The Bum's Rush

By Bill Wilson



On December 15th, 2010, the Financial Crisis Inquiry Commission is due to deliver its report to Barack Obama on the principal causes of the financial meltdown of 2007 and 2008.



Of course, there's a bit of a problem with this timeframe. Namely, the Senate is already fully prepared to begin debate on Senator Chris Dodd's financial takeover this week, as reported by CNN.com.



It is "a bill that Democrats say will prevent another Wall Street meltdown like the one that precipitated the U.S. recession."



Except, that's what the Commission — which Congress voted to create — is supposed to be doing in presenting its report. According to the Commission's website, it is tasked to "examine the causes of major financial institutions which failed, or were likely to have failed, had they not received exceptional government assistance."



Unfortunately, Congress is not waiting for these critical findings prior to passing sweeping changes to the way the financial system operates. Instead, this is another example of the bum's rush by a Congress that wants nothing more than to shove another government takeover down the throats of the American people.



Chief among the institutions the Commission is examining are the failures caused by Fannie Mae and Freddie Mac. The now-nationalized mortgage giants bought some $4.7 trillion of mortgages and sold them all over the world as securities, all the while overstating the quality of the underlying mortgage investments, as revealed by former Chief Credit Officer of Fannie Mae, Ed Pinto, in a recent article by Commissioner Peter Wallison of the American Enterprise Institute.



Writes Wallison, "By the end of 2008, Fannie and Freddie held or guaranteed approximately 10 million subprime and Alt-A mortgages and mortgage-backed securities (MBS)—risky loans with a total principal balance of $1.6 trillion." That's more than one-third of all the securities Fannie and Freddie guarantee.



Sadly, credit rating agencies missed this mislabeling. In fact, they had little to no role in rating the Fannie and Freddie securities. Instead, securities issued by the Government Sponsored Enterprises' (GSE's) were automatically given AAA ratings simply because of their implicit backing by taxpayers.



Most certainly, Fannie and Freddie's deception caused purchasers of the securities to wildly miscalculate the true delinquency and default rates of the underlying mortgages. This inherent feature is what made the assets "toxic," for purchasing them in large quantity was much riskier than was advertised by the GSE's.



Commissioner Wallison has already called this a "principal cause of the financial crisis."



That being the case, one might think the Senate would turn its attention to Fannie and Freddie, or wait for the critical findings of the Commission before reshaping the entire financial system. Regrettably, the Dodd bill does neither. Instead, the GSE's are startlingly omitted from the new legislation.



Although, this is not surprising when one considers the fact that Dodd was the top recipient of campaign donations from GSE employees and Political Action Committees, as revealed by OpenSecrets.org.



In fact, the Dodd bill does nothing to rein in Fannie and Freddie now or in the future. Nor does it seek to begin unwinding government control of the mortgage industry. Instead, Dodd is rushing ahead with legislation that gives government the power to seize any firm it deems "too risky," all the while perpetuating the crisis by leaving the ultimate fate of the GSE's in limbo.



In December the Treasury arbitrarily lifted the $400 billion cap on the GSE bailout, and so far taxpayers have dumped $129 billion into these two agencies. By rushing ahead with legislation that does not begin to unwind them now, the Senate is increasing the likelihood that the government will be unable or unwilling to unwind them later, even if that is what the Commission concludes is the proper course of action.



Bill Wilson is the President of Americans for Limited Government.