Monday, October 06, 2008

How The Democrats Created the Financial Crisis

One thing that's been missing is a simple, easy to follow narrative from John McCain's campaign to counteract the fable that Bush/McSame and their cronies are entirely to blame for what's going on in the credit market.

Since the current occupant of the White House and the GOP aspirant to the job seem unwilling or unable to make this case to the American people, I suppose it's up to lil' ol' me...

In one sentence, what caused the meltdown is that Democrats in Congress refused on a pretty much straight party line vote to do anything to regulate Fannie Mae and Freddie Mac, in spite of warnings from the Bush Administration and ironically enough, Senator John McCain. And the rot from Fannie and Freddie percolated through the entire financial system, so when they collapsed, so did a lot of other people.

Think of it as a missile strike, with a whole bunch of collateral damage.

Here's how it worked:

Freddie and Fannie are private companies, but with a government they, unlike private companies were not allowed to fail. They simply received more funds from the government in an ever-expanding cushion when they needed it.Because of that, almost anything they did had the aura of the US government's full faith and credit behind it.

So, as time went on, Fannie and Freddie became the major enabler of the mortgage crisis. They lowered underwriting criteria and standards that fed Wall Street's desire to become a player in securitizing subprime loans by becoming the main buyer of pools of AAA-rated subprime mortgages - huge multimillion dollar groups of mortgage loans sold as securities, and the toxic securities spread throughout the system. Freddie and Fannie also held on to a huge amount of mortgages themselves, and in time this added up to a huge amount of money wrapped around these dubious loans.

That was fine as long as real estate prices continued to rise and another sucker could be found. Once the market went south, the whole pyramid scheme collapsed, bringing a large chunk of America's financial infrastructure with them.

And it's not as if it was any surprise to Washington.

Even President Clinton has admitted as much. But the rot could be seen even more recently than that.

Back in early 2005, Fannie and Freddie were under major scrutiny. Thanks to Fannie Mae chiefs Franklin Raines and James A. Johnson manipulating the accounting numbers to pay themselves huge unearned bonuses (something more commonly known as embezzlement when the Little People do it), there was major impetus in congress for reform of Fannie and Freddie.

In 2005, Fed chairman Alan Greenspan told Congress outright that 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."

Clear, hmmm?

In response, a major Fannie and Freddie reform bill was introduced by the Senate Banking Committee, S.190. That bill established a regulator for Fannie and Freddie, gave him the power to oversee the two agencies, force the tightening of underwriting standards as necessary and would have mandated that Freddie and Fannie eliminate garbage loans from their portfolios.

One of the three co-sponsors of that bill, incidentally, was Senator John McCain.

Had that bill passed, there would have been an end to the questionable subprime loans Fannie and Freddie were underwriting and then spreading throughout the rest of the financial structure like toxic waste, and we'd be in a very different place today.

But it didn't pass because, on a straight party-line vote, the Democrats tied it up in committe and killed it, preventing it from even comming to a full vote in the Senate.

Part of the reason was politics, and politics with a racial component. Many Democrats saw these loans as a way of extending home ownership to minorities, whether they were qualified to own a home of not.That was the real reason behind th esupercharging of the CRA under the Clinton Administration, which was used as a club along with Fannie and Freddie's increasingly lax standards to get lenders to dilute their underwriting criteria and make those loans regardless.

But others had additional ones.

Senator Barack Obama has gotten more than $125,000 in campaign contributions from employees and political action committees of Fannie Mae and Freddie Mac, and he's second only to Senator Chris Dodd, the Senate Banking Committee chairman, who got over $165,000. Senator John Kerry ended up with $111,000.Democrat members of the House like Maxine Waters and Barney Frank got a fistful of cash as well, and in the case of Frank, the man he introduced as his 'wife' , Herb Amos, was a high level Fannie Mae executive who specialized in overturning Fannie's lending underwriting standards.

In other words, Fannie and bribed legislators to look the other way and keep Fannie and Freddie doing business as usual.

There's other things I could mention, like the fact that one of the major beneficiaries of the $700 billion plus buyout was none other than Democrat kingpin George Soros, but let's keep this as simple as possible.

What I just wrote took you roughly 3 1/2 to 4 minutes to read, and about the same amount of time to speak. There's absolutely no reason why the current occupant of the White House couldn't level with the American people and do exactly the same.I'll leave his motivations to your imagination.

And there's even less reason for John McCain to keep silent, if he plans on winning the election. It remains to be seen whether he plans to open up about this or not.

In any event, you now know what happened, in the simplest most direct way possible.


Anonymous said...

If your explanation of the financial crisis is superior to the "fable" perpetrated by the mainstream media, then please tell me why past, present and expected mortgage default rates are at least twice as high for private market entities than for the government-sponsored Freddie and Fannie (see Janet Yellen's report from the SF Fed for the data)? How does your explanation pinning blame on the GSE's take into account the toxic collateralized debt obligations and credit default swaps that sank Lehman and AIG, among others? How does it account for the timing of the crisis, given that government-sponsored pooling of mortgages originated in the 1930's yet this crisis happened in the last couple of years and built up only since 2001? Your theory is pretty weak, even though it does strongly serve your partisan goals...

Freedom Fighter said...

Talking about 'partisan goals' Anonymous!

Respectfully, you appear to have no idea about how the secondary mortgage market or the CRA works.

I'm intimately familiar with both and can assure you that Fannie/Freddie was the linchpin behind the credit crisis. You're confusing the stuff Fannie and Freddie actually OWN with the toxic stuff that was resold under their auspices..and then used as collateral for additional financing by the other companies it was sold to, both here and abroad.

Not only that, but lending and underwriting standards were decimated because the CRA was used as a club to compel lending to people that had no business getting a loan.

An example of this was a lawsuit against CitiCorp by ACORN and other 'concerned groups and individuals' as co-plaintifs (of whom Barack Obama was one)topuyshthem to do exactly that. That lawsuit was settled out of court and CitiCorp's underwriting standards were revised downwards as a result, as I can personally attest to.

President Bush bears a great deal of the blame as well. He obviously knew what was going on and even attempted to get legislation passed, but when it was blocked he had business to go to the American people, explain what was going on and if necessary issue an Executive order for an emergency goverbnment takeover and reform of Fannie and Freddie.

Part of the reason he didn't was because the Bush family was coining a fortune selling mortgage securities to the Arabs through the Carlyle group, where the Bush family has a significant part of its family money and Bush Sr. is chairman emeritus.

However the Democrats in congress, as I've shown, were the ones protecting these institutions, in exchange for sweetheart loans
(mostly from CountryWide) and campaign cash. Simple truth.

Ask yourself this: 2 years ago, gas prices were low, unemployment was at about 4.85 %, and the market was doing extremely well.

You think the change in which party took over Congress two years ago might have something to do with what's changed???

That, and maybe the fact that it's an election year and a poor economy increases their chances of taking the White House?

Ya think?

And trust me, it will gewt infinitely worse if Obama takes over, no matter what your income is. AFter he gets through playing with payroll taxes an dthe capital gains tax and unleashing an orgy of spending, you better HOPE you have some CHANGE left in your pocket.


Anonymous said...

Respectfully, this hardly constitutes fair discussion when you refuse to post opposing viewpoints or information that refutes your point of view. Hardly the behavior becoming of a freedomfighter, unless you are fighting for the freedom to censor the truth. As I stated in my last post, the default rates on loans originated by Freddie and Fannie, as well as CRA loans, are running at one-half the rate of private sector originated loans, and this includes both the ones they kept on their own books and the ones they packaged and sold. Freddie and Fannie cannot be the lynchpin of the crisis if their loans are not the most toxic stuff, and CRA could hardly be the cause of lax lending practices if other lenders made much riskier loans. Also, you fail to account for the credit default swaps and collateralized debt obligations, which were more responsible than collateralized mortgage obligations (the CDS market alone, at $40 trillion, dwarves the CMO market) for taking down Lehman and AIG. Again, a politically motivated account of the causes of the financial crisis is no account at all.

Freedom Fighter said...

Hello Anonymous,
I do not know what other comment I supposedly didn't post you're talking about. It did not show up in the moderation screen...did you accidently delete it?

Since you're new here and obviously have a brain, the comments policy here is as follows: anyone not shilling for porn, viagra or vacations who is respectful and does not engage in racist, libelous, or other inappropriate nonsense is welcome to comment. Spam, flame wars and stupidity get filtered out at my sole discretion.

The above comment you submitted don't fall into any of these categories.

As to the issue at hand...I have 15 years experience dealing directly with the mortgage and financial services industry. I personally saw how the rot spread, how lenders were intimidated by Fannie Mae and the CRA into diluting their underwriting standards, an dhow they were 'encouraged' to make loans to people that shouldn't have gotten them in any normal banking climate, even on the notes Fannie and Freddie didn't directly handle.

Fannie and Freddie were, however, the impetus, strict regulation of them would have stopped the orgy of speculation in its tracks if democrats in congress who were getting campaign money from them ( including Obama) hadn't stopped it, and I can't understand why you can't see that.

The other financial vehicles you mention were an outgrowth of these practices and in many cases were securitized with these bogus notes as collateral assets.

Did Wall Street and the bond boys get in on the party? Sure they did, but only after Fannie and Freddie showed that the party was in full swing.

Of course, President Bush also shares a good part of the blame for not straightening this out, even if it took an executive order to do it...but then, the Bush family was making far too much money selling this crap to their Arab clients via the Carlyle Fund, and Dubbyah was probably hoping it would all just muddle through, or at least hit the fan after he vacated the White House.