Mortgage Tsunami Blame Misdirected by Congressional Leadership
House Oversight and Government Reform Committee Chairman Henry Waxman, Democrat from California, began dragging Wall Street titans from failed institutions in front of his committee on Monday to answer for the world wide credit crisis that has devastated markets around the globe. There is no doubt, as confirmed by their own testimony, that greed in these institutions ran rampant with generous bonuses being dolled out to parting executives even as those institutions became insolvent and headed toward bankruptcy. These true confessions make for great theater and give those affected by the rapidly declining economy a target for their disgust and frustration but ignore the fact that the primary cause of the failures were the non-performing portfolios dominated by sub-prime mortgages generated in staggering dollar amounts under guidelines set by the quasi-government mortgage institutions of Fannie Mae [FNME] and Freddie Mack [FMAC].
While Democrats on the committee hammered executives from Lehman Chairman and Chief Executive Officer Richard Fuld Republicans on the committee criticized Waxman for not holding a hearing to delve into the root of the problem at the now-nationalized mortgage giants. As Rep. John Mica [R-Fla] stated
“Any hearing on oversight that does not begin with Fannie and Freddie and [former Fannie Mae CEO] Franklin Raines will be a sham. This is like investigating a train robbery and only talking to the dining car stewards.”
But Fannie and Freddie are not included in the 5 part hearings on the financial crisis scheduled by Waxman for October. His intentions could be more clear as revealed in these sentiments:
“I don’t think we ought to use these hearings to be partisan. To look at Lehman is appropriate. To look at Fannie Mae and Freddie Mac is appropriate.”
However, no hearings were scheduled to look into the part Fannie / Freddie and the enormous bonuses dolled out to the officers who received these positions as political patronage, the contributions dolled out as campaign contributions, and support to a long list of progressive organizations. Just comparing the distribution of the bailout dollars shows the weight that should be given these government backed institutions in any investigation: Bear Sterns finanacing, AIG loan and nationalization, JPMorgan Chase repayments and Loans to banks via the Fed’s Term Auction Facility total around $400 billion. Compare that to the combined total of government sponsored Frankensteins that include Fannie Mae and Freddie Mac nationalization, Federal Housing Administration housing rescue bill, Mortgage community grants, Loans from Depression-era Exchange Stabilization Fund, and Purchases of mortgage securities by Fannie Mae and Freddie Mac which amounts to some $800 billion.
Fannie Mae started as a government sponsored enterprise [GSE] in 1938, the brainchild of New Deal Democrats during the Great Depression. Its purpose was to generate additional funds for housing by creating a secondary mortgage market establishing uniform parameters so mortgages could be packaged and sold as securities. Mortgage institutions could package the loans they made, sell them in the secondary market and re-loan the proceeds. In 1968 the Johnson Administration converted Fannie into a shareholder based corporation to remove their obligations from the federal budget. In the late 1990s, the Clinton administration encouraged Freddie to accommodate low income borrowers with low rates thereby building a massive pool of low grade securities that are the root cause of the dramatic real estate collapse. That sent shock waves through the international credit markets. Now a credit crisis the magnitude of which only a government could create requires tax payer money to bail it out.
Waxman, the Democratic leadership, and those who have benefited, hope to avoid public scrutiny about the partisan preferences of the institution especially with the upcoming election. Fannie Mae funds have been widely distributed to a variety of liberal causes including ACORN where Obama was a community activist and himself channeled funds after being recruited by confessed terrorist William Ayers to distribute education funds. Additionally, two of Obama’s advisers made millions in boneses in patronage positions. The presidential candidate has been the recipient of more political contributions from the institution than any other politician with the exception of Senator Dodd [Dem-Conn].
Franklin Delano Raines, President Clinton’s Director of the Office of Management and Budget, cashed in as CEO of Fannie Mae collecting some $90 million in compensation over a six year period. He is currently an adviser to Barack Obama. Jim Johnson, campaign manager for Mondale in 1984, CEO before Raines, took in $25 million. Johnson served on Obama’s VP selection committee. They have avoided media scrutiny as well as review by Congress in spite of warnings from pubic officials and economists.
What’s worse is the current cast of characters in Congress who call for more Congressional oversight for financial institutions while ignoring calls for more oversight at Fannie and Freddie. They routinely provide ample contributions to key committee members responsible for overseeing their industry such as The House Financial Services Committee, the Senate Banking, Housing & Urban Affairs Committee, and the Senate Finance Committee. Beneficiaries that continually denied a crisis was looming and blocked legislation to control these runaway GSE’s included Barney Frank, Chris Dodd, Chuck Schumer and a host of others in addition to the lack of response from Democratic leaders, Nancy Pelosi and Harry Reid who cast the urgency aside as they did when they adjorned with pending energy legislation on the table.
The warnings of the pending crises from the Bush Administration in April 2001, only three months after taking office, from Treasury Secretary Snow in 2003, Alan Greenspan in 2005, and a host of others that included Senator McCain in 2006. This video from Bret Baer of Fox News provides a concise review of the events leading up to the crisis:
With Democrats holding a majority in the House and Senate we can expect more oversight for publicly traded financial institutions. Meanwhile, though they offer securities, Fannie and Freddie are exempt from SEC regulations. If Obama wins the White House, the root cause of these problems will not only be swept under the carpet but we can expect increased government participation in the public sector and confusion in the markets as a result. It will be a decade before investors would be comfortable determining the real value of a single family home. If a moritorium on foreclosures it will be even longer before they feel comfortable investing in a trust deed.