U.S. Senator Richard Shelby (R-Ala.), ranking Republican on the Banking, Housing, and Urban Affairs Committee, today spoke on the Senate floor in strong support of an amendment that he cosponsored with Sens. McCain and Gregg to the financial regulatory reform legislation. The amendment would put in place an orderly transition period to end the conservatorship of both Fannie Mae and Freddie Mac and eventually require each to operate – without government subsidies – on a level playing field with private sector competitors.
On Christmas Eve 2009, the Obama Administration lifted the $400 billion cap on taxpayer exposure to losses from Fannie Mae and Freddie Mac. Total taxpayer losses from Fannie Mae and Freddie Mac currently total approximately $145 billion. The losses continue to mount. In just the past week, Freddie Mac asked for 10.6 billion more taxpayer dollars; Fannie Mae an additional $8.4 billion.
The Democrats’ financial reform legislation does nothing to address this situation. Shelby has argued that meaningful financial reform legislation must address Fannie Mae and Freddie Mac, who were at the heart of the mortgage crisis.
Shelby has for years fought to protect taxpayers from the reckless actions of Fannie Mae and Freddie Mac. As Chairman of the Senate Banking Committee, he twice passed strong reform (2004, 2005) that would have reined in these entities. Each of these bills were blocked by Democrats.
Excerpts of Shelby’s statement are below, followed by the full text of his floor statement:
“During the debate on this bill, we have heard numerous times that we need to have a tighter grip on Wall Street to prevent those large Wall Street firms from harming small businesses on Main Street…
“If only my Democrat colleagues had been less concerned with Wall Street’s reaction in 2004 and 2005, perhaps we could have protected not only those ‘less sophisticated banks’ on Main Street, but also the millions of consumers caught up in the resulting inflated housing market and the millions of taxpayers who have had to foot the bill for the resulting debacle…
“Instead, the stalling of this legislation by Democrats ended any attempts of meaningful GSE reform until mid-2008 when Fannie Mae and Freddie Mac were already in serious trouble. Mr. President, the simple truth is that we didn’t act when we could have affected real change. Republicans were ready to enact real reform, and unfortunately for the taxpayer, Democrats were not. Let us not make that same mistake again…
“I urge my Democrat colleagues to ignore Wall Street and the special interests lobbying against this amendment. Join with Republicans and do something good for the American taxpayer – support the McCain/Shelby/Gregg amendment.”
The text of Senator Shelby’s statement, as prepared, is as follows:
“Mr. President, as part of the debate on the McCain-Shelby-Gregg Amendment, I want to take this opportunity to discuss the history of Fannie Mae and Freddie Mac. By doing this, I want to emphasize past Republican attempts at regulating and reforming these institutions, while also discussing their role in the financial crisis.
“The Government Sponsored Enterprises, Fannie Mae and Freddie Mac, were key players in the collapse of the U.S. housing market. Their multi-trillion dollar portfolios gave them the purchasing power to drive markets.
“In addition, false presumptions about their housing finance expertise and their connections to the government gave them further power to influence the housing market. And, let us not forget the GSE’s nation-wide lobbying and public affairs apparatus that was designed to keep reformers at bay, and their supporters flush with cash.
“When the GSEs began to buy sub-prime securities, other firms, including most of the Wall Street banks, took this as a signal that sub-prime mortgage securities were safe and worthwhile investments.
“In effect, Fannie Mae and Freddie Mac placed the Good Housekeeping ‘Seal of Approval’ on these risky instruments. As a result, the rest of the market engaged in this practice and the race to the bottom began. Ultimately, the GSEs collapse lit a wild fire that burned through the financial markets.
“Due to their miscalculations, Fannie Mae and Freddie Mac have been placed in conservatorship and have already cost the taxpayers well over $100 billion. Just last week, we learned that the GSEs will need another $20 billion in taxpayer assistance for their losses during the previous quarter.
“Mr. President, this did not have to happen. For years the warning signs were flashing, and Republicans made multiple attempts to adopt the necessary reforms. Unfortunately, those efforts were opposed by Democrats in the Senate Banking Committee and ultimately caused the many efforts put forth by Republicans to stall in the Senate.
“In 2003, as Chairman of the Banking Committee, I held multiple hearings on proposals for improving the regulation of the GSEs. I would like to read a portion of my opening statement from one of those hearings:
“The enterprises are large institutions. Collectively, Fannie Mae and Freddie Mac carry $1.6 trillion in assets on their balance sheets and have outstanding debt of almost $1.5 trillion. The Federal Home Loan Bank System is not far behind, with combined assets of over $780 billion and outstanding advances to member institutions of $495 billion. Due to the importance of the housing GSEs’ mission, and the size of their assets, I believe that the enterprises require a strong, credible regulator.
“I remain concerned that the current regulatory structure for the housing GSEs is neither strong nor credible.”
“Mr. President, at this same hearing, it became apparent that the two parties had very different perspectives regarding the need for reform. One of my Democrat colleagues noted:
“There is an old expression, if it ain’t broke don’t fix it. I think some of us here in the Senate believe that when we try to fix things that aren’t really broken, we can end up doing more harm than good.”
“Notwithstanding the mind set on the other side of the aisle, my Republican colleagues and I remained engaged in the effort to reform the GSEs by holding numerous hearings and closely tracking the GSEs’ activities.
“We decided that those who believed ‘things aren’t really broken’ were wrong. In the face of strong Democrat opposition and a relentless lobbying campaign by the GSEs and their supporters, we proceeded with a markup of The Federal Housing Enterprise Regulatory Reform Act of 2004.
“Mr. President, today I would like to reread portions of my brief opening statement from that markup which lays out the issues and the responses we crafted to address them.
“This afternoon the Committee will consider S. 1508, a bill to address regulation of the housing GSEs.
“Today, we are faced with the most important decisions considered by this Committee in years – determining the strength, independence and credibility of regulation of our nation’s Government Sponsored Housing Enterprises.
“The strength, independence and credibility of this regulatory system have tremendous implications for the future health and vitality of our housing markets, our capital markets and the economy as a whole.
“Fannie Mae and Freddie Mac currently have a combined $1.7 trillion of debt outstanding. To provide some perspective, our nation’s Treasury debt in the hands of the public stands at just over $4 trillion. The Federal Home Loan Bank System has also grown significantly since the 1990s and has a vastly expanded membership base.
“Its current regulator is not up to the task of providing adequate oversight of its significant role.”
“My statement continued:
“Fannie Mae is the second largest financial institution in the United States. Freddie Mac is fourth. Their debt is held by foreign central banks, insurance companies, money center banks and community banks. Because of the interest rate risk these GSEs must manage, they have an extensive network of derivative contracts.
“Should one of these institutions encounter significant financial difficulty it could make the S & L crises pale by comparison. I was here, as were some of you during the bailout of the S & Ls, and it was no pretty matter. It ended up costing the taxpayer $130 billion.
“This experience has only reaffirmed my resolve to ensure such a debacle never revisits the taxpayer. And, quite simply, the real truth is we cannot afford a crisis of the magnitude a failing GSE would pose.
“I approach this markup with a firm appreciation of the gravity and relevance of what we do here today. I state again, as I have before – I support the housing mission of the GSEs. Home ownership is the primary source of wealth for many Americans. It fosters strong communities and promotes stability for children and families.
“But, and I believe there is consensus in this Committee on this one point at least, they are not well-regulated and, therefore, pose significant risk to the taxpayer and the markets they serve.
“To be clear: they are not well-regulated because the regulatory structures and authorities that Congress created are insufficient and weak by design.
“And that is what the draft before us is all about. Reaffirming the important mission of the GSEs, creating a regulator that has all the tools and independence that other first class financial regulators require, and protecting the taxpayer. These are the guiding principles that animate the draft that I have put forth before the Committee today.”
“Mr. President, unfortunately for the taxpayers, politics got in the way of advancing credible public policy.
“Apparently the Democrats felt that it was better to block necessary change, adhere to the status quo, and ignore the risks to the financial system all while leaving the taxpayer fully exposed.
“We, the same Republicans who have been characterized by Democrats as being ‘pro-Wall Street’ and anti-regulation throughout this process, were trying to create a stronger regulator, raise capital standards, reduce risk taking, and put in place a resolution regime that would limit taxpayer exposure in the event of a firm failure.
“Mr. President, I would like to revisit the words of one of my Democrat colleagues who made the following statement as we debated the merits of the Republican GSE reform bill:
“Lord only knows where the economy would be today if it were not for the stability of the housing market in the midst of so much turbulence and the ability of Americans to draw down some of their home equity to engage in consumer purchases.”
“As we stood on the precipice of a housing and financial meltdown, my Democrat colleagues were opposing more regulation and promoting more consumer spending. As if that wasn’t bad enough, they were encouraging home owners to raid their home’s equity to finance their purchases.
“Another Democrat took issue with the fact that we attempted to give the regulator the power to place a GSE into receivership:
“Receivership, first, it does not have to be in the bill, but, second, to allow a regulator who may not like this institution to then sort of dole out little pieces of it one way or another and weaken the fundamental structure of Fannie and Freddie easily leads to its demise.”
“I am not sure whether my colleague then understood the basic concept behind establishing an orderly resolution process, but I hope the lesson has now been learned. Ironically, Democrat opposition to strong reform actually produced the exact outcome my colleague feared.
“When reform stalled in the face of Democrat objections, investors, once again, viewed Fannie Mae and Freddie Mac as ‘too big to fail.’ They were confident that Congress and the U.S. government would never allow them to go under.
“This, of course, gave the GSEs a significant financing cost advantage which led to their explosive growth and excessive risk- taking.
“Finally, and most telling, one of my Democrat colleagues was concerned about how Wall Street might interpret the regulatory changes that Republicans were advocating, stating:
“It is a fact that just mere speculation about the prospects of some provisions in the bill is sending shock waves through Wall Street.”
“Mr. President, when Wall Street became concerned that our legislation would provide a stronger regulator, require higher capital standards, mandate less risk taking, and establish a well-designed resolution regime, the Democrats came to Wall Street’s rescue, not the Republicans.
“When the choice was really between Main Street and Wall Street, the Democrats made it absolutely clear whose side they were on: they chose Wall Street and ultimately paved the road that led to this collapse.
“At this time, I ask unanimous consent to enter into the record a copy of the recorded vote of the proceedings that day. The result was a party line vote, with all twelve Republicans voting for GSE reform and all nine Democrats opposing it.
“That wasn’t the end of the story though. More than one year later, we tried again to pass these important reforms. The Banking Committee held more hearings leading to a markup of S. 190, the Federal Housing Enterprise Regulatory Reform Act of 2005.
“I will not read my entire statement from this markup, but I will read a part of it that describes the common sense steps we were attempting to take with our newest effort to pass GSE reform:
“My legislation creates a new regulator with combined oversight authority for both the safety and soundness and the housing mission of Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System.
“The new regulator will have general regulatory authority over all housing GSEs, including enhanced authority over capital requirements, and enforcement and prompt corrective action authorities that are comparable to those of the bank regulatory agencies.
“Among other enhanced regulatory authorities, the bill we will consider today includes clear direction on portfolio review for compliance with safety and soundness, mission and systemic risk.
“Under this proposal, the enterprises are permitted to hold those assets which promote the enterprises’ mission in the housing market.
“The bill also transfers the product review function from HUD to the new regulator and creates a two-tier approval process through which the enterprises must receive approval prior to offering any new product.
“The bill also establishes new criteria for approval of a product that will ensure that the enterprises remain focused on their statutory mission of facilitating a secondary mortgage market.”
“The new regulator will also have the power to conduct an orderly resolution of a failing or insolvent GSE through a receivership process. This clear and definitive process for dealing with a troubled enterprise is a critical tool for the credibility and strength of a new regulator.”
“Mr. President, unfortunately the Democrats did not share my view of increasing regulations on the GSEs, and their comments during this second attempt to pass meaningful reform are telling. One of my Democrat colleagues stated, “when the sink is leaking, you do not tear down the house, especially if the house has served you well.”
“Another recalled a critique he read of the bill before the markup which claimed, “It is like trying to cure the common cold with chemotherapy.”
“In fact, at one hearing, a Democrat colleague expressed an interest in hearing how the GSEs’ roles might be increased, when he explained:
“I am not only interested in hearing about the role GSEs currently play in the mortgage market. I am also interested in how their commitment to home ownership and affordable housing can be expanded.”
“In the end, the result of our 2005 markup was the same as our 2004 markup: a strict party line vote with all eleven Republicans supporting the reforms and all nine Democrats opposing them.
“Unfortunately Mr. President, the Democrats, once again, sided with Wall Street and the special interests by rejecting GSE reform and any attempt to move the legislation beyond the Committee.
“I ask unanimous consent to enter into the record a copy of the recorded vote.
“I would like to point out another bit of irony, Mr. President. Many of my colleagues who recently complained about the process regarding consideration of this bill, were some of the same people who took every measure to block all consideration of GSE reform.
“Actions have consequences, and in this particular instance they were almost immediate. As soon as it was apparent that GSE reform was dead, Fannie Mae and Freddie Mac took steps to dramatically increase their risk.
“The Government Accountability Office detailed this in a September 2009 report. The GAO discovered that in 2004 and 2005 the enterprises:
“Embarked on aggressive strategies to purchase mortgages and mortgage assets with questionable underwriting standards. For example, they purchased a large volume of what are known as Alt-A mortgages, which typically did not have documentation of borrowers’ incomes and had higher loan-to-value ratio or debt-to-income ratios.
“Furthermore, purchases of private-label MBS increased rapidly as a percentage of retained mortgage portfolios from 2003 through 2006. By the end of 2007, the enterprises collectively held more than $313 billion in private-label MBS, of which $94.8 billion was held by Fannie Mae and $218.9 billion held by Freddie Mac.”
“Recently, Daniel Mudd, Fannie Mae’s former COO and CEO, testified:
“While the market was changing, Fannie Mae struggled to meet aggressively increasing HUD goals. The goals were extremely challenging, increased significantly every year, and permitted no leeway to account for the challenging lending environment. Certain mortgages that may not have met our traditional standards could not be ignored.”
“While Mr. Mudd may be correct that these mortgages aided their ability to meet their HUD goals, it also should be noted that the GAO, in this same report, did not see these purchases as a benefit to their mission, stating: “the rapid increase in the enterprises’ mortgage portfolios and the associated interest-rate risk did not result in a corresponding benefit to the achievement of their housing missions.”
“Ultimately, this increased risk played a significant role in the demise of Fannie Mae and Freddie Mac. I would like to read one final section of that 2009 GAO report:
“According to FHFA, while these questionable mortgage assets accounted for less than 20 percent of the enterprises’ total assets, they represented a disproportionate share of credit-related losses in 2007 and 2008.
“For example, by the end of 2008, Fannie Mae held approximately $295 billion in Alt-A loans, which accounted for about 10 percent of the total single-family mortgage book of business.
“Similarly, Alt-A mortgages accounted for nearly half of Fannie Mae’s $27.1 billion in credit losses of its single-family guarantee book of business in 2008.
“At a June 2009 congressional hearing, former OFHEO Director James Lockhart said that 60 percent of the AAA-rated, private-label MBS purchased by the enterprises [had] since been downgraded to below investment grade.
“He also stated that investor concerns about the extent of the enterprises’ holdings of such assets and the potential associated losses compromised their capacity to raise needed capital and issue debt at acceptable rates.”
“Mr. President, we all know what happened once they were unable to raise capital. But, let us also remember the consequences that followed our failure to properly regulate Fannie Mae and Freddie Mac.
“Charles Duhigg of the New York Times, part of a group journalists that produced ‘The Reckoning,’ a series that explored the roots of the financial crisis, wrote in 2008 that:
“The ripple effect of Fannie’s plunge into riskier lending was profound. Fannie’s stamp of approval made shunned borrowers and complex loans more acceptable to other lenders, particularly small and less sophisticated banks.”
“James Lockhart supported this conclusion in his testimony before the Financial Crisis Inquiry Commission on April 9, 2010 when he observed that the GSEs:
“indirectly encouraged lower standards by purchasing private label securities. They also encouraged lower standards by not aggressively pursuing the obligations to repurchase mortgages if they did not comply with the enterprises’ underwriting requirements.”
“Mr. President, during the debate on this bill, we have heard numerous times that we need to have a tighter grip on Wall Street to prevent those large Wall Street firms from harming small businesses on Main Street.
“If only my Democrat colleagues had been less concerned with Wall Street’s reaction in 2004 and 2005, perhaps we could have protected not only those ‘less sophisticated banks’ on Main Street, but also the millions of consumers caught up in the resulting inflated housing market and the millions of taxpayers who have had to foot the bill for the resulting debacle.
“Instead, the stalling of this legislation by Democrats ended any attempts of meaningful GSE reform until mid-2008 when Fannie Mae and Freddie Mac were already in serious trouble. Mr. President, the simple truth is that we didn’t act when we could have affected real change. Republicans were ready to enact real reform, and unfortunately for the taxpayer, Democrats were not. Let us not make that same mistake again.
“The McCain-Shelby-Gregg GSE amendment takes several important steps to reform the GSEs.
“It provides transparency to the conservatorships of the GSEs by establishing much needed investigative oversight. It also requires Fannie Mae and Freddie Mac to be included in the Federal budget as long as they are in conservatorship or receivership status.
“It reestablishes taxpayer protections that were abolished by the Obama Administration last Christmas Eve, and it requires that Congress be involved in any decision to spend additional resources to stabilize the housing markets.
“Finally, it establishes a definite end to the ongoing conservatorships of Fannie Mae and Freddie Mac and paves a responsible path forward by refocusing their efforts, installing proper safeguards, and untangling the U.S. taxpayer from this mess.
“I urge my Democrat colleagues to ignore Wall Street and the special interests lobbying against this amendment. Join with Republicans and do something good for the American taxpayer – support the McCain/Shelby/Gregg amendment.