John McCain has taken a strong reform position here, and he’s totally right. This is McCain at his very best. He argues that Fannie and Freddie employees manipulated financial reports to line the pockets of senior executives. He calls the GSEs a danger to financial markets. And he says if one dime of taxpayer money ends up in those institutions “the management and the board should immediately be replaced, multimillion dollar salaries should be cut, and bonuses and other compensation should be eliminated. They should cease all lobbying activities and drop all payments to outside lobbyists.”
He also argues for strong regulation of Fan and Fred “that limits their ability to borrow, shrinks their size until they are no longer a threat to our economy, and privatizes and eliminates their links to the government.”
McCain economic advisor Steve Forbes wants to breakup Fannie and Freddie into 10 or 12 companies, completely severing their ties to the government. With these private companies competing in the mortgage market, Forbes says the entire housing sector will be revived, with taxpayers off the hook for a change.
On the other hand, Treasury Secretary Henry Paulson is putting his reform hopes on new Fannie-Freddie regulator James Lockhart, who runs the Office of Federal Housing Enterprise Oversight. Lockhart is a reformist skeptic of Fannie and Freddie. But his term would only last until year-end. After that, his successor will be subject to Senate confirmation and a public grilling from the two banking committees, all while Fan and Fred pour money into the campaign coffers of the Democrats and Republicans serving on those committees.
Does this sound like true reform? Highly doubtful. In fact, the bailout bill should be completely rewritten to stipulate the kind of privatization program outlined by Sen. McCain.
Former Reagan Treasury official Peter Wallison has warned for years that Fannie and Freddie would blow up financial markets. Well, we just witnessed the blow-up. But now we should also blow up the Fannie-Freddie bailout. It’s not real reform.
Obama won’t do it. He says there must be an essential role for Fan and Fred. And Obama advisor Franklin Raines -- the former Fannie Mae CEO who was forced to resign over accounting scandals -- argues for the status quo. But McCain is talking real reform. Bravo for the Arizonan. He’s the real candidate of change.