GSEs Need Reform Now; Fannie, Freddie Scandals Highlight Problems

Article excerpt


Following an overwhelming bipartisan vote in the House of Representatives last week, Congress is closer than ever before to enacting comprehensive reform legislation to strengthen the oversight and regulation of Fannie Mae and Freddie Mac, the taxpayer-subsidized government sponsored enterprises (GSEs).

That's welcome news. For the first time in more than a decade, Congress has taken action to protect the American taxpayers from the risks posed by the GSEs. Now it is up to the Senate to finish the job so that President Bush can sign a strong, comprehensive bill into law.

Let us remember why Congress is considering GSE reform. Over the past two years, Fannie Mae and Freddie Mac have revealed accounting scandals of staggering magnitude: Fannie Mae's earnings restatement is already estimated to be $11 billion - 19 times larger than Enron's and $1 billion more than WorldCom's accounting error. And recent news reports suggest that Fannie Mae's accounting error may grow even larger than previously estimated.

But regardless of exactly how gargantuan the errors, the GSE accounting scandals represent a fundamentally more severe problem than previous business scandals. What makes these instances of cooked books, phony profits and cover-ups of particular concern to the public is that in the event of a financial meltdown at either company, taxpayers could be forced to bear the multibillion-dollar bailout cost - a sum that would make the tab for the Savings & Loan crisis look like chicken feed.

Fannie and Freddie apologists would have us sweep this inconvenient history under the rug, or more likely, deny the existence of these facts. But as the late Senator Daniel Patrick Moynihan famously remarked, "Everyone is entitled to their own opinion - but not their own facts."

In addition to the taxpayer exposure, the entire economy is at risk should something go seriously awry. Federal Reserve Chairman Alan Greenspan warns at every opportunity about the "systemic risk" posed by the GSEs. That's Fed-speak. Translated into plain English, it means if Fannie Mae or Freddie Mac make a mistake in their risky and complex hedging strategies, the resultant financial shock-waves could be catastrophic, not only for the housing market, but the economy as a whole. …