Yesterday, the Senate passed a so-called financial reform bill by a vote of 60-to-38, making it all but certain to become law. The bill will do nothing to prevent another financial crisis or end bailouts, but it will cause all sorts of new problems.
The bill does nothing to reform the biggest bailout recipients, the government-sponsored mortgage giants Fannie Mae and Freddie Mac, even though administration officials admit they were at the “core” of “what went wrong.” But it will impact farmers and others who had nothing to do with the financial crisis, by imposing restrictions on derivatives they use to hedge against risk, restrictions that could cost U.S. companies as much as $1 trillion in lost capital and liquidity.
Fannie Mae and Freddie Mac have been incredibly costly to taxpayers. The Obama administration earlier lifted a $400 billion limit on bailing them out. At the direction of the Obama administration, Freddie Mac ran up more than $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, reported The Washington Post.
Fannie and Freddie helped spawn the mortgage crisis by buying up risky mortgages and repackaging them as prime mortgages, thus creating an artificial market for junk: “From the time Fannie and Freddie began buying risky loans as early as 1993, they routinely misrepresented the mortgages they were acquiring, reporting them as prime when they had characteristics that made them clearly subprime.” The situation was recently found to be even worse than feared by the federal Financial Crisis Inquiry Commission.
Meanwhile, they paid their CEOs millions, and engaged in massive accounting fraud–$6.3 billion at Fannie Mae alone–to increase the size of their managers’ bonuses. As Government-Sponsored Enterprises, 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.