WASHINGTON   –  “Earlier in December, the U.S. House of Representatives took up legislation to reform the government agencies responsible for regulating the U.S. financial sector.  You might think that the point of this exercise would be to assure that the irresponsible pattern of lending and repackaging and insuring loans never, ever happens again.  You would be wrong.

The financial regulatory bill had a number of shortcomings, but one major shortcoming was clear:  Fannie Mae and Freddie Mac were completely left out of sweeping new rules affecting everyone from community banks to international financial firms.  Though the mere mention of those two behemoths sends chills down the spine of federal regulators, this bill ignored those and other Government-Sponsored Enterprises.  Those entities are the institutions at the heart of the financial crisis that gripped our country in late 2008 and 2009, and ignoring them in reform will have ramifications for our economy for many years to come. 

Our financial crisis has had swift, severe and far-reaching ramifications on Main Street, U.S.A., but it was also more than a decade in the making.  During the slow lead-up to the crash, Government-Sponsored Enterprises like Fannie Mae and Freddie Mac were instrumental in guaranteeing a national sub-prime lending problem would seep into every other financial sector of our economy.  The GSEs put their own interests ahead of their public responsibility to assure a stable U.S. market for lending.  But the keystone in the effort to assure that lightning does not strike the U.S. economy twice in this decade ignores them.

As big government gets bigger, Congress is asking government to regulate everything but itself, a continuation of the poor policies that allowed that crisis to take place.  As of October 31, 2009, Fannie Mae alone held $771.5 billion in its gross mortgage portfolio.  They have another $2.8 trillion in mortgage-backed securities and other guarantees.  Fannie Mae has actually grown bigger since the crisis rocked the housing market a little more than a year ago.

In addition to letting GSEs off the regulatory hook, the bill presented in the U.S. House of Representatives did two other terrible things.  First, it bypassed the opportunity to simplify the financial documents used to initiate a loan or a mortgage or any other financial product you might need.  Instead of putting these documents in plain language, they will remain shrouded by the tiny-print legalese that enables predatory lenders to hoodwink tens of thousands of trusting consumers each year. 

Second, the bill takes the opportunity to extend the ability of the Treasury to bail out financial institutions indefinitely, using a new system of fees on the banks left in business after the crisis – the ones we trust, the ones in our communities, the ones who didn’t contribute an iota to the worst financial crisis of the last half-century.  A good bill would end TARP-style bailouts, not allow them to continue forever into the future.  I’ve repeatedly called for legislation to use every dollar repaid to TARP for reduction of the staggering U.S. debt.  But unfortunately some of my colleagues, and plenty of officials at the U.S. Treasury, cannot resist the urge to risk and spend this money again and again.

The American people understand that we need more and better protections for consumers of financial products.  They also understand that exempting GSEs is the legislative equivalent of leaving a huge part of the American securities markets unwatched.  We need more regulation of the American financial system, and we also need Congress to set aside its tainted relationship with Fannie Mae and Freddie Mac to get serious about reform.”