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September 18, 2008

How They Built the Bomb

From the NYT in 2003, but found by Astute Blogger:

nytheader.jpg

By STEPHEN LABATON

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.

''There is a general recognition that the supervisory system for housing-related government-sponsored enterprises neither has the tools, nor the stature, to deal effectively with the current size, complexity and importance of these enterprises,'' Treasury Secretary John W. Snow told the House Financial Services Committee in an appearance with Housing Secretary Mel Martinez, who also backed the plan.
...

Significant details must still be worked out before Congress can approve a bill. Among the groups denouncing the proposal today were the National Association of Home Builders and Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing.

''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.

''I don't see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing,'' Mr. Watt said.

Thanks to Larry.

Solid plan -- reduce the size of the high-risk subprime mortgages these companies were floating -- which, by the way, Fannie and Freddie execs were making millions on in bonuses, as they kept the profits while the immense and growing risk was passed on to you, the taxpayer.

So what happened?

Democrats blocked any attempt at reform. Ostensibly to keep the pyramid scheme of easy money flowing to credit poor homeowners. But largely because their big donors at Freddie and Fannie successfully lobbied them to keep their fire sale going.

WSJ: "Barney's Rubble." Engineer of an economic crisis. What the hell is he still doing chairing the committee?

Mr. Frank contends that he favored "very strong reform" of Fannie Mae and Freddie Mac, even before Democrats took over Congress after the 2006 elections. To adapt a famous phrase, this depends on what the meaning of "reform" is. Mr. Frank did support a bill that he and others on Capitol Hill described as reform. But on the threshold reform issue -- limiting the size of the portfolios of mortgage-backed securities (MBS) that the two companies could hold -- Mr. Frank was a stalwart opponent.

In fact, Mr. Frank was publicly arguing for an increase in the size of their combined $1.4 trillion portfolios right up to the day they were bailed out. Even now, after he's been proven wrong about a taxpayer guarantee, he opposes Treasury's planned reduction in the size of the portfolios starting in 2010, according to a quote attributed to him in this newspaper last week. "Good luck on that," he reportedly said. Mr. Frank's spokeswoman hung up the phone when we sought confirmation Tuesday.

The MBS portfolios have long been both the chief source of the systemic risk posed by the two mortgage giants and of the profits that so handsomely enriched shareholders and officers alike for decades. Without the extreme leverage inherent in those portfolios -- which the companies borrowed heavily, at taxpayer-subsidized rates, to accumulate -- their federal takeover might never have become necessary.

For years, Mr. Frank and other friends of Fan and Fred opposed not only bills written to limit the size of their portfolios, but any bill that in their view gave an independent regulator too much discretion to order a reduction. This was true of the reform that his House committee passed last year. Only when the White House caved to Mr. Frank and dropped its earlier insistence that a reform bill rein in the portfolios did Mr. Frank move his bill.

In his letter, Mr. Frank also repeats his familiar claim that Fannie and Freddie are vital because they support "affordable housing." This is political smoke. The awful irony of Fan and Fred is that they have done very little to assist affordable housing. Most of the taxpayer subsidy has gone to enrich shareholders and Fannie managers, as a 2003 study by the Federal Reserve shows.

The Men Who Built the Bomb: ... are all working as advisers to Obama now.

Penny Pritzker, "the Michael Milken of subprime mortgages," is Obama's Finance Chair.

Jim Johnson, disgraced former CEO of Fannie, was Obama's vice presidential search chairman, at least until he resigned under fire due to his role in providing subsidized sweetheart loans to Democratic Senators during his stint at CountryWide.

Franklin Raines, who participated in the accounting scandals to fix Fannie's books and deliver unwarranted bonuses to its top executives, is a top Obama adviser.

Corrupt "Community Organizer" organization ACORN, an institutional ally of Barack Obama, lobbied Freddie and Fannie to extend even more risky loans to credit-poor borrowers in the interest of ending "racial redlining." But they didn't end "racial redlining." What they ended was any credit-checking at all, as subprime mortgage providers simply stopped verifying self-reported claims of income and in fact ended even the most basic prudential element of a mortgage -- the down payment.

"Fannie Mae is proud to work with ACORN Housing, " said Thomas Collins, Director, Single Family Business, and Fannie Mae. By working with ACORN and lenders like Citibank, we can support their efforts to expand homeownership opportunities for underserved communities at affordable price points achieve sustainable homeownership."

In this same speech, Collins referred to, Obama, and other members of the Black Congressional Caucus which had worked so diligently to craft the time bomb that would ultimately destroy two key segments of the American economy (both housing/home construction and the financial sectors), members of "the family."


Obama Economics Adviser Austan Goolsbee continued defending and lobbying on behalf of the mortgage industry's no-money-down-no-credit-check policies at least until September of 2007.

McCain on Offense: The election turns on getting this message out. The pubic, wrongly in this instance, assumes that any Wall Street scandal is the fault of Republicans. If that assumption is permitted to stand, we lose the election.

Senator Obama talks a tough game on the financial markets but the facts tell a different story. He took more money from Fannie and Freddie than any Senator but the Democratic chairman of the committee that regulates them. He put Fannie Maeís CEO who helped create this disaster in charge of finding his Vice President. Fannieís former General Counsel is a senior advisor to his campaign. Whose side do you think he is on? When I pushed legislation to reform Fannie Mae and Freddie Mac, Senator Obama was silent. He didnít lift a hand to avert this crisis. While the leaders of Fannie and Freddie were lining the pockets of his campaign, they were sowing the seeds of the financial crisis we see today and enriching themselves with millions of dollars in payments. Thatís not change, thatís whatís broken in Washington.

...

Those same Congressional leaders who give Senator Obama his marching orders are now saying that this mess isnít their fault and they arenít going to take any action on this crisis until after the election. Senator Obamaís own advisers are saying that crisis will benefit him politically. My friends, that is the kind of me-first, country-second politics that are broken in Washington.

In the upcoming debate, McCain must read aloud from a sheet of paper his plan for fixing and averting the mortgage crisis by regulating Fannie and Freddie and other subprime lenders.

Then he should set the paper down. And announce those remarks are from a speech from 2005.

And that Democrats blocked his proposal.

Your risk, their reward. You put the money into their corrupt pockets which they then in turn donated to Chris Dodd, Barney Frank, and Barack Obama, who in turn dutifully kept the gravy train chugging along.

Congress Adjourning! Harry Reid admits he has no idea what to do. So he's packing it up, leaving yet another crisis on the table for more responsible people to figure out.

Actually, Harry Reid and the Democrats always knew what to do. They knew the problem was this trillion dollar giveaway to credit-poor homebuyers. They further knew that by making money for homes so cheap and so artificially plentiful, they were driving up the cost of homes to astronomical levels. That's the way it works -- the more cheap, devalued dollars chasing after goods, the more the good rise in price.

Ultimately people who were simply not credit-worthy enough to buy houses at all were not merely buying houses -- they were buying houses that were well beyond their means to purchase even in a normal market, but furthermore, were inflated in price to double their fair value. So ultimately these legions of bad-credit-risks found themselves paying mortgages valued at 150% or 200% or even more of what their actual homes were worth.

So what did they do? They did what anyone would do: They walked away from the mortgages.

They both hyperinflated the housing market and created the bubble, and put the American taxpayer on the hook for all the excesses they created. And would not check -- because they were too busy appeasing ACORN and taking money from Fannie, Freddie, Lehman Brothers, AIG, and Raines, Johnson, and Pritzker.

They created the housing bubble. They created the financial meltdown -- which occurred, inevitably, when the bubble burst.

And now they want to go home.

And they should. We don't need any more of this sort of wisdom.


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posted by Ace at 03:27 PM

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