For Fannie and Freddie Reform, Transparency Is a Must

Six years after the onset of the financial crisis, another Congress has adjourned without doing anything to rein in the government-sponsored entities (GSEs) that many experts have identified as the leading cause of the mortgage meltdown. But there is some good news. It appears that a phony “reform” that would actually make things worse has died a merciful death.

As I have written in National Review and elsewhere, the so-called Johnson-Crapo reform introduced by the top Republican and Democrat on the Senate Banking Committee is “Fannie and Freddie on Steroids.” As I noted, “Not only would the government’s role in subsidizing and micromanaging housing not be reduced, in many ways it would be substantially increased.”

One can hope that the next Congress will pursue real reform of Fannie and Freddie, or at least reduce their size and scope. But a necessary condition for reform is transparency. And many of the Obama administration’s policies regarding Fannie and Freddie have been shrouded in secrecy.

This is particularly the case with the so-called Third Amendment. Issued in August 2012 by then–treasury secretary Tim Geithner to the GSE conservatorship, the Third Amendment would require all of the GSEs’ profits to be siphoned off to the U.S. Treasury Department in perpetuity – even after the GSEs paid back what they owed to taxpayers.

This arbitrary action has spawned more than 20 lawsuits from Fannie and Freddie’s private shareholders. The suits charge the administration with everything from violating the Administrative Procedures Act to unconstitutionally taking property without just compensation.

But the really amazing thing is that we know very little about what prompted Obama and Geithner to pursue this highly controversial policy. The Obama administration has claimed a form of “executive privilege” and sealed documents regarding how the decision was made.

But now one of these shareholder lawsuits – Fairholme v. United States – has prompted a judge to compel the administration to produce some of those documents, in order to satisfy a discovery request from the mutual fund plaintiff. And a new coalition letter, coordinated by the Competitive Enterprise Institute and signed by leaders of 17 conservative and free market organizations, calls for a key oversight subcommittee to spread a little sunshine by obtaining the documents and making them public. In the letter sent last week to Reps. Patrick McHenry (R-N.C) and Al Green (D-TX), chairman and ranking member, respectively, of the House Financial Services Subcommittee on Oversight and Investigations, we wrote:

Not only is this Third Amendment an unprecedented power grab that violates shareholder property rights, but the process used by the Treasury Department to develop the Amendment provided neither an opportunity for public comment nor the customary transparency safeguards that permit we the people to hold our government accountable. To this day, the Amendment's provenance remains secret.

We asked the heads of the subcommittee to “demand greater transparency and accountability on this matter by requesting that the Treasury Department turn over to your committee, or otherwise make public, any and all documents shedding light on the alleged need for and legal rationale justifying the Third Amendment, as well as all documents detailing the Amendment's development and evolution, such as those customarily contained in the administrative docket for an agency rulemaking.”

CEI has long advocated ending the risk posed by the GSEs to taxpayers and the economy through an orderly liquidation of their assets, with no government-backed entity to replace them. Our forthcoming “Agenda for Congress” will put forth options on the most practical ways to move forward on such a phase-out.

As CEI founder and chairman Fred Smith urged Congress in 2000 — to mostly deaf ears — policy makers should “develop a divestiture or breakup plan for Fannie and Freddie.” And in such a plan, as in traditional bankruptcies, the rights of both taxpayers and private investors should be sacrosanct.

But in order to have real reform, first we need transparency. It’s time for the administration that promised to be the most transparent in history to open the books on its management of the two government-sponsored entities that play such a dominant role in housing and the economy.