September 22, 2008

Reminder: Yes, the Democrats Built This Bomb, and Yes, They Blocked the Last Best Chance to Defuse it in 2005
— Ace

McCain, of course, pressed for action to head off the crisis. The Democrats on the Banking Communism and Graft Committee blocked it on a party-line vote.

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.''

Read the whole thing, which documents the graft, the huge amounts of money being funneled to Democratic Senators to keep the gravy train running... until it derailed. And then they presented you with the clean-up bill.

Thanks to Sprung.

Posted by: Ace at 08:57 AM | Comments (57)
Post contains 771 words, total size 5 kb.

1

So why is McCain placing the blame on Wallstreet and Chris Cox?  He's sounding like a wanker.

President Bush warned since 2001:

http://www.whitehouse.gov/news/releases/2008/09/20080919-15.html

 

During all that time how come Sen. Reach Across the Aisle could not get his dear friends in Congress to pass a vitally important bi-partisan compromise to Reform Freddie-Fannie dirty money?

Go Palin (please reform McCain)

Posted by: syn at September 22, 2008 09:06 AM (U/PTC)

2 I know, I know the other candidate is worse no worry I'll pull the lever for the 'Maverick'.

Posted by: syn at September 22, 2008 09:08 AM (U/PTC)

3

This is John's hurt-stick.

Watch John hurt the Dems with it.

Bad, bad Dems!

 

This info should be made into a dozen different ads, covering everything from Dems who blocked it, all the way back to Raines-Obama ties.  This is McCain's version of Thor's Hammer and he should beat the Dems like they owe him money...

 

 

 

...because they do!

Posted by: EC at September 22, 2008 09:08 AM (mAhn3)

4

So why is McCain placing the blame on Wallstreet and Chris Cox?  He's sounding like a wanker.

Because McCain is an idiot.  If he waited 5 seconds and thought things over, and talked to people with actual knowledge, he would've have said that.  But he's a "maverick", and so he spoke without thinking. 

However, I'm not going to blame McCain for the failure to reform Freddie Mac and Fannie Mae.  There are just too many Senators who were bought and sold by those organizations.  He had no prayer of reforming them.

 

Posted by: Sydney Carton at September 22, 2008 09:09 AM (nWYwS)

5

Syn,

Let's be clear.  There are two aspects to this problem.  First is that Fannie and Freddie sought and obtained Washington cover for their activities.

The second was that there WAS greed and recklessness on Wall St. (and around the world) in taking those mortgage instruments and turning them into even more toxic investment vehicles--the full scope of the damage from that step may never be known.

I'd rather have McCain railing a bit down the populist trail than the Alfred E. Neuman stuff coming from the other side.

Posted by: Circa (Insert Year Here) at September 22, 2008 09:11 AM (B+qrE)

6 And when can we expect people to be held accountable for this?????  Our system will stay broke until those responsible are punished harshly but since we can't even plug the leaks in the CIA and STATE, I'm not holding my breath.  Stupid is as stupid does.

Posted by: CDR M at September 22, 2008 09:12 AM (jc124)

7 As far as McCain and the firing Cox that's just because McCain is old school and military. Both say the when there is failure the man in charge gets demoted.
McCain does not mean to actually disgrace Cox, he means he should fall on his sword. If McCain actually thought these guys should be put against the wall then he sure as hell wouldn't be suggesting an idiot like Andrew Cuomo to replace him.
it's a good policy in a way, it's good not to have things associated with a single person to the extent people are afraid to lose him not matter what.


Posted by: Rocks at September 22, 2008 09:17 AM (Q1lie)

8 The reorganization of Fanny/Freddie must include a ban on contributions, overtly political but also charitable.   These organizations have become partisan piggy banks for the Democratic party and their NGO partners.

Those who disagree, suck cock by choice.

Posted by: tom nutall at September 22, 2008 09:18 AM (daF/K)

9

The way for McCain to completely score on this is to be real Mavericky and try to hold both parties to account.  He should try to get the current bailout shut down.  Not that I'm gonna hold my breath on that one, as his camp's initial reaction to the bailout was supportive.

There's tons of blame to go around on both sides of the aisle.  Rather than political sniping, while bureaucrats like Paulson get a free hand to fuck things up even worse, it would be refreshing to see people actually try to get this bailout shut down. 

Posted by: Hermit Dave at September 22, 2008 09:19 AM (WhFvm)

10 Any bailout should state that any  taking the money gives up the right to donate to anything at all. They have no business giving away money when they are in the red.

Posted by: Rocks at September 22, 2008 09:20 AM (Q1lie)

11

Excellent article, but since the author is associated with the American Enterprise Institute the reaction of the poo-flingers in predictable enought ("right wing STOOGE1!!!11!!11eleventy!!").

And that would be OK, except that that is what we are going to hear from most of the network anchors and all of the editorial writers for the MSM.

Posted by: CavMedic at September 22, 2008 09:23 AM (tc3dx)

12

Those who disagree, suck cock by choice.

I disagree! I disagree! Call me!!!!!!!

Posted by: Andrew Sullivan at September 22, 2008 09:24 AM (WTn2v)

13 I read or at the The Corner that Hassett is receiving death threats.

Posted by: mark at September 22, 2008 09:28 AM (fzZwa)

14 True, Circa.

We must be cognizant of the fact that there are those on Wall Street that share some blame for the magnitude of this crisis.

Without government failure however, they never would have even had a chance to push us this deep.

But without accepting the whole story of how this blew up, we risk losing a chance to come to a real solution, and instead will be pinned to the immobility and finger-pointing thorn tree that SS reform died on.

Superior knowledge of the facts may see us through this. The media and the Dems have won endless small battles based on the Right's dependence on sound-bites that leave them open to the hypocritical accusations of partisanship.

McCain's part in this must be to force a debate on the issue. He can solidify his self-criticized economic bona-fides if he does this on a stage large enough that the media cannot hide it, and that will probably be enough for him to win the election.

Posted by: krakatoa at September 22, 2008 09:28 AM (/FUhT)

15 Wall Street (Funds & such) bought and sold a lot of bad product using their client's money.

They could have steered their client's investments away from these particular investments, thus limiting the trade in these instruments and the eventual scope of their destruction.

Posted by: krakatoa at September 22, 2008 09:37 AM (/FUhT)

16 And my contention isn't that Wall Street created the mess. Merely that given an opportunity to make fast money off questionable securities, many on the Street jumped into the pool.

Had the Dem's not dug the hole, then resisted any attempt at adding a lifeguard, so many big names would not now be drowning.

Posted by: krakatoa at September 22, 2008 09:40 AM (/FUhT)

17 Technically, these organizations never guaranteed anything. Taxpayers did. And now it's time to pay up.

Posted by: bunny boy at September 22, 2008 09:42 AM (3/O0e)

18 This presentation, though snarky, still applies.

Posted by: krakatoa at September 22, 2008 09:44 AM (/FUhT)

19

True, Circa.

We must be cognizant of the fact that there are those on Wall Street that share some blame for the magnitude of this crisis.

Without government failure however, they never would have even had a chance to push us this deep.

No, not true.

The financial markets are not in the business of regulation, they are in the business of making money.  They use the regulation imposed on them by the gov't as a guide and then try to maximize profits around those regulations.

The Clinton administration had as one of its goals from day 1 to radically change the interpretation of the CRA and use it as one of the crowning jewels of his legacy.  It was something he learned in Arkansas with the help of a little know Chicago banker (yeah, that Chicago) who was building a name for himself as a champion of investing in the inner city.  What Clinton realized was that not only would this be good short term politics for him, investing in the poor inner city neighborhoods and being the consumate supporter of the little guy, but it would be great long term politics for him because of the nationwide network of left wing groups he could use to help distribute money and support the cause. 

One of the trades Clinton made to get the new and improved CRA passed was to given the financial markets the ability to securitize these mortgages and sell them with the backing of Fannie.  The first such case took in 1997, 2 years after the new CRA went into affect and was led by Bear Stearns.  Yeah, that Bear Stearns.

That's when the bomb was built and the fuse was lit.  It has been growing and ticking ever since.  Some have been warning about this for years but nobody paid any attention becaue the good times were a rollin'. 

But to expect the financial markets to watch themselves and be self-correcting when what they were doing was not only legal but endorsed by DC is silly.  It's what the Barney Franks and Barack Obama's of the world want.  This problem was created in DC, fostered in DC and now we are the ones paying for it.

Posted by: JackStraw at September 22, 2008 09:45 AM (VBon8)

20 The MSM is trying to create and spread the notion that the Democrats had nothing to do with this, and are trying to get to the bottom of it. We need to stop this meme now. The Democrats did this! That message has to be attached to every story about this debacle.

Posted by: eman at September 22, 2008 09:50 AM (TE1SV)

21

Jack,

That's all good in economic theory.  But 2+2 never, ever, ever equals 5.  Saying that something is legal is not the same as saying that it is risk free.  The underlying foundations of the subprime loans were that they were, on their face, very, very risky loans.  Loans to banana republics with bad economic fundamentals are never a good idea.  TRADING in those loans is even worse.

Posted by: Circa (Insert Year Here) at September 22, 2008 09:52 AM (B+qrE)

22 ^^^ Another way to look it at, and rub salt in our wounds... Democrats bought votes for a generation, and now we get to pay for them retroactively. Brilliant and disgusting.

Posted by: bunny boy at September 22, 2008 09:52 AM (3/O0e)

23 I think that both the oil and housing bubbles are the indirect result of nearly thirty years of prosperity and the raised expectations of return that have been engendered in investors.  Everyone has come to think that a 10%+ return was their god given right. 

As the economy cooled, investors, worldwide, continued to press their fund managers to keep the party rolling, forcing those managers to chase whatever was returning the most, however risky, or lose their jobs. 

Real estate values and then oil speculation were the best shows going, for a while. 

Posted by: toby928: Caesarist at September 22, 2008 09:57 AM (evdj2)

24

Saying that something is legal is not the same as saying that it is risk free. 

True.  There is always risk when trading in any type of financial instrument.  But, and this is the important but, these instruments were not only allowed to be created by DC but they were endorsed by Fannie who was one of the biggest buyers of subprime mortgages.  Fannie was never supposed to be a player in high risk securities, that wasn't their mission.  But once they started, they gave cover and implied endorsement of the entire scheme.

Don't get me wrong.  Wall Street is chuck full of slimy operators.  But this crisis was not caused by Wall Street or huge compensation packages.  It was caused by DC.

Posted by: JackStraw at September 22, 2008 09:58 AM (VBon8)

25 Hey, guys, and by guys, I mean effeminate lady-boys, and by that I mean Democrats,

Um, I appreciate what you guys say you want with the Leprecauns and the unicorns and dancing, singing butterflies and all, but if you get a chance, please stop kicking me in the balls. Thanx!

Love from Commonsense, Middle America,
The Economy

Posted by: The Economy at September 22, 2008 09:58 AM (N8eC4)

26

Aand, ace, I don't usually disagree with you (ever that I remember), but I really, really disagree with this statement:

Once again, that's not Wall Street's fault.  Wall Street saw a system gamed by the government and jumped in.  They can't be blamed for that.

See my statement above to Jack.  If it was common knowledge that the loans were a hosue of cards, of course we can blame Wall Street.

Posted by: Circa (Insert Year Here) at September 22, 2008 10:00 AM (B+qrE)

27 JackStraw, I don't disagree one bit with what you say.

However, the apparent contention (and I apologize if I am misinterpreting) that there is nothing the Republicans or Wall Street could have done to mitigate the scope of the subprime crisis is false.

The 'Pubs have a bully pulpit that they consistently under-use. Either they are retarded. Or they are scared of bad press. Or they are bought.

There may be some other factors, but I'm betting those three cover 90% of the reason we are consistently tossed down the Socialist slide.

Pointing fingers and saying "the big democrat bully Barney Frank forced me to accept it" is no excuse.

And Wall Street's players who took advantage of the situation to ride a wave of speculative profits share some blame for the fact that there are so many houses washed away.

Let me expand this however, lest I am being misunderstood:

Wall Street is guilty of greed, and its shenanigans was legal, although unethical in that it sold out stabililty for itself, and for its clients, in return for short term glory. The argument for regulating securities is there clear for all of us, as unbridled capitalism, while capable of great economic leaps, is equally capable of great economic downturns.

Politicians are guilty of allowing the situation to develop, fester, explode, and now be paid for with taxpayer's money. Again, most likely legal, unless some lobbying efforts can be found otherwise.

They certainly must bear the brunt of our (the taxpayers & voters) ire. They need to be tossed out, spending needs to be reigned in to cover the vast expansion of debt, regulations need to be examined and brought up-to-date with the realities on the ground, and real lobbying reform needs to be enacted.

But ignoring the short-sightedness of Wall Steet gives the left and their mouthpieces the ammunition to cover their organized retreat into another socialist direction.

Posted by: krakatoa at September 22, 2008 10:05 AM (/FUhT)

28

Actually, Wall Street did create a lot of the problem investments.  Here's one brief example of an infamous Lehman deal.  And yes, they were able to dump a large portion of it onto Fannie and Freddie.

Anyone who doesn't think that Paulson and his buddies on Wall Street haven't been involved in this up to their necks is kidding themselves.  Paulson had to know that the shit was going to hit the fan as early as 2005 (if he didn't he's grossly  unqualified for his job in any event).  Like the RTC mess in the'80s, when Salomon lobbied heavily for expanded ability to sell their toxic crap to the banks, Wall Street has pushed for all these expanded dumping grounds for their bad paper.

Bush (and Maverick) did get on the right side of this issue, but by 2005 it was already too late.  The damage had been done by idiotically low interest rates under Greenspan, the increasingly manipulated inflation reports (most notoriously the CPI), and many other factors for which the GOP can share the blame.  Of course, the stonewalling of any attempts at reform by the Dems certainly increased the problem.

Yes, many of these policies started under the Clinton administration, but in the areas where the Bush administration could have made a difference, he mostly did his 'go along to get along' routine.

Posted by: Hermit Dave at September 22, 2008 10:06 AM (WhFvm)

29 I'm thinking the burden of proof is a bit more on him in this, because he is arguing that in a singular motion we could have averted calamity, and we don't have specifics on the entirety of the bill beyond what he is saying. To me that does not pass the smell test.

What makes it incredibly suspect is that he is saying there was only ONE situation where the Democrats opposed some sort of regulatory bill and that ONE opposition was enough to lead to disaster. That seems utterly ridiculous, since there were multiple causative and contributing factors to the financial meltdown and there should have been multiple opportunities to mitigate it early on. It wasn't just that real estate prices were skyrocketing, but additionally debt was being chopped up and moved around and repackaged in unbelievably arcane ways such that the market for this debt ballooned to absolutely ridiculous amounts (we're talking on the order of the total world GDP combined) and these companies were becoming extremely leveraged and unstable.

And to make it even more silly, the period when this started to build up, 2000-2006, the Republicans were in command of the legislature and presidency.

This whole thing reaks of bullshit.

Posted by: Palooka at September 22, 2008 10:07 AM (8a5iE)

30 Here is what Paul Hackett democrat who was running for congress in Ohio say is the best way to attack Palin. This is still on Kos and it was posted September12. You might expect one of the kos kidz to say things like this but an ex candidate for congress? For shame Mr. Hackett: Obama is losing Ohio by Paul Hackett Fri Sep 12, 2008 at 07:48:58 AM PDT Obama is losing Ohio and contrary to Mr. Plouffe’s assertion that Obama can win without Ohio history indicates otherwise. There are at least three issues that lead me to believe that the Obama campaign does not grasp the situation in Ohio. Unreliable polling No organized presence in Southern Ohio No attack strategy against Palin/McCain coupled with a lack of defense of the Obama central theme of change. Paul Hackett's diary :: :: If one believes the polling in Ohio Obama is in a neck and neck race with Palin/McCain to win the state. Additionally it must be remembered that Obama has yet to win over the support of middle of the road Ohioans or solidify the support of Hillary Clinton’s constituents post primary. Recall that Obama was handily beaten by Clinton in the Ohio primary. While the polling is close I believe it is far worse than the numbers reflect given social apprehension of middle of the road uncommitted respondents to appear racist by not supporting Obama. There has been much speculation across America regarding this phenomenon and as such can impact the accuracy of polling by at least 5 points. Thus instead of being down in Ohio by 3 or 4 points I would argue that for planning purposes the working assumption should indicate that Obama is down in Ohio by roughly 10 points. That’s a lot of ground to make up in less than 60 days, and as such there must be an aggressive offense to cover such a distance. The Obama campaign has no organized presence in Southern Ohio; southern Ohio defined as south of Interstate 70 which runs east west and loosely divides the state in half both geographically and culturally. The Obama campaign’s focus of effort is evident in the traditionally Democratic strongholds of northeast Ohio, the Cleveland area and Mahoning Valley, in addition to Franklin County/Columbus in the center of the state. Certainly these are densely populated areas with huge numbers of Democratic constituents, however, they voted for Clinton in the primary, and even if they have increased the registered democrats in these areas the state still can not be won without a majority of the independent hardscrabble rural voter spread throughout southern Ohio from West Virginia to Indiana. Focusing on Columbus, Cleveland, and Dayton is like campaigning in California; it feels good but we’ve already won there. Southern Ohio is made up of rural people who make judgments based on the recommendation of close friends and family or personal experience. While TV and radio play a supporting role its impact is not decisive and in order to cover Southern Ohio completely one has to buy into roughly 7 media markets. In other words one has to spend a tremendous amount of money to reach a sparsely but indispensable population spread throughout a region of the country that is not well understood by “outsiders” in order to win the state and therefore the White House. Outsiders is defined as someone who grew up 20 miles away. This hardscrabble population that largely has a self reliant history that predisposes itself to apparently vote against its economic self interests values perhaps one quality in a person above all others; a fighting spirit. Given McCain’s recent selection of Governor Palin as his running mate it’s clear the Republicans understand the dynamic in not only Southern Ohio but like minded communities throughout rural America. The Palin/McCain ticket reflects a course of action on the part of the Republican party that deftly understands both the strengths and weaknesses of the Democratic ticket and aggressively attacks both. The only antidote for such an assault is a comprehensive and aggressive personal attack on the Republican ticket focusing on how the personal lives of Palin/McCain evidence their personal unreliability and therefore their lack of character and values to lead America coupled with an aggressive defense of the Democratic central theme of Change. Both elements of strategy, an offensive and defensive plan appear to be absent in Southern Ohio. The solution rests with local surrogates on the ground spreading the attack face to face coupled with an air campaign via radio and TV. The message is simple and the professionals can refine it but essentially it should contain these elements: "Sarah Palin? Can't keep her solemn oath of devotion to her husband and had sex with his employee. Sarah Palin? Accidentally got pregnant at age 43 and the tax payers of Alaska have to pay for the care of her disabled child. Sarah Palin? Unable to teach her 16 year old daughter right from wrong and now another teenager is pregnant. Sarah Palin? Can you trust Sarah Palin and her values with America's future? John McCain? Divorced from his first wife one month and marries a billionaire influence peddler and convicted felon. John McCain, a record of rash and impulsive decisions. That’s not change that’s more of the same.” Like it or not the path to the White House requires paying the Ohio Toll, and traipsing around Columbus or Cleveland and preaching to the converted is no substitute, and for that matter nor is duck hunting with Governor Strickland; See John Kerry, 2004. Tags: Barack Obama, 2008 elections, president, Democrats, Ohio, Paul Hackett, Recommended, WOMD (all tags) :: Previous Tag Versions Permalink | 1301 comments

Posted by: jacksontn at September 22, 2008 10:07 AM (rkS+w)

31 Circa, do you have savings bonds or pay Social Security?

Same thing, government backed funds/obligations. That's what FNMA and Freddie Mac did; they backed those loans as good as government bonds. You can blame Wall Street but Wall Street was acting on premises set by the government. You still have to blame Wall Street for being stupid enough to follow the government's lead.

Why not just cut out the middle man and go right to the source? Which is...drum roll, please...the government.

Posted by: Vercingetorix at September 22, 2008 10:08 AM (N8eC4)

32 Can we from now instead of saying the "Democrats built this bomb" could we use "Democrats set us up the bomb"? This is the internet you know?

Posted by: Rocks at September 22, 2008 10:09 AM (Q1lie)

33

many other factors for which the GOP can share the blame

Like what? I'm curious and haven't seen much of anything on that subject other than a couple lame troll statement about McCain one time being against increased regulation of something completely different.

Posted by: Talking Points, Inc. at September 22, 2008 10:10 AM (X6Zdh)

34 shame on you jacksontn for threadjacking.

Someone oughta delete your comment.

Posted by: krakatoa at September 22, 2008 10:13 AM (/FUhT)

35 Damn it. I'm me, I'm meeeee.

Posted by: MamaAJ at September 22, 2008 10:14 AM (X6Zdh)

36

Verc,

(And again--I don't think you and I have EVER disagreed about anything either here or at Protein Wisdom when used to comment there).  The foundations of SS and savings bonds are not and were not the foundations of the subprime loans. 

I just do not believe it is right or advisable to let the investment guys off the hook this easily.  If you know that the core is rotten, should you still eat the apple? 

Posted by: Circa (Insert Year Here) at September 22, 2008 10:15 AM (B+qrE)

37

Circa and krakatoa-

Guys.  I'm not arguing that there isn't greed on Wall Street.  Wall Street IS greed.  That's what they do.  It's a feature, not a bug.  The bug enters the game when the rules of the game are altered such that it will inevitably crash. 

In orfer to really understand this you have to understand the relationship of Fannie and Freddie to the secondary mortgage market.  Fannie was first created to purchase mortgages from banks thus freeing banks up to issue more mortgages, loans..stuff banks do.  Previously, banks could only lend a percentage of what they had in assets and with cash tied up, they were limited.  Think It's a Wonderful Life for an illustrative example.

Fannie and Freddie got the backing of the US government to guarantee these transactions.  Thats where things get interesting.

Now, fast forward to the brave new world of CRA.  This was a Clinton/liberal democrat wet dream with backing not only from liberal members of Congress but also from groups like ACORN, NACA, La Raza and on and on and on.  In order to make this more palatable to those who thought this was bad, they allowed those subprime CRA mortgages to be securitized and backed by Fannie.  In other words, the risk being guaranteed by the federal government, you and me, skyrocketed at the very time Clinton was installing his cronies in Fannie/Freddie, HUD (see Cuomo, Andrew) FHA, etc., and decreasing the oversight of these organizations.

The market responded as the market will when given a new product to sell, particularly one guaranteed by DC, they sold the hell out of it.  They were getting deeper and deeper into the CRA business while Fannie/Freddie was taking on ridiculously high levels of risk behind these instruments.  When Fannie/Freddie finally went tits up, it was a surprise to everyone because they had been hiding and cooking the books for years.  And the affect on Wall Street was devastating.  The CRA's became worth a fraction of what they were trading at overnight and nobody had the assets to cover them.

 

Now...if there is fraud and mismanagement at Fannie/Freddie, the group charged with managing and guaranteeing the products behind the securitized instruments, who exactly should the street have known this and why should they have planned for it?

Posted by: JackStraw at September 22, 2008 10:20 AM (VBon8)

38

Jack,

It's a two-tier problem.  We all agree that the Fannie/Freddie/Congress nexus was bad mojo.  Perhaps the most disastrous economic mojo since Smoot-Hawley, if not ever.

My point is that the second tier of actually trading in what most KNEW to be suspect instruments is where things really went wrong for the big investment firms.  They sought a free lunch and I suppose in the end they will almost get it due to the pending legislation, but the risks were real because of the fundamental character of the investments.  I am all for making money and for capitalism, but somebody has to show some responsibility.

I'm thinking more and more of Nassim Taleb's low opinion of bankers in "The Black Swan" lately.  He was obviously on to something.

Posted by: Circa (Insert Year Here) at September 22, 2008 10:31 AM (B+qrE)

39 Pointing to 2005 simply is not sufficient.  The architects of the Community Reinvestment Act of 1974 share a huge portion of the blame for this. Walter Williams makes mention of this today:

Many politicians and pundits claim that the credit crunch and high mortgage foreclosure rate is an example of market failure and want government to step in to bail out creditors and borrowers at the expense of taxpayers who prudently managed their affairs. These financial problems are not market failures but government failure. The Community Reinvestment Act of 1977 is a federal law that intimidated lenders into offering credit throughout their entire market and discouraged them from restricting their credit services to low-risk markets, a practice sometimes called redlining. The Federal Reserve Bank, keeping interest rates artificially low, gave buyers and builders incentive to buy and build, thereby producing the housing bubble. Lenders were willing to make creative interest-only loans, often high-risk "no doc" and "liar loans," in order to allow people to buy more housing than they could afford. Of course, with the expectation that housing prices will continue to rise, it was no problem for lenders and borrowers but housing prices began to fall, leaving some people with negative home equity and banks in trouble.

The credit crunch and foreclosure problems are failures of government policy. In fact, what we see now is a market correction to foolhardy government policy. Congress' move to bailout lenders and borrowers who made poor decisions will simply create incentives for people to make unwise decisions in the future. English philosopher Herbert Spencer said, "The ultimate result of shielding men from the effects of folly is to fill the world with fools."

I won't do a dissertation here, but for brevity's sake, Wikipedia has this to say about the CRA of 1974: 

The CRA mandates that each banking institution be evaluated to determine if it has met the credit needs of its entire community. That record is taken into account when the federal government considers an institution's application for deposit facilities, including mergers and acquisitions. The CRA is enforced by the financial regulators.

*      *       *

In 1995, as a result of interest from President Bill Clinton's administration, the implementing regulations for the CRA were strengthened by focusing the financial regulators' attention on institutions' performance in helping to meet community credit needs. These revisions with an effective starting date of January 31, 1995 were credited with substantially increasing the number and aggregate amount of loans to small businesses and to low- and moderate-income borrowers for home loans. These changes were very controversial and as a result, the regulators agreed to revisit the rule after it had been fully implemented for seven years. Thus in 2002, the regulators opened up the regulation for review and potential revision.

*       *       *

Part of the increase in home loans was due to increased efficiency and the genesis of lenders, like Countrywide, that do not mitigate loan risk with savings deposits as do traditional banks using the new subprime authorization. This is known as the secondary market for mortgage loans. The revisions allowed the securitization of CRA loans containing subprime mortgages. The first public securitization of CRA loans started in 1997 by Bear Stearns.  The number of CRA mortgage loans increased by 39 percent between 1993 and 1998, while other loans increased by only 17 percent.

The blame goes much farther back the foiled reforms of 2005.  And so much for effing brevity.


Posted by: Jazz at September 22, 2008 10:34 AM (hnq5i)

40 Walter Williams "Stubborn Ignorance." 

Wikipedia entry for Community Reinvestment Act of 1977.

Sorry for the oversight to source.

Posted by: Jazz at September 22, 2008 10:37 AM (hnq5i)

41

Circa-

My point is that the second tier of actually trading in what most KNEW to be suspect instruments is where things really went wrong for the big investment firms.  They sought a free lunch and I suppose in the end they will almost get it due to the pending legislation, but the risks were real because of the fundamental character of the investments.  I am all for making money and for capitalism, but somebody has to show some responsibility.

Here is where you and I part.  I haven't heard of anyone who knew these instruments were fraudulent.  Because of the actions of Fannie/Freddie, that's what they were.  I have certainly heard they were riskier than normal MBS instruments and they were priced accordingly.  The difference seems to be in our understanding of what the market actually knew about the underlying value of the CRA mortgages behind all of this.

If people knew that Fannie was cooking the books then yes, I agree with you.  I haven't heard anybody assert that yet and given the widespread, and I mean worldwide, impact this is having, I would think that it was collusion on the most unimaginable scale.

It will all come out eventually but until I see evidence to the contrary, I will blame the only people who have been proven to have dirt on their hands.  Fannie/Freddie, the donks in Congress who created this, Bill Clinton and the alphabet soup of left wing victim groups who worked in concert to start this mess.

 

Posted by: JackStraw at September 22, 2008 10:43 AM (VBon8)

42 FYI(and I got this shit from Josh "more on that later" Marshall): Hassett is the co-author of "DOW 36,000".

http://www.amazon.com/Dow-36-000-Strategy-Profiting/dp/0609806998

Whoops.  Remind me to never write any books.

Posted by: Gabriel Sutherland at September 22, 2008 10:46 AM (AHrTm)

43 "Fannie/Freddie, the donks in Congress who created this, Bill Clinton and the alphabet soup of left wing victim groups who worked in concert to start this mess."

With flippin Rick Davis heading the lobby shop at the time?  I prefer my Republicans to be the ones wearing the ski masks rather than the suit with "kick me, I'm getting 6 figures for this shit" stapled to their lapel.

All I see are endless "No U" arguments on the Fannie/Freddie front.

Posted by: Gabriel Sutherland at September 22, 2008 10:50 AM (AHrTm)

44

MamaAJ:

The first and most obvious way in which the GOP can share the blame is in the aftermath of the post-dot.com bubble.  Granted that this bubble was a Clinton legacy; however, the Bush administration's response was to push for an incredibly low interest rate environment.  This was peddled as necessary to keep the economy moving, when in truth all it really served to do was take an already small housing bubble and turn it into a monster.

Would we have had a recession without this action?  Most likely yes, a small one.  However, just as allowing bankruptcies cleans out the deadwood of bad companies, allowing recessions cleans out bad areas of the economy.  Attempting to stave off every single recession merely pushes back the date of reckoning and increases the damage.

Another way in which the Bush administration is compicit is in the continual pushing of the CPI as a reliable measure of inflation and assuring everyone that inflation is low, when in fact it's been increasing steadily.  This is a pretty good explanation of the CPI controversy, if you don't mind some technical reading.  Once again, the CPI changes started under Clinton, but Bush has exacerbated the problem.

Finally, I'll leave you with this piece by ParaPundit, which gets to the real root of the Wall Street problem -- the insane leveraging which made the investment banks so susceptable to even a small downturn (never mind one of this magnitude).  Once again, the Dems are out front and center.  However, when these SEC rule changes were implemented, lets not forget that the GOP controlled both houses of congress.

The GOP's faults are more of inaction, while the Dem's are more those of action.  Naturally, this makes it easier to point to the problems created by the Dems, as JackStraw has so ably in this thread.  However, when given the chance to make reforms when they controlled both houses of congress and the bully pulpit of the White House, and when these burgening issues were already obvious to many interested observers, the GOP took a complete pass, and in some cases acted the enabler.

In any event, as one of the most respected conservative voices (and rightfully so), I'll let Malkin have the last word.

Posted by: Hermit Dave at September 22, 2008 11:11 AM (WhFvm)

45 My point as well, Gabriel S.

The Right has to define and own its tacit support of these bad Leftist policies, even though it is substantially only that our representative let themselves be rolled.

If we let the Left define this issue as simply partisan finger pointing in their media proxies, then no lasting solution will be had.

JackStraw -- I think there was ample reason for many institutions to steer clear of these instruments. I don't blame them for their nature. I think it is worth pointing out however, that their nature certainly amplified the effects of the eventual collapse.

So I think it worth pointing out that the Republicans were the ones pushing for actual oversight of this, and not having that significant detail overshadowed by he-said she-said political grandstanding. At the same time, I think it would do the Republicans well to admit they rolled over too easily, and perhaps in some cases, because some had their fingers in the pie.

I want our legislative bodies to act like grownups for once. Just fucking once.


Posted by: krakatoa at September 22, 2008 11:18 AM (/FUhT)

46

Ha!  Sprung = me.  Thanks ace.  But it is rspung, not sprung.

This needs to be a massive wave of campaign commericals by the RNC.  Remember a couple of months ago when we were all hyped about nailing Democrats on high oil prices?  Well, now we need to nail them on low stock prices.

They are killing us both ways.  Wiping out our IRAs and our weekly food/gasoline budgets.

Posted by: Dogstar at September 22, 2008 11:23 AM (PQZBi)

47

JackStraw -- I think there was ample reason for many institutions to steer clear of these instruments. I don't blame them for their nature. I think it is worth pointing out however, that their nature certainly amplified the effects of the eventual collapse.

No doubt.  But it also must be pointed out that their actions created a lot of cheap, available credit which has helped keep this economy humming.  Had the underlying foundation, Fannie Mae, not been fraudulent, we wouldn't have had such a strong economy nor would we be in this mess.  Nobody is totally clean.

So I think it worth pointing out that the Republicans were the ones pushing for actual oversight of this, and not having that significant detail overshadowed by he-said she-said political grandstanding. At the same time, I think it would do the Republicans well to admit they rolled over too easily, and perhaps in some cases, because some had their fingers in the pie.

When you have every Democrat blaming Republicans and greedy execs on Wall Street (who most assume are Republicans even though contribution to Dems dwarf contributions to Repubs), I'm not sure it is a good idea for Republicans to start blaming themselves.  I agree, they should have done more but if they don't fight this hard and tell the whole story they are going to get killed even worse in November.

Posted by: JackStraw at September 22, 2008 11:44 AM (VBon8)

48

The Democrats and their Leftist agitators are largely responsible for the current financial meltdown.  No down payment mortgages?  Lending large sums to people with terrible credit histories? This were not common even a few years ago.

Check out this City Journal article from the Winter of 2000:

The Trillion-Dollar Bank Shakedown that Bodes Ill for Cities

"The Community Reinvestment Act funnels billions to left-wing activists, while threatening to destabilize lower-middle-class neighborhoods."

Posted by: Jones in SC at September 22, 2008 11:47 AM (PLnvB)

Posted by: Jones in SC at September 22, 2008 11:59 AM (PLnvB)

50

Yeah the fact that RNC isn't jumping all over this with ads is troubling.

I mean Barry HO's in this up to his eyeballs. This should be a slam dunk game clincher.

How hard is it to come up with: "They crush us with high gas prices, and wipe out our retirments all so they can stay in power."

Apparently really hard.

Posted by: Iblis at September 22, 2008 12:26 PM (9221z)

51

Thanks, Hermit Dave. I've kind of had my head down and my fingers in my ears about this whole subject for a while, so I'm trying to catch up.

Posted by: MamaAJ at September 22, 2008 12:33 PM (X6Zdh)

52

You're welcome MamaAJ.  I'm not especially trying to bash the GOP over this, as the Dems are clearly more culpable; however, I'd like to see at least some of the partisanship put aside as this is such a large issue.

McCain's responses have at least had some substance to them, while Obama's have been his usual hopey-changey socialist puffery.  Unfortunately, McCain went after the wrong guy in Cox, when he should have gone after Paulson.

I also understand JackStraw's reluctance have the Republicans blame themselves.  I believe that this issue  is so large, however, that it makes this presidential election almost moot.  Whoever is elected is almost certainly going to be a one-term Prez, and the Paulson 'kick the can further along the road' bailout could lead to either hyperinflation, a massive tanking of the dollar, or a default on some of the national debt during that administration.

The problem is large, real, is not going away, and is blunt force trauma that is not going to be cured by even very large band-aids.  Pointing fingers into the past is less helpful than looking the issue square-on and making an honest assessment of what should be done regardless of partisanship.

Posted by: Hermit Dave at September 22, 2008 12:44 PM (WhFvm)

53 As painful as it would be there is only one solution to this financial crisis: http://www.youtube.com/watch?v=KdF6M2FBKG4 Let the mother'effer burn until institutional and private investors are willing to step in and prop up the markets at more realistic values. This bailout will be a disaster and the beginning of our nation's financial ruin, I fear.

Posted by: Wes at September 22, 2008 12:48 PM (sxFuJ)

54

Soooo, it is the Dems fault? I seem to recall the Repubs being in charge for 20+ years. I recall Rick Davis is McSame campaign manager. I recall McSame doesn't like regulation. I recall Obama and raines has already been debunked even by Fox News - but you still cling to the lie. I recall Mcsame and the Keating five scandal, the S&L scandal and being asleep at the switch for 20+ years - but you figure it is the Dems fault?

It is no wonder the world hates us and feels we are being lead by a bunch of pussies. You allow the country to raided and raped, but it is the Dems fault? STFU...

Posted by: Tom at September 22, 2008 02:00 PM (RuxVs)

55

These bailouts don't work, can't work and never worked in the past.

The market is all-powerful.  The market always, and I mean ALWAYS, finds its own level.  And that level is much, much lower.

The market really hasn't gone down much at all, yet.

It will, at a minimum, re-test the 2003 lows.  There are too many bad assets in too many places that are marked to too many incorrect prices.

Plus, there is a wave of Alt-A foreclosures that will hit next year, after the current wave of sub-prime foreclosures finishes.

And Alt-A is a much, much larger pool of people.

Also, the projections of troubled loans of all varieties (student, car, home, business) grows every month, because the number of people losing jobs grows every month.

Government bailouts are done for one reason and one reason only - to sacrifice our children for political careers.

What did that guy on Fast Times at Ridgemont High say?  "Learn it, know it, live it"?  There you go.

Posted by: Dogstar at September 22, 2008 02:02 PM (PQZBi)

56 I can understand why the media aren't all over this, since it would hurt their Precious One. But geez, SOME honest journalists have to start reporting the origins of this debacle--how can they pretend to delve into the history of it and not do so? And I cannot for the life of me understand why McCain has failed to pick this up and run hard with it. Instead, he bloviates about a need for regulation and firing people who had nothing to do with this. C'mon, McCain! Fight, dammit!

Posted by: Erwin Hussein O'Barry at September 22, 2008 02:53 PM (eepJm)

57 Pretty typical.

The Democrats build it, light it, and stop people trying top defuse it, so naturally the Republicans take the blame for not doing enough to stop them.

What else is new.

Look, I totally understand the desire to be even-handed and take responsibility for your faults. Democrats don't understand that, and the MSM are Democrats, so y'all need to adjust your strategy.

Or, you know, lose. You can do that too.

Posted by: Merovign at September 23, 2008 05:24 AM (UXoQt)

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