Googling the GSEs
Sunlight on Freddie and Fannie.

By Mark Hemingway
National Review Online

There's only one way to make sure that there is some accountability in the current financial crisis. Americans need to insist on absolute transparency.

Now that Fannie Mae and Freddie Mac's failures have forced the federal government to put both into conservatorship - costing taxpayers some $200 billion - Americans, who now own the two entities, are entitled to know what role the government-sponsored enterprises (GSEs) played in creating this mess.

The public needs to see every relevant scrap of paper: every balance sheet, expense report, and executive pay stub - and most importantly, every lobbying contract, memo related to meetings with lawmakers and anything else related to their dealings with Congress.

For years, Fannie Mae and Freddie Mac wreaked havoc in the mortgage markets. Between the two, they own around 50 percent of the $12-trillion mortgage-securities market - effectively a monopoly. As Fannie and Freddie sowed the seeds of economic ruin with shady accounting practices, they fattened their coffers and heaped money on their executives. Back in July, William Poole, one of the most respected economists in America, and - until earlier this year, president of the St. Louis Federal Reserve Bank - told Bloomberg that "Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer."

So why didn't Congress do anything about these taxpayer-financed "bastions of privilege" sooner? Lest anyone ask questions about what they were up to, Fannie and Freddie also showered elected officials on Capitol Hill with campaign cash to keep their mouths shut and vociferously defend their accounting practices.

After the Office of Federal Housing Enterprise Oversight (OFHEO) issued a damning report about Fannie and Freddie's troubling accounting practices in 2004, the Republican majority at the time held hearings. At those hearings (highlights of which can be viewed here), Democratic congressman Gregory Meeks (D., N.Y.) said the report's findings suggested to him that OFHEO was incompetent, and that accusations of fiscal malfeasance at GSEs made him "pissed off." Meeks didn't just disagree with OFHEO's report - he browbeat the bean-counters for daring to look after the taxpayer, in an obvious attempt to discourage their investigations. But because Meeks was waxing poetic about his anger at OFHEO, instead of the real culprits at Fannie and Freddie, now millions of responsible taxpayers have a reason to be . . . ticked.

During the savings-and-loan crisis, senators who merely sat in a room with banker Charles Keating while he tried to discourage them from launching an investigation were vilified at the "Keating Five." How is this any better?

Meeks wasn't alone in browbeating OFHEO. A parade of notable Democrats lined up to discredit and discourage criticism of Fannie and Freddie. Rep. Lacy Clay played the race card, claiming OFHEO was engaged in a "political lynching" of Franklin Raines, an African American who was Fannie Mae's CEO at the time. "I don't see anything in this report that raises safety and soundness problems," fellow Democrat Barney Frank said of OFHEO's report. Does he see anything now? Rep. Maxine Waters further complained the hearings were "trying to fix something that wasn't broke." Does it look broken now?

After Enron failed due to the company's dubious accounting practices, Congress passed Sarbanes-Oxley - ostensibly to ensure that companies properly disclose financial information to investors. And yet, Fannie and Freddie were exempted from key components of the act. At the hearings over the OFHEO report, Congressman Chris Shays (R., Conn.) had one theory as to how Fannie and Freddie had managed to keep themselves exempt from the accounting regulations. "I'm tempted to ask how many people in this room are on the payroll of Fannie Mae," he said. "What they do is that they basically hire every lobbyist they can possibly hire. They hire some people to lobby and they hire some people not to lobby so that the opposition can't hire them."

Clearly the collusion with members of Congress to cover up Fannie and Freddie's failure is unprecedented, and normal oversight measures can't be trusted. Under Rep. Henry Waxman's chairmanship, the House Oversight and Government Reform committee has been used almost exclusively as a tool to embarrass Republicans rather than enact any honest reform. Despite staging dozens of show trials for TV cameras, Waxman's committee passed only two pieces of significant legislation last year - neither of them amounting to significant government reform.

Another option is to appoint a special prosecutor to get to the bottom of this mess, similar to when one was appointed to look into corruption at the Department of Housing and Urban Development in the 1980s. But an investigation by a special prosecutor would likely take years.

The simplest most effective way to get a handle on what caused the looming financial crisis, and to expose any Congressional malfeasance, would be to get all of Fannie and Freddie's documentation and put it online for the public to download and search - now.

The government has already begun gathering and cataloging the evidence. Fannie and Freddie have already received subpoenas from a federal grand jury in New York for their records, as well as requests from the Securities and Exchange Commission that they preserve such documentation. But those investigations will be limited to fraud, not aimed at exposing possible political corruption.

John McCain, who in 2005 presciently warned in stark terms of trouble ahead for Fannie and Freddie, often brags of not being the Senate's "Miss Congeniality." The Arizona senator - who has former Fannie and Freddie lobbyists on his own campaign team - should prove it by demanding the GREs' docs become public, thereby exposing to scrutiny everyone and every taxpayer dollar involved.

Similarly, Barack Obama constantly touts one of his few accomplishments in the senate - a bipartisan piece of legislation cosponsored with Republican Tom Coburn, aimed at increasing transparency by putting all government spending online. If Obama is a proud sponsor of what he calls "Google for government," then he should be for "Google for government corruption."

The congressional Republicans could insist on amending any bailout legislation to include a provision to make Fannie and Freddie's documents public. It would provide political cover for Republicans to vote for a strictly necessary bailout. Further, it would benefit Republicans by helping expose government corruption as the root cause of the scandal, shifting blame away from the shibboleths that the media and Democrats have latched on to - namely, that the free market failed and deregulation is to blame.

While the aforementioned 2004 hearing revealed Democrats as the more vocal Fannie and Freddie defenders, the corruption runs deep and is likely bipartisan in nature. Ultimately, partisan concerns should be shunted aside and the chips should fall where they may. If Congress is eventually going to demand that taxpayers cough up nearly a trillion dollars to prop up irresponsible actors in the financial sector, it's only fair we know who in Congress was getting paid to look the other way.

- Mark Hemingway is an NRO staff reporter.