In a recent column, The New York Times‘ David Brooks lambastes the devastating “affordable housing” scandal which he describes as “the most important political scandal since Watergate. It helped sink the American economy,” notes Brooks. “It has cost taxpayers about $153 billion, so far. It indicts patterns of behavior that are considered normal and respectable in Washington.”
Since Brooks’ column concisely details both the scope and severity of the Fannie Mae housing crisis, it’s worth quoting from it extensively. He begins by describing how James A. Johnson, a Democratic Party politician, started an aggressive effort to expand homeownership once appointed chief executive of the government-sponsored enterprise in 1991.
Back then, Fannie Mae could raise money at low interest rates because the federal government implicitly guaranteed its debt. In 1995, according to the Congressional Budget Office, this implied guarantee netted the agency $7 billion. Instead of using that money to help buyers, Johnson and other executives kept $2.1 billion for themselves and their shareholders. They used it to further the cause — expanding their clout, their salaries and their bonuses. They did the things that every special interest group does to advance its interests.
Indeed, a 2004 report from the Office of Federal Housing Enterprise Oversight found that during Johnson’s tenure, Fannie Mae improperly deferred $200 million in expenses. This enabled top executives, including Johnson, to receive substantial bonuses. A 2006 study by the same office found that Fannie Mae had substantially underreported Johnson’s compensation. Instead of $6 to $7 million, he actually received approximately $21 million.
Even more money was used to recruit relevant activist groups for Fannie Mae’s cause, including Democratic congressmen and Acorn, an organization that championed affordable housing for low-income neighborhoods.
Fannie ginned up Astroturf lobbying campaigns. In 2000, for example, a bill was introduced that threatened Fannie’s special status. The Coalition for Homeownership was formed and letters poured into congressional offices opposing the bill. Many signatories of the letter had no idea their names had been used.
Fannie lavished campaign contributions on members of Congress. Time and again experts would go before some congressional committee to warn that Fannie was lowering borrowing standards and posing an enormous risk to taxpayers. Phalanxes of congressmen would be mobilized to bludgeon the experts and kill unfriendly legislation.
Fannie executives ginned up academic studies. They created a foundation that spent tens of millions in advertising. They spent enormous amounts of time and money capturing the regulators who were supposed to police them.
According to Brooks, “this is how Washington works.” Except for Johnson, who made millions while “helping the poor,” many of the people involved were simply doing what reputable figures do in service to a supposedly good cause. he writes. “Johnson roped in some of the most respected establishment names: Bill Daley, Tom Donilon, Joseph Stiglitz, Dianne Feinstein, Kit Bond, Franklin Raines, Larry Summers, Robert Zoellick, Ken Starr and so on.” Only Congressman Barney Frank of Massachusetts, whose partner at the time worked for Fannie, deserves some blame for being “arrogantly dismissive when anybody raised doubts about the stability of the whole arrangement.”
Of course, it all came undone. Underneath, Fannie was a cancer that helped spread risky behavior and low standards across the housing industry. We all know what happened next.
The financial collapse of 2008 happened next and the very people involved in the scandal went on to call for even more regulation and an even greater role for government in housing and finance.
Bill Daley and Tom Donilon went on to serve in the Obama Administration. Dianne Feinstein still represents the state of California in the United States Senate. Larry Summers was the president’s chief economic advisor until late last year. Robert Zoellick is now president of the World Bank. They are responsible, in part, for today’s recession. They were not involved in any “good cause.” They were involved in a scam.