Opinion

Bethany McLean

from The Great Debate:

Fannie and Freddie are more complicated than that

Ralph Nader
Feb 21, 2014 18:11 UTC

This article was written in response to “How Ralph Nader learned to love Fannie and Freddie” (February 18) by Bethany McLean.

Bethany McLean’s article deserves a number of clarifying responses.

McLean injects an air of complexity and confusion with regard to my positions on a number of separate issues in what seems to be an attempt to imply a more interesting narrative for her article than exists in reality. Some clarifications are in order:

In the 1990s and early 2000s I opposed corruption in the government-sponsored enterprises (GSEs). I was clear about my admonition of the government subsidies they received in the form of an implicit government guarantee without meeting their obligations to advance affordable housing. I was clear that their drive for profits could tempt them deeper into murky legal waters. My opposition to their management compensation packages and questionable accounting practices were made plain.

Now I am advocating for the GSEs’ shareholders’ rights. This is an issue separate from the previous transgressions and corruption.

In its conservatorship of the GSEs, the federal government has used and abused GSE shareholders. It has unfairly treated the GSEs differently than other bailed-out corporations that were equally -- or more -- at fault for the financial crisis.

How Ralph Nader learned to love Fannie and Freddie

Bethany McLean
Feb 18, 2014 21:34 UTC

Corrects story issued February 18 in third-to-last paragraph regarding efforts to contact Ralph  Nader.

“It is time for [government-sponsored enterprises] to give up ties to the federal government that have made them poster children for corporate welfare. Most of all, Congress needs to look more to the protection of the taxpayers and less to the hyperbole of the GSE lobbyists. –Ralph Nader, testimony before the House Committee on Banking and Financial Services, June 15, 2000

“Fannie Mae and Freddie Mac should be relisted on the NYSE and their conservatorships should, over time, be terminated. –Ralph Nader, letter to Treasury Secretary Jacob Lew, May 23, 2013

Faith-based economic theory

Bethany McLean
Jan 25, 2012 17:36 UTC

The Republican candidates for president have some major differences in their policies and their personal lives. But they have one striking thing in common—they all say the federal government is responsible for the financial crisis. Even Newt Gingrich (pilloried for having been a Freddie Mac lobbyist) says: “The fix was put in by the federal government.”

The notion that the federal government, via the Community Reinvestment Act (CRA) and by pushing housing finance giants Fannie Mae and Freddie Mac to meet affordable housing goals, was responsible for the financial crisis has become Republican orthodoxy. This contention got a boost from a recent lawsuit the Securities and Exchange Commission (SEC) filed against six former executives at Fannie and Freddie, including two former CEOs. “Today’s announcement by the SEC proves what I have been saying all along—Fannie Mae and Freddie Mac played a leading role in the 2008 financial collapse that wreaked havoc on the U.S. economy,” said Congressman Scott Garrett, the New Jersey Republican who is chairman of the financial services subcommittee on capital markets and government-sponsored enterprises (GSEs).

But the SEC’s case doesn’t prove anything of the sort, and in fact, the theory that the GSEs are to blame for the crisis has been thoroughly discredited, again and again. The roots of this canard lie in an opposition—one that festered over decades—to the growing power of Fannie Mae, in particular, and its smaller sibling, Freddie Mac. This stance was both right and brave, and was mostly taken by a few Republicans and free-market economists—although even President Clinton’s Treasury Department took on Fannie and Freddie in the late 1990s. The funny thing, though, is that the complaint back then wasn’t that Fannie and Freddie were making housing too affordable. It was that their government-subsidized profits were accruing to private shareholders (correct), that they had far too much leverage (correct), that they posed a risk to taxpayers (correct), and what they did to make housing affordable didn’t justify the massive benefits they got from the government (also correct!). Indeed, in a 2004 book that recommended privatizing Fannie and Freddie, one of its authors, Peter Wallison, wrote, “Study after study has shown that Fannie Mae and Freddie Mac, despite full-throated claims about trillion-dollar commitments and the like, have failed to lead the private market in assisting the development and financing of affordable housing.”

A tale of two SEC cases

Bethany McLean
Jan 17, 2012 23:20 UTC

Juries are sometimes told that in the eyes of the law, all Americans are created equal. But if that’s the case, then why does the Securities and Exchange Commission’s treatment of former top Fannie and Freddie executives seem to be so much harsher than its treatment of Citigroup and its senior people for what appear to be similar infractions?

Recall that on Dec. 16, the SEC charged six former executives at mortgage giants Fannie Mae and Freddie Mac with fraud for not properly disclosing the companies’ exposure to risky mortgages. In Fannie’s case, the SEC alleges that former CEO Dan Mudd and two other executives made a series of “materially false and misleading public disclosures.” The SEC says, for instance, that at the end of 2006, Fannie didn’t include $43.3 billion of so-called expanded approval mortgages in its subprime exposure and $201 billion of mortgages with reduced documentation in its Alt-A exposure. In Freddie’s case, the SEC alleges that while former CEO Dick Syron and two other executives told investors it had “basically no” subprime exposure, they weren’t including $141 billion in loans (as of the end of 2006) that they internally described as “subprime” or “subprime like.”

There are some gray areas in the SEC’s case. Start with the fact that there is no single definition of what constitutes a subprime or Alt-A loan, or as Mudd said in a speech in the fall of 2007, “the vague, prosaic titles that pass for market data — ‘subprime,’ ‘Alt A,’ ‘A minus’ — mean different things to the beholders.” In Fannie’s 2006 10(k), Mudd noted that apart from what Fannie was defining as subprime or Alt-A, the company also had “certain products and loan attributes [that] are often associated with a greater degree of credit risk,” like loans with low FICO scores or high loan-to-value ratios. And in a letter to shareholders in 2006, Mudd noted that “to provide an alternative to risky subprime products, we have purchased or guaranteed more than $53 billion in Fannie Mae loan products with low down payments, flexible amortization schedules, and other features.” These are the very holdings that the SEC says should have been disclosed as subprime exposure.

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