A new report by federal regulators accuses the mortgage giant Fannie Mae of cooking its books. But you won't hear about this in the presidential debates.
Fannie and her smaller cousin, Freddie Mac, help finance about half the home mortgages in the United States. Their combined debt is now more than $2 trillion -- and on the way to exceeding the debt of the entire federal government. We're not talking peanuts here. Last year, Freddie got in trouble for accounting manipulations. Now, it's Fannie's turn.
Federal regulators say Fannie manipulated its earnings partly to allow its top executives huge bonuses. Sounds like the same tune we've been hearing on Wall Street for several years. But here's the difference -- and why we won't hear much about it in the presidential campaign. Fannie is a creature of Washington, not Wall Street. Its top executives and board members come from the highest rungs of both parties. It's one of the most generous campaign contributors in Washington, and its lobbyists are among the most powerful.
Fannie is a Washington power house in order to maintain its privileged position -- acting as if its debt is backed by the federal government, when in fact it isn't; borrowing money at a discount because financial markets assume that the feds will bail it out if it ever gets in trouble; using the cash pretty much as it wants; while at the same time avoiding tough federal oversight. Who could want anything more?
The scandal could easily spread further. For example, the report refers to a brand of software Fannie purchased that allowed the company to smooth out its earnings from year to year -- thereby disguising what was really going on. Well, you can bet that if this software was bought by Fannie Mae, it was bought by a lot of others among America's corporate giants. We're talking about a veritable smoking gun here, which could lead to another rash of corporate scandals.
And talk about a housing bubble! Listen to this: Another of the report's findings is that Fannie Mae's risk controls and accounting systems are especially weak. And it turns out that most of the mortgages underwritten today in the United States use automated programs to assess risk that were designed by Fannie Mae. If the mortgage giant's own ways of assessing its financial risks are weak, then we better start worrying about the systems in place for gauging mortgage underwriting risks across the nation.
None of this will be heard in the presidential debates. The debates will all be about who's tougher on terrorists. Well, I can tell you one thing: Washington hasn't been nearly tough enough with Fannie Mae and Freddie Mac. It's time for some tough regulations, before these two harm the safety and soundness of our entire financial system.
Robert B. Reich is co-founder of The American Prospect.
