Thursday, October 2, 2008

Who's to blame, Part II

Let's see. Today America is facing a "financial crisis" -- The U. S. House of Representatives rejected a bill earlier in the week to "Bailout" whomever. Some say Wall Street, some say the U. S. Economy. President Bush and his ex-Goldman, Sachs Treasury Secretary developed and promoted the $700,000,000,000 use of taxpayers' money to purchase "toxic" assets from U. S. banks. Then it went to The Democratic Congress to be put into a bill ("The Economic Stabilization Act of 2008"). The Democrats added their own biases: caps on executives' pay packages when their institutions are helped; adding foreign financial institutions; adding pension funds and "other" financial institutions; giving some money to the Democrats' favorite slush funds like ACORN; establishment of strict oversight, including Congress; giving the government rights to purchase equity in the assisted financial companies so as to return somthing to the taxpayers; and so on. House Republicans jumped in and made some changes, such as eliminating the payola to ACORN. Upon publicity, the public overwhelmingly rose up against the bailout. 100 - 1 in many communications with politicians. It was subsequently defeated, in part by wary Republicans (65 for, about one-third vs. 60%, 140, Democrats for), but also Democrats who were apparently told by House Leader Nancy Pelosi that they could vote against it to protect their reelection campaigns. Democrats could have passed it all on their own but were apparently politically afraid to. Wisely it turned out. The stock market plunged 700+ points Monday. There was blaming all over the place, especially including "deregulation" started by Reagan and abetted by Bush.

So for fun, who IS to blame? I believe, mostly Democrats who began (courtesy Wikipedia:) "The Community Reinvestment Act (or CRA, Pub.L. 95-128, title VIII, 91 Stat. 1147, 12 U.S.C. § 2901 et seq.) is a United States federal law that requires banks and savings and loan associations to offer credit throughout their entire market area. (See full text of Act and current regulations.) The act prohibits financial institutions from targeting only wealthier neighborhoods with their services, a practice known as 'redlining.' The purpose of the CRA is to ensure that under-served populations can obtain credit, including home ownership opportunities and commercial loans to small businesses. The Act was passed in 1977 and has been subjected to important regulatory revisions since then." And further..."The CRA was passed by the 95th United States Congress, controlled by Democrats, and signed into law by President Jimmy Carter in 1977 as a result of national pressure for affordable housing, and despite considerable opposition from the mainstream banking community. 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.
"The Act charged the Federal Reserve System to implement the CRA through ensuring banks and savings and loans met their CRA obligations. The CRA is also enforced by the Federal Deposit Insurance Corporation ("FDIC") CRA Statute. "

And courtesy the N. Y. Post, October, 8, 2008: "Long the director of Chicago ACORN [the Association of Community Organizations for Reform Now] , [Madeline] Talbott is a specialist in 'direct action' - organizers' term for their militant tactics of intimidation and disruption... But her real legacy may be her drive to push banks into making risky mortgage loans.
"In February 1990, Illinois regulators held what was believed to be the first-ever state hearing to consider blocking a thrift merger for lack of compliance with CRA. The challenge was filed by ACORN, led by Talbott. Officials of Bell Federal Savings and Loan Association, her target, complained that ACORN pressure was undermining its ability to meet strict financial requirements it was obligated to uphold and protested being boxed into an 'affirmative-action lending policy.' The following years saw Talbott featured in dozens of news stories about pressuring banks into higher-risk minority loans.
"In April 1992, Talbott filed an other precedent-setting com plaint using the 'community support requirements' of the 1989 savings-and-loan bailout, this time against Avondale Federal Bank for Savings. Within a month, Chicago ACORN had organized its first 'bank fair' at Malcolm X College and found 16 Chicago-area financial institutions willing to participate.
Two months later, aided by ACORN organizer Sandra Maxwell, Talbott announced plans to conduct demonstrations in the lobbies of area banks that refused to attend an ACORN-sponsored national bank 'summit' in New York. She insisted that banks show a commitment to minority lending by lowering their standards on downpayments and underwriting - for example, by overlooking bad credit histories.
"By September 1992, The Chicago Tribune was describing Talbott's program as 'affirmative-action lending' and ACORN was issuing fact sheets bragging about relaxations of credit standards that it had won on behalf of minorities.
"And Talbott continued her effort to, as she put it, drag banks 'kicking and screaming' into high-risk loans. A September 1993 story in The Chicago Sun-Times presents her as the leader of an initiative in which five area financial institutions (including two of her former targets, now plainly cowed - Bell Federal Savings and Avondale Federal Savings) were 'participating in a $55 million national pilot program with affordable-housing group ACORN to make mortgages for low- and moderate-income people with troubled credit histories.' " (Presidental candidate Barack Obama early in his career in Chicago trained Ms. Talbott's executives and street-level workers, and raised and directed monies to ACORN in part from foundations on whose boards he sat.

As the City Journal reported in 2000, using the power to extort granted in the CRA, the radical, anti-free market group ACORN received $760 million from the Bank of New York, the Boston-based Neighborhood Assistance Corporation of America dragged $3 billion out of the Bank of America and a coalition of “community groups” in New Jersey got an astounding five-year, $13 billion agreement with First Union Bank.

That was the start. Later, Democrats in Congress pushed this "affordable housing" onto Fannie Mae and Freddie Mac, in part forcing them to purchase sub-prime and alt-A loans, ultimately for over $1 trillion. The support was lubricated by huge campaign contributions and government employees heading to Fan or Fred to work when their government employment was over. The Wall Street Journal and a variety of politicians railed against the added leverage coupled with highly-risky loans, to no avail. An Opinion article in today's Wall Street Journal follows:

OCTOBER 2, 2008
What They Said About Fan and Fred

House Financial Services Committee hearing, Sept. 10, 2003:
Rep. Barney Frank (D., Mass.): I worry, frankly, that there's a tension here. The more people, in my judgment, exaggerate a threat of safety and soundness, the more people conjure up the possibility of serious financial losses to the Treasury, which I do not see. I think we see entities that are fundamentally sound financially and withstand some of the disaster scenarios. . . .
Clockwise from top left: Sen. Thomas Carper, Rep. Barney Frank, Sen. Robert Bennett, Rep. Maxine Waters, Sen. Chris Dodd and Sen. Charles Schumer.
Rep. Maxine Waters (D., Calif.), speaking to Housing and Urban Development Secretary Mel Martinez:
Secretary Martinez, if it ain't broke, why do you want to fix it? Have the GSEs [government-sponsored enterprises] ever missed their housing goals?
* * *
House Financial Services Committee hearing, Sept. 25, 2003:
Rep. Frank: I do think I do not want the same kind of focus on safety and soundness that we have in OCC [Office of the Comptroller of the Currency] and OTS [Office of Thrift Supervision]. I want to roll the dice a little bit more in this situation towards subsidized housing. . . .
* * *
House Financial Services Committee hearing, Sept. 25, 2003:
Rep. Gregory Meeks, (D., N.Y.): . . . I am just pissed off at Ofheo [Office of Federal Housing Enterprise Oversight] because if it wasn't for you I don't think that we would be here in the first place.

Fannie Mayhem: A History
A compendium of The Wall Street Journal's recent editorial coverage of Fannie and Freddie.
And Freddie Mac, who on its own, you know, came out front and indicated it is wrong, and now the problem that we have and that we are faced with is maybe some individuals who wanted to do away with GSEs in the first place, you have given them an excuse to try to have this forum so that we can talk about it and maybe change the direction and the mission of what the GSEs had, which they have done a tremendous job. . .
Ofheo Director Armando Falcon Jr.: Congressman, Ofheo did not improperly apply accounting rules; Freddie Mac did. Ofheo did not try to manage earnings improperly; Freddie Mac did. So this isn't about the agency's engagement in improper conduct, it is about Freddie Mac. Let me just correct the record on that. . . . I have been asking for these additional authorities for four years now. I have been asking for additional resources, the independent appropriations assessment powers.
This is not a matter of the agency engaging in any misconduct. . . .
Rep. Waters: However, I have sat through nearly a dozen hearings where, frankly, we were trying to fix something that wasn't broke. Housing is the economic engine of our economy, and in no community does this engine need to work more than in mine. With last week's hurricane and the drain on the economy from the war in Iraq, we should do no harm to these GSEs. We should be enhancing regulation, not making fundamental change.
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. Everything in the 1992 act has worked just fine. In fact, the GSEs have exceeded their housing goals. . . .
Rep. Frank: Let me ask [George] Gould and [Franklin] Raines on behalf of Freddie Mac and Fannie Mae, do you feel that over the past years you have been substantially under-regulated?
Mr. Raines?
Mr. Raines: No, sir.
Mr. Frank: Mr. Gould?
Mr. Gould: No, sir. . . .
Mr. Frank: OK. Then I am not entirely sure why we are here. . . .
Rep. Frank: I believe there has been more alarm raised about potential unsafety and unsoundness than, in fact, exists.
* * *
Senate Banking Committee, Oct. 16, 2003:
Sen. Charles Schumer (D., N.Y.): And my worry is that we're using the recent safety and soundness concerns, particularly with Freddie, and with a poor regulator, as a straw man to curtail Fannie and Freddie's mission. And I don't think there is any doubt that there are some in the administration who don't believe in Fannie and Freddie altogether, say let the private sector do it. That would be sort of an ideological position.
Mr. Raines: But more importantly, banks are in a far more risky business than we are.
* * *
Senate Banking Committee, Feb. 24-25, 2004:
Sen. Thomas Carper (D., Del.): What is the wrong that we're trying to right here? What is the potential harm that we're trying to avert?
Federal Reserve Chairman Alan Greenspan: Well, I think that that is a very good question, senator.
What we're trying to avert is we have in our financial system right now two very large and growing financial institutions which are very effective and are essentially capable of gaining market shares in a very major market to a large extent as a consequence of what is perceived to be a subsidy that prevents the markets from adjusting appropriately, prevents competition and the normal adjustment processes that we see on a day-by-day basis from functioning in a way that creates stability. . . . And so what we have is a structure here in which a very rapidly growing organization, holding assets and financing them by subsidized debt, is growing in a manner which really does not in and of itself contribute to either home ownership or necessarily liquidity or other aspects of the financial markets. . . .
Sen. Richard Shelby (R., Ala.): [T]he federal government has [an] ambiguous relationship with the GSEs. And how do we actually get rid of that ambiguity is a complicated, tricky thing. I don't know how we do it.
I mean, you've alluded to it a little bit, but how do we define the relationship? It's important, is it not?
Mr. Greenspan: Yes. Of all the issues that have been discussed today, I think that is the most difficult one. Because you cannot have, in a rational government or a rational society, two fundamentally different views as to what will happen under a certain event. Because it invites crisis, and it invites instability. . .
Sen. Christopher Dodd (D., Conn.): I, just briefly will say, Mr. Chairman, obviously, like most of us here, this is one of the great success stories of all time. And we don't want to lose sight of that and [what] has been pointed out by all of our witnesses here, obviously, the 70% of Americans who own their own homes today, in no small measure, due because of the work that's been done here. And that shouldn't be lost in this debate and discussion. . . .
* * *
Senate Banking Committee, April 6, 2005:
Sen. Schumer: I'll lay my marker down right now, Mr. Chairman. I think Fannie and Freddie need some changes, but I don't think they need dramatic restructuring in terms of their mission, in terms of their role in the secondary mortgage market, et cetera. Change some of the accounting and regulatory issues, yes, but don't undo Fannie and Freddie.
* * *
Senate Banking Committee, June 15, 2006:
Sen. Robert Bennett (R., Utah): I think we do need a strong regulator. I think we do need a piece of legislation. But I think we do need also to be careful that we don't overreact.
I know the press, particularly, keeps saying this is another Enron, which it clearly is not. Fannie Mae has taken its lumps. Fannie Mae is paying a very large fine. Fannie Mae is under a very, very strong microscope, which it needs to be. . . . So let's not do nothing, and at the same time, let's not overreact. . .
Sen. Jack Reed (D., R.I.): I think a lot of people are being opportunistic, . . . throwing out the baby with the bathwater, saying, "Let's dramatically restructure Fannie and Freddie," when that is not what's called for as a result of what's happened here. . . .
Sen. Chuck Hagel (R., Neb.): Mr. Chairman, what we're dealing with is an astounding failure of management and board responsibility, driven clearly by self interest and greed. And when we reference this issue in the context of -- the best we can say is, "It's no Enron." Now, that's a hell of a high standard."

The 2001 "Dot.Com bust" made the ever-increasing housing prices a political bright spot in an otherwise ugly economy. But in February 2, 2002, an editorial in the Wall Street Journal strongly pointed out the huge funancial risks of Fan and Fred. But a brief chronology:


April: The Administration's FY02 budget declares that the size of Fannie Mae and Freddie Mac is "a potential problem," because "financial trouble of a large GSE could cause strong repercussions in financial markets, affecting Federally insured entities and economic activity."


May: The President calls for the disclosure and corporate governance principles contained in his 10-point plan for corporate responsibility to apply to Fannie Mae and Freddie Mac. (OMB Prompt Letter to OFHEO, 5/29/02)


January: Freddie Mac announces it has to restate financial results for the previous three years.

February: The Office of Federal Housing Enterprise Oversight (OFHEO) releases a report explaining that "although investors perceive an implicit Federal guarantee of [GSE] obligations," "the government has provided no explicit legal backing for them." As a consequence, unexpected problems at a GSE could immediately spread into financial sectors beyond the housing market. ("Systemic Risk: Fannie Mae, Freddie Mac and the Role of OFHEO," OFHEO Report, 2/4/03)

September: Fannie Mae discloses SEC investigation and acknowledges OFHEO's review found earnings manipulations.

September: Treasury Secretary John Snow testifies before the House Financial Services Committee to recommend that Congress enact "legislation to create a new Federal agency to regulate and supervise the financial activities of our housing-related government sponsored enterprises" and set prudent and appropriate minimum capital adequacy requirements. The Bush Administration offered up a proposed bill to add significant oversight. It was blocked by a full vote by the Democrats on the House Financial Services Committee, along party lines. The ranking member of that committee, Rep. Barney Fife stressed the benefits to society of "affordable housing".

October: Fannie Mae discloses $1.2 billion accounting error.

November: Council of the Economic Advisers (CEA) Chairman Greg Mankiw explains that any "legislation to reform GSE regulation should empower the new regulator with sufficient strength and credibility to reduce systemic risk." To reduce the potential for systemic instability, the regulator would have "broad authority to set both risk-based and minimum capital standards" and "receivership powers necessary to wind down the affairs of a troubled GSE." (N. Gregory Mankiw, Remarks At The Conference Of State Bank Supervisors State Banking Summit And Leadership, 11/6/03)


February: The President's FY05 Budget again highlights the risk posed by the explosive growth of the GSEs and their low levels of required capital, and called for creation of a new, world-class regulator: "The Administration has determined that the safety and soundness regulators of the housing GSEs lack sufficient power and stature to meet their responsibilities, and therefore…should be replaced with a new strengthened regulator." (2005 Budget Analytic Perspectives, pg. 83)

February: CEA Chairman Mankiw cautions Congress to "not take [the financial market's] strength for granted." Again, the call from the Administration was to reduce this risk by "ensuring that the housing GSEs are overseen by an effective regulator." (N. Gregory Mankiw, Op-Ed, "Keeping Fannie And Freddie's House In Order," Financial Times, 2/24/04)

June: Deputy Secretary of Treasury Samuel Bodman spotlights the risk posed by the GSEs and called for reform, saying "We do not have a world-class system of supervision of the housing government sponsored enterprises (GSEs), even though the importance of the housing financial system that the GSEs serve demands the best in supervision to ensure the long-term vitality of that system. Therefore, the Administration has called for a new, first class, regulatory supervisor for the three housing GSEs: Fannie Mae, Freddie Mac, and the Federal Home Loan Banking System." (Samuel Bodman, House Financial Services Subcommittee on Oversight and Investigations Testimony, 6/16/04)


April: Treasury Secretary John Snow repeats his call for GSE reform, saying "Events that have transpired since I testified before this Committee in 2003 reinforce concerns over the systemic risks posed by the GSEs and further highlight the need for real GSE reform to ensure that our housing finance system remains a strong and vibrant source of funding for expanding homeownership opportunities in America… Half-measures will only exacerbate the risks to our financial system." (Secretary John W. Snow, "Testimony Before The U.S. House Financial Services Committee," 4/13/05). The Bush Administration tried again, with Sen. McCain a sponsor of a stronger regulatory bill for Fan and Fred. It was again blocked by Democrats from getting a full Senate vote by the Senate Banking Committee. (The vote again along party lines.)

Offered easy money, banks and mortgage companies piled on. Including Countrywide Mortgage which became the largest mortgage originator in the country and largest seller to Fan and Fred. Its CEO, Angelo Mozilo, made under-market mortgages to a variety of politicians, including executives (and former Clinton Administration member Fan CEO Franklin Raines) of Fan and Fred and members and Chairmen of the Congressional subcommittees overseeing them. In 2004 both Fan and Fred announced financial statement revisions, or, in other words, "accounting scandals" in both Government-Sponsored Enterprises (GSEs). CEOs left, with tens of millions of dollars in severance, but the campaign contributions rolled on. Sen. Charles Schumer, later Chairman of the Senate Banking Committee, announced that things were good, not to create problems where there were none and where oversight was sufficient.

And the Federal Reserve kept interest rates low. Thank you Mr. Greenspan.

Housing prices moved up and up. And mortgage brokers shoved out the loans; appraisers assisted them, sometimes by inventing housing values; financial institutions stopped asking for verification of income and other minor little details; consumers and housing speculators bought, knowing prices would increase and they'd get to keep their dream house or make some serious money flipping them. A classic mania. And housing prices moved up and up.

And up and up and up until they flattened and started down. The beginning was the day I purchased a $1.6 million condominium, August 2007!

So...then the wily Democratic-controlled Senate Majority Leader Harry Reid, after Mrs. Pelosi's House bill failed, coldly brought ITS bill, essentially a failed tax bill from the week before (which then wouldn't have passed the House and would've been vetoed, perhaps, by President Bush.) This bill larded the "Bailout Bill" with a Democrat wish-list: $18 billion in clean-energy tax breaks, including one for bicyle riders; tariffs on Caribbean rum; easing film and TV companies to use some tax deduction; exempting children's practice arrows from an excise tax; allow Valdez-affected fishermen to income average; extensioning tax credits: for specific economic-development, mine-rescue training teams, certain things on Indian Reservations, short-line railroad track maintenance, motorsports racetrack land improvements, victims of some natural disasters, deductions for state and local sales taxes, decuctions specifically for teachers getting higher education and spending their own money buying stuff; and some reductions on import duties for some wool fabrics. The biggest Democratic success, in my view, is another health-care price-increasing mandate, the equalization of coverage for mental with physical health. A Democrate desire for ten years. And softening the blow to some 20 million taxpayers of the Democratic-invented Alternative Minimum Tax. All imperitives for a "Bailout"! (Not.) Four hundred pages of Democratic Pork. Some real bailout provisions, good and bad, are increasing FDIC guarantees to $250,000; attempting to change the "mark-to-market" accounting that some believe partially reponsible for making some banks and insurance companies fail or falter. But it put the Republicans, including an amazingly naive President Bush, in an impossible situation. The bill was passed 74 to 25. Next stop the U. S. House of Representatives tonight or tomorrow.

Now follow to Who's to Blame III

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