‘Don Quixote’ Explains A Long, Lonely Crusade
Criticizing mortgage giants Freddie Mac and Fannie Mae does not win one a lot of friends on Capitol Hill, and no one knows that better than Rep. Richard Baker (R-La.).
“I was out there on my own,” the nine-term Congressman says of his early days in Congress. “I was a Don Quixote.”
But now that Freddie Mac, the second-largest government-sponsored enterprise, is in hot water, the subcommittee chairman who oversees them hopes his long-stalled reform crusade will get a boost.
While he said he “can’t go there quite yet” in terms of telling colleagues “I told you so,” he is holding a hearing today as to probe whether there is enough oversight of Fannie and Freddie.
The lawmaker has long warned that the gigantic quasi-governmental companies could get into big trouble. That trouble came June 9, when Freddie ousted its top three executives in response to a brewing accounting scandal.
Just days before the bombshell, its regulator, the Office of Federal Housing Enterprise Oversight, had publicly signed off on Freddie’s pending earnings restatement.
Now Baker wants to know why the OFHEO did not question Freddie’s management until after it dismissed its chairman, president and chief financial officer.
“Precisely what transpired at Freddie Mac remains unclear and will take the combined effort of several ongoing investigations to unravel,” he said. “What is clear, however, is that this episode is but a symptom of a much larger problem of gaps in Freddie’s current regulatory supervision.”
Baker’s suspicions of Fannie and Freddie date back to his days as a real estate broker in Baton Rouge, La.
Back then, he did not completely understand how the mortgage behemoths worked. Upon coming to Congress in 1987, he began to look more closely.
“As a new Member in the minority, I didn’t have a lot to do,” Baker said half-jokingly.
So he began talking to regulators and requesting reports from the General Accounting Office. Baker admits the topic was not very sexy.
“It didn’t make very good cocktail conversation,” he acknowledged, but “I had great concern” about the ramifications if Fannie or Freddie failed. And, still smarting from the savings and loan crisis, he wanted to help avert a repeat.
Fannie and Freddie’s critics worry that even though the companies are private, their government charters falsely lead investors to think the federal government would bail them out in the event of a failure.
Furthermore, with Freddie now holding or guaranteeing one of every six mortgages (and Fannie even more), close observers fear, in the words of Baker, that the giants are “too big to fail.”
Despite such concerns, Baker said his attempts at reform have been rebuffed time and time again.
“There was no way to move anything” of substance, he said.
Even though he has headed up the subcommittee on capital markets, insurance and government-sponsored enterprises in its different incarnations — the jurisdiction changed when the House transformed the former Banking Committee into the current Financial Services Committee — since the 104th Congress, his reform efforts have repeatedly stalled.
Baker attributes that to the fact that Fannie and Freddie are one of the “best political forces in Washington.” He added that Fannie in particular is “enormously effective” at lobbying.
Both have donated generously to parties and candidates. Last year, Freddie contributed $4 million in soft money to political parties and Fannie dispensed $1.8 million, according to the Center for Responsive Politics.
While Baker “always thought something big would happen,” he said he could not have predicted the debacle at Freddie.
“I thought it would be Fannie first,” he said, “not management risk at Freddie.”
While he expects his critics to say “Baker’s off on a tangent” again, he hopes the time for reform is right.
But he’s hesitant to make any predictions, saying: “I’ve been up and down so many mountains in this effort.”
While people may wonder why he has toiled on a relatively obscure topic for so long, even his opponents do not impugn his motives.
“He doesn’t want another savings and loan crisis; not on his watch,” said one industry source who spoke on the condition of anonymity. “He’s very vigilant.”
Looking at Baker’s campaign contributions, he has received generous amounts of money from the industry — including members of FM Watch, a group formed to force concessions from the GSEs.
“This is not work you would do to bolster your campaign coffers,” Baker said. “You have to believe in it. [Almost everyone] has to work with Fannie and Freddie,” even the same banks and lenders that criticize them, he said.
“It’s been a lonely fight,” Rep. Spencer Bachus (R-Ala.) said of Baker’s crusade. “When he believes in a cause, he doesn’t let politics or public opinion sway him and I admire that,” Bachus said.
Bert Ely, an independent financial services industry analyst who has written extensively about the dangers of Fannie and Freddie, sang the praises of Baker.
“He’s doing the Lord’s work,” Ely said. “He has genuine concerns about the risk they pose to taxpayers as well as the [anti-competitiveness] that stems from the fact that they are government-sponsored enterprises.”
Nonetheless, Baker has a tough sell ahead of him on Capitol Hill.
“I like him personally, but we disagree on this issue,” said Rep. Harold Ford Jr. (D-Tenn.), who sits on the Financial Services Committee.
“I can’t say definitely [but] according to what I have been briefed, it is not a systemic problem,” added Rep. Paul Kanjorski (Pa.), a veteran Democrat on the panel. “This is not Enron.”
But even Fannie and Freddie’s most ardent supporters cannot overlook the possibility that at least some minor changes are needed.
Kanjorski said he supports beefing up the regulator, while Ford went so far as to say Congress should examine whether the OFHEO is up to the task.
“Is the OFHEO capable?” he asked. “Is it credible?”
Bachus, a senior committee member, said Congress needs to be careful not to overreact and upset the markets. He thinks the GSEs do a good job, but he would support changing their regulatory structure.
He suggested moving Fannie and Freddie’s oversight responsibility to the Office of Thrift Supervision, or restructuring the OFHEO under Treasury’s umbrella.
In 2001, Baker proposed a bill that would have eliminated the OFHEO and put the Federal Reserve Board in charge of regulating GSEs.
Financial Services Chairman Mike Oxley (R-Ohio) pushed aside that proposal, prompting Baker’s detractors to cite it as an example that he did not have the support of his own chairman.
Baker denied that Oxley abandoned him, saying the chairman recognizes the need for reform but current events forced the committee off course.
Enron, the Sept. 11, 2001, terrorist attacks, and other matters “took us off our agenda,” Baker said. But he believes that Freddie’s actions brought the issue back to the forefront, and Baker claims to have Oxley’s full support in pursuing the matter.
Baker suggested that if he is successful, the home loan banks, Sallie Mae and other GSEs better watch out.
“Success in this arena will have implications for all of them,” Baker said, adding that his next project may be tackling the Tennessee Valley Authority.
The agency most people probably have not even thought about since President Franklin Roosevelt created it during the Great Depression could become Baker’s next quixotic quest.
“It’s not a GSE but it has a similar arrangement [with the federal government],” he said. “I’ve been quietly asking about them.”