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.

[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.

[Fred Douglass]

..me and this broad named "Fanny" (who I didn't even know!).....WhaddidIdo?

P.S. I can say Warren, that it's Bawnie Fwank (no "s') and (as I've said innumerable times before) that PLICK twied to fwow me out of college. Appropriately, I DID have the first potato streaking (RPG-like) towards his fat head when the lights went out in 1967(?) in Winthrop House dorm (wherein, as I've said before, resided also TLJ and his foo keen room-mate, Al ["The Tree"] Gore). Krikeys, it's amazing I got outta that place with my right wing-nut still screwed down tight!!!

What can you say about a state (and a college, for that matter) that supports, lionizes and rolls at the knees of the likes of Uncle Teddie, Bawnie Fwank, etc.?

Ar-ar-ar-ooooooooGAH!!!!!!!!!!

[392cobra]

Originally Posted by Fred Douglass

..in Winthrop House dorm (wherein, as I've said before, resided also TLJ and his foo keen room-mate, Al ["The Tree"] Gore). Krikeys, it's amazing I got outta that place with my right wing-nut still screwed down tight!!!


Ar-ar-ar-ooooooooGAH!!!!!!!!!!

Semi-small world Freddie.

I went to High School with TLJ. At that time,Pre-"Tree",he was very much a Conservative. Helluva nice guy too.

How come you didn't save him from that moron Al ?

[Fred Douglass]

........in the class behind me. When I saw "St. Mark's School" in the Hanoi U. freshman register, I thought it was referring to a veddy-veddy exclusive Prep(pie) Skoo in central-south Massachusetts!

Since he was a freshman (class of '69) he was a year behind me (I was '68). I only played freshman ball (Fall of '64)---whereas TLJ went on to considerable glory, blocking for a true titan named Vic Gatto. Of special note was THE most famous GAME of all----the 1968 Hanoi-Yale Game. Gatto scored with 00:00 on the clock---Hahvud was allowed a point after attempt, went for two and "won" 29-29. Ar-ar. Carm Cozza (Yale coach) said it was "the worst loss he ever suffered". Having gradiated the precvious Spring, I was standing up in the stands, getting spat on, 'cuz I was wearing a Naval OCS uni.

My everlasting, indelible record (never broken as far as I know) was set during the 1964 Hanoi-Dartmouth (freshman) game: I was assessed three (count'em 3!) 15-yard penalties, the last being a Game Ejection. Even got a letter fro AD 'Dolph Zamborski on that one. O'course, being firmly in the grip o' Demon Rum the following day, while watching Hanoi get HUMILIATED by Dartmouf 48-0 in Hanoi's first televised game (Ken Coleman behind the mike)----I decided to rip out of the stands, and kidnap Wahoo-Wah (Dartmouth's Indian mascot). THAT episode led to my interview with Bawney Fwank. Had that c-s-er succeeded in expelling me, it woulda been 'Nam in6 weeks! Yippa daing!

Carrion.

Fly to Hawai'i tomorrow! Keee---kkkeee---rist!

[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?

[Anthony]

Originally Posted by 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?

Alot of good points, but I believe the underlying cause are the current laws/regulations in place that allow companies, CEO's, executives to get away with millions when the failure of their company cost's the general public mega-money.

It's the legislators (lawyers) that have created the current legal envrioment that has allowed businessmen to hide behind LLC's, Corp.s, etc, such that the artificial inflation of real estate, as well as stock prices, ultimately leads to a collapse and tax payer bail out, as well as let the businessmen exit with millions/billions of dollars.

It cracks me up people talking about more legislation/regulations are needed, when it is the current legislation/regulations that has allowed this situation in the beginning. But, I guess, that's the easiest solution to apply more layers of BS regulations to bandaid the underlying problem.

If the culprits are appropriately punished for gross mismanagement, i.e. all their private assets confiscated and then sold/redistributed, then there would not be too many CEO's/businessmen doing bad things, risking their own wealth/assets.

The current legal enviroment allows this type of thing, and will continue to do so unless drastic changes in the system occur, which we know never will happen.

If this was done in China, I bet some people would have been executed, or at least commited suicide.

Obviously, we all know that anybody can sue anybody for any reason. The problem is that there is no simple recourse for the victim to recover their expenses for their defense, costing them thousands/millions of dollars when they were not in the wrong. Obviously, the lawyers make out all the time, and encourage this practice as well.

What a phucked up system.

[Ron61]

Anthony,

You make some very good points. Many of these CEOs sit on boards of more than one company in addition to the ones they run into bankruptcy and take millions of dollars in bonuses with them when they leave. And more laws piled on top of ones that they won't or can't enforce isn't going to solve the problem. I agree that the top people should have everything confiscated and sold and the amount divided up among the stock holders who get left holding an empty bag. I may be wrong about this, but I think they used to have regulation of Fanny Mae and the other big loan companies and some of the politicians who undoubtedly got millions for this, decided they would do better if unregulated. Now that is not a statement of fact as I am going from memory and I may be completely wrong about it. They had warnings of what was coming several years ago and chose to ignore them, probably since they knew it wouldn't hurt them any.

Ron

[jmimac351]

Watch this...

Of course, Obama was warning about the crisis in 1897...

[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.

[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 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.

[FWB]

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

[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.

[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.