Fannie Mae's Thugs.--

Some people thought that I was too hard on the former managers of Fannie Mae, whose greed and misconduct in their Enron-style accounting scandal of 2003-4 helped to destroy the soundness of a huge quasi-government agency.

Now comes Paul Gigot recounting just how thuggish their behavior was. The Fannie Mae officials at the time made millions in unearned profits from phony accounting to maximize their bonuses while trying to intimidate --- and when that didn't work, to destroy — any politician who dared to stand up to their corruption.

Paul Gigot writes:

The Fannie Mae Gang

Angelo Mozilo was in one of his Napoleonic moods. It was October 2003, and the CEO of Countrywide Financial was berating me for The Wall Street Journal's editorials raising doubts about the accounting of Fannie Mae. I had just been introduced to him by Franklin Raines, then the CEO of Fannie, whom I had run into by chance at a reception hosted by the Business Council, the CEO group that had invited me to moderate a couple of panels.

Mr. Mozilo loudly declared that I didn't know what I was talking about, that I didn't understand accounting or the mortgage markets, and that I was in the pocket of Fannie's competitors, among other insults. Mr. Raines, always smoother than Mr. Mozilo, politely intervened to avoid an extended argument, and Countrywide's bantam rooster strutted off.

I've thought about that episode more than once recently amid the meltdown and government rescue of Fannie and its sibling, Freddie Mac. Trying to defend the mortgage giants, Paul Krugman of the New York Times recently wrote, "What you need to know here is that the right — the WSJ editorial page, Heritage, etc. — hates, hates, hates Fannie and Freddie. Why? Because they don't want quasi-public entities competing with Angelo Mozilo."

That's a howler even by Mr. Krugman's standards. Fannie Mae and Mr. Mozilo weren't competitors; they were partners. Fannie helped to make Countrywide as profitable as it once was by buying its mortgages in bulk. Mr. Raines — following predecessor Jim Johnson — and Mr. Mozilo made each other rich. Which explains why Mr. Johnson could feel so comfortable asking Sen. Kent Conrad (D., N.D.) to discuss a sweetheart mortgage with Mr. Mozilo, and also explains the Mozilo-Raines tag team in 2003.

I recount all this now because it illustrates the perverse nature of Fannie and Freddie that has made them such a relentless and untouchable political force. Their unique clout derives from a combination of liberal ideology and private profit. Fannie has been able to purchase political immunity for decades by disguising its vast profit-making machine in the cloak of "affordable housing." To be more precise, Fan and Fred have been protected by an alliance of Capitol Hill and Wall Street, of Barney Frank and Angelo Mozilo.

I know this because for more than six years I've been one of their antagonists. Any editor worth his expense account makes enemies, and complaints from CEOs, politicians and World Bank presidents are common. But Fannie Mae and Freddie Mac are unique in their thuggery, and their response to critics may help readers appreciate why taxpayers are now explicitly on the hook to rescue companies that some of us have spent years warning about.

My battles with Fan and Fred began with no great expectations. In late 2001, I got a tip that Fannie's derivatives accounting might be suspect. I asked Susan Lee to investigate, and the editorial she wrote in February 2002, "Fannie Mae Enron?", sent Fannie's shares down nearly 4% in a day. In retrospect, my only regret is the question mark.

Mr. Raines reacted with immediate fury, denouncing us in a letter to the editor as "glib, disingenuous, contorted, even irresponsible," and that was the subtle part. He turned up on CNBC to say, in essence, that we had made it all up because we didn't want poor people to own houses, while Freddie issued its own denunciation.

The companies also mobilized their Wall Street allies, who benefited both from promoting their shares and from selling their mortgage-backed securities, or MBSs. The latter is a beautiful racket, thanks to the previously implicit and now explicit government guarantee that the companies are too big to fail. The Street can hawk Fan and Fred MBSs as nearly as safe as Treasurys but with a higher yield. They make a bundle in fees. At the time, Wall Street's Fannie apologists outdid themselves with their counterattack. . . .

After describing attacks on his accurate reporting, Gigot continues:

The companies eased their assaults when they concluded we weren't about to stop, and in any case they soon had bigger problems. Freddie's accounting fiasco became public in 2003, while Fannie's accounting blew up in 2004. Mr. Raines was forced to resign, and a report by regulator James Lockhart discovered that Fannie had rigged its earnings in a way that allowed it to pay huge bonuses to Mr. Raines and other executives.

Such a debacle after so much denial would have sunk any normal financial company, but once again Fan and Fred could fall back on their political protection. In the wake of Freddie's implosion, Republican Rep. Cliff Stearns of Florida held one hearing on its accounting practices and scheduled more in early 2004.

He was soon told that not only could he hold no more hearings, but House Speaker Dennis Hastert was stripping his subcommittee of jurisdiction over Fan and Fred's accounting and giving it to Mike Oxley's Financial Services Committee. "It was because of all their lobbying work," explains Mr. Stearns today, in epic understatement. Mr. Oxley proceeded to let Barney Frank (D., Mass.), then in the minority, roll all over him and protect the companies from stronger regulatory oversight. Mr. Oxley, who has since retired, was the featured guest at no fewer than 19 Fannie-sponsored fund-raisers.

Or consider the experience of Wisconsin Rep. Paul Ryan, one of the GOP's bright young lights who decided in the 1990s that Fan and Fred needed more supervision. As he held town hall meetings in his district, he soon noticed a man in a well-tailored suit hanging out amid the John Deere caps and street clothes. Mr. Ryan was being stalked by a Fannie lobbyist monitoring his every word.

On another occasion, he was invited to a meeting with the Democratic mayor of Racine, which is in his district, though he wasn't sure why. When he arrived, Mr. Ryan discovered that both he and the mayor had been invited separately — not by each other, but by a Fannie lobbyist who proceeded to tell them about the great things Fannie did for home ownership in Racine.

When none of that deterred Mr. Ryan, Fannie played rougher. It called every mortgage holder in his district, claiming (falsely) that Mr. Ryan wanted to raise the cost of their mortgage and asking if Fannie could tell the congressman to stop on their behalf. He received some 6,000 telegrams. When Mr. Ryan finally left Financial Services for a seat on Ways and Means, which doesn't oversee Fannie, he received a personal note from Mr. Raines congratulating him. "He meant good riddance," says Mr. Ryan.

Fan and Fred also couldn't prosper for as long as they have without the support of the political left, both in Congress and the intellectual class. This includes Mr. Frank and Sen. Chuck Schumer (D., N.Y.) on Capitol Hill, as well as Mr. Krugman and the Washington Post's Steven Pearlstein in the press. Their claim is that the companies are essential for homeownership.

Yet as studies have shown, about half of the implicit taxpayer subsidy for Fan and Fred is pocketed by shareholders and management. According to the Federal Reserve, the half that goes to homeowners adds up to a mere seven basis points on mortgages. In return for this, Fannie was able to pay no fewer than 21 of its executives more than $1 million in 2002, and in 2003 Mr. Raines pocketed more than $20 million. Fannie's left-wing defenders are underwriters of crony capitalism, not affordable housing.

I worked part of yesterday, and will work part of tomorrow, to pay for this joke. So did everyone else.

Stossel for President, I guess.
7.23.2008 2:33am
A. Zarkov (mail):
I have personal experience in dealing with Freddie Mac. They insisted they did not have to pay me interest on fire insurance money they wanted to hold. They told me this policy was dictated by a secret set of rules which I could not see or get under the FIA. They refused to tell me who regulated them (it was HUD). They said they were exempt from FIA rules because they were quasi governmental. Both these assertions are incorrect. It was obvious from the get go that I was dealing with a bunch of crooks. I managed to solve the problem with a cleaver end run so I never had to file a suit against them.
7.23.2008 8:38am
Richard Aubrey (mail):
The more the goverment can do for you....

Not many seem to get it. Over and over.
7.23.2008 9:15am
Slightly off-topic, but a point worth raising here: Why do we (still) refer to these federal agencies by such diminutive nicknames (Fannie Mae, Freddie Mac, etc.)? These nicknames have a psychological effect of making them seem down-to-earth and reasonable to the common person, when as Lindgren has pointed out, at the end of the day they are still part of the bloated federal bureaucracy, as power-hungry and as corruptible as any other part. Maybe if people started calling them by their official acronyms (in this case, FNMA instead of Fannie Mae) they would lose some of their Teflon?
7.23.2008 9:23am
Quasi governmental businesses like this probably aren't necessary any more or less likely to pull this kind of crap than public ones, but at least with public companies, a) they occassionally have to face the music, and b) I can choose not to patronize them.
7.23.2008 9:59am
erics (mail):
Don't hurt yourself patting your own back.
7.23.2008 10:03am
Argh. probably not necessary = not necessarily.
7.23.2008 10:09am
Jon Rowe (mail) (www):
We should treat them just like Ken Lay. When are the indictments coming?
7.23.2008 11:15am
Dr. Weevil (mail) (www):
Calling them by their initials also makes for a nice pun: "F.N.M.A." sounds just like "Effin' M.A.". Whether that's a plus or a minus is a matter of taste.
7.23.2008 11:36am
Typical WSJ analysis. Hastert takes the issue away from Stearns and gives it to Oxley, the honored guest of Effin' M.A. Yet Barney Frank suddenly enters the storyline to "roll over" Oxley? Even though the Dems in the House rarely accomplished anything prior to January 2007?

Got it.
7.23.2008 2:02pm
Bama 1L:
Sloppy article.

Does anyone believe Paul Ryan received 6,000 telegrams? Ryan has been in Congress since 1999. Western Union delivered 20,000 telegrams total in 2006.
7.23.2008 5:55pm
John McCall (mail):
I agree that Fannie and Freddie are gross examples of crony capitalism, and we'd be better off without them, but Gigot really undermines his point by pausing every few paragraphs to explain why the Republicans are the heroes and Democrats are the villains. Not that it's the other way around — clearly, these companies enjoy a great deal of political protection from both parties.
7.23.2008 6:50pm
Dr. T (mail) (www):
As far as I can see, there were many villains but no heroes among our federal politicians. The crisis today was predicted by numerous experts years ago. Most of the press, the public, and Congress chose to ignore the impending failures. Then again, to some, these were wonderful entities: some well-connected folks got wealthy, some congressmen got bribes, some federal finance-related workers got huge pay increases by resigning and then being hired by Freddie Mac or Fannie Mae, some home buyers got better deals than they deserved, and the taxpayers got stuck with the past and future bills. Our corrupt bureaucracy marches on.
7.23.2008 8:33pm