K Marx The Spot

Bad Barron's

Barron's is certainly an odd beast until you think about it a bit. There is a lot of the old lean-Republican trope in its editorial pages, but there is also a good amount of fair coverage of corporate misdeeds. And the latter is particularly useful to lefties, even those the typical Barron's readers simply want to avoid getting fleeced any more than they have to.

Anyway, here is an exemplar of the bad Barron's, from Thomas Donlan's editorial two weeks ago:

Where are the Congressional hearings to put Rep. Barney Frank (D-Mass.), in the hot seat? He should be grilled about his judgment and integrity, along with hundreds of other legislators of both parties who indulged and subsidized home buyers, house builders and mortgage lenders, and started the country down the road to nationalized banking.

Where is the eagerness to make Frank—chairman of the House Financial Services Committee—eat his most intemperate words? In 2003, he said: "I want to roll the dice a little bit more in this situation toward subsidized housing." He also said then that Fannie Mae and Freddie Mac, the dice-rollers, were "fundamentally sound."

Actually reading the actual hearing text provides, as one might expect, a bit of context. At the time, Frank was the ranking minority member of the House Financial Services Committee; Republican Michael Oxley was chairman. In fact, even if Barney Frank could get every Democrat to act with him on anything, he would need Republican support just to get a bill through the House, let alone keep it from getting vetoed.

Indeed, what was clear to the members of the committee was that regulation in 2003 was inadequate and that the government needed something better. Remember, this is chairman Michael Oxley speaking:

There is a broad agreement that the current regulatory structure for the GSEs is not operating as effectively as it should. The Office of Federal Housing Enterprise Oversight is underfunded, understaffed and unable to fully oversee the operations of these sophisticated enterprises.

This was reflected in the surprise management reorganization by Freddie Mac and by Wall Street reports stating that GSE oversight is viewed with skepticism because OFHEO is largely seen as a weak regulator.

A strengthened regulator will send a signal to the markets that these entities have solid management and are engaging in safe and sound activities. Confidence will be restored in the GSEs and they will be able to get back to their important work of expanding home
ownership opportunities without the distractions that have been plaguing them over the past several months.

I should point out that Donlan's criticism is reasonable in one respect, in that it is not clear that Frank ought to have proclaimed Freddie Mac and Fannie Mae to have been fundamentally sound in 2003—on the other hand, the combined market capitalization for the two companies at the time exceeded $100 billion at the time.

The bigger problem here is that Donlan is conflating subprime lending with subsidized housing. If he bothered to read the hearing transcript, he would find that the members of the committee and a number of witnesses discussed (1) housing subsidized under the federal low-income housing tax credit (Fannie Mae and Freddie Mac have been longstanding leaders in tax credit investing); (2) the Affordable Housing Program of the Federal Home Loan Banks and whether it could inspire similar programs; and (3) the need to have housing subsides for older rural and urban housing stock that was about to age out of existing programs. (In the interest of full disclosure, I worked with one of the witnesses, Terri Montague, when we were both with a previous employer.)

Indeed, when Frank makes his "roll the dice" comment, he was discussing the need for Fannie Mae and Freddie Mac to continue to have a commitment for low-income housing and not just the weak provisions that banks fulfill under the Community Reinvestment Act.

The problems that sank Fannie Mae and Freddie Mac had almost nothing to do with their commitments to low-income housing; rather, they got too clever with leverage. A good version of Barron's would feature columnists who knew how to read the original versions of the sources they quote.

Labels: bad Barron's, Barney Frank. Thomas Donlan, Barron's, Fannie Mae, Freddie Mac, Stupid reporting tricks

Fanning the Flames

Conservatives generally hate Freddie Mac and Fannie Mae, the huge quasi-governmental agencies in the United States that backstop a good chunk of the residential mortgage market. After all, markets never prove wrong about anything as simple as mortgages, so the government should just butt out.

Markets, of course, fail often enough that even Americans believe that the government should step in—hence, the lack of outrage when the recent housing bill essentially backstopped Fannie and Freddie's debt.

What is a good conservative to do now? Make something up. Take this letter to Barron's:

One thing that really bugs me about Fannie and Freddie (Editorial Commentary, July 21), is that they do not pay federal or state income taxes, so the taxpayer is already subsidizing them. Who knows what they would have paid in taxes if taxed as an ordinary company?

Alas for the readers of Barron's, whoever edits the Mailbag column could not be bothered to check the assertions in the letter. While Fannie Mae and Freddie Mac are exempt from state and local income taxes, they are indeed subject to federal income taxes. While both have low effective tax rates, they have used federal tax credits for affordable housing and historic rehabilitation—the same tax credits that other companies can and do use—to get that way.

(What a pleasant world it would be if letter writers were equally up in arms when companies avoid state income taxes by paying royalties for intellectual property use to shell companies in Delaware or Montana.)

Labels: Barron's, Fannie Mae, Freddie Mac, stupid mailbag tricks