Looking at Fannie

In November of 2008, our economic house of cards began to topple. At that time I wrote:

All of us who have temporarily seen our balance sheets spiral downward have real reason to question the rank stupidity, voracious greed, and total lack of responsible behavior by everyone involved in the sub-prime credit scandal. Whether it’s the California farm worker whose $14,000 per year salary justified a $500,000 delayed interest home loan; the dishonest mortgage broker who gave it to him; the regulators and politicians who looked the other way; the Wall Street investment banker who consolidated that dysfunctional loan with millions of others and sold them to insurance and banking executives who were more interested in year-end bonus than in fiduciary responsibility, we have good reason to condemn them all.

The thrust of that post was optimistic, suggesting that our problems were transitory and that as soon as we got our spending and debt under control, things would begin to improve. Little did I know that the incoming Obama administration would increase spending and debt to levels that were unprecedented in our history.

But that’s not the topic of this post.

One of the real culprits of the economic collapse—Fannie Mae—often goes unmentioned. A new book, Reckless Endangerment, by Gretchen Morgenson and Joshua Rosner, outline the scandalous behavior of well-connected Washington Democrats who used Fanny Mae to enrich themselves, fund their pet activist projects, and put the entire home mortgage system at risk. David Brooks reports:

The story centers around James Johnson, a Democratic sage with a raft of prestigious connections. Appointed as chief executive of Fannie Mae in 1991, Johnson started an aggressive effort to expand homeownership.

Back then, Fannie Mae could raise money at low interest rates because the federal government implicitly guaranteed its debt. In 1995, according to the Congressional Budget Office, this implied guarantee netted the agency $7 billion. Instead of using that money to help buyers, Johnson and other executives kept $2.1 billion for themselves and their shareholders. They used it to further the cause — expanding their clout, their salaries and their bonuses. They did the things that every special-interest group does to advance its interests.

Fannie Mae co-opted relevant activist groups, handing out money to Acorn, the Congressional Black Caucus, the Congressional Hispanic Caucus and other groups that it might need on its side.

Brooks characterizes this as “the most devastating scandal in recent history,” and yet, we hear very little about it in the legacy media. Part of the problem is that most of the players are Democrats who did nothing illegal. They provided members of congress with large campaign contributions, they lowered borrowing standing to assist the poor achieve home ownership and then branded as “racist” those who worried about the quality of the resultant loans. Their champion, democratic Congressman Barney Frank, fought regulators who raised warning flags, and to quote Brooks: “… was arrogantly dismissive when anybody raised doubts about the stability of the whole arrangement.”

The bottom line:

Fannie was a cancer that helped spread risky behavior and low standards across the housing industry. We all know what happened next.

Why does the legacy media spend enormous time on the salacious activities of a junior (now ex-) congressman from New York, but doesn’t mention Morgenson and Rosner’s new book or interview them on it? Could it be that Fannie Mae—a darling of Left-leaning politicians including the President—is considered untouchable because of it underlying politics? Possibly. But the silence might also be due to a tacit understanding that the elite of Washington know best. These masters of the universe (Washington style) can and do play fast and loose with hundreds of billions of our tax dollars, and no one is held accountable. It’s a travesty.