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McCain 2005 - Reform Fannie Mae and Freddie Mac

John Mccain May 25, 2005 from the Senate floor discussing the Federal Housing Enterprise Regulatory Reform Act of 2005

Mr. President, this week Fannie Mae’s regulator reported that the company’s quarterly reports of profit growth over the past few years were “illusions deliberately and systematically created” by the company’s senior management, which resulted in a $10.6 billion accounting scandal.

The Office of Federal Housing Enterprise Oversight’s report goes on to say that Fannie Mae employees deliberately and intentionally manipulated financial reports to hit earnings targets in order to trigger bonuses for senior executives. In the case of Franklin Raines, Fannie Mae’s former chief executive officer, OFHEO’s report shows that over half of Mr. Raines’ compensation for the 6 years through 2003 was directly tied to meeting earnings targets. The report of financial misconduct at Fannie Mae echoes the deeply troubling $5 billion profit restatement at Freddie Mac.

The OFHEO report also states that Fannie Mae used its political power to lobby Congress in an effort to interfere with the regulator’s examination of the company’s accounting problems. This report comes some weeks after Freddie Mac paid a record $3.8 million fine in a settlement with the Federal Election Commission and restated lobbying disclosure reports from 2004 to 2005. These are entities that have demonstrated over and over again that they are deeply in need of reform.

For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac-known as Government-sponsored entities or GSEs-and the sheer magnitude of these companies and the role they play in the housing market. OFHEO’s report this week does nothing to ease these concerns. In fact, the report does quite the contrary. OFHEO’s report solidifies my view that the GSEs need to be reformed without delay.

I join as a cosponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005, S. 190, to underscore my support for quick passage of GSE regulatory reform legislation. If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.

39 Responses

  1. I’m disappointed that McCain voted for the bailout for that reason. ****** There is no guarantee or provision in the bailout to force the firms to use the funds they receive to extend credit to the US economy! ****** We in the center have to defeat this disastrous legislation. Check my site SandySays1.wordpress.com
    for some tools to fight it.

  2. It has been disappointing all around in that the Left is getting away with blaming deregulation and the free market for the credit crisis.

    Freddie/Fannie was a poison pill that threw the markets out of whack and established, sometimes through coercion, the unnatural lending practices that started the fire. As this post shows, the Republicans were the ones calling for regulation of Fannie/Freddie

    McCain has been pulling his punches. Possibly now that the vote is over he will come out swinging. I just fear it is too late.

    Watching the Democrats benefit from this brings to mind the Reichstag fire. (No, I’m not saying the Democrats are Nazis). The Nazis, though, are thought to have started the fire, to have blamed their opponents, and then were swept into power. It is the same sort of thing. The Democrats started this fire in the markets and are reaping the political rewards.

    And today we are fundamentally a different country. What next? Will the government buy the cars of everyone who cannot make their car payments? Maybe the government can buy stereos and furniture as well.

    If we behave, the government will give us a cheap house, car and home entertainment system. If we don’t behave, we’ll have to hoof it or pay top dollar to pay for all the free stuff.

    Sad. I hope McCain starts talking about this.

  3. Agreed Peter. You can’t blame McCain -although I think the Democrats had a political agenda against McCain when putting the bill together.

    Unfortunately - they created the mess.

    I see a huge ACORN and it smells very much like Obama!

  4. Sparky, curious that you think the Democrats had some hand in putting the bill together, as it was drafted and sponsored by four Republicans. It was re-introduction of a bill that had been introduced, and failed, in the prior session of Congress — all at a time when the Republicans controlled both houses.

    And Peter, it’s a bit naive to blame the economic crisis on Fannie and Freddie. They buy mortgages, they don’t lend. Banks do that. The CDOs were invented by the investment banks — JP Morgan leading the way on credit default swaps — and that was a function of the deregulation trend that began in the late 1970s and accelerated during the Reagan years. If they had not created the market, Fannie and Freddie could not have sold the mortgage-backed securities. Also, the Bush administration pushed, beginning in 2002, a program to boost home ownership from its traditional level that hovered around 60%, and toward this end the Fed rate was kept low to enable borrowing at low rates. So Greenspan shares some of the blame. And everyone shares responsibility for the failure to recognize that derivatives were being created that escaped regulation because the SEC does not have regulatory authority over private contracts, which is just what interest rate swaps and credit default swaps are.

    Your purple looks awfully red from my perspective.

  5. Tori, you have no idea what you are talking about. Freddie Mac and Fannie Mae are involved in lending - how do I know - they are my clients. I know exactly how they run their business and who they loan to.

    The bill was put in by the Democrats and the Republicans refused to sign it based on it’s contents.

    In the end - both sides finally compromised, based on timing of the viability of our financial instituions and the U.S Economy.

    You are the most uneducated person around. You don’t need to be purple, red, blue or green to figure out economics.

    Educate yourself and know all the parameters before you go on a blog and totally embarrass yourself with an issue that is totally out of your league.

  6. Tori,

    Pres. Carter started it with the Community Reinvestment Act, that sought to increase home ownership by people who would not otherwise have qualified financially for a home loan. Pres. Clinton went much further, actually telling mortgage lenders that they would pay extremely large fines if their lending didn’t match the total population, not just those who could reasonably have been expected to be able to make the payments, as well as maintain, their homes. On 9/11/03 Pres. Bush tried to rein in Fannie and Freddie and was prevented by Democrats in Congress. In late 2004 an audit of Fannie and Freddie was reported to Congress. It showed that $10.6 billion accounting scandal, but Democrats in Congress bullied the auditor who made the report and claimed that Fannie and Freddie weren’t a problem. Then Sen. McCain tried in 2005, as reported above. These are facts, and as the late Sen. Moynihan famously said, “Facts are facts. Everyone is entitled to their own opinion, but no one is entitled to their own version of the facts.”

  7. Exactly Walter. By the way, the law was signed by Jimmy Carter in 1977.

    I guess Tori is no longer on here - she must of left with a funny limp since one of her feet is still planted firmly in her mouth.

  8. Tori,

    If you came back, let me say that I do not say Fannie/Freddy were 100 percent responsible.

    Still, it was government meddling in the markets that started the practice of subprime lending. The private sector was pushed, to a large extent , in that direction by the government. Read Walter’s post.

    Once the government changes the game, the game changes. Private firms are forced to play by those new rules. Unfortunately, Freddie/Fannie, backed by Democrat administrations and pols, played the biggest part in introducing the changes that led to the meltdown.

    My point is that most people do not realize this and assume more of the same interventionist/social engineering policies will fix a problem those policies actually helped to create.

  9. Peter,

    And I do not say that Freddie and Fannie did not have a hand in it. But I do take issue with the notion that it is all the Democrats’ fault, and I also think the posters here are so determined to blame the GSEs that they are blind to other causes of this storm. And it’s not like Freddie/Fannie has not enjoyed the cheerleading of Republicans like Rick Davis who in 2001 in response to solicitation of public comments by the OFHEO contended that “any objective analysis of the roles played by Fannie Mae and Freddie Mac
    would show that they in fact reduce systemic risk …” As Raines and KPMG learned, risk was not controlled.

    Our economic crisis is, to use a popular cliche, the product of a perfect storm. I don’t think anyone gets a pass on this one — a position with which some on this board apparently disagree. The unregulated sector contributed. The investment banks found derivatives more lucrative than traditional fee-based services, and their compensation structure encouraged risk taking to boost short-term profits. The Big Five auditors moved into consulting services and took their eyes off of management. Shareholders did not demand accountability of their boards, and boards did not demand accountability by management. AIG and others strayed beyond traditional insurance and began insuring against market risk. The courts, particularly the Second Circuit where most of the financial players are HQ’d, invented the Wagoner Rule which deprives bankruptcy trustees of standing to bring suits against those who are responsible for creative accounting and failed disclosure of risk. And Congress — during the Clinton Administration — shut the doors for investors to pick up the pieces.

    I respect your view that government meddling in the housing market is a factor, I just will not grant that it was the only factor. And I don’t accept that deregulation is the answer. As a litigator in the area of corporate accounting fraud, I have witnessed where a hands-off approach leads us.

    And Sparky, you just keep up those personal attacks. I feel that Georgetown educated me just fine.

  10. Tori - Really? I’m sure it was on my dime.

  11. Tori- every time your respond, you either cut and past your response or try to explain your cause which proves with a doubt your ignorance of all matters.

  12. Tori,

    I’m with you that proper regulations are sometimes necessary. The Government’s participation in the markets necessitates this. In this case, though, it was the Republicans who were calling for more oversight and Democrats who were blocking it.

    The problem is that government agencies in this instance are not held to the same standards as the private sector. There isn’t much difference between Enron and Fannie and their business practices aside from the fact that Fannie was a government-protected institution and Enron wasn’t. Certainly, Fannie had much more of a negative effect that Enron.

    Regulation? Sure. But let’s be consistent in who we accuse of opposing it, and let’s be honest in pointing out places where deregulation has had a positive effect (telecommunications is a good example).

  13. Peter,

    Actually, you would be surprised to know that we agree more than than we disagree that subprime lending, coupled with securitization of mortgages, is the biggest culprit of the current crisis. But are Democrats to blame for blocking regulation? That’s where I think we’re going to have to disagree. The original push for more oversight was in 1992, and the Democrats were leading that charge. Many at that time, from both parties, were critical that the GSEs had become too large and were severely undercapitalized. No action, however. Who’s to blame? Everyone has his opinion, but McCain went on record as voting “nay.” So did other Republicans and a smattering of Democrats. Fast forward to the 108th Congress, and Senate Republicans introduced the predecessor to what would become S.190 in the next Congress, and that died, in Committee I believe. Now we get to the 109th, where both Houses were considering legislation to tighten control over Freddie/Fannie. This comes in the wake of the report lambasting accounting shenanigans and excessive compensation. The House passes a bipartisan bill. The Senate version is never brought to the floor by Santorum, a Republican, perhaps because he foresaw a filibuster by Democrats. The Senate Democrats grumbled because the House version had added an amendment that, among other things, prohibited voter registration drives by nonprofits that provide low-income housing assistance. I guess in that sense, the Democrats are to blame because they might have blocked a bill that might have made it to the floor that might have had the support of Republicans despite the fact that the White House and Greenspan had withdrawn their support. A pure version without the political baggage added by House Republicans might have succeeded in passing both houses and getting signed into law.

    I’m all for consistency, but think it is myopic to blame one party. Both had the ability at one time or another to really push for reform, and neither did that until the recent mortgage meltdown — just as the bipartisan reforms brought about by SOX were possible only after the massive publicity that followed the collapses of Enron, Worldcom, Adelphia, etc.

  14. Sparky,

    Don’t worry about your dime. My grandfather’s trust took care of it.

  15. Tori - there had been repeated requests to have Fannie and Freddie or for that matter ACORN investigated - Pelosi and company has been blocking that procedure for the last 2 or three years.

    Yes there are some Republicans with their hands “dirty” as well - the crux is that we need to clean house.

    Having Joe Biden and Obama in place - who by the way were “knee deep” in the block of the investigations is not helping the matter, it will only get worse.

    You need to be fully aware of Obama’s relationship with ACORN and also on the downfall of the financial institutions.

    To totally ignore the “relationships” and the development of destruction of the instituions is not doing you or the rest of the uninformed and/or ignorant voters any service.

    You won’t do it, because you truly don’t want to know the truth, it would burst your bubble on the “messiah”.

  16. Really - well he or you better enjoy it before Obama get’s his hands on it - however little it is.

  17. Sparky,

    I’m afraid you’re going to have to connect the dots for me between groups that advocate for community justice and the current economic crisis, because I just don’t see it. I will give you the benefit of the doubt and assume that you are not an advocate for predatory lending practices and redlining. I’m also assuming your remarks aren’t driven by racism. I think this board rises above that.

    Ya know, economists have yet to produce evidence linking low- and moderate-income advocacy groups to financial institution failures. The balloon in house prices and the relaxation of credit standards was not not limited to the lower end of the housing market, and there is plenty of evidence that speculation and flipping by high-income investors was what really fueled the fire. I know that here in the Southwest that certainly was the case.

    I understand that you want to pin this mess on Obama — he singlehandedly caused our financial markets to freeze up. But to convince me, you are going to have walk me through the ABCs of how his community service brought up to this point.

  18. He did not single-handedly contribute to the mess - that would be ridiculous - he was though associated as a contributor to the mess.

  19. Tori - no matter what would be explained to you on “connecting the dot” - you won’t accept it anyway.

    Here’s a hint - go to and type in Financial Crisis - Acorn - Freddie Mac and Fannie Mae - Obama and do some reading - there will be pros and cons relating to your “messiah” entanglement.

    Take a step back once fully investigated and try doing a 360 - I doubt you will see it.

    Hear no evil, see no evil, speak no evil.

  20. Really, it would be better if you simply explain it. Surely there is a National Review article on this that you could consult.

  21. Why bother - nothing would penetrate that empty space in your “Georgetown “tiny” trust fund” head.

  22. I luv you too, Sparky.

  23. Love and Hate are met by a very thin line.

  24. Can’t we all get along? Tori, simply read the blog post about ACORN above.

    Also, I agree Repubs could have done more to make Fannie/Freddy an issue, but pushing too hard would have had a bad effect on the housing market, which was seen, by the Economist and many others, as a singular strength holding up the market as long as people were buying. This should have been done quickly and efficiently without the public accusations of racism hurled by many democrats at the time for wanting to reform Freddie/Fannie.

    My point is that if Democrats had not been so politically invested in Fannie/Freddy reform would have been much easier to achieve without disturbing the housing market. Fannie/Freddie was their little community chest and a way to spread largess.

    This one reason government interference in markets is so bad. It leads to corruption.

  25. Exactly Peter. It won’t matter - she won’t see it for what it is. There is always an excuse.

  26. Peter,

    I wouldn’t mind getting along. I knew when I jumped in the cardinal-hued shark tank that I would be attacked. That’s to be expected. The problem with blog posts about ACORN is that they all cross pollinate one another, and ultimately they all trace back to Stan’s article in the NR. Rather incestuous, if you ask me. I was hoping for something fresh.

    In response to your post, the issue, as I see it, is whether Fannie and Freddie are the chicken or the egg. You no doubt adhere to the chicken view. It’s a popular one making the rounds on the net. But they aren’t the only players in the CBO market, and I think the “chicken” theory overlooks — perhaps a better word is underplays — a significant event : the SEC’s allowance of the alternative method of computing capital requirements (and, gasp!, using the industry’s own VAR models) — something that I think Paulsen now regrets, inasmuch as he led the lobbying on this. The chronology of that rule spans both parties’ control, beginning with its adoption in original form during the Ford years, solicitations for comment beginning under the Clinton administration, and final rule under Bush’s watch. They got deregulation, or self regulation, and 40:1 was the result.

    Associational politics — please, please don’t tell me you’re one of those. I’ve seen the youtube smear. Maxine Waters and Barney Frank are not “many” — witness the large number on the left side of the aisle who voted in favor.

    Hey, sparring partner, bring it on. (I may not be back tonight — gotta watch Sally Fields take on Calista Flockhart, then it’s off to bed to rest up for another day of taking on the Masters of the Universe.)

  27. [...] Tie the Democrats to Fannie Mae and Freddy Mac:  McCain seems hesitant to do this, but this is the biggest under-reported story of the campaign.  The blame of the current financial crisis can easily and effectively be tied to the Democrats, and McCain has proposed reform legislation of Fannie Mae and Freddy Mac.  [...]

  28. It appears that McCain was calling for more regulation of Fannie and Freddie but not for their competitors in the subprime market.

    Currently their competitors in the subprime market are suffering defaults at a much higher percentage of their subprime loans than are Fannie and Freddie.

    Does anyone know whether McCains’ call for regulations in 2005, that fell on deaf ears of a Republican Administration and a Repub;ican Congress, callled for additional regulaion of all subprime lenders

  29. Peter, please… numerous economists on all sides have said that deregulation and lack of oversight are indeed at the heart of the financial crisis we face today. The left isn’t “getting away” with anything but the truth. That’s exactly why members of congress on both sides favor more now.

    “As this post shows, the Republicans were the ones calling for regulation of Fannie/Freddie” - No, if you follow the link, what this post actually shows is that there were all of FOUR Republicans that put their name on that bill, and in spite of the fact that the GOP had the majority in both houses and the executive branch, they failed to even get it to the floor. Leadership? I think NOT. And without the bill even making it to the floor, nor a single Democrat chairing any committees (because the Republicans were the majority in both houses), how could it even be possible for the Democrats to block it??? This statement exposes no knowledge of how the system actually WORKS!!!

    And most that are writing in support of these ridiculous notions are also choosing to simply ignore the fact that there have been several bills introduced by Democrats that called for regulation of these markets too. not like the Republican majority would let them go anywhere while they ruled, but since they took majority in 2007…here are a couple examples:

    A bill that passed both houses, created and solely sponsored by Democrats, and it includes all kinds of regulation - it all began in 2007:

    Here’s another that passed the House last year, calling for Fannie & Freddie to be better regulated:

    I’m not saying that the Democrats are innocent in creating this whole mess either, that would be ignorant. Although, being completely honest about the circumstances surrounding congressional actions taken or not, on both sides, is absolutely vital to casting an educated vote as an Independent!

  30. [...] by reducing the government’s hand in that economy. McCain called for economic reform of the very entities that helped lead to the current financial crisis. McCain believes in lowering and simplifying taxes on all Americans, including corporations, as an [...]

  31. Robert maybe you should be asking Nancy Pelosi why she interferred with an on-going investigation of Freddie, Fannie and ACORN.

    Your argument is weak at best.

  32. [...] the House and was stopped dead in the Senate? Answer: Maxine waters, Democrats and Chris Dodd.. McCain 2005 - Reform Fannie Mae and Freddie Mac Purple People Vote Here is McCain on the floor of the Senate in 2005 John Mccain May 25, 2005 from the Senate floor [...]

  33. How is this site non-partisan? It is clearly tilted towards McCain.

    “To me Purple People are those of us who are neither Republican Red nor Democrat Blue; we find ourselves in between. The internet often represents those on the far left or the far right; this site is for those of us in the middle.”

  34. I’m an Independent and McCain supporter.

  35. Need to fix the gravatar code. Suggest WPCache as well.

  36. I join as a cosponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005, S. 190, to underscore my support for quick passage of GSE regulatory reform legislation. If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.


    THE AVERAGE CITIZEN DOESN’T KNOW THIS FACT and everyone I know is furious about Freddie and Fannie.




  37. McCain absolutely should highlight his support — in 2006 — for the housing reform act of 2005. That would go a lot further with me than his attacks on Obama. It’s hardly persuasive by itself, of course, but it’s a positive. Everyone should confront why it took McCain so long — is that all bad? Of course not. Is it all good? Doubt it. Instead, I expect many people will point out how Obama is worse — with responses about why McCain is worse … ad nauseum (literally!).

    The only thing that makes this discussion purple is the opposition of red and blue, with only a few exceptions. Kudos to Peter, whose perspective seems fairly balanced.

  38. Your blog is amazing, i first landed to another post but then get interested and thought, i will just look a little more arround to see what else i can find out about such stuff :-)

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