Thread: How the Democrats Created the Financial Crisis

How the Democrats Created the Financial Crisis
Commentary by Kevin Hassett

Sept. 22 (Bloomberg) -- The financial crisis of the past year has provided a number of surprising twists and turns, and from Bear Stearns Cos. to American International Group Inc., ambiguity has been a big part of the story.

Why did Bear Stearns fail, and how does that relate to AIG? It all seems so complex.

But really, it isn't. Enough cards on this table have been turned over that the story is now clear. 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.''

Mounds of Materials

Now that the collapse has occurred, the roadblock built by Senate Democrats in 2005 is unforgivable. Many who opposed the bill doubtlessly did so for honorable reasons. Fannie and Freddie provided mounds of materials defending their practices. Perhaps some found their propaganda convincing.

But we now know that many of the senators who protected Fannie and Freddie, including Barack Obama, Hillary Clinton and Christopher Dodd, have received mind-boggling levels of financial support from them over the years.

Throughout his political career, Obama has gotten more than $125,000 in campaign contributions from employees and political action committees of Fannie Mae and Freddie Mac, second only to Dodd, the Senate Banking Committee chairman, who received more than $165,000.

Clinton, the 12th-ranked recipient of Fannie and Freddie PAC and employee contributions, has received more than $75,000 from the two enterprises and their employees. The private profit found its way back to the senators who killed the fix.

There has been a lot of talk about who is to blame for this crisis. A look back at the story of 2005 makes the answer pretty clear.

Oh, and there is one little footnote to the story that's worth keeping in mind while Democrats point fingers between now and Nov. 4: Senator John McCain was one of the three cosponsors of S.190, the bill that would have averted this mess.
http://www.bloomberg.com/apps/news?pid= ... KSoiNbnQY0

Republicans share some of the blame also, they could have stopped this when they controlled Congress but didn't.

Originally Posted by Bowman

Republicans share some of the blame also, they could have stopped this when they controlled Congress but didn't.

Au contraire, mon frère.

The Bush Administration attempted Fannie & Freddie regulation in 2003 but it was stopped by Congressional Democrats. In 2005, McCain co-sponsored a bill with Senator Dole to regulate Fannie & Freddie, but it was sopped by Congressional Democrats. Again in 2007, Republicans tried again but were stopped by Congressional Democrats.

“It is an affront to the nation that some of the people who brought on the crisis (and financially and politically benefited from the status quo) were asking the questions at the Banking Committee hearing. They should have been in the witness chair. [Sen. Chris] Dodd said the crisis was ‘entirely foreseeable and preventable.’ Then why didn’t he try to prevent it? He should have been answering questions about the PAC contributions he received from Fannie Mae and Freddie Mac, (according to opensecrets.org, he’s the Senate’s no. 1 recipient of campaign contributions, $133,900, Barack Obama is no. 3, $105,849), his sweetheart Countrywide Financial mortgage rate and whether they influenced his inattentiveness to the growing mortgage crisis.â€

House Democrats are concerned that it wasn't just Rep. Barney Frank who was having extracurricular relations with Fannie Mae and Freddie Mac executives, and that those relationships will come to light before the election a month from now. According to a former Democrat staffer working for the House Committee on Financial Services, there were a number of stories involving Democrat members and staffers of the committee, participating in retreats and getaway weekends paid for by Fan and Fred executives and lobbyists. If I were a Democratic member in the mid to late 90s and dealt with financial services or housing issues, I'd be real nervous right now.

Frank has not hidden the fact that he was in a romantic relationship with a executive for Fannie Mae. Frank now chairs the Financial Services Committee and was one of several Democrat members who sought assurances from Pelosi that no action would be taken on investigations until after the election... http://tinyurl.com/3tlcm2

Shocking Video Unearthed - Democrats in their own words Covering up the Fannie Mae, Freddie Mac Scam that caused our Economic Crisis
http://mx.youtube.com/watch?v=_MGT_cSi7Rs

Republicans Saw It Coming, Democrats Helped It Along - The Truth Behind The Collapse

Using the affordable housing issue as a screen, these GSE's, Fannie Mae and Freddie Mac were allowed because of continual blocking by Democrats to continue virtually unregulated as they flooded the market with sub prime bad loans many of which were bought up by institutions like Lehman Brothers and Merrill Lynch which have since gone belly up along with Fannie and Freddie.

Now because of the bailout caused by this Democrat debacle, Republicans who have warned for years and tried to force regulatory oversight to prevent the collapse are taking a hit since the GOP is now faced with being the party in charge of the White House when saving the financial markets is necessary and keeping this from having a further ripple affect on the rest of the economy. Additionally Democrats have been spending the week claiming that deregulation by Republicans was the cause of this financial meltdown when just the opposite is true…. http://tinyurl.com/3ob5we

The current financial crisis is almost entirely a Democrat creation, put in place during the Clinton years, based on the belief that poor people have some kind of right to live in homes that they can’t afford. It forced Fannie Mae and Freddie Mac to abandon prudent procedures. Both parties, though, can share the blame for the Sarbanes-Oxley Act that distorted accounting practices in the wake of the Enron scandal.
http://www.borderfirereport.net/alan-ca ... crats.html

The Mother of all Mortgage Meltdown Videos
http://www.youtube.com/watch?v=Ii9UXFxwnO8

Democrats Stopped Fannie & Freddie Reform
http://www.youtube.com/watch?v=4n5dKztd ... re=related

Obama’s Cozy Connections With Fannie and Freddie
http://www.youtube.com/watch?v=RbkEAR2G ... re=related

While President Carter in 1977 signed the Community Reinvestment Act, which pushed Fannie and Freddie to aggressively lend to minority communities, it was Clinton who supercharged the process. After entering office in 1993, he extensively rewrote Fannie's and Freddie's rules.

In so doing, he turned the two quasi-private, mortgage-funding firms into a semi-nationalized monopoly that dispensed cash to markets, made loans to large Democratic voting blocs and handed favors, jobs and money to political allies. This potent mix led inevitably to corruption and the Fannie-Freddie collapse…

How A Clinton-Era Rule Rewrite Made Subprime Crisis Inevitable: http://www.ibdeditorials.com/IBDArticle ... 9667289804