Lois & Clark Forums Forums General Discussion Off Topic Possible reason for Wall Street crisis

See this commentary piece on Bloomberg:

How the Democrats Created the Financial Crisis

The key things you wanted to know was why are Fannie Mae and Freddie Mac so important to this scandal.

From the piece, we have:


And

The two were so large a part of the market that their sheer size and presence dominated the subprime loan market. So when they exploded, their detonation took out a lot of others, such as Bear Stearns, Lehman, AIG, and so on.

On the bill, there was never an actual filibuster as I had said before. I had said that the mere threat of one was enough to stop a bill. And it's far more common than you think. Filibusters themselves rarely happen but the threat of one is almost constant. It's so common that for virtually every bill, there is automatically a cloture vote with an assumption that a filibuster will happen. Such is the distrust between the two parties. That is one reason Congress can rarely get anything done that doesn't have a consensus between the two parties. No party has had 60 votes in the Senate since Jimmy Carter was president.

The reason why a threat is as good as a filibuster is that nobody actually has to debate, unlike in the old days when the lack of debate immediately ended the filibuster. Today, all a Senator has to do to initiate a filibuster is to say, "I'm holding a filibuster." And that's it. There's no debate, no Senate session, no nothing. A vote cannot take place on any bill without a 60-vote cloture.

The filibuster does have an exception. Budget bills cannot be filibustered. So when the Senate is voting on spending measures for the overall budget, those cannot be filibustered. Everything else is fair game. Of course, you can guess what happens with these bills. They get decorated like Christmas trees with all sorts of pork barrel projects and other items that could never stand on their own simply because they cannot be filibustered.

The relevant part of this piece that you were interested in is:

If you watched the video, you would know how partisan it became as Democrats attacked the regulator and refused to acknowledge a problem existed. They had no interest in reform. We're paying the price for that lack of interest.


The 2005 bill was not the first. Why did the Democrats block this:

New Agency Proposed to Oversee Freddie Mac and Fannie Mae

Seventeen times, the Administration tried to reform the two GSE. Seventeen times they were blocked. You're treating this whole thing as a one-time blockage of a single bill and focusing only on the 2005 bill. It's been a series of obstruction by Democrats to prevent reforms of the two GSE's over a number of years from 2001 on, so there is no excuse.

All I can say is, the Republicans should have pushed the issue. If they felt that it was so important to get the bill accepted, they should have tried their best to make it happen. They controlled the majority of the Senate when the bill was proposed. If the majority party of the Senate is so powerless, then I don't understand why Republicans worry at all about having lost the majority in the Senate. Clearly they can be just as powerful as a minority party, if not more so.

Anyway, just imagine if Republicans had really tried to force the issue, and the Democrats, assuming they were so dead set on defeating the bill, had been forced to filibuster. Imagine how bad that would have looked now. I find it hard to believe that Obama would have been ahead in the polls, if Republicans could prove that they really did try to regulate Fannie and Freddie, but the Democrats stopped it by filibustering.

But the Republicans didn't force the issue. All they say is that they couldn't do it, because the Democrats would have filibustered. That sounds very much like putting at least part of the blame on someone else. It is like saying that you had the right idea, and you had slightly more people backing you up than your opponents had, but things might have gotten ugly if you had really tried to defeat your opponents, so it is their fault that you didn't even try.

Roger, you said previously that the Democrats must bear all the blame for the current crisis. I think that such a stand is absolutely bound to be partisan and wrong, considering the Republicans have had the President for the last eight years and have had majorities in both the Senate and the House for parts of the President's term.

But since you seem to be determined to prove that it was all the Democrats' faults that the crisis has happened, you have to look for whatever evidence you can find to back up your claim. You have to concentrate on the bad things the Democrats did and disregard any mistakes that the Republicans did. Since Fannie and Freddie is where the Democrats are most vulnerable, you will have to argue that the crisis is all about Fannie and Freddie and ultimately all about Democratic interference.

That is why I so much want to listen to Alcyone now. Alcyone is, by her own admission, not "neutral" in this debate. She is definitely a left-leaning person, and it is no secret that she hopes that Barack Obama will be elected President. But Alcyone does her very, very, very best to look at all the issues from both sides. I find that so admirable. And that is why, right now, I so much more want to hear Alcyone's analysis of the situation than I want to hear yours.

Ann

You're blaming Republicans for not being able to push it through solid Democratic opposition?

Who had the right position and who had the wrong position? You're basically absolving Democrats of blame because the Republicans didn't think they could pass it. It also would not have solved anything. The bill still would not have passed. So yes, maybe it would have helped Republicans electorally, but in the end, the result in the economy is the same.

What did you think of the video? It's a very powerful video that if seen by enough people would easily decide the course of this presidential race and Congress. Still think the Dems were only quibbling over an amendment or two over a bill? Or were they saying that no reform is necessary because there's no problem, so they could protect their piggy bank so they could continue to line their own pockets at our expense?

First they perpetrate the fraud on the American people by forcing banks to make loans to people who couldn't pay. Then they protect the organizations from repeated attempts by Republicans to stop the fraud... and it's the Republicans' fault because they didn't force an active filibuster?

Who do you think bears the brunt of the blame? It certainly wasn't deregulation as Obama's been lying about. Even Alcyone admits it had nothing to do with deregulation.

I remind you that the Democrats have had control of Congress for two years and did nothing, even after the 2005 bill was reintroduced. It never got a committee vote. So whose fault is that?

By the way, filibustering is a tool of the minority. It's always preferable to have a majority because you can push through much of your agenda, such as in budget matters. If you're the minority, you get nothing.

Right now, the GOP is in the minority. They're getting none of their agenda through, but are in a position to stop much of the Democratic agenda. Some predict the Democrats may pick up the 60 seats necessary to block filibusters. With a filibuster-proof majority and the White House, liberalism will be unchecked and we would be setting the stage for more financial meltdowns as the Democrats won't even admit they're part of the problem. You cannot fix anything when you can't even diagnose the problem.

I know you're far left, but even you have to admit the evidence against the Democrats is pretty overwhelming. To reward people who have brought the world to the brink of financial disaster and have already caused the stock market to fall 40% in just a few weeks and costing retirees trillions of dollars should be revolting to most people. Democrats are supposedly for the little people. Yet look what they've done to all of us. The world is teetering on recession right now.

You've even said that the Democratic opposition is pretty good grounds to vote for McCain. Do you still feel that way? Not that you're actually eligible to vote here.

You've said that I've only looked for blame for Democrats. Well, lots of Democrats have been looking to blame Republicans and all they can come up with is Gramm-Leach-Bliley. That should tell you there isn't anything they can really pin on Republicans. If all of the Democrats' opposition research groups and Obama's research teams can't come up with anything, why do you expect me to? Do you find it interesting that the Democratically-held Congress isn't interested in the least about holding hearings to uncover the causes, yet will spend two years investigating the firing of federal prosecutors the president had every right to fire without cause?

My exact words were

Note the italics which were also in the original.

I pick my words very carefully, Roger. Please don't distort my claims with hyperbole.

alcyone

I didn't say that, Roger. I said that if it could be proved that the Republicans honestly tried to push through a bill that would have regulated Fannie and Freddie, but if it could be proved that the Democrats stopped it by filibustering, then that would have been a good reason for people to put a lot of blame on the Democrats, and it would have been a good reason for them to vote for McCain.

But I have seen no proof that the Republicans did their very best to avert the incoming disaster, and to make everyone see that it was the Democrats' fault that the tidal wave wasn't stopped after all. Calling the Democrats' bluff, or allowing them to filibuster themselves into a corner, would have done precisely that.

Ann

I'm back. Thanks for the kind words, Ann. Seriously.

The Bloomberg article author is associated with the McCain campaign. Hmm.

What makes the FM/FM situation so murky in the gov't is that the actual negotiations are unclear (there's reports about party alliances, but no official voting ever took place as far as I know), there is a lot of hearsay, partisan speculation and few straight conclusions. This is what I’ve pieced together--I am limiting it to the FM/FM situation and that strict time period linked to the bills. Since it's all so muddy, I'm afraid your question doesn't get answered, Ann one way or another. But still, the situation is interesting to flesh out, I think.

First for a general timeline and our factions let’s go back to the Sept. 11, 2003 NYT .

Okay, so we have that set-up. The Administration wanted to regulate FM/FM in 2003. The Republicans seemed to agree. The Democrats did not, (see possible reasons here , if you want to give them the benefit of the doubt).

Fast forward to 2005. There’s two bills that were in play, which is another reason why this is so messy.

House bill Federal Housing Finance Reform Act of 2005 HR 1461, gets introduced April 2005 put for by chairman Michael Oxley (R) and was voted on by 10/26/05 (a 331-90 vote) after much wrangling. It got passed on to the Senate where it was shelved by the Banking, Housing, and Urban Affairs Committee.

Oxley said some controversial stuff in here . A conservative disputes Oxley's criticism and mentions, interestingly enough, that a bipartisan vote in the House was not needed as one of the responses against him.

Speaking very generally—what emerges is that there’s the Administration on one side, there’s the Democrats on the other and in the middle there seem to be the Republicans (reminds me a bit of the bailout situation though the configuration was obviously different). The reason that Oxley says the Administration gave him the “one finger salute” is because they were less than pleased with the bill that the House passed considering it too weak according to American Enterprise Institute, a conservative think tank (by the way the same one the Bloomberg author works for). However, if I go by the conservative in the website above, I'm left wondering (like you) how important the bill was thought to be by the Republicans that they'd sell out the content of the bill (and White House support) in favor of bipartisanship. According to Oxley the Administration basically said that no bill was better than that one.

But about him-- there’s also been information of money in his pockets from lobbyists in a fishy way as in WSJ from April 2006.

Oxley responds on May 2006 and he makes a point here on the Administration. I’ll return to that eventually:

Like I said, I’ll return to the Administration later, but I wanted to flag it.

By this point, the House bill was stalled in the Senate’s Banking, Housing, and Urban Affairs Committee. Let’s look at the other Senate bill.

That bill, the Federal Housing Enterprise Regulatory Reform Act of 2005, S190, differs from the House bill in that it was more in line with what the Administration wanted. It was sponsored by Sen. Hagel with co-sponsors Sen. Dole and Sen. Sununu (all Republicans) on 1/26/05. (McCain’s support is dated 5/25/06 btw and he didn't sign on to the next one while Sen. Dole and Sen. Sununu did). It passed to the Senate in 7/28/05, but was never placed on the agenda; there were two floor speeches (Hagel-2005 and McCain-2006) and that was it.

What most people point to is the committee where the initial partisan divisions took place (though not on official terms), Let’s take a look:

Richard Shelby (Ala.-R), Chairman, Robert Menendez (N.J.-R), [b]Robert Bennett (Utah-R), Wayne Allard (Colo.-R), Mike Enzi (Wyo.-R), Chuck Hagel (Neb.-R), Rick Santorum (Pa.-R), Mike Crapo (Idaho-R), John E. Sununu (N.H.-R), Elizabeth Dole (N.C.-R), Mel Martinez (Fla.-R)

Paul S. Sarbanes (Md.-D), Christopher Dodd (Conn.-D), Tim Johnson (S.D.-D), Jack Reed (R.I.-D), Chuck Schumer (N.Y.-D), Evan Bayh (Ind.-D), Thomas R. Carper (Del.-D), Debbie Stabenow (Mich.-D), Jim Bunning-R (Ky.-D).

Information from here scroll down to 109th Congress.

From this we see that 1) the sponsor and co-sponsors of the bill sat in the committee and that these were senior Senators. And 2) we know that the Dems didn’t like it. 3) We know there was pressure from the NAHB. 5)We know it was taken out of committee, but never put to a vote on the floor. But that’s as far as the barest facts take us.

Now, let’s go back to the Administration.

Oxley’s credibility can be seen as kind of shaky, I suppose, but the original Wall Street Journal put the idea forth first and conservative think tank American Enterprise Institute also backs the notion that an intervention from the Administration was needed and possible. On Sept. 2005, one of their people wrote:

That the Dems didn't want it is widely known, so there's no need to rehearse that. What I'm drawn to is that not only is there little evidence of Republicans pushing back on the issue in a substantive way, but that the Administration didn't act decisively either even though they were the ones that started the push...even when conservatives both in and out of government encouraged they act. And this is just one part of the financial crisis, which definitely lines up with Factcheck's claim of a murky, complicated number of factors.

In this situation alone, it seems to me there are more questions than answers. For some more details Slate\'s coverage looks pretty legit, even though it's Slate. But they have good links.

Here\'s some more on the House bill also.

*nods* At the very least it would have called more attention to the matter.

alcyone

Thanks. Very interesting. Apparently there is a lot of blame to go around.

Ann

My apologies, Alcyone. I had interpreted your words incorrectly.

Lots of people love to say this to take the sting out of their own failures (I'm looking at you, Democratic Party), looking for the remotest excuse so that they can lay a tiny bit of blame on the opposition so they can assuage their own guilt and absolve themselves of their malfeasance. And it's easy to say, too. Everybody loves to be bipartisan and say everybody's to blame. Well, that's just not true. I'm not one to play that old canard. The CAUSE of the problem can only be laid at the feet of one party and not the other.

So how is it that all the R's were on the right side, the D's were all on the wrong side, yet there's plenty of blame to go around? I'd say if it weren't for the strident opposition of the D's, we wouldn't be in the trouble we have today. If it weren't for the malfeasance of the D's we wouldn't be in the troubles we're in now. If it weren't for Clinton's redefinition of the Community Reinvestment Act, we wouldn't be in the troubles we're in now.

There's not a single Republican we can blame any of this on as no Republican tried to use the force of government to make banks issue bad loans as the Reno Justice Department did under the Community Reinvestment Act. No Republican organization like ACORN lobbied banks to make bad loans at the threat of labeling the banks as being insensitive to minorities and the poor. No Republican was high in the executive staff of Fannie Mae or Freddie Mac and used fraudulent accounting practices in order to inflate their bonuses (Franklin Raines, Jim Johnson, Jamie Gorelick, Daniel Mudd, Herb Moses, Beth Wilkinson, Democrats-all). No Republican drove FHMA/FHMC into the ground by maintaining ridiculous reserves (Franklin Raines and his, "they're so safe, we should only have to have 2% reserves"). No Republican took on huge amounts of bad debt, repackaged it into "AAA"-rated securities and sold them to unsuspecting investment bankers. Lots of Democrats got sweetheart deals on their personal mortgages. Republicans were virtually unified in wanting to reform FHMA/FHMC. Democrats were virtually unified in wanting to stop reform of FHMA/FHMC. But there's plenty of blame to go around? Eh? This defies logic.

The only thing that Republicans seem "guilty" of is not forcing a filibuster that wouldn't have succeeded anyway. Oh, because they didn't force a filibuster, it's okay to ignore all the Democratic malfeasance and vote for Obama anyway because the GOP didn't do a procedural move? One side caused the disaster. The other side tried to stop the disaster. But we should vote for the people who caused the disaster because the other people didn't conduct a parliamentary move? I would say there's blame for the Republicans if the bill would have passed if brought to the floor. But there was no chance of passage. Any attempt would likely be cast by the media today as a publicity stunt to take away from the true blame of deregulation caused by McCain and Bush (and you know that's what the media would do). So basically the GOP has to take a lot of blame because they didn't do a publicity stunt, all style no substance? It must have been all Phil Gramm's fault, despite the fact that 3/4 of all House Democrats and all but 8 Senators supported including Joe Biden voting yes.

This bill not withstanding, every other attempt was snuffed and there were many. You seem to have a fixation on this one bill as the end-all, be-all, ignoring all other attempts. When the Administration tried two or three years earlier, they were rebuffed as well. And when the Democrats had control of the Congress, they did nothing, not even permitting a committee vote. Yet there's plenty of blame to go around? Doesn't that sound even remotely odd to you, Ann?

BTW, you still haven't commented on the video. What did you think of the video?

Now I've watched that video, Roger. It is clear that we watched very poor judgement on the parts of many Democrats.

An interesting thing that emerges from the video is that most of the Senators that oppose stricter regulation of Fannie Mae most strenuously are black. It seems to me that to these black Senators, defending Fannie Mae was probably a symbolic and an emotional issue, not necessarily a logical and rational one. Fannie Mae, if I have understood things correctly, had become symbolic of the Community Reinvestment Act, which required banks to give loans to minorities, such as black people, and help them buy their own homes. A call for stricter regulation of Fannie Mae might have seemed like an attempt to force this huge mortgage institution to become less generous to minorities. The black Democratic Senators who opposed the attempts to regulate Fannie may have done so because they though that this was the best way to ensure that black people would be able to get mortgages in the future, too. In a society like the United States, where some people are fabulously rich and some people have a hard time getting by, sometimes because of their skin color, some people are going to fight extra hard to oppose anything that smacks the least bit of racism. That was probably what killed the bill that would have regulated Fannie Mae.

Well, the Democratic Senators were clearly wrong here, and the Republicans were right. However, Alcyone quoted Congressman Michael Oxley (R) who said:

So according to Oxley, George W. Bush himself could have made sure that Fannie and Freddie were regulated. Ultimately it wasn't necessary to 'sell' the bill of regulation to recalcitrant Democratic Senators. If the Republican Administration didn't move forward here and didn't try to get Fannie and Freddie regulated even if they had the means to so so, shouldn't some of the blame fall on them?

Another point I've tried to make here is that this crisis is certainly not all about Fannie and Freddie. Alcyone gave us a link to a highly interesting Newsweek opinion-piece . Let me quote a few things from that article:

Not all subprime loans were made by Fannie and Freddie. A significant number of them were issued by unregulated banks, which had nothing to do with the CRA or the Federal Reserve.

But many of these institutions were indeed highly associated with banks like Bear Stearns and Lehman Brothers. And Bear Stearns and Lehman Brothers were not regulated by the CRA.

The Newsweek opinion-piece claims that the bad and reckless behaviour of many mortgage companies was nothing that the CRA had forced upon them. Rather, the mortgage institutions chose to behave like that because they could make more money that way. (And as far as I can understand, the mortgage companies that the article talks about here are not only Fannie and Freddie, but certainly also institutions like Argent and American Home Mortgage.)

The Newsweek article says that many of the biggest crashes in real estate have come from other sources than subprime loans and Fannie and Freddie.

The Newsweek article also says that Bear Stearns ran with a leverage ratio of 33:1.

Again, the article says that so many actors did their part to make the crisis happen, actors that weren't Fannie, Freddie, the CRA or Bill Clinton.

According to the Newsweek article, a Republican Congressman tried to make Richard Fuld of Lehman Brothers say that Lehman's demise was caused by the bank's dealing with Fannie Mae. But Richard Fuld answered that Lehman had had very little to do with Fannie Mae.

You try to put all the blame on the Democrats, Roger. You say that it is all about Fannie and Freddie. Yes, Fannie and Freddie certainly played a part. And the Republicans tried to regulate them, but the Democrats said no. That was a very serious mistake. But the Republicans could have tried harder, and the Administration could have forced the issue. And in any case, there were so many other actors involved, actors who had little or nothing to do with Fannie and Freddie or with the CRA or the Democrats.

And that is why I said that there is plenty of blame to go around. And I stick by that assessment.

You, on the other hand, appear to have made up your mind that the Democrats caused this crisis all on their own.

Ann

Some more links and information:

This is a really deep article dated Jan 2005 from Forbes about the mess.

Politico has one on the fingerpointing. Not particularly deep, but worth a skim.

This comment caught my eye from a political thread elsewhere (although I admit that opening up discussion on the actual content of the bills is ):

alcyone

Fannie Mae and Freddie Mac do not issue mortgages and never have. They are not a bank. They act as a secondary market by buying up mortgages and packaging them up in marketable mortgage-backed securities. As I said before, they are responsible for buying 40-50% of all subprime mortgages along with roughly 80% of all mortgages, so they make up the biggest chunk of the market. What happens to them affects everyone by their sheer size. That is why so many people say that without them, the whole mortgage mess would never have happened. Of course not everything is because of subprime loans. There are ARMs that are above prime that have caused people to default. Subprimes are a market all in themselves that caused most of the problems, but not all the problems.

But when organizations hold up to 80% of all mortgages, that's significant. It's a very good reason for government to never get involved in the markets directly. I have no problems with safe regulation, but for the government to be such a large participant in the markets is a different matter.

It was also the failure of Fannie Mae and Freddie Mac that triggered the collapse of Lehman Brothers, Bear Stearns, AIG, Washington Mutual, etc. as the mark-to-market rules kicked in. With the market for mortgage-backed securities gone due to the bankruptcies of FHMA/FHMC, mark-to-market rules suddenly made many of the securities held by these organizations suddenly worthless, triggering downgrades in their credit ratings, and in turn creating a credit crisis as these companies could not come up with the reserve requirements needed for their lower credit ratings. Companies did not have to hold securities directly issued by Fannie Mae to be caught in the avalanche. In those cases the failure of FHMA/FHMC was the catalyst for their collapse since FHMA/FHMC was the biggest market for these securities, acting like the first domino that falls, taking out many of the dominoes behind them.

To explain further, companies with high credit ratings are only required to hold 4-7% of their debt in assets. AIG, for instance, was downgraded by Moodys and Standard and Poors after mark-to-market forced them to write off a large number of their mortgage-backed securities. That upped their reserve requirements to 85% of assets to debt. Going from 7% to 85% required the bank to come up with a tremendous amount of immediate cash, which they couldn't get. That caused those companies that could not obtain sufficient cash to immediately go bankrupt. AIG, for instance, only got bailed out because the federal government gave them an emergency loan of $85 billion in cash to cover their reserve requirements.

So now, you should be able to understand just what the impact of FHMA/FHMC had on the investment banks.

I've seen no other sources that say the Administration had the authority to restrict the portfolio of the two mortgage giants. Every article and commentary piece I've seen indicates that was what the Administration was asking for, such as in this article reprinted from the Washington Post:

White House Sets Forth Plan To Limit Size of Fannie, Freddie

It makes no sense that the Administration would be asking for power it already had, so I seriously doubt that was the case. The regulator is the entity that actually performs the enforcement of these rules as they are the representative of the executive branch, and the regulator was saying they needed the power, so I have no idea what it was Oxley was actually referring to.

By the way, banks like Bear Stearns and Lehman Brothers are not banks that originate mortgages. They had large amounts of mortgage-backed securities that caused their investment arms to collapse. Investment banking is their primary function, which is assisting companies in making their securities public, e.g. IPO's.

American Home Mortgage and brokers like LendingTree.com are primarily conduits. Having used these sites myself, what happens is that you fill out an online application, tell them the type of loan you want, and wait. After a day or two, you'll get dozens of emails and phone calls from numerous banks who want to loan you money. Those banks are the loan originators.

Mortgages are a fairly complex topic, but underneath all of the layers of middlemen, brokers, and such are the commercial banks, who are the originators of these loans. Those loans are subject to the rules of the CRA and the Federal Reserve.

The bank originators do not hold onto the mortgages, typically, which I've mentioned in the past with regards to swaps. Swaps, remember, are financial transactions designed to equalize the risk time frames between the loans and deposits in a bank. Once those banks sell their loans to entities like Fannie Mae, those organizations package them up into marketable mortgage-backed securities that are then sold to other organizations like investments banks such as Lehman Brothers and AIG and Bear Stearns. Most of the banks that have failed, with notable exceptions like Washington Mutual, are not the originators of the loans but rather bought what they thought were government-backed AAA securities. Those AAA's didn't turn out to be as safe as they thought.

This issue is getting more and more complex. I read that Forbes article that Alcyone gave us a link to. Although I took a fairly basic course on economy more than thirty years ago, much of today's more technical economy-talk is, well, Greek to me. But I did what I do when I try to wrangle meaning from the astrophysical papers I sometimes read: disregard the lingo and the details and try to focus on what the broader question is about.

All right. Fannie Mae, or Federal National Mortgage Association (FNMA), was founded in 1938 as a federal agency which operates with a congressional charter to help lower- and middle-income Americans buy homes. In other words, Fannie was originally a sort of big-government agency whose sole object was to render housing help to lower- and middle-income Americans. It was, therefore, the sort of government agency that I approve of, the kind that exists to help the less fortunate citizens in a country.

But in 1968, Fannie became a for-profit company. Suddenly the agency had two aims. One was to help non-rich people get mortgages. The other one was to make a profit. Which of these two aims would be the most important? And indeed, are these two goals even compatible?

Bottom line, I don't think they are compatible. A federal agency whose aim is to serve the public should concentrate entirely on that. The people running the agency should receive a fixed pay from the government. If, on the other hand, the aim of the agency is to make a profit, then I think that its dealings with the public will eventually become of secondary importance. After all, for such an agency the public is basically a means to an end, the means that the agency needs to make a profit.

If a society is ruled by relatively collectivist ideals, then I think it is easy to argue that an agency like Fannie should have only the best interests of the public at heart. But in a society where Reaganomics has taken a firm hold, where profit is king and self-interest is promoted as the road to collective blessings, serving the public becomes equivalent to selling vacuum cleaners or or drilling for oil or getting yourself a stable full of racing horses: you do it to make a profit, and if you are unsuccessful you can hopefully sell your business and find a more profitable means of making money instead.

I think there is ample evidence in that Forbes article that Fannie started using the public as a means to an end, where the end was to make a profit. According to the article, Federal Reserve economist Wayne Passmore wrote in 2003 about GSEs, Government Sponsored Enterprises, of which Fannie is a prime example. According to the Forbes article, Passmore said that

In other words, servicing the public by securing more and better mortgages for lower- and middle-income Americans was no longer much of a priority for Fannie. But the agency sure made money, all the same. So where did that money go? The Forbes article says,

Right. Fannie sure made a profit, or at least, it most definitely had the ability to give its top executives nice bonuses.

Not only Fannie's own executives were happy. So was Wall Street. When Fannie came under fire for shoddy and downright illegal accounting from Armando Falcon, a Texas Democrat who had been appointed head of the Office of Federal Housing Enterprise Oversight (OFHEO), several Wall Street executives rushed to Fannie's defence:

Wow. The Forbes article is dated January 24, 2005. Its author, Bethany McLean, had no way of knowing that Lehman Brothers and Bear Stearns would be two of the first casualties of the Wall Street crisis. Yet she picked them out as two of the staunchest defenders of Fannie. McLean also points out in her article that in 2005, Fannie was still "one of the Street's top fee-payers". So Bear Stearns and Lehman Brothers rushed to Fannie's defence. Yes, making a profit is what matters. Or rather, making money for oneself.

To be sure, the Democrats also did their level best to defend Fannie. Because Fannie used to be an agency that served the public. When it became an agency that was allowed to make a profit - indeed, when it was allowed to expand wildly to make grotesque profits - the Democrats still defended the Fannie because of what it had been, and because of what they hoped it could still be, a symbol of federal aid to poor people.

And maybe they also defended Fannie because it was so big and mighty and so associated with the Democratic Party - it must have been founded by FDR, after all - and it is nice to have something that is so big and mighty on your side.

What interests me is not so much if people call themselves Democrats or Republicans. The people who defended slavery during the Civil War almost all called themselves Democrats. I don't care what people call themselves. I care about what they really believe in, what they want to fight for. Do they believe in a measure of collectivism, so that the problem with Fannie was that it forgot its duty to the public in order to make a magnificent profit? Or do they believe in Reaganomics and the total rule of the free market, so that the problem with Fannie was that it received government support?

I think that so much of today's crisis has its roots in the belief that the unchecked rule of the free market will make everybody richer and happier. Of course, the people at Fannie Mae tried to have it both ways, as they asked for government support to make a profit. The way I see it, however, the sins of Fannie Mae was that it put the interests of the public second and the interests of its own executives and Wall Street executives first.

Ann

Not only Wall St execs--turns out FM used it's power to get a Sen. to get the OFHEO investigated (from Roll Call):

That Sen. wanted Falcon fired (Washington Post):

So it's really complex because of the sheer strength and reach of the giant's influence on all sides. But even more than that, the more I read, the more I see this whole issue as something knotted and systemic. Here are a couple of more links (not about FM/FM), but the crisis as a whole that I found interesting.

Barry Ritholtz has a super detailed discussion with charts graphs, links and all that about the history of the housing environment, etc. And since I'm obsessed with who is giving me the info, here's his bio .

Here's some more from NYT and derivatives- Taking a Hard New Look at a Greenspan Legacy .

The Hill has another article, not particularly deep, but still of interest as far as it displays the partisan wrangling some more from both sides- Barbs Traded on Hearing on Lehman\'s Fall .

I found your comment a bit ago on the Democrats following the free market philosophy food for thought. I was reminded of a discussion in an academic talk where someone mentioned that in the US we don't really have a true "left" as it is understood elsewhere generally.

alcyone

Like you said, Alcyone, the more one tries to look into the causes of the present economic woes, the more the roots of the financial crisis are found to be complex and intertwined.

So when Republicans try to pin all the blame for the Wall Street crisis on Fannie and Freddie, it reminds me a little of how George W. Bush put the blame for 9/11 on Iraq and Saddam Hussein. Admittedly there is an important difference, because Iraq and Saddam Hussein had nothing to do with 9/11, whereas Fannie and Freddie are certainly not blameless in the mess that created the Wall Street next-to-meltdown. But then as now, Republicans are missing the big picture. And spekaing of the big picture, Barry Ritholtz on the Big Picture has this to say about Fannie, Freddie, the RCA and the current crisis:

Barry Ritholtz goes on by saying this:

This is highly significant to me. Fannie, at least, had been around for seventy years when the credit market collapsed. There has been a recent development with a huge housing bubble expanding mightily for a couple of years, but the blame should be put on a seventy-year-old institution that worked pretty much blamelessly for at least half a century? Isn't it more likely that a venerable institution stumbled because the general economic and financial framework within which it acted had changed its rules?

Barry Ritholtz says:

A nonfeasant Fed. I assume that Barry Ritholtz is referring to the Administration in general and, perhaps, to the Chairman of the Federal Reserve, Alan Greenspan, in particular. The New York Times had a lot to say about how Alan Greenspan was determined to not rein in or regulate derivatives, which I believe is the term you use for "repackaging" loans, shaky or otherwise, and selling them to others as assets.

But as we have seen, many of those derivatives were nearly worthless, and when banking institutions which held such derivatives were asked to come up with real money, there was no real money in the derivatives to be found.

The New York Times describes how Alan Greenspan fought off several attempts to regulate derivatives trading and make sure that worthless papers weren't traded in the same way as secure ones. The reasons for Greenspan's defence of the derivatives are described by NYT like this:

Faith. Alan Greenspain had faith in the market. Inspired by Ayn Rand, he believed that collective power, as wielded by governments, was intrinsically evil, at least when it interfered with the free market. On the other hand, he absolutely believed that the individuals who acted on the free market were honorable and intrinsically good, because they were individuals.

Of course... you can ask yourself how Greenspan could have thought that Lehman Brothers or Bear Stearns or AIG or any of the other big actors on the financial market were individuals. As far as I can understand, this is another unfounded assumption made by the free market gurus. They believe that governments per definition are representatives of a collective power (and they certainly almost always are), whereas any private businesses of any sort should be defined as individuals, although they basically never are. (But even if they were, how would the fact that they are individuals guarantee that they are always honorable and not in need of any regulation?)

So if New York Times is correct, Alan Greenspan has been a believer in the unique goodness of the free market and the unique evilness of government interference, and he has used his unique influence to protect the free market from government regulations. To put it differently, Alan Greenspan's way of managing America's economy has been a faith-based initiative.

So what did he do, then, apart from fighting hard and successfully to protect the trade of derivatives from any regulation? The other thing he did was fuel the housing boom with ultra-low rates. The Ritholtz article has a very tell-tale graph, making it plain for all to see how uniquely low rates were between 2002 and 2005.

In my post which started this thread, I said that a very serious problem in the American economy is that the majority of American families have become poorer during the Bush presidency. An incredibe redistribution of wealth has taken place from poor- and middle-income families to, particularly, very rich families.

But such a huge redistribution of wealth, which makes the majority of American families poorer, should have caused concern and calls for action a lot sooner. I think it can be argued that the ultra-low rates hid the declining prosperity of most Americans. Thanks to the extremely low rates, it became very cheap to buy a house. And once you had bought a house, the value of your property would just keep rising, thanks to the housing boom. During this period Americans could use their homes as ATM machines, taking out new mortgages on their houses when they needed more cash. Who needs a decent job which pays decent wages when you can milk your own home for money?

But when the bubble bursts, the majority of the Americans will come to realize that they are poorer, perhaps far poorer, than they would have guessed during the happy boom and bubble years.

Roger, you helpfully pointed out to me a couple of posts ago that I can't vote in the upcoming American election. That, I have to admit, is correct. But for all of that it is of great interest to me, too, who wins the November election.

Just today, a Swedish radio program pointed out that even though Sweden has had only three right-wing governments since the 1930s, all of these right-wing Swedish governments have run into economic crises and financially hard times. But what the radio program didn't say, but which I find significant, is that all these right-wing Swedish governments were elected after the Republican Party had won at least two American elections in a row. The first of these right-wing Swedish governments was voted into power in 1976, after Nixon and Ford had been Republican Presidents for eight years. The second Swedish right-wing government was elected in 1990, after Ronald Reagan and the elder Bush had been Republican Presidents for ten years. And the third right-wing Swedish government was elected in 2006, after the younger Bush had been re-elected.

American politics counts. It counts in Sweden, too. It affects the political scene in Sweden.

But because I am a left-wing person, I believe that right-wing politics is usually bad. I think it is morally bad, because I believe that it is morally wrong to make the rich richer and the poor poorer. (And, for the record, that is exactly what has happened in Sweden, too. The present right-wing government has been lowering taxes, and guess who has benefited from that? And the government has cut down on aid to poor people, and guess who gets a worse life because of that?)

But it so happens that I don't just believe that right-wing politics is morally wrong. I believe that most of the time it is financially unsound, too. I believe, therefore, that if you try to steer your economic system to the right, the economy as a whole is likely to suffer from that. And judging from the Swedish example, this could in fact be true. Every time we vote a right-wing government into office, our economy suffers.

Ann

Amazing. Despite all the evidence we have of government interference in the markets, we have the free market taking the blame. We did not, and do not currently, have a free market. When you have government-created organizations that are beholden to politicians and make up 80% of the market for mortgages, we blame the free market? We have the collapse of two government corporations which then sets off a tidal wave of bankruptcies because of mark-to-market and the resulting disappearance of the mortgage-backed securities market and that's the free market?

Look up mark-to-market and you'll see how this government overreaction to Enron and WorldCom has cost us dearly. Perhaps this is why Mike Oxley is so sensitive these days as he's half-responsible for Sarbanes-Oxley. (No, mark-to-market is not part of SOX, but it was part of the overreaction)

Now take a look at privatized GSE's like Sallie Mae (student loans former GSE), which no longer have connections with the government. They are well-run, profitable, and trouble free.

The age of Fannie Mae and CRA is irrelevant. The CRA was passed during the Carter Administration but was redefined by the Clinton Administration when it began to use the threat of financial sanctions to force lenders to lend against their better judgment in their attempts at social engineering. Every time government has tried social engineering, it has always turned out to be a disaster. Just look at the failed Great Society, which failed to reduce poverty and destroyed the family structure among minorities in the process, wasting $7 trillion in taxpayer funds. Fannie Mae essentially created the subprime market, a recent phenomenon not from the 30's, encouraging lenders to give out these loans to unqualified borrowers with a promise that it would buy up those risky mortgages and pass them off to other buyers. Countrywide Mortgage, which offered many perks to Democratic Senators, was the biggest lender of subprime mortgages with Fannie Mae as its biggest buyer.

We have yet another example of social engineering that has led to disaster, yet for some strange reason, some are blaming the free market.

The mortgage-backed securities were not the problems either. The underlying loans to unqualified people were the problem. People buy AAA paper for a reason. If they cannot trust AAA paper issued by quasi-governmental organizations, then that's a huge problem. It means government cannot be trusted and that's bordering on a catastrophe.

By the way, there are no conservatives in Sweden, at least how Americans define conservatism. You have a left wing, a far left wing, and a fringe left wing. My relatives in Sweden would be considered ultra-conservatives in your country. That's what they call themselves. If I were to place their ideology in America, they would place left of most Democrats. Unfortunately, our Democrats are controlled by our fringe-left, which would be your centrists. From your point of view, you could probably say America has no liberals as our left wing and your right wing probably intersect.

I don't know how well or how badly your "conservatives" govern, but I doubt they would govern as ours do. For instance, conservatives would not support universal health care. Conservatives would not support a mandatory 6-week vacations. Conservatives would not support a 25% VAT or the extreme taxes paid in Sweden. They also support all the other social issues that would be an anathema to American conservatives. If they actually support tax cuts, that's good, but that's necessary but not sufficient.

You also say Democrats have adopted Reaganomics. They have not by any stretch of the imagination. Perhaps they seem conservative to you, but as I said, there are no conservatives in Sweden. Your right wing is left of our left wing. Witness Obama as a poster child for non-Reaganomics. He is promising tax increases in the face of a declining economy. His tax cuts are phantoms. Democrats always promise tax cuts and don't deliver. Obama promised one in his Senate campaign as well and never even bothered to offer one for a vote. Democrats talk about tax cuts for the middle class only to get votes but never deliver. They always deliver on tax increases. Bill Clinton did the same, promising a middle class tax cut. Instead, he raised taxes on everybody including the elderly. Even if he were to enact them, which I doubt, then he would be enacting demand-side tax cuts, always ineffective when boosting an economy. Job producers would see their taxes skyrocket.

Even worse today, Obama showed his total ignorance on the economy. He promised a zero capital gains rate for investments in small businesses after McCain accused him of killing job growth by taxing small business. Say what? Does he have any idea what a small business is? Virtually all small businesses HAVE NO PUBLICLY TRADED STOCK. Any profits are reported by small businesses on their 1040's as INCOME as they file as proprietorships, partnerships, and S-Corps. Basically he is proposing a zero tax cut because SMALL BUSINESSES DON'T GENERATE CAPITAL GAINS for investors.

Maybe he does understand. If he does, then he's purposely offering what sounds great, but any person who actually knows a thing about small business knows he's talking utter nonsense, so he's offering a non-tax cut only to buy votes, knowing he never has to follow through. Unless he actually doesn't know what he's talking about, which I can believe.

Meanwhile, in the real world, small business will be socked by twin tax increases, first on their income, then with the lifting of the Social Security cap on income. Most small business pay double on Social Security taxes, the 6.2% personal portion and the 6.2% employer-matched portion. So that 12.4% plus the rise in the top rate of 6.6% will kill jobs as many small businesses will see their effective tax rate rise by 19% (that translates to 58% higher taxes). Put yourself into the mindset of a business person. If somebody decided to take 19% (58% higher) of your income on top of what taxes you already pay, would you feel like expanding your business or hiring more people? Or would you retrench and try to figure out ways to avoid paying those onerous taxes?

That is not Reaganomics when you're raising taxes by 58%.

On Iraq, the Bush Administration never tried to blame Saddam Hussein for 9/11. I have no idea where you got that from, but it has never been the case. Hussein was considered a danger only because he had a history of using WMD and for harboring terrorists and the fear was that he would provide terrorists with WMD.

If your news media reported otherwise, they were flat-out wrong.

Remember that in the president's speech on September 20, 2001, he explained the new global war on terror. All countries that sponsor terrorism would be considered threats. That was the Axis of Evil speech where North Korea, Iran, and Iraq were identified as the axis members. This also became what some in the press have called the Bush Doctrine, version 2.0. Sorry Charlie Gibson.

Never did President Bush blame any of those three countries for 9/11. The blame was always on al Qaeda.

The three countries were to be handled differently as well. Iran would be pressured through the UN to abandon the pursuit of nuclear weapons and would be discouraged from sponsoring terrorism. That hasn't worked terribly well with weak support for real sanctions from most Security Council members.

North Korea would be handled through the Six-Party Talks that have been going on for quite a while, the biggest hangup there being that North Korea is the largest counterfeiter of US currency and wants us to stop pursuing their counterfeiting operation in exchange for concessions.

Iraq would be dealt with within the framework of the seventeen UN resolutions violated by Iraq.

But at no time did the president ever identify Iraq as a responsible party for 9/11. Some point to a single speech by Dick Cheney where it seemed as if he was, but when asked immediately afterwards the Administration said that was not the case. The Administration said that people had misinterpreted Cheney's words.

So please stop saying that the Administration tried to blame Saddam for 9/11. It never happened.

Roger, you said this about our Swedish right-wing governments:

Indeed, they do support tax cuts. And every right-wing Swedish government has cut taxes. Every time, that has led to decreasing tax revenue, and every time, it has led to a growing national debt. All right, this time the right-wing alliance was riding the wave of a bullish economy when they were instated in 2006, so until now tax revenue hasn't gone down. But every time the right-wing parties have ruled, the less fortunate in our society have ended up being even worse off than before. That is going to be more true than ever this time, when our government has done their best to punish those who don't have a job. If unemploynment is going to rise in response to the Wall Street crisis, the present government will have created the worst situation for unemployed Swedes than we have seen since, well, perhaps since the 1930s.

Regarding the United States' war on Iraq, you said:

Well, they used the context of 9/11 to find a reason to attack Saddam Hussein and Iraq. If President Bush had pointed his finger at Saddam Hussein and Iraq before 9/11 and said that America needed to send at least 100,000 troops to Iraq to attack and occupy that country, I very much doubt that most Americans would have thought that this was a good idea. In fact, I'm 99% sure that most Americans would have been shocked at the idea, and then they would have protested so loudly that it would have been impossible for Bush to carry out his plan.

And make no mistake, Roger. To most people in the world outside the United States, it seems plain as day that the United States attacked Iraq because the Bush Administration blamed Saddam Hussein for 9/11.

After 9/11, I read as many newspapers as I could, and saw as many TV documentaries and listened to as many TV and radio commentators as I could, in an attempt to understand what had happened on 9/11, who was to blame, and what would be the most sensible response to the awful attack. Not one of those newspapers, not one of those documentaries, not one of those commentators ever mentioned Saddam Hussein in connection with the actual attack. What is more, not one of those newspapers, documentaries or commentators ever mentioned Saddam Hussein when they tried to paint a broader picture of terrorism in the world.

I remember very well the very first time I heard Iraq mentioned by the Bush Administration after 9/11. It was after the Afghanistan war was considered victorious - big mistake, that - and I was on my commuter train, reading my morning paper. And I saw that rather small article mentioning the Bush Administration's wish to attack Iraq. I remember that I almost cried out right then and there on the packed train, among all the other commuters, almost shouting, "What???? Iraq!!!!!"

Saddam Hussein was known for harboring terrorists? No, Roger, he was not. After it was clear that the Bush Administration wanted to attack Iraq, all the newspapers and documentaries and commentators that had used to discuss 9/11 in general now rushed to discuss Iraq. I remember very well listening to international experts who said that whatever horrible things Saddam Hussein had done to his own people, particularly to the Iraqi Kurds, he had never harbored any international terrorists at all. The reason, explained the experts, was that Saddam Hussein ruled a country that was divided along religious lines, between Sunni Muslims and Shia Muslims, and he knew that his country could erupt if he allowed foreign religious warriors to enter his country and, perhaps, stoke religious fires there. Therefore, the experts said, if there is one Arab country where you will not find any foreign Islamist terrorists, it is Iraq!

Of course, that was before America attacked Iraq. After the United States launched its war on Iraq in March 2003 (if I remember correctly), terrorists streamed into that country like bees and flies to lumps of sugar.

Nevertheless, I will go so far as to say that you lie when you claim that Saddam Hussein was known for harboring terrorists, and that that was one of the reasons why Bush attacked him.

Anyway, who harbored the terrorists? Several of the 9/11 terrorists had spent quite some time in Germany, so Germany had harbored them. Should your country have attacked Germany? And let's not forget that the terrorists had spent quite some time in the United States too, before the attack. You yourself had harbored them. Should you have attacked yourself?

No, Roger. The thing is that after 9/11 much of the world was busy discussing how this attack could have happened and what could be done to prevent anything like that from happening again. No one mentioned Iraq, until the Bush Administration named Iraq as its new target.

In the present Wall Street crisis, Fannie and Freddie were mentioned, yes. Freddie, in particular, was in deep trouble. And the Administration promised to bail out both Freddie and Fannie. I remember it well.

But Freddie and Fannie was not what most newspapers articles, editorials and commentators talked about most. They talked about derivatives and swaps, about the housing bubble and about the problems of deregulations.

Those commentators who tried to explain George W. Bush's obsession with Iraq said that Bush had long wanted to attack Iraq, and 9/11 gave him a reason to do so. And at least one of the articles that Alcyone has given us links to has said that Republicans have long disliked Fannie Mae - Ronald Reagan, for example, tried to sever the bonds between Fannie and the public and federal domain - and the Wall Street crisis gave Republicans a chance to single out Fannie as the reason for the crisis. In particular, it became possible to single out the CRA and subprime loans to poor people as the reason for the crisis.

Well, Barry Ritholtz from the Big Picture claimed in the commentary that Alcyone gave us a link to that the worst of the defaults had not come from subprime loans, but from loans given to people whose economy was regarded as much sounder. And Ritholtz also claimed that one of the two major reasons for the housing bubble was the ultra-low rates, which made it so tempting for people from all walks of life to try to get themselves a loan so they could buy a house, and which also made house prices soar so that it seemed that everybody who had a mortgage would soon own a house that was worth more than any mortgage. The second major reason for the present crisis, according to Ritholtz, was a general lack of interest on the part of the Fed to regulate anything at all when it came to banking and loans.

I can feel that I'm beginning to repeat what I have said before, so let me just repeat two of my main points again. George Bush, who wanted to attack Iraq anyway, used 9/11 as a reason to attack it. Republicans, who disliked Fannie Mae anyway, used the Wall Street crisis to single out Fannie (and Freddie) as the sole causes of the crisis.

But both George Bush and today's Republicans are out of line, because they prefer to chase their own sworn enemies rather than try to understand what is really going on in the world.

As for what I have said about taxes, Reaganomics, the redistribution of wealth from lower- and middle-income families to very high-income families, the declining income of most Americans, the way tax cuts for the rich have led to declining tax revenue and forced the Administration to borrow from abroad so that America's debt is now by far the biggest debt that any country has had in recorded history, the way ultra-low rates and mad borrowing has papered over most Americans' declining purchasing power and at the same time has fueled the mad housing bubble that has now exploded - well, all of what I have said about that still stands.

And now I really hope that this will be my last post here. But if you feel the need to post again, Roger, I would really appreciate it if you would comment on the incredible redistibution of wealth from the poor to the rich in America, on most Americans' declining income, and on the huge debts that most American households have incurred (and certainly not only those who have taken subprime loans) and the incredible national debt of the United States.

Ann