Did Frank have a conflict of interest at Fannie Mae?

posted at 8:30 pm on October 3, 2008 by Ed Morrissey
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Now that Congress has passed the bailout emergency liquidity bill, we can expect that both Democrats and Republicans will attempt to define the catastrophic failures of Fannie Mae and Freddie Mac quickly and energetically.  Democrats such as Barack Obama and Nancy Pelosi have already started calling it a failure of “deregulation” and greed, while Republicans have attacked Democrats like Chris Dodd and Barney Frank for blocking action to tighten regulatory control over the two giant lenders.  Bill Sammon at Fox News reports on one potential argument for a conflict of interest that may have Frank on the defensive:

Unqualified home buyers were not the only ones who benefitted from Massachusetts Rep. Barney Frank’s efforts to deregulate Fannie Mae throughout the 1990s.

So did Frank’s partner, a Fannie Mae executive at the forefront of the agency’s push to relax lending restrictions.

Now that Fannie Mae is at the epicenter of a financial meltdown that threatens the U.S. economy, some are raising new questions about Frank’s relationship with Herb Moses, who was Fannie’s assistant director for product initiatives. Moses worked at the government-sponsored enterprise from 1991 to 1998, while Frank was on the House Banking Committee, which had jurisdiction over Fannie. …

The two lived together in a Washington home until they broke up in 1998, a few months after Moses ended his seven-year tenure at Fannie Mae, where he was the assistant director of product initiatives. According to National Mortgage News, Moses “helped develop many of Fannie Mae’s affordable housing and home improvement lending programs.”

Critics say such programs led to the mortgage meltdown that prompted last month’s government takeover of Fannie Mae and its financial cousin, Freddie Mac. The giant firms are blamed for spreading bad mortgages throughout the private financial sector.

The big question here would be what Moses did as “assistant director for product initiatives”.  “Product” in Fannie Mae parlance would be securities created by the lender that were sold to investors.  While that position would not approve the purchase of bad loans, the creation of “product initiatives” would create pressure to purchase more and more loans to generate more and more sales of the securities.  An assistant director would certainly have significant influence on the direction of Fannie Mae in this regard — especially one with a partner in Congress on the Financial Services Committee.

For that reason, regardless of Moses’ actual efforts in creating the bad paper, the relationship provided a serious conflict of interest for Frank.  Frank was supposed to oversee the actions of Fannie Mae as a government-sponsored entity.  If he had a partner, spouse, or family member in position to be affected by Frank’s decisions, then Frank should have recused himself from that committee.  His failure to do so represents a breach of public trust regardless of Fannie Mae’s failure.

It does put an interesting light on Frank’s resistance to regulators regarding Fannie Mae, but doesn’t necessarily explain the collapse, at least not directly.  Most of that happened after Frank ended his relationship with Moses, though, as did most of the damage from Fannie’s overvalued securities, which have poisoned the entire investment industry.  This may not have much bearing on the actual failures, but it shows the lack of ethics among those whom the public trusted to safeguard our interests.

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