Dems on Freddie, Fannie: Wagging a five-legged dog

Abraham Lincoln once posed the question, “How many legs does a dog have if you call a tail a leg?” Lincoln’s answer was four. A tail is still a tail even if you call it a leg. Perhaps Treasury Secretary Timothy Geithner and the Obama administration can learn a thing or two from Honest Abe.  

Last week House Republicans issued a set of principles for legislation to immediately address the future of two Government-Sponsored Enterprises, Fannie Mae and Freddie Mac. The goal is to reestablish a stable housing market using private capital as the primary source of mortgage financing. Fundamental to our priorities is putting the terrible twosome that contributed greatly to destabilizing our economy on the federal budget, ensuring fully transparent and honest accounting of all government spending and liabilities, and subjecting the debt issued by the two GSEs to the national debt limit.

Our reasons are simple: thanks to Treasury’s open-ended, unlimited blank-check bailout, Fannie and Freddie’s debt is now our debt, and their losses are now our losses. Taxpayers now own at least 80 percent of the two enterprises, and have explicitly guaranteed $1.7 trillion of their debt and more than $5 trillion in mortgages they have purchased. Some have estimated the losses to be as high as $448 billion. The non-partisan Congressional Budget Office has concluded that Fannie and Freddie have “effectively become government entities whose operations should be included in the federal budget.”

And yet, Secretary Geithner says that he doesn’t want to put the costs of keeping Fannie and Freddie on life support onto the federal budget. Our question is why.

It’s not news that Fannie Mae and Freddie Mac were at the center of the mortgage market meltdown that destabilized the economy, yet Democrats in both the House and Senate have ignored repeated calls to address it. H.R. 4173, the so-called Wall Street Reform and Consumer Protection Act that narrowly passed the House of Representatives in December, failed to include a single provision to address the status of the two companies. And Senate Banking Committee Chairman Chris Dodd (D-Conn.) did nothing to address it in his bill, leading us to believe they either don’t know how to reform or why we need to, or that they are still ignoring the obvious danger signs ahead.

If nothing else, the housing and fiscal crisis that nearly took down our financial system shows the peril of off-balance sheet wizardry. Enron pioneered off-balance-sheet sleights of hand to fool its investors and lenders. Big Wall Street banks perfected the use of off-balance-sheet vehicles to mask debt. And, thanks to the Lehman Brothers bankruptcy examiner’s report, we now know that fancy accounting tricks managed to fool even the New York Federal Reserve and the SEC, all while Lehman was borrowing billions from the Fed.

But accounting gimmicks never hide the truth forever, and House and Senate Democrats will have to address the Fannie and Freddie issue if they ever hope to restore our markets. Eventually, debt has to be paid. Pretending that debt is something else only postpones the day of reckoning and makes it much worse. Look at Greece. The government thought it could hide runaway deficits and out-of-control spending with a little creative accounting. Greece managed to fool its creditors for a while, and avoided the necessary — but difficult — task of putting its fiscal house in order. But Greece’s experiment in creative accounting came to a terrible end.

Like Greece, we in America face difficult choices because our government spends far more than it takes in, and does not honestly account for the funds. The administration has conceded that the projected budget deficits are unsustainable. According to Moody’s, America’s AAA credit rating may be at risk in coming years as our nation copes with its growing debts. We have a problem, a problem that we need to fix — and soon.

But you can’t fix a problem by pretending it’s not there or diverting attention to other troubles. Calling your dog’s tail a leg doesn’t give you a five-legged dog, and claiming other policies caused the crisis or need to be addressed first doesn’t make it true. Honest Abe would say a debt is still a debt, whether you put it on your balance sheet or not. And keeping Fannie and Freddie off-budget doesn’t make them any less of a problem for the American taxpayer. We need to address the biggest systemic risk to the financial markets and the economy by fixing Fannie and Freddie, and we can start by, first, bringing them on-budget, and second, including a plan for winding down the two companies as part of financial regulatory reform.

Bachus is ranking member of the House Financial Services Committee.