Bigger Than Enron: Bailout for Fraud-Ridden Fannie Mae

by Hans Bader on July 14, 2008 · 21 comments

Following in the wake of Friday’s massive bank failure, and the Senate’s passage of an economically destructive and pork-filled mortgage bailout bill that will further destabilize housing markets, the federal government is now moving to bail out the mortgage giants Fannie Mae and Freddie Mac.  It will cost the treasury (and taxpayers) billions of dollars to bail them out.  Fannie Mae, which helped spawn the mortgage crisis, has engaged in accounting fraud worse than what happened at Enron in order to inflate its managers’ bonuses. 

Fannie Mae, an unaccountable entity set up during the New Deal, is nominally private, the way Amtrak is, but it operates much like a government agency.  (The Supreme Court ruled in its 1995 Lebron decision that Amtrak is really a government agency, even though Congress declared it to be private in its enabling statute).

Fannie Mae passes its costs and risks on to the taxpayers, while relying on its supposedly “private” status to allow its managers to collect inflated pay that is the envy of many private sector companies.  It has been run by cronies of liberal politicians like Franklin Raines and liberal power broker Jim Johnson.  But even liberal newspapers like the Seattle Post-Intelligencer have documented scandalous accounting manipulations at Fannie Mae.  As the Post-Intelligencer reports, Fannie Mae’s vice president for audits all but ordered employees to engage in accounting fraud to increase the bonuses of Fannie Mae’s managers:

“‘You must have 6.46 branded in your brains. You must be able to say it in your sleep, you must be able to recite it forwards and backwards, you must have a raging fire in your belly that burns away all doubts, you must live, breathe and dream 6.46, you must be obsessed by 6.46,’ a corporate officer told his colleagues in the year 2000.  This was no ordinary company. It was Fannie Mae, a government-sponsored private company that helps banks finance mortgages, and the company vice president was not a cheerleader or a sales manager but the senior vice president in charge of internal audits.”

CEI has long warned about the danger to our financial system posed by Fannie Mae and other unaccountable government-subsidized lenders.

In 2006, CEI filed a lawsuit to curb unaccountable government agencies, called Free Enterprise Fund v. Public Company Accounting Oversight BoardCEI is suing the Public Company Accounting Oversight Board, which was set up by Congress, and declared to be “private” (and thus unaccountable under open-government laws), even though it can impose multimillion dollar fines, and has generated red tape that costs the economy at least $35 billion per year.  CEI argues that this violates the Constitution’s Appointments Clause and separation of powers.

Hans Bader July 14, 2008 at 8:58 am

The Supreme Court's 1995 Lebron decision is, alas, probably insufficient to judicially classify Fannie Mae as governmental. Like many quasi-governmental corporations that enrich themselves at taxpayer expense, it probably does not meet the exacting criteria for being RECOGNIZED as governmental by that decision, even though it might as well be from the vantage point of hapless taxpayers forced to bail it out.

Much of its board is not appointed by the federal government (unlike, say, the Public Company Accounting Oversight Board, whose members are entirely picked by the federal SEC commissioners).

And it does not have broad regulatory powers, the way that the PCAOB, which can impose multimillion dollar fines, does.

It doesn't satisfy each of the Lebron factors for qualifying as a governmental entity, the way that the PCAOB and Amtrak, classic examples of governmental agencies, obviously do.

Lebron illustrates that being labeled as "private" by Congress, or being chartered as a "private" institution, is not enough to make a governmental agency "private" for purposes of the Constitution (much less truly private in fact).

But many corporations that are subsidized by the taxpayers and have an incestuous relationship with government officials nevertheless are not deemed governmental entities, even after the Lebron decision.

Rod September 7, 2008 at 7:20 pm

Many corporations, whether government, private or a murky mixture of the two, would not be so dependent on the Fed for bailouts from their greed and incompetence if the taxpayers simply refused to pay Federal income taxes. And the taxpayers would be better served because what would be their Fed tax money could actually be used for better local education, micro-loans etc. Besides, we know there is no law that says US citizens MUST pay federal income tax. If you refuse to give them money…if many refused…who would it hurt but the greedy bastards destroying the US. Remember, the US Fed is largely, as is the case in many other countries, controlled by the Bank of International Settlements in Switzerland. Check it out. Some people would say the country would fall apart if no federal income tax was collected. Oh yeah? Look at the country now!

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