Saddest Thing About This Mess: Congress Had Chance To Stop It
INVESTOR'S BUSINESS DAILY
By Terry Jones
Could the crisis at Fannie Mae (FNM) - Freddie Mac (FRE) and the subprime meltdown have been avoided?
The answer is yes.
As early as 1992, alarm bells were going off on the threat Fannie and Freddie posed to our financial system and our economy. Intervention at any point could have staved off today's crisis. But Democrats in Congress stood in the way.
As the president recently said, Democrats have been "resisting any efforts by Republicans in the Congress or by me . . . to put some standards and tighten up a little on Fannie Mae and Freddie Mac."
No, it wasn't President Bush who said that; it was President Clinton, Democrat, speaking just last week.
Interesting, because it was his administration's relentless focus on multiculturalism that led to looser lending standards and regulatory pressure on banks to make mortgage loans to shaky borrowers.
Freddie and Fannie, backed by an "implicit" taxpayer guarantee, bought hundreds of billions of dollars of those subprime loans.
The mortgage giants, whose executive suites were top-heavy with former Democratic officials (and some Republicans), worked with Wall Street to repackage the bad loans and sell them to investors.
As the housing market continued to fall in 2007, subprime loan portfolios suffered major losses. The crisis was on? though it was 15 years in the making.
Democrats Blocked Reform
Just as Republicans got blamed for Enron, WorldCom and other early-2000s scandals that were actually due to the anything-goes Clinton era, the media are now blaming them for the mortgage meltdown.
But Republicans tried repeatedly to bring fiscal sanity to Fannie and Freddie. Democrats opposed them, especially Sen. Chris Dodd and Rep. Barney Frank, who now run Congress' key banking panels.
History is utterly clear on this.
After Treasury Secretary Lawrence Summers warned Congress in 1999 of the "systemic risk" posed by Fannie and Freddie, Congress held hearings the next year.
But nothing was done. Why? Fannie and Freddie had donated millions to key congressmen and radical groups, ensuring no meaningful changes would take place.
"We manage our political risk with the same intensity that we manage our credit and interest rate risks," Fannie CEO Franklin Raines, a former Clinton official and current Barack Obama adviser, bragged to investors in 1999.
In November 2000, Clinton's HUD hailed "new regulations to provide $2.4 trillion in mortgages for affordable housing for 28.1 million families." It made Fannie and Freddie take part in the biggest federal expansion of housing aid ever.
Soon after taking office, Bush had his hands full with the Clinton recession and 9/11. But by 2003, he proposed what the New York Times called "the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago."
The plan included a new regulator for Fannie and Freddie, one that could boost capital mandates and look at how they managed risk.
Even after regulators in 2003 uncovered a scheme by Fannie and Freddie executives to overstate earnings by $10.6 billion to boost bonuses, Democrats killed reform.
"Fannie Mae and Freddie Mac are not facing any kind of financial crisis," said Rep. Frank, then-ranking Democrat on the Financial Services Committee.
North Carolina Democrat Melvin Watt accused the White House of "weakening the bargaining power of poorer families and their ability to get affordable housing."
In 2005, then-Fed Chairman Alan Greenspan told Congress: "We are placing the total financial system of the future at substantial risk."
McCain Urged Changes
That year, Sen. John McCain, one of three sponsors of a Fannie-Freddie reform bill, said: "If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system and the economy as a whole."
Sen. Harry Reid, now Majority Leader, accused the GOP of trying to "cripple the ability of Fannie Mae and Freddie Mac to carry out their mission of expanding homeownership."
The bill went nowhere.
This year, the media have repeated Democrats' talking points about this being a "Republican" disaster. Well, McCain has repeatedly called for reforming the mortgage giants. The White House has repeatedly warned Congress. This year alone, Bush urged reform 17 times.
Some GOP members are complicit. But Fannie and Freddie were created by Democrats, regulated by Democrats, largely run by Democrats and protected by Democrats.
That's why taxpayers are now being asked for $700 billion.