It wasn’t speculators; it wasn’t corporate greed; it wasn’t deregulation, nor Reaganomics. Fannie’s near-death experience came directly from her sponsor, the Federal government, which treated Fannie Mae like its own personal honey jar, to be raided at will.
Loading up the GSE (government-sponsored enterprise) with "pinstripe patronage" hires, dumping political loyalists and failed bureaucrats (like the former FBI chief whose tenure ended with the catastrophic intelligence failure known as 9/11), and practicing identity politics vote-buying using the GSE’s balance sheets, our representatives insured the bank’s eventual collapse.
Not surprisingly, those representatives are going to use our money to resuscitate their monster.
FNMA emerged out of the alphabet soup of New Deal regulatory agencies created during the 1930s under FDR. Desperate for cash, LBJ sold it to the public in 1968, creating what we now call Fannie Mae.
The Feds sold it but never really relinquished complete control of, or liabilities from, the entity. Fannie became a genetic splice of public and private -- merging the transparency of high finance with the efficiency of government -- a place to park political friends looking for work, and an instrument with which to engage in vote buying and social engineering.
Fannie, despite not being a direct mortgage lender, played her role well as midwife to the subprime mortgage bubble and the crisis that came from it. Regulators encouraged banks to discard traditional lending standards, which require a thorough credit history or a steady paycheck, and opt for standards which are not "discriminatory" or culturally biased. Don’t worry, they advised, Fannie and Freddie Mac will buy the paper.
Fannie did her part.
The internal investigation of allegations of accounting fraud -- which led to the departure of previous FNM CEO, Franklin Delano Raines, a former Clinton Administration official -- included a critique of the bank's "minority lending initiative," or MLI.
Awhistle-blower in the company circulated an e-mail claiming that Fannie bought mortgages which were not financially sound, in order to bolster its minority-lending portfolio and resultantly, its political capital.
The report concluded that, indeed, Fannie had paid prices more consistent with prime mortgage values for loans that were closer to subprime in their credit characteristics. To add insult to injury, Fannie "capitalized" rather than expensed these premiums, and so doing exaggerated its earnings and the salaries of managers who received performance bonuses.
Nothing is more frustrating to me than to see this crisis laid at the door of "market failure" and thrown into the face of supply-siders like me. Fannie's not ours and she never was. From government she came; and whenever her plans fail, to government she returns.
Jerry Bowyer is chief economist at Benchmark Financial Network, is a member of the Kudlow Caucus, and makes regular appearances on CNBC. He also writes extensively on finance and history for the National Review, The Pittsburgh Post Gazette, Crosswalk.com, and The New York Sun. He can be emailed at firstname.lastname@example.org.