Politics & Policy

The Mega Scandal Everyone Has Forgotten

Fannie, Freddie, and Congress get off scot-free.

In Star Wars, Obi-Wan Kenobi used an old Jedi mind trick on Stormtroopers to deflect them from their real quarry: “These aren’t the droids you’re looking for.” It worked.

It looks as if another mind trick, well known in the Congress — delay and deflection — will now work to make Americans forget one of the biggest scandals of our time: the housing collapse that triggered the 2008 financial meltdown we are still suffering from. We shouldn’t just gaze over the fiscal cliff everyone else is scrutinizing; we should also examine the droids who helped set in motion our current economic mess.

Last week, over the holidays, the House Ethics Committee quietly joined its Senate counterpart in finding that no members or staffers — or at least any it claimed jurisdiction over — broke congressional rules while obtaining “VIP” mortgages from Countrywide. This failed lender at one time provided a huge share of the questionable subprime mortgages issued by Fannie Mae and Freddie Mac, the government-backed mortgage lenders that were some of the first players to fall in the 2008 financial collapse.

Fannie and Freddie scooped up Countrywide loans and pooled them and others into mortgage-backed securities that were sold with an implicit taxpayer guarantee that eventually became explicit. The taxpayer guarantee allowed — indeed, encouraged — the lenders to be reckless, creating a moral hazard. In 2008, this set-up helped bring down the whole house of cards built by subprime mortgages.

But far from being dismantled, Fannie and Freddie have avoided insolvency, thanks to massive taxpayer bailouts. Talk of winding them down has faded on Capitol Hill and is being discouraged by the Obama administration. The two entities, along with the Federal Housing Administration, currently back some 90 percent of new mortgages. Talk about there being no consequences for failure.

At least Countrywide had to be sold to Bank of America in 2008; and two years later, Countrywide’s disgraced CEO, Angelo Mozilo, had to pay a $22.5 million fine, the largest ever at that time for a senior executive of a public company, for insider trading and concealing information on Countrywide’s deteriorating mortgages.

But Mozilo avoided criminal charges and to date has never satisfactorily explained Countrywide’s infamous “Friends of Angelo” program, which provided discount mortgages and other benefits to numerous executives at Fannie and Freddie as well as executive-branch officials and up to 30 members of Congress and their staffers. Countrywide wouldn’t have thrived or been allowed to go off the ethical rails without lots of “friends” in government.

Representative Darrell Issa (R., Calif.), chairman of the House Government Reform and Oversight Committee, issued a report last July concluding, among other things, that Countrywide lobbyists would frequently refer members of Congress and their staff to the company’s VIP desk so they could receive “enhanced customer service.” E-mail evidence was found showing that specific requests for personal loans were made to the VIP desk and quickly facilitated. Issa’s committee found that more than six current and former lawmakers — including retiring Senate Budget Committee chairman Kent Conrad, a North Dakota Democrat, and House Armed Services Committee chairman Buck McKeon, a California Republican — obtained mortgages through the Countrywide VIP program.

Countrywide’s most famous client was Democratic senator Chris Dodd, chair of the Financial Services Committee from 2006 to 2010. Although he and Conrad were cleared of ethics violations by the Senate Ethics Committee in 2009, Dodd retired the next year after it became clear that revelations about his involvement with Countrywide had destroyed his political standing in his home state of Connecticut. He was nonetheless able to shepherd the now-infamous Dodd-Frank bill into law before he stepped down. Dodd-Frank is a rat’s nest of new regulations on financial firms, but it goes notably light on regulating the housing industry and its cozy relationship with the federal government.

Despite its explosive findings, Representative Issa’s committee lacked any jurisdiction to suggest punishment for any individuals. The matter was handed off to the secretive House Ethics Committee, which quietly issued a report just two days after Christmas. This report concluded:

While these allegations concern serious matters, almost all of the allegations concerned actions taken outside, or well outside, the jurisdiction of this Committee . . . because they occurred before the third Congress prior to the current Congress. In addition, several of the Members and employees mentioned in the allegations are no longer serving in or employed by the House, and therefore are outside the Committee’s jurisdiction. 

In other words, some of the suspect droids have moved on, so it’s time the rest of us did, too.

Indeed, the name of only one member of Congress or staffer is mentioned in the entire report, that of Representative Pete Sessions, a Texas Republican who took a Countrywide loan but insisted on not getting favorable treatment or terms.

But even while it is maddeningly silent on who was involved in the Countrywide scandal, the House Ethics Committee report does uncover exactly how corrupt the program was. “Countrywide partnered with Fannie Mae in a strategic business alliance that also included joint lobbying efforts,” it concludes. “Countrywide lobbyists and CEO Angelo Mozilo used discounted loans as a tool to ingratiate itself with policymakers in an effort to benefit the company’s business interests,” Issa said in a release about the report. As Politico notes, the report discloses that at least four Capitol Hill staffers in critical positions for Countrywide, including aides on the House Financial Services and Senate Banking panels, obtained VIP loans from the firm. These loans started as early as 1998.

Left unsaid is that Countrywide, Fannie, and Freddie were also able to kill attempts to rein in the subprime-mortgage market while it was pumping up the unsustainable housing bubble, starting in the late 1990s, and peaking between 2004 and 2006.

The Ethics Committee insists that some House members and staffers didn’t know they were receiving favorable treatment; the committee also suggests that the discounts these individuals obtained might have been equal to or less generous than the terms offered by other lenders. The entire culture of Congress was corrupted by the housing government- industrial complex, and the Ethics Committee report only skims over the surface of that scandal.

Representative Hansen Clarke, a Michigan Democrat who will soon retire, was asked by Dave Weigel of Slate this month to name the most important lesson he’d picked up in Congress. His statement is extraordinary:

Everybody in this building knows that the housing market was the root of the financial crisis. Here’s the problem: They’re scared of crossing the financial industry and being defeated with the industry’s money. So they’re silent. Silent. Silent. Silent. Their rationale is: If I get defeated, I’m not going to be able to do anything. That’s what the problem is.

A brand-new Rasmussen poll shows that even though the American people may not know the details of what’s wrong with Congress, they can sure smell the stench. Only 5 percent of those surveyed by Rasmussen rate Congress as doing a good or excellent job. A full 69 percent rate its performance as “poor.” Even if lawmakers temporarily avert the fiscal cliff, our fiscal problems will continue until we address the government-directed crony capitalism that is destroying our ability to end the current economic malaise and reclaim our prosperity.

— John Fund is national-affairs correspondent for NRO.


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