About a week ago (Sept. 7), James Lockhart of the Federal Housing Finance Agency (FHFA) took into conservatorship a major government-sponsored enterprise (GSE) duopoly authorized to make loans and loan guarantees, Fannie Mae and Freddie Mac. Fannie Mae was initially introduced as a mortgage credit facility (like a national savings-and-loan for primary mortgage lenders using federal money) in 1936; the risk of mortgage payment and/or repayment of the original principal was transferred to the secondary market, freeing up primary market lenders to make new loans. By 1965, the percentage of homeowners had increased from about 44 percent in 1940 to 63 percent, and the federal share of the residential market was roughly 6%, with other primary players being savings and loans, savings and commercial banks, and life insurance companies. Fannie Mae was "privitized" in 1968 by LBJ to take it off the federal budget, focusing on FHA or VA-guaranteed loans, and Freddie Mac was added in 1970 to provide liquidity for savings and loan and other lenders and brokers. Certain business restrictions were subsequently relaxed, facilitating growth of the GSE's. The secondary market has attracted pension funds, institutions, foreign central banks and other investors to loan at low interest rates because of US government backing; bundled mortgage securities provided diversification of risk for investors.
These two shareholder-owned companies enjoyed competitive advantages over their competitors, including state/local tax exemption, a credit line at the US Treasury, exemption from SEC oversight, and possible intercession in the open market by the Fed Reserve to purchase relevant securities and have aggressively used their federal cost advantage over their private sector competition to increase their overall share to over half the residential mortgage market, almost 50% larger than the country's largest bank. A recent probe by the Justice Department and the SEC, revealed accounting errors in total of just over $4.5B. Whereas banks hold about $1 in capital for $12 in assets, the GSEs had about $1 for every $20 accordingly. Relevant attempts to implement accounting-rule reforms lowering risk of the GSE's failed, attributable to the influence of liberal lobbyists. The end result is federal taxpayers assumed the additional risk of the capital/asset imbalance vs. the private sector, plus the disproportionate risk of having assumed over half of the troubled 12-trillion-dollar residential mortgage market; their current debt constitutes nearly half of the national debt.
Conservatives argue that the liquidity concerns that Fannie Mae initially was designed to address during the Great Depression and post-war years are no longer relevant, and the marginal benefits of increasing home ownership outweighed the risk assumed by the taxpayer by the unnecessarily large federal exposure to the residential mortgage market. In addition, they recommend allocating assets among multiple entities without the government cost/subsidy advantages and spinning them off to the private sector.
Barack Obama has been trying to argue lobbyist influence on the McCain campaign and has attempted to slice and dice numbers in a misleading way. However, from OpenSecrets.org, we note the following cumulative campaign contributions from Fannie Mae and Freddie Mac (1989-2008):
Barack Obama total $126,349 PAC $6000 Individual $120,349
John McCain total $ 21,550 PAC $ 0 Individual $ 21,550
Barack Obama ranked #2 recipient overall, despite being only in his third year in the Senate. It should be noted James Johnson, who led Fannie Mae from 1991-1998, resigned from the Obama campaign in June over disclosure of certain loans he had received after leaving Fannie Mae by infamous top mortgage lender Countrywide outside the normal underwriting process, some reportedly at below-market interest rates. It should be noted overall Barack Obama has drawn about $10M from the securities and investment banking sector, almost 50% more than McCain.
The reactions from the candidates on the crisis are notable. John McCain is talking in terms of the above conservative critique; Barack Obama does the usual liberal bashing of executive pay and parachutes, the profit motives of GSE's and stockholder greed, completely ignoring McCain's business model critique. This is just another indicator of Obama's fundamental incompetence on business and economic issues.
In addition, the Lehman Brothers bankruptcy yesterday roiled the financial markets, causing the largest decline in the Dow since the 9/11 market correction. The reaction of the candidates is instructive; as usual, Obama responded by arguing for more government regulation, a bigger federal footprint. McCain commended the fact that taxpayers were not going to bail out Lehman's business management failure, responded with his Teddy Roosevelt-style populism on executive pay and parachutes, and then spoke not so much about eliminating regulation at the federal level but consolidating fragmentary federal regulatory structures into a cohesive, more efficient, more manageable framework, just as we attempted to do the same with lack of integration, redundancies and inconsistencies in intelligence gathering following 9/11.
To conclude, again using OpenSecrets.org with respect to Lehman Brothers and aggregate campaign contributions from 1989-2008:
Barack Obama total $395,574 PAC $ 0 Individual $395,574
John McCain total $145,100 PAC $1,000 Individual $144,100
Once again, Barack Obama ranked as #2 overall, despite being in the Senate only 3 years.
