Making money off the mortgage mess

To borrow a Barack Obama line, "There's not a liberal America and a conservative America, there's a United States of America." That's true — and everyone in it tried to make a quick buck off the housing bubble.

Since Ronald Reagan, Republicans have demonized government oversight as a liberal plot to dampen the animal spirits of America's entrepreneurs. Let the market do the regulating, conservatives said. The market will punish those who make bad choices.

But guess what. Republicans are not letting the market bring the housing bubble to its bloody finale. The Bush administration is working feverishly to bail out mortgage giants Fannie Mae and Freddie Mac, in addition to investment banks. Were the officials true free-marketeers, they would have let Bear Stearns go splat. They'd have stayed aloof to the panic surrounding Fannie and Freddie. They'd just let market forces do their job — and then usher in another Great Depression.

So Treasury Secretary Henry Paulson had no choice but to engineer a rescue of Fannie and Freddie. The two companies hold or guarantee over half of America's mortgages. And lawmakers of both parties have no option but to go along.

It was funny to hear Obama's economic spokesman say last week that "the Bush administration's willful neglect of warning signs in housing, in financial markets and in the job market have compromised the nation's housing-finance system."

Funny because a mere month ago, Obama had chosen, of all people, former Fannie Mae CEO James Johnson to help pick his running mate. Johnson has played a significant role in compromising the stability of the housing market.

Fannie Mae is government sponsored and subsidized but owned by shareholders. Its mission is to inject money into the housing market by buying mortgages and selling them to investors in the form of mortgage-backed securities. (The smaller Freddie Mac performs a similar function.)

You can imagine the money to be milked from a corporate beast that lets its private owners and senior executives scoop the profits while sticking taxpayers with the risk. Johnson left Fannie Mae a rich man.

Under Johnson in the 1990s, Fannie began the controversial practice of holding on to more mortgages and securities as its own investments. The Washington Post reported that then-Federal Reserve Chairman Alan Greenspan feared "a sudden meltdown" in Fannie and Freddie "could bring down the financial markets with it — an argument that Johnson and his successor Franklin D. Raines (another Democratic power broker) fought at every opportunity."

Johnson had hired lobbyists of both parties to kill any idea of regulating Fannie's sweet deals. As one lobbyist told the Post, "Politicians of both parties were afraid to give it proper oversight."

On the Republican side, John McCain's economic adviser, former Texas Sen. Phil Gramm, pushed through a bill in 2000 that forbade federal agencies to regulate the financial derivatives that greased the skids for passing along risky mortgage-backed securities to investors.

What about regulating the dodgy mortgages themselves? Banning complicated and abusive loan terms would seem an obvious job for Democrats. But did Democrats rise up during the bubble's thrill ride to demand stricter consumer protections? They did not.

The Congressional Hispanic Caucus listed Countrywide Financial — an aggressive pusher of subprime mortgages to minorities — as a "trusted friend" on its housing literature and Web site. Countrywide had paid $50,000 for the favorable mention.

There's no ideology here. Just politicians taking care of the moneyed interests. Conservatives, liberals — everyone was in on creating the conditions that led to the mortgage collapse. The bill for it all now goes to the taxpayers, party affiliation unimportant.

Providence Journal columnist Froma Harrop's column appears regularly on editorial pages of The Times. Her e-mail address is fharrop@projo.com