Fannie Mae Played a Bigger Role in the Financial Crisis than Previously Thought
In the Wall Street Journal, Peter Wallison, who prophetically warned against the risky practices of mortgage giant Fannie Mae, describes the key role that government-sponsored entity played in spawning the recent financial crisis, in an article entitled “Government-Sponsored Meltdown.” He cites the findings of a recent book about the causes of the crisis by New York Times business reporter Gretchen Morgenson and financial analyst Josh Rosner, a book called “Reckless Endangerment,” which chronicles how “it was Fannie Mae and the government housing policies it supported, pursued, and exploited that brought the financial system to a halt in 2008.” Earlier, a top investment manager at JP Morgan Private Bank reached a similar conclusion, noting that “new research” showed that “US Agencies played a larger role in the housing crisis than we first reported,” and thus were a “primary catalyst for the US housing crisis.”
As Wallison notes, Government-Sponsored Enterprises (GSE’s) like Fannie Mae played a central role in precipitating the financial crisis:
After James A. Johnson, a Democratic political operative and former aide to Walter Mondale, became chairman of Fannie Mae in 1991 . . . it became a political powerhouse, intimidating and suborning Congress and tying itself closely to the Clinton administration’s support for the low-income lending program called “affordable housing.” This program required subprime and other risky lending, but it solidified Fannie’s support among Democrats and some Republicans in Congress, and enabled the agency to resist privatization or significant regulation until 2008. “Under Johnson,” write Ms. Morgenson and Mr. Rosner, “Fannie Mae led the way in encouraging loose lending practices among banks whose loans the company bought. . . . Johnson led both the private and public sectors down a path that led directly to the financial crisis of 2008.”. . .Far from being a marginal player, Fannie Mae was the source of the decline in mortgage underwriting standards that eventually brought down the financial system. It led rather than followed Wall Street into risky lending. . .Edward Pinto (a former chief credit officer of Fannie Mae) . . . presented . . . evidence . . . showing that by 2008 half of all mortgages in the U.S. (27 million loans) were subprime or otherwise risky, and that 12 million of these loans were on the books of the GSEs.
Recently, Congress passed a confusing, 2,315 page law to regulate the financial industry called the Dodd-Frank Act. But it does absolutely nothing about Fannie Mae, which it left completely unreformed despite the fact that taxpayers will end up paying over $100 billion to bail out Fannie Mae. Instead, the Dodd-Frank delegates to largely-unaccountable agencies the power to write innumerable new regulations restricting financial transactions and related spheres of the economy
As Wallison notes,
The principal sponsors of that Dodd-Frank Act, former Sen. Chris Dodd and former House Financial Services Committee Chair Barney Frank, were also the principal supporters and political protectors of Fannie Mae and Freddie Mac, and the government housing policies they implemented. It is little wonder then that legislation named after them would place the blame for the financial crisis solely on the private sector and do nothing to reform a government-backed housing finance system that will increasingly be seen as the primary cause of the devastating events of 2008.
Some of the government agencies vested with vast regulatory power by the Dodd-Frank Act are new agencies created by the law itself, while others have a long track record of failure — like the SEC, which failed to prevent Bernard Madoff’s $50 billion Ponzi scheme despite repeated warnings, and which is currently wasting millions of dollars on unauthorized spending. I previously outlined three different ways that the Dodd-Frank Act violates the Constitution here, here, and here.