The two mortgage giants Freddie Mac and Fannie Mae — seized by the government September 7 before they went completely bankrupt, at a potential cost to taxpayers of more than $25 billion — have been in obvious trouble for much of the past five years — with criminal investigations, accounting scandals, firings, resignations, huge losses and warnings from the Federal Reserve that their huge portfolio of mortgage securities posed a risk to the overall financial system.
But prior to this year, the watchdogs at ABC, CBS and NBC found time for only 10 stories on the financial health and management of Fannie Mae and Freddie Mac. A review of the three networks’ morning and evening news programs from January 1, 2003 through December 31, 2007 found nine anchor-read items or brief references to the companies troubles, plus one in-depth report by CBS’s Anthony Mason on the May 23, 2006 Evening News, after Fannie Mae was fined $400 million for accounting fraud.
[This item, by the MRC’s Rich Noyes, was posted Thursday afternoon on the MRC’s blog, NewsBusters.org: newsbusters.org ]
It’s not that the networks eschew business news. A 2005 report from the MRC’s Business and Media Institute found heavy coverage of the scandal surrounding Enron, but no interest in the growing scandal surrounding Fannie Mae: “A LexisNexis search of ABC, CBS, NBC, and CNN on the term ‘Enron’ from the nine months around when the story first broke — Oct. 1, 2001, to July 1, 2002, produced 3,017 hits….A similar LexisNexis search was performed for the term ‘Fannie Mae’ for those same media, from June 1, 2004, to March 1, 2005, again during the time the story was breaking. This search discovered a paltry 37 matches.” See: www.businessandmedia.org
But the networks should (presumably) be more interested in monitoring these mortgage behemoths, since they’re not normal private companies but rather Government Sponsored Entities (GSEs) chartered by Congress to promote the specific cause of promoting home ownership. This special status, along with the presumption that taxpayers would bail out the firms if they got into trouble, amounts to an implicit federal subsidy that the Federal Reserve in 2003 calculated was worth between $119 and $164 billion a year.
Writing in Tuesday’s Wall Street Journal, Charles Calomiris and Peter Wallison of the American Enterprise Institute explained how these two GSEs — plus members of Congress who refused to hold them accountable — are “largely to blame for our current mess.” An excerpt:
Many monumental errors and misjudgments contributed to the acute financial turmoil in which we now find ourselves. Nevertheless, the vast accumulation of toxic mortgage debt that poisoned the global financial system was driven by the aggressive buying of subprime and Alt-A mortgages, and mortgage-backed securities, by Fannie Mae and Freddie Mac. The poor choices of these two government-sponsored enterprises (GSEs) — and their sponsors in Washington — are largely to blame for our current mess.
How did we get here? Let’s review: In order to curry congressional support after their accounting scandals in 2003 and 2004, Fannie Mae and Freddie Mac committed to increased financing of “affordable housing.” They became the largest buyers of subprime and Alt-A mortgages between 2004 and 2007, with total GSE exposure eventually exceeding $1 trillion. In doing so, they stimulated the growth of the subpar mortgage market and substantially magnified the costs of its collapse….
In 2005, the Senate Banking Committee, then under Republican control, adopted a strong reform bill, introduced by Republican Sens. Elizabeth Dole, John Sununu and Chuck Hagel, and supported by then chairman Richard Shelby. The bill prohibited the GSEs from holding portfolios, and gave their regulator prudential authority (such as setting capital requirements) roughly equivalent to a bank regulator. In light of the current financial crisis, this bill was probably the most important piece of financial regulation before Congress in 2005 and 2006. All the Republicans on the Committee supported the bill, and all the Democrats voted against it. Mr. McCain endorsed the legislation in a speech on the Senate floor. Mr. Obama, like all other Democrats, remained silent.
Now the Democrats are blaming the financial crisis on “deregulation.” This is a canard. There has indeed been deregulation in our economy — in long-distance telephone rates, airline fares, securities brokerage and trucking, to name just a few — and this has produced much innovation and lower consumer prices….
If the Democrats had let the 2005 legislation come to a vote, the huge growth in the subprime and Alt-A loan portfolios of Fannie and Freddie could not have occurred, and the scale of the financial meltdown would have been substantially less. The same politicians who today decry the lack of intervention to stop excess risk taking in 2005-2006 were the ones who blocked the only legislative effort that could have stopped it.