Setting the stage for the contentious legislation was the auspicious federal takeover of mortgage-lender giants Fannie Mae and Freddie Mac. For years legislators had suspected or even observed that the two Government Sponsored Enterprises (GSEs) were not being fiscally responsible, and were leveraged much too far. In 2003 the Bush administration sought to create an agency that would oversee the two GSEs, but ultimately no reform materialized.
This is in large part because Fannie and Freddie maintained one of the strongest lobbies on Capitol Hill, and their version of “crony capitalism” was returning profits on un-regulated capital gains directly into the pockets of lawmakers (O’Driscoll, 2008). After legislators finally realized that the opaque mortgage market weaknesses could be devastating to the American economy (when homeowners began to default on loans en masse), they acted swiftly to provide bailout money to the GSEs (and, of course, “diligently” relieved the respective CEOs of their authority).
But this now created a precedent: soon after Fannie and Freddie were placed in a conservatorship, Congress and the Treasury found that they needed to deliberate on the fates of Wall Street giants Lehman Brothers and American International Group (AIG). During these bailouts (or in the case of Lehman, the lack thereof) a particular sticky point for Congress and the American public became the “golden parachutes” that corporations provided to fired CEOs: billions of dollars in total for executives that had leveraged their companies into the ground.
Moreover, the branch effects of special interest and lobbies had finally backed Congress into a corner, and all agreed that not acting was an untenable option. Federalizing some of these large corporations now seemed a necessary solution, despite the fact that these bailouts could potentially kneecap the fundamental tenets of the American economy.
Large banking giants on Wall Street had set the stage for the bailout dilemma on Capitol Hill with strong lobbies that promoted the continuation of unregulated markets. This was recognized by legislators who drafted the bailout bill, and hence was addressed in the key items of legislation in the TARP (items such as limiting executive compensation). But these key items became hot for debate on Capitol Hill, and ended up becoming some of the most debatable policy issues in the entire economic crisis.