Fanny, Freddy, and the Wheels of Justice

A complaint often heard from our more liberal friends is that no one has gone to jail as a consequence of the 2008 financial crisis. The same people who wax empathetic about draconian punishments and the prison-industrial complex when speaking of robbers and murderers suddenly become law-and-order hard-liners when it comes to any white-collared company man who might have violated part four, subsection C of a directive on a regulation issued pursuant to some Jacksonian-era banking law or another. Being flinty old conservatives of the lock-‘em-up school we always egg on our friends’ revenge lust, but notice that their enthusiasm flags when we suggest that the prosecutions begin with Fannie Mae and Freddy Mac.

The two government-sponsored enterprises are somehow exempt from the rampant anti-corporate sentiment among liberals, despite the fact that their profits are largely privatized and their executives lavishly compensated. We suspect that’s partly because the home mortgage giants were created by the sainted Franklin Delano Roosevelt, long hailed as shining success stories of his interventionist economic philosophy, and untainted by a pure profit motive. More urgently, attention must be averted from the key role that Fannie and Freddy and various government policies played in the current financial mess, lest it distract from the bizarre yet widely-believed theory that it was all caused by crazy free-marketeers eliminating the all-important regulation that prevented greedy bankers from trying to get filthy rich by giving loans to people who could never pay them back.

That’s why we were delighted to see the Securities and Exchange Commission has finally gotten around to taking legal action against several executives at both Fanny and Freddy for understating their holdings in subprime mortgages by many billions of dollars. It’s a lawsuit rather than a criminal proceeding, meaning it won’t result in prison or any of the hoped-for degradations that occur within, but the SEC’s news release warns they are seeking “financial penalties, disgorgement of ill-gotten gains with interest, permanent injunctive relief and officer and director bars” against the six defendants. If you’ve ever had your ill-gotten gains disgorged, with or without interest, you know how very painful that can be.

Fannie and Freddy as semi-corporate entities won’t be going to prison, either, as they have apparently signed a Non-Prosecution Agreement — the capital letters are provided by the SEC, which can presumably afford them — with the government. The agreement states that Fanny and Freddy “agreed to accept responsibility for its conduct and not dispute, contest, or contradict the contents of an agreed-upon Statement of Facts without admitting nor denying liability.” So far as we can tell, Fanny and Freddy won’t be required by the agreement to return the $150 billion in subsidies that have kept them afloat since 2008. This isn’t so satisfyingly harsh as a long stretch in prison, but semi-corporate entities can’t actually be imprisoned, and the agreement also requires that they “cooperate with the Commission’s litigation against the former executives.”

As lenient as the SEC’s actions might seem, they have already provoked outrage from Fanny’s and Freddy’s apologists. The New York Times, which enthusiastically supported the government’s efforts to lower credit standards back when the idea seemed to be working, offered a column that accused Fanny’s and Freddy’s critics of spreading “A Big Lie.”

Two of the big liars mentioned by name, Peter Wallison and Edward Pinto of the American Enterprise Institute, promptly fired back that the aforementioned Statement of Facts show that Fanny and Freddy were even further into the subprime mortgage mess than critics had supposed. They’ve headlined their response “Why the Left is Losing the Argument Over the Financial Crisis,” and if they’re right that will be even better than seeing someone get prison time.

— Bud Norman

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