‘Sherlock Holmes puffs on his long-stemmed pipe and quietly plays a haunting melody on his violin, thinking deeply about the Scandal at Pennyslvania Avenue. ‘I am now quite sure, my dear Watson, that the scandal does not rest at Number 1500′, he murmurs. ‘A small-time operator like Secretary Geithner would not act alone on such an extensive adventure. Surely, he is controlled by more powerful actors. In politics, money is the Book of All Power. Let us follow the money and see where it leads. Watson, kindly review for me the movement of political campaign contributions from Fannie Mae and Freddie Mac. In the meantime, I shall explore the network of relationships between US politicians and the GSEs that they oversee.’
As always, Dr. Watson pursued his task with meticulous professionalism while Holmes used his intuition to identify the key political players in the Scandal. The facts entirely supported Holmes’ theory:
Over the period 1989 to 2008, political action committees financed by Fannie Mae and Freddie Mac contributed $3,017,797 to liberal members of both Houses of Congress. Barney Frank (Democrat: Massachusetts), since 2007, Chairman of the House Financial Services Committee (and a member of that Committee since 1981) is ranked 16th on a list that includes both Houses and 5th among his colleagues in the House as a recipient of this funding. Other prominent Democrats in receipt of such funding include former Congressman Joe Kennedy (Democrat:Massachusetts), Senator Chuck Schumer (Democrat: New York) and Senator Christopher Dodd (Democrat: Connecticut). In addition, Fannie Mae and Freddie Mac funded the presidential campaign of Barack Obama, as well as such media lobbyists as Paul Krugman and Steven Pearlstein. All of these political operators, and many more, have provided continuous support for Fannie Mae and Freddie Mac throughout the mortgage market debacle.
Sherlock Holmes identified an important personal link between Barney Frank and Fannie Mae in the form of a long-time homosexual relationship between Frank and Herb Moses (then a senior executive with Fannie Mae and personally responsible for developing high-risk mortgage relationships between the Corporation and poor rural farmers). The personal relationship ended in 1998, when Herb Moses left Fannie Mae. Frank served on the House Banking Committee throughout the ten years that they were together. That Committee has jurisdiction over government-sponsored enterprises.
The consequences are entirely predictable. Here are a few examples. In 1991, Barney Frank and Joe Kennedy lobbied for Fannie Mae to soften rules on multi-family home mortgages, despite the fact that such dwellings showed a default rate twice that of single-family homes. In September, 2003, Frank aggressively thwarted reform efforts by the Bush administration, stating that the problems of Fannie Mae and Freddie Mac were ‘exaggerated’. On October 8, 2003, Frank opposed giving the Bush administration the right to disapprove business activities that could pose risk to the taxpayers. In April 2008, Frank blamed short-sellers for Fannie and Freddie’s problems, stating that the two corporations ‘are better off than the market thinks’. In June 2008, Frank stated that ‘Fannie and Freddie are fundamentally sound.’ In July 2008, Dodd strongly defended Fannie and Freddie stating that ‘these are viable strong institutions’. Not once on the campaign trail was Barack Obama motivated to say anything controversial on the GSE issue. And he had plenty to say about almost everything else.
The political consequences of this scandal are serious indeed. Since September 2008, Fannie Mae and Freddie Mac have been bailed out with $1.5 trillion in direct and indirect government aid. The Obama administration is banking on them to end a three-year housing market slump and is delaying plans to lay out a new framework for them. Congress has not scheduled any meetings on their future. On Christmas Eve, 2009, the Treasury Department removed a $200 billion limit on aid to each of the two companies, and promised to cover their losses through 2012 (note the year). Earlier, the Federal Reserve extended a mortgage-bond purchase program by three months, through March 2010. The Federal Reserve has purchased $1.1 trillion of the two corporations’ home-loan funds and $124.1 billion of their corporate debt in 2009, pushing mortgage rates to record lows. The Treasury has also purchased $191 billion of their mortgage bonds and made $112 billion of preferred stock purchases. In the meantime, the two corporations have lost $188.4 billion over the past nine quarters and are set to lose a great deal more as the housing market continues to struggle.
‘What did the President know, and when did he know it?’ muses the great detective, still puffing on his pipe. Ultimately that is a question that even a biased media will have no option but to confront.