Is the Bush Administration Trying to Take Down Fannie Mae?

It all came back to Friedman's single-minded message: Everything went wrong with the New Deal. That's when so many countries "including my own, got off on the wrong track" … Friedman's war on the "welfare state" and "big government" held out the promise of a new font of rapid riches -- only this time, rather than conquering new territory, the state itself would be the new frontier, its public services and assets auctioned off.
--Naomi Klein, The Shock Doctrine

"I love my grandfather," CNN chatterhead Glenn Beck complained on his eponymous show, "but I just want to slap him across the face for liking FDR. I think that was one evil son of a bitch."

Beck's complaint was echoed by his guest for the segment, supply-side economist Stephen Moore, one-time president of the Club for Growth, fellow at think tanks like the Cato Institute and Heritage Foundation, author of Bullish on Bush and now a Rupert Murdoch employee on the Wall Street Journal's editorial board. Together, they tag-teamed the history books so hard on Roosevelt and the New Deal that one could have been forgiven for forgetting that the four-time president's policies not only carried America through the Great Depression, but defeated both Hitler and Mussolini to score a geopolitical hat trick. In Beck and Moore's rhetorical attacks, FDR comes out looking like the very fascists he defeated, one who actually lengthened the Great Depression in an attempt to "nationalize," as Beck asserted, everything in sight and screw honest, hard-working businessmen out of their deserved paydays.

Of course, Moore and Beck are not alone: Naomi Klein's stunning The Shock Doctrine, a deeply researched and scathing condemnation of Milton Friedman's free-market ideology (and ideologues), catalogs neoconservative attempts over the last several decades to unwind everything FDR's New Deal has accomplished. Taken together, the attacks on FDR share one major goal: To privatize what is left of the New Deal and undermine its programs to help the poor and unlucky of the United States navigate their way into the middle class.

The Federal National Mortgage Association (FNMA), more commonly known by its portmanteau nickname Fannie Mae, is one such government entity created by the New Deal, initially to inject liquidity -- or cold, hard cash -- into the mortgage market. That is, until 1968, when it was converted into a private corporation that ceased to guarantee loans made by the government. Since then, it has existed in a nebulous state otherwise known as a government-sponsored entity (GSE), like its smaller GSE-in-arms Freddie Mac, which also buys and pools loans on the secondary market to package them into mortgage-backed securities for sale to investors on the open market. Even though Fannie and Freddie receive no direct funding or backing by the government, the loans that they securitize have the implicit support of the U.S. government behind them, thereby making it easier to land favorable lending rates, buy prices and what passes for financial security in the capital and mortgage markets.

And if that sounds like a bureaucratic labyrinth to you, that's because it's supposed to. Good luck navigating it. But the tangled acronyms and economic jargon still cannot hide one major problem: The GSEs are neck-deep in the housing meltdown and sinking fast.

As of last report, Fannie and Freddie were holding upwards of $4.8 trillion in mortgage-backed securities, financial instruments at the dark heart of our current housing crisis. And because many of those securities are built up of nothing more than debt, one could argue that they're holding onto a whole lot of nothing at all. Which, of course, is the realization that the markets came to over the last several months, when mortgage-backed securities collapsed like a house of cards, taking the American economy, and others it supports, down the rabbit hole.

The U.S. economy has yet to recover. The dollar is on what seems like a permanent nosedive, liquidity has dried up and been replaced with even more debt, stocks are tanking and both the legislative and executive branches are hastily arranging bailout plans that may do little to stop the recession many economists argue has already occurred. In other words, things suck.

Worse yet, there are those who believe Fannie and Freddie's weakened state and powers have been influenced by the Bush administration. The problem, however, is that those who so believe are ex-Fannie employees who have been sued for securities fraud. Franklin Raines, the Fannie Mae CEO from 1999 to 2004, who served under Carter and Clinton and was one of the few African-American suits running a Fortune 500, was accused in 2004 of manipulating earnings in order to skim bonuses for himself and his pals off the top. In 2006, Fannie Mae's regulatory body, the Office of Federal Housing Enterprise Oversight (OFHEO), made it official with a lawsuit against Raines and two other officials in hopes of recouping over $100 million of ill-gotten gains.

Those following the FDR breadcrumbs would appreciate knowing that Raines' middle name is Delano. Franklin. Delano. Raines. You can't make this stuff up.

For his part, Raines accused the White House of what the Washington Post described as "a coordinated plan within the Bush administration to depress Fannie Mae's stock price," one that goes by the name of "Noriega." That title is in honor of the Panamanian dictator captured by Bush's father, after hours of bombardment not by shock-and-awed heavy metal, but shockingly bad heavy metal music. Raines' attempts to subpoena the White House for pertinent records was met with the type of stonewalling the administration is well-known for. The subpoena was also summarily dismissed by judge Richard J. Leon, appointed by George W. Bush on Sept. 10, 2001. But the roots go deeper: Leon also served as special counsel in 1994 on the Whitewater investigation that failed to nail Bill Clinton with criminal conduct. Bush tabbed him to replace Judge Norma Holloway Johnson, who, for her part, ruled an investigation into whether or not Clinton gadfly Kenneth Starr had improperly leaked grand jury information.

The partisan soap gets thicker still.

The director of OFHEO, who is suing Raines and two other Fannie Mae employees, is James B. Lockhart, a classmate of Bush at Andover and Yale, as well as a loyal campaign contributor. Before Bush appointed him in 2006 to oversee the OFHEO and Fannie/Freddie, Lockhart was with the Social Security Administration and spent a few road trips with disgraced Sen. Rick Santorum and other public officials trying to sell the nation on -- what else? -- privatization. Since the Social Security Administration is one of FDR's most lasting New Deal legacies, the move raised the hackles of the watchdog group Citizens for Responsibility and Ethics in Washington, which claimed that the maneuver repeated the administration's "demonstrated pattern of misrepresenting important information to the public." Before that, deeper down the tree, Lockhart served four years under Bush's father as the executive director of the Pension Benefit Guaranty Corp.

And so the partisan battle lines have been drawn down the years, like the Capulets and Montagues of Romeo and Juliet, in concert with a depressed American economy and a cratered housing market. Meanwhile, Fannie Mae and Freddie Mac have come to possess about two-thirds of all the mortgage-backed securities on the books, an increase of almost 50 percent from the second-quarter of 2007. On one end, you have Raines and his Democratic associates accused of cooking the books, Enron-style, and getting no love from their Whitewater-hardened, Bush-appointed judge in hopes of shedding light on what they claim is a Bush conspiracy to weaken and/or privatize the public trust. On the other end, you have a series of well-connected Bush appointees trying to nail Clinton grads for skimming millions off the top of two titans in a mortgage-backed securities scam, built almost wholly out of debt.

Trying to pull nuance from this pitched battle is like trying to suck water out of sand.

"We're probably not going to go on the record for this interview," Mark Fabiani, a lawyer associated with the Raines defense team, as well as the Clinton and Gore teams, told me after what could only be described as an email courtship over the course of what seemed like weeks. (Raines plays hard to get.) "There are plenty of legal briefs filed in the various cases that state our position well," he added, "and we are inclined to rely on those."

Meanwhile, the OFHEO played easy to get. Going anywhere else was the problem.

"Are you an accredited journalist?" OFHEO spokesperson Stefanie Mullen asked me, after repeatedly refusing to answer one of my questions and referring me to Lockhart's recent speech to the American Enterprise Institute. Rather than read another speech to what Klein called "a Friedmanite think tank" in The Shock Doctrine, I need an original quote, I explained. "We don't comment on pending litigation. You need to go and do your homework," she added as she tried to, in her words, "educate" me.

Fine. We were breaking up already. I could handle that; except she kept calling, if only to argue that I wasn't interested in the "pertinent facts." I was perturbed but flattered. It was the first time an interview subject had called to stonewall me. You don't see that every day.

What was it Alice said? Curiouser and curiouser? Exactly.

"This is a curious matter," mortgage-backed securities hater, market columnist and The Long Emergency author James Kunstler explained to me via email, without knowing how dead-on his choice of words would become. "It's possibly a dangerous accusation, since it suggests something like a criminal conspiracy to defraud bondholders. I can understand why Raines would want to go this route, since apparently he was left -- in the immortal words of Nixon -- to 'twist slowly, slowly in the wind.'"

Twist is a nice word for what Raines has been left to do, although no one should shed a tear for a man who may have cooked the books to land $50 million in free money. But according to a brief filed in the case, the OFHEO has allegedly delayed and ignored court orders to supply documents critical to Raines' defense. That brush-off, familiar to those who follow the administration, is making Raines look more like a victim and less like a perp.

"At this late stage," argued Raines' attorney Kevin Downey, "OFHEO alone should suffer the consequences of its noncompliance."

Yet the Raines defense, as well as the OFHEO lawsuit, is irrelevant to the greater matter at hand, which is the future of Fannie Mae and Freddie Mac, two New Deal entities slowly being stripped, like most everything else FDR set in motion, of their mandate to serve the greater good. Instead, it has become a safe haven for scam artists trafficking in GSEs, MBSs, CDOs, SIVs and a bunch of other crafty acronyms that add up to screw jobs for Average Joe and Jane. And now that the two agencies, as well as their neutered overseer OFEHO, have been admonished by everyone from Democrats and Republicans to Fed Chairman Ben Bernanke for their economic gamesmanship, their future is as dark as Glenn Beck finds their past.

If FDR was a son of a bitch, as Beck whines, then that would make Fannie and Freddie the grandchildren of that same bitch. And the privatization payback, rumored to be from that very same bitch family, seems to be well on its way. Perhaps just in time for another Clinton to take office and rewind the whole curious narrative again. Until the Cheshire cat's immortal grin has been turned upside down into a pained frown.