Over the last week and a half the possible $700 billion bailout of the financial sector has been the talk of the town. Lots of TALK and no study of the history. Lots of TALK about how to solve the “problem” without spending any time to figure out what the problem is. Lots of TALK and backdoor, dark room, under the table, secret meetings between Congressional leaders and the increasingly annoying Bush Administration.
When the bill failed to pass the first go in the House the market reacted with shock and awe. Why? Because they continue to get caught with their pants down. There is more blame to go around than there is time to explain and it falls on Democrats, Republicans, Presidents over the last 50 or so years, and to bankers and Wall Street slicksters alike.
But lets not forget that we are the ones who ultimately are responsible for this mess. Not only did we not do our duty and provide proper oversight of our Representatives WE took the credit (as in $). We bought houses we couldn’t afford. We accepted the credit cards and department store cards and the expensive cars. WE failed to understand that we were being swindled by a gang of swindlers consisting of many Congresses looking for votes and heeding the calls of lobbyists to bankers looking to grant more and more insane ARM loans without considering who their were giving them to.
It started long ago all in the interest of granting the great American Dream. Regulations were pushed through to provide assistance to those who might not normally be able to afford to purchase a house. It was called the Community Reinvestment Act (1977). This legislation requires that banks offer credit (mortgages included) to “under-served populations.” The bill encouraged mortgage lending through a couple of government sponsored enterprises (GSE’s) that you may, or for some strange reason, may not be aware of; the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. So maybe you know them by their more… notorious name: Fannie Mae and Freddie Mac.
By now you should be well versed in the fate of Fannie and Freddie. [ASIDE: I say that you SHOULD BE because if you aren't paying attention to this problem abdicating your responsibility as a citizen of this republic. One of the reasons we are in such "dire straits" is because of the amazingly destructive lack of interest put forth by the citizenry of this country. Had we paid attention to what was going on and asked more of our representatives we might have staved off this problem but instead we viewed what they were doing as a way to help people realize that "great American dream." Don't kid yourself, folks, not everything that looks like a cupcake is covered in frosting.]
You absolutely MUST watch this video from a 2004 congressional committee meeting investigating Fannie Mae and Freddie Mac’s illegal book keeping. (If you decide that you don’t want to watch it then you might as well just go back to do whatever it is that you do to keep yourself uninformed.) You may loose track of what I’m talking about unless you click play.
Two things are obvious in this. The Democrats covered up the problems in the mortgage market to protect their low income housing loan programs and their supporters inside Freddie and Fannie. The Republicans as far back as 2003 (including Bush and McCain in 2005) tried to point out the problems brewing within these mortgage institutions. The question is WHY did the Republicans not get anything done? It’s clear that the people in this committee knew of the growing problems why wasnt it presented to larger body of Congress? If it was presented to Congress, what happened? We need to look at some more history first.
In the video you hear Rep. Maxine Waters (D-CA) insist that we were trying to fix some phantom problem and that there is no crisis “especially at Fannie Mae. You also hear her refer to the “outstanding leadership” of Mr. Frank Raines at Fannie Mae.
Mr. Franklin Raines illustrious career in public service started started back in 1969 when he reported to the Nixon administration regarding causes of unrest around the country that were related to the Vietnam War.” In the Carter administration he was an Associate Director for Economics and Government in the Office of Management and Budget and also worked as Assistant Director of the White House Domestic Policy staff from 1977 to 1979. He then joined an investment banking firm by the name of Lazard Freres and Co. Sounds good enough, right?
Mr. Raines seen lying to congress
In 1991, following his gig at Lazard Freres and Co., Franklin Raines joined Fannie Mae as a Vice Chairman where he served until 1996 when he moved into a role with the Clinton Administration as the Director of the US Office of Management and Budget where he served for the next two years. He returned to Fannie Mae in 1999 but this time he would be at the helm; the first black man to head a Fortune 500 company.
Following his five year reign as CEO of Fannie Mae, Franklin Raines took what he referred to as an “early retirement.” During his time at Fannie the Office of Federal Housing Enterprise Oversight (OFHEO) which is the regulating body of Fannie Mae began investigations into widespread accounting errors which according to testimony received by OFEHO included the shifting of losses so that senior executives like Mr. Raines could realize large bonuses. In 2006 OFHEO filed suit against Raines to recover some $50 million in payments made to Raines based on these overstated earnings which had been announced at levels reaching $6.3 billion.
More recent news reports via the Wall Street Journal list Franklin Raines as one of several public officials who received loans at less than market rate from Countrywide Financial. This group of public officials were referred to as FOA’s or “Friends of Angelo” (this refers to Countrywide Chief Executive Angelo Mozilo). It was reported that Franklin Rains received nearly $3 million in loans while at Fannie Mae.
The FOA scandal broke slightly into the current Presidential election campaign when it was realized that Obama campaign official James A. Johnson (former Fannie Mae Chief Executive) was the recipient of a favorable Countrywide Loan. Mr. Johnson was the head of the vice presidential search committee for Barack Obama. This was during the same period of time when Barack Obamas $1.32 million loan for his mansion was coming under fire for being locked in at a favorable rate at Northern Trust in Illinois.
Others receiving questionable FOA/Countrywide loans included Chairman of the Senate Banking Committee, Chris Dodd (D-CT), and the chairman of the Senate Budget Committee, Kent Conrad (D-ND). Prior to the Countrywide loan scandal becoming public knowledge the Dodd campaign received some $70,000 in donations from Bank of America who ended up purchasing Countrywide.
To quote, as I did earlier, Rep. Maxine Waters (D-CA) there was (in 2004) apparently no crisis at Freddie Mac and especially not at Fannie Mae as it was under the “outstanding leadership” of Franklin Raines. No problem here. These are not the crooks you are looking for. Move along.
There is much more to discuss regarding this matter. The growth of ARM loans which have become the source of so much financial distress in the mortgage market. The selling and buying of mortgages. The investment in high risk mortgages. The housing bubble; when it started and how it was inflated. There is a lot to learn from the situation we are in and unfortunately it is going to be up to regular Joe’s to learn the lessons as our elected officials and the bankers of this nation are more concerned with digging themselves out of a hole than they are at really learning any lessons. More to come, stay tuned.