Treasury Secretary Henry Paulson had barely finished announcing the bailout plan for mortgage giants Fannie Mae and Freddie Mac when Republicans and Democrats predictably began what has now become a near-daily ritual of finger pointing.
But in a rare spirit of true partisanship, both parties are equally responsible for this fiasco, and in true Washington-style accountability, guess who gets to clean up this debacle?
Um…let me guess. The taxpayers? Perhaps to the tune of $200 billion.
For those fuzzy on the history of these two companies, Fannie Mae was created as part of the New Deal in 1938 and 30 years later, spun off as a government-sponsored enterprise. Freddie Mac was started in 1970 as a sibling GSE.
Their premise was simple: both would buy mortgages, repackage them as securities and sell them on the open market to investors, subsequently increasing the supply of funding available for mortgage lending.
Both Democrats and the GOP stood on the sidelines replete with pom-poms and cheered the fact that more Americans realized their dream of home ownership.
At the time of the bailout, both Freddie Mac and Fannie Mae
owned or guaranteed about half of the U.S.'s $12 trillion mortgage market.
It didn’t matter that the majority of the public was never clear on exactly what a GSE was, or that both companies suffered from laughable oversight.
But for those scant few paying attention, storm warnings were evident as far back as 1999 when former Clinton budget director Franklin Raines was appointed to head Fannie Mae.
Raines expanded both the volume of mortgages and the size of the loans – in one two-year stretch, Fannie had posted a 10-percent increase in the loan amounts it could borrow from the banks, a practice that carried over to the Bush administration.
Then Federal Reserve chairman Alan Greenspan exacerbated the problem by keeping interest rates incredibly low.
Even as early as 2000, some economists were calling for the breakup of the two factions, citing the inherent dangers of increasing its pipeline of credit with the Treasury.
That same year, Rep. Richard Baker, R-La., proposed unsuccessful legislation to reform Fannie and Freddie's oversight.
Raines left Fannie Mae in 2004 after it was discovered that the company had overstated its profits and was forced into a $6.3 billion restatement.
One year earlier, Freddie Mac had been fined $125 million for misstating its earnings by $5 billion.
In any event, the government takeover of the two companies translates into the Treasury buying up to $1 billion of preferred shares of each company and a “pledge” (read: taxpayer pledge) of up to $200 billion.
I doubt anyone expects it to stop there.
