Regulating Fannie Mae & Freddie Mac: ...

Regulating Fannie Mae & Freddie Mac: What Happened?

Posted in the US News Forum

Since: Jan 08

Vineland, NJ

#1 Sep 22, 2008
This is a portion of an article tells the story of what happened with the Bush administration's attempt to regulate Fannie Mae and Freddie Mac in 2003 through H.R. 2575. To this end, I draw your attention to paragraphs 4-6. Notice the article is written in May 2005.

The full article in PDF can be found here:
http://www.aei.org/docLib/20050513_FSOMay_g.p...

Regulating Fannie Mae and Freddie Mac:
Now It Gets Serious

By Peter J. Wallison

Posted: Friday, May 13, 2005
FINANCIAL SERVICES OUTLOOK
AEI Online (Washington)
Publication Date: May 13, 2005

Congressman Richard Baker (R-La.) has been concerned about the risks created by Fannie and Freddie since 2000,when he first introduced legislation to augment the powers of their regulator. However, the alignment of the political stars was so unfavorable at the time that Baker—then the chairman of the House subcommittee that had jurisdiction over the GSEs—could not find sufficient support for his bill to bring it to formal consideration and possible amendment by the subcommittee (what is known as“mark-up”). Successive bills in 2002 and 2003 met similar fates, although the threat of legislation brought Fannie and Freddie to agree to modest changes in their financial procedures and voluntary registration of their equity securities under the Securities Exchange Act of 1934.

Then, in June 2003, came what in retrospect appears to have been the turning point. As part of the fallout from Enron and WorldCom, Freddie Mac decided to engage new auditors, replacing Arthur Andersen. The new auditors found discrepancies in the company’s financial reports, and an independent counsel was engaged to do an investigation. The investigation showed that Freddie had manipulated its earnings in order to reduce reported volatility, and—perhaps more important—one of Freddie’s senior managers seemed to have taken steps to obstruct the investigation. As a result, Freddie dismissed its three top officers, an action that apparently came as a complete surprise to the Office of Federal Housing Enterprise Oversight (OFHEO), the company’s regulator. OFHEO was embarrassed by its failure to discover on its own the facts that led to the dismissal of Freddie’s top officers—or even that there was an internal investigation that might lead to their dismissal—and its ability effectively to regulate the GSEs was publicly called into question.

This event seems to have precipitated major changes in the views and behavior of the three principal government groups that had the power to affect the future of Fannie and Freddie. The administration became engaged,seemingly for the first time, in considering the risks associated with both companies; OFHEO metamorphosed from a butterfly into a wasp; and members of Congress started to take Chairman Baker’s legislation more seriously.The result was a compete change in the atmosphere surrounding the GSEs. Suddenly, administration figures—representatives of Treasury, the Department of Housing and Urban Development, the Council of Economic Advisers, and the Office of Management and Budget,among others—began making public statements criticizing the GSEs, questioning their role in the housing market and the risks they were creating for taxpayers and the economy. Federal Reserve chairman Alan Greenspan, citing these same risks, weighed in with letters to lawmakers and testimony supporting stricter regulation and even privatization. OFHEO vowed tougher regulation, and sought and received funds from Congress to do a forensic audit of Fannie, arguing that if Freddie had manipulated its financial results Fannie may also have done so. As a result of these steps and disclosures, the GSEs’ share prices, which had been stable over several years, began a significant decline. Investors were either losing confidence in the companies, or were unwilling to absorb the constant headline risk to which the companies were subject.

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