On June 17, British Petroleum Chief Executive Tony Hayward was grilled on his company’s role in the ongoing oil spill disaster in the Gulf of Mexico. Those hearings dominated business TV all day. Some lawmakers asked insightful and excellent questions, while some resigned themselves to emotional populist rants.
At one point in the discussion, U.S. House Energy and Commerce Committee Chairman Henry Waxman (D, Calif.) told Mr. Hayward “There is not a single email or document that shows you paid even the slightest attention to the dangers at this well”. At this time, from what we know, BP is at fault for this massive tragedy, and they have publicly taken responsibility and promised to pay for the clean-up and all economic and environmental consequences. On June 16, the day before the aforementioned hearings, BP did pledge a $20 billion escrow account to begin to ease the economic consequences of the disaster.
While the oil spill is a huge economic and environmental disaster, we would like to know the following: Having cost the U.S. taxpayer $145 billion, and still “leaking” at $20 billion per quarter, why aren’t Congressional leaders “doing something” about Fannie Mae and Freddie Mac? After all, they are the only body that can. We note that the 2000+ page Financial Reform bill in Congress’ Conference Committee has not a single word devoted to the reform of these hemorrhaging mortgage giants. Aren’t U.S. lawmakers just as irresponsible for this economic calamity as, it appears, BP’s management is for the oil disaster? The U.S. is currently suffering from the largest credit bubble in its history. More Americans have lost their jobs and their homes than at any time since the Great Depression. One of the major reasons for this mess is Fannie Mae and Freddie Mac.
As far back as 2001, the Economist was calling Fannie a “big scary monster”. The Wall Street Journal (WSJ), and its sister publication Barron’s, have dozens of articles going back to the late 1990’s discussing the risks of a housing and general economic meltdown related to the risks of Fannie’s and Freddie’s growing market share. One of our favorite articles in the WSJ (2002) compared Fannie Mae to Enron, due to “ambitious” accounting which helped executives “earn” outrageous bonuses. In addition, tens of millions of dollars were disbursed as political patronage via despicable director fees for Fannie and Freddie board positions. Where was the “Pay Czar” then? Why aren’t those directors being held accountable?
In summation, we believe that BP is a crisis that will define how the world extracts oil over the coming decades. We agree that many people will be harmed, and that restitution should be paid. We do have a problem with lawmakers pointing fingers while oil still leaks and before the reasons for the tragedy are known. The “leaks” at Fannie and Freddie, in our view, will ultimately cost significantly more to the U.S. economy and taxpayers than will the BP disaster. These same lawmakers should admit to a decade of playing down those economic risks. They should be grilled on TV and asked why they didn’t do anything for an entire decade while being warned of potential economic collapse. If BP CEO Hayward needs to go, then why not Barney Frank? He constantly downplayed the risks at Fannie and Freddie, and even encouraged more risks. Should these leaders be allowed to fiddle while Rome burns? Here are a few quotes, taken from a WSJ article titled “What They Said About Fan and Fred”, printed on Oct 2, 2008:
House Financial Services Committee hearing, Sept. 10, 2003:
Rep. Barney Frank (D., Mass.): I worry, frankly, that there’s a tension here. The more people, in my judgment, exaggerate a threat of safety and soundness, the more people conjure up the possibility of serious financial losses to the Treasury, which I do not see. I think we see entities that are fundamentally sound financially and withstand some of the disaster scenarios. . . .
House Financial Services Committee hearing, Sept. 25, 2003:
Rep. Frank: I do think I do not want the same kind of focus on safety and soundness that we have in OCC [Office of the Comptroller of the Currency] and OTS [Office of Thrift Supervision]. I want to roll the dice a little bit more in this situation towards subsidized housing.
Rep. Frank: I believe there has been more alarm raised about potential unsafety and unsoundness than, in fact, exists.
Having been apprised many times about the dangers at Fannie and Freddie, the American public should be as indignant toward Congress about the “massive leaking” of taxpayer dollars, the devastation to the economy, jobs and income and the resulting human suffering as Congress is about BP’s irresponsible behavior.
Robert N. Barone, Ph.D.
June 18, 2010
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