The Economic Mess of 2008

I include here below an abstract of an article that appeared in the New York Times in 1999 quantifying the problems so far.

Fannie Mae Eases Credit to Aid Mortgage Lending
By STEVEN A. HOLMES Published: September 30, 1999 New York Times





In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.
The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit, is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring. Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans. ''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''

Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market. In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's. ''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.'' Under Fannie Mae's pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 -- a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.

Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings. Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites. Home ownership has, in fact, exploded among minorities during the economic boom of the 1990's. The number of mortgages extended to Hispanic applicants jumped by 87.2 per cent from 1993 to 1998, according to Harvard University's Joint Center for Housing Studies. During that same period the number of African Americans who got mortgages to buy a home increased by 71.9 per cent and the number of Asian Americans by 46.3 per cent.

So we can see from this article that the seeds of this cancer where well under way in the Clinton administration. It was done for very admirable reasons to give the “American Dream” to millions of Americans. I don’t think there was evil intent in this, they just wanted to do something to help low income folks by making sub prime loans available during what seemed to be good times economically for our country. How could we tell that the bubble was going to burst so soon? Well as was stated some experts did see the possibility of trouble ahead but with the resources of the government behind the scheme, only the “scaredy-cat banks objected.
Banks had been accused of a practice called Red Lining.

From Wikipedia
Redlining is the practice of denying or increasing the cost of services such as banking, insurance, access to jobs,[2] access to health care,[3] or even supermarkets[4] to residents in certain often racially determined[5] areas. The most devastating form of redlining and the most common use of the term refers to mortgage discrimination in which middle income black and Hispanic residents are denied loans available to lower income whites. The term "redlining" was coined in the late 1960s by community activists in Chicago. It describes the practice of marking a red line on a map to delineate the area where banks would not invest; later the term was applied to discrimination against a particular group of people (usually by race or sex) no matter the geography. During the heyday of redlining these areas were most frequently black inner city neighborhoods. Through at least the 1990s this discrimination involved lending to lower income whites but not to middle or upper income blacks.

Obviously this is a very despicable practice and should never have been done and certainly never done in the future. There were several law suits filed by individuals and firms to stop this practice in the mid 90s. One of the organizations fighting to protect these wronged folks was the Association of Community Organizations for Reform Now (ACORN). ACORN has several sub-groups. One group works for economic and educational opportunities of the poor inner-city people. During the 90s one of the lawyers working for ACORN was Mr. Obama. He was only a support lawyer but did a competent job for the organization. One of the other wings is the political action group.

During the early part of this century after the time Fanny Mae had reduced the strict requirements to get a home loan; there was still a lot of resistance by bankers to actually give home loans to folks with less than excellent credit and job history. This is when the political wing of ACORN went to congress and the banks to put pressure on them to get loans. In 1992 Obama took time off to direct Project Vote, the most successful grass-roots voter-registration campaign in recent city history. When Mr. Obama says he was a community organizer this was the work he was involved in getting out the vote amongst poor black people and putting pressure on banks and politicians to acquire these sub prime loans for people in the black community in Chicago.

Who were the folks at ACORN’s political wing working with in congress to try to acquire loans for these people?

From Wikipedia
The responsibility of oversight of banking is the general is handled by The United States House Committee on Financial Services (or House Banking Committee) oversees the entire financial services industry, including the securities, insurance, banking, and housing industries. The Committee also oversees the work of the Federal Reserve, the United States Department of the Treasury, the U.S. Securities and Exchange Commission, and other financial services regulators. It is chaired by Barney Frank (D-MA) and the ranking Republican is Spencer Bachus (R-AL). During the first part of the Bush administration the Republican Party was in control of the house so the chairman was a republican, but the ranking Democrat was Barney Frank D-MA.



From Wikipedia
Mr. Frank has been outspoken on many civil rights issues, including gay rights. In 1987, he spoke publicly about his homosexuality for the first time. He said in a 1996 interview: "I'm used to being in the minority. I'm a left-handed gay Jew. I've never felt, automatically, a member of any majority." In 1990, the House voted to reprimand Frank when it was revealed that Steve Gobie, a male escort whom Frank had befriended after hiring him through a personal advertisement, claimed to have conducted an escort service from Frank's apartment when he was not at home. Frank had dismissed Gobie earlier that year and reported the incident to the House Ethics Committee after learning of Gobie's activities. After an investigation, the House Ethics Committee found no evidence that Frank had known of or been involved in the alleged illegal activity.[2] Regarding Gobie's more scandalous claims the report by the Ethics Committee concluded, "In numerous instances where an assertion made by Mr. Gobie (either publicly or during his Committee deposition) was investigated for accuracy, the assertion was contradicted by third-party sworn testimony or other evidence of Mr. Gobie himself."[3]

Frank was and remains a stalwart defender of Fannie Mae, and Freddie Mac, which recently participants in government bailouts. Frank has derailed efforts to regulate the institution, as well as denying it posed any financial risk. Frank’s office has been unresponsive to efforts by the Business & Media Institute to comment on these potential conflicts of interest.

According to an article by Kathleen Day in the Oct. 8, 2003, Washington Post, Frank opposed giving the Bush administration the right to approve or disapprove business activities that “could pose risk to the taxpayers.” He told the Post he worried the Treasury Department “would sacrifice activities that are good for consumers in the name of lowering the companies’ market risks.” Just a month before, Frank had aggressively thwarted reform efforts by the Bush administration. He told The New York Times on Sept. 11, 2003, Fannie Mae and Freddie Mac’s problems were “exaggerated,” a gross miscalculation some five years later with costs estimated to be in the hundreds of billions. “These two entities – Fannie Mae and Freddie Mac – are not facing any kind of financial crisis,” Frank said to the Times. “The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.” Frank has also reaped campaign contribution benefits from Fannie Mae and its counterpart Freddie Mac. Frank has received $40,100 in campaign cash over the past two decades from the GSEs.

Frank is ranked 16th on a list that includes both houses of Congress and fifth among his colleagues in the House. Political action committees financed by both Freddie and Fannie have contributed $3,017,797 to members of Congress since 1989. The two entities have spent a whopping $200 million to buy influence – including not only campaign donations to members of Congress, but also presidential campaigns and lobbying efforts. In the Wall Street Journal Editorial Page July 23, 2008 Editor Paul Gigot put the blame for the GSEs’ collapse firmly on the members of the liberal establishment who took money from Freddie and Fannie. “Fan and Fred also couldn't prosper for as long as they have without the support of the political left... This includes Mr. Frank and Sen. Chuck Schumer (D., N.Y.) on Capitol Hill, as well as Mr. [Paul] Krugman and the Washington Post's Steven Pearlstein in the press.” Frank was asked by CNN’s John Roberts on the Sept. 22, 2008 “American Morning” about this and his opposition to reform Fannie Mae and Freddie Mac. Originally, he claimed he didn’t think the two GSEs were facing any problems when the issue first surfaced in 2003. He instead blamed the Republican-controlled Congress for their ultimate fall, failing to mention his friendly relationship with Fannie Mae and the contributions it had made to his campaign over the years. Nor his position on the banking committee as ranking member, that ultimately became the chairman when the Democrats gained majority. “Yes, I did not think we were facing a crisis in 2003, but that didn't mean we didn't have to have reform,” Frank said when confronted with the question. “Here’s the deal, the Republicans controlled Congress from 1995 through 2006. They did zero to reform Fannie Mae and Freddie Mac.” He and his friends did quite a bit of reforming or should we call it restructuring to a ultra liberal position.

However, on Sept. 17, 2008, former Bush administration Deputy Chief of Staff Karl Rove elaborated on the Bush administration’s efforts to curb abuses at the two GSEs in 2003. He said that Frank was among the most aggressive opponents of White House attempts to reform Fannie Mae and Freddie Mac. “All of this bad stuff on Wall Street happened because people got greedy and the greed started at Fannie Mae and Freddie Mac,” Rove said. “And I know this because five years ago, the administration was alerted by the regulator, James Lockhart, that there was insufficient authority and that these institutions – particularly Fannie – were out of control.” Rove said the Bush administration’s efforts to reform Fannie and Freddie were opposed by congressional Democrats – specifically Frank and Senate Banking Committee Chairman Christopher Dodd, D-Conn. “And I got to tell you, for five years, I was part of an effort at the White House to fight this and our biggest opponents on the Hill who blocked this every step of the way were people like Chris Dodd and Barney Frank. And Fannie and Freddie are the $200 billion contagion at the center of this.”

Frank has been quick to blame deregulation for some of the problems in the financial environment, as he did on Bloomberg television’s Sept. 19 “Political Capital with Al Hunt.” However, as earmark crusader Rep. Jeff Flake, R-Ariz. pointed out – it’s not deregulation, but it was the structure of Fannie Mae and Freddie Mac that had been guarded by Frank and other members of Congress. “Some people point at deregulation,” Flake said to the Business & Media Institute on Sept. 23. “It’s not deregulation at all. We have for far too long shielded Fannie and Freddie for example, with the implicit and now explicit guarantee. I just found it humorous.” Flake specifically named Frank as one of the members behind letting allegations of transgressions at the two GSEs for slipping by without oversight from Congress. “Just a few minutes ago, a reporter was asking me about this and saying, ‘Barney Frank is saying that’s just – because there were allegations,’ correct ones – ‘that Fannie and Freddie have been the playground for politicians for years and now the other side is saying Fannie and Freddie were just a small part of this and this goes far beyond.’ It does, but these same people a couple of weeks ago said, ‘You got to bail out Fannie and Freddie because they touch everything out there. And because of that explicit guarantee – that we would come and bail them out, nobody has been subject to market discipline. Frank claims differently, according to a letter to the editor published in the Sept. 17, 2008 Wall Street Journal. Frank noted that in 2005 he supported regulating compensation for Fannie and Freddie executives. “In fact, my reform efforts had begun when we were still in the minority. In 2005, I joined Michael Oxley, then chairman of the House Financial Services Committee, in supporting legislation to increase the regulation of Fannie and Freddie that passed the House by a vote of 330 to 90,” Frank wrote. “When former Congressman Richard Baker proposed to examine the compensation structure of Fannie and Freddie's top executives, and some members of Congress tried to block him, I explicitly spoke out in support of his right to do that and our right, as a Congress, to examine the GSE’s compensation practices.”

The red flags were raised long before the government bailed out the two GSEs in August 2008. The first egregious scandal involving Fannie Mae occurred in 2004. A 2004 Wall Street Journal editorial was first to point out claims in an OFHEO report that showed accounting malpractices by the GSE. “For years, mortgage giant Fannie Mae has produced smoothly growing earnings. And for years, observers have wondered how Fannie could manage its inherently risky portfolio without a whiff of volatility, the Oct. 4, 2004, editorial, “Fannie Mae Enron?” said. “Now, thanks to Fannie’s regulator, we know the answer. The company was cooking the books. Big time.”

In Summary Naturally, the Democrats, led by The One, Barack Obama, made it a point to blame George W. Bush and his administration. But when we dig deeper into the cause and effect, we see the real culprits are our good friends in the Democratic Party. Let us step into our Way-Back Machine and set the dial for 1997.Freddie Mac and Fanny Mae, under pressure from the sub-prime debacle, turned to the heads of the House and Senate Committees overseeing them, led by Barney Frank in the House and Chris Dodd in the Senate. The bail out was encouraged by them to the Treasury Department and the Federal Reserve. Now, to be fair & balanced three Republicans are also involved in the financial meltdown. Former Senator Phil Gramm, and Congressmen James Leach and Thomas Bliley. The Gramm-Leach-Bliley Act of 1999 knocked down the regulatory wall known as Glass Steagall. This wall prevented mortgage banks from dabbling in the investment banking world, and vice-a-versa. It should be also noted that GLBA got bipartisan support and was signed into law by Bill Clinton. Glass-Steagall had been the law of the land since 1933, and prohibited the two major types of banks from engaging in each others territory. During the 1990s, about 1000 banks had gone under. GLBA was seen as a way to let free-market forces play out and reward well-run institutions. But, needless to say, the bank lobbyists, like Hunter Biden, son of Joe Biden, were not going to let them fail. Tougher bankruptcy laws were passed and the bailouts continued. Banks like IndyMac, who did not have well-connected allies in the Congress, were left to fail. Lehman Brothers came to the table too late, the Treasury was tapped dry.


Pictured above is Barney Frank, Charles Schumer, Chris Dodd, and
Henry M Paulson Jr congratulating each other and talking to the press about the bank bailout or TARP. Congress along with the Bush administration authorized approximately 750 billion dollars for the effort to prop up banks that were failing. The Bush administration spent about 350 billion of the funds but left the rest for the Obama administration. Prior to the passage of the authorization many Republicans protested and it was in doubt until Nancy Pelosi got it passed in the house over the objections of the Republicans. In my personal opinion at lest a couple of these fine folks should not only be put out of office, but should be sent to jail….but then again that is just me.