Labor groups will be invited to the U.S. Chamber of Commerce to talk about an alarming shortfall in state employee pension plans that some believe could lead to a new government bailout.
Randy Johnson, the Chamber’s senior vice president for Labor, Immigration and Employee Benefits, told The Hill the total shortfall for state pension funds could run as high as $3 trillion.

A Chamber spokesperson said the event is in the early stages of development and that it is unclear which unions would be invited to participate or when the session would be held.
While the faltering economy has kept the dire state of pensions from grabbing many headlines, several experts agree that absent drastic measures these funds could be the next financial calamity that receives a government bailout.

An August report by the Kellogg Graduate School of Management at Northwestern University found government pension programs in as many as 31 states are headed for financial disaster by 2030 and that taxpayers will likely wind up paying for unfunded liabilities.

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Chairman Phil Angelides and his panel will begin two days of hearings on the subject of “Too Big to Fail,” featuring testimony from Federal Reserve Chairman Ben Bernanke and Federal Deposit Insurance Corporation Chairman Sheila Bair. Across bailouts from Bear Stearns to AIG, the government has refused to release its analysis of the “systemic risks” that compelled it to mount unprecedented interventions into the financial system with taxpayer money. Two years after the crisis, Mr. Angelides and his colleagues should finally let the sun shine on this critical period of our economic history.

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The administration has vowed to produce a plan by January to change the role the two government-controlled firms play in supporting the housing market. The conference on Tuesday is aimed at soliciting views from top industry officials on how to the companies should be restructured.

The Bush administration seized Fannie Mae and Freddie Mac in September 2008 as the financial crisis was reaching fever pitch. The two companies were heavily saddled with mortgage losses after the implosion of the U.S. housing market.

A consensus has since emerged that their former status as shareholder-owned but congressionally chartered entities, which fostered a belief in financial markets that the government would not let them fail, should not be resurrected.

Still, the debate over how much support the government should provide to foster homeownership is likely to prove messy given the diversity of views along the political spectrum. Any decision on what to do could take years to resolve.

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But when it comes to the mortgage market, the innovation piece looks to be off the agenda. Instead, as Mr. Geithner made clear in response to a question after his speech at New York University, the Administration seems more intent on rehabbing the two biggest obstacles to innovation in home-finance—government-owned Fannie Mae and Freddie Mac. No talk here of trying something new.

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To watch President Obama sign the financial reform bill last week was to be reminded of the greatest financial scandal that never was: the collapse of Fannie Mae and Freddie Mac in September 2008, and their subsequent continued existence as money-losing zombie financial companies in the bosom of the federal government.

Fannie and Freddie have liabilities in excess of $5 trillion. They have already directly cost taxpayers nearly $150 billion, with no end in sight. Most of the banks bailed out in the fall of 2008 have gotten back on their feet and many have paid back, or started to pay back, the money provided to recapitalize them at the height of the panic. Not so Fan and Fred. They continue to bleed money, and each quarter brings new losses and new demands on their unlimited line of credit with the federal government, which is to say the American taxpayer. And yet these facts are ignored—not just by Congress or the administration, but by the press and much of the public.

Meanwhile, Fannie and Freddie, failures that they are, have become more central than ever to America’s mortgage industry. They underwrite the vast majority of all new home loans, and they own or guarantee about half of all the mortgages outstanding.

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Already their $160 billion government rescue has surpassed the amount spent on AIG, Citigroup and other poster boys of the financial crisis, making their liability “the mother of all bailouts,” as one analyst put it.

The failed Washington-based mortgage giants were more exposed to subprime and other junk home loans than any of Washington’s favorite Wall Street whipping boys. And they commanded a much larger share of the mortgage market. Together they owned or guaranteed more than half the mortgages and mortgage-backed securities when they collapsed in 2008.

Thanks to their politically mandated lending goals, congressionally chartered Fannie and Freddie were at the heart of the subprime scandal. We can’t think of two companies more deserving of overhaul.

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Congress may be making progress crafting new regulations for the financial-services industry, but it has yet to begin reforming two institutions that played a key role in the 2008 credit crisis—Fannie Mae and Freddie Mac.

We cannot reform these government-sponsored enterprises unless we fully confront the extent to which their outrageous behavior and reckless business practices have affected the entire commercial banking sector and the U.S. economy as a whole.

At the end of 2009, their total debt outstanding—either held directly on their balance sheets or as guarantees on mortgage securities they’d sold to investors—was $8.1 trillion. That compares to $7.8 trillion in total marketable debt outstanding for the entire U.S. government. The debt has the implicit guarantee of the federal government but is not reflected on the national balance sheet.

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One thing can be said about the current debate over the administration’s financial regulation plan, or at least Senator Chris Dodd’s version: the debate has sharpened the issues so that Dodd, the Democrats, and the administration can no longer hide behind slogans. If the administration thought that the bill could be passed simply because the American people resent Wall Street and the big banks, they may have guessed wrong. Senate Minority Leader Mitch McConnell has called them on this, and pointed out that the Dodd bill has some troubling provisions. This required Dodd, in a speech yesterday, to defend the provisions of the bill. The fact that he did it with misinformation is really a step forward, considering where the administration and he have been for the last few weeks.

Does the bill, as McConnell said, “institutionalize too big to fail?” Of course. There can’t be any reasonable doubt about this. The bill authorizes the Fed to regulate all non-bank financial institutions that are “systemically important” or might cause instability in the U.S. financial system if they failed. These words mean something—that the companies designated for Fed regulation are too big to fail. It’s so obvious that it should not have to be repeated, but it seems that Dodd and the administration believe that as long as they don’t actually say these companies are too big to fail no one will notice.

That, with all respect, is ridiculous. The market will see immediately that the government has created Fannie Maes and Freddie Macs in every sector of the financial system where these large companies are designated for Fed regulation, including insurance companies, hedge funds, finance companies, bank holding companies, securities firms, and any other kind of financial institution the government wants to regulate. Since these firms will be too big to fail, they will be seen in the market—as Fannie and Freddie were seen—as ultimately backed by the government and thus safer firms to lend to than small firms that are not government backed. This will permanently distort the financial market, favoring large companies over small ones, and eventually force a consolidation of each market where these firms exist into a few large competitors operating under the benign supervision of the government.

Does the bill, as McConnell has said, provide for permanent bailouts? Yes, again without question. The administration and the Democrats, especially Dodd, seem wounded by this suggestion. To them it seems obvious that this can’t be true. Why, they protest, the bill says that these firms have to be wound down, not bailed out. But why then is there a $50 billion fund set up to assist this wind down? In his statement yesterday on the Senate floor, in which he said the opposition had used “falsehoods” to oppose his bill, Dodd said: “And middle class families on Main Street won’t have to pay a penny: the largest Wall Street firms will have to put up money for a $50 billion fund to cover the costs of liquidating the failed financial firm.” The costs of liquidating the failed financial firm? What might those costs be?

The answer is that the $50 billion will be used to pay off the creditors, so that the market’s fear of a general collapse will be allayed. Remember, the theory under which the administration and Dodd are operating is that the failure of one of these large companies will cause a systemic breakdown or instability in the economy. The way to avoid that is to assure the market—in other words the creditors—that they will be paid. Otherwise, they will run from the failing company, and every other company similarly situated. That act—paying off the creditors when the government takes over a failing firm—is a bailout. It doesn’t matter that the management lose their jobs, or that the shareholders get nothing. When the creditors are aware that they will get a better deal with the failure of a large company than they will get with a small one that goes the ordinary route to bankruptcy, that is a bailout.  And the signal it sends to the market is the most dangerous part of this bailout, because it tells the market that creditors will be taking less risk when they lend to small companies than if they lend to large ones, and this—as noted above—will simply provide the credit advantages to large companies that will not be available to small companies. Again, like too big to fail, this will distort and suppress competition in financial markets.

Both these provisions, then, have the potential to change and restructure our competitive financial system and thus the very nature of our economy. Republicans are right to oppose them with every resource available.

Peter J. Wallison is the Arthur F. Burns Fellow in Financial Policy Studies at the American Enterprise Institute for Public Policy Research.

It turns out that even the former CEO of Fannie Mae thought that his company had an impossible task.

Citing the unique public-private hybrid nature of Fannie and its sister company Freddie Mac, former CEO Daniel Mudd told the Financial Crisis Inquiry Commission on Friday that the demands on the firms — to increase access to housing and to maximize profits — were sometimes in unworkable conflict with each other.

“When prices crashed far beyond the realm of historical experience, it became ‘The Pit and the Pendulum,’ a choice between horrible alternatives,” Mudd said in his prepared testimony.

“I wish I could have maintained the delicate balance of the roles assigned to Fannie Mae, and I am sorry that I could not,” he said.

The two companies have become political lightning rods, with Republicans arguing that efforts by Democrats to push the two entities to extend home lending to more and more people — even to those who may have been unable to pay their mortgages — helped fuel the subprime mortgage boom that ultimately became the trigger for the broader economic collapse in 2008.

The administration is gearing up for an effort to reform Freddie and Fannie, and Treasury Secretary Timothy Geithner has said he thinks the public-private hybrid model is unworkable. But Freddie and Fannie are not addressed in detail in the pending Wall Street reform legislation — something that Republicans have said is a failure of the current bill.

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WASHINGTON, April 7 (Reuters) – Former Federal Reserve Chairman Alan Greenspan chastised critics on Wednesday by pointing out that Congress pushed the U.S. central bank to make sure lending to poorer Americans kept rising in the 2000s.

“If the Fed as a regulator had tried to thwart what everyone perceived as a fairly broad consensus that the trend was in the right direction, homeownership was rising and that was an unmitigated good, then Congress would have clamped down on us,” he told a questioner at a congressionally appointed commission investigating the financial crisis.

“There’s a presumption that the Federal Reserve’s an independent agency, and it is up to a point, but we are a creature of the Congress and if … we had said we’re running into a bubble and we need to retrench, the Congress would say ‘we haven’t a clue what you’re talking about’,” Greenspan said. (Reporting by Glenn Somerville; Editing by James Dalgleish)

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