A Reminder of the Corruption That Helped Birth the Biggest Bailout in History
Posted by on July 18, 2013

“Fannie Mae will never impose a cost on the American taxpayer…” – James A. Johnson, Chief Executive Officer of Fannie Mae, testifying before the House of Representatives, April 17, 1996 

“Under the direction of James A. Johnson, Fannie Mae’s calculating and politically connected chief executive, the company capitalized on its government ties, building itself into the largest and most powerful financial institution in the world. In 2008, however, the colossus would fail, requiring hundreds of billions in taxpayer backing to keep it afloat.  Fannie Mae became the quintessential example of a company whose risk taking allowed its executives to amass great wealth.  But when those gambles went awry, the taxpayers had to foot the bill.” – Reckless Endangerment, published in 2011

Few issues have united Americans quite like the outrage at taxpayer-funded bailouts – and rightfully so.

Hardworking taxpayers should never forget:  The nearly $200 billion bailout of Fannie Mae and Freddie Mac is the biggest, costliest taxpayer-funded bailout in history

Nor should taxpayers ever forget that Fannie and Freddie were at the epicenter of the financial crisis that destroyed millions of jobs

In 2008, more than 70% of subprime and other low-quality mortgages were on the books of the federal government, primarily the “Government Sponsored Enterprises” Fannie Mae and Freddie Mac.  The GSEs bought these riskier mortgages to meet the politically-motivated “affordable housing goals” that Congress assigned to them.  As Peter Wallison, who served as on the Financial Crisis Inquiry Commission, said, when these mortgages defaulted, they drove down housing prices, weakened most large financial institutions and caused the financial crisis.

While Fannie and Freddie’s role in the financial crisis is widely acknowledged, what some may have forgotten is how rank cronyism, Enron-style accounting and outright financial fraud made these GSEs so powerful and unaccountable that they were able to wreck our economy.

Beginning in the late 1990s, executive pay at Fannie Mae and Freddie Mac became tied almost solely to earnings growth.  So in order to trigger maximum bonus payouts for themselves, top management at the firms cooked the books to make it appear the companies were producing enough corporate earnings.

And meeting the “affordable housing” goals mandated by Congress also enabled these executives “to keep their lush government perks and pay packages.”  (See Reckless Endangerment, Pg. 247)

When the fraud was finally detected, the Office of Federal Housing Enterprise Oversight (OFHEO) issued a scathing report calling the corporate culture created by the executives “unethical.” The report noted:

"Senior management manipulated accounting; reaped maximum, undeserved bonuses; and prevented the rest of the world from knowing."

"The combination of earnings manipulation, mismanagement and unconstrained growth resulted in an estimated $10.6 billion of losses, well over a billion dollars in expenses to fix the problems, and ill-gotten bonuses in the hundreds of millions of dollars."

"As a government-sponsored enterprise, Fannie Mae has a unique position among American corporations ... It is also the second largest borrower in the world, only behind the U.S. government. As such, Fannie Mae has a special mandate and position of public trust. The previous management team violated that trust and did serious harm to Fannie Mae." (OFHEO Report: "Fannie Mae Facade," 5/23/06)

OFHEO issued a separate report detailing numerous examples of improper accounting practices at Freddie Mac and pointed to improper trades designed to mislead investors and trigger big bonuses for top executives.  The report noted Freddie Mac executives had an “obsession” with earnings growth that came “at the expense of proper accounting policies and strong accounting controls.”

The PATH Act (Protecting American Taxpayers and Homeowners) makes sure this never happens again. 

Under the PATH Act, Americans will have a sustainable housing finance system that works for the 21st century. 

The PATH Act includes major reforms to fix the broken GSE model that hurt our economy, including reforms that:

  • End the taxpayer-funded bailout of Fannie Mae and Freddie Mac
  • Put these corruption-plagued enterprises on the road to extinction within five years
  • Repeal Fannie and Freddie’s misguided affordable housing mandate
  • Liquidate the GSEs and sells off any remaining assets

Unless we take bold and decisive action, Americans will never have the sustainable housing finance system they deserve.  Unless we take bold and decisive action, the GSEs will remain a threat to our economy.  The PATH Act is our opportunity to end the bailout, end the troubled and costly GSEs, and build a housing finance system that’s sustainable for home owners, respectful of hardworking taxpayers and built to last.

The opinions expressed below are those of their respective authors and do not necessarily represent those of this office.
  • Steve Foley commented on 7/22/2013
    How come nobody went to jail?
  • Warren Moody commented on 7/23/2013
    stop the bailouts nobody especially the goverment bails me out let them eat beans like I do when I get in a jam
  • Mike Zoegler commented on 10/18/2013
    i oppose H.R. 2767 because there doesn't seem to be a real body of proof the Fannie and Freddie were "Partners in Crime" at all, but somewhat under "orders" to take a liberal stance on loan securitization. Below is a recent Press Release from Housing Wire on the sentencing of a vice-president ot a mortgage firm in FL who was convicted of defrauding Fannie and Freddie. I have read MANY such stories. Mike Zoegler
  • Jason Agresta commented on 10/22/2013
    Were you absent the past few weeks where FNMA has won every lawsuit in the billions of dollars because they were defrauded by the banks, and that is what led to them loosing billions and needing a bailout. (on that note FNMA a quasi gov't entity means these banks thought nothing about defrauding US Gov't, guess that the private market you want running mortgage market) Say FNMA did not exist but the banks still falsified all those loans and sold them to smaller non agency companies. The tax payer would still have paid a bailout because a default of that size would have crushed economy. As for cronyism. FNMA has done everything under conservatorship to enforce stricter guidelines etc etc. They have paid tax payer back 145 billion dollars roughly. But politicians created a loop hole that requires all profits to be a dividend. Creating a legal situation where FNMA can never pay tax payer back. Almost like a bookie with a vig, or loan shark. What about the million of taxpayers that own stock that you want to be zero. What about the millions of people have they made the American dream happen.
  • Truth Teller commented on 10/31/2013
    The government allowed this to develop, it took decades of lobbying to undo laws that would've prevented such large conglomerates in the 1st place.. The bribes were taken, the laws changed, & corporations slowly monopolized, not because they were better profit-earners, but because they had more capital, the exact opposite as before... Suddenly, you could just buy-out/eliminate the competition, you didnt need to out-perform.. You could lobby/bribe for laws that favor those with the most capital... Believe it or not, there was a time when charging 2 different prices to seperate customers was illegal.. Needless to say, once you allow $$/power to influence laws(morality), the results we see today should be expected.