How Democrats Created Financial Crisis

iVillage Member
Registered: 08-29-2008
How Democrats Created Financial Crisis
73
Mon, 09-22-2008 - 12:29pm

September 22 (Bloomberg) -- The financial crisis of the past year has provided a number of surprising twists and turns, and from Bear Stearns Cos. to American International Group Inc., ambiguity has been a big part of the story.

Why did Bear Stearns fail, and how does that relate to AIG? It all seems so complex.

But really, it isn't. Enough cards on this table have been turned over that the story is now clear. The economic history books will describe this episode in simple and understandable terms: Fannie Mae and Freddie Mac exploded, and many bystanders were injured in the blast, some fatally.

Fannie and Freddie did this by becoming a key enabler of the mortgage crisis. They fueled Wall Street's efforts to securitize subprime loans by becoming the primary customer of all AAA-rated subprime-mortgage pools. In addition, they held an enormous portfolio of mortgages themselves.

In the times that Fannie and Freddie couldn't make the market, they became the market. Over the years, it added up to an enormous obligation. As of last June, Fannie alone owned or guaranteed more than $388 billion in high-risk mortgage investments. Their large presence created an environment within which even mortgage-backed securities assembled by others could find a ready home.

The problem was that the trillions of dollars in play were only low-risk investments if real estate prices continued to rise. Once they began to fall, the entire house of cards came down with them.

Turning Point

Take away Fannie and Freddie, or regulate them more wisely, and it's hard to imagine how these highly liquid markets would ever have emerged. This whole mess would never have happened.

It is easy to identify the historical turning point that marked the beginning of the end.

Back in 2005, Fannie and Freddie were, after years of dominating Washington, on the ropes. They were enmeshed in accounting scandals that led to turnover at the top. At one telling moment in late 2004, captured in an article by my American Enterprise Institute colleague Peter Wallison, the Securities and Exchange Comiission's chief accountant told disgraced Fannie Mae chief Franklin Raines that Fannie's position on the relevant accounting issue was not even ``on the page'' of allowable interpretations.

Then legislative momentum emerged for an attempt to create a ``world-class regulator'' that would oversee the pair more like banks, imposing strict requirements on their ability to take excessive risks. Politicians who previously had associated themselves proudly with the two accounting miscreants were less eager to be associated with them. The time was ripe.

Greenspan's Warning

The clear gravity of the situation pushed the legislation forward. Some might say the current mess couldn't be foreseen, yet in 2005 Alan Greenspan told Congress how urgent it was for it to act in the clearest possible terms: If Fannie and Freddie ``continue to grow, continue to have the low capital that they have, continue to engage in the dynamic hedging of their portfolios, which they need to do for interest rate risk aversion, they potentially create ever-growing potential systemic risk down the road,'' he said. ``We are placing the total financial system of the future at a substantial risk.''

What happened next was extraordinary. For the first time in history, a serious Fannie and Freddie reform bill was passed by the Senate Banking Committee. The bill gave a regulator power to crack down, and would have required the companies to eliminate their investments in risky assets.

Different World

If that bill had become law, then the world today would be different. In 2005, 2006 and 2007, a blizzard of terrible mortgage paper fluttered out of the Fannie and Freddie clouds, burying many of our oldest and most venerable institutions. Without their checkbooks keeping the market liquid and buying up excess supply, the market would likely have not existed.

But the bill didn't become law, for a simple reason: Democrats opposed it on a party-line vote in the committee, signaling that this would be a partisan issue. Republicans, tied in knots by the tight Democratic opposition, couldn't even get the Senate to vote on the matter.

That such a reckless political stand could have been taken by the Democrats was obscene even then. Wallison wrote at the time: ``It is a classic case of socializing the risk while privatizing the profit. The Democrats and the few Republicans who oppose portfolio limitations could not possibly do so if their constituents understood what they were doing.''

Mounds of Materials

Now that the collapse has occurred, the roadblock built by Senate Democrats in 2005 is unforgivable. Many who opposed the bill doubtlessly did so for honorable reasons. Fannie and Freddie provided mounds of materials defending their practices. Perhaps some found their propaganda convincing.

But we now know that many of the senators who protected Fannie and Freddie, including Barack Obama, Hillary Clinton and Christopher Dodd, have received mind-boggling levels of financial support from them over the years.

Throughout his political career, Obama has gotten more than $125,000 in campaign contributions from employees and political action committees of Fannie Mae and Freddie Mac, second only to Dodd, the Senate Banking Committee chairman, who received more than $165,000.

Clinton, the 12th-ranked recipient of Fannie and Freddie PAC and employee contributions, has received more than $75,000 from the two enterprises and their employees. The private profit found its way back to the senators who killed the fix.

There has been a lot of talk about who is to blame for this crisis. A look back at the story of 2005 makes the answer pretty clear.

Oh, and there is one little footnote to the story that's worth keeping in mind while Democrats point fingers between now and Nov. 4: Senator John McCain was one of the three cosponsors of S.190, the bill that would have averted this mess.

-Kevin Hassett

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aSKSoiNbnQY0

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iVillage Member
Registered: 09-15-2008
Mon, 09-22-2008 - 3:47pm
Democrats are on record opposing reform.


Where? Links?

All you've done is CLAIM Democrats tried to filibuster it, and all you've PROVIDED is one article from a McCain campaign SPOKESMAN, no less - the very DEFINITION of "propaganda" - coming directly from a campaign itself.


But for the present age, which prefers the sign to the thing signified, the copy to the original, representation to reality, appearance to essence.....truth is considered profane, and only illusion sacred. Sacredness
iVillage Member
Registered: 09-15-2008
Mon, 09-22-2008 - 4:00pm
I think if someone takes "campaign contributions" with a quid pro quo - THAT IS A BRIBE.


Sure it is. But it's very difficult indeed to prove quid pro quo. The mere effort by legislators on behalf of constituents who also just happen to be campaign contributors is not - in itself - evidence of a quid pro quo. It sure looks slimy to you and me, and it may very well BE illegal....but without proof, even murderers walk. McCain, right along with Riegle, DeConcini, Cranston and Glenn, intervened on behalf of Keating with the head of the FHLBB, more than once. And all of them took tens of thousands of dollars in campaign contributions from him and his associates. Does that add up to bribery? Possibly in the genuine definition of the word; certainly I think all of those five - and probably many others in Congress at the time who were never investigated, let alone charged - were guilty of exactly that. Politics is a dirty business which tends to corrupt people. But was ANY of it solid enough to withstand a full-disclosure criminal case?

No. Or one would have been brought. Anyone can bring such a case; Senate Democrats could not have prevented a criminal case from proceeding. And a case of violating Senate rules or House rules doesn't ever end in incarceration UNLESS the charges ALSO coincide with a criminal investigation of the same events, and it's found that those actions were in fact violations of law. Cranston took the most money; he was reprimanded the most severely (stopping short of outright censure). Glenn took the least money, but arguably "leaned" a little harder on the regulators. McCain took more than Glenn but less than Cranston and DeConcini....but was closest "friends" with Keating, chumming up with him at his private pad in the Bahamas (which none of the others did). Who was most guilty? You decide. But none of them committed acts which could have been proven to be against the law. That's not to say they didn't COMMIT any acts that were illegal....only that not enough evidence exists that they did for them to be formally charged. It wasn't a partisan issue that Cranston and the rest didn't go to jail, it's simply a function of the lack of evidence of actual lawbreaking, annoying as that may be for you personally to bear. Remember, though - that sword cuts both ways. If we were somehow able to wave a magic wand and immediately have incontrovertible PROOF of any illegal misdeeds undertaken by any of the Keating Five, we might very well be sending ol' Gramps McBush off to the slam along with Riegle and Cranston....and Neil Bush, the head honcho at ANOTHER failed, taken-over S&L, Silverado.

Oh, and? If YOU want YOUR blatherings to be taken seriously, don't give me an op-ed piece from a paid McCain campaign staffer with an obvious agenda. Say what you like about Kos and his crew - they're not on the payroll of the Obama campaign.


But for the present age, which prefers the sign to the thing signified, the copy to the original, representation to reality, appearance to essence.....truth is considered profane, and only illusion sacred. Sacredness
Avatar for undefeated
iVillage Member
Registered: 03-27-2003
Mon, 09-22-2008 - 4:27pm

First the embedded links showed me nothing but other opinion pieces.

iVillage Member
Registered: 08-29-2008
Mon, 09-22-2008 - 5:54pm

Democrats are on the record opposing reform of Fannie and Freddie - Republicans are on the record calling for it. Surely you don't think the NEW YORK TIMES in the tank for McCain

http://messageboards.ivillage.com/n/mb/message.asp?webtag=iv-elpoliticsto&msg=16846.7

iVillage Member
Registered: 08-29-2008
Mon, 09-22-2008 - 6:06pm
It's funny that I can lose credibility with you by what you IMAGINE I may think or say... That's a new one!
iVillage Member
Registered: 08-29-2008
Mon, 09-22-2008 - 6:12pm

It was proven that McCain didn't do any favors in return for campaign contributions. Therefore, no quid pro quo. No Bribe. The Democrats did favors, quid pro quo. Bribe. I'm not happy that they were able to get away with it.

Also, everyone who advises a candidate is not a "paid staffer". That is ridiculous. Can you prove that this man has ever been paid one dime by McCain?




Edited 9/22/2008 6:37 pm ET by chillychillychilly
iVillage Member
Registered: 04-04-2001
Mon, 09-22-2008 - 6:15pm

Neither the Democrats nor the Republicans have covered themselves with glory in this one BUT McCain in the only candidate on either slate who pointed out the coming crisis and tried to do something about it.

iVillage Member
Registered: 08-29-2008
Mon, 09-22-2008 - 6:18pm
They are non partisan. Amazing that all non-left-wing-nuts are considered right wingnuts in your eyes. That figures. He is actually not a "member", he is the director of economic-policy studies at the American Enterprise Institute.

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