Election américaine: Attention, un hold up peut en cacher un autre (From Fannie Mae to the White House: Playing the race card all the way to the top)

Shut up and write the check white boy!
L’extraordinaire ascension de M. Obama au premier plan de la politique américaine est moins une mesure de l’homme que de la soif de l’Amérique blanche pour l’innocence raciale. (…) Sa peau foncée, avec ses évocations puissantes du passé racial torturé de l’Amérique, fait ressembler la compétition politique à ces sortes de fables édifiantes qu’on jouait sur les parvis des églises médiévales. Sa victoire signifiera-t-elle le rachat de l’Amérique de son passé raciste? Sa défaite manifestera-t-elle une Amérique moralement sous-développée? (…) Pour beaucoup d’Américains – noirs et blancs – Barack Obama est une occasion simplement trop bonne (et trop rare) pour la laisser passer. Pour les blancs, voici l’occasion de démontrer leur affranchissement des hontes de leurs ancêtres. Et pour les noirs, voici la chance de prouver la fin de leur infériorité. Ainsi les Clintons se sont retrouvés plus concourir contre les possibilités les plus élevées de l’Amérique que contre un homme. Et la presse, normalement heureuse de dissiper la moindre prétension politique, s’est pratiquement aplatie devant M. Obama. Comme tout le monde, elle a craint de se retrouver du mauvais côté de l’Histoire. Shelby Steele
Les PDG sont-il censés être irresponsables simplement parce qu’ils sont de couleur? Le Wall Street Journal

Les organismes combinant des fonctions publiques et privées se réclament de l’idéal fumeux du partenariat gouvernement-monde des affaires. Ils semblent représenter une troisième voie, une méfiance saine du gouvernement et du marché, le bon sens incarné avec un zeste de coeur. La plupart du temps, comme avec Fannie Mae, on se retrouve avec les pires excès des deux. Matthew Cooper (Slate, le 23 février 1997)

Nous acheminons-nous vers le hold up du siècle?

A l’heure où, à moins d’un mois de l’élection présidentielle américaine et des deux côtés de l’Atlantique, la bien-pensance politico-médiatique se félicite déjà de la victoire que l’actuelle crise financière est censée livrer sur un plateau à leur poulain démocrate …

Petit flashback, avec un éditorial du WSJ d’il y a quatre ans, sur …

Une bande d’escrocs à qui l’argent facile est manifestement monté à la tête (comme l’autre FDR, fils de concierge diplomé de Harvard devenu « le premier noir à diriger une entreprise des 500 du magazine Fortune » ou leurs acolytes du Congressional Black Caucus) …

Qui se sont engraissés sur la bête en multipliant les opérations douteuses pour maximiser leurs bonus au risque de couler le rêve américain pour tout le monde et d’abord pour les plus démunis dont ils étaient censés avoir la charge et qui leur servaient en fait de prétexte pour leur enrichissement personnel …

Qui non seulement s’en tirent sans la moindre condamnation pénale mais viennent de forcer les contribuables à éponger les résultats catastrophiques de leurs magouilles (à la hauteur,excusez du peu, de 700 milliards de dollars!) …

Qui se permettent en plus, culpabilité blanche pour l’esclavage oblige, de jouer les victimes et de mettre ça sur le dos d’une Administration Bush dont le principal tort était surtout, contre l’ensemble de la claque noire-démocrate et de leur armée de pleureuses et belles âmes armés de leur sempiternel chantage au racisme, de ne pas avoir été assez ferme avec eux …

Pour finalement, cerise sur le gâteau, permettre à l’un de leurs principaux soutiens et, avec la complicité des belles âmes des médias, en jouant sur la culpabilité comme le besoin de rédemption et d’innocence raciale des Blancs, de faire main basse sur… la présidence de la première puissance mondiale!

Fannie Mae Liberals
The WSJ
October 14, 2004

There were many moments of high entertainment during last week’s House hearings on Fannie Mae’s creative accounting. But our favorite was the Mister Magoo performance given by Barney Frank (D., Massachusetts) after learning that Fannie had handed out $245 million in bonuses over five years. Mr. Frank chided Fannie CEO Frank Raines and CFO Tim Howard, saying, « At the level of compensation you get, we ought to be able to count on you to do your very best without additional incentives. »

Here’s a case of misplaced moral outrage if we’ve ever seen one. Mr. Franks is mad about the salaries when he really should be mad at the rigged political game that has made them possible. Fannie’s regulator, the Office of Federal Housing Enterprise Oversight, has reported that Fannie has been cooking its books. Add that to the increasing evidence that Fannie has been ignoring its mission to provide affordable housing, and we wonder if Mr. Frank doesn’t need an eye checkup.

Ditto for the good liberals in the Congressional Black Caucus. Members of this group are often the loudest defenders of Fannie and her brother, Freddie Mac. Can it be that the annual donations made by the Fannie Mae Foundation to the Caucus have blurred their vision too?

Maxine Waters (D., California) cooed all over Mr. Raines, and Clay Lacy (D., Missouri) played the race card by calling the hearings a « political lynching » of Mr. Raines, who is African-American. Are CEOs not supposed to be accountable simply because they’re persons of color? By the way, Roger Barnes, the whistle-blower who was fired by Fannie after complaining about its accounting procedures, is also black. In a more consistent world — where political principles mean something — these liberals would be scorching a company that used a government subsidy to enrich its own executives. Instead, they’re defending it.

The default position for Fannie’s defenders is that the giant mortgage finance company provides more affordable housing. At least that’s Fannie’s declared mission and that’s why the government offers it an implicit subsidy. But as study after study has demonstrated, Fannie does not provide homeowners with significant savings.

The Federal Reserve found that about half of the government subsidy going to Fannie and Freddie is retained by the company. The half that goes to homeowners amounts to seven basis points on mortgages. The Congressional Budget Office has calculated that Fannie and Freddie pass through 25 basis points to mortgage buyers, or about 60% of its estimate of the total subsidy. Both studies conclude that the tiny amount of subsidy that actually reaches borrowers does not increase homeownership.

The disconnect between Fannie’s rhetoric and its self-enriching practice was clear a few months ago when the Department of Housing and Urban Development proposed a rule to require Fan and Fred to purchase more mortgages from lower-income households. Currently, Fan and Fred must buy half their loans from people making less than the median income in a region. HUD wants to raise that target to 53% for next year and to 57% by 2008. It was a modest request, especially since HUD data show that Fan and Fred have lagged behind other mortgage lenders in financing such loans.

Well, you would have thought that HUD was proposing to kick poor folks out of their homes, not make it easier to buy them. Fan and Fred’s Congressional sympathizers (including some of the same Members who lavished valentines over Fan last week) sent a letter to HUD complaining against the new quotas. And you can bet the companies were egging them on behind the scenes.

To be sure, Mr. Franks is right that Fannie’s executive compensation is rich by any standards. When a government-sponsored company pays its top 21 executives more than $1 million each in 2002 (and three of them are lobbyists), that fact does bear some reflection.

And, aside from the evidence that Fannie was cooking its books to trigger big bonuses, there’s also the issue of performance. Mr. Raines’s 2003 compensation was over $20 million. That’s about $14 million more than the median for CEOs of very large companies. What did Mr. Raines do to deserve this giant sum? Not much. In the five years that Mr. Raines has been at the helm, Fannie’s cumulative shareholder return, including reinvested dividends, has been 4% compared with the 23% achieved by the S&P financial sector.

The evidence is overwhelming that Fannie only pretends to be a tribune of the poor. Not only does the company use its implicit subsidy to enrich its executives, some of that money is funneled into the Fannie Mae Foundation, which, no surprise, motors it back out to favorite charities of Fannie board members. It’s an odd sort of liberal principle that endorses private profits at public risk.

Voir aussi:

A Medici With Your MoneyFannie Mae’s strategic generosity.
Matthew Cooper
Slate
Feb. 23, 1997

James A. Johnson, chairman of both the Kennedy Center and the Brookings Institution, has become, at age 53, Washington, D.C.’s Medici. But even though he makes some $5 million a year off the Federal National Mortgage Association (Fannie Mae), of which he is also chairman, 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, which gives away millions every year in the District and elsewhere.

Of course, it is common these days for corporate CEOs to enjoy the perks, status, gratitude, and frisson of generosity that comes from giving away the stockholders’ money. 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.

Indeed, preserving its government subsidy is Fannie Mae’s central mission, which helps to explain why a fellow like Jim Johnson is the CEO of this $325 billion company. Johnson has only a modest business background. A Minnesota native, he was a longtime aide to Walter Mondale, the senator and later vice president. When Mondale lost the vice presidency in 1980, Johnson and Richard Holbrooke, the diplomat, founded Public Strategies, a Washington consulting firm that gave advice to business clients. Later he performed similar services for Shearson Lehman. When Mondale ran for president in 1984, Johnson was the chairman of his campaign. Maxine Isaacs, who later became his wife, was the campaign’s press secretary. Considered likable and charming, Johnson and Isaacs were, in a small way, the Carville and Matalin of that period: the hot political couple. Johnson joined Fannie Mae in 1990 and became its chairman a year later.

Established in 1938 as a government agency, Fannie Mae is a financial behemoth with assets greater than Citibank and Wells Fargo combined. In 1968, it became a private, for-profit company. Its stock is publicly traded; its Web site ends in a « .com. » Basically what it does is buy home mortgages from banks and package them into what are called « mortgage-backed securities, » which it sells to investors. The banks then can use their own money for more mortgages. By giving home buyers indirect access to the world’s capital markets, this device makes it easier for Americans to buy a home. That is Fannie Mae’s social function. These days, however, that function is served by many private companies: Mortgage-backed securities are a roaring business.

Fannie Mae, though, has special privileges. Its securities need not be registered with the Securities and Exchange Commission. It is exempt from state and local taxes, so it escapes having to pay an estimated $300 million a year into the parched District treasury. Most important, Fannie Mae’s securities come with an implicit guarantee that they are backed by the federal government. This allows it to raise money at an interest rate that is lower than what a normal private corporation has to pay.

Fannie Mae has it both ways about the federal guarantee. Its securities are required to say in so many words that they are not backed by the full faith and credit of the United States government. But nobody believes it. Why? As a report last year from the Congressional Budget Office explains, « What the government appears to withhold with one requirement, it provides with a host of other legal provisions. » The capital markets are persuaded that Fannie Mae’s bonds are backed by the government. Fannie Mae, while denying the guarantee exists, fights to preserve the arrangement that makes it possible.

The company also notes that, since it has never missed a payment, the taxpayers have not yet had to shell out a penny. But that is like saying that fire insurance is worthless if you’ve never had a fire. Just ask other private companies if they would like to have a free federal guarantee of their debts! The government, if it wanted to, could sell its backing to private borrowers like Fannie Mae. As the CBO points out, the government’s guarantee of Fannie Mae’s debt is just like a giveaway of federal land or hydroelectric power. The fact that no money changes hands doesn’t mean it has no cost.

And what is the cost? The CBO calculates that the federal guarantee saves Fannie Mae about one-half of 1 percent in interest. That was worth almost $4 billion to the company in 1995 (plus another $2.6 billion to a similar organization called Freddie Mac, the Federal Home Mortgage Corp.). The CBO figures that $2.5 billion of that approximately $4 billion federal subsidy was passed along to lucky homeowners, and $1.4 billion went into the pockets of Fannie Mae shareholders and executives.
Illustration by William L. Brown

Fannie Mae’s executive salaries resemble those of a real private company of its size, even though its size is largely a function of the federal guarantee and its business is not as complex as size alone would suggest. Its officers are in many ways glorified lobbyists. Johnson makes $5 million a year. Franklin Raines made well over $2 million in his last year as Fannie Mae’s vice president before he joined the Clinton administration last year as director of the Office of Management and Budget. Other politicos feeding at the trough include Senior Vice President for Public Affairs John Buckley, who was on leave last year as Bob Dole’s press secretary, and Executive Vice President for Housing and Law Robert Zoellick, who was an aide to James Baker.

Not surprisingly, then, Fannie Mae’s public-relations operation is unparalleled in Washington. Its charitable contributions, through the Fannie Mae Foundation, are a crucial part. The foundation sprinkles contributions on everything: homeless shelters as well as hospitals, the Kennedy Center, and powerful think tanks like the Heritage Foundation (which, to its credit, has issued reports decrying Fannie Mae’s privileged status).

Fannie Mae sports television ads depicting young couples, plucky immigrants, and others being helped by Fannie Mae. « Showing America a New Way Home » is the slogan. That is also the name of Johnson’s recent book–a 175-page tract that pleads for still more subsidies while cloaking itself in high-mindedness. The book is a parody of Bartlett’s, serving up quotes from Lincoln, Jefferson, and Roger Rosenblatt with equal pomposity. The cover shows Johnson, a bland-looking man in full business attire, on the porch of an all-American home that looks a tad too small to be his. The flag is conveniently draped in the background. The back jacket is crammed with bipartisan blurbs–from Jack Kemp to Vernon Jordan, Dianne Feinstein, and Ann McLaughlin, George Bush’s secretary of labor. Acknowledgments are offered to any number of Washington big shots, including Slate’s own Robert Shrum, who is thanked for his « considerable editing skills. » Alas, the text could have done with more Shrum, who, let’s hope, did not pen the line, « Home is about freedom. »

The book’s subtitle is « Expanding Opportunities for Home Ownership. » Johnson’s idea of opportunity ranges from the unobjectionable–like giving banks better software for mortgage applications–to a bunch of new subsidies, many of which, sadly, Clinton and the Republican Congress may enact. The truth about government subsidies for real estate–including the granddaddy: the home-mortgage-interest deduction–is that they do very little to make housing more affordable. Part gets siphoned off by middlemen like Fannie Mae. Most of the rest melts away into higher real-estate prices. The main beneficiary of any subsidy for real estate is the person who owns the property at the time the subsidy is instituted, not the future buyer.

Fannie Mae, unfortunately, has become a model. There is Freddie Mac, Fannie Mae’s smaller cousin in the housing market. And there is Sallie Mae (Student Loan Marketing Association), which creates a similar secondary market in subsidized student loans. Organizations combining public and private functions appeal to the woolly ideal of government-business partnership. They seem to represent a third way, a healthy distrust of government and the market, levelheadedness leavened by a kind heart. More often, as with Fannie Mae, what you get is the worst excesses of both.

Voir enfin:

What’s missing is the role politicians and policy makers played in creating artificially high housing prices, and artificially reducing the danger of extremely risky assets.

Congress designed Fannie and Freddie to serve both their investors and the political class. Demanding that Fannie and Freddie do more to increase home ownership among poor people allowed Congress and the White House to subsidize low-income housing outside of the budget, at least in the short run. It was a political free lunch.

The Fed did its part, too. In 2003, the federal-funds rate hit 40-year lows of 1.25%. That pushed the rates on adjustable loans to historic lows as well, helping to fuel the housing boom.

Part of the answer is a political class greedy to push home-ownership rates to historic highs — from 64% in 1994 to 69% in 2004. This was mostly the result of loans to low-income, higher-risk borrowers. Both Bill Clinton and George W. Bush, abetted by Congress, trumpeted that rise as it occurred. The consequence? On top of putting the entire financial system at risk, the hidden cost has been hundreds of billions of dollars funneled into the housing market instead of more productive assets.

Beware of trying to do good with other people’s money. Unfortunately, that strategy remains at the heart of the political process, and of proposed solutions to this crisis.

How Government Stoked the Mania
Housing prices would never have risen so high without multiple Washington mistakes.
Russell Roberts
The WSJ
October 3, 2008

Many believe that wild greed and market failure led us into this sorry mess. According to that narrative, investors in search of higher yields bought novel securities that bundled loans made to high-risk borrowers. Banks issued these loans because they could sell them to hungry investors. It was a giant Ponzi scheme that only worked as long as housing prices were on the rise. But housing prices were the result of a speculative mania. Once the bubble burst, too many borrowers had negative equity, and the system collapsed.

Part of this story is true. The fall in housing prices did lead to a sudden increase in defaults that reduced the value of mortgage-backed securities. What’s missing is the role politicians and policy makers played in creating artificially high housing prices, and artificially reducing the danger of extremely risky assets.

Beginning in 1992, Congress pushed Fannie Mae and Freddie Mac to increase their purchases of mortgages going to low and moderate income borrowers. For 1996, the Department of Housing and Urban Development (HUD) gave Fannie and Freddie an explicit target — 42% of their mortgage financing had to go to borrowers with income below the median in their area. The target increased to 50% in 2000 and 52% in 2005.

For 1996, HUD required that 12% of all mortgage purchases by Fannie and Freddie be « special affordable » loans, typically to borrowers with income less than 60% of their area’s median income. That number was increased to 20% in 2000 and 22% in 2005. The 2008 goal was to be 28%. Between 2000 and 2005, Fannie and Freddie met those goals every year, funding hundreds of billions of dollars worth of loans, many of them subprime and adjustable-rate loans, and made to borrowers who bought houses with less than 10% down.
Hear No Evil

What some Congresspeople said about Fannie and Freddie.

Fannie and Freddie also purchased hundreds of billions of subprime securities for their own portfolios to make money and to help satisfy HUD affordable housing goals. Fannie and Freddie were important contributors to the demand for subprime securities.

Congress designed Fannie and Freddie to serve both their investors and the political class. Demanding that Fannie and Freddie do more to increase home ownership among poor people allowed Congress and the White House to subsidize low-income housing outside of the budget, at least in the short run. It was a political free lunch.

The Community Reinvestment Act (CRA) did the same thing with traditional banks. It encouraged banks to serve two masters — their bottom line and the so-called common good. First passed in 1977, the CRA was « strengthened » in 1995, causing an increase of 80% in the number of bank loans going to low- and moderate-income families.

Fannie and Freddie were part of the CRA story, too. In 1997, Bear Stearns did the first securitization of CRA loans, a $384 million offering guaranteed by Freddie Mac. Over the next 10 months, Bear Stearns issued $1.9 billion of CRA mortgages backed by Fannie or Freddie. Between 2000 and 2002 Fannie Mae securitized $394 billion in CRA loans with $20 billion going to securitized mortgages.

By pressuring banks to serve poor borrowers and poor regions of the country, politicians could push for increases in home ownership and urban development without having to commit budgetary dollars. Another political free lunch.

Fannie and Freddie and the banks opposed these policy changes at first through both lobbying and intransigence. But when they found out that following these policies could be profitable — which they were as long as rising housing prices kept default rates unusually low — their complaints disappeared. Maybe they could serve two masters. They turned out to be wrong. And when Fannie and Freddie went into conservatorship, politicians found out that budgetary dollars were on the line after all.

While Fannie and Freddie and the CRA were pushing up the demand for relatively low-priced property, the Taxpayer Relief Act of 1997 increased the demand for higher valued property by expanding the availability and size of the capital-gains exclusion to $500,000 from $125,000. It also made it easier to exclude capital gains from rental property, further pushing up the demand for housing.

The Fed did its part, too. In 2003, the federal-funds rate hit 40-year lows of 1.25%. That pushed the rates on adjustable loans to historic lows as well, helping to fuel the housing boom.

The Taxpayer Relief Act of 1997 and low interest rates — along with the regulatory push for more low-income homeowners — dramatically increased the demand for housing. Between 1997 and 2005, the average price of a house in the U.S. more than doubled. It wasn’t simply a speculative bubble. Much of the rise in housing prices was the result of public policies that increased the demand for housing. Without the surge in housing prices, the subprime market would have never taken off.

Fannie and Freddie played a significant role in the explosion of subprime mortgages and subprime mortgage-backed securities. Without Fannie and Freddie’s implicit guarantee of government support (which turned out to be all too real), would the mortgage-backed securities market and the subprime part of it have expanded the way they did?

Perhaps. But before we conclude that markets failed, we need a careful analysis of public policy’s role in creating this mess. Greedy investors obviously played a part, but investors have always been greedy, and some inevitably overreach and destroy themselves. Why did they take so many down with them this time?

Part of the answer is a political class greedy to push home-ownership rates to historic highs — from 64% in 1994 to 69% in 2004. This was mostly the result of loans to low-income, higher-risk borrowers. Both Bill Clinton and George W. Bush, abetted by Congress, trumpeted that rise as it occurred. The consequence? On top of putting the entire financial system at risk, the hidden cost has been hundreds of billions of dollars funneled into the housing market instead of more productive assets.

Beware of trying to do good with other people’s money. Unfortunately, that strategy remains at the heart of the political process, and of proposed solutions to this crisis.

Mr. Roberts is a professor of economics at George Mason University and a scholar at the Mercatus Center. His latest book is a novel on how markets work, « The Price of Everything: A Parable of Possibility and Prosperity » (Princeton University Press, 2008).

One Response to Election américaine: Attention, un hold up peut en cacher un autre (From Fannie Mae to the White House: Playing the race card all the way to the top)

  1. […] corruption, de l’ancien maire de Chicago Richard Daley ou de Jessie Jackson, les ACORN et les Fannie Mae…A l’heure où, après les premiers de ses 395 mensonges sur l’Irak et contrairement à […]

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