Why Were FNM/FRE Banned From Lobbying?

By Barry Ritholtz – January 31st, 2011

“All political activities — including all lobbying — will be halted immediately.”

-Federal Housing Finance Agency Director James Lockhart (Bloomberg)

Here is a factoid you may not have been aware of. It explains a lot if things about the political philosophy, crisis resolution, and approach to regulation in Washington D.C. It also explains to a large degree why the final version of the Dodd-Frank bill looks the way it does, and goes so relatively easy on the institutions at the core of the crisis.

The conclusions are not pretty. Indeed, its downright fugly.

Let’s start with the FACTS, something Washington D.C. seems to be allergic to:

When the GSEs were put into conservatorship by Hank Paulson, several steps were immediately effected: The CEOs and much of the senior management were fired, and one of the very next steps put into place was a total ban on all political activities, including — especially — lobbying. Common stockholders placed last in line for any claims, with preferred shareholders right behind them.

Compare that to the rescues of Citigroup, Bank of America, Merrill Lynch, and the rest of the bankers wrecking crew. The vast majority of senior management and board members who created and oversaw their own implosions are still in place. A report on Corporate Governance by Professor Emma Coleman Jordan of the Georgetown University Law found that 92% of senior bank execs were still working in their same jobs.

But worse of all, at these insolvent institutions, none of the POLITICAL ACTIVITIES, CAMPAIGN DONATIONS OR LOBBYING ACTIVITIES were halted. It was business as usual on capital hill, for the bankrupt banks and their highly paid shills.

When we look at the shortcomings of Dodd-Frank, or the weaknesses of the FCIC (Underfunded, short on time, lacking prosecutorial zeal), it traces back to this decision.

I suspect there are two reasons for this:

First, Treasury Secretary Hank Paulson was the former CEO of Goldman Sachs. He was very much aware of how profitable the banks lobbying efforts were — keeping capital requirements low, allowing excess leverage, capturing regulators. He sure as hell wasn’t going to allow the bank to lose that strategic advantage. Second, it reflected the longstanding conservative ideology against Fannie and Freddie while simultaneously favoring all other things financial. Remember, before he became a Socialist redistributing taxpayer wealth to the banking sector, George W. Bush was ostensibly a conservative.

Hence, we see a dichotomy: There were well deserved lobbying restrictions placed on the mess that was Fannie and Freddie. At the same time, there was an undeserved freedom to lobby, to continue exploiting their wealth and power, despite their essential insolvency,

The bottom line: If you think Dodd-Frank was too soft in its treatment on banks, if you belief the FCIC was hamstrung from the outset, consider this ugly fact of American politics: It was by design.

And the folks who allowed that lobbying juggernaut to continue uninterrupted were Hank Paulson and George W. Bush . . .