A Brief History…

UPDATE: John McCain has come out with a good op-ed on the topic that should be reprinted widely. Unfortunately, it looks as though Bush has given up and will sign the pork fest bailout bill. I guess he is ready for next January and President Obama.

That’s not a very good headline but the Paul Gigot article today in the Wall Street Journal tells the story of Freddie Mac and Fannie Mae with the names named. It can’t be any clearer how the Washington insiders kept the ball rolling.

Angelo Mozilo was in one of his Napoleonic moods. It was October 2003, and the CEO of Countrywide Financial was berating me for The Wall Street Journal’s editorials raising doubts about the accounting of Fannie Mae. I had just been introduced to him by Franklin Raines, then the CEO of Fannie, whom I had run into by chance at a reception hosted by the Business Council, the CEO group that had invited me to moderate a couple of panels.

Mr. Mozilo loudly declared that I didn’t know what I was talking about, that I didn’t understand accounting or the mortgage markets, and that I was in the pocket of Fannie’s competitors, among other insults. Mr. Raines, always smoother than Mr. Mozilo, politely intervened to avoid an extended argument, and Countrywide’s bantam rooster strutted off.

I remember reading those editorial page pieces and wondering why nothing happened. Now we know.

In late 2001, I got a tip that Fannie’s derivatives accounting might be suspect. I asked Susan Lee to investigate, and the editorial she wrote in February 2002, “Fannie Mae Enron?”, sent Fannie’s shares down nearly 4% in a day. In retrospect, my only regret is the question mark.

Mr. Raines reacted with immediate fury, denouncing us in a letter to the editor as “glib, disingenuous, contorted, even irresponsible,” and that was the subtle part. He turned up on CNBC to say, in essence, that we had made it all up because we didn’t want poor people to own houses, while Freddie issued its own denunciation.

The insiders turned up the pressure by complaining to Dow-Jones executives, Mr. Gigot’s bosses.

At the time, Wall Street’s Fannie apologists outdid themselves with their counterattack. One of the most slavish was Jonathan Gray, of Sanford C. Bernstein, who wrote to clients that the editorial was “unfounded and unsubstantiated” and “discredits the paper.” My favorite point in his Feb. 20, 2002, Bernstein Research Call was this rebuttal to our point that “Taxpayers Are on The Hook: This is incorrect. The agencies’ debt is not guaranteed by the U.S. Treasury or any agency of the Federal Government.” Oops.

Mr. Gray’s memo made its way to Wall Street Journal management via Michael Ellmann, a research analyst who had covered Dow Jones and was then at Grantham, Mayo, Van Otterloo & Co. “I think Gray is far more accurate than your editorial writer. Your subscribers deserve better,”

Paul Gigot, who was not then the editor of the op-ed page, is not deterred although Congress is busy feeding at the trough and does not want to hear any bad news.

I also received several interventions from friends and even Dow Jones colleagues on behalf of the companies. But I was especially startled one day to find in my mail a personal letter from George Gould, an acquaintance about whom I’d written a favorable column when he was Treasury undersecretary for finance in 1988.

The companies eased their assaults when they concluded we weren’t about to stop, and in any case they soon had bigger problems. Freddie’s accounting fiasco became public in 2003, while Fannie’s accounting blew up in 2004. Mr. Raines was forced to resign, and a report by regulator James Lockhart discovered that Fannie had rigged its earnings in a way that allowed it to pay huge bonuses to Mr. Raines and other executives.

Remember that Raines was a Bill Clinton appointee, even though this was now the Bush administration. They still had enough politicians in their entourage to stave off the final reckoning, though. Republicans were every bit as complicit in the fiasco.

Such a debacle after so much denial would have sunk any normal financial company, but once again Fan and Fred could fall back on their political protection. In the wake of Freddie’s implosion, Republican Rep. Cliff Stearns of Florida held one hearing on its accounting practices and scheduled more in early 2004.

He was soon told that not only could he hold no more hearings, but House Speaker Dennis Hastert was stripping his subcommittee of jurisdiction over Fan and Fred’s accounting and giving it to Mike Oxley’s Financial Services Committee. “It was because of all their lobbying work,” explains Mr. Stearns today, in epic understatement. Mr. Oxley proceeded to let Barney Frank (D., Mass.), then in the minority, roll all over him and protect the companies from stronger regulatory oversight. Mr. Oxley, who has since retired, was the featured guest at no fewer than 19 Fannie-sponsored fund-raisers.

Bipartisan financial malpractice. And the taxpayers will be bailing them out.

Or consider the experience of Wisconsin Rep. Paul Ryan, one of the GOP’s bright young lights who decided in the 1990s that Fan and Fred needed more supervision. As he held town hall meetings in his district, he soon noticed a man in a well-tailored suit hanging out amid the John Deere caps and street clothes. Mr. Ryan was being stalked by a Fannie lobbyist monitoring his every word.

When none of that deterred Mr. Ryan, Fannie played rougher. It called every mortgage holder in his district, claiming (falsely) that Mr. Ryan wanted to raise the cost of their mortgage and asking if Fannie could tell the congressman to stop on their behalf. He received some 6,000 telegrams. When Mr. Ryan finally left Financial Services for a seat on Ways and Means, which doesn’t oversee Fannie, he received a personal note from Mr. Raines congratulating him. “He meant good riddance,” says Mr. Ryan.

That wasn’t enough.

about half of the implicit taxpayer subsidy for Fan and Fred is pocketed by shareholders and management. According to the Federal Reserve, the half that goes to homeowners adds up to a mere seven basis points on mortgages. In return for this, Fannie was able to pay no fewer than 21 of its executives more than $1 million in 2002, and in 2003 Mr. Raines pocketed more than $20 million. Fannie’s left-wing defenders are underwriters of crony capitalism, not affordable housing.

And we will bail them out because “they are too big too fail.” Why did a Republican Speaker cooperate in this debacle ? The GOP paid the price in 2006 but the rest of us will be paying for years.

Apologies to the WSJ but I was afraid that piece was behind the subscription wall and it is too important to hide. Everyone should read it.

Here’s what they were saying a year ago. Pretty funny, eh ?