Those who do not learn from history are doomed to repeat it. -- George Santayana quotes (Spanish born American Philosopher, poet and Humanist who made important contributions to aesthetics, speculative philosophy and literary criticism. 1863-1952)
This housing market debacle that has occurred under George W. Bush's watch can be traced back to many of the same causes as the Savings & Loan debacle during Reagan's watch on October 1987: it's about how deregulation sets the market up for failure.
This problem goes back to Carter. And every administration and every Congress since then has been complicit in this mess. The reason they waited until it was too late to put it off is that they are ALL in bed with the financial contributors. This year, Dodd, our Senate Banking Committee chair, got the most from the investment houses, Obama was second. (http://www.opensecrets.org/). But, none of them are blameless. James A. "Jim" Johnson, a close friend of Richard Daley and the Chicago Daley political machine, Franklin Raines, Jamie Gorelick and Penny Pritzker are Obama advisors, and McCain had Rick Davis as his campaign manager.
In 1990, [Jim] Johnson [the head of Obama's VP search committee] went to work for the Federal National Mortgage Association (Fannie Mae) and quickly became its $5 million-a-year chairman. His compensation rose to a reported $21 million by his final year, 1998....
When he left his job at Fannie Mae, which long has had a reputation as a cushy landing spot for the political class in Washington, he was serenaded by 16 members of the Benson High band, which had been flown to D.C. at Fannie Mae's expense. He also received a number of perks, including a $600,000 annual consulting fee….
It should be noted that Johnson got out of Fannie Mae while the getting was good. since his leaving, the massive, quasi-public home mortgage organization has been buffeted by negative headlines. Accounting scandals, dating back to Johnson's era, have been followed by recent news that Fannie Mae has lost more than $3 billion in the housing slump. (http://www.minnpost.com/stories/2008/06/03/2078/obama_turns_to_trusted_political_insider_jim_johnson_for_key_campaign_role)
Franklin Raines, CEO of the Federal National Mortgage Association (Fannie Mae) from 1999-2004 [an Obama advisor], is the individual most responsible for the subprime mortgage crisis. It was on Mr. Raines' watch that Fannie Mae went bankrupt.
He was accused of manipulating earnings statements so he could be paid bonuses to which he was not entitled.
Mr. Johnson and Mr. Raines aren't the only figures in the subprime mortgage scandal to be connected to the Obama campaign. Jamie Gorelick, rumored to be an attorney general candidate in an Obama administration, was vice chairman of Fannie Mae from 1997 to 2003. Penny Pritzker, Mr. Obama's national finance chairman, has been described as "the Michael Milken of the subprime mortgage crisis" for her pioneering of the packaging of bad loans with good ones at her now defunct Superior bank in suburban Chicago. (http://www.realclearpolitics.com/articles/2008/09/how_close_are_raines_and_obama.html)
Senator John McCain's campaign manager [Rick Davis] was paid more than $30,000 a month for five years as president of an advocacy group set up by the mortgage giants Fannie Mae and Freddie Mac to defend them against stricter regulations, current and former officials say.As long as times were good, nobody complained too hard because you "don't fix what ain't broke." (Will Rogers) The markets were great, the bubble hadn't burst yet. But, then the bubble burst.
… several current and former executives of the companies came forward to discuss the role that Rick Davis, Mr. McCain’s campaign manager and longtime adviser, played in helping Fannie Mae and Freddie Mac beat back regulatory challenges when he served as president of their advocacy group, the Homeownership Alliance, formed in the summer of 2000. (http://www.nytimes.com/2008/09/22/us/politics/22mccain.html?_r=2&oref=slogin&ref=politics&pagewanted=print&oref=slogin)
This is not the first time de-regulated markets have posed a problem. The Glass-Steagall Act of 1933 was passed to protect homeowners.
Bad Government Policies
Economist Robert Kuttner has criticized the repeal of the Glass-Steagall Act as contributing to the subprime meltdown. A taxpayer-funded government bailout related to mortgages during the Savings and Loan crisis may have created a moral hazard and acted as encouragement to lenders to make similar higher risk loans.” (Wiki -- http://en.wikipedia.org/wiki/Subprime_mortgage_crisis)
Banking deregulation started in earnest during the Carter admin in 1978. Interest rate ceilings on deposits were phased out in the early 1980s, during Reagan's watch. Next came the Commodities Futures Modernization Act of 2000, HR.5660, also passed by a Republican Congress and signed by Clinton.
Additionally, there is debate among economists regarding the effect of the Community Reinvestment Act (CRA), with detractors claiming it encourages lending to uncreditworthy consumers and defenders claiming a thirty year history of lending without increased risk. Amendments to the CRA in the mid-1990s, dramatically raised the amount of home loans to otherwise unqualified low-income borrowers and also allowed for the first time the securitization of CRA-regulated loans containing subprime mortgages.
Some have argued that, despite attempts by various U.S. states to prevent the growth of a secondary market in repackaged predatory loans, the Treasury Department's Office of the Comptroller of the Currency, at the insistence of national banks, struck down such attempts as violations of Federal banking laws.
The U.S. Department of Housing and Urban Development's mortgage policies fueled the trend towards issuing risky loans. Like the second link says, HUD and the Community Reinvestment Act are major culprits. After their accounting scandals in 2003 and 2004, Fannie Mae and Freddie Mac committed to increased financing of "affordable housing." They became the largest buyers of subprime and Alt-A mortgages between 2004 and 2007, with total GSE exposure eventually exceeding $1 trillion. They greatly grew the subprime mortgage market, leading to a housing bubble and its subsequent collapse.
Among banks and the regulatory agencies, there was a consensus that data collection, recordkeeping, and reporting requirements imposed a heavy burden on small community institutions. As a result of a 2002 review of the CRA regulations, and revision of an initial Federal Deposit Insurance Corporation (FDIC) proposal following a public commenting period that was largely negative, the FDIC, Office of the Comptroller of the Currency (OCC) and the Federal Reserve Board (FRB), made substantive changes to the implementation of regulations for the CRA for banks (not thrifts).
Previously, all institutions over $250 million in assets were subject to a three-part CRA test that covered lending (including community development loans), qualified investments, and services (including community development services) to their assessment areas. Institutions less than $250 million were subject only to a lending test.
However, as of September 1, 2005, only those institutions with more than $1 billion in assets were subject to the three-part test. Institutions below $250 million remain subject to only a lending test, and a new CRA test was created for institutions with assets between $250 million and $1 billion. This latter category, referred to as Intermediate Small Banks, is subject to the same lending test to which institutions under $250 million were subject, along with a new combined community development test that covers community development loans, qualified investments, and community development services. The $250 million and $1 billion asset thresholds also were indexed to the consumer price index and could change annually. Thus, all institutions remain subject to the CRA test. These substantive changes were intended to be a compromise between changes advocated by banks and community groups.
However, the changes were not received positively by all community groups. Changes to tests conducted on the Intermediate Small category were viewed by some as decreasing the institutions' obligations to meet lending requirements of low and moderate-income households. Racial inequities in mortgage acceptance rates (as reported by Inner City Press, the National Community Reinvestment Coalition, ACORN and other groups) are cited as a primary reason to maintain or even increase the scope of the CRA. (Wiki -- http://en.wikipedia.org/wiki/Community_Reinvestment_Act)
The Gramm-Leach-Bliley Act, passed in 1999, and the Commodities Futures Modernization Act, passed in 2000 "broke down the firewalls between Wall Street and commercial banks and banned regulation of credit default swaps, an insurance-like product bought by financial services companies to cover their risky subprime mortgage investments." (http://www.politico.com/news/stories/0908/13683.html
The Gramm-Leach-Bliley Act, also known as the Gramm-Leach-Bliley Financial Services Modernization Act, Pub.L. 106-102, 113 Stat.1338, enacted 1999-11-12, is an Act of the United States Congress which repealed part of the Glass-Steagall Act, opening up competition among banks, securities companies and insurance companies. The Glass-Steagall Act prohibited a bank from offering investment, commercial banking, and insurance services.” (Wiki -- http://en.wikipedia.org/wiki/Gramm-Leach-Bliley_Act
American International Group (AIG), rescued by the Federal Reserve on Tuesday [September 16, 2008] is one of the biggest sellers of these swaps." Barney Frank commented to reporters that he had been sitting on a bill (S.190, then S.1100 refiled), tabling it until after the presidential election. Clinton had tried to get legislation through during his administration that modified some of this. Even Bush tried to do the same. McCain even raised the cry.
Relaxation of geographical restrictions on bank expansion proceeded historically, and this resulted in the history of state-level regulation being completely abandoned. Over a period of 20 years, Glass-Steagall was pecked at and undermined and weakened. It was finally killed altogether in 1999 with the Graham-Leach-Bliley Financial Services Modernization Act of 1999, signed by Clinton, but passed by a Republican-dominated Congress.
Triggering the financial implosion on Wall Street were the problems at Fannie Mae and Freddie Mac, which had its legislative roots in the Congressional Black Caucus. The concept for these institutions was a good one -- to break down the barriers of institutionalized racism in the financial and housing market. But the implementation and de-regulation made for a situation is which widespread fraud and abuse and far-too-relaxed lending practices created an unstable situation. These firms were not properly leveraged, and their impending collapse should have been easy to predict. These firms, fostered lax lending practices and covered up their own financial deficiencies. And these two institutions have their tentacles in the 2008 presidential campaign in the forms of Jim Johnson, Franklin Raines, Rick Davis, Jamie Gorelick and Penny Pritzker.
Although I am not a fan of GWB, it is only fair to say that, going back to the beginning of his administration, President Bush warned of the problems at these institutions and the consequences if Congress did not bring them under control. Seventeen times, Bush publicly called for reform of both institutions. But Democrats and Republicans in Congress ignored the warnings and denied there were any problems. What follows is an administration chronology of efforts to achieve reform:
At the beginning of 2005, a bill was introduced by Chuck Hagel to deal with the need for regulating Fannie and Freddie, among other investment banks. John McCain was a cosponsor: (http://uppitywoman08.wordpress.com/2008/09/21/john-mccains-fannie-maefreddie-mac-warnings-may-2006/). And Barney Frank (http://www.house.gov/apps/list/press/financialsvcs_dem/press092308.shtml) and Chuck Dodd had a bill in the last Congress that was filed as S.190 and refiled as S.1100 that they have been sitting on until after the presidential election was over, only the economy wouldn't wait
As with most idealistic theories, Adam Smith and his concept of a free market works very well in a laboratory setting, where all the factors are carefully controlled, much like any utopian philosophy. But in real life, with real people who have real greed and real problems with ethical behavior, it simply does not work. It works no better than its polar extreme socialism, which does not motivate people to work and to strive for excellence. That's why we need regulation of the markets. Because markets deal with real people and real temptation and real greed must be controlled.
The next problem that is happening today is both a symptom of deregulation and a cause of the resulting debacle, and that is lack of transparency. It is a particularly strong trait of this administration. And this administration has set the tone for the entire country, especially the business world. Lack of transparency makes it impossible for real oversight or regulation to occur. People who hide things usually have something to hide. We have found this to be true of this administration, and now we see the same trait is both a cause and a symptom of this deregulated market and its result: the biggest market failure requiring the biggest bailout in history.
The same applies to our other regulatory agencies which have been decimated during the Bush administration. We need environmental, labor and consumer protection regulation both at home and as it applies to our imports and trade agreements.
We know from our own experience as children that rules work. Rules that are reasonable and that are fairly and consistently enforced make society work for everyone. It also applies to markets and to business.
So, how do we fix it? The administration is pressuring Congress to move quickly. But I hope Congress realizes that there is a difference between moving quickly (and knowing what you're doing) and moving irresponsibly and imprudently. Rash behavior will only complicate the existing mess and create an even bigger mess. And U.S. Treasury Secretary Hank Paulson's "Chicken Little" presentation before the Senate Banking Committee did not inspire confidence.
When you are reacting, you are not in control. We must get control of these markets, and that requires thoughtful, deliberate action that requires controls and oversight tools to be included in the pending legislation, which, in its current form, is a prescription for a larger disaster, but it basically writes a blank check to Secretary Paulson, who helped oversee the making of this mess in the first place, and makes him an unregulated and uncontrolled God of the market economy. Paulson was Chairman and CEO of Goldman Sachs since the firm’s initial public offering in 1999, and this, plus his $500M fortune earned by the very excesses and abuses that have cause this market to fail, tends to further erode my confidence in his ability to objectively oversee this recovery and select firms to bail out. All this leads me to believe that this legislation in its current for is a prescription for disaster.
There are also some punitive actions that must be included, not the least of which is that the golden parachutes of the executives who got their company in this mess should not be permitted. And, most of all, there must be provisions within this deal that protects the American taxpayers in such a way that the funds they are lending these institutions are recoverable, at least in part. Otherwise, we will be encouraging the same behavior to happen again. If Uncle Sam bails you out every time you screw up, then why should you change your behavior?
One of the most disturbing aspects of this bailout legislation in its first incarnation is that it provides for American taxpayers to bail out foreign firms that had business transactions in the United States. Since we are in a global economy, shouldn't the entire globe -- any nation that was involved with these transactions -- be participating in the pain? After all, it is their firms who did not observe good lending practices when buying these instruments. Why should the American taxpayers be held holding the bag for any of it? There must be some real controls and deliberation on bailing out a foreign-owned institution. What do we do if we can't recover our investment in bad paper? Invade the country where the firms originates? There is much about this bailout that gives me pause.
The American taxpayers will be experiencing significant pain in this deal. They are taking on, with the recent deals already done, over $1.3T in bad debt that may not be recoverable. Remember, all the wonderful plans for healthcare, education and many other factors have been flushed down the toilet once this deal is signed. There will be no money for any of those programs.
And if we are willing to take over the banking industry, we must also take measures to control the rising costs of commodities that has already occurred and will continue to occur with investors moving their money to this market. Just today oil went up $25/barrel. And rising food prices are already increasing starvation in third-world countries. The American taxpayer must have some protection with temporary price controls. Otherwise, other markets will start to fail as rising costs put small businesses out of business. And the next problem will be all the other industries that have been hard hit during this economic downturn. Who do we bail out next? The auto industry?
The Commodity Futures Modernization Act of 2000 or CFMA (H.R. 5660 and S.3283) repealed the Shad-Johnson jurisdictional accord, which had banned single stock futures in 1982. The legislation also provided certainty that products offered by banking institutions would not be regulated as futures contracts. This act was incorporated by reference into HR.4577 (see below). The legislation thus became law as a part of HR.4577 - Public Law 106–554, §1(a)(5) signed by Bill Clinton December 21, 2000….
The Commodity Futures Modernization Act of 2000 has received criticism for the so-called "Enron Loophole," 7 U.S.C. §2(h)(3) and (g), which exempts most over-the-counter energy trades and trading on electronic energy commodity markets. The "loophole" was drafted by Enron Lobbyists working with Senator Phil Gramm [one of McCain’s financial advisors] seeking a deregulated atmosphere for their new experiment, "Enron On-line."
Several Democratic Legislators introduced legislation to close the loophole from 2000-2006, but were unsuccessful.
In September 2007, Senator Carl Levin (D-MI) introduced Senate Bill S.2058 to specifically close the "Enron Loophole." This bill was later attached to H.R.6124, the Food, Conservation, and Energy Act of 2008, aka "The 2008 Farm Bill". President Bush vetoed the bill, but was overridden by both the House and Senate, and on June 18th, 2008, the bill was enacted into law. One specific reason behind its introduction was to address the record high oil prices of the 2000s energy crisis. Since it was enacted, average gas prices of regular unleaded gasoline in the U.S. have dropped $0.357, from their record high of $4.114 on 7/17/2008 to an average of $3.757 as of 09/21/2008.
The prohibition on single-stock futures and narrow-based indices that had been in effect until the passage of this act was known as the Shad-Johnson Accord because it was first announced in 1982, as part of a jurisdictional pact between John S.R. Shad, then chairman of the U.S. Securities and Exchange Commission and Phil Johnson, then chairman of the Commodity Futures Trading Commission.
The act specifically banned regulation of credit default swaps. These unregulated instruments, insurance policies against default on risky investments like mortgage backed securities, necessitated the government bailout of insurer AIG. (Wiki -- http://en.wikipedia.org/wiki/Commodity_Futures_Modernization_Act_of_2000)
Next, if we protect the investors in these institutions, we must also take measures to protect the American taxpayers and the good homeowners who are struggling to pay their mortgages. I suggest that all homeowners be allowed to adjust their loans to current market value and refinance with fixed rate loans based on that value since the market has devalued their property so greatly. This strategy worked well during the Great Depression recovery. In fact, most banks following this practice made money. Keep these good homeowners who are paying their mortgages in their homes.
This crisis could have been averted by practicing reasonable regulation and oversight. The market, big business and our government failed us on every level.
Ours is a system of corporate socialism, where companies capitalize their profits and socialize their losses...in effect, they tax you for their accidents, bungling, boondoggles, and mismanagement, just like a government. We should be able to dis-elect them. -- Ralph Nader
But we must also include our own culpability in this problem. Many people became speculators during the housing bubble. They were speculating on the fact that the market would be good and the value of the investment homes would increase so they could sell them at a profit. And then there were the folks living well above their means who entered into interest-only payments with a big balloon at the end of three- or five-year period, etc., living at the edge of their income and banking on their ability to sell their home for the balloon price or better, then doing it all over again with a new house. The market failed, the value of the house dropped, and they had no savings to cover the balloon, so they lost their home and ruined their credit.
And one final note: The administration's view is that they are bailing out the "market," not just a few key firms. But the greatest beneficiaries ARE the few key firms. Granted, anyone who has investments, whether it be stock, money market accounts, 401Ks or other retirement or savings vehicles, and anyone who needs credit (especially businesses) will be impacted by this failure. But there must be some real controls and an objective bipartisan oversight -- a deliberative body who decides on what actions should be taken and with which firm.
So, here we are again. Will we learn from history this time? Will Congress have the balls to face this crisis without giving into the "Chicken Little" panic-atmosphere that the administration has created to push this bill through without the necessary controls and oversight? We shall see. But, whatever, the outcome, we know the American taxpayers will get stuck with the bill. And, although life is not fair, this is particularly unfair, because it has to do with unbridled greed and mismanagement of private industry due to our elected officials rolling over and playing dead when deregulating the markets and then failing to perform their oversight duties.
There is a record of legislation going back to the Clinton administration that addressed this problem, but could not get passed.
The largest contributors in all the campaigns came from these same failed firms. If that does not wake us up to the need to get money and corporations out of our political campaigns, I don't know what will. It's our fault, too, because we did not demand better from our government.
And then there were the honest folks who dealt with predatory lenders -- fraudulent real estate brokers, mortgage brokers, etc., that were encouraged to enter into mortgages with variable interest rates or graduated interest rates and hidden costs that caused them to be unable to pay their mortgage. These real estate brokers and mortgage brokers that falsely represented to their clients their ability to afford these homes, and fraudulently submitted false information about the client's income or down payment or the value of the home in an effort to put the deal through. Then they turned around and sold this bad paper to other investment firms. And the homeowners are left with an unmanagement mortgage payment that they can ill afford or a home beyond their means when they were told they could afford it. These conspirators must be brought to justice.
Capitalism will always survive in the United States as long as the government is willing to use socialism to bail it out. -- Ralph Nader
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