McCain's Warning About Fannie Mae and Freddie Mac<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
J. Michael Sharman
 
On the day after the first Presidential debate between Barrack Obama and John McCain, ABC News reported that Obama told a campaign audience, "I think Senator McCain just doesn't get it – he doesn't understand that the storm hitting Wall Street hit <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Main Street long ago. That's why his first response to the greatest financial meltdown in generations was a Katrina like response. Sort of stood there. Said the 'fundamentals of the economy are strong.'"[1]
Actually, John McCain did see this problem coming and his first response 2 ½ years ago was on the Senate floor when he tried to have Congress  address it.
Both Obama and McCain were in the U.S. Senate when the Federal Housing Enterprise Regulatory Reform Act of 2005 was pending. Both had a chance to co-sponsor the bill. Only four senators sponsored or co-sponsored it. All were Republicans. John McCain was one of the three co-sponsors.
            The Congressional Record captured the reasons Sen. McCain gave when he became a co-sponsor:
Mr. President, this week Fannie Mae's regulator reported that the company's quarterly reports of profit growth over the past few years were ``illusions deliberately and systematically created'' by the company's senior management, which resulted in a $10.6 billion accounting scandal.
The Office of Federal Housing Enterprise Oversight's report goes on to say that Fannie Mae employees deliberately and intentionally manipulated financial reports to hit earnings targets in order to trigger bonuses for senior executives. In the case of Franklin Raines, Fannie Mae's former chief executive officer, OFHEO's report shows that over half of Mr. Raines' compensation for the 6 years through 2003 was directly tied to meeting earnings targets. The report of financial misconduct at Fannie Mae echoes the deeply troubling $5 billion profit restatement at Freddie Mac.
The OFHEO report also states that Fannie Mae used its political power to lobby Congress in an effort to interfere with the regulator's examination of the company's accounting problems. This report comes some weeks after Freddie Mac paid a record $3.8 million fine in a settlement with the Federal Election Commission and restated lobbying disclosure reports from 2004 to 2005. These are entities that have demonstrated over and over again that they are deeply in need of reform.
For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac--known as Government-sponsored entities or GSEs--and the sheer magnitude of these companies and the role they play in the housing market. OFHEO's report this week does nothing to ease these concerns. In fact, the report does quite the contrary. OFHEO's report solidifies my view that the GSEs need to be reformed without delay.
I join as a cosponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005, S. 190, to underscore my support for quick passage of GSE regulatory reform legislation. If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.
I urge my colleagues to support swift action on this GSE reform legislation.[2]
 
His colleagues definitely did not take swift action to reform Fannie Mae or Freddie Mac, and it is not merely coincidental that the top person on Fannie Mae and Freddie Mac's political contributions list is, Sen. Chris Dodd (D_CT), the Chairman of the U.S. Senate Committee on Banking, Housing, and Urban Affairs.[3] (Yes, that is the same Sen. Dodd who received favorable loan treatment from Countrywide Mortgage with lower rates and waived fees that saved him approximately $75,000.[4])
In the meantime, back on Main Street, the Sunday edition of our local Culpeper Star-Exponent had the headline, "Little Guys Avoid Wall St. Woes". The article quoted quite a number of financial folks for the proposition that  smaller banks and credit unions are staying out of trouble and doing quite well right now, because unlike the big firms traded on Wall Street, they know their customers and don't dilute their portfolios with loans they know nothing about.[5]
Good banking practices produce good results even in today's difficult market. In other words, as Sen. McCain said, the fundamentals of our economy are sound, but we cannot ignore, as Senators Obama and Dodd have done for at least 2 ½ years, the need to have the corrupt big lending institutions held accountable, and appropriately regulated.
 
 
 

[1] "Obama Slams McCain for a 'Katrina Like' Response to the Bailout Bill", September 28, 2008,
http://blogs.abcnews.com/politicalradar/2008/09/obama-slams-mcc.html
 

[2] http://thomas.loc.gov/cgi-bin/query/D?r109:1:./temp/~r1098rP05C::
FEDERAL HOUSING ENTERPRISE REGULATORY REFORM ACT OF 2005 -- (Senate - May 25, 2006)

[3] Top Recipients of Fannie Mae and Freddie Mac Campaign Contributions, 1989-2008 www.opensecrets.org/news/2008/07/top-senate-recipients-of-fanni.html - 85k -
The top four on Fannie Mae and Freddie Mac's 1989 to 2008 political contributions lists are all Democrats in the U.S. Senate: #1, Sen. Chris Dodd (D-CT) $133,900; #2, Sen. John Kerry, (D-MA) $111,000; #3, Sen. Barack Obama, (D-IL) $105,849; and, of course, Sen. Hillary Clinton (D-NY) at #4 with $75,550.

[4] "Senators Reportedly Got Favors from Countrywide"
 http://www.npr.org/templates/story/story.php?storyId=91573913 June 17, 2008

[5] Amos, Catherine "Little Guys Avoid Wall St. Woes" Culpeper Star-Exponent, September 28, 2008