1991 Backscratching Philanthropy Sows Havoc
Charitable donations aimed at influencing policy can occasionally lead to disaster, particularly if they are entangled with taxpayer money. That’s the lesson of Fannie Mae and Freddie Mac, so-called government-sponsored enterprises created by Congress to lubricate the housing market. The two agencies were allowed to operate almost like corporations—including in setting up foundation arms and making large donations to nonprofits, even though they were neither real private companies nor real philanthropists.
Fannie Mae had become insolvent during the 1980s, and government officials were exploring ways of ending the government privileges (like loose capital standards) that kept it and Freddie Mac afloat. In 1988, the White House Commission on Privatization called for an end to “all federal benefits and backing for Fannie and Freddie.” In the 1990 reconciliation act, the Congressional Budget Office was asked to study the financial risks to taxpayers created by these government-sheltered housing subsidizers.
To fight back, Fannie Mae hired the political operator who had run Walter Mondale’s presidential campaign. When Jim Johnson became CEO in 1991, two of his first ventures were to 1) allocate $10 billion for low-income people to borrow money to buy houses, and 2) establish a string of “partnership offices” in congressional districts across the U.S. where Fannie Mae would distribute grants to local nonprofits and win allies. As a Fannie Mae executive told New York Times reporter Gretchen Morgenson, “the partnership offices gave us an enormous advantage when Congress was debating further regulations. We were able to call…upon all our partners in the cities where we had these offices and say you have to weigh in. Write to Congress.”
Johnson put $350 million into Fannie Mae’s foundation and started making hundred-thousand-dollar gifts to scores of advocacy groups and nonprofits. In the words of the Times reporter, Fannie’s CEO made the foundation “a powerhouse in charitable giving that targeted organizations associated with favored politicians, or located in their areas.” For instance, a nonprofit founded by the mother of Barney Frank (who became chairman of the House Financial Services Committee) was twice given an “Award of Excellence” by Fannie Mae.
In addition to myriad local nonprofits, national activist groups like ACORN, the National Council of La Raza, and the National Low Income Housing Coalition were showered with grants and attention. Poverty and minority advocates were charmed when Johnson announced in 1994 that Fannie Mae would spend $1 trillion on “affordable housing” over the next seven years. When the bills aimed at reining in reckless mortgage underwriting finally came up in Congress, Fannie and Freddie literally wrote much of the language, according to the New York Times. Not only was privatization of the agencies fended off, but so were stricter operating standards.
Fannie and Freddie’s share of the mortgage market soared from 5 percent in 1990 to ten times that much in 2008. And at that point the entire U.S. housing market melted down, made toxic by mortgages pumped into non-creditworthy households. The economic trauma caused by the subprime-mortgage mess damaged family incomes and national prosperity for years thereafter.
- Gretchen Morgenson and Joshua Rosner, Reckless Endangerment (St. Martin’s Press, 2011)
- Heritage Foundation research report, heritage.org/research/reports/2013/11/fannie-and-freddie-what-record-of-success#_ftn25
- Philanthropy Daily analysis, philanthropydaily.com/a-public-private-disaster