Wishing We Could Send Congress to Federal Prison Over the Financial Crisis

Hunt for Justice by Cynthia Hunt

A joke in Washington goes like this: "What's the difference between Enron and Fannie Mae? Answer: The guys at Enron have been convicted.”

That's no new joke. In the beginning of a Wall Street Journal editorial from June 2006—that's right, two years ago—the WSJ wrote 20 editorials starting all the way back in February 2002, and continuing through June 2006, warning of the impending mortgage crisis.

Again and again, the WSJ described the disaster that was being created, a building crisis that could endanger our entire financial system. In 2004, a top FBI official also warned that the mortgage boom made the market ripe for shady operators, but he said the FBI was on top of it.

Convictions aren’t the only difference between Enron and the current crisis. If you remember, Enron executives fooled everyone for a long time with their voodoo accounting. A special investigative committee worked for months to unravel and explain how Enron executives cooked the books. The committee released its findings in what was called the “Powers Report.”

The current financial crisis is no surprise. A WSJ editorial in October 2004 said Fannie has been “cooking the books. Big time.” (at left: NYSE traders yesterday after the Dow plummetted 800 points).

Repeated warnings were sounded.

Our elected government do-nothings did nothing.

And yes, greed on Wall Street contributed too. As a matter of fact, there's plenty of blame for us all to be sickened as taxpayers with Congress and with Wall Street.

Here's what you need to know. Fannie and Freddie are the two biggest mortgage holders in the country. Fannie Mae and Freddie Mac are government-sponsored entities that were designed to help with the noble goal of allowing more Americans to own a home. Congress gave Fan and Fred special privileges long ago. They were allowed the benefits of completely private companies but not required to follow the same rules. They don't have to register their securities or file insider trading forms with the Securities and Exchange Commission. In other words, they don't have to disclose how they are running their business to investors.

This exemption from the rules allowed Fannie and Freddie to pile up massive debt knowing there was an implicit guarantee by the American taxpayers. To make matters worse, this accounting funny business with Fan and Fred allowed their executives to manipulate numbers and make huge bonuses.

While Fan and Fred were engaged in their bad business, Wall Street investment firms were buying up subprime mortgages and bundling them as investments so complicated that few understood what they were. When the housing bubble burst, the firm's investments were in deep trouble.

In 2003, The Bush White House tried half-heartedly to impose regulation and stop the runaway train. But the president never took his case to the American people so that he could rally support and force Congress's hand. In 2004, the mighty Alan Greenspan said Fannie and Freddie must be reformed or they posed a risk to the entire financial system. However, the bipartisan Fan and Fred defenders in Congress, who were lining their pockets with campaign contributions from the duo, defended and protected the ugly couple.

Now the FBI and SEC have launched more than 75 investigations into this debacle to find out if laws were broken. Government lawyers are already warning that the current crisis is so complex that it may be impossible to prove that a crime was actually committed.

Two WSJ editorials in 2002 and 2004 were entitled "Fannie Mae Enron" in an attempt to show the scary similarities between Enron and Fannie Mae. The losses in the current banking crisis dwarf those of Enron, and it took government investigators five years to make their complicated case against the Enron executives. One wonders if they'll ever figure this one out.

Years ago when I covered the Enron cases, I sat in the beautiful Houston mansion owned by former Enron Executive Jeff Skilling (pictured left) while he meticulously presented his case to me that he committed no crime at Enron. Bad business decisions are not necessarily crimes. But in 2006, a jury convicted him of fraud saying he intentionally misled investors. He is in federal prison appealing his case and is scheduled to get out in 2028.

I remember Skilling describing the collapse of Enron as an "old-fashioned run on the bank" when investors lost confidence in that business. I am struck now as I am already starting to hear some use that same phrase in the current crisis. Remember, Skilling didn't plead the Fifth. He went before Congress and answered all their questions because he was and still is convinced that he did no wrong.

The current crisis makes Enron look like a hiccup. Common sense says that someone should be put in a federal jumpsuit over this. Perhaps the most deserving culprit is the body of Congress. If Jeff Skilling misled investors, then Congress not only misled Americans but was a willing accomplice to this horrific crime.

I believe this is the real "crime of the century," and like O. J. Simpson after his first trial, I predict Congress members will spend the next few years feigning disgust in congressional hearings and on beautiful golf courses while looking for the "real killers" of our economy.

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