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Mr. Wallison’s Curious View of the Rule of Law

Yesterday, Congressman Jeb Hensarling and former general counsel to the Reagan White House Peter Wallison participated in a briefing hosted by the American Enterprise Institute (AEI) to discuss causes of financial crisis. 

During the briefing, John Berlau, director of the Center for Investors and Entrepreneurs at the Competitive Enterprise Institute (CEI), a free-market think tank, cited the recent  Krimminger-Calabria paper to ask Wallison about the GSEs. Here’s our rough transcript of the exchange:

John Berlau: I wanted to ask a question about net worth sweep. Mark Calabria says that this leaves Fannie and Freddie with very little capital buffer, and that it violates HERA. Would it be better if they were taken out of conservatorship?

Peter Wallison: No, if we ever let them out of conservatorship, they would go back to the business that they were in before. I’m perfectly happy that government is taking all their profits, because it keeps them from gaining capital. If they had capital there would be tremendous pressure in Congress to release them. We have to come up with a new system, unfortunately we don’t know what such a system will look like. Once we come up with a new system, Fannie and Freddie will be gone.

Mr. Wallison’s response was interesting to us, because it almost sounds like his disdain for Fannie Mae and Freddie Mac  would override his commitment to the rule of law.  If true, that would be surprising, coming from a former White House Counsel for President Reagan.

William Isaac, a former chairman of the FDIC under President Reagan has written about this very dynamic, and about the importance of not subordinating the law to one’s personal beliefs about what should be done with Fannie and Freddie:

There can be varied opinions over which reform is best for our country or what, if any, role Fannie and Freddie will have in a future housing market. But there should be no disagreement about the law. Capital follows the rule of law, and if investors can’t count on that in the U.S. and in the housing markets, they will put their money elsewhere.”

Mark Calabria, co-author of the paper Berlau cited in his question, doesn’t seem to be a big fan of GSEs, either, as evidenced by testimony he gave to the U.S. House Financial Services Committee in July 2013:

“We should also remember Fannie Mae and Freddie Mac were two of the largest corporate financial restatements in history. These were not innocent companies sunk by a hundred year storm. Both companies were deeply corrupt—a depth of corruption that can only result from their protected, entrenched status. Bear Stearns, Lehman Brothers, and Countrywide are all gone. Fannie Mae and Freddie Mac merit the same fate. In so many ways, Fannie Mae and Freddie Mac have been and continue to be emblematic of what is broken in both Washington and corporate America. If we cannot end entities so obviously broken as Fannie Mae and Freddie Mac, then we have almost no hope in addressing other pressing issues that face our country.”

But in his paper, Mark Calabria, like Bill Isaac, is firm on the point that the law must be followed. Congress enacted HERA – the Housing Economic Recovery Act – as a first-step toward putting right what went wrong for the 2008 financial crisis.

It’s not up to the White House, or agency directors, or AEI to decide for themselves what parts of a law they want to follow.  The law is the law.  In this case, that law is HERA.  Hopefully Congress will rise up soon and demand that it is enforced.