When the Democrats claim they will now hold Wall Street accountable, I guess it depends on what your address is on Wall Street or perhaps who you know in Washington. The Democrats clearly anoint winners and losers in the financial regulatory restructuring bill sponsored by Sen. Chris Dodd (D-Conn.), and it is particularly interesting that the Dodd bill, and other Democrat-supported proposals, supposedly intended to close loopholes, actually create loopholes that benefit many people on Wall Street.
Perhaps the most glaring loophole in this legislation is what is not included in S. 3217: fundamental reform of the two largest recipients of taxpayer bailouts, Fannie Mae and Freddie Mac. Together they represent the two largest, most influence-exerting, regulation-avoiding, bailed-out institutions in America.
The failures of Fannie and Freddie have directly cost taxpayers more than $138 billion, so far. I say "so far" because just last week Freddie Mac announced it lost $6.7 billion in the first quarter of 2010 and that the company's net worth deficit was $10.5 billion as of March 31. As a result of the net worth deficit, the Federal Housing Finance Agency, as Freddie's conservator, will submit a request for $10.6 billion in additional taxpayer funding to the Treasury. This will bring total taxpayer funding of Freddie alone to $62.3 billion — with no end in sight.
Talk about a loophole — instead of developing a true plan to reform Fannie and Freddie, the House-passed bill specifically exempts them from the very regime it claims will end "too big to fail." That's why I have introduced legislation to reform Fannie and Freddie, H.R. 4889, the GSE Bailout Elimination and Taxpayer Protection Act, a version of which was also included in the regulatory reform alternative bill offered last year by House Republicans.
H.R. 4889 would end the conservatorship for both government-sponsored enterprises within two years and, if they are financially viable, allow them to resume operations for a transition period of three years where they would be subject to phased-in new limitations, including smaller portfolio holdings, increased minimum capital requirements, minimum loan down payment requirements and tighter limits on the size of mortgages that can be securitized. It would also permanently repeal the GSEs' misguided affordable housing goals mandate, which pushed the GSEs to purchase poorly underwritten loans for which taxpayers are now footing the bill. At the end of the transition, the GSEs' government-granted charters would expire, and they would be required to operate on a level playing field with their private-sector competitors without government subsidies.
Ending the taxpayer subsidies may not be the only way to reform the GSEs, but given the current options, it is clearly the best way. Other options such as nationalizing them or concocting a public utility model simply do not solve the anti-competitive market distortions the GSEs have caused, nor do they protect taxpayers from the hundreds of billions of dollars in possible bailout costs they now face.
Dodd's new financial restructuring proposal is yet another attempt to convince the American people that if only the government possessed more power in 2008, there never would have been a credit crisis. More government regulations and more bailouts, Dodd and his cohorts illogically argue, will be the solution to the problems caused by failed government policies and taxpayer bailouts. The American people, however, are smarter than that.
Protecting taxpayers is not a distraction, as the president recently suggested; it is a paramount goal of any true regulatory reform effort. Unfortunately, S. 3217, like the House bill before it, ignores the inherent and continuing dangers posed by the financial Frankensteins Fannie Mae and Freddie Mac.
Rep. Jeb Hensarling (R-Texas) is the ranking member of the Financial Services Subcommittee on Financial Institutions and Consumer Credit.