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DeMarco Makes His Work for Too Big to Fail Banks Official

For the better part of his career, Ed DeMarco, former acting Director of the Federal Housing Finance Agency (FHFA), has been a reliable ally of the TBTF banks.  It was therefore not a surprise to learn today that DeMarco will head the policy council for the Financial Services Roundtable, the trade association for the TBTF banks.  In the new role, DeMarco will now free to openly advance his agenda to dismantle Fannie and Freddie and turn their business over to Wells Fargo and its peers in the industry.

The announcement comes just days after one of the biggest of these banks, Wells Fargo, made public its decision to reclaim some $75 million in compensation paid to ousted CEO John G. Stumpf, and its former head of community banking, Carrie L. Tolstedt. Recall the two presided over a scandal in which bank employees opened thousands of phony accounts, often without customers’ knowledge. Eventually, 5,300 bankers were fired for creating as many as two million unwanted bank and credit card accounts.

As acting FHFA Director from 2009 to 2014, DeMarco engineered the Net Worth Sweep, championed the creation of the Common Securitization Platform and ushered in the introduction of credit risk sharing. Instead of following the mandate of the Housing and Economic Recovery Act of 2008 and restoring the government sponsored enterprises to financial health, DeMarco decided it was better to weaken them to the benefit of TBTF banks, widely regarded as more culpable than the GSEs in the 2008 financial crisis. DeMarco’s maneuverings to put Fannie and Freddie out of business became clear in some of the documents unsealed in shareholder suits.  

When DeMarco left government service, he publicly argued for putting Fannie and Freddie “out of the taxpayers’ misery” and landed at the Milken Institute. There he detailed proposals to whittle away at the GSE’s without regard to the impact this would have on interest rates, access to homeownership and affordable rental housing. Remarkably, the former conservator of Fannie and Freddie revealed his deep hostility for the mission and function at the heart of their charters.

Among the ideas showcased at Milken was a plan to cede Fannie and Freddie’s role to large lenders, which, in turn, would reconstitute the GSEs as a private-sector mutual insurance company that would sell insurance against defaults instead of buying and securitizing mortgages.  Not surprisingly, his policies as acting director and proposals after leaving government invited scorn from advocates for homeownership access but plaudits and encouragement from bankers for whom he is now working.

DeMarco’s collaborator in policy proposals at Milken was Michael Bright, a former aide to Sen. Bob Corker, R-TN, who led congressional efforts to dismantle Fannie and Freddie as Senate Banking Chairman in the last Congress and is gearing up to try again. DeMarco has praised Corker’s so-called Jump Start bill. As we have noted, the proposal would not facilitate reform at Fannie and Freddie but nullify FHFA’s statutory authority as conservator and empower Congress.

Incidentally, Corker’s ties to Wells Fargo were scrutinized in a new piece by Jerome Corsi at Infowars this week that loosely connects the dots about the bank’s role in keeping Corker out of bankruptcy when real estate deals in which Corker had been involved ran into trouble years ago and its subsequent contributions to Corker’s campaigns.

Leading up to the 2008 financial crisis, Wells Fargo accounted for close to a third of the country’s home loans. Its enthusiasm for originating loans was evident early last year when it admitted to deceiving the U.S. government into insuring thousands of risky mortgages and agreed to pay a record $1.2 billion to settle a lawsuit initiated by the U.S. Department of Justice. While it now has a much reduced market share, it continues to work the levers of power in Washington. In the years just after the financial crisis, the bank more than doubled its outlays for lobbying to $7.8 million, according to the Center for Responsive Politics. Last year, it spent nearly $5 million lobbying Congress.  Housing finance reform has been a top priority in these efforts, specifically policies that would give large banks a bigger role in the mortgage market.

Fannie and Freddie are now in the ninth year of a conservatorship that Ed DeMarco at varying times supervised and undermined. As a result of policies DeMarco spearheaded, the GSEs have had their capital swept up and are now inching toward the need for more taxpayer-funded assistance. Meanwhile, Wells Fargo and other banks have gotten larger but no more responsible as they continue to throw millions of dollars at Members of Congress. And now DeMarco is better positioned than ever to help these banks supplant the GSEs. Taxpayers, working Americans seeking affordable homeownership, and shareholders can rightfully wonder if this is all going to end well for them or for DeMarco and his pals at the Financial Services Roundtable.