Ungoverned Too Long

Back in 2003, then-Federal Reserve Chairman Alan Greenspan warned Congress about mortgage giants Fannie Mae and Freddie Mac. Mr. Greenspan now looks like Cassandra, the prophetess whose predictions went unheeded.

He said the two government-chartered companies may not have had enough capital and that many investors mistakenly believed the government backed them. He repeated his warnings a year later, saying a tough new regulatory agency was needed to supervise the corporations, two of the biggest financial companies in the world.

Would that lawmakers had listened. But the two enormous companies were spending millions lobbying Congress to fend off greater oversight. The Center for Responsive Politics says Freddie Mac spent more than $94 million and Fannie Mae about $79 million on lobbying in the past decade.

This past weekend, the government seized control of them and put them in a conservatorship — like a wild-spending couple gone bust. Many will suffer from their lack of restraint.
Fannie Mae was created by a New Deal-era Congress to boost mortgage markets and lower interest rates. It was later privatized in 1968, and Freddie Mac was created as another private entity in 1970. They now hold or guarantee two-thirds of all U.S. home mortgages.

But in recent years, demanding shareholders and highly paid executives took much of the profit. One former top executive, Franklin D. Raines, earned more than $52 million in his five years at Fannie Mae, though he had to forfeit millions when the company was found to have inflated earnings reports to boost executive bonuses.

Shareholders may end up with little or nothing because of their misplaced faith.

Fannie Mae and Freddie Mac didn't exactly operate on a level playing field. With their special status somewhere between government agency and publicly traded company, they didn't have to report to the Securities and Exchange Commission. Their privileged position allowed them to raise money at lower interest rates than their competitors. They didn't have to pay state or local corporate taxes. Many investors assumed their credit had the implicit backing of the federal government.

They also gave generously to political parties. And lawmakers let them expand their business into risky markets and away from their original purpose.

Those lawmakers will be called to account now for, among many other things, letting Freddie Mac enter the subprime market in 1997 and allowing Fannie Mae to embrace zero down payments in 2001. That was the year Freddie Mac boasted of buying a mortgage every 11 seconds — double the 2000 rate.

A record 9 percent of mortgage holders are now behind on their payments or in foreclosure.

Again in 2005, Mr. Greenspan urged Congress to restrict the companies' holdings, saying their debt was too large. But Congress moved so slowly that it wasn't until this year that a new regulator was created. Though stronger, it still has less power than bank regulators do.

Taxpayers will pay the rescue tab, which could run to $200 billion or more. They'll soon want to know who's responsible.