Revisionist History 101-GWB tried to regulate FNMA/FMAC in 2003

There’s a reason courts ask for the truth, the whole truth, and nothing but the truth. Every Urban Legend has a grain of truth; the Republican claim that the Bush administration was attempting to regulate the Government Sponsored Enterprises (GSE – FMNA/FMAC) in order to prevent out of control lending until it was thwarted by the Democrats is no different. Republicans generally cite this 9/11/2003 NYT article as a starting point before their tale spins into outright lunacy. Before I elaborate on this, let’s take a quick look at the GSE’s.

FNMA was a New Deal program intended to increase home ownership by purchasing loans from community banks, recapitalizing them so they could make more home loans. In 1968 (possibly to allow LBJ to balance the budget) FNMA was privatized and two years later FMAC was formed, also a private agency and also with an implied govt backing of its activity. Both GSE’s made their money from purchasing loans, bundling them into income-generating packages (securitizing) and selling them while charging a guaranty fee. The guaranty meant that the GSE would make the payments should any of the loans default. Due to their implied govt backing, loans to the GSE’s (purchase of the debt they issued) were seen as less risky than bonds issued by other investment banking entities, thus the GSE’s borrowed at very favorable rates. This enabled them to hold many of the mortgages they purchased in their own portfolios and make earnings off the spread between the interest paid on the debt they issued and the interest they received from payments on those loans.

OK, back to the Urban Legend. S. 190 was introduced on Jan 26,2005 – where according to Republican dogma the bill was killed by Democrats, who used the GSE’s and the CRA as a tag-team to force the well-meaning but naive banking industry into making bad loans to minorities.

Except for one tiny detail – the dates.

Republicans controlled both houses at the time. Democrats didn’t get control until the 2006 elections. So maybe the Democrats in the Senate Banking Committee killed it? Nope, the vote went along party lines all right, but it was 11-9, simple majority, where it went to (R) Rick Santorum’s desk on Sept 1, 2005 where it sat until it died.

But there’s one more thing. S.190 was prompted by an accounting scandal. It had nothing to do with the housing bubble. Those claims are an attempt at historical revisionism and flagrant partisan politicking. Recall that the GSE’s were making a portion of their earnings off the interest spread between the debt they issued and the loans they purchased.

In order to protect themselves from interest rate fluctuations they purchased interest rate swaps, a form of derivative. Perfectly legal, as long as they paid taxes on any profit they made from their derivative position. Should a firm choose to use those profits to pay bonuses and dividends as the GSE’s did however, it’s perfectly ILLEGAL – hence S.190. It was drafted to deal with accounting scandals, not a housing bubble few saw coming. The solution offered in S.190 was to move the GSE’s from regulation by HUD, to regulation by Treasury as well as forcing the GSE’s to move loans off their portfolios and into the secondary market. Neither solution seems very good, which is probably why the bill died on Santorum’s desk.

The GSE’s lost almost half their market share to investment banks, who did not have to conform to FNMA/FMAC’s mandate. Once the GSE’s began to relax their standards and purchase alt-A and higher tranche subprime loans, market share rose. But this was done in response to shareholder demand. The GSE’s were certainly a part of the housing bubble and it’s resulting explosion and negative effect on our economy – but they most definitely were not the cause of it.

This ongoing Urban Legend is being revived again by Republican members of the Catfood Commission in order to absolve the banking industry of blame for our economic disaster, shifting blame instead to perceived big govt liberalism.

There’s a grain of truth here too. Govt is certainly to blame for most of our economic collapse – but not from excessive interference or regulation. It is the LACK of govt oversight and regulation, as well as easy money policy from the Fed which is the root of our problem. BOTH parties are to blame – there is no good guy here, except for maybe Brooksley Born.