Message To The GOP: Fannie Mae and Freddie Mac Is The Democrat Scandal We've Been Waiting For

Although you wouldn't know it from any of the reports in the drive-by media, the losses suffered by the recent market capitalization collapse of the government sponsored entities (GSEs) Fannie Mae and Freddie Mac over the last few months dwarf the investor losses suffered during the last great Washington financial scandal, Enron. Fannie Mae has gone from a high of $70.57 per share to a low of $6.68, a market loss of $63.89 per share. Freddie Mac has gone from a high of $67.20 to a low of $3.89, a market loss of $63.31 per share. Combined, that's a $127.20 loss in share value. For comparison, Enron lost $90.56 of its share value.

According to this WSJ article, Sinking Stock in Mortgage Giants Pains Employees, there are currently about 1 billion shares of Fannie Mae stock outstanding, and 650 million shares of outstanding stock in Freddie Mac. That means that Fannie Mae's market value dropped from a little over $70 billion to a little over $6 billion over the past few months. Freddie Mac experienced a similar loss - its market value went from a high of a little over $43 billion down to about $2.5 billion during that same time period.

That's a combined GSE market value loss of about $103.5 billion. In comparison, the entire Enron market value loss was a little under $68 billion. So where is the outcry today over the GSEs? It's simple - Enron was seen to be a Republican scandal with ties to a Republican President, and if the drive-by media ever did their job and investigated the GSEs, they know that Fannie Mae and Freddie Mac would prove to be a Congressional scandal with major Democratic Party ties. I mean, Clinton and the Dems put Jamie Gorelick in charge of Fannie Mae alongside former Clinton Administration official Franklin Raines immediately after her stint at the Justice Department (remember her memo on the "wall of separation" that led up to 9/11?). Over the six years she was there, she made over $26 million dollars. What, exactly, were her qualifications for the job? Or, rather, who did she have pictures of (a question that always must be asked if Clintons are involved)?

Gorelick and Raines managed to preside over one of the biggest accounting scandals that ever affected a major financial institution, uncovered in 2004 (Study Finds 'Extensive' Fraud at Fannie Mae). Do any of the readers remember the media making a big deal out of it at the time, aside from a few articles here and there? Had Republicans been involved, there would have been calls by the media and the Dems for perp walks for the lot of them, along with their Republican Congressional benefactors. Instead, as it involved primarily Democrats, Congress - in conjunction with the Democrat "lifers" in the Justice Department -  swept it under the table. Look at the Washington Post headline linked to above. The word "fraud" (let alone the words "extensive fraud") has a specific and significant criminal connotation. But instead of criminal investigations, we had civil cases. Image what would have happened if, say, John Ashcroft was the Vice-Chairman of Fannie Mae during that time? Bank-run instigator Chuck Schumer would probably orchestrate and conduct the arrest and perp walk of Ashcroft and his 'cronies' himself.

Speaking of the senior Senator from New York, how does the recent Schumer-initiated IndyMac failure compare to Fannie Mae and Freddie Mac? Well, IndyMac share value plunged a total of 95%, which represented a market capitalization loss of about $3.5 billion over two years. While the percentage loss is similar to the share value decline of Fannie Mae (90.5%) and Freddie Mac (94%), the GSEs' combined plunge happened in less than a year, and the market capitalization figure for the loss ($103.5 billion) dwarfs IndyMac's loss by a factor of 29.5 to 1. 

I'd suggest that readers visit this page over at the Wall Street Journal's website: Fannie Mayhem: A History. It's a great primer on this issue, containing links and short descriptions to articles and editorials on the GSE mortgage mess going back to early 2002. To the Wall Street Journal's credit, their editorial page has been screaming bloody murder about Fannie Mae and Freddie Mac for the better part of a decade. This was not an unforeseen collapse. It's just that Congress has ignored it, up until now.

As the GSE scandal is, at its heart, a Congressional scandal, GOP members might be hesitant to scream loudly about this for fear of one of their own getting caught up in it. That's a foolish way of looking at it, since part of what the Republicans should be doing right now is cleaning up their own ranks - and far more Democrats are involved that Republicans. Put more bluntly, if the GOP doesn't move on this issue first, the Dems and the media will pin this whole mess on them.

It's not as if some in the media aren't starting to try. Froma Harrop is a great (in my opinion) syndicated liberal columnist who serves on the editorial board of my home newspaper, the Providence Journal. But she is a Democrat, through and through, and would blame the Crucifixion on the Republicans if she though she could get away with it. In that light, her op-ed this morning, Mortgage meltdown a bi-partisan affair, is a bit surprising. Contrary to the tenor of the title, the most she can pin on the Republicans in her piece is the fact that it is a Republican Administration that is bailing out the GSEs (which she seems to oppose), and a complaint about a 2000 law sponsored by ex-Senator Phil Gramm. The rest is about Democrats - and she doesn't even mention the accounting scandal. Using Harrop as a barometer, it seems apparent that the Democrats have a lot of exposure on this issue.

As such, the Republicans in Congress, including John McCain, must move quickly to 1) demand that more attention be paid to the GSE collapse, pointing out the sheer numbers and tying it into the past accounting scandals, 2) tie current Congressional Democrats directly to it, 3) call for both civil and criminal investigations of the two mortgage giants, and 4) tie Congressional Democrats to the cost of the forthcoming federal bailout of the GSEs.

In addition, the GOP must point out that the Democrat-sponsored mortgage bailout plan just passed specifically orders the GSEs to take responsibility and ownership of most, if not all, of the failing sub-prime mortgages currently out there in the private sector. They're ordering the GSEs to assume this additional troublesome exposure at a time when those same GSEs, were they not government-sponsored entities operating under Congressional cover, would be declared bankrupt, closed, reopened under government control and put up for sale at discount.

This is yet another issue, like drilling, that is custom made for the GOP to run on this fall. It's going to take some courage, since some Republicans might be caught up in this. But if we want a cleaner Congress, and better government, we must let the chips fall where they may. Let's see if the GOP takes advantage of this affair which is being handed to them on a silver platter.