The Democrat fingerprints on the financial mess
What is curious about this argument is how few Republicans are making it. Sarah Palin last night blamed Wall Street greed instead of the Democrats who caused the debacle. McCain has run a couple of ads but he has not made a consistent argument based on the obvious responsibility of the Democrats. My guess is that they have polling data which indicates the voters are not buying the truth right now so they have to stick with the populist beating up of Wall Street.Of all the characteristics of a successful politician, none is more essential than bare-faced cheek. Never has this been more evident than in the past fortnight, as senior Democrat members of the US legislature have sought to lay all the blame for the country's financial crisis on the executive arm of Government and Wall Street.
Neither of these two institutions is blameless – far from it. Yet when I see such senior Democrats as Barney Frank, Chairman of the House Financial Services Committee, and Christopher Dodd, Chairman of the Senate's Banking Committee, play the part of avenging angels – well, I can only stand in silent awe at the sheer tight-bottomed nerve of it. These are men with sphincters of steel.
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".
Maxine Walters' complaint about previous attempts to bring the great state-sponsored housing finance bodies under stricter control was partly a reference to Bill Clinton's efforts. Last week the former President acknowledged that "responsibility" for the absence of proper regulation rested "with Democrats who were resisting any efforts of Republicans in Congress, and earlier when I was President and tried to impose tighter standards on Fannie Mae and Freddie Mac". Then, as now, members of his own party saw all such initiatives as unwonted attacks on the chances for low-earners, and particularly African-Americans, to own their own homes.
...
They should consider an alternative which is a more effective presentation of the truth of Democrat responsibility. They owe to themselves and to the country to make the case to voters that it would be a mistake to turn the mess over to those who were responsible for it.
Re Democrats opposing tough regulation of Fannie and Freddie.
ReplyDeleteThis is wrong. In 2005, Barney Frank cooperated with the then chairman of the House Financial Services Committee Republican Michael Oxley and the Republican chairman of the House Banking Committee Richard Baker to pass the Federal Housing Finance Reform Act of 2005 through the House. It passed by a wide margin, with votes from both parties. But it got nowhere in the Senate. It didn’t even get out of committee.
The Federal Housing Finance Reform Act of 2005 was very similar in terms of its tough regulatory provisions to the bill sponsored by Hagel and co-sponsored by McCain (known as the Federal Housing Enterprise Regulatory Reform Act of 2005). (For confirmation, see http://www.opencongress.org/bill/109-h1461/show and click on “more” after “amends the housing”). But the White House didn’t like some of the provisions of this act. Something other than the regulation, I suppose.
I do not know why, but they asked their strong supporters to vote against the Housing Finance Reform Act in committee, and it failed. In response, the strong supporters of the Housing Finance Reform Act voted against the Housing Enterprise Regulatory Reform Act. Even if it had passed, it would have had to go back to the house of representatives, where it would have had to be approved by Republicans Oxley and Baker, who were irritated that their bill had been chopped down.
Oxley is now saying how pissed he was by the treatment that bill got, and by the impression given that all the good ideas about regulating Fannie and Freddie came from McCain and none from Oxley. Also, the House Democrats also voted for the Federal Housing Finance Reform Act of 2005, but the current blogging is saying that they were opposed to any tightening of regulation over Fannie and Freddie.
Oxley says (quoting from the Financial Times):
In the aftermath of the US Treasury’s decision to seize control of Fannie Mae and Freddie Mac, critics have hit at lax oversight of the mortgage companies. The dominant theme has been that Congress let the two government-sponsored enterprises morph into a creature that eventually threatened the US financial system.
Mike Oxley will have none of it. Instead, the Ohio Republican who headed the House financial services committee until his retirement after mid-term elections last year, blames the mess on ideologues within the White House as well as Alan Greenspan, former chairman of the Federal Reserve.
The critics have forgotten that the House passed a GSE reform bill in 2005 that could well have prevented the current crisis, says Mr Oxley, now vice-chairman of Nasdaq. He fumes about the criticism of his House colleagues.
“All the handwringing and bedwetting is going on without remembering how the House stepped up on this,” he says. “What did we get from the White House? We got a one-finger salute.” The House bill, the 2005 Federal Housing Finance Reform Act, would have created a stronger regulator with new powers to increase capital at Fannie and Freddie, to limit their portfolios and to deal with the possibility of receivership.
Mr Oxley reached out to Barney Frank, then the ranking Democrat on the committee and now its chairman, to secure support on the other side of the aisle. But after winning bipartisan support in the House, where the bill passed by 331 to 90 votes, the legislation lacked a champion in the Senate and faced hostility from the Bush administration.
Adamant that the only solution to the problems posed by Fannie and Freddie was their privatisation, the White House attacked the bill. Mr Greenspan also weighed in, saying that the House legislation was worse than no bill at all.
“We missed a golden opportunity that would have avoided a lot of the problems we’re facing now, if we hadn’t had such a firm ideological position at the White House and the Treasury and the Fed,” Mr Oxley says. (See: http://www.ft.com/cms/s/0/8780c35e-7e91-11dd-b1af-000077b07658.html?nclick_check=1)