- The Washington Times - Tuesday, November 1, 2005

Following an overwhelming bipartisan vote in the House of Representatives last week, Congress is closer than ever before to enacting comprehensive reform legislation to strengthen the oversight and regulation of Fannie Mae and Freddie Mac, the taxpayer-subsidized government sponsored enterprises (GSEs).

That’s welcome news. For the first time in more than a decade, Congress has taken action to protect the American taxpayers from the risks posed by the GSEs. Now it is up to the Senate to finish the job so that President Bush can sign a strong, comprehensive bill into law.

Let us remember why Congress is considering GSE reform. Over the past two years, Fannie Mae and Freddie Mac have revealed accounting scandals of staggering magnitude: Fannie Mae’s earnings restatement is already estimated to be $11 billion — 19 times larger than Enron’s and $1 billion more than WorldCom’s accounting error. And recent news reports suggest that Fannie Mae’s accounting error may grow even larger than previously estimated.

But regardless of exactly how gargantuan the errors, the GSE accounting scandals represent a fundamentally more severe problem than previous business scandals. What makes these instances of cooked books, phony profits and cover-ups of particular concern to the public is that in the event of a financial meltdown at either company, taxpayers could be forced to bear the multibillion-dollar bailout cost — a sum that would make the tab for the Savings & Loan crisis look like chicken feed.

Fannie and Freddie apologists would have us sweep this inconvenient history under the rug, or more likely, deny the existence of these facts. But as the late Senator Daniel Patrick Moynihan famously remarked, “Everyone is entitled to their own opinion — but not their own facts.”

In addition to the taxpayer exposure, the entire economy is at risk should something go seriously awry. Federal Reserve Chairman Alan Greenspan warns at every opportunity about the “systemic risk” posed by the GSEs. That’s Fed-speak. Translated into plain English, it means if Fannie Mae or Freddie Mac make a mistake in their risky and complex hedging strategies, the resultant financial shock-waves could be catastrophic, not only for the housing market, but the economy as a whole. Now that’s downright scary. And where I come from, when someone as wise as Mr. Greenspan tells you there’s a skunk at the picnic, prudence dictates that you at least sniff around.

The accounting scandals and the Fed Chairman’s repeated warnings have served as a wake-up call. The White House, the Treasury Department and Mr. Greenspan all support congressional action on strong legislation to protect the taxpayers, the housing market, and the economy as a whole. A stalwart band of reformers in the House and Senate are moving legislative proposals to address the problems with Fannie Mae and Freddie Mac before they metastasize into a fullblown crisis. The strong vote in the House last week was a decisive step in moving the process forward and now is the time for the full Senate to take action.

In the Senate, Banking Committee Chairman Richard Shelby, Alabama Republican, deserves great credit for shepherding a very strong bill through his committee. That legislation contains even stronger protections than its House counterpart, elements that my organization, FM Policy Focus, and many others consider essential for true comprehensive regulatory reform — particularly in the area of program review. That is, ensuring that the risky activities the GSEs engage in have strict scrutiny and robust oversight.

Given the wide-ranging support for reform, and the seemingly never-ending stream of scandalous accounting news from the GSEs, legislation should be a slam dunk. Yet the same groups that have succeeded in derailing previous reform efforts are again hard at work to preserve the status quo.

Congress and the administration have the chance to fix the roof while the sun is shining. Standing in their way are the entrenched defenders of a structure that has consistently failed to properly oversee Fannie Mae and Freddie Mac. GSE reformers need to finish the job and enact comprehensive legislation this year. For the sake of the American taxpayers, let’s hope they succeed.

J.C. Watts, a former Republican congressman from Oklahoma, is chairman of FM Policy Focus.

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