The permanent scandal machine in the nation's capital is about to take a bite out of Freddie Mac.
While the growing controversy (is it a scandal yet?) at the secondary mortgage market giant is currently restricted to accounting questions, there is bound to be more dirt dug up as increasing numbers of institutions and overseers initiate investigations.
In a matter of days after the boardroom ouster of the company's three top executives, separate investigations were announced by the House and Senate banking committees, the Securities and Exchange Commission, the U.S. Justice Department, and the Office of Federal Housing Enterprises Oversight, the federal regulator for both Freddie Mac and Fannie Mae.
I don't know what these groups are going to find, but one thing that recent scandals have made clear (remember Whitewater?), the more investigations conducted the more disclosures that are sure to follow. These groups are being charged with finding improprieties, even illegalities, so they are certain to do so.
Some of these entities have preconceived agendas necessitating that they find something. The House Financial Services Subcommittee on Capital Markets and its chairman, Rep. Richard Baker of Louisiana, for example, have been advocating changes in the regulatory oversight of Freddie and Fannie. So they are sure to find shortcomings with the current structure in order to support their existing positions.
As a result, watch for all kinds of disclosures in the coming months to shed doubt on the management practices of and potential risks posed by the second biggest mortgage company.
This is how a controversy in Washington spreads into a scandal.
What Will Be Seen
Among the things that will be brought to light though are the following:
* There is no imminent threat to the safety and soundness of Freddie Mac. Market observers and regulators all agree on that. And if there were, the doctrine of "too big to fail" would surely apply to them, as much as any other entity in the financial services industry. After all, the mortgage market, the main engine in an otherwise sputtering economy, depends on the liquidity that Freddie and Fannie provide.
* The credit union market may be the best example of the importance of Freddie Mac ot only does the company buy billions of dollars of credit union loans on the secondary market, but credit unions, in turn, buy billions of dollars in company debt and mortgage backed securities from Freddie. Freddie's prospects are that closely tied to the credit union movement's.
* Another thing that will be brought to light is the complexity of the finances of the two mortgage giants. The buying and packaging, then reselling, of billions of dollars in home mortgages, and the hedging of all those securities, rivals any financial entity's for complexity xcept for Fannie Mae, the scope and sophistication of these operations is unprecedented anywhere in the world. In fact, the accomplishments of Freddie and Fannie in facilitating a secondary market for home mortgages is so envied that several other countries are studying the creation of similar entities to do the same for them.
Writing Their Own Rules
While accounting rules set by the SEC, Financial Accounting Standards Board, the AICPA, and other structures, set certain parameters, there is no book that explains exactly how these sophisticated entities must be accounted for. So they are writing their own rules in many ways.
The extent that the federal government subsidizes the two companies will also be closely scrutinized during the process. A two-year-old study by the authoritative Congressional Budget Office found those subsidies are worth as much as $10 billion a year. That includes as much as $1 billion through an exemption from local and state property taxes and from Securities and Exchange Commission registration fees paid by all other publicly traded entities when they issue stock and bonds. But the largest part of the subsidy is the guaranteed line of credit with the U.S. Treasury (the implied federal guarantee of debt) that has been estimated to save the two entities as much as 50 basis points every time they issue debt. Since the two entities issued more than $2 trillion-that's trillion with a "T"-last year, those savings can be significant. Do the math.
Also to be illuminated will be just how politically connected both Freddie Mac and Fannie Mae are. The two not only run some of the biggest lobbying operations on Capitol Hill, but have showered millions of dollars of campaign contributions on both parties (neither makes individual campaign contributions), and also make it a regular practice to stage local events with members of Congress in their home districts. This has built up tremendous goodwill with hundreds of lawmakers who have benefited from the publicity. In addition, dozens of lawmakers have personal investments in one or both of the two mortgage giants.
The expanding process of investigations may also do much to explain the nature and benefits enjoyed by other government sponsored enterprises, like the Federal Home Loan Bank System, and taxpayers' role in supporting them.
The process, though sure to muddy many a reputation, is good for the public debate, as it will shed much light on these little understood, but pervasive entities.
Contact Ed Roberts at roberscuj aol.com.