Former GOP Representative Richard Baker says he spent about 17 of his 21 years in Congress talking about the need to better regulate Fannie Mae and Freddie Mac. Today, the erstwhile Louisiana congressman doesn't seem to know how he should feel about that distinction--validated in showing such prescience, or perhaps embarrassed at having been ignored for so long. Because as Baker can attest, until the mortgage giants were put on a joint deathwatch earlier this year and speaking scornfully of them became a matter of political survival, legislators could hardly feel any more impotent as when they squared off with the Fannie and Freddie lobbying teams.
Fannie's crew was particularly effective at keeping regulators at bay. "The best in Washington by a wide margin," says the 60-year-old Baker, who left Congress earlier this year to become a lobbyist himself, working as president of the Managed Funds Association, a lead trade group for the hedge fund industry.
Having been a homebuilder and broker before going into national politics, Baker witnessed the financial ruin of good friends due to the 1980s savings and loan crisis. So in the late '90s and early 2000s, he repeatedly sponsored a bill aimed at creating a well-funded, bank-like regulator to assess the amount of risk taken on by the government-sponsored enterprises (GSEs). As a member of the House Financial Services Committee, he says he would sometimes have a co-sponsor come on board Friday afternoon, only to jump ship by Monday morning. His oversight hearings on Fannie and Freddie, in which he hoped to make their vulnerabilities (and executive pay) a matter of public record, proved to be an exercise in legislative futility: The GSEs would write speeches for friendly committee members on both sides of the aisle, spoon-feed talking points, pre-leak information, and generally discredit watchdog groups and committee members that posed a threat to their unique financial freedoms. Baker didn't have to look far to see the root of his failure. In the front row at such meetings, there would often be a dozen or more Fannie lobbyists sitting shoulder-to-shoulder, about as persuasive as New England's offensive line.
So, as the economy falters and Washington grows evermore wrathful toward the finance and mortgage industries, it's worth asking: How much of the blame for the meltdown should fall on the financial legislators--especially the members of the House Financial Services Committee, both Democrat and Republican--who were supposedly watching the store during a decade of lax regulation?
"It really was a gilded time to work on the Hill," says a former Democratic staffer. He's referring specifically to the House finance committee, during the time period between Bush's first win in 2000 and the Jack Abramoff scandal of 2005. "Friends and I used to say that there'd be nothing better than to be a Republican banking lobbyist or Republican banking staffer."
The chairman of the finance committee during that time was Michael Oxley of Ohio, who left the House last year. Oxley, whose chairmanship ran from 2001 through 2006, has been recalled as something of a regulatory hawk, largely because he had his name on the Sarbanes-Oxley Act of 2002, which ramped up corporate accounting regulations in the wake of the Enron scandal, and because he got a bill dealing with Fannie Mae out of committee in 2005, though it never made it through the Senate. But Oxley, who's now a vice chairman with NASDAQ, as well as a lobbyist, has described himself as a good friend of the business world, and his record of campaign contributions bears that out. The top of his donor list always looked like a roster of securities and investment-bank heavyweights: Citigroup, MBNA, JP Morgan, Goldman Sachs, Bank of America--and, among the dead or wheezing--Bear Sterns and Lehman Brothers.
In 2006, Freddie Mac paid the Federal Elections Commission (FEC) a $3.8 million fine to settle a civil suit alleging the firm had violated federal law by using corporate resources to throw 85 fundraisers for committee members, many of them for Oxley. The FEC maintained that Freddie had illegally steered $1.7 million toward members' reelection efforts between 2000 and 2003. In internal documents, Freddie employees referred to these fundraisers as "political risk management."
Over the course of his six-year chairmanship, Oxley signed off on an eye-popping half-million-dollars' worth of privately financed travel for Congressional staffers and himself, much of it to sunny locales in Florida and the West, and much of it coming courtesy of firms in the finance and real estate sectors, according to LegiStorm, a non-partisan database that tracks such expenses.
Among the more infamous trips was one to Las Vegas in January 2003, sponsored by Citigroup. On paper, this two-day jaunt looked less like a Congressional fact-finding expedition than an extravagant corporate retreat. At least 16 Democratic and Republican staffers were piled into the ritzy Four Seasons hotel, which sits atop the Mandalay Bay casino's hotel tower on the South Strip, replete with its own spa and Charlie Palmer steakhouse. The stated purpose of the trip? To discuss the credit industry and give congressional staffers a tour of Citigroup's credit-card center in The Lakes, Nevada.
"I remember thinking," says one staffer present on the trip, "Do we really need to tour this credit-card facility?"
In those days, Vegas was a popular destination for committee members and staffers--Republican and Democrat alike--whose travels to Sin City were generously financed by America's Community Bankers and the National Association of Home Builders. Among other pleasurable destinations: Kona, Hawaii (Federal Home Loan Bank of Seattle); Miami and New Orleans (Mortgage Insurance Companies of America); St. Petersburg, Florida (Capital One); Fort Lauderdale (American Bankers Association); Aventura, Florida (Securities Industry Association); and Puerto Rico (North Carolina Bankers Association). Such trips often included substantive panels and a bit of work, but most staffers would pounce at the opportunity to leave the Hill for a more temperate destination during the work week. Between 2001 and 2005, for instance, a single aide to Alabama Republican Spencer Bachus racked up an impressive $50,000 worth of privately funded flights, food, and lodging, much of it footed by the finance and real estate world.
During those high-flying years, as critics now love to point out, precious little legislation emerged from the House finance committee that could have helped stem the current crisis. "The committee under Oxley had numerous opportunities to oversee aspects of the financial services sector, and they repeatedly didn't do anything," says Kathleen Day, a former Washington Post reporter who wrote about the finance industry. "The House believed everything the industry told them."
Of course, not everyone agrees. In a recent story in the Financial Times, Oxley himself put the blame for Fannie and Freddie's demise squarely on the White House, saying the Bush administration greeted his 2005 GSE reform bill with a "one-finger salute." Also coming to Oxley's defense was his colleague Representative Barney Frank, who recently told Fox's Bill O'Reilly that Oxley was "a pretty tough guy on regulation." (Frank, of course, has been widely criticized for his own record on the House finance committee. Last month the Massachusetts Democrat was outraged to read a Wall Street Journal editorial about himself entitled "Fannie Mae's Patron Saint," in which he was deemed "the most vociferous and powerful" voice in opposing Fannie reform over the years.)
A former GOP committee staffer says too much is now being made of the committee's lobbying ties and campaign contributions. "I don't think the [committee] members were motivated by any of that. I think it's a knee-jerk reaction to add up campaign contributions." Pointing to a raft of hearings held on the GSEs, the staffer also defends Oxley's tenure, saying it was impossible for the chairman to put together a bill on Fannie and Freddie that would please both the Senate and the Bush administration. (Oxley referred an interview request for this story to a colleague at his lobbying firm.)
If Fannie and Freddie seemed to always get their way, perhaps it was because the GSEs made their case for limited oversight so effectively. A couple of times a year, Fannie would bring Hill staffers up to their headquarters on Wisconsin Avenue for "Half a Day at Fannie Mae" events, which were aimed at reassuring attendees that Fannie was on solid financial ground and needed no new forms of regulation. The staffers read from binders as they followed speeches by then-CEO Franklin Raines and Vice Chairman Jamie Gorelick, both Clinton associates.
"They were just so good at providing information," says a former staffer present at such meetings. These half days, says the staffer, boiled down to a startling "take-away point": "Fannie Mae has enough controls in place to survive conditions approximating the Great Depression."
In those years, former staffers say, it seemed Fannie devoted practically one lobbyist to every representative on the roughly 70-member committee--a staggering deployment of resources. The firm apparently prided itself on such expenditures. Baker paraphrases a line that Raines was rumored to have once said in a shareholder meeting: "We budget for political risk the way other companies budget for credit or interest-rate risk."
As the joke went, Fannie was a political force that dabbled in the mortgage business. And as the housing boom rolled on, the GSEs enjoyed the parallel lobbying power of builders, realtors, and banks, many of whom had an interest in seeing Fannie and Freddie grow.
As it turned out, the relationship between the finance lobby and the finance staffers proved fruitful for both sides. A slew of committee aides left the Hill and landed on the payrolls of some of the very firms that had been lobbying them and their bosses, according to the Center for Responsive Politics. Former Oxley adviser Carter McDowell moved on to the American Bankers Association; Karen Lynch Calton, one-time counsel to the committee, has lobbied for the Consumer Bankers Association; Greg Zerzan, an aide to Oxley, eventually went to the International Swaps and Derivatives Association; Linda Dallas Rich, a committee adviser, headed to the New York Stock Exchange; longtime Oxley aide Clinton Jones hopped to Fannie for a spell, before returning to Congress to serve Bachus on the finance committee; and even though Baker had been a perennial foe to the GSEs, the congressman's own former chief of staff, Duane Duncan, became a star on Fannie's lobbying team.
In fact, back when Baker released the names of the highest-paid employees at Fannie, his one-time staffer's name was on the list. But it wasn't like Duncan was one of the 20 executives making $1 million or more. His salary was $920,144.
By Dave Jamieson
Reprinted with permission from The New Republic