Fannie & Freddie hearings – “feel good” dance to bury the truth

While the tunnel-visioned MSM focuses on the speed bumps in the auto bailout bill, and the disgrace of the IL Governor – allegedly accused of offering to sell Obama’s Senate seat to the highest bidder – the hearings from CEOs from Fannie/Freddie on the Hill have all but fallen under the nation’s radar.

And what a drama of feigned indignation by lawmakers it must be. As four former CEOs of the two GSEs testified, lawmakers blasted the execs for creating a portfolio for failure by their purchases of subprime loans… a practice that began in earnest prior to the fall of 2002.

The House Oversight and Government Reform Committee, headed by Henry Waxman, perused internal emails and documents from former executives going back to late 2003/2004, warning of the increasing risks of buying what would prove to be bad promissory notes…. coincidently about the same time the Bush admin started advocating a reform of the GSEs.

Their irresponsible decisions are now costing the taxpayers billions of dollars,” said Rep. Henry Waxman, D-Calif., chairman of the committee, which reviewed nearly 400,000 internal documents from Fannie and Freddie.

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Rep. Carolyn Maloney, D.-N.Y., grilled Syron about the Freddie Mac’s decision to fire David Andrukonis, its former chief risk officer. Andrukonis had sounded warnings as far back as 2004 about the risks posed by loans in which borrowers didn’t provide proof of their incomes or detail their assets, according to e-mails released by the committee.

“Do you regret firing him?” Maloney said. “Do you regret buying these risky loans? Do you regret the way you led — and I would say mismanaged — this company?”

Syron said Andrukonis “was fired for a variety of reasons. It was not primarily for his having a view on credit.”

This indignation on the part of Congressional members is but a clever ruse to cover up their own involvement and failures to implement measures to hedge off what was obviously coming. Indeed, Waxman was dragged into these hearings kicking, screaming biting fighting… refusing to instigate any investigation into Fannie/Freddie’s role until after the Presidential election. Instead, in the wake of the AIG bailout, he focused on Wall Street’s Lehman Brothers, never once mentioning Fannie/Freddie’s role.

In one of the rare moments of true bipartisanship in the past two POTUS terms, the Dems – fully behind protecting Fannie and Freddie from reform in 2005, and aided by enough GOP members to give them a voting majority in the Republican dominated Congress – effectively blocked any efforts to reform the GSEs. During the campaign – or even today – the last thing Congressional members want is exposing their own culpability in the financial housing debacle.

Instead, The Dems, and most GOP, still stick to their story that it was Wall Street, and not the GSEs as the culprit. This, of course, flies in the fact of lending reality… where Fannie/Freddie set the industry guidelines for sale on the secondary mortgage market.

Democrats acknowledged that the two government-sponsored companies contributed to the financial crisis. But they stressed that Wall Street banks — not Fannie and Freddie — led the dramatic decline in lending standards that caused mortgages to start defaulting in huge numbers two years ago.

Even after the fact, their criticisms of the GSE execs, while giving themselves a pass, is beyond offensive.

Chris Shay (R-CT) seemed to be the only one who had a clear grip on reality:

Republicans argued that the primary causes of the financial meltdown were weak government regulation of Fannie and Freddie and Clinton administration policies to promote homeownership. “We knew a long time ago that this train was going to crash,” said Rep. Christopher Shays, R-Conn.

Indeed, as the WSJ op-ed today states, Waxman appears to be reluctantly holding this hearing not to expose the truth, but to bury it.

The companies understood the risks they were running. But squeezed between the need to meet affordable-housing goals set by HUD and the desire to sustain their growth and profits, they took the leap anyway. As a result, by the middle of this year, the two companies were responsible for some $1.6 trillion worth of subprime credit of one form or another. The answer to Mr. Waxman’s question about their role in the crisis, in other words, is that they were central players, if not the central players, in the creation of the housing boom and the credit bust. Mr. Waxman released some of these documents Tuesday but kept others under wraps.

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In early 2004, Freddie’s executive team was engaged in a heated debate over whether to start acquiring “stated income, stated assets” mortgages. And in April of that year, David Andrukonis, the head of risk management, wrote to his colleagues, “This is not an affordable product, as I understand it, but a product necessary to recapture [market] share. . . . In 1990 we called this product ‘dangerous’ and eliminated it from the marketplace.” Freddie went ahead anyway.

At Tuesday’s hearing, both Mr. Waxman and former Fannie CEO Franklin Raines argued that Fan and Fred were following the market, not leading it, as if this was exculpatory. The documents plainly show that people at both Fan and Fred clearly understood that these mortgages were risky, thought many homeowners didn’t understand them and that they were putting their business at risk by buying up Alt-A and subprime mortgage-backed securities.

One Fannie Mae document from March 2005 notes dryly, “Although we invest almost exclusively in AAA-rated securities, there is a concern that the rating agencies may not be properly assessing the risk in these securities.” But they bought them anyway, both to maintain their market share and to show people like Democrat Barney Frank that they were promoting affordable housing.

What’s specifically interesting about the WSJ op-ed is that when discussing Raines’ insistence that the GSEs were “victims” and not leading culprits in the housing crisis, they follow up with a laundry list of Republicans receiving lobby money.

Mr. Raines even suggested that Fan and Fred’s regulator was to blame for allowing them to get into trouble. “It is remarkable,” he told the committee, “that during the period that Fannie Mae substantially increased its exposure to credit risk its regulator made no visible effort to enforce any limits.”

What Mr. Raines failed to mention was that, all along, Fannie and Freddie were spending millions on lobbying to ensure that regulators did not get in their way. As the AP reported Sunday night, Freddie spent $11.7 million in lobbying in 2006 alone, with Newt Gingrich, for example, getting $300,000 that year for talking up the benefits of Freddie’s business model. (Apologies welcome, Newt.)

Other Republicans on Freddie’s payroll included former Senator Al D’Amato and Congressman Vin Weber, and then House Majority Leader Tom DeLay’s former chief of staff, Susan Hirschmann. As we know by now, Fan and Fred tried to buy everybody in town from both political parties, and the companies did it well enough to make themselves immune from regulatory scrutiny.

I’m not sure where the AP gets it’s figures, but the lobbying in 2006 is dwarfed by that done in 2003-04. And of course Republicans receive more than the Democrats… for two reasons. First, they were the party in power; and second, you don’t have to bribe the party who already agrees with your cause, and will cast their vote accordingly…

But this corruption of paid cover up for the GSEs well crosses the party lines. In fact, as the records from Open Secrets show, not only is there ample blame to go around, but the top three money beneficiaries for campaign funds from 1989 to 2008 were prominent Democrats… one being the President-elect. That the latter was active only in Congress some 143 days before hitting the Presidential campaign trail shows that Obama was particularly effective in raking in the GSE’s lobby or campaign cash fast and furious.

As a side note on the Open Secrets laundry list of GSE campaign money recipients, Chris Dodd was number 1, John Kerry number 2, and Barack Obama number three – all with more than $100K in pocket. Harry Reid was 11th, Hillary Clinton, 12th, Pelosi was at #18, and Rahm Emmanuel was #22. McCain came in 62nd on the list.

Of the top 20 recipients, twelve were Democrats, and eight were Republicans.

Waxman himself does not appear on the list of beneficiaries. Yet he knows the import of party politics and perception, and has no qualms going to bat for his peers. But it remains we – the common citizens – are witnessing nothing more than a dance between donors and recipients, staged merely to present the illusion that corruption is being sorted out by our elected officials in Washington.

The only problem is this is the proverbial fox guarding the hen “House” syndrome… the corrupt investigating the corrupt.