When Congress slogged through the post-recession enactment of the 2010 Dodd-Frank Financial Reform Act, lawmakers basically punted on how to handle the government-sponsored enterprises known as Freddie Mac and Fannie Mae.
Both were taken into emergency conservatorship by the Treasury Department (costing taxpayers some $187.5 billion before they returned a profit to the Treasury). But a stalemate over the next step continues. Some conservatives press for privatization, and others for greater transparency. Some liberals favor re-routing the GSE profits into underserved housing markets.
Just released from Johns Hopkins University Press is perhaps the first juicy insider account of an executive’s experience during the 2008 financial meltdown at one of those private mortgage funding companies that many think of as quasi-government agencies.
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“Days of Slaughter: The Fall of Freddie Mac and Why it Could Happen Again” is a non-technical narrative and diagnosis of capitalist greed by Susan Wharton Gates, a 19-year Freddie Mac employee who resigned mid-recession as vice president of public policy (she now teaches business and public administration at Georgetown and Virginia Tech universities).
Her blow-by-blow account of Freddie Mac’s boardroom meetings, displays of competitiveness and firings of high-level functionaries, portrayed a financial industry plagued by “moral cowardice.”
She wrote: “From my vantage point as a communicator at Freddie Mac, the crisis was as much a result of sins of omission as commission. For every bad decision financial companies like mine made, I would guess there were a dozen in-the-know employees who swallowed their reservations and did nothing….There were far more bystanders than whistleblowers.”
Gates, who resigned in 2009 and was then subpoenaed, described getting the word from Treasury Secretary Hank Paulson that Freddie and Fannie were being taken over. “Employees would later learn that Paulson designed the stringent terms to ensure that the two companies would not be able to grow out of their problems without significant reform,” she said. Freddie Mac chief financial officer David Kellerman committed suicide, leaving Gates “as devastated as I was disillusioned.”
The causes of the housing-industry collapse at the heart of the Great Recession were broader, in Gates’ view. She cited a tough-to-sort-out mixture of “expansive Federal Reserve monetary policies, loosely regulated subprime mortgage brokers, unregulated and rapacious Wall Street investors seeking high-yielding assets, conflicted credit rating agencies that failed to accurately assess the risk of subprime securities, millions of suckered, naïve or conniving borrows, and widespread regulatory lapses.”
Her solution for Freddie Mac would combine both conservative and liberal housing philosophies. “Consumers need to slow down and exert greater control” over the pressure to invest in homeownership as the ticket to the American dream. But, she added, “Individuals need to take greater responsibility for becoming financially literate. Read the fine print.”
Arguing that the government-sponsored enterprises have already repaid the government for their bailout with $50 billion to spare, she declared that “before redistributing GSE profits, the entities actually have to make some.”
That means “deeper reforms are needed, reforms that penetrate to the core of the capitalistic system,” Gates said. She punted on recommending a precise reorganization, however, ending her narrative with a nod toward industry ethics reform using “spiritual guideposts and roadmaps.”
The Trump administration’s approach remains to be seen.