“Like a lot of my Democratic colleagues, I was too slow to appreciate the recklessness of Fannie Mae and Freddie Mac...Frankly, I wish my Democratic colleagues would admit that when it comes to Fannie and Freddie, we were wrong.”  -- Congressman Artur Davis

BACKGROUND:

Fannie Mae and Freddie Mac, the government created duopolies, are at the epicenter of the nation's current financial crisis.  Their managements are textbook examples of recklessness having put Fannie and Freddie in a position to cost taxpayers trillions of dollars.  AIG, the failed Wall Street firm infamous for its taxpayer funded retention bonuses, received a taxpayer bailout of approximately $180 billion under a plan devised by then-president of the Federal Reserve Bank of New York, Tim Geithner.  Instead of rejecting the policies that led to the current turmoil and despite their roles in helping to cause and extend the current financial crisis, which has led to record unemployment and deficits, Rep. Barney Frank (D-MA) and Treasury Secretary Geithner have authored a plan that makes permanent the failed policies of the past and fundamentally restructures the nation's free market system, replacing it firmly within government's control.  The Geithner/Frank TARP II plan, H.R. 4173, would expose the taxpayers to further exploitation by making permanent the policies used to bailout politically connected firms like Fannie Mae, Freddie Mac and AIG, while restricting the access to credit and increasing the costs of credit products used by small businesses on main street.

ISSUES OF CONCERN:

Authorizes Permanent Bailouts for the "Politically Significant":  On March 17, 2009, the Wall Street Journal reported, "After months of government stonewalling, on Sunday night AIG officially acknowledged where most of the taxpayer funds have been going.  Since September 16, AIG has sent $120 billion in cash, collateral and other payouts to banks [including Goldman Sachs, Merrill Lynch and a few foreign banks], municipal governments and other derivative counterparties around the world..."  AIG has received up to $180 billion in taxpayer funds.  On November 16, 2009, the Special Inspector General for TARP reported that the Federal Reserve Bank of New York, under then-president Tim Geithner, decided to pay AIG's counterparties par value.  The report further stated that in March 2009, only after "significant public and Congressional pressure, AIG, after consultation with the Federal Reserve, publicly disclosed the identities of the counterparties."  In other words, under Geithner's leadership, not only did AIG receive a taxpayer bailout, but its counterparties received secret taxpayer bailouts too.  Under H.R.4173, the FDIC, without Congressional approval, would be authorized to extend endless federal guarantees and loans to financially troubled firms for the sake of "financial stability" and the agency would not be required to unwind such a failing firm-meaning that certain parts of the "zombie" company could be propped up indefinitely using taxpayer dollars. 

Creates More Fannie and Freddies:  Moral hazard occurs when an institution is protected from exposure to certain market risks and behaves without discipline as a result.  Designating a firm as being "too big to fail" would significantly increase the moral hazard.  For example, Fannie and Freddie were protected from the risks usually associated with financial institutions due to their status as government sponsored enterprises.  They engaged in risky behavior knowing the government would bail them out if their risks failed and the taxpayers suffered tremendous financial losses as a consequence.  Yet, H.R. 4173 authorizes a government panel to designate numerous firms as being "to big to fail."     

Expands A Failed Regulatory Structure:  H.R. 4173 creates a Consumer Financial Protection Agency with authority to dictate the types and terms of all credit products offered to consumers, creating a conflict between numerous existing agencies.  The CFPA would separate the regulation of protecting consumers from ensuring safety and soundness and therefore will increase systemic risk.  Fannie Mae and Freddie Mac are examples of what happens when there is a bifurcated system of regulation.  In a July 8, 2009 interview with the American Banker, James Lockhart, Director of the Federal Housing Finance Agency speaking about the importance of safety and soundness and mission stated, "[A] separation of such responsibilities among GSE regulators helped cause their downfall...You can't really separate that."  However, in the words of Rep. Barney Frank, "I believe there has been more alarm raised about potential [Fannie Mae and Freddie Mac] un-safety and unsoundness than, in fact, exists...I do not want the same kind of focus on safety and soundness that we have in the OCC and OTS.  I want to roll the dice a little bit more in this situation towards subsidized housing."  With the creation of a CFPA, taxpayers can expect more of the same.