Fannie, Freddie, the Feds & Freud... FUBAR

As a citizen, a voter, and a consumer, what do you think this country needs? Less partisanship in Congress? Less Congress? Easier credit? Lower taxes? Higher taxes?

There are about 307 million Americans and given the state of the American economy, perhaps there are as many answers to that question.

Here’s my take: We need a good shrink. I’m talking real, Freudian-style analysis, because we don’t seem to be paying attention to what we’re doing, both individually, with regard to how we vote, and institutionally, with regard to policy. Last week, we took a look at the former, this week, we focus on the latter.

When I was growing up, I was taught that the purpose of government was to “promote the general welfare,” and to provide “liberty and justice for all.” I guess it depends upon your definition of the word “all.”

The “all” keeps getting smaller.

These days it seems that government functions largely as the protector of the rich, or perhaps as the not-necessarily-unbiased referee in a wrestling match between those who got and those who have not.

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For example, last week, finally, the SEC sued six guys—three executives from Fannie Mae and three from Freddie Mac alleging securities fraud. Now don’t get too excited. The fraud that’s being alleged has nothing to do with defrauding you or any other homeowner. Instead the SEC alleges that Fannie and Freddie defrauded large institutional investors, who bought portfolios of their securitized mortgages, by vastly understating the risk associated with subprime loans, and by mischaracterizing many such loans with words other than “subprime.”

“Fannie Mae and Freddie Mac executives told the world that their subprime exposure was substantially smaller than it really was,” said Robert Khuzami, Director of the SEC’s Enforcement Division. “These material misstatements occurred during a time of acute investor interest in financial institutions’ exposure to subprime loans, and misled the market about the amount of risk on the company’s books. All individuals, regardless of their rank or position, will be held accountable for perpetuating half-truths or misrepresentations about matters materially important to the interest of our country’s investors.

See—it’s the investors who got hurt, not you.

The securities laws of the United States, administered by the SEC, involve thousands of often abstruse rules and regulations, but they all boil down to one simple idea: you gotta tell the truth. Theoretically, one could sell to the public the securities of a company intending to mine the green cheese of the moon so long as the prospectus describing those securities accurately represented the risks associated with the proposed endeavor. The SEC complaints against Fannie and Freddie really charge just one thing—that in selling those now-infamous mortgage-backed securities, the defendant executives didn’t tell the truth. The complaints don’t allege that there was any actual fraud—no one stole any money and no one was manipulating prices or markets—it’s just that all those investors in Asia, Europe and Wall Street were misled. The only allegation of real breaking bad was the almost parenthetical mention of the fact that the six employees in question received incentive compensation—and a lot of it—based, in part, on the profits from securitizations of subprime loans.

I’m not arguing that the SEC should not have brought this case or that there is no one in Washington trying to protect the interests of the 99%. Rather, I’m saying is that the existing tools of government machinery make it difficult for anyone to actually be protected unless they have money—and lots of it.

Millions of dollars will be spent defending the suit. This is yet another example of how the government is working to stimulate the economy. (I have long held the belief that—contrary to the opinions espoused John Boehner, Mitch McConnell and the Party of Tea—government agencies, whatever they may cost, actually do create far greater benefit to the economy in terms of private sector jobs and economic activity). Just think about how many lawyers, accountants and other professionals make serious bank by sidestepping government rules or defending against their enforcement. I have no idea what the numbers are, but I’ll bet you $10,000 (thanks Mitt!) literally millions of people owe their livelihood to the idiocy and complexity of the Internal Revenue Code of 1954.

When you step back and take a look at it all, the forest can look very different from the trees. I think that the SEC suit against Fannie Mae and Freddie Mac executives represents a kind of stress release, in a very different form than, say, Occupy Wall Street. Americans are seething over the fact that despite the near collapse of the entire financial system, the guys who ran the game and profited immensely from it, and continue to profit immensely from it, remain largely unscathed by its results.

The government that oversaw the morass and certainly had at least some hand in creating it still can’t manage to appoint a director of the CFPB, or even extend a payroll tax holiday that means an awful lot to a whole lot of people, especially at this time of year. No doubt, the fine folks in Washington are trying to do something, and that something is typified by the complaint against Fannie and Freddie—full of sound and fury and good intentions, but signifying very little.

The very sad truth is that in addition to all of the other schisms about which you can read daily—income inequality, extremists controlling Congress, etc. etc.—the largest gap exists between what government does and what government should do. The people who argue that there is too much regulation are right, principally because so much of it is ill-conceived and counterproductive. The people that argue that there is too little regulation are also right, principally because most government action, both good and bad, ignores the 99%. Only one thing is certain: good people both in and out of government are trying to do something, by calling out snake oil salesmen on the Hill, or by occupying parks around the country. Those expressions of frustration will keep building until something happens—but I’m not sure what or when.

No wonder so many people feel that America has lost its way. Perhaps couches should be installed in voting booths…