America’s greatest economic liability is also the greatest political liability for the Democratic congressional leadership. Fannie Mae and Freddie Mac have exposed taxpayers to $5.4 trillion in risk from loan guarantees, with taxpayers already having covered $126 billion in losses. So far, Democrats have been reluctant to include tough reforms on the profligate government-sponsored enterprises in the financial regulation package currently making its way through the legislative process.
A group of Republican senators led by John McCain, Arizona Republican, last week proposed to give the housing market giants five years either to become self-sufficient or to go out of business. They would also reduce the total amount of losses that taxpayers would cover to $400 billion. Rather than debate the particulars of this idea, Democratic leaders appear more interested in burying any and all such changes.
And no wonder. Renewed scrutiny of the two institutions would remind the public that senior Democrats were in bed, sometimes literally, with Fannie and Freddie. House Financial Services Chairman Barney Frank of Massachusetts spent a number of years blocking various attempts to regulate government-sponsored enterprises, famously saying that that he did not see any “safety and soundness” problems worthy of note. There was good reason for Mr. Frank to look the other way, given his history of close association with Herb Moses, Fannie’s assistant director for product initiatives from 1991 to 1998.
Many other top Democrats were friends with financial benefits from Fannie and Freddie. Franklin Raines, a former Carter- and Clinton-administration official, pocketed $90 million as Fannie Mae’s CEO - a figure bolstered by the agency’s overstated earnings. Former Clinton appointee Jamie Gorelick was paid $26 million as Fannie’s vice chairman. Veteran Democratic honcho Jim Johnson, who led Sen. John Kerry’s vice presidential search committee and temporarily led Mr. Obama’s veep search, enjoyed $21 million. Mr. Johnson later resigned from the Obama team when he was identified as a “friend of Angelo” - one of those who were given below-market loans directly by Countrywide Financial CEO Angelo Mozilo. Among other “friends of Angelo” were Mr. Raines, Senate Budget Committee Chairman Kent Conrad of North Dakota and Senate Banking Chairman Christopher Dodd of Connecticut. Fannie Mae was the biggest buyer of the outrageously risky mortgages that proved to be Countrywide’s undoing.
Fannie and Freddie’s campaign donations almost always have gone heavily to Democrats. According to the nonpartisan Center for Responsive Politics, Barack Obama was the second-largest recipient of contributions from Fannie and Freddie sources during his brief Senate tenure. Former president Bill Clinton said it best in 2008. “I think the responsibility the Democrats have may rest more in resisting any efforts by Republicans in the Congress or by me when I was president to put some standards and tighten up a little on Fannie Mae and Freddie Mac.”
Congressional Democrats should drop their resistance to reform proposals and make a break from their sordid history with these toxic firms.