Markets breathed a sigh of relief on Monday following the government bailout of the debt holders of Freddie Mac and Fannie Mae. But one wonders if that sigh is like that of the murderer who received life in prison rather than the death penalty. Once the immediate threat was removed then the reality of the long run set in, and it isn’t pretty.
We have a nasty mess our hands, and it isn’t helped by the fact that few of the parties to the problem have faced up to what the true causes were. For example, consider the observations of Senator Shelby quoted in a Bloomberg article on Tuesday, September 9.
“Once they got someone looking closely at Fannie and Freddie’s books, they realized there just wasn’t adequate capital there,” US Senator Richard Shelby of Alabama, the ranking Republican on the Senate Banking Committee, said after a briefing by Treasury officials. “They found out they had a house of cards.”
Coming from someone who was in Congress during the accounting scandals of the Frank Raines era and the failure of Freddie and Fannie to produce audited financial statements for many years, such a statement is incredible. The regulators and accountants have been in those two institutions for several years, trying to unravel the creative regulatory capital accounting they employed. It is hard to believe that the whiz-kids from Morgan Stanley were able to divine in less than a couple of weeks accounting problems that outside accountants and regulators couldn’t discern in years.
The fact is that problems weren’t found because no one wanted to find them. And if they were found, the fallout from Congress, as the Wall Street Journal’s Tuesday editorial correctly points out, would likely have been to protect the institutions from regulatory sanctions.