NPR's Linda Wertheimer talked with New York Times columnist, Gretchen Morgenson, about Fannie and Freddie yesterday. It's not a pretty story.
... WERTHEIMER: The Securities and Exchange Commission last week accused six former officials - including former CEOs of Fannie and Freddie - of fraud, of ensuring investors that their portfolio of bad loans was substantially smaller than it really was. What's the likely outcome, do you think, of those cases?
MORGENSON: Well, as you know, the SEC rarely brings these cases to court. They generally settle. Usually, it's a monetary settlement, a penalty of some kind. So I'm anticipating that will be what happens here. It would be unfortunate, because I think that it would be very interesting to see what comes out in a courtroom, in a trial, because then the American people will really have a far greater grasp of what these entities were doing.
WERTHEIMER: Now, if you just go back to six former executives in these two large institutions, you're still not reaching back far enough to identify the people who set this thing in motion.
MORGENSON: That's correct. A catastrophe this large cannot happen overnight. This really began in 1991 and '92, when Congress was considering legislation to protect the taxpayer for just these kinds of losses. At the moment, they were worried about the S and L crisis, which, as you remember, had arisen out of a lot of failed banks. They were worried that these kinds of losses might be in Fannie Mae and Freddie Mac's portfolio, and they wanted to craft legislation that would increase the strength of the regulator and that would increase the capital requirements of the companies - i.e., money that they would have to set aside for a rainy day. But what happened was the company did everything it could and successfully defanged that legislation.
WERTHEIMER: Why were they able to do that? How did that work?
MORGENSON: It was a traditional lobbying effort in which they threw money at legislators. Both sides of the aisle received donations from Fannie Mae and Freddie Mac. It was a political machine par excellence.
WERTHEIMER: Now, is there any possibility of criminal prosecution for the losses at Fannie and Freddie? A lot of people did make a lot of money. Is there any chance that any of them will, you know, will have to take something more than a fine for what they've done?
MORGENSON: A very little likelihood. Certainly, the SEC is not allowed to bring criminal cases. They are not criminal enforcement entity. You know, we have seen absolutely no indication that the Justice Department is investigating Fannie Mae and Freddie Mac. And, you know, if you want real perverse paradoxes, let's face the fact that the American taxpayer, because we own these entities, are actually paying the legal bills of the executives who are being sued now by the SEC. ...NPR