In 2004, after a tip from a whistle blower who was later fired, the Office of Federal Housing Enterprise Oversight (Ofheo) issued a report finding that the government-sponsored entity Fannie Mae had engaged in Enron-like accounting machinations that allowed Fannie to overstate its earnings and underestimate the risk the company faced. The accounting wizardry Fannie engaged in was designed so that Fannie could meet profit targets to maximize bonus payments to company executives like Clinton administration deputy attorney general Jamie Gorelick and Carter administration assistant director for domestic policy Franklin Raines.

For years, conservatives have been critical of how Fannie, and Freddie Mac, have leveraged their government-sponsored advantages (including exemptions from state and federal taxes, lower capital requirements, and the ability to borrow at rates well below those paid by private companies), to create a co-monopoly in the housing finance sector. When Fannie’s accounting scandal came to light in 2004, conservatives pushed hard for reforms to phase out Fannie and Freddie. Led by former Walter Mondale and Barack Obama campaign adviser James Johnson, Fannie and Freddie pushed back hard, raising millions of dollars for members of the relevant oversight committees and opening up “Partnership Offices” that funneled money into various housing projects in districts of key members of Congress.

Fannie also bought off activist groups such as the corrupt Association of Community Organizations for Reform Now (ACORN), which has been indicted, multiple times across the country, for vote fraud (Obama worked closely with ACORN as a street organizer in Chicago). Fannie’s lobbying efforts paid off as liberal politicians such as Sen. Chuck Schumer (D-N.Y.) and Rep. William Clay (D-Mo.) worked to kill any real reform of Freddie and Fannie. The Washington Post reports: “In an internal memo in 2004, Fannie Mae executive Daniel H. Mudd affirmed what the company’s critics had long contended: In the political arena, ‘we always won’ and ‘we took no prisoners.’”

Fannie was created during the New Deal to make homes more affordable for lower- and middle-income Americans. Freddie was added years later for the same purpose. Fannie and Freddie have long outlived their purpose as the market for repackaging loans as securities is now well developed. When the housing market is booming, they are not needed, and they have both gone well beyond their original mission and are now backing loans for wealthy (witness Speaker Nancy Pelosi’s continued efforts to raise the cap on the size of the loans that Fannie and Freddie can buy).

Many parts of the bill the Senate passed last week only continue the worst aspects of the crony capitalism at the hard of Freddie’s success. This is especially true of the Community Development Block Grant funds that have long been a goal of partisan housing activist groups like ACORN. There is an opportunity here to use the recapitalization the White House is now proposing to re-organize housing finance by breaking up Fannie and Freddie and creating several smaller truly private entities that can compete.

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