Monday, October 25, 2010

Fannie, Freddie, Dodd, Blumenthal And Government Supported Entities

Even the New York Times, a publication that can hardly be accused of harboring black thoughts about the usual culprits in the U.S. Congress, referred last August in a news story to Fannie Mae and Freddie Mac, two quasi-private business enterprises cosseted by the Democratic Congress, as “wards of the state.” Previously, each had been designated a Government Supported Entity (GSE).

In a news story – the editorial board of the Times, predictably listing left, has already predictably endorsed Connecticut’s attorney General Richard Blumenthal for Congress – reporter Gretchen Morgenson snickered that Fannie and Freddie, now become wards of the state sucking the blood from taxpayers, “got just two mentions in the 1,500-page law known as Dodd-Frank: first, when it ordered the Treasury to produce a study on ending the taxpayer-owned status of the companies and, second, in a ‘sense of the Congress’ passage stating that efforts to improve the nation’s mortgage credit system ‘would be incomplete without enactment of meaningful structural reforms’ of Fannie and Freddie.”

“Fannie and Freddie amplified the housing boom by buying mortgages from lenders, allowing them to originate even more loans. They grew into behemoths because they lobbied aggressively and played the Washington political game to a T. But after both companies bought boatloads of risky mortgages, they required a federal rescue…

“Outwardly, Fannie and Freddie wrapped themselves in the American flag and the dream of homeownership. But internally, they were relentless in their pursuit of profits from partners in the mortgage boom. One of their biggest and most steadfast collaborators was Countrywide, the subprime lending machine run by Angelo R. Mozilo.”

OhMyGod!!! as the kids sometimes say. There it is – “Countrywide,” somewhat in the news these days largely owing to an ad recently released by the Linda McMahon campaign that mentions Blumenthal, according to recent polls the heir apparent to Dodd’s seat.

The McMahon ad was put under the microscope a few days ago by Hartford Courant scrutinizers and found wanting. The ad touches an important point, gently but inadequately. The Courant misses the critical point entirely -- this point: All the so called GSEs have failed miserably. But they failed upwards – because they were Government Backed Entities. Fannie, Freddie and Countrywide were too well connected with Washington insiders to fail. In the private marketplace, failure means bankruptcy, scowling judges, ransacked investors and, at the margin, possible jail terms for CEO frauds. In a command business structure in which Washington decides what business are to succeed or fail, GSEs, underwritten by taxpayers, are resuscitated when they fail -- by taxpayers. That is what a bailout is: It involves a taxpayer infusion of funds to politically connected businesses that are too big to fail engineered by a paternalistic government committed to a command economy that has become too big to fail.

This should be the issue in all Connecticut’s congressional campaigns: How long can any administration in Washington continue to shuttle the wealth of the nation to failed enterprises before the wealth is depleted?

Angelo Mozilo, the CEO of Countrywide, it should be noted, is not in jail. A settlement was made in his case, with the energetic assistance of more than a dozen state attorneys general, Blumenthal prominent among them. The settlement having been made, Blumenthal, who should have been monitoring his settlement, was distressed, we discover from recent news reports – really distressed, and surprised too, very surprised, indeed shocked – that Mozilo’s patrons in Washington took care of Countrywide and other of its GSE co-conspirators such as the Bank of America, which purchased Countrywide’s fraudulent mortgages, by passing along the bill to taxpayers.

It turns out, after all the sleight of hand, that taxpayers who contribute to pension funds will be picking up the tab. Billing pensioners is nothing new in Connecticut where, under a Democratic regime that claims to represent the interests of teachers and firefighter and other public servants, pension funds are regularly raided by legislators and governors, while political benefactors such as John Larson and Blumenthal look the other way.

We should draw two indispensable lessons from the Countrywide-Fannie-Freddie-Bank of America affair: 1) Monopolies such as Countrywide, Fannie and Freddie cannot be formed without the willing participation of governing officials such as Dodd and Barney Frank who afford them privileges not enjoyed by their competitors in a diverse free market, and 2) Any business savvy enough to become a cosseted GSE has acquired enough friends in Congress and the Obama administration to pass along to others any comeuppance served up with great fanfare by Blumenthal and his cohorts.

Blumenthal’s response to Bank of America’s great escape from sanctions thought by Blumenthal to have been imposed on them by the attorneys general is further evidence that the people of Connecticut should vote someone other than him to send to Congress.

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