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Fannie, Freddie tentacles embraced many in Washington

File photo shows the headquarters of mortgage lender Freddie Mac in McLean
File photo shows the headquarters of mortgage lender Freddie Mac in McLean

By Tim Reid, Margaret Chadbourn and Mark Hosenball

WASHINGTON (Reuters) - While presidential hopeful Newt Gingrich was forced to defend his lucrative former role with Freddie Mac this week, the mortgage giant and its larger cousin Fannie Mae had a roster of Washington heavyweights on their payroll for years, many of them Democrats.

The two entities spent over $170 million on political and lobbying operations in a 10-year period leading up to the financial crisis of 2008 when both were seized by the government as they teetered on the brink of failure, according to the Center for Responsive Politics.

Fannie and Freddie hired figures such as Tom Donilon, now President Barack Obama's national security adviser, and Rahm Emanuel, Obama's former White House chief of staff, as part of a campaign aimed at protecting government ties that allowed them to borrow money cheaply from financial markets.

"It was a mob-like operation," said a senior congressional official who over the years dealt with the political and lobbying operations at the firms, the two biggest sources of U.S. mortgage finance. "They had tentacles everywhere."

Fannie Mae and Freddie Mac are congressionally chartered firms that buy loans from lenders and repackage them as guaranteed securities for sale to investors.

In turn, the debt they issue was seen as having implicit government backing. Since nearly going bust, they have received about $169 billion in taxpayer aid and the government has relied on them to help revive the housing market.

Gingrich was just one of a lengthy list of political power brokers with close ties to Congress and Republican and Democratic administrations hired by Fannie and Freddie as either board members, senior executives, lobbyists or consultants.

"They used to be the near-exclusive domain for Democrats," said John Taylor, president and CEO of the National Community Reinvestment Coalition. "But both Fannie and Freddie realized the perilous way of that strategy and eventually they began dealing with either party."

Emanuel and Donilon were hired when they were working in the private sector. Donilon was a top executive at Fannie Mae for five years, essentially running its lobbying operation. He departed in 2005.

Emanuel was named to the board of Freddie Mac by former Democratic President Bill Clinton in 2000, where he served for 13 months, earning more than $320,000.

POWER BROKERS

Fannie also hired other Washington power brokers during this time, including Bill Daley, who is now Obama's current White House chief of staff; Jamie Gorelick, a deputy attorney-general under Clinton; and Robert Zoellick, the current head of the World Bank.

From 1993 until 1997 Zoellick served as Fannie Mae's executive vice-president. Gorelick was vice chairman of Fannie Mae from 1997 to 2003, after she left the Clinton administration.

Kenneth Duberstein, former White House Chief of Staff for Republican President Ronald Reagan, served on the board of Fannie Mae from 1998 until 2007.

Another recognizable Washington name tied to the mortgage giants is a former director at the Office of Management and Budget during the Clinton White House. Franklin Raines, former CEO of Fannie Mae, was implicated in an accounting scandal for massaging earnings at the firm.

Congress and federal regulators played a role in their expansion as the housing market moved toward a peak by relaxing restrictions on the size of loans they could back and the speed at which their mortgage holdings could grow.

Conservative critics in particular accuse them of fueling the housing bubble at the heart of the 2008 financial collapse by securitizing loans made to people who could not afford them.

Gingrich, a Republican former House Speaker, came under fire this week for being paid about $1.6 million to $1.8 million as a consultant to Freddie Mac from 1999 until 2008. A person with an understanding of the arrangement confirmed the figure, which was first reported by Bloomberg Wednesday.

The two government-controlled firms have been a favorite target of this year's Republican presidential contenders, including Gingrich.

Gingrich even said the top Democrat on the House Financial Services Committee, Barney Frank, should be thrown in jail because Gingrich claimed he had close ties to lobbyists at Freddie Mac.

While both Republicans and Democrats eventually want to see the firms wound down, an overhaul of the mortgage system is expected to take years. The companies, which back about half of the U.S. residential mortgage market, currently benefit from an unlimited line of credit with the Treasury.

(Editing by Alistair Bell and Eric Walsh)

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