Why isn't Congress probing the Fannie, Freddie fiasco?

They are the two largest mortgage lenders in the United States, and their collapse helped feed the global financial panic.

Of the torrent of jumbo failures last fall, the insolvencies of Fannie Mae and Freddie Mac could be among the most expensive, costing taxpayers $200 billion or more. Yet, ever since the government took control Sept. 7 of Fannie Mae and Freddie Mac, effectively declaring them insolvent, Congress has done little to look into the causes.

It has held one full-blown investigative hearing, where it heard sworn testimony from a handful of witnesses who ran the companies before the collapse. At another, before the House Financial Services Committee, chairman Barney Frank (D., Mass.) didn't arrive until the hearing was more than half over.

A spokesman said Frank arrived late because he had been working with the Bush administration on last fall's financial bailout.

At a third hearing, Senate Banking Committee Chairman Christopher Dodd (D., Conn.) devoted a portion of his opening statement to absolving the two lenders of blame for the mortgage crisis, but did not hear from the executives who ran the companies when they collapsed.

There were plenty of red flags before the failure.

Accounting scandals at Fannie Mae and Freddie Mac in 2003 and 2004 had raised questions about the credibility of their financial statements and forced the departure of senior managers at both companies.

Moreover, critics of the companies, which spread campaign contributions liberally and employed a huge lobbying force, had been warning that Fannie and Freddie were too thinly capitalized.

Last summer, after years of dickering, Congress finally enacted legislation permitting regulators to force the companies to beef up reserves to protect against a downturn.

But by then it was too late. The companies were taken over a few weeks later.

Now, some longtime political observers say that Congress may be reluctant to turn over too many rocks for fear of what might crawl out.

"It is awkward for any group to examine itself," said former Rep. Jim Leach of Iowa, a Republican who was chairman of the House Financial Services Committee before he lost his reelection bid in 2006.

Leach had long warned that Fannie and Freddie were out of control.

Added Leach, who now teaches at Princeton University and headed Republicans for Obama during last fall's election campaign: "When it comes to self-complicity, it is especially difficult."

Representatives for congressional Democrats, who hold majorities in both houses, say there was not time last fall to conduct more than a handful of hearings, because they were preoccupied with stanching the meltdown in the financial markets. Steve Adamske, a spokesman for the financial-services committee, said the panel reviewed not only problems at Fannie and Freddie, but also at other failed financial institutions, including Lehman Bros. Holdings Inc. and Bear Stearns Cos. Inc. He said the problem went well beyond Fannie and Freddie.

"I am not saying that there weren't things that could have been done in a better way," said Brendan Daly, spokesman for House Speaker Nancy Pelosi. But he maintained that Republicans blocked earlier reform efforts and that the sheer crush of crises last fall prevented the House from spending more time on Fannie and Freddie.

A spokeswoman for Dodd said it was not necessary to hear from former Fannie Mae and Freddie Mac executives because the committee questioned James Lockhart, director of the Federal Housing Finance Agency.

"We had their regulator, James Lockhart, in, and he was in charge of overseeing the companies, and we had the Treasury secretary in at the same hearing, who made the decision to put [Fannie and Freddie] into conservatorship," said Kate Szostak.

Congressional Democrats say they expect to conduct more hearings that will look at Fannie and Freddie and other failed financial institutions with the aim of devising reform proposals.

But Congress' response so far is in sharp contrast to the nation's last financial meltdown, when one committee alone, the House Energy and Commerce Committee, over 60 days in 2002, held eight investigative hearings on the failed energy-trading company Enron Corp.

Over the last decade, Fannie and Freddie spent $175 million on lobbying members of Congress and the executive branch. They lavished members of Congress with more than $3 million in campaign contributions.

Dodd, whose Banking Committee has primary responsibility in the Senate for overseeing Fannie and Freddie, received a total of $165,400 from 1989 to 2008, the highest of any member of the House or Senate, according to the Center for Responsive Politics, an independent research group that tracks campaign finance.

Leading the GOP recipients was Sen. Robert Bennett, of Utah, the second-highest-ranking Republican on the Senate Banking Committee, who received $108,000.

Fannie and Freddie, by design, had a unique relationship with the legislators. The banks once were seen on Capitol Hill as being on the side of the angels. They were created by Congress for the purpose of spurring home-lending. They did this by purchasing bundles of home mortgages from banks and brokers, a practice that freed money for new mortgage-lending.

They were able to offer favorable rates because of an implied government guarantee of their finances that allowed them to borrow at lower rates than commercial banks and other lenders.

But when housing values began to drop across the nation in late 2006, Fannie and Freddie were swamped with foreclosures. Their capital reserves at that point were far too thin to provide enough cushion.

Many of their losses have been tied to substandard mortgages the companies made directly or guaranteed, a number that has been variously estimated at about $800 million to almost twice that. But Susan Wachter, a professor at the University of Pennsylvania's Wharton School, says the foreclosures sweeping the country are now forcing homeowners with much higher incomes and better credit profiles out of their homes, as more people lose their jobs in the worsening economy. That development, too, has been hitting Fannie and Freddie hard, she said.

Alarms began ringing loudly in 2003 and then in 2004, when both companies were accused by their regulator of manipulating their financial reports.

The Fannie Mae investigation, conducted by lawyers with Center City's Duane Morris L.L.P., found that senior executives had manipulated reported earnings in a way that maximized their bonuses.

"Our examination found an environment where the ends justified the means," said Lockhart, their chief regulator. "Senior management manipulated accounting, reaped maximum undeserved bonuses, and prevented the rest of the world from knowing."

What little Congress has uncovered regarding the fiasco at Fannie and Freddie has been revealing and suggests that a sustained investigation would produce even more.

At the one intensive investigative hearing held after the collapse, led by Rep. Henry Waxman (D., Calif.), the committee disclosed a series of e-mail from executives at Freddie Mac warning that the company had been weakening its lending standards and that it might get into trouble as a result.

One e-mail obtained by the committee suggested that Freddie Mac's purchase of substandard loans was stimulating demand and might serve as an incentive for brokers to produce more of them.

While some were questioned behind closed doors, to date, Congress has yet to hear any public testimony from the authors of that e-mail.

Fannie and Freddie, now under federal control, still are major players in the mortgage market.