During the height of the financial crisis, then-Treasury Secretary Henry Paulson pulled Sen. John McCain aside and said if the Arizona Republican blew up negotiations over a government rescue of big banks, Paulson would publicly blame the presidential candidate when the economy collapsed.
During a Senate Banking Committee vote on housing finance reform on Thursday, Sen. Mark Warner, the normally even-keeled moderate Democrat from Virginia, appeared to be channeling Paulson.
He warned lawmakers voting against the bill—mostly Democrats—that when Fannie Mae or Freddie Mac start losing money again and costing the government billions, it will be their fault.
"So those who say, 'Well, we can punt. Let's wait till next week, next year, next Congress,' just wait till some of these enterprises come back to the taxpayer because we didn't take action today to move forward on a bipartisan, substantive, multiyear transition that protects taxpayers, ensures access for low-income folks, and preserves 30-year fixed-rate mortgage products that are paid for in a rational way," said Warner.
Although the bill eventually passed the panel 13-9, it lacks the necessary Democratic support to advance to the full chamber, effectively killing the legislation for this year.
Warner, who co-authored the original reform bill with Sen. Bob Corker, R-Tenn., that was used as a model by Senate Banking leaders, noted that recent stress tests of the government-sponsored enterprises showed they could lose $190 billion in an economic downturn. And he referenced what many analysts of the GSEs have already concluded—that their recent profits aren't sustainable.
"I would urge my colleagues to carefully read Freddie Mac's recent quarterly report. It looks good at first blush," he said. "Then you realize there's virtually no profit at all except for one-time legal settlement fees. Anybody that bases their presumptions on one-time legal settlements as a rationale for continuing a business is disconnected from reality."
The GSEs themselves have raised similar concerns. During a first-quarter earnings call last week, Timothy Mayopoulos, Fannie's chief executive, said "we are faced with running this business with no cushion."
"We do remain exposed to external events that we do not control, such that if losses exceed our revenue in any given quarter we would have to make a draw on the Treasury Department because we have no capital cushion," Mayopoulos said.
U.S. taxpayers, he said, are "still in the first-loss position...and that's not the best approach long-term."
(The GSEs are required to pay all their profits to the government, under terms of the 2008 bailout and subsequent amendments, and so cannot retain earnings.)
But Warner also had strong words for Democrats who opposed the reform bill because it did not do enough for affordable housing. He alluded to the fact that under the current system, with the two GSEs in conservatorship, no money has been placed into an affordable housing trust fund set up in 2008.
"Are we going to have any public policy that [ensures] low-income and minority homebuyers get access to the market, which I think is very important?" he asked. "Those who say, 'Well, let's not do it now,' how do they answer the concern that African-American and Latino consumer access to housing credit today is at historic lows? Nothing with the status quo will change that, whereas this legislation had substantial improvements."