May 12, 2010


By Idaho Senator Mike Crapo

"Reforming the financial system without fixing Fannie and Freddie is like declaring a war on terror and ignoring al Qaeda."
-Wall Street Journal editorial, May 6, 2010

The Democrats' new financial reform bill fails to end bailouts for Wall Street and imposes expensive new regulatory burdens that will fall heavily on small businesses. Even worse, the bill fails to end bailouts for Government Sponsored Enterprises (GSE) Fannie Mae and Freddie Mac, the largest housing lenders that purchased home loans, packaged them into investments and guaranteed them against default. They are at the core of the financial crisis and the biggest cause of losses for American taxpayers, yet the bill doesn't even mention them. Worse still, instead of ending bailouts for Fannie Mae and Freddie Mac, the Treasury Department announced last Christmas Eve that it was lifting the $400 billion loss cap on the two companies, creating a potentially unlimited liability, and effectively providing the full faith and credit of the government (i.e., taxpayers) in support of their debt.

On May 5th, Freddie Mac reported losing $8 billion in the first quarter and requested $10.6 billion from taxpayers, saying it would need more in the future. On May 10th, Fannie Mae reported losing $11.5 billion, its 11th consecutive quarterly loss, and asked for $8.4 billion more from taxpayers. This is in addition to the $126.9 billion that Fannie Mae and Freddie Mac have already lost through the end of 2009. The nonpartisan Congressional Budget Office (CBO) 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. This is simply unacceptable. We cannot claim to have addressed the financial crisis without reforming Fannie Mae and Freddie Mac.

Senator John McCain (R-Arizona) proposed an amendment to this bill that would require government conservatorship of the companies to end within 2 ½ years, reestablish the $200 billion loss cap and include their debt obligations in the calculation of federal debt as long as taxpayers are liable for their losses. This last measure will offer transparency and give the American people the true picture of how much of our national debt has increased due to the bailout of Fannie Mae and Freddie Mac and how much more taxpayers owe because of them. The nonpartisan CBO also supports this idea. The amendment was voted down in the Senate last week.

In 2006, along with 26 of my Senate colleagues, I signed a letter to the Chairman of the Banking Committee saying that, if effective regulatory reform of Fannie Mae and Freddie Mac were not enacted that year, American taxpayers would continue to be exposed to the enormous risk that they pose to the housing market, the overall financial system, and the economy as a whole. I also supported legislation in 2005 that had it been enacted that year, according to Peter Wallison, writing in the Wall Street Journal, "many if not all the losses that Fannie and Freddie have suffered, and will suffer in the future, might have been avoided." That bill failed due to a filibuster.

True financial reform would actually end bailouts and the notion that any company is "too big to fail" and it would not overly burden small businesses. But most importantly, it would reform the practices of Fannie Mae and Freddie Mac. The longer they are allowed to operate in their current role---as political rather than business entities---the greater the odds of a repeat crisis and greater losses for taxpayers.

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