Shortly after the 2008 market collapse, Washington lawmakers hurried to bury the skeletons at the root of the Great Recession and housing crisis.
In recent months, however, with recognition that the "too big to fail problem" wouldn't stay buried forever, these same lawmakers have shown an openness to addressing the proper roles of the government-sponsored enterprises, Fannie Mae and Freddie Mac.
A few proposals have been advanced, none of which would make the housing market more efficient and also protect taxpayers from another potential bailout.
Sen. Tim Johnson, D-S.D., and Sen. Mike Crapo, R-Idaho, both members of the Senate Banking, Housing and Urban Affairs Committee, tweaked the original proposal put forth by Sen. Bob Corker, R-Tenn., and Sen. Mark Warner, D-Va.
But their bill drew fire from all sides and is unlikely to see the light of day on the Senate floor this Congress.
Should Americans be surprised? How likely is it that the same Washington which ...
• Pressured Fannie and Freddie to increase the proportion of mortgages to recipients that would more likely than not default;
• Looked past a myriad of illegitimate lending practices that accelerated the housing collapse;
• Used $188 billion in tax money to rescue the GSEs after the aforementioned policies were proscribed …
... would now become the Washington that would produce sound, effective GSE reform on its initial attempts?
James C. Miller IIIDespite much-needed reform, federal policymakers and President Obama should not expect private capital to rush in to sustain the housing market when “reform” condones and encourages the confiscation of property. That's akin to offering a deal with the devil.
What power brokers in Washington must do to advance successful housing reform is to lay out a plan that upholds the rule of law, maintains balance in the housing market, and maximizes value for taxpayers and investors alike.
Unfortunately, the one stronghold that has stifled progress on housing reform has been the federal government's blatant disregard of the rule of law.
The federal government's use and abuse of power began in 2012 when then-Treasury Secretary Timothy Geithner moved to take possession of the two GSEs, including their entire stream of future income, and “zombified” their shareholders.
Not only did these actions -- which, let it be noted, were codified by both the Corker/Warner and Johnson/Crapo proposals -- contravene common law against stealing, they were also explicitly forbidden by the Fifth Amendment's "takings clause."
Sen. Mike Crapo, R-Idaho (Photo via Project VoteSmart)
The victims of this illegal taking included pension funds, community banks and individual investors, many of whom felt "set up" by the government, since they had been courted to invest in the GSEs by repeated assurances that Fannie and Freddie were adequately capitalized and that the risk was negligible.
Sen. Tim Johnson, D-S.D. (Photo via CongressMerge)As is now clear from a 2010 memo authored by a Geithner deputy, the Obama administration had no intention of repaying Fannie and Freddie shareholders. It planned to confiscate the profits from the GSEs from early on.
Moreover, current reform proposals would hang private shareholders out to dry, and thus codify a taking more characteristic of a nation like Argentina than the U.S.A.
Fannie and Freddie need to be reformed. Whether the best solution involves keeping them around as GSEs, allowing them to be sold off to private investors, or putting them through a managed bankruptcy is up for debate.
But before Washington moves forward with reform legislation, one thing is clear: The fundamental rights of shareholders must be guaranteed.
What's at stake is a principle which if violated could have repercussions for financial markets that dwarf the government's stake in the GSEs.James C. Miller III is a former director of the U.S. Office of Management and Budget under President Reagan and a senior adviser at Husch Blackwell law firm.