Will the lame duck fly?
Among those certain to have been cheering the Democrats’ recapturing of both houses of Congress must have been the two GSEs, Fannie Mae and Freddie Mac, for the result dramatically changes the political calculus of their future regulatory structure.
Or has it?
That depends on whether the lame duck flies.
A ‘lame duck’ session
A Congressional session after an election and before a new Congress takes office.
The Democrats will control the 110th Congress, but it will not convene until January. But meanwhile, the 109th Congress — which the Republicans control — is in office, and its members (including many defeated Republicans) will be returning to finish up their second session.
The lame duck session has work to do — such as passing several carried-over appropriations bills (including HUD’s) — and work it could do, such as reconciling the House and Senate GSE reform bills and sending compromise GSE regulatory reform legislation to the President for signature.
In fact, the 109th Congress could have done this earlier, but had reached an impasse, or at least a pause:
Proposed legislation has been stalled because lawmakers cannot agree on how to control the scale of the companies’ investments. Critics contend their sheer size makes them a threat to the stability of global financial markets.
In political terms, Democrats are GSE supporters, Republicans are GSE skeptics. (Departed former CEO Franklin Raines was President Clinton’s OMB Director) Additionally, the Bush Administration is even more skeptical than the Republican Senate, and the President had previously threatened to veto even the Senate’s legislation, to say nothing of the House’s milder version, with its 5%-of-profits half-tithing provision. The halt-tithe was the brainchild of Barney Frank, who in the 109th Congress is ranking minority member of the House Financial Services Committee, but who in the 110th will be its chair.
You know it’s an official picture because his hair is combed
So the Republicans could conference between the House and Senate bills if they could reach agreement. Or, if the Republican leadership were worried about corralling the votes in one body, the Senate could simply accept the House-passed version — if they thought the legislation could be enacted.
Yet the Administration had previously signaled veto. Why would it reverse course and accept the House legislation now?
Because sometimes it’s cool to be a lame duck
Because, from the Administration’s perspective, the House bill is better than nothing — which is what the 110th Congress might well enact. Indeed, the GSEs are probably hoping for a no-action 110th:
Former Freddie Mac lobbyist Mitchell Delk
Mr. Delk is hardly an unbiased source: he resigned as a lobbyist because of alleged fundraising improprieties.
said the impetus for legislative action has faded.
“I think the crisis has abated,” he said. “Now that there is really no crisis, one could argue that . . . the risk of draconian action by the Congress, regardless of which party is in control, has abated.”
Compared with a no-action Congress, the House legislation looks good for both the Administration and Mr. Frank:
· The Administration gains an improved regulatory structure.
· Mr. Frank gains the half-tithing 5%-of-profits, worth $400 million a year for affordable housing, at no cost to the Federal government.
Here then is the prospect of political pragmatism: doing business on an issue for mutual benefit.
Despite the GSEs’ protestations of having reformed themselves, there is plenty of reason to be concerned, starting with this Boston Globe observation:
Fannie Mae owns or guarantees about 20% percent of the $10.5 trillion U S home loan market.
This is a gigantic sum.
Imagine having a million million-dollar bills
$2.1 trillion dollars is the Gross Domestic Product of France. As I discussed in my extended series on Fannie Mae, that much leverage has enormous volatility and systemic risk for taxpayers, the more so when Fannie Mae’s accounting and financial control (previously used to give the illusion of smoothness) remain unproven, leaving taxpayers at grave risk:
The government-chartered company, which in May estimated it would spend $800 million this year revamping its bookkeeping, will also spend more than $200 million preparing financial statements and filing reports to the Securities and Exchange Commission, Fannie Mae said in a regulatory filing yesterday.
That’s some half-year regular reporting cost!
The $200 million “is a pretty eye-popping number for six months of regular, ongoing financial statement preparation,” said Matthew Park, an analyst at Prudential Equity Group Inc. in New York. The spending disclosed yesterday increases the total cumulative costs from the faulty accounting to $1.62 billion.
The Administration’s previous objections have been that proposed legislation is not tough enough. But compared with the status quo, it would be an improvement to the Administration. As reported in the Washington Post, HUD’s Office of Federal Housing Enterprise Oversight, which exposed the previous shenanigans, is actively rooting for new legislation:
In an interview earlier this week, [OFHEO Director James B. Lockhart III] said legislation is needed to strengthen supervision of the companies.
“These companies still cannot produce audited accounts. They’re at least several years away from restoring themselves to full financial health, having proper internal controls,” he said. “I think any company that cannot produce audited financials is in a crisis.”
In fact, Mr. Lockhart has taken such steps as he can:
The chief regulator of Fannie Mae and Freddie Mac yesterday tightened its rules for overseeing the accounting, executive compensation and corporate governance practices at the two mortgage finance giants.
The Office of Federal Housing Enterprise Oversight said the changes, part of a series of “guidances” for its examiners, were intended to address problems the agency uncovered during its investigations into accounting problems at the two companies.
The guidance issued yesterday was effective immediately because it is considered a detailed elaboration on existing regulations and does not require a public comment and notice period.
Though these changes are constructive, they are also minor, and as indicated merely elaborate current regulation. Tougher oversight requires legislation:
If it looks circular, it is.
One point addresses problems the government has had in recovering compensation from top Fannie Mae and Freddie Mac executives who were pushed out as a result of the accounting scandals. It requires the companies to include provisions in future employment contracts about returning bonuses and salaries if executives are fired “for cause” in cases of misconduct.
Lame ducks — elected representatives just defeated for re-election — have a unique political invulnerability. What else can anyone do to them? They are suddenly free completely to vote their consciences.
Lockhart said Congress could pass the legislation before the lame-duck session ends.
Will the lame-duck 109th Congress fly, or just quack?
If it walks like a Congress, and passes legislation like a Congress, then …
