A Palace For Fannie (Mae)—–Why The Imperial City Must Be Sacked

Contra Corner ^ | David Stockman

[Lorianne]

To hear the establishment media tell it, you would think that Attila the Hun was fixing to sack the Imperial City. Would that Donald Trump were that bold or dangerous.

Then again, he is a showman of no mean talents. So if there is a maquette of Fannie Mae’s planned new $770 million headquarters somewhere around Washington DC, he could start the sacking right there. Hopefully, he would not hesitate to shatter it with a fusillade of tweets—-or even take a jackhammer to it while wearing a Trump hard hat.

Fannie Mae is surely a monument to crony capitalist corruption, and living proof that massive state intervention in credit markets is a recipe for disaster. But rather than shut it down after it helped bring the nation’s financial system to the edge of ruin, the beltway pols have come up with an altogether different idea.

To wit, they plan to move Fannie from her already luxurious NW Washington headquarters to this hideous new glass palace to be built in the heart of Washington DC. Could there be a bigger insult to the 15 million families who lost their homes to foreclosure owing to the crash of the giant housing bubble that Fannie Mae and the crony capitalist crooks who ran it helped perpetuate?

And that’s to say nothing of the $180 billion of taxpayer money that was pumped into Fannie Mae and the other GSE’s after the house of cards came tumbling down in August 2008. In fact, while the politicians on Capitol Hill have dawdled for eight years without any statutory changes or mandates for even minor reforms, Fannie Mae’s management and its phalanx of K-Street lobbies showed exactly who rules in the Imperial City. It is the larcenous rule of these syndicates of beltway racketeers, in fact, that has put Donald Trump’s name on the Presidential ballot.

So let it be granted that his manners and policy knowledge appear to be on the meager side. Yet it is malodorous tales like that of Fannie Mae’s swank new palace which demonstrate why a disrupter on horseback is exactly what the Imperial City deserves.

In truth, the government housing guarantee programs at Fannie Mae and Freddie Mac have been an abomination from the very beginning.

Not only did they inappropriately subsidize home mortgages by upwards of $60 billion annually—–most of which went to affluent middle class households not entitled to taxpayer help in the first place—-but they were also based on the kind of Washington artifice upon which today’s rampant crony capitalism thrives. Namely, the specious claim that the GSEs are unique, creative “public-private partnerships” that enable a “secondary market” for home mortgages, and thereby remedy the alleged failure of the free market to provide cheap 30-year housing loans to the public.

In fact, the so-called secondary market for mortgages was no such thing. Freddie and Fannie have always been a de facto branch office of the US Treasury and their securities have been just another variant of treasury bonds. That finally became official when the U.S. Treasury threw them a $180 billion lifeline on the eve of the financial crisis.

The reason that became necessary, of course, is that the GSE’s had been minting fabulous book profits over several decades by drastically under-reserving for losses, confident that Uncle Sam would bail them out if a crisis ever came.

In fact, when the mortgage meltdown did come, Freddie and Fannie had virtually no accumulated reserves and capital and would have exposed investors to tens of billions of losses. Needless to say, the implicit “call” on the US Treasury that had always been embedded in the below market rates on Freddie/Fannie paper was instantly exercised by Wall Street’s then plenipotentiary in Washington, former Goldman CEO and US Treasury Secretary Hank Paulson.

To be sure, the proper course would have been to force investors ranging from the sovereign wealth fund of China to Norwegian fishing villages and Wall Street hedge funds to take their lumps for not reading the indentures (which contained no legal US guarantee), and to prosecute Freddie and Fannie and their executives for blatant and monumental accounting fraud.

But the accounting fraud was never even acknowledged, let alone prosecuted, owing to the beltway fiction that the GSE’s are “off-budget” public-private partnerships.

snip (there's more)

[Pelham]

Yes but Bush was the President and he was in charge of the regulatory agencies. Instead of heeding warnings from the likes of Brooksley Born he listened to the Candides and Panglosses. Granted that Born, one of the few heros in this mess, resigned in 1999 during Clinton but that’s all the more reason that Bush had plenty of time to become aware of looming danger in the financial market even before he became President. Of course that would have required him to be intellectually curious and there is absolutely no sign that he ever suffered from that trait.

The bipartisan idiocy was going on strong during Clinton and Bush continued it. The last vestiges of Glass Steagall were being scrapped with Graham-Leach-Bliley, although this may not be as implicated in 2008 as I first suspected. The Commodities Futures Modernization Act 2000 kept the derivatives market unregulated and opaque and this is surely where a lot of damage was centered. Warren Buffet’s quip that derivatives are financial weapons of mass destruction turned out to be eerily prophetic.

[x]

The old headquarters was impressive enough:

Even if they did rip-off Colonial Williamsburg.