Posted on 10/01/2008 3:54:21 PM PDT by markomalley
There have been a number of explanations put forth in both the mainstream media and on the internet that attempt to explain the current financial sector meltdown and the mess with Fannie Mae and Freddie Mac but none that really ties the whole story together. This is really a story that traverses many decades and numerous actions taken by government that eventually created this crisis. I will attempt to lay out the full timeline in this piece.
The Community Reinvestment Act (CRA) which was passed in 1977, required banks and savings and loan associations to offer loans throughout their entire market area, an effort to end the practice known as “redlining.” Redlining was thought at that time to be entirely racially based and failed to take into account the ability of the borrowers to pay. People in poor neighborhoods normally cannot afford home loans. This is simply a fact of life.
The enforcement of the CRA was rather lackluster until 1993 when the Clinton Administration sought to strengthen CRA rules to increase the number of home loans to “distressed” areas. The Secretary of the Treasury at that time was Lloyd Bentsen who said, “In a nutshell, what we're proposing to do is to make it easier for lenders to show how they're complying with the Community Reinvestment Act.” The translation of this really means, “We want to make sure that banks are making home loans in communities to people who cannot afford them.”
In his opening remarks in the press briefing he also said, “I want to briefly tell you about it and how it fits into the Clinton administration's initiatives for change.” Initiatives for change. Sound familiar?
Bentsen also had an eerily familiar remark, “We promised we were going to get rid of the duplicative regulation in our financial institutions, and we've developed legislation to accomplish just that. We said the Clinton administration was going to get money flowing into community development financial institutions, and we're doing just that.”
I want you to remember that phrase about “duplicative regulation” later on, as I will refer to it later.
U.S. Attorney General Janet Reno set the tone for what was to come, “For those who thumb their nose at us, I promise vigorous enforcement,” she warned.
In 1995 the Clinton Administration implemented these revised regulations. Banks were under pressure to increase the number of small business and home loans in disadvantaged areas. Some companies, such as Countrywide Financial Corporation were happy to comply. These loans were known as “subprime” and were backed by securitization.
Securitization is a fancy term that means many loans were bundled together into a single package and sold much as common stocks are sold. The idea is that long term debts, such as mortgages, are assets that will produce long term returns. Since the assets are not tangible, not physical objects, but are intangible, i.e., loans, they are sold as “securities” not as stocks. But in the final analysis they are pretty much the same.
One of the first companies to start dealing in these subprime mortgage securities was Bear Stearns. (That name ring a bell?)
Thus the number of such subprime and what are known as Alt-A loans began to skyrocket in comparison to traditional loans. These loans were made without the usual level of capital backing required for regular banks (10 percent) when they were sold to Fannie Mae and Freddie Mac (2.5 percent).
In 1997 Jamie Gorelick was appointed Vice Chairman of Fannie Mae even though she had no training or experience in financial matters. This was the same Jamie Gorelick, as Deputy Attorney General under Janet Reno, that implemented the so-called, “wall of separation” that prevented the United States Attorney from compiling information from the Office of Intelligence Policy and Review, which included the CIA, with information gathered by the FBI and state police agencies. This was in response to the bombing of the World Trade Center by Sheik Omar Abdel-Rahman in 1993.
As a result of this “wall of separation” the identification of Zacarias Moussaoui was thwarted which could have identified him as a member of the Al Qaeda group planning the 9/11 attacks. The one opportunity to prevent the 9/11 attacks was thus blocked. Gorelick was later appointed to the 9/11 commission investigating the events of that fateful day but this is preposterous since she, herself, was instrumental in the failure that led to the disaster in the first place.
Jamie Gorelick served as Vice Chairman of Fannie Mae until 2003.
By 1992 Fannie Mae loans consisted of 51.5 percent that served low- and moderate-income families; 32.5 percent served underserved areas, and 21.6 percent served special affordable housing. This was because HUD increased Fannie Mae's goals for each category, raising the low- and moderate-income goal from 42 percent to 50 percent; the underserved goal from 24 percent to 31 percent; the special affordable goal from 14 percent to 20 percent; and the multifamily minimum in special affordable financing from $1.29 billion to $2.85 billion. Fannie Mae exceeded the goals in each category.
What needs to be born in mind is that the financial officers of Fanny Mae and Freddie Mac were awarded huge bonuses for reaching or exceeding these targets. This explains the statement by Franklin D. Raines, Chairman and CEO of Fannie Mae, "In 2001, Fannie Mae seized on housing's best year in history to bring affordable housing to lower-income families, minorities and other Americans who've been overlooked, underserved and overcharged." Raines would eventually go on to take down $90 million in bonuses before he had to step down for faulty accounting practices (also known as cooking the books – but we are getting ahead of ourselves).
By 2001 some people were beginning to see the problem. The Bush Administration's 2002 fiscal year budget stated that: “the size of Fannie Mae and Freddie Mac is a potential problem, because financial trouble of a large GSE could cause strong repercussions in financial markets, affecting Federally insured entities and economic activity.”
In 2003 the pressure was really building to do something about Fannie Mae and Freddie Mac, but Democrat congressmembers would have none of it. In face of recommendations by the Bush Administration for reforms, regulations and oversight of Fannie and Freddie Representative Barney Frank of Massachusetts stated: “These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis. The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing."
This has been the Democrat party line ever since. More sensible people have been saying otherwise. In May 2005 Senator John McCain spoke about legislation he co-sponsored creating more oversight for Fannie Mae and Freddie Mac:
“For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac–known as Government-sponsored entities or GSEs–and the sheer magnitude of these companies and the role they play in the housing market. OFHEO’s report this week does nothing to ease these concerns. In fact, the report does quite the contrary. OFHEO’s report solidifies my view that the GSEs need to be reformed without delay.
I join as a cosponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005, S. 190, to underscore my support for quick passage of GSE regulatory reform legislation. If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.”
This legislation was torpedoed by Connecticut Senator Chris Dodd, Rep. Barney Frank, Sen. Chuck Schumer and other Democrats. Although the upcoming crisis was nearly perfectly predicted by Senator McCain they weren’t interested in hearing it.
Now that the meltdown has occurred the same congressmen who blocked any attempts to institute reform and regulation over Fannie Mae and Freddie Mac are blaming “free markets” and a lack of regulation for the disaster. But the record shows that nothing could be further from the truth. It was the insistence that government regulations control who got loans, whether they could afford them or not that created the problem. This was the “duplicative regulation” that resulted in this mess. There were regulations alright, but they were all in the wrong direction.
There are two contributory factors to this debacle that must be noted in order to understand the speed and intensity of the meltdown.
First is the sloppy monetary policy of the Federal Reserve. It was no accident that the stock market crash of 1929 came a mere 16 years after the creation of the Fed in 1913. The late 1970s stagflation which was quickly cured by the sound Fed. policies of Paul Volcker also demonstrate the opposite case.
The creation and subsequent burst of the high tech bubble, the commodity markets and eventually the mortgage markets are all due to faulty prime interest rate proclamations by the Fed. In reality the Federal Reserve should not exist and interest rates should be determined by the market. Had this been the case the financial crisis we face now would not have come about.
Artificially holding down interest rates in order to spur growth has the unintended consequence of inducing unwise and foolish investments, since credit is so cheap. In the case of the stock market, investing in risky stocks and in the case of commodities, buying for speculation items such as pork bellies, concrete, steel, copper or oil. The speculation in the oil markets that drove up oil and gasoline prices is a direct result of the anticipation the prices will continue to rise because of the easy availability of credit.
Eventually, as each bubble burst, it eventually found its way to the housing market. People who had no justifiable reasons to buy houses were induced to do so because of the Fannie Mae, Freddie Mac mandates. This ties all the way back to Attorney General Janet Reno’s promise, “For those who thumb their nose at us, I promise vigorous enforcement.”
The second contributory factor is the Federal law known as the Sarbanes-Oxley act. This required lending institutions (among other equally foolish rules) to value assets held for what they are currently worth on the current day. When mortgage loans were written at the height of the bubble they were valued at that current price, as the housing market collapsed the portfolios became worthless even though they would probably be worth much more in the future when the market recovered.
This is what drove Fannie Mae, Freddie Mac, Indymac, Washington Mutual and so many others in the past, and yet to come, to bankruptcy. In each and every case it is the morass of congressional laws and regulations that have created this situation, that so many call a crisis. But the cause is not the lack of regulation, the free market or capitalism.
And this is the real point of this missive. Sen. Chris Dodd, Rep. Barney Frank and House Leader Nancy Pelosi are all saying in news conferences that Democrats had nothing to do with this financial market meltdown when their fingerprints are all over it. It was created, orchestrated and imposed by these and other Democrats. They are either ignorant, forgetful, or (shall I dare say it?) lying.
One thing is clear, the current turmoil in the mortgage and financial markets is not due to unregulated capitalism. Nor is it due to the “failed policies of the last eight years” as one presidential contender labels it. It is due to decades of liberal/socialist Democrat policies that sought to provide goods and services to people who could not afford them, in order to buy votes. This is the real and true bottom line.
The upcoming election is going to be a referendum on whether we are going to keep electing the same people who have proven they have no idea how economics works or electing leaders who do. This latest financial crisis is a perfect instructive lesson between the two. The question is whether people are going to believe ABC, CBS, NBC, CNN, the New York Times and the rest of the mainstream media or are going to learn to think for themselves.
It is up to you. Spread the word.
Okay. And here's how:
| ---------------------------------------------------- DEMOCRATS NOT TO BLAME? NONSENSE ! About Nancy Pelosi. She says the Democrats share absolutely none of the blame for the current financial goings-on. She's wrong. In fact, she's lying because she knows her statement to be untrue ... here's your primer: 1. Almost all of the financial problems we see today are based on bad mortgage lending. That would be lending money to people to buy homes who didn't qualify for a loan. 2. The Democrats, under Clinton, strengthened a government-created monster called the "Community Reinvestment Act." This law was then used by "activists" and "community organizers" (like Obama?) to coerce lending institutions to make these bad loans ... millions of them. 3. Now we see what happens when political "wisdom" supplants good loan underwriting. When private financial institutions are virtually forced to make loans to people with a bad credit and job history ... this is what you get. Enjoy it. The Democrats have offered us a candidate who is very anti-private sector. Obama believes that America is great because of government and those who, like him, deride the profit motive. ... -- Neal Boortz at http://boortz.com/nuze/200809/09192008.html
The Financial Sector Meltdown "The reasons for [the financial sector problems] are not obscured. There are several of them. "One of them is that the Federal Reserve under Alan Greenspan kept the punch bowl open for a long time with [unusually low] loan interest rates after 9-11, which led to a wild borrowing spree on Wall Street and Main Street. "Secondly, for two decades you've had Republicans and Democrats in the Presidency and also in Congress who pushed to expand lending for housing for people who hadn't had it before, particularly African-Americans who'd been denied it because of discrimination and racism, and encouraged sub-prime loans which, in the end, collapsed in a fury and in a wave. "And thirdly, what we had was a kind of advance in computers in which people derived these esoteric instruments of debt, which was understood, not as a way to cheat and hide, but as a way to spread the risk of mortgages. But ultimately, because it was [so] obscure, it had the opposite effect of spreading the liability in a way that people aren't even sure how much they own. "The reason Lehman collapsed is because it looked at its books and doesn't understand how much of a liability it has, and a run starts on it, and it can't answer. "Both are appealing mindlessly to populism [blaming Republicans or Wall Street instead of the politicians who started the whole mess when, for years and years, so many of those politicians had the government coerce the financial sector into selling all those risky mortgages]." -- Charles Krauthammer on Special Report with Brit Hume, Sept. 18, 2008
Fannie Mae Eases Credit To Aid Mortgage Lending [to minorities and uncreditworthy] By Steven A. Holmes, The New York Times, September 30, 1999 at http://tinyurl.com/4clng5 In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders. The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring. Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.
New Agency Proposed to Oversee Freddie Mac and Fannie Mae By Stephen Labaton, New York Times, September 11, 2003 at http://tinyurl.com/6lp5qu The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago. Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry. The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios. The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac -- which together have issued more than $1.5 trillion in outstanding debt -- is broken. A report by outside investigators in July concluded that Freddie Mac manipulated its accounting to mislead investors, and critics have said Fannie Mae does not adequately hedge against rising interest rates. ... ''These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.'' Representative Melvin L. Watt, Democrat of North Carolina, agreed. [The DEMOCRATS killed the plan by stopping all action on it.]
When the Bush administration tried to rein in Freddie and Fannie from continuing to engage in risky practices, guess who stepped in to block their efforts? Democratic senators Chris Dodd, John Kerry, Hillary Clinton, and -- are you ready? -- Barack Obama. Meanwhile, guess who were the top four recipients of campaign contributions from Fannie and Freddie between 1988 and 2008? Senators Chris Dodd, John Kerry, Hillary Clinton, and -- still ready? -- Barack Obama. A coincidence, I tell you -- just a coincidence. More mere coincidences: Franklin Raines -- a former Carter- and Clinton-administration official and former head of Fannie Mae, now under investigation for cooking its books -- had a lot of powerful people in Congress beholden to his agency. Here is a list of his campaign-contribution recipients. Meanwhile, Democratic honcho Jim Johnson, another former Fannie Mae CEO, has been an economic adviser to and major fundraiser for Barack Obama, and even ran his vice-presidential search committee until growing scandals over his Fannie management forced him to step down in July. -- Robert Bidinotto, here: http://bidinotto.journalspace.com/?entryid=783
On May 25, 2006, Sen. John McCain spoke forcefully on behalf of the Federal Housing Enterprise Regulatory Reform Act of 2005. He said on the floor of the Senate: "Mr. President, this week Fannie Mae’s regulator reported that the company’s quarterly reports of profit growth over the past few years were “illusions deliberately and systematically created” by the company’s senior management, which resulted in a $10.6 billion accounting scandal. "The Office of Federal Housing Enterprise Oversight’s report goes on to say that Fannie Mae employees deliberately and intentionally manipulated financial reports to hit earnings targets in order to trigger bonuses for senior executives. In the case of Franklin Raines, Fannie Mae’s former chief executive officer, OFHEO’s report shows that over half of Mr. Raines’ compensation for the 6 years through 2003 was directly tied to meeting earnings targets. The report of financial misconduct at Fannie Mae echoes the deeply troubling $5 billion profit restatement at Freddie Mac. " The OFHEO report also states that Fannie Mae used its political power to lobby Congress in an effort to interfere with the regulator’s examination of the company’s accounting problems. This report comes some weeks after Freddie Mac paid a record $3.8 million fine in a settlement with the Federal Election Commission and restated lobbying disclosure reports from 2004 to 2005. These are entities that have demonstrated over and over again that they are deeply in need of reform. "For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac–known as Government-sponsored entities or GSEs–and the sheer magnitude of these companies and the role they play in the housing market. OFHEO’s report this week does nothing to ease these concerns. In fact, the report does quite the contrary. OFHEO’s report solidifies my view that the GSEs need to be reformed without delay. "I join as a cosponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005, S. 190, to underscore my support for quick passage of GSE regulatory reform legislation. If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole. "I urge my colleagues to support swift action on this GSE reform legislation." It died at the hands of the DEMOCRATS --
Democrats and some Republicans opposed reform in part because Fannie and Freddie were very good at greasing palms. Fannie has spent $170 million on lobbying since 1998 and $19.3 million on political contributions since 1990. The principal recipient of Fannie Mae's largesse was a Democrat, Sen. Chris Dodd (D, CT), chairman of the Senate Banking Committee. No. 2 was another Democrat, Sen. Barack Obama (D, IL). Mr. Dodd was also the second largest recipient in the Senate of contributions from Countrywide's political action committee and its employees, and the recipient of a home loan from Countrywide at well below market rates. The No. 1 senator on Countrywide's list? Barack Obama. Check it out here: http://tinyurl.com/4h9955 OBVIOUSLY, DEMOCRATS DESERVE A GREAT DEAL, IF NOT ALL, OF THE BLAME.
find a cleaner copy of this email at
and please: PASS IT ALONG ---------->
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Glad handing pols trying to make banks give stuff to their constituents, check. That'll go away when fishes fly and the seas run dry.
Bankers with dollar sign eyes salivating over a 1% higher interest rate from a likely deadbeat, check. That'll go away when water is dry and air heavy.
Speculator borrowers playing heads I win and tails you lose with anyone fool enough to lend them money to gamble with, check. We can stop that by repealing gravity.
Monetary authorities reacting to recession and war and declining markets with low rate easy money trying to get things moving again, succeeding, and leaving the punch-bowl out for too long, check. Because that has never happened before and is sure to never happen again, right?
Financial whiz kids inventing new ways to bet and rejiggering them to find every nook and cranny in investor preferences to sell the same pizza for twice as much using more slices and a snazzier logo on the box, check. Pay a million energetic power freaks each a million dollars a year for profits any way any how, and then ask where moderation and sobriety went.
Distracted savers chasing the last quarter's performance or believing anything written in a glossy enough brochure with a staggering enough number written in the "past performance" column, and salesmen peddling it on commission, check. We'll get rid of that by making the average human salesperson into a sleepy accounting geek and your average soccer mom with 30 minutes a week for finances into Warren Buffett.
Cycles are normal. Everyone's to blame, and it doesn't matter who is anyway, we are all in the same boat. Any screw up big enough will hit everyone there is. Grow up. Freedom means free to make mistakes.
Pelosi may actually be that stupid. Frank and Dodd are lying scum.
Great explanation bump and bookmark.
Congressman Billybob
The Declaration, the Constitution, parts of the Federalist, and America's Owner's Manual, here.
1) 80% of subprime loans were made by lenders (such as Countrywide) which were essentially unregulated, inculding requirements to comply with minority lending targets.
2) Even in the case of the 20% of loans made by regulated lenders, it leaves out a whole bunch of other bad actors, for example the bond rating houses that should have informed investors of the actual risk, the people who misrepresented and sold the securitized results, and so on – and in the next few years we will be reading many, many account of such misbehavior as a result of both criminal prosecutions and civil suits.
Given the way the entire process was structured, and the enormous profits to be made short-term by participants, human nature pretty much guaranteed that in a poorly regulated envirmoment there would be abuse every step of the way. This was pretty much a classic case of market failure - and the banksters bought both the Democrat and Republican parties to make it happen
Thanks for the quotes and the links.
THANK YOU!Great links!We need information like that.
You’re welcome. I see you’re in Ohio. May I encourage you to post a link to http://www.freerepublic.com/focus/news/2095277/posts?page=2#2
on the Ohio message board? And start an email campaign of your own?
What would you think of the theory that rules the floodgates were opened for all kinds of funny-money tricks so as to make the CRA-induced funny money less visible. Something like the bank robber who throws open a suitcase or two full of cash so the mob that rushes in to grab the money will conceal him.
Think about the sheer number of people who misbehaved when given the opportunity and assured that “everybody was doing it”: the millions of borrowers who ignored the obvious eventual implications of the loans they were signing or cheerfully lied on their applications, hundreds of thousands of mortgage brokers, real estate agents, and appraisers who look the other way when fraud was being committed or even participated in committing it, the tens of thousands of mid-level managers and supervisors who did nothing to stop it despite the fact it was obviously occurring, and the few hundred people at the very top of the pyramid who are happy to walk home with a with enormous paychecks for setting the moral and ethical tone that allowed the whole thing to happen - meanwhile paying the swarm of lobbyists who kept the process running and even accelerating, and bankrolling the current campaigns and future-private sector careers of a the national legislators to let it happen (and this was a Democrat and Republican problem alike).
Everyone involved was on the gravy train rolling along toward next week's even bigger paycheck or expected increase the value of their home, and nobody had an incentive to slow the train before the inevitable train wreck - and in fact, they had every short-term incentive to shovel still more coal into the boiler.
And there's nothing surprising in any of this, this is exactly what human nature predetermines will happen absent appropriate regulation to prevent it - we've had plenty of recent reminders (for example the dot.com boom and crash) that people act this way, but unfortunately the only way people learn the lesson is when they get hammered - hard - by the inevitable result, and just as inevitably the lessons unlearned two or three generations later.
Of course anti-poverty activists were gaming the system right along with everyone else, but their input into this mess is just one of many factors in its creation, and far from the most important. In fact I think it's pretty clear that far from being the most successful gamers they were amongst the big-time losers, having been themselves successfully gamed by the ideological purists who ignored human nature while pushing for a regulatory changes that could be absolutely guaranteed to reinforce obvious and destructive patterns of human behavior.
And this is just the way politics and human economies work: you get cycles of reaction which become overreaction, clearly in this case oversimplified views of market behavior first improved economic conditions by removing unnecessary regulation and then moved on to ruinously irresponsible deregulation, now we are entering a period of reaction and correction in which will likely overshoot in the other direction - all we can hope is that the accretion of such lessons will eventually teach us to temper the excesses of the swing in both directions.
But for now, the conservative swing in American economic policy is at an end, just as Thatcherism overshot its way to electoral disaster in England and the conservatives crashed and burned in Canada - just as the Tories in England and the conservatives in Canada - having rebuilt as a conservative parties appropriate for modern realities - seem ready to regain ascendancy as the pendulum swings back.
Some of us here have trying for years here to bring other conservatives around the realization that the result of attempting to apply 20th-century conservative ideology to 21st century economic and social reality - for example, ignoring the economic stagnation of the middle class at the same time that wealth and power are accruing to the most wealthy at an accelerating rate because it's ideologically inconvenient to knowledge or address - is an eventual prescription for electoral defeat and perhaps editorial disaster.
What were seeing in this election as a result of the consequences of irresponsible deregulation in the service of ideological purity (and conservatives are doubly to blame, for if anybody ought to be realistically aware of human nature, and try to control rather than intensify its worst consequences, it ought to be conservatives) is an excellent example of how the process works.
Actually, I don't think I quite said what I really meant.
Once the housing-price bubble created by F&F's loose but somewhat sane rules started to wane, it was necessary to either let the bubble burst or else come up with a way to prop up the demand for absurdly-expensive homes. Thus, opening the floodgates to anyone with a pulse, without regard for whether they had any assets or even any provable ID, made it possible to keep the market soaring even higher.
That sounds about right.
Thank you.
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