How the Democrats Created the Financial Crisis

[392cobra]

How the Democrats Created the Financial Crisis: Kevin Hassett

Commentary by Kevin Hassett

Sept. 22 (Bloomberg) -- The financial crisis of the past year has provided a number of surprising twists and turns, and from Bear Stearns Cos. to American International Group Inc., ambiguity has been a big part of the story.

Why did Bear Stearns fail, and how does that relate to AIG? It all seems so complex.

But really, it isn't. Enough cards on this table have been turned over that the story is now clear. The economic history books will describe this episode in simple and understandable terms: Fannie Mae and Freddie Mac exploded, and many bystanders were injured in the blast, some fatally.

Fannie and Freddie did this by becoming a key enabler of the mortgage crisis. They fueled Wall Street's efforts to securitize subprime loans by becoming the primary customer of all AAA-rated subprime-mortgage pools. In addition, they held an enormous portfolio of mortgages themselves.

In the times that Fannie and Freddie couldn't make the market, they became the market. Over the years, it added up to an enormous obligation. As of last June, Fannie alone owned or guaranteed more than $388 billion in high-risk mortgage investments. Their large presence created an environment within which even mortgage-backed securities assembled by others could find a ready home.

The problem was that the trillions of dollars in play were only low-risk investments if real estate prices continued to rise. Once they began to fall, the entire house of cards came down with them.

Turning Point

Take away Fannie and Freddie, or regulate them more wisely, and it's hard to imagine how these highly liquid markets would ever have emerged. This whole mess would never have happened.

It is easy to identify the historical turning point that marked the beginning of the end.

Back in 2005, Fannie and Freddie were, after years of dominating Washington, on the ropes. They were enmeshed in accounting scandals that led to turnover at the top. At one telling moment in late 2004, captured in an article by my American Enterprise Institute colleague Peter Wallison, the Securities and Exchange Comiission's chief accountant told disgraced Fannie Mae chief Franklin Raines that Fannie's position on the relevant accounting issue was not even ``on the page'' of allowable interpretations.
Then legislative momentum emerged for an attempt to create a ``world-class regulator'' that would oversee the pair more like banks, imposing strict requirements on their ability to take excessive risks. Politicians who previously had associated themselves proudly with the two accounting miscreants were less eager to be associated with them. The time was ripe.

Greenspan's Warning

The clear gravity of the situation pushed the legislation forward. Some might say the current mess couldn't be foreseen, yet in 2005 Alan Greenspan told Congress how urgent it was for it to act in the clearest possible terms: If Fannie and Freddie ``continue to grow, continue to have the low capital that they have, continue to engage in the dynamic hedging of their portfolios, which they need to do for interest rate risk aversion, they potentially create ever-growing potential systemic risk down the road,'' he said. ``We are placing the total financial system of the future at a substantial risk.''

What happened next was extraordinary. For the first time in history, a serious Fannie and Freddie reform bill was passed by the Senate Banking Committee. The bill gave a regulator power to crack down, and would have required the companies to eliminate their investments in risky assets.

Different World

If that bill had become law, then the world today would be different. In 2005, 2006 and 2007, a blizzard of terrible mortgage paper fluttered out of the Fannie and Freddie clouds, burying many of our oldest and most venerable institutions. Without their checkbooks keeping the market liquid and buying up excess supply, the market would likely have not existed.

But the bill didn't become law, for a simple reason: Democrats opposed it on a party-line vote in the committee, signaling that this would be a partisan issue. Republicans, tied in knots by the tight Democratic opposition, couldn't even get the Senate to vote on the matter.

That such a reckless political stand could have been taken by the Democrats was obscene even then. Wallison wrote at the time: ``It is a classic case of socializing the risk while privatizing the profit. The Democrats and the few Republicans who oppose portfolio limitations could not possibly do so if their constituents understood what they were doing.''

Mounds of Materials

Now that the collapse has occurred, the roadblock built by Senate Democrats in 2005 is unforgivable. Many who opposed the bill doubtlessly did so for honorable reasons. Fannie and Freddie provided mounds of materials defending their practices. Perhaps some found their propaganda convincing.

But we now know that many of the senators who protected Fannie and Freddie, including Barack Obama, Hillary Clinton and Christopher Dodd, have received mind-boggling levels of financial support from them over the years.

Throughout his political career, Obama has gotten more than $125,000 in campaign contributions from employees and political action committees of Fannie Mae and Freddie Mac, second only to Dodd, the Senate Banking Committee chairman, who received more than $165,000.

Clinton, the 12th-ranked recipient of Fannie and Freddie PAC and employee contributions, has received more than $75,000 from the two enterprises and their employees. The private profit found its way back to the senators who killed the fix.

There has been a lot of talk about who is to blame for this crisis. A look back at the story of 2005 makes the answer pretty clear.

Oh, and there is one little footnote to the story that's worth keeping in mind while Democrats point fingers between now and Nov. 4: Senator John McCain was one of the three cosponsors of S.190, the bill that would have averted this mess.
(Kevin Hassett, director of economic-policy studies at the American Enterprise Institute, is a Bloomberg News columnist. He is an adviser to Republican Senator John McCain of Arizona in the 2008 presidential election. The opinions expressed are his own.)

To contact the writer of this column: Kevin Hassett at khassett@aei.org

Last Updated: September 22, 2008 00:04 EDT

[cobra de capell]

Plus this.....

For years the Wall Street Journal has been warning that Fannie Mae and Freddie Mac were taking reckless chances but liberal Democrats especially have pooh-poohed the dangers.

Back in 2002, the Wall Street Journal said: "The time for the political system to focus on Fannie and Fred isn't when we have a housing crisis; by then it will be too late." The hybrid public-and-private nature of these financial giants amounts to "privatizing profit and socializing risk," since taxpayers get stuck with the tab when high-risk finances don't work out.

Similar concerns were expressed in 2003 by N. Gregory Mankiw, then Chairman of the Council of Economic Advisers to President Bush. But liberal Democratic Congressman Barney Frank criticized Professor Mankiw, citing "concern for housing" as his reason for supporting Fannie Mae. Barney Frank said that fears about the riskiness of Fannie Mae were "overblown."

Maxine Waters and other members of the Congressional Black Caucus have also been among the liberal Democrats defending Fannie Mae. Just last year, Senator Charles Schumer advocated legislation to allow Fannie Mae and Freddie Mac to increase their already huge role in the mortgage market. Republican Congressman Mike Oxley has also defended these hybrid financial giants.

Both Fannie Mae and Freddie Mac have been generous in their contributions to politicians' political campaigns, so it is perhaps not surprising that politicians have been generous to them.

This is certainly part of "the mess in Washington" that Barack Obama talks about. But don't expect him to clean it up. Franklin Raines, who made mega-millions for himself while mismanaging Fannie Mae into a financial disaster, is one of Obama's advisers.

[Smokingcobra2]

And our great liberal leaders DODD and Franks are screaming about who's fault it is--Do they not know they where in charge?
joeg

[392cobra]

Statement by Senator John McCain, May 25, 2006:

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.

[427 S/O]

joeg, you hit the nail on the head, when the dust has settled on this mess, frank and dodd will be the #1 reason this happened with their 'no job, no assets, I don't care, give them a loan', suicide laws. If you notice, those two are screaming the loudest, hoping they can keep their 'career'.

[nevermind65]

No. The reason this happened is somebody came up with a great "get rich quick" ponzi scheme and milked the marked. Everybody knew what was going on, so why didn't these businesses just stop doing it? Because there are a few at the top that wanted to get rich, and now at the taxpayers expense, they are getting their dream. They ran their respective companies into the ground, then waited for the taxpayers to bail them out.

It is called capitalism and maybe we need a good depression to get rid of a lot of worthless businesses. BTW...read the article where the top 8 big shots at Lehmans got cushy multi-million dollar contracts? Nice huh?

[427 S/O]

Yes, dodd and frank started this mess and others saw an opportunity to buy with no $. When 'buying' became the thing to do, values jumped and speculators multiplied like rabbits.

[wtm442]

How the Democrats Created the Financial Crisis

Two words - Barney Franks.


It used to be that we only had two whippin' boys in Taxachusetts, namely the K twins (Cash & Carry Kerry and Car Wash Kennedy). Now we have our illustrious homo congressperson (cannot call him a congressman) Bawana Fwanks.

I'm afraid that the rest of the country will ask Taxachusetts to secede from the United States.

[cobra bill]

John McCain, Deregulation and The Economy:
The Bottom Line
by campaignmonitor, Sun Sep 21, 2008 at 02:16:25 PM EST

I just watched all the Sunday morning talk shows and one overriding theme emerged.

Nearly everyone, Democrat or Republican, that got up and talked about our current economic crisis largely blamed the lack of oversight and regulation.

Let me repeat that. The emerging consensus is that a lack of meaningful oversight and regulation over the financial services and mortgage industries is now causing us to socialize both industries and put at risk at least $1 trillion of taxpayer money to bail it out.

In light of this, the choice for President in this coming election has now become absolutely and unarguably clear.

McCain has spent his nearly three decades in Washington being aided and abetted by Phil Gramm and his cronies in push through every possible measure to keep the financial and mortgage industries from being subject to meaningful oversight and regulation.


This is how the New York Times describes John McCain's economic regulation pedigree:


[McCain's] record ... suggest[s] that he has never departed in any major way from his party's embrace of deregulation... [H]e has consistently characterized himself as fundamentally a deregulator [yet] he has no history prior to the presidential campaign of advocating steps to tighten standards on investment firms.

McCain has always been in his party's mainstream on the [economic] issue. In early 1995 ... McCain promoted a moratorium on federal regulations of all kinds. 'I'm always for less regulation,' he told The Wall Street Journal last March.... 'I am fundamentally a deregulator.'


The bottom line: John McCain's loving embrace of the fundamental Republican dogma of "deregulation, deregulation, deregulation" has caused the worst financial crisis in American history since the Great Depression.

John McCain, Phil Gramm and their Republican cohorts got us into this mess. It would be, at this point in history, absolutely and profoundly wrong for the American people to reward John McCain's failure by electing him to lead the world's biggest economy.

[FWB]

Originally Posted by wtm442

How the Democrats Created the Financial Crisis

Two words - Barney Franks.


It used to be that we only had two whippin' boys in Taxachusetts, namely the K twins (Cash & Carry Kerry and Car Wash Kennedy). Now we have our illustrious homo congressperson (cannot call him a congressman) Bawana Fwanks.

I'm afraid that the rest of the country will ask Taxachusetts to secede from the United States.

didn't know that was a lisp.....thought he just didn't believe in teeth..

[wtm442]

Originally Posted by cobra bill

This is how the New York Times describes John McCain's economic regulation pedigree: ......

The New York Times is nothing more than an Obama hatchet man. They are losing circulation, advertising and money trying to get Obama elected.

Does anyone read that paper any more?

Over a year ago, McCain co-sponsored bill S190 to reign in Fannie Mae and Freddie Mac. But the Dumbocratic legislature decide to defeat that bill. But lets blame that mean Republican man that wants to kill kids and put everyone out of work. Give me a break.

[wtm442]

Originally Posted by FWB

didn't know that was a lisp.....thought he just didn't believe in teeth..

Not when he is giving his buddies a BJ.

[Roscoe]

Take away Fannie and Freddie, or regulate them more wisely, and it’s hard to imagine how these highly liquid markets would ever have emerged. This whole mess would never have happened.

...in 2005 Alan Greenspan told Congress how urgent it was for it to act in the clearest possible terms: If Fannie and Freddie “continue to grow, continue to have the low capital that they have, continue to engage in the dynamic hedging of their portfolios, which they need to do for interest rate risk aversion, they potentially create ever-growing potential systemic risk down the road,” he said. “We are placing the total financial system of the future at a substantial risk.”

...But the bill didn’t become law, for a simple reason: Democrats opposed it on a party-line vote in the committee, signaling that this would be a partisan issue. Republicans, tied in knots by the tight Democratic opposition, couldn’t even get the Senate to vote on the matter.

...It is a classic case of socializing the risk while privatizing the profit. ...

Now that the collapse has occurred, the roadblock built by Senate Democrats in 2005 is unforgivable. Many who opposed the bill doubtlessly did so for honorable reasons. Fannie and Freddie provided mounds of materials defending their practices. Perhaps some found their propaganda convincing.

But we now know that many of the senators who protected Fannie and Freddie, including Barack Obama, Hillary Clinton and Christopher Dodd, have received mind-boggling levels of financial support from them over the years.

...Senator John McCain was one of the three cosponsors of S.190, the bill that would have averted this mess.

Full Disclosure: Kevin Hassett, director of economic-policy studies at the American Enterprise Institute, is a Bloomberg News columnist. He is an adviser to Republican Senator John McCain…

[FWB]

i guess there's something to say for a good gum job...

[392cobra]

Originally Posted by 392cobra

Statement by Senator John McCain, May 25, 2006:

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.

Fannie has long been a Retirement Home for Liberals who dole out money to other Liberals still in the House & Senate.
What they got back are Liberals looking the other way in hopes they too could retire there.

[nevermind65]

So...let me get this straight. After years of listening to all the Conservative bozo's say "Keep the government out", now they are blaming the government for not passing more laws to regulate?

Is that fish a flippin' or a floppin'?

[cobra bill]

And lets not forget who was in power in 2005, if the republicans didn't get there bill past, its because not enough went along with it, no bill put up by the democrats ever even maid it to the floor if the republicans didn't see something in it for themselves. when you guys had all the power what did they do with it? corruption and lining there pockets, so don't give me this crap about the dems, you have no idea what you are talking about. And for that matter, while they had all the power why didn't they do something about there pet pi eve, abortion! Did they do anything NO!! why because its a political tool they have no desire to loose! And who went to jail for corruption? And you want to talk about gay sex Ha! The republicans are the biggest bunch of flaming all be it closeted gays out there!

[cobra bill]

Predatory lending was widely understood to present a looming national crisis. This threat was so clear that as New York attorney general, I joined with colleagues in the other 49 states in attempting to fill the void left by the federal government. Individually, and together, state attorneys general of both parties brought litigation or entered into settlements with many subprime lenders that were engaged in predatory lending practices. Several state legislatures, including New York's, enacted laws aimed at curbing such practices.

What did the Bush administration do in response? Did it reverse course and decide to take action to halt this burgeoning scourge? As Americans are now painfully aware, with hundreds of thousands of homeowners facing foreclosure and our markets reeling, the answer is a resounding no.
Not only did the Bush administration do nothing to protect consumers, it embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which the federal government was turning a blind eye.
Let me explain: The administration accomplished this feat through an obscure federal agency called the Office of the Comptroller of the Currency (OCC). The OCC has been in existence since the Civil War. Its mission is to ensure the fiscal soundness of national banks. For 140 years, the OCC examined the books of national banks to make sure they were balanced, an important but uncontroversial function. But a few years ago, for the first time in its history, the OCC was used as a tool against consumers.
In 2003, during the height of the predatory lending crisis, the OCC invoked a clause from the 1863 National Bank Act to issue formal opinions preempting all state predatory lending laws, thereby rendering them inoperative. The OCC also promulgated new rules that prevented states from enforcing any of their own consumer protection laws against national banks. The federal government's actions were so egregious and so unprecedented that all 50 state attorneys general, and all 50 state banking superintendents, actively fought the new rules.
But the unanimous opposition of the 50 states did not deter, or even slow, the Bush administration in its goal of protecting the banks. In fact, when my office opened an investigation of possible discrimination in mortgage lending by a number of banks, the OCC filed a federal lawsuit to stop the investigation.
Throughout our battles with the OCC and the banks, the mantra of the banks and their defenders was that efforts to curb predatory lending would deny access to credit to the very consumers the states were trying to protect. But the curbs we sought on predatory and unfair lending would have in no way jeopardized access to the legitimate credit market for appropriately priced loans. Instead, they would have stopped the scourge of predatory lending practices that have resulted in countless thousands of consumers losing their homes and put our economy in a precarious position.
When history tells the story of the subprime lending crisis and recounts its devastating effects on the lives of so many innocent homeowners, the Bush administration will not be judged favorably. The tale is still unfolding, but when the dust settles, it will be judged as a willing accomplice to the lenders who went to any lengths in their quest for profits. So willing, in fact, that it used the power of the federal government in an unprecedented assault on state legislatures, as well as on state attorneys general and anyone else on the side of consumers.

[VRM]

CB, can you please post where you got that info from?
I know of plenty of blame that can be passed around on both sides already, despite some wankers thinking that the Dems managed this all by themselves.
I had not heard of this one, though, and I would like to read up a bit more on it.

Thanks,
Steve

[cobra bill]

Sure thing, it's a lengthy read, but very interesting!

http://www.huffingtonpost.com/steven...s_b_91764.html