Restoring American Finacial Stability Act of 2010
Floor Speech
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Mr. CRAPO. Mr. President, I stand today to discuss the McCain amendment as well. We have had a lot of debate about the financial regulatory legislation before us. A lot of the debate has focused on the content of the bill, with concerns being raised by some such as myself about whether we truly are ending too big to fail and truly are ending bailouts and whether we are going too far in creating yet again a big government response to an issue that needs to have a more effective response rather than more government, a response that will hammer Main Street, not Wall Street, and create yet again another big expansion of government in this Congress.
We have seen way too much of that in way too many parts of our economy so far, and some of us are concerned about that.
But what I want to talk about today is what is noticeably absent in the bill; that is, the reform of Fannie Mae and Freddie Mac, our government-sponsored entities--actually, our government-managed entities now--and the fact that these entities are at the core of the financial crisis we are dealing with and yet are not even touched by this legislation.
Americans remain rightly outraged that their tax dollars were used to bail out irresponsible Wall Street firms and auto companies. I have voted against these bailouts, and I have been working with my colleagues to make sure we do not set the stage for yet more government bailouts. The most expensive government bailouts of all, however, will be those of Fannie Mae and Freddie Mac--the largest housing lenders that purchased home loans, packaged them into investments, and then guaranteed them against default.
I think a little history of how we got to where we are is appropriate. Congress chartered Fannie Mae and Freddie Mac to provide access to home financing by maintaining liquidity in the secondary market. According to Peter Wallison of the American Enterprise Institute:
Their implicit, or assumed, government backing enabled them to drive all competition out of the middle-class housing sector, permitting Fannie and Freddie to acquire over $5 trillion in mortgages, which they either held in portfolios totaling approximately $1.5 trillion or securitized as mortgage backed securities.
Continuing his quote:
In pursuing their mission to support low and middle-income housing--also called affordable housing--Fannie and Freddie assumed the credit risk on almost 11 million subprime and other high-risk mortgages and contributed substantially to the growth of a housing bubble. When the bubble began to deflate in 2007, they began to suffer huge losses.
But I want to go back and talk a little bit about the history before 2007, when it became evident to everyone what was happening to Fannie Mae and Freddie Mac in our housing markets, because it did not just become known then. As my colleague, Senator Sessions, has already mentioned on the floor today in his earlier remarks, the Banking Committee was heavily engaged in reviewing this issue for several years leading up to this, as was the Office of Federal Housing Enterprise Oversight at HUD and the Fed and a number of other analysts.
Senator Sessions quoted a letter. I believe it was from then-Chairman Greenspan of the Fed, who noted we needed to put focus on Fannie and Freddie then--this was back in the 2004 to 2005 timeframe--and that if we did not establish much tighter regulatory control over Fannie and Freddie, their excesses were going to create systemic risk that would put the taxpayer in extreme jeopardy.
The committee itself focused very heavily on this same dynamic. In May of 2006, we had established legislation that would have, had it been able to be passed on the floor of this Senate, created a strong, new regulator for Fannie Mae and Freddie Mac and begun the process of setting the right capital standards and the right regulatory environment in which we could control this excessive growth and set the process in place for us to take Fannie Mae or Freddie Mac into receivership or into trust if they eventually failed, as it began looking as if they would.
The Office of Federal Housing Enterprise Oversight completed a multiyear special examination of Fannie Mae and issued a report describing OFHEO's findings and recommendations in May of 2006. OFHEO found the following:
Fannie Mae senior management promoted a false image of the enterprise as one of the lowest risk financial institutions in the world.
A large number of Fannie Mae's accounting policies and practices did not comply with generally accepted accounting principles.
Fannie Mae had serious problems of internal control, financial reporting, and corporate governance, resulting in Fannie Mae overstating reported income and capital.
Between 1998 and 2004, Fannie Mae senior management deliberately and intentionally manipulated accounting to hit earnings targets so that senior management maximized the bonuses and other executive compensation they received.
Fannie Mae's board of directors failed to be sufficiently informed, to act independently of its chairman and other senior executives, and to exercise the requisite oversight over the enterprise's operations.
And then the final finding of the report: Despite rapid growth and changing accounting and legal requirements, Fannie Mae senior management did not make investments in accounting systems, computer systems, other infrastructure and staffing needed to support a sound internal control system, proper accounting, and GAAP-consistent financial reporting.
Again, as a result of these findings and of an increasing awareness of the threat that was being posed by the excesses at Fannie Mae and Freddie Mac, the Banking Committee, on which I served then and still serve, developed legislation to address these very excesses and to create the kind of regulatory structure in which we could control these problems.
Along with 26 of my colleagues, in May of 2006 I signed a letter to then-majority leader Bill Frist and to the chairman of the Banking Committee then, Senator RICHARD SHELBY. In the letter, we stated:
We are concerned that if effective regulatory reform legislation for the housing-finance government sponsored entities is not enacted this year--
Remember, this is 2006--
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. Therefore, we offer you our support in bringing the Federal Housing Enterprise Regulatory Reform Act (S. 190) to the floor and allowing the Senate to debate the merits of this bill, which was passed by the Senate Banking Committee.
I might note that when we debated this bill back in 2006, it came out on a straight party-line vote from the Banking Committee--all the Republicans voting for it, all the Democrats opposing it.
As history shows us, we never were able to get that bill to the floor because although we had 55 Republican votes, it takes 60 votes to move legislation on the floor of the Senate in the face of filibusters, and that bill was filibustered. We were not able to get the additional support to get it past the filibuster.
I would like to quote from a recently written editorial about this chapter of the Fannie Mae-Freddie Mac history. Peter Wallison, in an April 20, 2010, editorial in the Wall Street Journal, wrote:
One chapter in this story took place in July 2005, when the Senate Banking Committee, then controlled by the Republicans, adopted tough regulatory legislation for the GSEs on a party-line vote. ..... The bill would have established a new regulator for Fannie and Freddie and given it authority to ensure that they maintained adequate capital, properly managed their interest rate risk, had adequate liquidity and reserves, and controlled their asset and investment portfolio growth.
These authorities were necessary to control the GSEs' risk-taking, but opposition by Fannie and Freddie--then the most politically powerful firms in the country--had consistently prevented reform.
He goes on to say:
The date of the Senate Banking Committee's action is important. It was in 2005 that the GSEs--which had been acquiring increasing numbers of subprime and Alt-A loans for many years in order to meet their HUD-imposed affordable housing requirements--accelerated the purchases that led to their 2008 insolvency. If legislation--
And this is the key part of the editorial--
along the lines of the Senate committee's bill had been enacted in that year, many if not all the losses that Fannie and Freddie have suffered, and will suffer in the future, might have been avoided.
What happened was the bill was stalled. Fannie and Freddie collapsed. When it became evident the losses were going to occur, there was a rush on the floor of the Senate to get back to that bill, and in 2008 the bill passed--after the horse was out of the barn. At least, though, we did get it passed in 2008, and Fannie and Freddie were taken into conservatorship.
Where are we now? The Congressional Budget Office has estimated that in the wake of the housing bubble and the unprecedented deflation in housing values that resulted, the government's cost to bail out Fannie Mae and Freddie Mac will eventually reach $381 billion. As we talk on this floor about bailouts, this is the biggest bailout of all. It exceeds, in fact, all of the other bailouts together, by far. Yet it is unlimited. I mean that literally.
Last Christmas Eve, in what was considered by many to be a Christmas Eve taxpayer massacre, the Treasury Department announced it was lifting the $400 billion loss cap on these two companies, creating a potentially unlimited liability and effectively providing the full faith and credit of the government to support their debt.
To date, the Federal Government has already provided about $126 billion to $130 billion to Fannie and Freddie. As I just indicated, the Congressional Budget Office estimates that will ultimately top $380 billion, and many believe that is a conservative number--direct taxpayer bailouts that are not even mentioned in this bill.
It reminds me of the fight back in 2005 when we were trying to get the legislation to reform Fannie and Freddie passed then, and here we are knowing what we need to do--seeing these bailouts, knowing the American taxpayers want those bailouts to stop--and we are being resisted in trying to bring an amendment just to add Fannie Mae and Freddie Mac--GSE--reform to the bill.
Last week, Freddie Mac announced it had lost $8 billion, as others on the floor have just said, in the first quarter and has requested another $10.6 billion to add to this mounting bailout.
As the government has pledged more and more money to cover these companies' losses, it has assured the public that planning is underway for overhauling these firms so that the bailouts will end. In December, the administration said it expected to release a preliminary report on how to remake Fannie and Freddie around February 1. But February 1 has come and gone, and no plan has been provided, and now we are being told it will be another year before the government proposes how to restructure these firms. Eighteen months after they were seized to prevent their collapse, the companies remain wards of the state in what has become the single costliest component of bailouts in our financial system.
In September of 2008, the Federal Housing Finance Agency placed Fannie Mae and Freddie Mac into that conservatorship I talked about, which allows the regulator to establish control and oversight of a company to put it in a sound and solvent condition. Since being placed in conservatorship, Fannie Mae and Freddie Mac have actually become a bigger part of the market, which will make reform of them even more difficult. Last quarter, Fannie Mae and Freddie Mac were responsible for funding two-thirds of all U.S. home loans. That is primarily because there is nobody else able to play in the markets these days, except for these government--now completely government--controlled and financed entities. When you add in the Federal Housing Administration, the U.S. Government is behind 96.5 percent of all loans.
What we have seen here is literally another government takeover. We have seen the government take over in the health care industry. We have seen the government take over in the auto industry. We have seen the government takeover of AIG and the insurance industry. We have seen the government take over in multiple parts of our financial industries and a greater government takeover being proposed in this bill. Yet we have the literal government control and management of Fannie Mae and Freddie Mac going unabated and unaddressed in the legislation that is before us.
What does the legislation do?
The longer Fannie Mae and Freddie Mac are allowed to operate in their current role--as political rather than business entities--the greater the financial losses will be for taxpayers and, frankly, the greater the risk they will simply continue endlessly in government control and government management, with the government managing yet one other big part of our economy perpetually.
That is why the McCain amendment requires the current conservatorship of the companies to end in the next 2 1/2 years and begin the process of shrinking their portfolios. If the companies are not viable at the end of that period, they would be placed into receivership, which is a form of bankruptcy restriction.
Without a hard deadline, I am very concerned Congress will not act and, just like back in 2005, we will find gridlock here in the Senate stopping us from moving forward and be left with a nationalized Fannie Mae and Freddie Mac.
The amendment would also reestablish the $200 billion cap and accelerate the 10-percent reductions of the mortgage portfolios, effectively requiring the companies to shrink those portfolios by holding a combined $100 billion from their current levels. This will also limit the losses taxpayers will face as a result of the blank check given by the administration in lifting all caps on December 24 of last year.
It also includes Fannie Mae and Freddie Mac as a part of the Federal budget as long as either institution is under conservatorship or receivership. This is going to show the American people the true picture of how much of our national debt has increased by the bailout of these institutions.
As an aside here, as most people probably did not realize, the Senate Budget Committee recently acted on a proposed budget for the Congress this year. We were supposed to have declared and created a budget for us to operate under months ago, but because of, I think, an unwillingness to literally put it out there--how much money this government is spending--the committee and the Senate have not acted on a budget yet. But the Budget Committee actually did finally act on one. I didn't vote for it. It is more spending--trying to spend ourselves into prosperity again as the last budget was--but at least we acted.
In that Budget Committee process, I brought forth an amendment to require that Fannie Mae and Freddie Mac debt be added to our national debt calculations. Why would I do that? According to the Congressional Budget Office Director Douglas Elmendorf:
After the U.S. Government assumed control in 2008 of Fannie Mae and Freddie Mac, two Federally-chartered institutions that provided credit guarantees for almost half--
and by the way, as I indicated, now it is two-thirds--
of all the outstanding residential mortgages in the United States, the Congressional Budget Office concluded that the institutions had effectively become government entities whose operations should be included in the Federal budget.
So here we have the Director of the Congressional Budget Office saying we run these companies, we are financially backing these companies, we should at least include them in our budget.
The purpose of my amendment then--and the same language that is in this amendment on the floor today--is to include in the debt calculations of the budget resolution the debt obligations of Fannie Mae and Freddie Mac. This allows the American people to see a true picture of how much our national debt has been increased by the bailout of these institutions. At the end of calendar year 2009, per the financial statements, those figures are $774 billion for Fannie Mae and $781 billion for Freddie Mac, for a total of $1.555 trillion of debt. That is debt the United States holds today that is not being disclosed to the American public as part of our debt because of our interesting budget procedures.
To put into perspective how large these entities are, their combined total books of business are nearly $5.5 trillion. The Congressional Budget Office has estimated that in the wake of the housing bubble and the unprecedented deflation in housing values that resulted, the government's cost to bail out Fannie Mae and Freddie Mac, as I indicated earlier, will eventually reach $381 billion, and that estimate may be too optimistic.
I also already mentioned that last Christmas Eve the Treasury lifted the cap. We actually had a cap so that the taxpayer was at least protected at $400 billion. Last Christmas Eve--and I told my colleagues earlier some called it the ``Christmas Eve Taxpayer Massacre''--Treasury lifted that cap so there now is no limit to the amount of debt we will assume and pay for as taxpayers as a result of this bailout of Fannie Mae and Freddie Mac. According to a January 2010 CBO background paper entitled ``CBO's Budgetary Treatment of Fannie Mae and Freddie Mac,'' CBO:
believes that the Federal Government's current financial and operational relationship with Fannie Mae and Freddie Mac warrants their inclusion in the budget.
By contrast, the administration has taken a different approach by continuing to treat Fannie Mae and Freddie Mac as outside the Federal budget, recording and projecting outlays equal to amounts of any cash infusions made by Treasury into the entities.
The Office of Management and Budget of the U.S. Government fiscal year 2011 states:
Under the approach in the budget--
This is the President's budget--
all of the GSEs' transactions with the public are nonbudgetary because the GSEs are not considered to be government agencies.
So we have the administration saying they are not considered to be government agencies, and, therefore, we aren't going to consider their debt and their financing, and we have the Congressional Budget Office saying they should be. CBO has included the GSEs in its budget baseline, but does not include the debt in its calculations because of their narrow view of how to calculate the Federal debt.
In light of all these facts, I think it is evident that we need to have transparency and we need to start telling the American people exactly what it means, that we have taken Fannie Mae and Freddie Mac into receivership, and that we are not going to put their finances in the Federal budget.
Going back to what the amendment we are debating here today does, in addition to putting Fannie Mae and Freddie Mac in the budget, it establishes a Senate-confirmed special inspector general within the Government Accountability Office with responsibility for investigating and reporting to Congress on decisions made with respect to the conservatorships of Fannie Mae and Freddie Mac, and this special inspector general would provide quarterly reports to Congress. There is no one politically accountable to the public for the operation of these multitrillion-dollar entities since the President has yet to nominate anyone to officially run the Federal Housing Finance Agency and the Office of Special Inspector General. The office of the Special Inspector General for the Troubled Asset Relief Program has done a good job to inform the public and Congress about TARP, and we should follow this model with Fannie Mae and Freddie Mac. It is not credible to say we are protecting the taxpayer and fixing mortgage financing and do nothing about Fannie Mae and Freddie Mac.
Let me conclude by reading from a couple of editorials. If you scan the news today about this issue, you will see editorials across this country. I think one of them said ``the silence on this issue is deafening.'' Others have said there is a huge hole in the legislation. The title of another one: ``Congress Remains Missing In Action on Two Key Causes of the Financial Crisis.''
I wish to read from one of the Wall Street Journal editorials on May 6 of this year. In part it says:
One sign that the White House financial reform is less potent than its advertising claims is that it doesn't even attempt to reform the two companies at the heart of the housing mania and panic--Fannie Mae and Freddie Mac. So we are glad to see that yesterday GOP Senators John McCain, Richard Shelby, and Judd Gregg introduced a Fannie and Freddie reform amendment.
Going on, it says:
The Financial Crisis Inquiry Commission spent yesterday focusing on financial leverage using Bear Stearns as an example. But Fannie Mae and Freddie Mac were twice as leveraged as Bear and much larger as a share of the mortgage market. Fan and Fred owned or guaranteed $5 trillion in mortgages and mortgage-backed securities when they collapsed in September of 2008.
This is a quote that has been read on the floor before, but it is exactly applicable.
Again, quoting the editorial:
Reforming the financial system without fixing Fannie and Freddie is like declaring war on terror and ignoring the al-Qaida. Unreformed, they are sure to kill the taxpayers again. Only yesterday--
this was on May 6--
Freddie said it had lost $8 billion in the first quarter--
which I have already mentioned.
Going on to another editorial, this one also in the Wall Street Journal by Robert Wilmers--and I quote just a part of it:
At the end of 2009, their total debt outstanding--either held directly by their balance sheets or as guarantees on mortgage securities they'd sold to investors--was $8.1 trillion. That compares to $7.8 trillion in total marketable debt outstanding for the entire U.S. Government. The debt has the implicit guarantee of the federal government but is not reflected on the national balance sheet.
The public has focused more on taxpayer bailouts of banks, auto makers and insurance companies. But the scale of the rescue required in September 2008 when Fannie and Freddie were forced into conservatorship--their version of bankruptcy--was staggering. To date, the federal government has been forced to pump $126 billion into Fannie and Freddie. That's far more than AIG, which absorbed $70 billion of government largess, and General Motors and Chrysler, which shared $77 billion. Banks received $205 billion, of which $136 billion has been repaid.
Fannie and Freddie continue to operate in the red, with no end in sight. The Congressional Budget Office estimated that if their operating costs and subsidies were included in our accounting of the overall deficit--as properly they should be--the 2009 deficit would be greater by $291 billion.
The point is simple. This bill is alleged to be focused on trying to solve the problem of bailouts. We will hear Senators on this floor say day in and day out that this bill will end bailouts and stop too big to fail. Yet the two largest enterprises which were at the core of the financial crisis are exempt from the provisions of the legislation. They are not even mentioned in the legislation. Apparently, they are too big to fail, because we in this Senate will not put them into a track of being resolved properly.
As I indicated earlier, I am concerned that the same outcome is going to happen now that happened back in 2005 and 2006 when we tried before their collapse to put some restraint into place, and that we will not act, the net result of which will be that we will, in effect, nationalize Fannie and Freddie and have a huge portion of our Nation's mortgage market be run by the government.
The McCain amendment will simply give us a track to move forward to stop that result from happening, and I encourage all of my colleagues to consider strongly supporting this amendment. If we don't, then I don't think we can honestly call this a bill that truly ends the bailouts in our country.
Thank you very much, Mr. President.
I note the absence of a quorum.
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