Lately, we've been hearing the word "inherited" a lot. Not in a good sense, as in "you've just inherited a million dollars from an uncle you'd never met". No, this word is being repeated ad nauseam by the Obama administration and the Democratic Congress to refer to the current economic crisis. They are stating categorically that they have inherited this state of affairs from President George W. Bush.
It is not an oversimplification to state that this financial crisis began, both in time frame and economic ripple effect with the Freddie Mac/Fannie Mae collapse and subsequent bailouts. In fact, AIG, currently in the news as a former blue-chip giant that is now 89% publicly-owned after the latest bailout, still has many highly profitable divisions. Unfortunately, AIG was heavily involved in the insuring of sub-prime mortgage packages- mortgages that were underwritten in large part by Fannie and Freddie. The media and the current administration seem to have forgotten that these Government Sponsored Enterprises were run by Democrats- among them Franklin Raines, Jim Johnson, and Jamie Gorelick- all high-ranking members of the Clinton administration. Even after investigations brought to light bad accounting practices and manipulations of the books of Fannie Mae, prominent Democrats such as Barney Frank, Chris Dodd, Maxine Waters, Chuck Schumer, and Clay Lacy claimed loudly that there was nothing to worry about- that Fannie and Freddie would be just fine!
This is not to say that there weren't Republicans feeding at the Fannie/Freddie trough- in fact, Freddie Mac held over 40 fundraisers for Rep. Michael Oxley, R-Ohio. Yes, that Oxley, of the Sarbanes-Oxley Act, the largest collection of toothless red-tape legislation ever unleashed on corporate America.
So why were so many Democrats sending our economy towards ruin? Simple- they were sure that this wasn't the wrong direction, and felt (that's FELT, not KNEW) deeply that if they could just get the economy moving in the right direction, their continued power would be guaranteed, as the low-income population would forever be beholden to the Democratic party. Senator Barack Obama, as it turns out, received the second highest amount of contributions from Fannie Mae. He even took on Franklin Raines as an economic advisor during his 2007-2008 candidacy.
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There were some doomsayers- those who didn't think that we could continue on this track without ultimately meeting with disaster. Two notables in this group were Senator John McCain and President George Bush.
To examine our current situation in-depth, you must start with Jimmy Carter. President Carter signed into law in 1977 the Community Reinvestment Act. The CRA was a piece of social engineering, plain and simple. Its aim was to encourage home ownership in America's inner cities and economically depressed areas by requiring lending institutions to meet "the credit needs of its entire community in a manner consistent with safe and sound operations." This horrible piece of legislation provided no criteria for exactly how lending institutions were to do this, or how they were to be evaluated as to their adherence to the legislation. The law does, however, provide that an institution's CRA compliance record would be taken into account by banking regulatory agencies when the institution planned to expand through mergers, acquisitions, or the establishment of branches. In other words, a bank's future successes could be limited by a poor record of compliance with the CRA.
The CRA addressed the concept of "redlining" in the lending industry. "Redlining" refers to the practice of drawing "lines" around low income areas (often minority-majority areas) and refusing to write loans to residents of those areas. This practice could also be defined as "Not Writing Loans to People Who Have a Lower Probability of Paying the Money Back." But that definition has no inflammatory nickname, and is much less catchy than "redlining". To claim that banks refused to write loans to minorities who were good risks is absurd. Banks make money on good risks, and the only color most banks see with regard to loans is green. Playing the race card was the easiest way for Democrats to push this legislation through Congress to the President Jimmy Carter, who signed it into law. Congress and the President were under heavy pressure from activist groups to pass this law- not the least of whom was Gale Cincotta of National People's Action. A "community organizer" from Chicago- sound familiar?
President George H.W. Bush and the Democratic majority 101st Congress added to the tangle of red tape in 1989 by signing into law the Financial Institutions Reform Recovery and Enforcement Act (FIRREA), which required CRA oversight agencies to publish the banking institution's CRA ratings, and use a four-tiered ratings system, not unlike the four-tiered ratings we all received in elementary school. This rating system created a simple way to ignore the incredibly complex decision-making process that governs whether or not a bank should start lending in a new geographic market, and boil it down to "Satisfactory" or "Substantial Non-compliance"- words and phrases that are much easier for a "community organizer" to shout through a megaphone on a street corner.
In 1995, President Bill Clinton asked Robert Rubin, the Assistant to the President for Economic Policy, and Lloyd Bentsen, the Secretary of the Treasury, to revise the CRA to make it easier for banking institutions to comply with the regulations- that is, easier for the institutions to write risky loans in low-income areas. As a result of changes to the legislation, CRA-covered lenders spewed $467 billion in mortgage credit to low- and medium-income borrowers between 1993-1998, according to a 2000 US Department of the Treasury study. Loans to low-income Americans from CRA-covered institutions rose 39% during this period, while loans to wealthier homeowners rose only 17%.
Finally, the beginning of the end. In October of 1997, Bear, Stearns & Co. launched the first publicly available bundling of CRA loans. These securities had the full backing of Freddie Mac, which gave them an "implied" AAA rating. These bundles signified the beginning of the process of taking large numbers of mortgages, lumping them together to make it nearly impossible to discover the details of (and risk involved in) the individual mortgages, and selling the packages as a security, not unlike a share of stock in a company consisting solely of mortgages. By creating highly profitable (and very risky) investments from risky loans, the subprime loan industry became the hot ticket of the late 1990s and early 2000s. By allowing nearly anyone to qualify for credit to purchase a home, housing prices were inflated. Inflated housing prices created the "bubble" that homeowners, mortgage brokers, banks- nearly everyone involved in home ownership- enjoyed for years.
Then the bubble burst. Increasing numbers of borrowers defaulted on the higher-interest subprime loans, causing a decrease in housing prices and an increase in foreclosures. Since Fannie and Freddie backed the majority of US mortgages, they experienced staggering losses. An investigation in 2004 by the Office of Federal Housing Enterprise Oversight resulted in a restatement of earnings by Fannie Mae to the tune of over $6 billion. While Fannie and Freddie were scrambling to correct their accounting procedures, and Raines, Gorelick, and Johnson were scrambling to justify over $100 million in bonuses they received as a result of the manipulated books, Democrats in Congress were making these comments:
"Mr. Chairman, we do not have a crisis at Freddie Mac and in particular at Fannie Mae, under the outstanding leadership of Mr. Frank Raines." Rep. Maxine Waters, D-California, to Rep. Richard Baker, R-Louisiana, chairman of the Government Sponsored Enterprises Subcommittee, after Rep. Baker proposed tighter regulation of Fannie and Freddie in late 2004.
"I get the feeling that the markets are not worried about the safety and soundness of Fannie May as OFHEO says it is…" -Rep. Lacy Clay, D-Missouri, to members of the Office of Federal Housing Enterprise Oversight (OFHEO), in the same 2004 hearings.
"…I have seen nothing in here that suggests that the safety and soundness [of Fannie Mae] are at issue, and…it serves us badly to raise safety and soundness…when it does not seem to me to be an issue." -Rep. Barney Frank, D-Massachusetts, Financial Services Committee Ranking Member, in response to claims that the Government Sponsored Enterprises (Fannie and Freddie) posed a huge risk to the American taxpayer.
"These assets are so riskless that their capital for holding them should be under 2%." -Franklin Raines, CEO of Fannie Mae from 1999-2004, at a hearing on the safety and soundness of Fannie Mae in 2004. Most banks, at that time, were required to hold 4% of their outstanding loans in capital- which seems to the layperson to be woefully inadequate to protect against a large-scale devaluation of the outstanding loans. Fannie Mae, under Raines, held just over 3% in capital. All technical aspects aside- he called these mortgages "riskless". Yes, "riskless".
"I think that the responsibility that Democrats have may rest more in resisting any efforts by Republicans in the Congress or by me when I was President to put some standards and tighten up a little on Fannie Mae and Freddie Mac." -former President Bill Clinton, commenting on the current financial crisis on ABC news. A video showcasing all of the above quotes can be found here.
So who was out there trying to stop the train? None other than Senator and 2008 Republican nominee for President of the United States, John McCain. This is an excerpt from the May 25, 2006 Congressional Record:
"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."
Senator McCain read the full statement into the record nearly two years before the financial crisis reached its crescendo. The bill failed to make it out of committee. And yet Democrats are still blaming this global financial crisis, that had its roots in the American housing market, on President George W. Bush. How long can the blame be shifted? With the cooperation of the mainstream media, I'd say about 8 years or so...
