As congressional Democrats press on with their attempts to get financial legislation reform passed, a key component has been lacking from the debate: how to handle the government-sponsored enterprises Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE).
Although some Republican lawmakers have cried foul over the fact nothing has been included in a bill sponsored by Senate Banking Committee Chairman Sen. Chris Dodd, (D-Conn.), President Barack Obama's administration has vowed to pursue reforming the GSEs ... eventually.
However, despite a long history of alleged corruption, close ties to the current administration and a recent $10-billion extension of "emergency aid" to Freddie and Fannie in the deadest possible part of the news cycle, these two entities have gone relatively unnoticed by the news media, with a lion's share of the spotlight given to Wall Street bogeymen like Goldman Sachs (NYSE:GS).
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Reporting on the roles of Fannie Mae and Freddie Mac has been almost nonexistent, particularly in the broadcast media. Since March 28, ABC, CBS and NBC put together only broached the topic of GSEs one time. But Goldman Sachs and the circumstances surrounding an SEC investigation were mentioned 37 times.
Even in the cable media, home of the 24-hour news cycle, when GSE-reform is discussed, it's dismissed as some sort of Republican talking point or distraction.
Background: Freddie and Fannie ‘Proximate Cause' of Crisis
Though the attention has been lacking, there is a strong to be made that these government-sponsored enterprises are at least somewhat, if not largely, culpable for the economic crisis.
According to the "Financial Services Committee Republican Plan for Reforming Fannie Mae and Freddie Mac," posted on March 26, it's not just the collapse in housing these GSEs are responsible for, but the entire economic crisis.
"The evidence is clear that the Government Sponsored Enterprises (GSEs) - specifically, Fannie Mae and Freddie Mac - were the proximate cause of the economic crisis," the Republican plan explained. "Ultimately supported by the taxpayers to the tune of hundreds of billions of dollars, Fannie and Freddie permitted their executives, investors, and creditors to make outsize profits when times were good, but stuck taxpayers with the tab when the housing bubble burst. Fannie and Freddie's access to cheap capital and the taxpayers' pocketbook helped run up housing prices to unsustainable levels, while crowding out lenders and investors who could not afford to compete against these government-sponsored juggernauts."
And as Business & Media Institute adviser John Lott pointed out on his blog on April 7, the notion that Fannie Mae and Freddie Mac played pivotal role in the financial isn't just a Republican talking point, but also one that former Federal Reserve Chairman Alan Greenspan testified to in front the Financial Crisis Inquiry on April 7.
"While the roots of the crisis were global, it was securitized U.S. subprime mortgages that served as the crisis' immediate trigger," Greenspan said. "The surge in demand for mortgage back securities was heavily driven by Fannie Mae and Freddie Mac which were pressed by the Department of Housing and Urban Development and the Congress to expand affordable housing commitments."
The federal government was forced to bail Fannie and Freddie out in 2008 to avert what some believed would have been a complete collapse of the U.S. financial system. Peter Wallison, a fellow at the American Enterprise Institute and considered by many to be the one of the foremost experts on these government-sponsored enterprises, wrote for the Wall Street Journal on April 20 this bailout isn't cheap.
"The Congressional Budget Office has estimated that, in the wake of the housing bubble and the unprecedented deflation in housing values that resulted, the government's cost to bail out Fannie and Freddie will eventually reach $381 billion," Wallison wrote. "That estimate may be too optimistic. Last Christmas Eve, Treasury removed the $400 billion cap on what the government might be required to invest in these two GSEs in the future, and this may tell the real story about the cost to taxpayers. In typical Washington fashion, everyone has amnesia about how this disaster occurred."
Called a ‘Red Herring,' ‘Diversionary Tactic'
Yet despite these exorbitant numbers, proponents of the Democratic reform legislation dismiss Freddie Mac and Fannie Mae as irrelevant.
On CNBC's April 23 "Power Lunch," network contributor Keith Boykin pooh poohed former Bush administration adviser Ron Christie's assertion that GSE reform was essential.
"If we talk about serious regulatory reform, you need to have Fannie Mae and Freddie Mac in there," Christie said. "The fact that those two entities, those GSE aren't in here makes me believe that the Democrats aren't serious.
"This is a red herring," Boykin responded. "The Republicans have been using this distraction about Fannie Mae and the GSEs - trying to throw this out there. If we don't get the government-sponsored enterprises in the loop, then somehow we're not doing serious financial reform. But this is really a trick I think on the part of the Republicans to prevent financial reform from taking place at all. Let's focuses on if it does well in this bill."
On CNN's April 22 "Rick's List," fill-in host Drew Griffin attempted to tackle the topic in an interview with Sen. Sherrod Brown, D-Ohio. But for that, Griffin was promptly rebuffed by Brown.
"Fannie and Freddie made mistakes, absolutely," Brown said. "I'm very willing to address them, but it's all diversionary tactics. It's what they do. I mean, again, I know you don't like to hear this, Drew, and maybe some of your viewers don't either, but when one party - and there are too many Democrats that are responsive to Wall Street. I don't deny that either, but when one party is totally captured by Wall Street interests, just like in the health care bill they were totally captured by insurance company interests, then it's hard to - it's hard to move forward. All this other stuff is diversionary tactics because they're trying to protect Wall Street."
Why? According to Brown, the GOP was pandering to Wall Street in return for campaign donations, despite evidence showing Democrats' willingness to accept Wall Street contributions and Wall Street's eagerness to make them. So to Brown, GSE reform was not a pressing matter.
"They meet with them," Brown continued. "They ask them for campaign money. They try to protect them. We've got a lot of work to do this right. We know how to do it. I hope we deal with Fannie Mae and Freddie Mac. But they aren't the underpinning of the problem. They were basically imitating some of the awful things that Wall Street did. That doesn't let them off the hook. But the fundamental reform is to do what we're doing in this bill and to do it frankly a little bit stronger than we're doing it now."
Members of the media are no more willing to address GSE reform than Democrat politicians, as Rep. Darrell Issa, R-Calif. Discovered on On MSNBC's April 22 broadcast of "MSNBC News Live."
"Well, the president is doing two things, pushing hard for what he calls reform and villifying Wall Street very broadly. And I think the pushback has to be that Wall Street was part of the problem, but it was only part of Wall Street," Issa explained. "Not every investment bank was part of this. You know, I think about Blackrock, who publicly said more than a year before the collapse that subprime was a problem, was getting out of it. There were plenty of people who did the right thing and certainly conventional banks did the right thing. So when we talk about somehow regulating this amorphous group on Wall Street, we're talking about people who in many cases had nothing to do with it, while Fannie and Freddie and AIG's FP division in England would not be covered by this bill."
But MSNBC host Tamron Hall rejected Issa's breakdown. In her view, its fine to punish for the whole for the crimes of a few. But oddly, that whole doesn't encompass GES.
"But congressman, you and I both know that's how life is," Hall replied. "I mean, you can have a neighborhood for example and something bad happens in the neighborhood. You're going to focus on what to do to fix that problem and most folks in that community being Wall Street in this case may be doing the right thing but when those who are making big mistakes affect our economy and effect the way you and I live and everyone watching, you want those problems corrected - even if it's one percent or two percent, if they're causing potential disaster to this country."
Broadcast Nets Make Little Mention of GSEs
While the actually role of government-sponsored enterprises in the financial crisis is a matter of debate for some of the cable media, even most of their defenders would likely concede Fannie Mae and Freddie Mac played some role.
However, a Nexis search of ABC, CBS and NBC coverage of Fannie Mae or Freddie Mac over the past month revealed very disappointing numbers. Dating back to March 28, these GSEs have been mentioned in news coverage by anyone who is not an elected official only once, when New York Times columnist David Brooks mounted his quasi-defense of Goldman Sachs on the April 25 "Meet the Press."
"I'd like to defend Goldman Sachs," Brooks said. "I mean, we had a mania. Everybody thought housing prices were going to go up forever. Who was going to stop that? Well, it wasn't the Fed. It wasn't the guys at Fannie and Freddie. It wasn't the great and the good, the people leading Citigroup and all those. It was a bunch of arrogant scuzzballs who said, ‘Everybody else in the world is a bunch of idiots. I know better, I'm going to put a lot of money betting against that, betting against this bubble.' And they happened to be right and they happened to be intelligent. And they are scuzzballs, but frankly a lot of people who were going long on the market were scuzzballs, too."
Goldman Sachs, however, being the scapegoat du jour was mentioned on 51 broadcasts on CBS, NBC and ABC. Each of the networks hit the topic 17 times.
It is important to note that, during that time, the Securities and Exchanges Commission charged Goldman with fraud. Therefore, the investment bank would logically overshadow the GSEs, even though President Barack Obama had explicitly said those filings had nothing to do with the politics of the financial regulation bill.
"Categorically, we found out about it on CNBC," Obama said to CNBC's John Harwood on April 21. "The SEC is an entirely independent agency that we have no day-to-day control over. And they have never discussed with us anything with respect to the charge that would be brought. So this notion that somehow there would be any attempt to interfere with an independent agency is completely false."