18 Feb 2011

How the Democrats Killed Roosevelt’s Dream of the Affordable Home

By Robert Scheer
Editor’s note: The following excerpt from Robert Scheer’s book “The Great American Stickup” details the perversion of Fannie Mae and Freddie Mac.

Chapter 7: Poverty Pimps

"It’s the same the whole world over
It’s the poor what gets the blame
It’s the rich what gets the pleasure
Ain’t it all a bloomin’ shame?"

That chorus of the nineteenth-century Cockney ditty “She Was Poor But She Was Honest,” detailing the travails of a poor lass whose life is ruined by the deflowering advances of a rich man, best captures the mainstream Republican response to the banking meltdown. Their defense has been to blame “bleeding-heart” liberals concerned for the poor for a debacle that occurred unmistakably on their watch, and in response to their antiregulatory ideology, but for which they shuddered to take responsibility.

The effort to shift blame from Wall Street moguls to the poor who took loans they could not afford, while illogical given the frenzy with which those loans were marketed, is also understandable as an act of political desperation. Blame those being swindled rather than the swindlers has been the mantra of America’s right wing bereft of any other explanation for the debacle that will allow them to continue their ways.

The Wall Street meltdown left conservative politicians and their ancillary pundits in the lurch looking for a culprit, any culprit—except the folks who run Wall Street, that powerful emblem and engine of American capitalism. Instead, they settled on an alternate bogeyman: government efforts to end discrimination in the mortgage markets and broaden home ownership to low-and moderate-income families.

The problem with the economy, they argued, was not greed or incompetence in the executive suites, but a misguided pressure to lend money to irresponsible poor and nonwhite people. Government influence on the mortgage markets, the logic went, had distorted the markets and created an unstable base of bad loans that, like a foundation made of sand, had sent the global economy sliding off a cliff at the first hard rain.

When the Bush administration was forced in the fall of 2008 to bail out the “government sponsored enterprises” or GSEs, as the mortgage buying companies of Fannie Mae and Freddie Mac are referred to, grateful conservatives finally had what appeared to be a convenient government villain. Working backwards from the GSEs’ founding mandate to support the market for middle- and low-income buyers by buying up mortgages from lenders and then repackaging them as securities, longtime critics were only too excited to blame do-gooder liberalism as the fly in the ointment of capitalism. Specifically, House Financial Services Committee chair Barney Frank was singled out as having pressured the GSEs to make loans to unqualified poor people—especially minorities—who then defaulted and caused the economic downturn.

“Taxpayers are now on the hook for as much as $200 billion to rescue Fannie Mae and Freddie Mac, and if you want to know why, look no further than the rapid response to this bailout from House baron Barney Frank,” wrote the Wall Street Journal in a September 9, 2008, editorial. “Mr. Frank wants you to pick up the tab for its failures, while he still vows to block a reform that might prevent the same disaster from happening again.”

The editorial is worth quoting at length because it summarizes a perspective broadly held and argued by conservatives. It correctly criticizes Frank for statements he made in 2004, when Fannie Mae revealed a “multibillion-dollar financial ‘misstatement.’ ” Frank had said that he felt that despite this, the mortgage lender was not a danger to taxpayers. “I think Wall Street will get over it,” Frank had said. The Journal mocked this response—”Yes they’re certainly ‘over it’now that Uncle Sam is guaranteeing their Fannie paper, and even Fannie’s subordinated debt.” The newspaper then ridiculed Frank for his criticism of conservative economic policies, saying that what really blocked reform was Frank’s insistence that “any reform be watered down and not include any reduction in their MBS [mortgage backed security] holdings.”

Some liberal pundits, most notably the New York Times’ Paul Krugman, attempted to play down the role of Freddie and Fannie, arguing, incorrectly, that they only made proper “conforming” loans. But that was false, for the definition of conforming is whatever Freddie and Fannie approved of, and those turned out to be as disastrously irresponsible as any.

The free-market conservatives are right in criticizing those GSEs, for they were highly culpable, and the grand swindle could not have taken place without them. But they are wrong in describing the GSEs led by Fannie Mae and Freddie Mac as do-gooder public entities; in reality they are privately owned, profit-driven companies that richly reward their executives for stock market success. That is the source of much confusion in this debate; the top executives of the GSEs were compensated as handsomely, and often more so, than any other corporate executives, but because of their original government sponsorship, they made for convenient targets for the wrath of free-market ideologues.

The man who understood that best was a whistleblower in the mold of Brooksley Born. Like her, Armando Falcon Jr. was appointed by the president to regulate entities led by people who had the political clout to prevent any meaningful regulation. Falcon was director of the Office of Federal Housing Enterprise Oversight (OFHEO), the underfunded and government agency assigned to monitor the federal housing behemoths.

Thus there was considerable irony when, a year and half after the crash he had warned against, Falcon found himself on April 9, 2010, before the bipartisan Financial Crisis Inquiry Commission, which included Brooksley Born, unraveling his part of this tale of woe. His testimony was a devastating indictment of the culture of corruption that was as bipartisan in origin as was the makeup of the commission now seeking answers. He had attempted to regulate agencies dominated by leaders drawn from Democratic ranks during a Republican administration, but as with Born earlier, he was done in by both sides.

Yet while Falcon had come to be supported by conservatives who never did have much love for the hybrid GSEs he was attempting to regulate, he was clear that the cause was not the pathetic ambitions of the ordinary folks attempting to buy homes they couldn’t properly afford. Rather, it was the greed of the powerful. Falcon cut through the false dichotomy that cast blame for the banking debacle either on the huge totally private financial moguls or their government-sponsored rivals but not both. He said they were, in terms of motivation and impact, one and the same.

Conservatives make much of the affordable housing goals of the GSEs, endorsed by George W. Bush as well as Bill Clinton, as the cause of the irresponsible lending that occurred these past decades. But Falcon in his testimony shot that one down. Asked by the commission to testify on the impact of those goals on the GSE issue, Falcon responded: “Your letter also asked me about the impact of affordable housing goals on the enterprises’ financial problems. In my opinion, the goals were not the cause of the enterprises’ demise. The firms would not engage in any activity, goal fulfilling or otherwise, unless there was a profit to be made. Fannie and Freddie invested in subprime and Alt A mortgages in order to increase profits and regain market share. Any impact on meeting affordable housing goals was a byproduct of the activity.”

Nevertheless, it remains true that the GSEs were the major purchasers and packagers of securities based on mortgages, and they acted with the implicit guarantee that the bonds they sold were backed by the federal government. When the meltdown occurred, that guarantee went from implicit to explicit, and the federal government moved in and backed all of those toxic obligations. It also fueled the conservative attack that two key executives of Fannie Mae, the larger of the two agencies, were also influential players within the earlier Clinton administration and had led the fight to prevent any meaningful regulation of those mortgage-based securities. What the conservatives insist on ignoring is that while Fannie and Freddie were originally government sponsored to make moderate-priced housing more accessible, they had long since shed any of the trappings or restraints of a government agency.

Over the decades since 1938, when Fannie Mae, the first of the GSEs, was created, they had in effect gone from being public to private enterprises, with the companies’ and their top executives’ fortunes dependent on stock market valuation of their publicly traded shares.

In that spirit, the top officials of the two agencies were rewarded not in the manner of heads of huge government agencies but rather at easily thirty times the highest pay of any such executive, including the president himself. But they did still require the acquiescence of Congress, which retained the power to pull their federal charters through legislation. Preventing that outcome, or indeed any serious regulation of the GSEs, became the major object of their lavishly funded lobbying operation. Not surprisingly then, the top executives tended to be drawn from the ranks of political operatives rather than from more traditional financial backgrounds. It is also true, as conservatives are wont to point out, that the two men who most shaped the actions of Fannie Mae, the bigger of the two agencies, were drawn from the Democratic side. But they couldn’t have done this damage to the housing market alone and instead functioned like, and indeed were in close partnership with, the other moguls in the mortgage business.

The tale of their alliance with leaders of a runaway mortgage industry, particularly the industry-dominant figure of Countrywide’s Angelo Mozilo, who also cofounded subprime sinkhole IndyMac Bank, which failed as well, is central to the debacle that ensued. But to mention the guys on the quasi-government–sponsored side and not their key partners in the fully privatized mortgage business is to deny reality.

In fact, it is the dance of the private with the public that is the norm in what we naïvely refer to as our “free enterprise system”—be it agribusiness, the defense industry, telecommunications, or, as in this case, the financial sector. All of these industries operate in an environment of government rules that their lobbyists get to help write, and all succeed through an ability to negotiate the regulatory environment that results from those laws.

At this dance, Countrywide’s Mozilo was a virtuoso, but he had two key partners every bit as skilled as he was on the GSE side of things. For the past two decades, one of the two main leaders of the government-sponsored agencies was James A. Johnson, who started political life working for Minnesota Democratic senator and later vice president Walter Mondale and parlayed that into a job running Fannie Mae that paid him more than $6 million a year.

The Washington Post in a fawning tribute to Johnson on March 27, 1998, shortly before he retired from Fannie Mae, referred to him as “one of the most powerful men in the United States.” The Post’s reporter added: “As chairman of three preeminent institutions in the nation’s capital—the government-sponsored home mortgage behemoth known as Fannie Mae, the peerless think tank known as the Brookings Institution, and the mammoth performing arts emporium known as the Kennedy Center—he has positioned himself to exert enormous influence over the country’s economic, intellectual and cultural lives. And while he’s at it, he’s getting seriously rich.”

A far less flattering portrait a year earlier by Matthew Cooper in Slate, titled “A Medici with Your Money,” pointed out, “he is not a philanthropist with his own money. The fount of Johnson’s generosity is Fannie Mae’s foundation, funded out of its profits.” The Slate article had it right, noting the connection between the vast public outreach of Johnson’s operation and his goal of retaining government backing for an enormous engine of profit from which he benefitted mightily: “What makes Fannie Mae special is that it is essentially the taxpayers’ money that Johnson is giving away. Fannie Mae enjoys a massive government subsidy, and its charitable contributions are part of a vital corporate strategy to keep it that way.”

Johnson’s expansive public relations strategy was maintained, indeed expanded, by the man who would replace him, his deputy Franklin Delano Raines. Prior to working for Johnson, Raines had been highly compensated as a Wall Street financial executive. At Fannie Mae he was earning $2.25 million when Clinton appointed him to be director of the Office of Management and Budget at an annual salary of $148,400. The president quipped that Raines would be joining “other successful people who came into this Administration to help save the middle class and when they leave they will be part of it.”

Not quite. After Raines left two years later in 1998 and replaced Johnson as the chair of Fannie Mae, he would be paid $36 million in compensation for his last three years of service, which extended well into the Bush years, before being forced out in 2004 amid an accounting scandal. He left with a $25 million pension, an $8.7 million deferred compensation plan, another $5.5 million in stock options, and a guaranteed income of $1.4 million. which would be paid to him and his wife until both died. Is that what Bill Clinton considers middle class?

A year before the scandal broke and four years before Fannie Mae was revealed as a disaster case—and taken over by the federal government even as its stock shares tumbled 90 percent—Raines was much celebrated as a typical elitist progressive “doing well by doing good.” Raised in a working-class family with a janitor father who built a home with his bare hands and struggled to keep a roof over his family’s head, Raines’s story made for great profile copy on NPR and in such national publications as the New York Times and Ebony magazine. More important, it gave Fannie Mae credibility in saying its huge expansion in alternative lending—boldly labeled the “American Dream Initiative”—was for progressive ends: helping the poor and minorities become homeowners.

Yet when the banking meltdown predictably occurred, based on years of high-risk lending and Wall Street gambling, those were the two groups hardest hit, with most who had signed up for the program losing everything. At no point in the glowing profiles of the “first African American Fortune 500 CEO” did any of those journalists use the words “predatory lending” or, at a minimum, query Raines as to the efficacy, let alone morality, of his huge compensation being tied to backing high-risk loans that should never have been made.

A significant percentage of those loans were made by Countrywide, whose chair and founder, Angelo Mozilo, had a particularly cozy relationship to Fannie Mae under both Johnson and Raines. Indeed, too cozy we would come to find out, when it was later revealed both men had received low-interest mortgage loans from Countrywide on various houses they owned around the country. They received this favorable treatment as part of the “Friends of Angelo” program, to which it was referred internally at Countrywide. Because of all this, there is no doubt both Raines and Johnson deserve the opprobrium heaped on them by conservatives. They are indeed “poverty pimps,” who, in the imagery of the 1960s are like the hustlers in poorer communities who rip off well-intentioned poverty programs and thus do a deep disservice to those they gave lip service to caring about.
Where the conservatives went wrong, however, is in describing this exploitation as the result of pressure from what they claim are bleeding-heart liberals in the Clinton administration and afterwards, with Frank acting as ringleader from his powerful perch in the House finance committee. The assumption they make is that Fannie and Freddie got into trouble because of pressure to support loans to people who shouldn’t have been given loans, and therefore had stopped acting as responsible loan guarantors of last resort. That is exactly wrong; the problem is quite opposite. The GSEs simply acted all too much like any other financial conglomerate lining the pockets of their top executives—trading short-term gain for long-term instability.

The key to Fannie Mae’s explosive growth in the backing of suspect mortgages in the 1990s rested in the decision of its chair, Johnson, to team up with Countrywide’s Mozilo in a computerized scheme to make suspect mortgages seem credible by changing the ways that creditworthiness was evaluated. The scheme, and that was what it unmistakably was, revolved around something called the “CLUES system,” a computer program Countrywide had developed that crunches data on the creditworthiness of potential homebuyers to bypass the evaluation of loan officers as to the creditworthiness of potential mortgage customers.

As Gretchen Morgenson would describe it in a August 26, 2007, New York Times article, as Countrywide was slithering into oblivion: “Countrywide’s entire operation, from its computer system to its incentive pay structure and financing arrangements, is intended to wring maximum profits out of the mortgage lending boom no matter what it costs borrowers, according to interviews with former employees and brokers who worked in different units of the company and internal documents they provided.”

Just how unsavory an operation Countrywide, the nation’s top mortgage lender, had run was laid out in that article as well as congressional and SEC investigations, as Countrywide came to be absorbed by Bank of America in a shotgun marriage arranged by the U.S. government in an attempt to save both. Johnson, who was chosen by Barack Obama to head the committee vetting his vice presidential choices, had to resign that post after the Wall Street Journal revealed his “sweetheart” loans of more than $5 million from Countrywide as a “Friend of Angelo.” Scant attention was paid, however, to the role of Mozilo in leading Fannie Mae into its downfall.

The connection between Mozilo and Johnson was as tight as it gets in their world. In 1996, as the subprime scandal was forming, Johnson named Mozilo to be chair of Fannie Mae’s National Advisory Council. The purpose of that body, as announced in the Fannie Mae press release, was “to advise the corporation on issues affecting the housing and mortgage finance industry and the expansion of home ownership opportunities.” And opportunities there were, as Mozilo pointed the way for Fannie Mae, providing it with an edge over its smaller and more cautious rival, Freddy Mac. A retrospective analysis by knowledgeable National Mortgage News executive editor Paul Muolo in May 2009 put the history of that connection clearly:

It was no secret in the industry that Freddie Mac officials (pre being taken over by the government) were unhappy that Countrywide sold most of its residential loans to Fannie Mae. And that was by design, really. In the early 1990s, under the direction of then Fannie CEO/chairman Jim Johnson, Countrywide’s founder and CEO Angelo Mozilo was actively courted and wined and dined (so to speak) by the GSE. The reason was simple: Mozilo’s Countrywide was the largest residential lender in the nation. The more loans it funded—the more loans it could (in theory) sell to Fannie (as opposed to Freddie)

For years the running joke in the industry was that Countrywide was really a subsidiary of Fannie Mae.

On July 9, 1999, Countrywide issued a press release that laid out just how cozy the relationship had become. Entitled “Countrywide Announces Strategic Agreement with Fannie Mae,” the press release began with the following: “Countrywide the nation’s largest independent residential mortgage lender and servicer, announced today that it has entered into a new strategic agreement with Fannie Mae that unites their unique and complimentary strengths to expand markets, reduce the costs of homeownership, and to lead the mortgage industry to higher levels of productivity, efficiency and innovation.”

And profit, which of course was at the heart of this “strategic agreement” between the very-much-for-profit private lender and the very-much-for-profit but government-sponsored Fannie Mae. The difference is that when the scam exploded, the federal government stepped in directly, using hundred of billions of taxpayer dollars to take over Fannie Mae, but also indirectly by providing funding for Bank of America’s takeover of Countrywide.

The key to the strategic agreement was in Fannie Mae’s endorsing Countrywide’s computer rating scheme that bypassed traditional credit checks by experienced loan officers that for the previous lengthy history of the nation’s housing industry had kept the mortgage industry solvent. As the Countrywide press release crowed: “The strategic agreement also addresses loan products and processes. The objective is to expand markets to accommodate more customers and streamline loan processing in order to reduce the up-front cost of homeownership. This entails increased acceptance of Countrywide’s proprietary CLUES underwriting technology, greater use of short form appraisals, expansion of streamlined home products, flow sales for expanded criteria loans, and guideline waivers.”

With those words, the mortgage lender and the government-sponsored agency sealed their deal with the devil; the wraps of reasonable restraint, due diligence of asset appraisal, verifiable credit checking, and all of the other bylaws of prudent banking were lifted, and the gold rush was on. Nor did the principals care much about the obvious risk in which they were engaging, since they assumed it would be passed on long before the consequences of such irresponsible behavior were felt. That was because of the wonders of securitization of debt to be sold in that unregulated commodities market, which seventeen months later the Commodity Futures Modernization Act signed by Clinton would guarantee to remain unregulated.

The press release marked this enormous shift in the marketing of mortgages, quoting Mozilo: “This new strategic agreement between Fannie Mae and Countrywide is an unprecedented milestone in mortgage banking history.” Key to the new era of the housing Ponzi scheme was the reduction of capital required to back up the unsavory mortgages as the Countrywide press release clearly stated: “The strategic agreement contemplates efforts by Fannie Mae and Countrywide to work together to create capital structures that reduce the intensive capital demands of mortgage banking. The Alternative Servicing Compensation mortgage-backed securities (ASC MBS) product developed by Fannie Mae and recently issued by Countrywide is an initial effort to provide this flexibility.”
Three months later, on October 7, 1999, American Banker reported that the newly liberated Countrywide was off to the subprime races: “Countrywide’s monthly report underscored a shift in strategy throughout the mortgage industry. Now that the refinancing boom has ended, lenders are making more loans to people who previously might not have qualified for a mortgage.” The article went on to mention the concern of Salomon Smith Barney analyst Thomas O’Donnell over “Fannie Mae’s official entrance into the sector last week, when it launched a program aimed at providing lower-cost mortgages for people with slightly impaired credit, would spur interest in serving the sector and provide liquidity to help lending increase their subprime business.”

After the banking meltdown, the SEC would file a civil suit against Mozilo’s and Countrywide’s many violations, but Johnson and Raines avoided such accountability for the crash. Johnson, the media pointed out, is the man who started Fannie Mae on its mortgage derivatives spree during the 1990s, after he had served as a managing director for corporate finance at Lehman Brothers, and who, after retiring from Fannie Mae, went on to be a director of Goldman Sachs. It is true that Johnson had begun as an aide to Democratic senator and later presidential aspirant Walter Mondale and throughout his private and public career drew identified with liberal rhetoric while personally enriching himself with hundreds of millions of dollars in stock options, salary, retirement packages, and other compensation.

His protégé and successor at Fannie Mae would provide an even more egregious example of a liberal veneer covering a rapacious capitalist greed. If you were to pick a spokesman for the American dream, it must have occurred to his backers in the Clinton administration that Franklin Delano Raines was a pretty damn good one. Saddled by his father with a rather heavyweight name—sharing those fulsome first five syllables with the renowned president—the African American Raines’s rise through Harvard and into high posts in successive Democratic administrations was stunning in a nation far more race-and class-bound than it likes to imagine.

After earning big bucks on Wall Street while his party was in the political wilderness during the Reagan era, Raines built a reputation as a skilled negotiator and clear-headed advisor while working in the Clinton White House as head of the large Office of Management and Budget. But it was when he again passed through the revolving door of the federal government to return to Fannie Mae to become the director of the nation’s largest buyer of home mortgages that he fully realized his potential as an icon, a mustachioed Horatio Alger stereotype proving the famed American elevator could still raise one to the top in a single lifetime.

The New York Times’ Richard Stevenson wrote on May 17, 1998, that Raines saw his father take five years building a home with his own hands. “To have such an emotional connection to a home may serve Mr. Raines well as he leaves his post this week as White House budget chief to take over Fannie Mae, the curious and huge Washington corporation whose government-mandated mission is to encourage homeownership, especially among low-and moderate-income working people.”

Fannie Mae and its smaller, parallel organizations such as Freddie Mac are often described the way the Times does here, because they were spawned by the government and have implicit advantages—on taxes and interest rates—and implied backing from the federal government. However, although they were originally chartered by it during the Depression, Fannie Mae and siblings have not been part of the government since 1968. When they profit, as they did enormously before the recession, the dividends go to shareholders and the bonuses to executives. In no sense are they independent government agencies like the Social Security Administration, depending on a form of taxation to be redistributed as a social safety net. And while they have a vague legacy and “mission” to broaden the base of home ownership in the United States—and pay lip service to this on their periodic presentations on Capitol Hill—their prime agenda is to produce profit.

Certainly, Raines, all heartwarming stories aside, was a corporate CEO, not a director of a social service agency—and he certainly wasn’t compensated like one, being paid, for example, the second highest compensation package in the mortgage business in 2001: $4 million in salary and an estimated $10 million in stock options. (The CEO of Freddie Mac was third, with numbers as nearly as staggering. Figures are from National Mortgage News, May 6, 2002.)

And like most modern CEOs, Raines was far more focused on short-term gain than on long-term goals. Thus, although his six-year reign at Fannie Mae was successful in generating huge profits, it also saw systemic accounting troubles—some called it fraud—that would force Raines to return some of his huge pay package, as well as a conveniently shortsighted view of the housing market as bubble-proof.

“We don’t think that there is a housing bubble in the country,” he told Black Enterprise magazine for an extensive profile in the May 2003 issue. Crediting low-interest rates, he added, incorrectly, “People’s incomes are higher so they can afford more housing and, obviously, the owners of the house [will] try to raise the price when they’re selling it.”

In fact, as was clear even then, real income for the vast majority of Americans—and especially those served by Raines’s “American Dream Initiative” program—had been barely rising throughout the Clinton bubble. What everybody and their sister knew was that, in fact, folks who would have never qualified for loans based on income were for some reason being sought after by lenders, and that those folks who did own were leveraging their reassessed assets to buy second, third, or fourth places to “flip” in the red-hot market.

With credit so loose and the market booming, Raines and Fannie were sitting pretty. From Black Enterprise:
Franklin D. Raines has a lot to smile about. In mid-January, the Federal Mortgage Loan Association, better known as Fannie Mae, accomplished something that’s rather uncommon these days—increased profits. Operating net income for fiscal 2002 rose 19.1% to $6.4 billion, or $6.31 on $10.6 billion in net interest income. And while Wall Street remains jittery after a slew of corporate scandals, economic uncertainty, and whispers of housing bubbles, Fannie Mae’s 54-year-old chief executive is at the helm of a financial products and services giant that posted its 16th consecutive year of double-digit earnings growth.

Sure, Raines wasn’t above exploiting Fannie’s high-minded charter to brush back critics, like the Wall Street Journal, who have long been nearly obsessive in pointing out that the GSEs enjoyed unfair advantages because of their historic government ties. From the Wall Street Journal: “The point all of this makes, and the point we’ve been trying to make all along, is that Fan and Fred don’t function like other companies. The two biggest mortgage holders in the country are allowed to pile up debt, implicitly guaranteed by taxpayers, without being held to even the minimum of corporate governance standards that every other publicly traded company has to observe. Sooner or later this is asking for trouble.”

That “trouble” was detailed by the New York Times’ Gretchen Morgenson in her September 5, 2009, story commemorating the one-year anniversary of the $200 billion in bailout funds “to keep Fannie in the black.” Morgenson reported on efforts of Florida Democratic congressman Alan Grayson to expose the malpractices of Fannie Mae’s Raines and other executives. Grayson was livid that in addition to the government having to take over the mortgage giant, taxpayers then had to foot the legal bills for Raines ($2.43 million) and two other Fannie Mae execs (another $3.87 million) for just ten months ending in July 2009, with the tab continuing to rise. The legal expenses were generated from shareholder lawsuits.

The reporter reminded readers, “With all the turmoil of the financial crisis, you may have forgotten about the book-cooking that went on at Fannie Mae. Government inquiries found that between 1998 and 2004, senior executives at Fannie manipulated its results to hit earnings targets and general $115 million in bonus compensation. Fannie had to restate results by $6.3 billion.”

In other words, the books were “cooked” so Raines and his pals—chief financial officer J. Timothy Howard and former controller Leanne Spencer—could earn bonuses based on the successes suggested by those phony figures. The government sought through litigation to collect from the three $100 million in fines and $115 million in restitution for the unearned bonuses—$84.6 million from Raines alone—but settled for $31.4 million from the three. As part of the settlement, Raines, Howard, and Spencer did not have to admit wrongdoing.

None of this sat very well with Congressman Grayson, who told Morgenson: “I cannot see the justification of people who led these organizations into insolvency getting a free ride. It goes right to the heart of what people find most disturbing in this situation—the absolute lack of justice.” He asked, “When did Uncle Sam become Uncle Sap?” and seemed to be speaking for all taxpayers when he lamented: “It is wrong in a very deep sense. The essence of our society is that people who do good things are rewarded and people who do bad things are punished. Where is the punishment for Raines, Howard and Spencer? There is none.”

Back in 2003, while bad things were certainly happening at Fannie Mae on his watch, Raines was showing a talent for obfuscation. As he assured Black Enterprise reporter Aisha Jefferson, “The Wall Street Journal finds problems where no other paper seems to find problems. They don’t believe in intervening in the market to help housing and homeownership. And so, I think this is an effort to make the case that Fannie Mae shouldn’t exist.”

Unfortunately, this was just a smokescreen. Fannie Mae actually was receiving pressure not from liberal politicians to become more heavily involved in riskier mortgages but from—what else?—the profit motive. With giants like Citi moving heavily into mortgage-based securities—a sector pioneered by Fannie itself—and increasingly betting on riskier and riskier loans, the GSEs were actually playing catch-up. And when they decided to push their chips deep into the hottest, yet most unpredictable, Alt-A and subprime mortgages, it was not at the behest of the Barney Franks of this world but rather in pursuit of Wall Street profits.

That sorry reality, brought home by the spectacular crash of 2008, was clearly outlined in testimony that Armando Falcon offered two years after the government fully took control of Fannie and Freddie. In his testimony before the bipartisan Financial Crisis Inquiry Commission, which Congress had created to analyze the causes of the banking meltdown, the former chief regulator of the housing agencies did not mince words.

Falcon corrected the errors of Democrats and Republicans in assigning responsibility. The problem, he stated, with the so-called government-sponsored but essentially private institutions that the conservatives are so happy to vilify and that liberals feel the need to defend is that they represented the worst of both worlds. Although originally chartered by the government, they had morphed into super for-profit monstrosities run by executives whose huge bonuses depended on the price of the company stock. As Falcon put it in his testimony: “Ultimately the companies were not unwitting victims of an economic down cycle or flawed products and services of theirs. Their failure was deeply rooted in a culture of arrogance and greed.”

In short, they behaved like the other financial conglomerates, but the government-sponsored housing enterprises were protected by powerful members of Congress and what turned out to be a strong guarantee that the taxpayers would cover their bad paper.

They do deserve considerable blame for the banking disaster that ensued, and while it is hardly the whole story, it gave the free-market conservatives a convenient target. But it also presents them with a contradiction that they refuse to confront. The housing enterprises failed not because they were do-gooder pubic entities but because they weren’t. Their top executives were driven by the same desire for outlandish profit that their counterparts at AIG and Citigroup had. As Falcon put it, referring to then Fannie Mae’s CEO Franklin Raines: “While all of this political power satisfied the egos of Fannie and Freddie executives, it ultimately served one primary purpose: the speedy accumulation of personal wealth by any means.

In the case of CEO Franklin Raines, he collected over $90 million in total compensation from 1998 to 2003. Of that amount, $52 million was directly tied to achieving earnings-per-share goals. However, the earnings goal turned out to be unachievable without breaking rules and hiding risks.”

It only adds insult to injury to blame the unfettered greed of folks like Raines, and his congressional allies who were lavishly attended to by those agencies, on a concern for the low-income homebuyers who were their main victims.

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