Before the House Budget Committee today, Treasury Secretary Timothy Geithner testified that the Obama administration won't reveal its plans for the future of the government sponsored entities (GSEs) Fannie Mae and Freddie Mac until 2011. Given that these two companies were the largest of all bailout recipients, played a major part in the financial crisis and continue to incur massive losses, I'm shocked that there's no sense of urgency for their reform. The news gets worse.
First, how is the Obama administration so detached from the real problems facing the economy that the GSEs won't even hit its radar screen until 2011? Today, Freddie just announced yet another multi-billion dollar quarterly loss, this time $6.5 billion. The GSEs may not have been the only cause of the financial crisis, but they were certainly a central cause. That's part of the reason why I've argued that these institutions should just be wound down. House Financial Services Chairman Barney Frank (D-MA) also wants them abolished.
Yet, today Geithner also implied that the administration has no intention of winding down the entities. The Wall Street Journal reports him saying:
"It's very important that we make it clear to investors around the world that we will make sure...that those two important government-sponsored enterprises can continue the role they need to play," Mr. Geithner said.
In other words, they're not going anywhere. The administration will just make them work better. Good luck with that. Whenever you've got organizations with the kind of deep inside-Washington connections that Fannie and Freddie have, they're beyond reform.
I'm in the middle of reading former Treasury Secretary Hank Paulson's book about the financial crisis, "On The Brink," where he makes clear that the only way the Bush administration managed to take the GSEs under government control and fire their management was by a very secretive, difficult process that included a lot of regulator arm twisting. Once Paulson realized the problem they posed, he essentially used his signature brute force to make it happen. But he's gone now. And if the GSEs get their way, then it will be back to business as usual before long.
In fact, I'll make a bold prediction right now: we won't get meaningful reform for Fannie and Freddie during President Obama's first term. If the administration is waiting until 2011 to reveal its plans, that means it doesn't intend for them to matter. Republicans will likely have a majority in the House by then and more power in the Senate. 2011-2012 will be a time of profound gridlock. And when it comes to Fannie and Freddie, Republicans are generally pretty outspoken in their criticism of the firms. I find it highly unlikely that their ideas for reform will match up with the Obama administration's plans. That translates to nothing -- or nothing meaningful -- getting done.
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