Fannie Mae Ex-Officials May Face Legal Action Over AccountingThis is not the kind of headline any financial institution wants to see.
The issues surrounding Fannie Mae, however, go well beyond possible charges of accounting fraud. Even if the firm and all its officials had done everything legally, there is an ongoing policy problem. Fannie Mae and its brother institution Freddie Mac enjoy implicit taxpayer subsidies because investors believe that, if these "government sponsored enterprises" ever got into financial trouble, Congress would bail them out. This perception gives the GSEs an advantage over truly private firms when raising funds in financial markets.
GSE reform was one of the issues I worked on while I was at the CEA. Here is an op-ed I wrote for the FT in 2004, and here is a longer speech I gave on the topic. The issues have not changed radically since then.
I have spoken with economists from the Clinton administration about the issues surrounding the GSEs. There is no disagreement between their view of the situation and what we Bush economists thought. The issue here is not Republican versus Democrat. It is good policy versus a powerful special interest. So far, the powerful special interest has won the day, blocking in Congress any attempt at meaningful reform. But with headlines like the one above weakening the special interest, there is still hope for good policy.