"The Angelides Commission - A Mea Culpa from Congress - Don't Bet On It"

Sydney M. Williams

Thought of the Day

“The Angelides Commission – A Mea Culpa from Congress – Don’t Bet On It”

April 12, 2010

Who will regulate the regulators? The Angelides Commission (the Financial Crisis Inquiries Commission) threatens to provide cover for the role Congress played in the downfall of Fannie Mae (FNM) and Freddie Mac (FRE) and the $126 billion of tax payer money those two enterprises have consumed, since entering receivership on September 7, 2008. It raises the ageless question posed by the Roman poet, Juvenal, 2000 years ago: “Quis custodiet ipsos custodes?” (“Who will watch the watchmen?”)

The financial meltdown of late 2008 has many parents – consumers caught up in rising home prices, shady mortgage and real estate brokers, bankers greedy for fees and trading profits, rating agencies who put fees ahead of responsibility and Washington politicians who implemented policy initiatives without regard to financial costs. Consumers have paid dearly. Home prices have declined and millions of homes seized. Jobs have been lost. Shareholders have paid dearly with banks like Lehman disappearing and Merrill and Bear Stearns sold for a fraction of what they had sold at months earlier, and dividends eliminated or reduced by those that survived. While a few traders on Wall Street continue to make millions, a far greater number have lost their jobs. The rating agencies are chastened but remain conflicted, and have become far quicker to downgrade most any piece of paper. But those in Washington, both members of HUD (Department of Housing and Urban Development) and Congress who had the job of regulating and overseeing the two agencies continue unrepentant.

In 2000, HUD mandated that half the mortgage portfolios of FNM and FRE should comprise high-risk, low-income loans. These “affirmative action” credit quotas were raised even higher during the Bush administration. According to Investor’s Business Daily, Commission member and former Reagan Treasury official, Peter Wallinson commented this past week: “HUD was pressing you to continue to make more investments in these affordable housing loans.”

While the former head of the Office of Federal Housing Enterprise Oversight (OFHEO), the agency with direct responsibility for FNM and FRE (1999-2005), Armando Falcon, Jr., made a compelling case in testimony before the Commission that the collapse was “clearly a failure of management and reflected a deeply rooted culture of arrogance and greed”, there is little question that the relationship with Congress was symbiotic. In 2004 hearings before a Congressional Committee, Connecticut Congressman, Chris Shays stated that the two G.S.E.’s not only hired lobbyists to work on their behalf, but they paid others to not lobby against them.

James Lockhart, Director of OFHEO at the time of the collapse of FNM and FRE, in testimony before the Commission, said, as quoted in the New York Times, “that heavy spending (lobbying members of Congress) by the two mortgage companies allowed them to head off most Congressional attempts to raise their capital requirements.” “The G.S.E.’s structure allowed them to be so politically strong that they resisted the very legislation that might have saved them.” In 2004, Republican attempts to reform FNM and FRE and to punish Franklin Raines, Chairman of FNM failed: at the 2004 hearings, Representative Frank Barney, “There is nothing wrong;” Representative Maxine Waters, “We do not have a crisis” and “Our goal of 100% loans has been reached;” Representative Gregory Meeks, “I’m pissed off! There is nothing wrong.” Franklin Raines, between 1998 and his resignation in 2003 received $90 million in compensation for his role as CEO of Fannie Mae, more than half of which was in bonuses that were based upon falsified earnings reports. The Washington Post, headlined a story on May 24, 2006, “Study Finds Extensive Fraud at Fannie Mae.” Two years later, on April 18, 2008, Mr. Raines admitted to accounting fraud during his tenure at FNM and paid a multi million dollar fine, though far less than what he received from taxpayers.

The last CEO of Fannie Mae, before going into receivership, Daniel Mudd, tried, in testimony before the Commission to delineate the inherent conflict between meeting financial goals and attracting capital while, at the same time, adhering to his Congressional mandate. We had, he said, “to maintain a fine balance between financial goals and what we called mission goals.” Mission goals were designed to broaden the homeownership class, by requiring little or no down payment and permitting low-doc or no-doc mortgages.

What they did, instead, was to destroy the dreams of millions of homeowners and nearly bring down the financial system.

While both Fannie Mae and Freddie Mac carry plenty of guilt and their managers deserve the fines and beratings they have received, they had accomplices in Congress and within the last two administrations that, for payments to PACs friendly to their re-election bids, were willing to overlook responsibility to the electorate. Mr. Falcon wrapped up his testimony: “A publicly traded and privately chartered firm does not work.” Peggy Noonan, in the weekend edition of the Wall Street Journal, commenting on the Commissions efforts last week, wrote: “In fact they weren’t dramatic but a tepid affair, gentle and genteel.” Perhaps that was so because the Commission is congressionally appointed, and concerns that a quest for the truth might lead back to Congress. Is there any wonder that the focus thus far has been on management and their immediate regulator, not their overseers in Congress? Is it any wonder that the people of this country have become so cynical about those who supposedly represent them in Washington? Even before Juvenal, Socrates had asked the same question: who will watch the watchmen? The question hangs over us.