Armando Falcon, Jr.: An Enemy of the People?

Armando Falcon, Jr. (pictured above) was the director of the Office of Federal Housing Enterprise Oversight (OFHEO) who brought to light problems at Fannie Mae and Freddie Mac several years ago. For his service as a diligent regulator, he received something less than gratitude from certain Members of Congress, as the video below (which got a lot of hits on YouTube last fall) shows¹. For some reason, the connection between that and the Ibsen play "An Enemy of the People" (which I last read when it was assigned in one of my high school English classes) just came to me yesterday. For those who aren't familiar with the play, here is the summary of it from Wikipedia:

Dr. Thomas Stockmann is the popular citizen of a small coastal town in Norway. The town has recently invested a large amount of public and private money towards the development of baths, a project led by Dr. Stockmann and his brother, the Mayor. The town is expecting a surge in tourism and prosperity from the new baths, said to be of great medicinal value, and as such, the baths are the pride of the town. However, as the baths are starting to succeed, Dr. Stockmann discovers that waste products from the town's tannery are contaminating the baths, causing serious illness among the tourists. He expects this important discovery to be his greatest achievement, and promptly sends a detailed report to the Mayor, which includes a proposed solution, which would come at a considerable cost to the town.

But to his surprise, Stockmann finds it difficult to get through to the authorities. They seem unable to appreciate the seriousness of the issue and unwilling to publicly acknowledge and address the problem because it could mean financial ruin for the town. As the conflict ensues, the Mayor warns his brother that he should "acquiesce in subordinating himself to the community." Stockmann refuses to accept this, and holds a town meeting at Captain Horster's house in order to convince the people to close the baths.

The townspeople - eagerly awaiting the prosperity that the baths are believed will bring - refuse to accept Stockmann's claims, as his friends and allies, who had explicitly given support for his campaign, turn against him en masse. He is taunted and denounced as a lunatic, an "Enemy of the People." In a scathing rebuke of both the Victorian notion of community and the principles of democracy, Dr. Stockmann proclaims that in matters of right and wrong, the individual is superior to the multitude, which is easily led by self-advancing demagogues. Stockmann sums up Ibsen's denunciation of the masses, with the memorable quote "...the strongest man in the world is the man who stands most alone."

And here is that video¹ showing how Falcon's warnings were resented by come Congressional Reps:



¹The creators of this video overstate their case slightly when they claim that Democrats opposed tighter regulation of the GSEs while Republicans advocated tighter regulation. Falcon mentioned to Real Clear Politics that one Democrat, Rep. Maurice Hinchey of New York, was supportive of his efforts. Also, although Republicans in Congress and the Bush Administration advocated stronger regulation of the GSEs, President Bush shared the zeal of most of the Democrats for encouraging the extension of credit to marginal borrowers, in order to increase home ownership levels, particularly among minorities.

The photo of Falcon above comes from this New York Times article, and is credited to Chris Kleponis/Bloomberg News.

Fannie Mae Exposé

Today's New York Times features a long cover article by Charles Duhigg on the fiasco at Fannie Mae, "Pressured to Take More Risk, Fannie Reached Tipping Point". The broad strokes of this have been covered before, but the Times article fills in some of the sordid details.

The article notes how former Fannie Mae CEO Franklin Raines and his CFO J. Timothy Howard expanded Fannie's share of the mortgage market by having the company increase its purchases of risky mortgages. Those two were of course forced to resign in 2004, after the accounting scandal at Fannie came to light, and Daniel Mudd took over as CEO then. Mudd was shown the door last month, after the federal government took over Fannie Mae. The Times article concludes by describing what Raines, Howard, and Mudd are up to today:

Mr. Raines and Mr. Howard, who kept most of their millions, are living well. Mr. Raines has improved his golf game. Mr. Howard divides his time between large homes outside Washington and Cancun, Mexico, where his staff is learning how to cook American meals.

But Mr. Mudd, who lost millions of dollars as the company’s stock declined and had his severance revoked after the company was seized, often travels to New York for job interviews.

Incidentally, at first I wondered why McCain didn't push back in the first debate when Obama blamed the credit crisis solely on "failed Republican policies", by noting Obama's receipt of campaign contributions from the GSEs, and his association with Franklin Raines. Then I read that McCain's campaign manager, Rick Davis, had been a lobbyist for Freddie Mac.

William Poole Again

The former St. Louis Fed chief has an op/ed in today's NY Times, "Too Big to Fail, or to Survive". With all the hysteria exhibited by pundits on this subject, Poole's is a voice of reason. He's no fan of Fannie and Freddie, and thinks the federal government should eventually get rid of them, but he also acknowledges that, at this point, a bailout was necessary. Poole is also rightly skeptical that the promised tighter regulation of the GSEs will prevent future problems. He writes,

Some believe that tighter regulation is the answer. I am skeptical of that because I know the extent to which the regulatory system is tied up in Fannie’s and Freddie’s political activities. I find it deeply troubling that Fannie and Freddie, essentially in receivership to the secretary of the Treasury today, continue to employ lobbyists and hand out campaign contributions to influence the legislative debate over their own futures. Fannie and Freddie paid out more than $170 million to lobbyists over the last decade — more than General Electric spent. Government departments cannot hire lobbyists or give money to campaigns — why should Fannie and Freddie, now wards of the government, be permitted to do so?

Those huge lobbying fees don't fully capture the political influence of the GSEs. Two politically well-connected former Fannie Mae CEOs come to mind, Franklin Raines, who was the head of President Clinton's Office of Management and Budget before returning to Fannie Mae as CEO, and James A. Johnson, the former Carter administration official and, until recently, the reported head of Barack Obama's running mate selection process.

Malapropism of the Day

I didn't expect to get a laugh out of an article about the Fed and Treasury attempting to calm fears about the big GSEs (AP: "US spells out Fannie-Freddie backstop plan"), but I did when I got to the second paragraph below:

A senior Treasury official said any increase in the line of credit — now at $2.25 billion for each company_ would be at the Treasury secretary's discretion. The same would apply to any equity investment made by the government.

The official, who spoke on condition of animosity, also sought to send a calming message about Fannie's and Freddie's financial shape, saying: "There's been no deterioration of the situation since Friday."