When the Fox is in Charge
of the Financial Henhouse
Wall Street Journal Letter Wednesday, November 5, 2008
Item 1 Fannie Mae‘s main regulator sued the company’s former chairman and chief executive, Franklin D. Raines in an effort to recoup more than $115 million in bonus payments. (iReports CNN, December 16, 2006) Raines was an economic consultant to Obama during his presidential campaign.
Item 2 Jamie Gorelick (a judicial appointee under Clinton) served as Vice Chairman of Fannie Mae for six years (1997 – 2003) and was key to a $10 billion accounting scandal, an ominous harbinger of the firm’s looming troubles. One of the falsified transactions helped FNMA hit earnings targets for 1998, which triggered bonuses for top executives including nearly $800,000 to Gorelick. During this 6 year period, she earned $26 million. In 2002 Business Week interviewed Gorelick concerning the health of FNMA. She responded, “We believe we are managed safely. We are very pleased that Moody’s gave us an A-minus in the area of bank financial strength — without a reference to the government in any way. Fannie Mae is among the handful of top-quality institutions.” (Virginia Virtucon, September 16, 2008)
What Obama Inherits
President-elect Obama’s two years in the senate may not be long enough for him to understand that our current financial crisis is not the byproduct of deregulation of banking, of Wall Street greed, of $4.00 gasoline, or any form of incompetence or ignorance in the Bush administration. Responsible republican legislators called attention to the dangers of over-leveraged banks and a frightening accumulation of trillions of dollars of sub-prime loans within the quasi-government institutions, Fannie Mae, and Freddie Mac. The democrats in the senate responded that all was well, and nothing needed to be done. Such confidence was undoubtedly based largely upon the reports of Franklin Raines and Jamie Gorelick, who left the scene of the accident with huge performance bonuses before the meltdown.
What happens next is the government take-over of both Fannie and Freddie for insolvency. As my granddaughter Marie would say, “Hello”!!
To provide context for this all is well report, the following campaign contributions by Fannie and Freddy to Washington senators, as reported by axisofright.com were as follows:
These sums are not exactly piggy-bank change. Barack’s take was substantial considering he was in his freshman term as a senator in Washington. This all is clear response was issued by Barney Frank, knowing that his campaign coffers were being nicely furnished. As all was well, the democrats in congress buried the issue in committee without hearings. The rest is history.
If this were a crime scene, given what is known today in the aftermath of the financial melt-down, the blood at the scene was mostly on the hands of the democrats, although the system which allows quasi-governmental institutions to give political contributions to selected politicians is both ethically and morally corrupt. The democrats are not alone in their complicity, although their imprimatur is primary.
So what is the history of complicity in the financial meltdown we are currently experiencing? Fannie and Freddie are the two primary casualties to date. Why did these two quasi-governmental institutions come to underwrite so many (50%) of the sub-prime loans? And what was the dynamism that lead to this meltdown?
What a grand scheme it would be, said the democrats in Washington, if the terrible cost of public housing could be transferred from the government to the private sector. With the waving of a magic wand, the answer was to help the poor become part of the American dream through financing their own housing, hence getting the government off the hook.
Step one in the developmental history of the financial meltdown was the environment created by the Community Redevelopment Act of 1975, and the subsequent amendments by the Clinton Administration in the 1990s. Aspects of this law provided the basis for government regulators to harass banks which might discriminate in their loan departments against select racial groups, think black. This regulatory bias put the banks on notice that they should share mortgage loans more equitably (fairly) for the country’s poor.
The OCC and the FDIC, national and state bank regulators, were well aware of the pressure that was placed on the banks to make loans fairly. In the name of fairness, the poor, minorities, single mothers, and illegal borrowers, were all able to buy a piece of the American dream. This innovative housing for the poor was now being financed entirely by the private sector, relieving public housing from the task of providing housing for a vast majority of the country’s less than affluent population. The sub-prime loan was the bank and mortgage companies answer, a piece of paper with questionable future value.
The next contributor was the development of mortgage packages which buried the questionable sub-prime loans among higher quality loans, the better to sell them to unsuspecting investors. This opened the barn doors for the creation of loans for the poor for which they might qualify: loans with nothing down (no equity), adjustable rate loans, teaser loans with 2% initial interest, loans for 125% of the appraised home value, and others instruments too numerous to mention. It is known that the issuance of mortgages was so lax that income verification was often not deemed necessary, an infringement on the privacy rights of the borrower. This, of course, is no way to run a bank or a mortgage company, but the democrats in Washington were all in favor of it.
All these shenanigans might have been fine had it not been for $4.00 gasoline, and had the price of homes continued to rise. It was not to be. When the loans adjusted, and $4.00 gasoline put a cramp in the family budget, the “chickens”, as the Rev. Wright would say, “came home to roost”.
When the bottom fell out of the real estate market, the media complained that Wall Street took advantage of those poor folks, and were going to force them out of the homes they were not paying for, had no equity in, and often destroyed in anger before they left. The media forgot about Fannie and Freddie which were the main culprits greasing the skids before the meltdown.
The democrats in Washington, with fresh blood on their hands and an election only weeks away, decided to blame the entire affair upon executive greed, Wall Street, and of course the Bush administration. Like the fox in charge of the chicken house, he blames the farmer for leaving the door open.
The bottom line is that George Bush had nothing to do with it. Overwhelming complicity can be attributed to the democrats in Washington, many lobbyists, and particularly the recipients of campaign contributions above who stated that everything was just hunky dory. The do-nothing Pelosi Democrats did nothing on their watch but pass resolutions, and rightfully earned approval ratings lower than George W. Bush. Hello!
With our new president bent on sharing the wealth more fairly with the poor, he need only look back upon the devastation created in the financial industry to see the ruins left in the wake of the latest government policies designed to share the wealth. Loans to the poor were the key ingredient in the current financial collapse, a political priority of the democrats for several decades, together with their current financial expert, Barney Frank.
The fox will soon be sworn to uphold the constitution of the U.S., and with that mighty act the chicken house will be all his.
Hello, Hello, Hello. Is anybody out there with a brain?