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Government Expands Fannie and Freddie Bailout and Lavishes Money on their CEOs

On Christmas Eve, when it hoped no one would notice, the Obama administration lifted the $400-billion limit on bailouts for government-sponsored mortgage giants Fannie Mae and Freddie Mac, and showered their executives with $42 million at taxpayer expense. (Earlier, Freddie Mac's CFO received $5.5 million).

Under the Bush administration, federal regulators took over Fannie and Freddie in the name of stopping their risky practices. But the Obama administration has increased their purchases of risky mortgages in a vain attempt to inflate the economy. Worse, it forced them to run up to tens of billions in losses to bail out deadbeat and at-risk mortgage borrowers, and then tried to conceal those losses, in conduct reminiscent of Enron.

Fannie and Freddie helped spawn the mortgage crisis by acting as loan toilets, buying up risky mortgages that were issued by banks and mortgage companies, and thus creating an artificial market for junk. They put up with Clinton-era affordable housing regulations that required them to buy up lots of risky loans, in order to curry favor on Capitol Hill and thus retain their annual $10 billion in tax and other special privileges (which they possessed owing to their status as "Government-Sponsored Enterprises" or GSEs). They paid their CEOs millions in the process, and engaged in massive accounting fraud -- $6.3 billion at Fannie Mae alone --  to increase the size of their managers' bonuses.  As GSEs, they were exempt from the capital requirements that apply to private banks, so they did not have enough reserves to cover their losses when their mortgages started defaulting.

The federal government has a double standard when it comes to huge executive pay.   It has no problem paying exorbitant sums of money to people who head failed government agencies like Freddie Mac and Fannie Mae.   (At the direction of the Obama administration, Freddie Mac is now running up $30 billion in losses to bail out mortgage borrowers, some of whom have high incomes.  Federal regulators sought to make Freddie Mac hide the resulting losses from the SEC and the public).

The federal government does, however, have a problem with big compensation packages at private banks like Bank of America and Citibank, even for talented new executives.  Obama’s pay czar, Ken Feinberg, a major donor to liberal politicians like Senator Chris Dodd (who recommended Feinberg for the job after he gave Dodd more than $9000), is now chopping compensation more at basically self-supporting institutions like Bank of America than at completely-bailed out entities like Chrysler.  (Many expect Chrysler to go under despite a $70-billion bailout.   Chrysler is owned mostly by the United Auto Workers union, which received majority ownership from the Obama administration at taxpayer expense, through a politicized bankruptcy process).

Feinberg’s actions have already left taxpayers worse off by forcing Citigroup to get rid of a profitable subsidiary. As finance professor Roy C. Smith noted in The Washington Post:

Feinberg’s actions . . . are not going to improve either the government’s chances of getting its money back or the prospects of repairing these damaged companies. Because of his recommendations, Citigroup agreed to sell its profitable Phibro unit at an extremely low price of only one or two times earnings in order to avoid having to pay a talented trader a $100 million contractual share of the profits he had earned. The most successful of the remaining employees of Citigroup, AIG and Bank of America have been given an incentive to leave their posts, and the firms will be constrained in hiring replacements.

Many competent executives whose pay is threatened by the pay czar are now leaving for other firms.  (The pay czar’s political patron, Senator Dodd, received sweetheart loans from the reckless, bankrupt subprime lender Countrywide, and a massive gift from Edward Downe, in the form of a luxurious “cottage” in Ireland he received in a “cut rate real estate deal” for hundreds of thousands of dollars less than fair market value.)

Banks will now be pressured to make even more risky, low-income loans. Obama has sent to Congress his proposal to create a politically correct entity called the Consumer Financial Protection Agency, tasked with enforcing the Community Reinvestment Act. Government pressure on banks to make low-income loans was a key reason for the mortgage meltdown and the financial crisis. Yet Obama’s proposals would empower the new agency to enforce the Community Reinvestment Act, which was a key contributor to the financial crisiswithout regard for banks’ financial safety and soundness.

The mortgage crisis was also caused by the reckless government-sponsored mortgage giants (”GSEs”) Fannie Mae and Freddie Mac, and by federal affordable-housing mandates. But Obama’s proposed financial rules overhaul does absolutely nothing about Fannie Mae and Freddie Mac, admits Obama’s Treasury Secretary, Timothy Geithner, even though he admits that “Fannie and Freddie were a core part of what went wrong in our system.”

Worse, Obama’s plan is “largely the product of extensive conversations” with two lawmakers responsible for the corrupt status quo, Chris Dodd and Barney Frank, and it expands the reach of regulations that have been used by left-wing groups to extort payoffs from banks.