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Enron, Fannie Mae and Freddie Mac; the Big Three

By Julia A. Seymour
Business & Media Institute
7/16/2008 5:25:43 PM
19 Times Bigger than Enron, and the Networks Didn't See It Coming Cooking the books but protected by powerful politicians, the Fannie Mae and Freddie Mac financial crisis was seen a mile away by print media, but mostly overlooked by networks.

Another billion-dollar taxpayer bailout is on the horizon with the trouble at Fannie Mae and Freddie Mac, but you won't find much criticism of the mortgage giants on the networks despite repeated warnings about the lenders' high-risk behavior.

Since Jan. 1, 2008, only four network news stories have included any criticism of Fannie and Freddie. Even the flood of reports since July 8 (when concerns began to surface that the two organizations might have to raise more capital) has provided little historical context for the situation. Warnings about Fannie and Freddie have been issued by print media and economic experts at least since 2002.

The NBC "Today" show hinted at problems with the two government-sponsored companies on July 14 when Andrea Mitchell reported Sen. John McCain's (R-Ariz.) reaction to a bailout:

"John McCain also says the survival of the mortgage giants is essential, despite some of their past practices," said Mitchell. Viewers were left to wonder what those "past practices" could have been. Here are a few hints: billions of dollars in accounting scandals, stock prices that have plummeted, connections to prominent politicians and a high-risk portfolio.

Even CNBC's Erin Burnett shed almost no light on the situation in a "Today" segment the same morning. Co-host Matt Lauer asked, "How did they get themselves in this situation?"

Her response explained that Fannie and Freddie guarantee mortgages for other lenders so that if the loan goes unpaid, they take the loss instead of the original lender. But Burnett neglected to mention the enterprises' government mandate to increase home ownership and the implied taxpayer guarantee that enabled the two public companies to dominate the market.

Unlike the three networks, which were praising Fannie Mae and Freddie Mac earlier in the year, The Wall Street Journal has been sounding an alarm bell about the corruption and financial danger of the lenders' practices for more than six years. The Journal has run at least 29 editorials or op-eds exposing the two businesses for political connections, preferential regulation, and Enron-like "cooking" of the books.

"The Washington political class has nurtured and subsidized these financial beasts for decades in return for their campaign cash and lobbying support," said one Journal editorial on July 12. That editorial also pointed out the lack of reporting on the issue saying, "Maybe the press corps will even start reporting how this vast confidence game could happen."

The Journal wasn't alone. The Washington Post said on July 14, "Though the implosion of investor confidence in Fannie Mae and Freddie Mac last week was sudden, the worries driving it have been the subject of countless warnings over many years."

That Post article explained that the two entities had too much debt and not enough capital operating "with financial cushions that were too thin to support their far-reaching financial risks." This was something former Federal Reserve Chairman Alan Greenspan told lawmakers in 2004, according to the Post. Greenspan argued for "preventive action" "sooner rather than later."

According to a previous Business & Media Institute study, the Journal, The New York Times, Post and other print media did a good job of exposing flaws of the behemoth mortgage financiers surrounding the 2004 Fannie Mae accounting scandal involving former Clinton administration officials. However, just as they have recently, the networks barely reported the story then.

Now every American man, woman and child could be on the hook for $2,000, according to one estimate from the National Taxpayers Union.

Fannie and Freddie: Socialist Siblings

Fannie Mae, the Federal National Mortgage Association, was created by President Franklin Delano Roosevelt in 1938. According to an article by Terry Jones in Investor's Business Daily, it was intended to "boost" the "residential mortgage market." The same story said Congress created Freddie Mac, the Federal Home Loan Mortgage Corporation, in 1970 upon worries that Fannie Mae would dominate the market.

Today, both Fannie and Freddie are government-sponsored enterprises (GSEs). They were created by government charters with the purpose of increasing home ownership and access to lower interest rates, with the implicit backing of the U.S. Treasury Department.
 
According to a 2002 publication about GSEs from the American Enterprise Institute, "GSEs are hybrids that combine the characteristics of public and private organizations. Their ownership and their control are private, but the government provides them significant subsidies, including tax and regulatory advantages, and permits them to fund their activities almost as if they were part of the government."

Together Fannie and Freddie "control 90 percent of the secondary mortgage market, and nearly 50 percent of the total mortgage market," according to Investor's Business Daily (IBD).

But this isn't an example of market failure according to IBD and The Wall Street Journal. The Journal said both GSEs are examples of socialism in disguise.

"We haven't suddenly become socialists. What taxpayers need to understand is that Fannie and Freddie already practice socialism, albeit of the dishonest kind. Their profit is privatized but their risk is socialized," said the July 12 editorial.

Sen. Jim Bunning (R-Ky.) said in a July 15 CNBC appearance that a taxpayer bailout of Fannie and Freddie would also amount to socialism: "[T]he administration is absolutely wrong in bailing out Bear Stearns and/or Freddie and Fannie," Bunning said. "And the Secretary of the Treasury and the complicity of the Fed Chairman [Ben Bernanke] to these two things - you're absolutely right, we have socialism in the Republican Party and this administration."

The term "socialist" wasn't used in network reports about Fannie and Freddie. Instead, the GSEs earned much kinder terms in network reports including "essential," "big players," "important" and the "backbone" of the mortgage industry.

While some of the networks have been honest about the fact that taxpayers will pay for this bailout, none between Jan. 1, 2008, and July 14, 2008, placed the blame on the government for designing them in a way that would soak taxpayers if there was a failure.

IBD accurately described it as "a government-created disaster, long in the making," on July 14.

As the July 14 Washington Post explained, the sponsorship of the government led to Fannie and Freddie's mess: "Their unusual status was the key to their business. The fact that they are federally sponsored led the financial markets to believe the government would cover their debts if they were unable to do so themselves. The assumption that they were virtually as reliable as the U.S. Treasury enabled them to borrow at low rates and fund their investments with cheap money. It also helped them charge a premium for their mortgage guarantees."

Enron x 19 = Fannie Mae
In the case of Fannie Mae, the network media have a history of underreporting the scandal. But everyone who was watching the network news in 2001-2002 knew about Enron, a company that overstated its earnings by millions of dollars, damaging its employees and shareholders when the truth came out.

Compared to the Fannie Mae scandal of 2004, Enron was a drop in the bucket - yet the problems weren't splashed on TV news night after night.

As the truth came out, the problems at Fannie Mae in 2004 were 19 times bigger than Enron, with roughly $11 billion in earnings restatements. Yet, the TV news media on ABC, CBS, CNN and NBC barely made a peep.

The Wall Street Journal was comparing Fannie Mae to Enron in editorials as early as Feb. 20, 2002. That editorial, aptly titled "Fannie Mae Enron?" exposed the high debt and poor risk management of Fannie and Freddie. A 2004 editorial in the Journal by the same name said "the company was cooking the books. Big time."

"The more we've since looked at Fan and Fred the more they look like poorly run hedge funds: lots of leverage and snarkily hedged risk. The word Enron ring any bells?"

The 2005 BMI special report "Government-Sponsored Enron" found that when comparing time periods at the height of those respective scandals, a search for "Enron" yielded 3,017 hits in LexisNexis, compared to a meager 37 hits for "Fannie Mae." That search included ABC, CBS, NBC and CNN.
 
There were also political ties between Fannie Mae and the Clinton administration. Former Fannie Mae CEO Franklin Raines and former Vice Chairman Jamie Gorelick were instrumental in the Clinton administration. Gorelick is also "rumored to be a possible attorney general in an Obama administration," according to Politico.
 
According to the Dec. 23, 2004, Washington Post, Raines "was a director of the Office of Management and Budget in the Clinton administration, and his name was mentioned as a possible Treasury Secretary had Sen. John F. Kerry (D-Mass.) been elected president."

As Reuters explained on July 11, 2008, "Fannie Mae in particular has strong connections to Democratic politics." In addition to Raines and Gorelick, "former Fannie Mae CEO James Johnson headed John Kerry's vice presidential search team, and was doing the same job for Obama but left the post after reports he received favorable mortgage interest rates as a result of his ties to the chief executive of the troubled mortgage lender Countrywide Financial."
 
BMI wrote in 2005 that Fannie's potential fall would be a "lose-lose situation." If Fannie's trillion-dollar portfolio were to falter, the shareholders would absorb the loss. On the other hand, if the U.S. were to bail out the mortgage giant, taxpayers would foot the bill.
 
The National Taxpayers Union (NTU) estimated that such a bailout could mean an additional cost of nearly $2,000 for every American:
 
     "Between the proposed giveaway to Fannie and Freddie, and legislation to fatten the Federal Housing Administration's (FHA) loan portfolio, Congress and the President could soon be saddling taxpayers with more than half a trillion dollars in new liabilities - or nearly $2,000 for every American," said NTU Vice President for Policy and Communications Pete Sepp. "If even part of this amount is eventually written off the government's balance sheet as a loss, taxpayers will be left to clean up a financial scandal not seen since the S&L crisis," according to NTU.
 
Daniel Gross, the Money Culture writer for Newsweek and Slate.com, came up with a $31 billion to $78 billion estimate in his July 15 story.
 
"[T]he amount of federal funds needed to make bond investors whole assuming the GSEs can't raise any more outside capital - would be about $78 billion. If 2 percent of the mortgages the GSEs hold or insure goes bad - a much more reasonable guess - the government would have to come up with about $31 billion. Those are big hypothetical costs for taxpayers," said Gross.
 
Newsweek's Charles Gasparino was asked why the Fannie Mae scandal wasn't being reported like Enron, during an appearance on CNN's "Newsnight with Aaron Brown" Dec. 28, 2004.
 
"Well, Fannie Mae is a very politically corrupt - it may be politically corrupt, but it's a politically correct company. I mean, they do all the things that, let's face it, liberal journalists like, like put home mortgages out there for poor people. And so right now, beating up on Fannie Mae is kind of politically incorrect," said Gasparino. "This is a huge story, and it's going overlooked."
 
A Tale of Washington, D.C., Influence Peddling

 How is it possible that Fannie Mae and Freddie Mac were able to place such risk on the taxpayers for so long? Washington politics. According to the July 16 Politico newspaper, Fannie and Freddie have spent $170 million on lobbying since 1998, and $19.3 million in campaign contributions to well-known Democrats and Republicans since 1990.

In 2004, Newsweek's Gasparino said the companies were "politically corrupt." That became more of a debate as Washington politicians continued to defend Fannie and Freddie and prevented greater transparency and accountability for the mortgage giants.
 
The July 14, 2008, Washington Post said Congress was deadlocked over stronger regulation of Freddie Mac even after it was obvious that the GSE had "manipulated earnings." That article also mentioned Freddie's $3.8-million fine in 2006 for allegedly violating federal election law.
 
"Political influence" was also cited by The Wall Street Journal in 2002. "During the 1999-2000 election cycle, Fan spread around $1.6 million and Fred $2.4 million, giving to both parties about equally. The total of $4 million is almost double what Enron spent."
 
In 2004, Fannie's CEO and vice chairman were former Clinton administration officials. A new article in the July 15 Journal said Fannie and Freddie's lobbyists "are said to have strongly influenced the 1992 legislation" that "created the companies' regulator." 

The New York Times listed Fannie Mae's Washington connections positively on April 20, 1997. That story, "The Velvet Fist of Fannie Mae," focused on James A. Johnson, who was at the time chairman and chief executive of Fannie Mae.

 That's the same "consummate Washington player" Obama "tapped" to lead his vice presidential search, according to the June 11 ABC "World News with Charles Gibson." After taking heat related to Countrywide loans, Johnson resigned from Obama's campaign.
 
"Washington insiders respect him as the most skilled political operator in corporate America, protecting Fannie Mae's franchise with an influential network that extends from the highest reaches of the Clinton Administration to the ranks of conservative Republicans on Capital Hill," said the Times.
 
The July 16 Washington Post also linked ousted Fannie CEO Franklin Raines to Obama's campaign. It said Raines has recently "taken calls from Barack Obama's presidential campaign seeking his advice on mortgage and housing policy matters."
 
"They've stacked their payrolls with top Washington power brokers of all political stripes, including Republican John McCain's presidential campaign manager, Rick Davis; Democrat Barack Obama's original vice presidential vetter, Jim Johnson; and scores of others now working for the two rivals for the White House," said Lisa Lerer for Politico.

Sidebars for Lerer's article said that in the 2008 election cycle, Freddie Mac has contributed $17,700 to Obama and $8,100 to McCain through PACs. Another Politico report on July 16 exposed "positive pundit" Howard Glaser, who has appeared on CNBC, CBS and in various print media supporting the bailout, and was discovered to be on Fannie and Freddie's payroll.

     Being a "Washington favorite" had its perks for Fannie and Freddie.

     Fannie and Freddie haven't been held the same standards as other businesses. They were allowed to operate with less capital and regulation than others in the industry. The New York Stock Exchange even passed an exception when Fannie didn't file financial reports for two years, according to a Journal editorial.

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