Back in December, while the holidays had everyone distracted, the Obama administration released a little-noticed announcement that it would be lifting the caps on federal assistance to Fannie Mae and Freddie Mac, the troubled mortgage giants that collapsed in the summer of 2008. With this surprise Christmas gift, the agencies were given unfettered access to the taxpayers’ wallet, and their absorption by the federal government became complete.
But the White House still is not accounting for Fannie and Freddie the way it accounts for other federal entities. A group of House Republicans has introduced a measure that would change that. The Accurate Accounting of Fannie Mae and Freddie Mac Act would compel the Office of Management and Budget to account for the losses sustained by the agencies since they were taken over by their federal regulator.
The administration is resisting, because this act would force it to do two things: First, according to the Congressional Budget Office, the administration’s policy of unlimited support for Fannie and Freddie would require it to add around $300 billion to this year’s record $1.4 trillion deficit — and some critics say it should add much more. And second, the act would force the administration to ask Congress to raise the debt limit — again. The author of the administration’s budget — and thus the man responsible for omitting Fannie and Freddie — is OMB director Peter Orszag. The omission puts Orszag in a tough spot: As CBO director in 2008, Orszag recommended that, because Fannie and Freddie were federally controlled and financed, they should be placed “on budget.”
“Obviously he answers to a different master now,” says Rep. Scott Garrett (R., N.J.), one of the Republicans who introduced the measure. “CBO is non-partisan, and now he’s acting in a partisan manner. The American public is looking for non-partisanship or bipartisanship, and not a partisan slant on the numbers.”
Doug Holtz-Eakin, who was a CBO director under President Bush, says, “The threshold question is, do Fannie and Freddie belong on the budget, and CBO has put them on, because CBO follows the guidelines that were laid down by the 1967 President’s Commission on Budget Concepts.”
Those guidelines impose the following tests: Who provides the capital for this enterprise? (In this case, the taxpayers.) Who determines the management? (The administration does.) And is this entity being used for policy purposes? “Well, yes,” says Holtz-Eakin, who now serves as president of the new American Action Network Forum. “We’re ordering Fannie and Freddie to modify mortgages to serve the administration’s goals, so that makes it a federal entity.”
The administration has accounted for the Treasury Department’s infusions of capital into Fannie and Freddie — an amount currently totaling approximately $100 billion and projected to grow by another $60 billion over the next two years — but it has not accounted for the subsidy costs of insuring the agencies against total collapse. As mentioned above, CBO puts those costs at around $300 billion. But others point to numerous other subsidies taxpayers have provided to Fannie and Freddie. The Federal Reserve has created almost $2 trillion in order to purchase mortgage-backed securities, reasoning that the purchases were necessary to keep the mortgage market liquid and mortgage interest rates low. The program has kept the agencies afloat, but with unknowable consequences for the future value of the currency. And then there is the mind-boggling size of the agencies’ obligations: According to one estimate, Fannie and Freddie’s liabilities total $6.3 trillion, all of which the government is now theoretically on the hook for.
Forcing the administration to use just the smaller CBO estimate would be a good start, but the GOP’s proposal faces a tough road in the House. “We will try to get bipartisan support, and I can think of a few members on their side who should sign on,” Garrett says. “We would hope that with the attention this is getting — and it is getting attention, especially for a dry topic — the administration would take note of this, because they do not need our legislation to do this.” The president has promised numerous times to adopt more honest accounting practices, and this is a step his administration should take unilaterally.
But the smaller estimate still hides the fact that Fannie and Freddie are large problems in need of a long-term solution. Holtz-Eakin, the new think tank’s president, jumps right in with a suggestion:
The right path forward is to recognize that Fannie and Freddie were in two lines of business: One line was the securitization and guarantee business, and that’s the line that arguably has a public purpose, although we should come back and debate whether that’s something the private sector couldn’t do.
And the second was just a large hedge fund. They would borrow, backed then-implicitly, now-explicitly by the taxpayer, and invest in risky assets. There’s literally no reason why they should be doing the latter. So we should wind down their large portfolios, get them out of the hedge-fund business, and if there is going to be a public entity, it should be a zero-profit entity that provides guarantees.
On the books, of course.
– Stephen Spruiell is an NRO staff reporter.