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Bloomberg: How Dems Created The Financial Crises

Mike

Well-known member
How the Democrats Created the Financial Crisis



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.

To contact the writer of this column: Kevin Hassett at [email protected]

Last Updated: September 22, 2008 00:04 EDT
 
Thanks for your post, Mike.

Two thoughts come to mind:
It's not what I can do for my country,
it's what my country can do for me, mentality and
will we hear any of this from the main stream media?

I say it's doubtful...but if BHO had been one of the cosponsors of
the bill that could have averted this mess--that would be front
page news.
 

Sandhusker

Well-known member
Joe Biden says that what you can do for your country is pay more taxes - it's "patriotic". :roll: The llama must agree because he's going to raise them - even though he can't argue that they won't LOWER tax revenue and we're in a recession!

Anyway, back to the topic. Great post, Mike. I like the quote, "It is a classic case of socializing the risk while privatizing the profit."
Socializing, Socialist - remind you of anybody? Don't we have somebody running for president that wants to socialize health care and the tax system? I guess he wants more socialism because it works so well?
 

fff

Well-known member
Yawn. Spin, spin, spin.

In 2005 Republicans held the Congress, including Chairmanships and majorities on all Committies.

It's the Bush Administration that's socializing our finanacial system, not Democrats. McCain's campaign manager took $2million over five years to help stop any Federal oversight of Fannie & Freddie. But keep spinning..... :lol:
 

VanC

Well-known member
fff said:
Yawn. Spin, spin, spin.

In 2005 Republicans held the Congress, including Chairmanships and majorities on all Committies.

It's the Bush Administration that's socializing our finanacial system, not Democrats. McCain's campaign manager took $2million over five years to help stop any Federal oversight of Fannie & Freddie. But keep spinning..... :lol:

John McCain Supported A Proposal For An Agency To Oversee Fannie And Freddie……In 2005!
In Sept. 2003 President Bush proposed a new agency to oversee regulatory reforms of Fannie Mae and Freddie Mac.
Here is an excerpt form the above linked article from Sept. 11, 2003.

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.


Then in 2005 John McCain co-sponsored the Federal Housing Enterprise Regulatory Reform Act of 2005.

The Bill was never passed. John McCain addressed the floor on May 26th, 2006. Here is an excerpt:

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.


This bill was shot down by the Democrats and some Republicans in Congress.

John McCain fought two years ago to shield the American people from the crisis some of us are facing.

As reported here, since 1989, Barack Obama is second only to Sen. Chris Dodd in most amount of Lobbyist money accepted from Fannie Mae and Freddie Mac.

Are you hearing this? He has been in the Senate less than four years and only Dodd has taken more money than he has. Since 1989. No wonder he wanted to keep Fannie and Freddie under Senate oversight.


And no wonder there isn’t an “Enron type” investigation going on. Nobody wants to investigate themselves.
 
A

Anonymous

Guest
Yep- Dems blame Repubs..Repubs blame Dems...To some extent they are both to blame...
I do have a problem blaming it all on the freddies and fannies- because the law setting up trying to get more folks into homes has been on the books since 1977- and was updated by the Repub Congress and signed by Clinton in the 90's....
Seems to me that this has operated a long time without bringing down the economy to now be the main problem...

But then you add in the deregulation bills on banks, lending institutions, mortgage firms- and commodity traders that were stuck in by Foreclosure Phil in 99/2000- and add in the fact that Bush openly and blatently set a pattern of essentially cancelling all oversight or regulation by nonenforcement of all the laws even still on the books when he took office-- and the banks, lending firms, commodity traders all began playing with folks money like they were playing on a roulette wheel... The biggest casino in the world...

With no oversight or policing and with not requiring any transparency in the markets greed overtook these financial outfits and they went absolutely nuts- with other folks money...Have you seen the number of ads on TV where they were advertising you can get money- or credit cards- with no credit rating needed- or in some cases even saying if you have a bad credit history :roll:

The topper is the one that comes on usually late at night- targeting young folks- stating they can get a credit card to cover all their college tuition, books, housing, even food costs...Up to $40,000 a year for 8 years- and they didn't have to pay "on the principle" until they finished college- and they needed NO credit rating....These type greedy bastards should go bankrupt- but instead will get bailed out- and the CEO's will get multi million dollar salaries and golden parachutes for bankrupting their companies (probably taxpayer funded now) ... :(

But I blame Bush mainly- because for 7 1/2 years he was at the helm- it was his watch- and the responsibility of him and his administration to oversee this and recognize the problem before it came to a "meltdown crisis"- and should have advised Congress if there were problems coming- instead of the continuing "the economy is fundamentally strong" I heard Paulson and Cox keep echoing to Congress...Comes down to either they were asleep at the wheel or lying.... :???:

Bush was warned of the economy instability by his former Treasury Secretary Paul O'Neill back in 2002- that called for huge rollbacks in spending or possible tax increases or both to keep the economy from bottoming out...But that didn't fit Bush's spend and borrow agenda- so Bush didn't include that report in his next budget report- and got rid of O'Neill..

My biggest criticism with Congress is the 6 years it was Repub controlled they hardly held an oversight hearing- and then questioned little...Then when the Dems took control and began holding hearings - instead of the administration working with them, they were met with stonewalling and absolute refusal to provide them information....
The Buck Stops Here.
Harry S. Truman
 
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