Thursday, October 09, 2008

Barney Frank and Christopher Dodd deserve blame for Fannie and Freddie

The Independent, a British newspaper, blames the Democrats for the failure of Fannie Mae and Freddie Mac:
What is the proximate cause of the collapse of confidence in the world's banks? Millions of improvident loans to American housebuyers. Which organisations were on their own responsible for guaranteeing half of this $12 trillion market? Freddie Mac and Fannie Mae, the so-called Government Sponsored Enterprises which last month were formally nationalised to prevent their immediate and catastrophic collapse. Now, who do you think were among the leading figures blocking all the earlier attempts by President Bush — and other Republicans — to bring these lending behemoths under greater regulatory control? Step forward, Barney Frank and Chris Dodd.

In September 2003 the Bush administration launched a measure to bring Fannie Mae and Freddie Mac under stricter regulatory control, after a report by outside investigators established that they were not adequately hedging against risks and that Fannie Mae in particular had scandalously mis-stated its accounts. In 2006, it was revealed that Fannie Mae had overstated its earnings — to which its senior executives' bonuses were linked — by a stunning $9.3billion. Between 1998 and 2003, Fannie Mae's executive chairman, Franklin Raines, picked up over $90m in bonuses and stock options.

Yet Barney Frank and his chums blocked all Bush's attempts to put a rein on Raines. During the House Financial Services Committee hearing following Bush's initiative, Frank declared: "The more people exaggerate a threat of safety and soundness [at Freddie Mac and Fannie Mae], 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." His colleague on the committee, the California Democrat Maxine Walters, said: "There were nearly a dozen hearings where we were trying to fix something that wasn't broke. Mr Chairman, we do not have a crisis at Freddie Mac and particularly at Fannie Mae under the outstanding leadership of Mr Franklin Raines."

When Mr Raines himself was challenged by the Republican Christopher Shays, to the effect that his ratio of capital to assets (that is, mortgages) of 3 per cent was dangerously low, the Fannie Mae boss retorted that "our assets are so riskless, we could have a capital ratio of under 2 per cent".


  1. Sure Barney Frank opposed tighter regulations, but the REPUBLICANS were in charge of House and Senate, so how did the Democrats block passage of this bill?

    Answer, there must have been some Republicans who were not in favor of it also.

    AND, the vast bulk of sub-prime mortgages, and the worst of the sub-prime mortgages, were sold by commercial mortgage companies.

    Democrats had long proposed regulation of commercial mortgage companies. REPUBLICANS blocked it.

    The following article goes into more details.

    Subprime Suspects
    The right blames the credit crisis on poor minority homeowners. This is not merely offensive, but entirely wrong.
    Slate Magazine
    Daniel Gross

    Posted Tuesday, Oct. 7, 2008, at 2:08 PM ET

    We've now entered a new stage of the financial crisis: the ritual assigning of blame. It began in earnest with Monday's congressional roasting of Lehman Bros. CEO Richard Fuld and continued on Tuesday with Capitol Hill solons delving into the failure of AIG.

    On the Republican side of Congress, in the right-wing financial media (which is to say the financial media), and in certain parts of the op-ed-o-sphere, there's a consensus emerging that the whole mess should be laid at the feet of Fannie Mae and Freddie Mac, the failed mortgage giants, and the Community Reinvestment Act, a law passed during the Carter administration. The CRA, which was amended in the 1990s and this decade, requires banks—which had a long, distinguished history of not making loans to minorities—to make more efforts to do so.

    The thesis is laid out almost daily on the Wall Street Journal editorial page, in the National Review, and on the campaign trail. John McCain said yesterday, "Bad mortgages were being backed by Fannie Mae and Freddie Mac, and it was only a matter of time before a contagion of unsustainable debt began to spread." Washington Post columnist Charles Krauthammer provides an excellent example, writing that "much of this crisis was brought upon us by the good intentions of good people."

    He continues: "For decades, starting with Jimmy Carter's Community Reinvestment Act of 1977, there has been bipartisan agreement to use government power to expand homeownership to people who had been shut out for economic reasons or, sometimes, because of racial and ethnic discrimination. What could be a more worthy cause? But it led to tremendous pressure on Fannie Mae and Freddie Mac—which in turn pressured banks and other lenders—to extend mortgages to people who were borrowing over their heads. That's called subprime lending. It lies at the root of our current calamity." The subtext: If only Congress didn't force banks to lend money to poor minorities, the Dow would be well on its way to 36,000. Or, as Fox Business Channel's Neil Cavuto put it, "I don't remember a clarion call that said: Fannie and Freddie are a disaster. Loaning to minorities and risky folks is a disaster."

    Let me get this straight. Investment banks and insurance companies run by centimillionaires blow up, and it's the fault of Jimmy Carter, Bill Clinton, and poor minorities?

    These arguments are generally made by people who read the editorial page of the Wall Street Journal and ignore the rest of the paper—economic know-nothings whose opinions are informed mostly by ideology and, occasionally, by prejudice. Let's be honest. Fannie and Freddie, which didn't make subprime loans but did buy subprime loans made by others, were part of the problem. Poor Congressional oversight was part of the problem. Banks that sought to meet CRA requirements by indiscriminately doling out loans to minorities may have been part of the problem.

    But none of these issues is the cause of the problem. Not by a long shot. From the beginning, subprime has been a symptom, not a cause. And the notion that the Community Reinvestment Act is somehow responsible for poor lending decisions is absurd.

    Here's why.

    The Community Reinvestment Act applies to depository banks. But many of the institutions that spurred the massive growth of the subprime market weren't regulated banks. They were outfits such as Argent and American Home Mortgage, which were generally not regulated by the Federal Reserve or other entities that monitored compliance with CRA. These institutions worked hand in glove with Bear Stearns and Lehman Brothers, entities to which the CRA likewise didn't apply. There's much more. As Barry Ritholtz notes in this fine rant, the CRA didn't force mortgage companies to offer loans for no money down, or to throw underwriting standards out the window, or to encourage mortgage brokers to aggressively seek out new markets. Nor did the CRA force the credit-rating agencies to slap high-grade ratings on packages of subprime debt.

    Second, many of the biggest flameouts in real estate have had nothing to do with subprime lending. WCI Communities, builder of highly amenitized condos in Florida (no subprime purchasers welcome there), filed for bankruptcy in August. Very few of the tens of thousands of now-surplus condominiums in Miami were conceived to be marketed to subprime borrowers, or minorities—unless you count rich Venezuelans and Colombians as minorities. The multiyear plague that has been documented in brilliant detail at IrvineHousingBlog is playing out in one of the least-subprime housing markets in the nation.

    Third, lending money to poor people and minorities isn't inherently risky. There's plenty of evidence that in fact it's not that risky at all. That's what we've learned from several decades of microlending programs, at home and abroad, with their very high repayment rates. And as the New York Times recently reported, Nehemiah Homes, a long-running initiative to build homes and sell them to the working poor in subprime areas of New York's outer boroughs, has a repayment rate that lenders in Greenwich, Conn., would envy. In 27 years, there have been fewer than 10 defaults on the project's 3,900 homes. That's a rate of 0.25 percent.

    On the other hand, lending money recklessly to obscenely rich white guys, such as Richard Fuld of Lehman Bros. or Jimmy Cayne of Bear Stearns, can be really risky. In fact, it's even more risky, since they have a lot more borrowing capacity. And here, again, it's difficult to imagine how Jimmy Carter could be responsible for the supremely poor decision-making seen in the financial system.

    I await the Krauthammer column in which he points out the specific provision of the Community Reinvestment Act that forced Bear Stearns to run with an absurd leverage ratio of 33 to 1, which instructed Bear Stearns hedge-fund managers to blow up hundreds of millions of their clients' money, and that required its septuagenarian CEO to play bridge while his company ran into trouble.

    Perhaps Neil Cavuto knows which CRA clause required Lehman Bros. to borrow hundreds of billions of dollars in short-term debt in the capital markets and then buy tens of billions of dollars of commercial real estate at the top of the market. I can't find it. Did AIG plunge into the credit-default-swaps business with abandon because Association of Community Organizations for Reform Now members picketed its offices? Please. How about the hundreds of billions of dollars of leveraged loans—loans banks committed to private-equity firms that wanted to conduct leveraged buyouts of retailers, restaurant companies, and industrial firms? Many of those are going bad now, too. Is that Bill Clinton's fault?

    Look: There was a culture of stupid, reckless lending, of which Fannie Mae and Freddie Mac and the subprime lenders were an integral part. But the dumb-lending virus originated in Greenwich, Conn., midtown Manhattan, and Southern California, not Eastchester, Brownsville, and Washington, D.C. Investment banks created a demand for subprime loans because they saw it as a new asset class that they could dominate. They made subprime loans for the same reason they made other loans: They could get paid for making the loans, for turning them into securities, and for trading them—frequently using borrowed capital.

    At Monday's hearing, Rep. John Mica, R-Fla., gamely tried to pin Lehman's demise on Fannie and Freddie. After comparing Lehman's small political contributions with Fannie and Freddie's much larger ones, Mica asked Fuld what role Fannie and Freddie's failure played in Lehman's demise. Fuld's response: "De minimis."

    Lending money to poor people doesn't make you poor. Lending money poorly to rich people does.

    end of article

    1. Rububs controlled both houses of congress but Chris Dodd single handedly killed debate through Filibuster ....need 60 votes to override which R's did not have. Franklin R.aines should be jailed for his dishonesty ! Enron execs were jailed for far less ! The Dems & C & R Act were the cause of crash .the Fed controlled opening of bank branches if they did not cooperate. Sub-prime mort. pkgs. were dreampt up in the 90,s at HUD under Andrew Coumo's leadership {kirsten Gillibrand et al]. In 2005 the R s in Senate tried 1 more time.....good ole Chris D threatenned filibuster & killed the last chance to prevent collapse.

  2. It amazes me how people get so incensed when it is pointed out how democrats too are to blame. For starters, lets be clear, the vast majority of this garbage went on during times of republican control of the house & senate. No one disputes that.

    Yet as soon as someone points out "oh by the way, the democrats bear some responsiblity too" you see responses like this one above crying foul - NO IT WAS ONLY REPUBLICANS - IT SAYS SO HERE IN MY LIBERAL LEANING ARTICLE!!!!

    Get real dude. This article thrashes, and spins, showing its true colors with words like "obscenely rich white guys" yet it so spectacuarly fails to understand the underlying issues.

    Stop being pushed and pulled by what the liberal and conservative machines want you to believe. I am a diehard republican, and will go to my grave believeing republicans were primarily responsible for this. That said, James has correctly pointed out that TWO DEMOCRATS ALSO BEAR RESPONSIBILITY!!! Why is this so hard for some to accept?

  3. this Congressional hearing from 2004 is mandatory viewing for anyone who thinks the Dems bear no responsibility for blocking mortgage regulation and scrutiny of CEO compensation:

  4. I am an independent. My father voted for Eisenhower twice. My mother voted for Stevenson twice. I voted for George H.W. Bush.

    So, when it is asked why I get "incensed" when it is pointed out that democrats share responsibility with republicans, I can only reply that the original article never said that the two shared the blame. It said that the Democrats were responsible.

    Re the above -- that the hearing from 2004 is "mandatory viewing." I have viewed it, and it isn't.

    Face it, 2004 is ancient history. In 2004 some people thought that Fannie and Freddie were just fine, and others said that they required tighter regulation.

    We cannot all forecast the future. In fact, only a month or so ago, our secretary of the treasury (who is surely well-informed) did not forecast a crisis on wall street and in the credit markets.

    However, it is said that the Democrats (who were not the majority party in 2003,2004,2005) "blocked" legislation. To be sure, they disagreed with the legislation. But how did they "block" it? Sure, they may have voted against it, but they were not in the majority.

    So who in the majority voted against it? And why? Well, perhaps these Republicans didn't think there was pressing need for the legislation either.

    Meanwhile, the Democrats had been pressing for years for regulation of the COMMERCIAL mortgage companies -- where most of the sub-prime mortgages were sold - and the Republicans wouldn't even consider it.

    So much for the issue of the legislation that wasn't passed. But, even if it had passed, that would not have stopped this crisis. Think about it. There are trillions of dollars of credit default swaps, collateralized mortgage paper rated at AAA when it should have been DDD, leverage of 33-to-1 in commercial and investment banks, suspect assets hidden from investors in "off-balance sheet" companies.

    These are the main causes of the disaster.

  5. "But, even if it had passed, that would not have stopped this crisis. Think about it. There are trillions of dollars of credit default swaps, collateralized mortgage paper rated at AAA when it should have been DDD, leverage of 33-to-1 in commercial and investment banks, suspect assets hidden from investors in "off-balance sheet" companies.

    These are the main causes of the disaster."

    Well at least you got the main causes of the disaster right. All this garbage about fannie and freddie is just fluff and fodder for no nothing political junkies who look to score political points more than they do the underlying issue (my father is the worst of these).

    I thought it was obvious from this blog and most others that the overwhelming sense was this happened during republican control, therefore it is a republican matter of blame. I accept it as such - I think the whole world does. Therefore, I see no harm in brining in the occasional article that reminds us all the Dems arent blameless in this either.

  6. If machain wins he should put juliany as headofjusticedept. and take down these criminals in the congres.Can you imagine for a few hundren thousand $ these nitwitssold thecounty? Frank Todd heins Franklin are the 1st, one to go down then get to bill and last if he is still alive Carter

  7. Re: I thought it was obvious from this blog and most others that the overwhelming sense was this happened during republican control, therefore it is a republican matter of blame.

    I agree with you. But the main article is titled: "Barney Frank and Christopher Dodd deserve blame for Fannie and Freddie."

    To be sure, I agree that they deserve a slight bit of the blame. They were not brilliant enough to forecast the crisis. If Fannie and Freddie had been regulated, things MIGHT have gone better.

    Only MIGHT because other regulators, such as the Fed and the SEC failed to find the causes of the problem, so how can we assume that the regulator of Fannie and Freddie would have caught it.

    But, still, they share a small part of the blame. But this blog implies that they are the main cause of the disaster!!

    Trillions in credit default swaps. Banks over leveraged. Off-balance sheet assets, and two congressmen are the main cause of the disaster.

  8. There's a lot of blame to go around. Both Democrats and Republicans deserve their fair share of blame. I'd just like to point out that the Libertarian Party and the Green Party are completely blameless. Renters are blameless too.

  9. "so how can we assume that the regulator of Fannie and Freddie would have caught it."

    you mean like in the video posted earlier where OFHEO Director Armando Falcon is testifying that the GSEs need greater oversight and the OFHEO needs greater ability to reign in their activity. this was in 2004. 53% of Fannie's book was originated from 2005-2007. the Dems called that hearing a "political lynching of Franklin Raines" and the OFHEO and Falcon "incompetent." others may call him prescient.

    sounds like Strauss is a believer in social engineering. please correct me if i'm wrong.

  10. The following was written on December 31st, 2007. This is only an excerpt. The full article predicts that the election will be shaped by the fallout of this crisis (which hadn't yet materialized)

    Down and Dirty
    I shudder to imagine how things will play out now as we turn the corner into 2008. Not to put too fine a point on it, but my little walnut brain can't imagine any scenario in which the US economy doesn't end up on a gurney in history's emergency room. It's not necessary to rehash the particulars of the Greenspan bubble-blowing disaster. The outcome is what concerns us. The web cables have been blazing for months with arguments as to what form the workout will take. There's little disagreement about the fundamentals at the housing end of things.

    The housing market is in a death spiral. Eventually, the median price of a house will have to fall back to the median income, and it has a very long way to go, perhaps 50 percent. Until that happens, houses will be generally unsellable. At the same time, of course, an anxious finance sector will be offering fewer mortgages and on much more rigorous terms, so there will be far fewer qualified buyers even for distress sales. And the median income itself may soon not be what it has been. The whole equation has changed. As the painful re-pricing process plays out, many owners/sellers will be upside-down and under water in what they owe on the mortgage in relation to the value of the house they occupy. Quite a few may have lost jobs and incomes along the way. Most of these unfortunates would be better off just mailing in the keys and walking away. But in so far as these awful liabilities are peoples' homes, full of all their stuff and their childrens' stuff, not to mention being the repository of all their previously-imagined wealth, as well as their hopes and dreams, walking away is psychologically more easily said than done.

    Full text here

  11. "smrstrauss said...
    But, still, they share a small part of the blame. But this blog implies that they are the main cause of the disaster!!"

    This blog ENTRY implies they are, but not this BLOG. There have been numerous entries in the past squarely placing blame on the repubs - yet no one really felt compelled to rush to their rescue and say "well the Dems did it too"!!! James has been very even handed in his treatment of the blame. Perhaps you have not been reading long enough.

  12. Barney Frank and Chris Dodd should be tried for TREASON !!

  13. Barney Frank and Chris Dodd should be put in jail for the rest of their lives. They have blood on their hands.

  14. Republicans did have control in congress but not enough majority so that they could pass their own bills. No, they needed some democrats' votes to pass anything during Bush's terms. Did they get any? No. Therefore I do not see how the republicans deserve any blame in this matter