at the height of the housing boom. these government - sponsored enterprises were assigned goals around affordable housing that contributed dramatically to the growth in subprime credit and the decline in lending standards that led to the crisis. fannie and freddie clearly fit the pattern of what paul volcker said we must avoid : “ private when things are going well and public when things are going badly. ” several studies have found that the various subsidies received by fannie and freddie have done little to lower mortgage rates. instead, the vast majority of such benefits accrued to fannie and freddie ’ s stockholders or was used to gain political favor. for example, only two months before fannie mae and freddie mac were put into conservatorship in september 2008, media accounts detailed how both had made the list of washington ’ s top 10 lobbying spenders over the previous decade. together, they had spent a total of $ 170 million. 1 at that time, fannie employed 51 lobbyists and freddie paid 91, with both counting former members of congress among their hired guns. this was only two years after the federal election commission levied a $ 3. 8 million penalty against freddie related to charges it was illegally involved in 85 political fundraisers. considering the high level of political activism on the part of these gses, it should not surprise you to learn that both fannie and freddie are considered “ heavy hitters ” on the center for responsive politics ’ website, opensecrets. org, which provides a wide range of usa today, july 17, 2008. data on money ’ s influence on u. s. elections and policy. that designation means that both are among the biggest donors to federal - level politics since 1989. so, while fannie and freddie have spent millions on lobbying and building influence in washington, their losses could cost taxpayers as much as $ 363 billion, according to recent estimates – and those are just the direct losses. the overall losses that could be attributed to the gses are likely to be several multiples higher when we consider that without their implied “ federal guarantee ” and related incentives around risk, the markets might have been far more cautious and the financial crisis far less prolific. more stunning perhaps, had these institutions been held to stricter financial standards, far fewer households would have suffered the tragedy of foreclosures, the lost home equity and the loss of personal savings and wealth that today continues to hold back our economic recovery. given the costs and market distortions these

seen so far. the attempts to address capital markets and their role as the “ financial foundation for main street, ” appear to place a much higher value on rhetoric than on substance and necessary reform. as a nation, we have violated the central tenants of any successful system. we have seen the formation of a powerful group of financial firms. we have inadvertently granted them implied guarantees and favors, and we have suffered the consequences. we must correct these violations. we must reinvigorate fair competition within our system in a culture of business ethics that operates under the rule of law. when we do this, we will not eliminate the small businesses ’ need for capital, but we will make access to capital once again earned, as it should be. the inevitable crisis the banking system has gone through an unprecedented era of change starting in the 1980s when lawmakers began removing the roadblocks to interstate banking. this evolution continued to pick up speed in the years that followed through a number of legislative moves that validated the creation of ever larger banks. the scope of activities continued to grow through the 1990s and by the end of the decade we saw the merger between citicorp and travelers group. that merger required the divestiture of certain activities, but this became unnecessary with the passage of the gramm - leach - bliley act. the legislation allowed a single financial company to engage in commercial banking, investment banking, insurance underwriting and brokerage. this expansion of activities, some argued, created a stronger system overall because the institutions were more diversified. for example, rather than being entirely reliant on a single community or industry, such as real estate, a stronger system was being created because banks were serving a broader nationwide base. a downturn in a single market would be offset by stability in other areas. although this new era of finance was widely supported, a critical ingredient was missing on the road to expansion and innovation : a framework that would limit dangerous excesses or the development of perverse incentives. undoubtedly, the most important omission was a way to deal with the larger firms that were using the new growth opportunities to become “ too big to fail ( tbtf ). ” although banking legislation in 1991 specifically tried to limit the federal deposit insurance corporation ’ s ( fdic ) ability to protect failing banks and their creditors, regulators could make an exception for large institutions whose failure might pose a threat to the economy or to financial stability. as a result, tbtf was embedded in our