Freddie Mac's Latest $4.4B Debacle Fits the Formula for Political Scandals

Freddie Mac's Latest $4.4B Debacle Fits the Formula for Political Scandals
by Anita Folsom
11/10/2011

We have just learned that $4.4 billion is the total money lost in the third quarter alone by Freddie Mac, the mortgage-finance company run by the government. Should we be surprised that Freddie Mac lost so much in the housing market? No. History informs us that the definition of scandal is “politicians entrusted with tax dollars to run something.”

Here are some examples from history of government-run debacles. In August 1921, President Warren G. Harding looked for a way to help the hundreds of thousands of World War I​ veterans who had been wounded or gassed while in the service. Harding appointed Charles R. Forbes as the first director of the new Veterans Bureau​, with the stipulation that all government contracts issued by the bureau for construction and supplies be awarded by sealed bids. As director, Forbes’ budget for the Veterans Bureau was half-a-billion dollars per year, which was almost 10% of the entire federal budget.

Forbes quickly circumvented sealed bids by giving his co-conspirators inside information about veterans’ hospitals and where they would be built. Forbes was able to skim $225 million into his personal fortune (in 1920s dollars), while ignoring 200,000 letters from veterans asking for medical help and job training. Forbes fled to Europe with another man’s wife in 1923, and Charles F. Cramer, attorney for the bureau, committed suicide. When Forbes returned to Washington, President Harding​ was so angry with the mess at the Veterans Bureau that he reportedly grabbed Forbes by the throat and shook him “as a dog would a rat.” Forbes was convicted of accepting bribes and spent time in Leavenworth Penitentiary.

Another source of scandal is tax money set aside for politicians to use for corporate bailouts. During the 1930s, the Reconstruction Finance Corporation​ (RFC) was established by President Herbert Hoover​ to bail out corporations struggling during the Great Depression​. Such bailouts sound good in theory but not in practice, where history again records the disappointing results. Both Presidents Hoover and Franklin D. Roosevelt secured huge loans for friends and political cronies through the RFC. J. David Stern, for example, published the Philadelphia Record in the swing state of Pennsylvania, backing FDR’s candidates in elections. Roosevelt made sure that RFC pressure helped Stern receive a million dollars in bank loans when his newspaper nearly went bankrupt. Both FDR’s son Elliott and presidential brother-in-law Hall Roosevelt benefited from RFC loans. Even Coolidge’s former vice president, Charles Dawes​ (a Republican and great-great-grandson of William Dawes, who rode with Paul Revere), resigned as head of the RFC in 1932 and fewer than three weeks later accepted a $90 million loan from the RFC for his Central Republic Bank and Trust Company in Chicago. That loan would be valued at almost $1 billion in today’s currency.

And in today’s crisis at Freddie Mac, political pressure played a huge role. In the Wall Street Journal, economist George W. Calomiris points out that both Fannie Mae​ and Freddie Mac’s big trouble started in 2004, when leaders at the two institutions responded to federal mandates for more high-risk loans to consumers. Congress passed legislation demanding that lower-income applicants receive more loans. Therefore, Freddie Mac and Fannie Mae lowered standards to include no-documentation loans, despite warnings from experienced analysts both inside the bureaucracy and at policy centers. Total subprime and Alt-A mortgage originations were $395 billion in 2003. By 2004, the total swelled to $715 billion and was a walloping $1 trillion in 2006.

Now we see why the Founders created only a limited role for the federal government: National defense is a legitimate role, but not housing, banking or newspapers—or producing solar panels and selling them at a loss, which Solyndra did with $535,000,000 of taxpayer cash. We shouldn’t be surprised that Freddie Mac is leaking cash. Its counterpart, Fannie Mae, first went broke in the 1930s shortly after it was set up. Or is it the taxpayers who are being set up? To avoid scandals, we need to keep politicians at arm’s length from other people’s money.