John A. Allison is the former chairman and CEO of BB&T Corporation, where he started working in 1971. Under Mr. Allison’s leadership, BB&T grew from $4.5 billion in assets to $152 billion, becoming America’s 10th largest financial services company and earning the bank’s chairman a spot on Harvard Business Review’s list of top 100 most successful CEOs in the world. Currently a distinguished professor at Wake Forest University’s School of Business, Mr. Allison is also a leader for Job Creators Alliance, a group of entrepreneurs who promote pro-growth policies to support small business. You can find out more at jobcreatorsalliance.org.

EXCERPT FROM THIS ARTICLE: Allison: If you want to centrally manage an economy, control the allocation of capital. Dodd-Frank is a dramatic move toward statism (i.e., crony socialism) as government bureaucrats can practically decide which industries, companies and consumers have available credit. Dodd-Frank encourages more consolidation in the banking industry and instead of eliminating “too big to fail,” makes this practice a permanent public policy. It is easier for the centralized government authorities to control a few large institutions than many small companies.

On July 27, 2000, a first-term Congressman from Wisconsin signed his name to the Housing Finance Regulatory Improvement Act. The 30-year-old legislator didn’t have much company. Of 435 Members of the House, only 12 were willing to join Paul Ryan in sponsoring a bill to reduce the taxpayer risks at Fannie Mae and Freddie Mac.

Eight years later to the day, a federal bailout of the two mortgage giants was on its way to the desk of President George W. Bush. Almost $190 billion in taxpayer financing later, the toxic twins of the housing crisis maintain their massive role in mortgage finance.

On Friday, the U.S. Treasury said it is relieving the two government-sponsored enterprises of the requirement to pay regular dividends to taxpayers. Instead, the toxic twins will simply pass to the feds any profits they make. Fan and Fred’s investment portfolios will also have to shrink more quickly, which is very good. But the deal suggests that they will continue to slap taxpayer-backed guarantees on mortgage bonds forever, or until there’s a reformer in the White House.

If only there had been a few more reformers on Capitol Hill in 2000. Fan and Fred and their army of “affordable housing” lobbyists saw to it that the plan backed by Mr. Ryan never made the House floor. The bill would have limited the assets the toxic twins could hold, increased their capital, added new federal oversight, and removed their credit lines at Treasury.

“In order to maintain double-digit growth,” noted Mr. Ryan at a 2000 Congressional hearing, “Fannie Mae will have to take on more and more risk” in order to “increase profitability to shareholders.” He added, “This is not a mission of public policy.”

As the government-fueled housing party heated up, Mr. Ryan continued to warn that many of Fan and Fred’s profit-making activities carried little benefit for homeowners. In 2002, he sponsored a bill to remove the exemptions Fan and Fred enjoyed from the disclosure requirements in federal securities laws.

Mr. Ryan continued his sometimes lonely effort to reform the mortgage giants, for which he endured their usual political wrath. In 2008 he told us that Fannie once called every mortgage holder in his district, claiming falsely that Mr. Ryan wanted to raise the cost of their mortgage and asking if Fannie could tell the Congressman to stop on their behalf. He received some 6,000 telegrams. (See “The Fannie Mae Gang,” July 23, 2008.)

Mr. Ryan’s embrace of reform in his first term in Congress compares favorably to the efforts of a freshman Senator from Illinois in 2005. President Obama likes to pretend he was a warning voice in the wilderness because he later issued vague statements of displeasure once the housing market was already cracking.

What Mr. Obama doesn’t say is that he failed to support any of the serious reform efforts to reduce the role of Fannie and Freddie in the mortgage market. The same is true of old Senate hand Joe Biden. Mitt Romney was never a Washington politician, so he can’t be blamed for the legislative failures of the 2000s.

This history bears further study, as Mr. Obama repeatedly attempts to tie the GOP candidates to Washington’s policy mistakes leading up to the financial crisis. In Iowa this week, the President said that Messrs. Romney and Ryan are proposing the same economic policies “that got us into this mess in the first place.”

The truth is that the President who loves to talk about the “mess” he “inherited” did nothing to prevent it when he had the chance. In contrast, his opponent’s new running mate was an early voice for reforms that might have helped America avoid it.

But the question is phrased badly. Three things happened: a housing bubble, a collapse in lending standards, and a global liquidity panic when markets lost trust in the solvency of financial institutions.

Now comes a Securities and Exchange Commission complaint against former Fannie and Freddie executives. The complaint makes plain that Fannie and Freddie held a lot more subprime loans than they publicly called subprime. It makes plain that Fannie and Freddie were co-sponsors with the private sector in driving down underwriting standards. Case in point: Fannie’s backing in 1999 of Countrywide’s “Fast and Easy” program to give buyers loans without proof of their income or assets.

So why do these SEC actions leave us queasy? The lawsuits don’t aim to do justice for the American people, but—very nominally—for Fannie and Freddie’s shareholders, who were supposedly misled by their disclosures. In fact, the complaints utterly miss the target in this regard.

Fannie and Freddie were under political pressure to underwrite loans to poor and minority borrowers. They were eager to do any business that appeared profitable. But investors knew what was going on. Investors’ biggest concern, as the duo’s losses mounted, was their political status. And right up to the moment it seized them, the Bush administration was insisting both were solvent and well capitalized.

In his first response after news broke that he’d made $300,000 working for Freddie, Mr. Gingrich claimed he had “offered them advice on precisely what they didn’t do.” As a “historian,” he said during a November 9 debate, he had concluded last decade that “this is a bubble,” and that Freddie and its sister Fannie Mae should stop making loans to people who have no credit history. He added that now they should be broken up.

A week later Bloomberg reported that Mr. Gingrich had made between $1.6 million and $1.8 million in two separate contracts with Freddie between 1999 and 2008. The former Speaker stuck to his line that “I was approached to offer strategic advice” and had warned the government-sponsored enterprises (GSEs) to stop lending to bad credit risks.

Then on December 2 our colleagues at the Journal reported that as late as April 2007 Mr. Gingrich had defended Fannie and Freddie as examples of conservative governance. “While we need to improve the regulation of the GSEs, I would be very cautious about fundamentally changing their role or the model itself,” Mr. Gingrich said in an interview at the time.

Mr. Gingrich added in that interview that there are times “when you need government to help spur private enterprise and economic development.” He cited electricity and telephone network expansion. “It’s not a point of view libertarians would embrace, but I am more in the Alexander Hamilton-Teddy Roosevelt tradition of conservatism,” he said, adding “I’m convinced that if NASA were a GSE, we probably would be on Mars today.” (more…)

That’s the story revealed Friday by the SEC’s civil lawsuits against six former Fannie and Freddie executives, including a pair of CEOs. The SEC says the companies defrauded investors because they “knew and approved of misleading statements” about Fan and Fred’s exposure to subprime loans, and it chronicles their push to expand the business.

The executives deny the charges, and we hope they don’t settle. The case deserves to play out in court, so Americans can see in detail how Fan and Fred were central to the bubble. The lawsuits themselves, combined with information admitted as true by Fan and Fred in civil nonprosecution agreements with the SEC, are certainly illuminating. (more…)

The Securities and Exchange Commission’s lawsuits against six top executives of Fannie Mae and Freddie Mac, announced last week, are a seminal event.

For the first time in a government report, the complaint has made it clear that the two government-sponsored enterprises (GSEs) played a major role in creating the demand for low-quality mortgages before the 2008 financial crisis. More importantly, the SEC is saying that Fannie and Freddie—the largest buyers and securitizers of subprime and other low-quality mortgages—hid the size of their purchases from the market. Through these alleged acts of securities fraud, they did not just mislead investors; they deprived analysts, risk managers, rating agencies and even financial regulators of vital data about market risks that could have prevented the crisis.

The lawsuit necessarily focuses on 2006 and 2007, the years that are still within the statute of limitations. But according to the SEC complaint, the behavior went on for many years: “Since the 1990s, Freddie Mac internally categorized loans as subprime or subprime-like as part of its loan acquisition program,” while its senior officials continued to state publicly that it had little or no exposure to subprime loans. (more…)

A young risk analyst trained as a rocket scientist has just run numbers showing the firm has taken on much more risk investing in mortgages than its financial models had assumed was possible. His boss needs the numbers explained, saying, “I don’t even know what you do.” When the head of trading is shown the spreadsheet, he says, “I can’t read those things.” The fictional chief executive (“John Tuld,” a play on Dick Fuld of Lehman Brothers) asks the analyst to explain what he had discovered: “Speak to me in plain English, as you would to a young child or golden retriever.”

It wasn’t just senior executives at Wall Street firms who failed to understand the numbers and how bundling subprime mortgages would undermine value-at-risk measures. The same was true for the lawmakers and regulators who created the problem. Rep. Barney Frank, who last week announced his intention to retire from Congress, will be remembered for his comment in 2003: “I want to roll the dice a little bit more in this situation towards subsidized housing.” He got what he wanted: By 2008, half of the 54 million mortgages in the U.S. were subprime and other low-quality loans.

The instant spread of information in financial markets means that policy mistakes are reflected quickly, globally and sometimes signaling trillions of dollars in regulatory mistakes. But our system is so complex that it now takes actual rocket scientists to measure the risks.

Another example: The chief risk officer at MF Global spent a decade in aerospace and engineering before switching to Wall Street. Michael Roseman warned CEO Jon Corzine and the MF Global board about the risks of too much exposure to the bonds of European countries, to no avail. The firm went bankrupt as it became clear that sovereign debt was riskier than financial models assumed. Mr. Corzine, a Democratic former senator and governor of New Jersey, last week told a House committee: “I simply do not know where the money is.” (more…)

Few House Members have made a bigger legislative mark, and arguably no one so expensively. Mr. Frank deserves to be forever remembered—and we’ll help everyone remember him—as the nation’s leading protector of Fannie Mae and Freddie Mac before their fall. For years Barney helped block meaningful reform of the mortgage giants while pushing an “affordable housing” agenda that helped to enlarge the subprime mortgage industry.

“I do think I do not want the same kind of focus on safety and soundness that we have in OCC [Office of the Comptroller of the Currency] and OTS [Office of Thrift Supervision],” Mr. Frank said on September 25, 2003, in one of his many legendary rhetorical hits. “I want to roll the dice a little bit more in this situation towards subsidized housing.” The dice came up snake-eyes for the housing market and U.S. economy.

Democracy can be unfair, and for his sins Mr. Frank was rewarded with the chairmanship of the Financial Services Committee in 2009 and an opening to remake the U.S. financial industry. It was like asking Charlie Sheen to teach an anger management class. The result was Dodd-Frank, which didn’t solve the “too big to fail” problem but did make banks even more subject to the wishes of Washington. The crony capitalism exemplified by Fannie and Freddie became more broadly embedded in U.S. financial markets. (more…)

Corporate welfare is the offer of special favors—cash grants, loans, guarantees, bailouts and special tax breaks—to specific industries or firms. The government doesn’t track the overall cost of these programs, but in 2008 the Cato Institute made an attempt and came up with $92 billion for fiscal 2006, which is more than the U.S. government spends on homeland security.

That annual cost may have doubled to $200 billion in this new era of industry bailouts and subsidies. According to the House Budget Committee, the 2009 stimulus bill alone contained more than $80 billion in “clean energy” subsidies, and tens of billions more went for the auto bailout and cash for clunkers, as well as aid for the mortgage industry through programs to refinance or buy up toxic loans.***

This industrial policy model of government as a financial partner with business can sound appealing, but the government’s record in picking winners and losers has been dreadful. Some of the most expensive flops include the Supersonic Transport plane of the mid-1970s, Jimmy Carter’s $2 billion Synthetic Fuels Corporation (the precursor to clean energy), Amtrak, which hasn’t turned a profit in four decades, and the most expensive public-private partnership debacle of all time, Fannie Mae and Freddie Mac, which have lost $142 billion of taxpayer money. A few other illustrative industry handouts: (more…)