ignore economic problems until they spiral into crises.

Well now, instead of prosperity trickling down, the pain has trickled up – from the struggles of hardworking Americans on Main Street to the largest firms of Wall Street.

This country can’t afford another four years of this failed philosophy. For years, I have consistently called for modernizing the rules of the road to suit a 21st century market – rules that would protect American investors and consumers. And I’ve called for policies that grow our economy and our middle-class together. That is the change I am calling for in this campaign, and that is the change I will bring as President.

As for the President's move, wow. A brand new agency. It's not like he could just push Congress to put the old laws back in place, properly fund and train regulators, and do the fucking job, now could he? No, he must have a new shiny toy with his name on it.

[Thanas]

^It's actually a pretty smart move by Bush if we think in crony-logic. By setting up a new agency he gets to control the hiring practices, plus he can define the agency as he wishes. Unlike the old one, which has all kinds of institutional memory and history.

[Gerald Tarrant]

^It's actually a pretty smart move by Bush if we think in crony-logic. By setting up a new agency he gets to control the hiring practices, plus he can define the agency as he wishes. Unlike the old one, which has all kinds of institutional memory and history.

It was a good idea at the time. The original organization which oversaw Fannie and Freddie was deliberately hamstrung. Unlike other regulatory agencies it couldn't set it's budget, instead having to come back to congress each year for funding requests. That made the oversight subject to lobbying efforts, it got bad enough that when President Bush ordered an independent audit the audit disclosed significant irregularities over what both OFHEO and Freddie were saying. Rather then amending the whole mess that the thing has become the current legislation will be crafting a new agency. President Bush's proposal in 2003 would have done the same thing; only if it had been done then the federal government might not be on the hook for so many bad loans that Fannie and Freddie have floated.

It's also amusing that you're accusing President Bush of cronyism, when you consider the particular case of Freddie Mac's very own F.D. Raines.

[Thanas]

It's also amusing that you're accusing President Bush of cronyism, when you consider the particular case of Freddie Mac's very own F.D. Raines.

Have you been living under a rock those past years or are you not aware of the corruption scandals and sheer inefficiency of this administration?

[Col. Crackpot]

''These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''

In a logical world this would have cost Bahhhney his jahhb. But New England politics are rarely logical.

[Gerald Tarrant]

It's also amusing that you're accusing President Bush of cronyism, when you consider the particular case of Freddie Mac's very own F.D. Raines.

Have you been living under a rock those past years or are you not aware of the corruption scandals and sheer inefficiency of this administration?

Your comment was in relation to the new agency which will regulate Fannie and Freddie, which are already bastions of former Clinton cronies. It's very ironic that an inept former Clinton Lackey runs Freddie into the ground and you're concerned about the possibility of an unqualified Republican appointee as a watch dog. At worst ineffectual regulations are crafted and the direction crafted by former Clinton Cronies continues. The damage has been done already, by someone else's cronies.