Mother Of All Financial Scandals: Fannie Mae and Freddie Mac

Stewart is a too-easy target, an overstuffed pink piñata
swinging in the wind, waiting to be thwacked by

every last critic
of capitalist excess. But the
stock-dumping doyenne is no match for the real mother of
all brewing financial scandals. That moniker belongs to
the twin behemoths,

Fannie Mae and Freddie Mac.

Who, you
say? Unlike Martha, or the three-piece-suited villains



, Fannie Mae and Freddie Mac haven`t been
plastered all over the tabloids and prime-time TV.
That`s because they are faceless, government-sponsored
enterprises in a complex, loosely regulated, highly
leveraged monopoly business that has engaged in
questionable accounting practices and put billions of
taxpayer dollars at risk—with plenty of private
profiteering for company executives and Washington
lobbyists, but almost zero accountability to the public.

As federally
chartered "government-sponsored enterprises," the
two institutions have been exempt from normal securities
regulations for almost their entire lives. Analysts
unable to decipher Fannie Mae and Freddie Mac`s
incomprehensible annual and quarterly reports have long
suspected book-cooking with regard to their real cash

This week,
the Wall Street Journal reported that Freddie Mac
faces an

SEC probe
over possible

accounting irregularities.
Investigators will
examine whether Freddie Mac
may have deferred some income to smooth out results in
future periods. The SEC will also probe the actions of
the chief executive and chief financial officer, who

fired on Monday
over an accounting review of earning

The news sent stocks south
and roiled some foreign markets as well.

Clothed in
politically correct fashions (“Catch the dream,”
beckons Freddie Mac`s

to boost minority home ownership; a
“leader in diversity,”
brags a Fannie Mae

press release)
, these public-private hybrids are two
dangerous pigs feeding at the federal trough. Congress
created Fannie Mae (nickname for the Federal National
Mortgage Association) in 1938 to bolster home ownership
during the Depression. Three decades later, it was
partially privatized, but retained a host of government
benefits. In 1970, Congress spawned Freddie Mac
(nickname for the Federal Home Mortgage Corp.) to
provide a lending competitor to Fannie Mae. Both
entities expand the pool of money for home purchasers by
snapping up loans that lenders make to homebuyers, and
then converting those loans into relatively safe
mortgage-backed securities that are attractive to

So, what`s
wrong with this picture?


Fred Smith
, president of the Washington, D.C-based

Competitive Enterprise Institute
, has noted, these
financial beasts are a textbook example of

"profit-side capitalism and loss-side socialism."

When things go right for Freddie Mac and Fannie Mae,
they keep the profits. But when things go wrong,
taxpayers—not just private shareholders, managers, and
employees—will be on the hook.

Freddie Mac
and Fannie Mae each receive $2.25 billion lines of
credit with the U.S. Treasury. These special pipelines
give the institutions an implied federal guarantee
available to no other private sector competitors in the
mortgage market. That protection makes them immune to
the costs normally associated with riskier and riskier
behavior. Moreover, Fannie Mae and Freddie Mac are not
required to pay state and local income taxes. In
addition, the standard for how much money the government
requires them to keep on hand in case homebuyers default
on their mortgages is lower for Freddie Mac and Fannie
Mae than for fully private banks and thrifts. The two
corporations receive an estimated $10 billion a year in
hidden taxpayer subsidies.

appointees to the companies` boards pocket millions in
stock options to bolster support on Capitol Hill.
Clinton-appointed board members at Fannie Mae include
March Rich lawyer Jack Quinn and Janet Reno`s lieutenant
at the Justice Department, Jamie Gorelick. At the helm
of Fannie Mae is another Clinton appointee, Franklin
Raines, who was paid more than $4 million and had almost
$6 million in unexercised stock options in his first
year at the helm.


both major political parties
have opposed
privatizing Fannie and Freddie.

If Martha
Stewart is the face of capitalist excess,

Fannie Mae

Freddie Mac
are the poster children for
government-sponsored gluttony. The potential fall of
Freddie Mac or Fannie Mae could rival the

savings and loan collapse
of the 1980s. Too bad the
Martha bashers, blind to the far greater catastrophes of

market socialism,
won`t pay attention until it`s too

Michelle Malkin [email
her] is author of

Invasion: How America Still Welcomes Terrorists,
Criminals, and Other Foreign Menaces to Our Shores

for Peter Brimelow`s review. Click

for Michelle Malkin`s website.