by Ralf Seiffe
The crash of the bail out bill this afternoon was the last gasp of congressional Democrats and members of the Clinton Administration to cover up their real role in the financial crisis escape blame. We’ll see if another try at a legislative bail out develops but, what today’s failure to launch really shows is that the whole notion of who is responsible gets recent reality exactly wrong. Conventional wisdom holds that private sector greed caused this problem and, as a result, ruined the markets. That's not true in this case: it is the faithless officials—principally Democrats—who corrupted the markets. Thoughtful Americans recognize this bill only addressed financial symptoms in the private sector while leaving the cause of the problem, Congress, blameless. That’s why calls to Washington are running 10:1 against the bail out and will continue that way until the root cause is remedied.
The truth about the mortgage meltdown is oozing out slowly, but surely. Early adopters are connecting Jimmy Carter’s Community Reinvestment Act which Bill Clinton expanded to extort banks into making bad loans and they are beginning to understand CEO Franklin Raines’ reprise of Enronomics at Fannie Mae. They are starting to see the connections and to recognize this was no random economic development, rather, it was a conspiracy to gain control Fannie and Freddie to loot it. The motive was to gain anc consolidate political power, disguised as “affordable housing” programs.
This afternoon, others, including visitors to The Illinois Review, are becoming aware of an internet video viraling its way into the public’s awareness. It shows clips of a 2004 hearing where Democrats are praising the management of Fannie and Freddie while at the same hearing , an official of the Office of Federal Housing Enterprise Oversight is testifying that Fannie was falsifying its books and thereby creating doubt about its capital adequacy. As much as the Democrats seemed to ignore those warnings, the Republicans seemed to “get it” as the video plainly shows.
One particularly disappointing clip is of Maxine Waters praising Franklin Raines even as she chooses to ignore testimony that he’s a looter via an ongoing accounting fraud. What’s particularly telling is Congresswoman Waters’ observation that the GSE’s had met their quotas and her regard for their innovations. This included “desktop underwriting”, a process by which “community organizers” could become existential loan officers. It is how Fannie and Freddie could loosen credit standards it required of borrowers at the “point of sale”. Banks using desktop underwriting could thereby be assured that any loan they originated through the system would be acceptable—and purchased—by the government. As the banks were paid fees to originate these loans, they could care less whether the loans made any economic sense.
The financial treachery continued as Fannie and Freddie polluted the markets when they offered investors packages of these sub-prime mortgages to get them off their own balance sheet. These are the instruments which the legislation which failed today officially describes as “toxic”. With the government’s guarantee, they soon found their way to Wall Street.
It is at this point in this ultimately crooked scheme that Congress starts looking for blame. In their view, the culprits are the greedy Wall Streeters who bought these securities from Fannie and Freddie. By terms of today’s bill, the Congress wants to destroy American capitalism through nationalization and wage controls for the “crime” of buying and selling government paper on which the government defaulted on its guarantee. That’s wrong because this view fails to account for Franklin Raines saying real estate loans were “riskless” and could be prudently financed with capital reserves of less than 2%. It forgets the now chairman of the House Financial Services Committee, Barney Frank, commenting that any question of Fannie or Freddie’s capital was a “shibboleth” implying objective financial analysis had an ultimately racist motive. It completely discounts the decimation of credit standards reported in 1999 and it ignores how the Clinton Administration used the Community Reinvestment Act to make demands that the nation’s retail banks make bad loans, to favored groups, as a condition of growth.
“Markets” exist to fill needs ranging from corn flakes to derivative financial instruments. With the government generating so many new “sub-prime” mortgages, it was utterly predictable that a secondary market for these instruments would develop—but only because they were guaranteed by Fannie and Freddie. Without the guarantee, the risk premiums these loans would have to carry would make them unviable.
So, on the one hand, the politicians used their extraordinary power to create a near-monopoly, trading in financial heroin and counting on the natural ways of the market to addict investors to these loans. The target of this ploy was Wall Street and the bankers who took Fannie CEO Raines at his word and levered up.
The result was that the markets and the people who make them were in fact, corrupted by the politicians. Their ability to create trillions in transactions dwarfed the volume of productive business on the Street and made the bankers’ bonuses flow. It didn’t take long for the big Wall Street firms to understand who their patrons were; following the money shows that the majority of Wall Street’s political contributions now go to Democrats, according to Opensecrets.org. That they contribute to Democrats, who promise higher taxes that hydraulically diminish their customers’ wealth, shows their relationship with politicians is more valuable than their relationship with private investors. This pattern of giving also indicates they have become complicit in the disaster and, accordingly, should pay some price.
Indeed, this cozy relationship is proof that the blame--and the penalties--should attach to both Wall Street and to the crooks in the House and Senate. We should remember that the principal villains in today’s drama did not control a trillion dollars in mortgage volume to yield less than $200,000 each in campaign contributions. Instead, they used the money to fundamentally improve their party’s long-term ability to compete by creating a new welfare program called “affordable housing” and empowering local organizations to become their distributors. This mortgage manipulation is one element in the Barack Obama story as Stanley Kurtz reports in The New York Post today At the same time, they addicted Wall Street to deals too good to be true. As Americans become more familiar with the whole story they should demand Congressional accountability and some penalties on the architects of this mess. Until there is, there will be no bail out bill passed—nor should there be.
