The Corner

Don’t Mention the War

Like Basil Fawlty confronted with German guests, the Congressional leadership appears determined not to mention the role of Fannie and Freddie in the financial crisis. There will be no witnesses from either of those major players in the subprime meltdown when the Financial Crisis Inquiry Commission holds its first hearing today. My colleague John Berlau explains further:

Testifying at today’s hearing are executives from Goldman Sachs, JPMorgan Chase and other big banks. This is all well and good, but the commissioners called no one from the mortgage giants Fannie and Freddie, widely acknowledged to be at the center of the crisis. This suggests that the commission, formed by Congress last year with a 6-4 Democratic majority, may be trying to cover the tracks of the politicians who worked to shield Fannie and Freddie from oversight.

As the Commission’s own appointee Peter Wallison recently wrote in the Wall Street Journal, “By the end of 2008, Fannie and Freddie held or guaranteed approximately 10 million subprime and Alt-A mortgages and mortgage-backed securities (MBS)–risky loans with a total principal balance of $1.6 trillion.” Even more damning is recent data uncovered by housing expert Edward Pinto, Fannie’s former chief credit officer, that Fannie and Freddie mislabeled the mortgages they bought and resold as “prime” when many had subprime characteristics.

According to Pinto, who has presented his findings before Congress, millions of mortgages to borrowers with credit scores of less than 660 – considered by prominent researcher to be the dividing line for subprime loans — had been labeled by Fannie and Freddie as prime going back as early as 1993. Wallison noted that this misrepresentation by the government-backed mortgage giants could have itself been a major factor in inflating the housing bubble. “Market observers, rating agencies and investors were unaware of the number of subprime and Alt-A mortgages infecting the financial system in late 2006 and early 2007,” he wrote.

CEI President Fred Smith had long warned about the systemic risk Fannie and Freddie posed to the financial system, warning as early as 2000 that their implosion could cause a taxpayer bailout of as much as $200 billion. That turned out to have greatly underestimated the $400 billion the bailout has already cost taxpayers and the possibly hundreds of billions more it will cost them, since the Obama administration removed the cap on Treasury Department assistance this November. But at the time, his voice was a voice in the wilderness as members of Congress pooh-poohed the notion of Fannie and Freddie ever slipping up. In 1003, Rep. Barney Frank, D-Mass., now chairman of the House Financial Services Committee, even publicly called for the mortgage entities to “roll the dice” on less credit worthy borrowers.

The Bush administration also pushed policies that tilted incentives toward home ownership, and the mistakes of politicians of both parties should be examined in thorough hearings. Unfortunately, it looks as is the commission is so far giving a pass to the fat cats from Washington.

If ever there were an elephant in the hearing room, this is it.

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