Gretchen Morgenson on Fannie Mae, Barney Frank, June O'Neill, and Walker Todd
By David Henderson
Last week, NPR did a great interview with Gretchen Morgenson of the New York Times in which she discusses highlights of her recent book, Reckless Endangerment: How Outsized Ambition, Greed and Corruption Led to Economic Armageddon. It’s co-authored with Joshua Rosner. Walker Todd and June O’Neill come out smelling like roses: they saw through some of this early on. Barney Frank? The opposite.
On Barney Frank:
One of the really big beneficiaries, albeit indirectly, was Congressman Barney Frank of Massachusetts. Back in 1991, when Congress was writing the legislation that would, you know, enhance or improve the oversight of Fannie Mae, or so they thought, Frank actually called up the company and asked them to hire his companion, who had just gotten an MBA from the Amos Tuck School of Business.
So that was an example of the kind of thing that Fannie Mae would do. Now, when I asked Mr. Frank about this, I asked him, did it have any impact on his approach to the company. You know, was it a conflict? Did he feel that it had been a conflicted, put him in a conflicted spot? And he said absolutely not, that he didn’t really remember being interested or having much to do with the 1992 legislation.
But the record shows that he was very aggressive and really tough on those who were testifying in Congress about reining in Fannie Mae and Freddie Mac. He was very aggressive to, for instance, the head of the Congressional Budget Office at that time, who was trying to call for increased capital requirements and to call for a focus on safety and soundness at Fannie Mae, that Frank really took him apart in testimony.
On June O’Neill [who, by the way, did the article, “Comparable Worth,” for the first edition of The Concise Encyclopedia of Economics.”]
Ms. MORGENSON: Well, first of all, before the report was published, Fannie Mae sent a couple of its top executives to see June O’Neill [at the time, head of the Congressional Budget Office], to try to persuade her not to publish the paper.
She described it as being visited by the mafia, and it was an interesting meeting because these two executives could not really explain why the CBO report was wrong. They couldn’t pinpoint the errors in the analysis.
But what they ended up doing was again speaking in these bromides about homeownership, the costs of homeownership, how Fannie Mae, you know, wrapped itself in the American flag, essentially.
And so they tried to get her to tone it down, to not publish it as is, and she stood up to them. But that was not the end of it. She had to go and deliver her report to Congress, as required under the 1992 act.
And when she did, she had to withstand a firestorm of criticism from Fannie’s friends in Congress who were literally reading from scripts that the company had supplied to them.
On Walker Todd:
So it was an interesting moment in the writing of that law, that there came a sort of an amendment that had been brought to the floor by Chris Dodd which enabled insurance companies, brokerage firms, non-bank financial companies to tap into the Federal Reserve’s special powers in time of crisis.
What that means is that these firms that had not been able to gain access to Federal Reserve borrowings in time of crisis – insurance companies did not have access. Brokerage firms had not had access. It was really only banks that were able to call on the Fed in times of trouble. This small, unnoticed part of the bill that was carried by Dodd expanded the federal safety net to include these companies.
It was a moment nobody noticed, except for Walker Todd, who was a research fellow at the Federal Reserve Bank of Cleveland. He thought this was fascinating, because the law that this was buried in was supposed to, you know, restrain the ability of financial companies to harm the taxpayer and to create losses that would be funded by the taxpayer. So it was counterintuitive. It was a paradox to Walker Todd that this small thing was inserted into the bill.
He tried to write about it. He, in fact, did write about it. He discovered that it had been inserted by the financial services companies at their request, and he tried to publish a paper talking about this expansion of the federal safety net. He came up against a buzz saw of criticism from the Federal Reserve Board in Washington. They tried valiantly to prevent the Federal Reserve Bank of Cleveland from publishing Walker Todd’s report.
They failed, happily, and the report was published. But it was very, very interesting the degree to which the Federal Reserve Board seemed to want to keep that little amendment under wraps and to keep it from having the sunlight shone on it by this report that Walker Todd had produced.
HT to Greg Mankiw.