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Who’s Really to Blame for the Banking Meltdown? |
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WASHINGTON, DC - Anyone
who has picked up a newspaper or turned on the TV over the last few
months was led to believe that the current housing crisis was caused by
greedy wall street types and unscrupulous mortgage lenders, and reckless real
estate agents. As industry insiders we all know that although there were some
bad apples, by and large most of our industry was just doing their
jobs, getting people into homes using the programs that were readily
available. So then what went wrong
and who is really to blame for the meltdown of the country’s banking system? The process of
securitizing mortgages in the United States is the most unique in the world.
Fannie Mae and Freddie Mac were established by Congress with a mission to
provide liquidity and stability to the U.S. housing and mortgage markets.
Fannie Mae was established as a federal agency in 1938,
and in 1968 was chartered by Congress as a private shareholder-owned company.
In 1970 Freddie Mac was established to provide competition for Fannie Mae.
Both of these organizations are commonly referred to as a (GSE) Government
Sponsored Enterprise. It was precisely this GSE
status, and the belief by investors that securities sold by the GSEs were backed by the federal government, that
both gave the GSEs the ability to raise nearly
unlimited capital to be eventually used to loan as mortgages, but it also set
a series of events into play that was at the heart of the meltdown. In 1992, the
democratically controlled Congress under President Clinton enacted The
Federal Housing Enterprises Financial Safety and Soundness Act
("FHEFSSA") which was supposed to modernize the regulatory oversight
of Fannie Mae and Freddie Mac in response to the savings and loan crisis. The
act created the Office of Federal Housing Enterprise Oversight
("OFHEO") as a new regulatory office within HUD with the
responsibility to "ensure that Fannie Mae and Freddie Mac are adequately
capitalized and operating safely." However, the act also established
HUD-imposed housing goals for financing of affordable housing. Although the GSEs corporate structures went through several iterations
of government then public ownership since their inception in 1938, OFHEO’s first initial report to congress stated that even
though “the savings and loan crisis was the catalyst for the [FHEFSSA] act,”
the GSEs were financially sound. It’s important to note
that prior to FHEFSSA the GSEs needed to adhere to
strict underwriting guidelines that essentially prohibited them from unsound
lending. However, now they were mandated by FHEFSSA to make loans that were
unsound under the guise of “affordable housing.” Since the formation of of HEFO both Democrats and Republicans constantly argued
over the effectiveness of the agency. In fact according to the New York
Times, “the Clinton administration did not take the agency very seriously and
left the top job unfilled for two years after Aida Alvarez, the agency's
first director, left to head the Small Business Administration.” In 1999, President
Clinton finally appointed Armando Falcon Jr. a little-known Washington lawyer
and former Congressional aide to head OFHEO. According to the New York Times,
“He and his agency were often the target of
political attacks by Fannie Mae and Freddie Mac and were ridiculed by
lawmakers who viewed the office as ill-equipped to oversee such large
companies.” That same year Franklin
Raines took over as CEO of Fannie Mae. In 1991 Raines became Fannie Mae's
Vice Chairman, a post he left in 1996 in order to join the Clinton
Administration as the Director of the U.S. Office of Management and Budget,
where he served until 1998. During the Clinton
administration, Fannie’s and Freddie’s combined portfolios grew five fold -
from about $200 billion to over $1 trillion. In accordance with the
mission of Fannie Mae and in compliance with the affordable housing
provisions in FHEFSSA, Raines, while Chairman and CEO, began a pilot program
in 1999 to issue bank loans to individuals with low to moderate income, and
to ease credit requirements on loans that Fannie Mae purchased from banks.
The move was intended in part to increase the number of minority and low
income home owners. Some observers have noted that the expansion of easy
credit to home buyers with a lesser ability to pay them back was one of the
major contributing factors to the subprime mortgage crisis. Although under Raines,
Fannie Mae invested in some securities backed by subprime loans, it didn't
start buying subprime and Alt-A loans directly (and bundling them into
securities) until late 2004 after the accounting scandal. Purchasing of
subprime and alt-A mortgages expanded exponentially under the guidance of
Raines's successor Daniel H. Mudd. Raines was the subject of
controversy and investigation during his reign at Fannie Mae. He took an
“early retirement” in 2004 as the SEC was investigating “irregularities” and OFHEO,
led by Falcon who accused him of accounting errors that shifted losses so
that executives could reach their lucrative bonuses. OFHEO had enough evidence
to take Raines to court in 2006 in an attempt to recover the $90 million
Raines pocketed by “adjusting” the company’s earnings by over three billion
dollars. In 2008, Raines agreed to a settlement that allowed him to walk away
after paying fines of $3 million. Additionally the OFHEO
investigation found that James A. Johnson who served as Fannie Mae’s chairman
and chief executive officer from 1991 to 1998 had improperly deferred $200
million in expenses. This enabled top executives, including Johnson and his
successor, Franklin Raines, to receive substantial bonuses in 1998. A 2006
OFHEO report found that Fannie Mae had substantially under-reported Johnson's
compensation. Originally reported as $6-7 million, Johnson actually received
approximately $21 million. Mudd, the son of TV anchor Roger Mudd took over as CEO of Fannie Mae in 2004. According to
the Washington Post, "Raines recruited Mudd
from General Electric Co., where he had risen quickly from a line management
job to chief executive of GE Capital in In 2005 the Democrats
came under fire as they fought Republican’s efforts to implement a regulatory
overhaul in regard to Fannie Mae and Freddie Mac, sparked in part by the
Raines accounting scandal, with a plan called the Federal Housing Enterprise
Regulatory Reform Act of 2005. The New York Times reported the following
quotes in a published story. “The Bush administration
today recommended the most significant regulatory overhaul in the housing
finance industry since the savings and loan crisis a decade ago. Under the
plan, disclosed at a Congressional hearing today, a new agency would be
created within the Treasury Department to assume supervision of Fannie Mae
and Freddie Mac, the government-sponsored companies that are the two largest
players in the mortgage lending industry. The new agency would have the
authority, which now rests with Congress, to set one of the two
capital-reserve requirements for the companies. It would exercise authority
over any new lines of business. And it would determine whether the two are
adequately managing the risks of their ballooning portfolios. “Democrats pushed back.
Among the groups denouncing the proposal today were the National Association
of Home Builders and Congressional Democrats who fear that tighter regulation
of the companies could sharply reduce their commitment to financing
low-income and affordable housing.” “These two entities, Fannie Mae and Freddie Mac, are not
facing any kind of financial crisis”, said Barney Frank of Representative Melvin L.
Watt, Democrat of North Carolina, agreed. “I don’t see much other than a
shell game going on here, moving something from one agency to another and in
the process weakening the bargaining power of poorer families and their
ability to get affordable housing,” Mr. Watt said. Senator and presidential
candidate John McCain strongly supported the Federal Housing Enterprise
Regulatory Reform Act of 2005. In McCain’s record text
he stated, “Fannie Mae's regulator reported that the company's quarterly
reports of profit growth over the past few years were "illusions
deliberately and systematically created" by the company's senior
management, which resulted in a $10.6 billion accounting scandal. “For years I have been
concerned about the regulatory structure that governs Fannie Mae and Freddie
Mac and the sheer magnitude of these companies and the role they play in the
housing market. OFHEO's report solidifies my view
that the GSEs need to be reformed without delay. “I join as a cosponsor of
the Federal Housing Enterprise Regulatory Reform Act of 2005 to underscore my
support for quick passage of GSE regulatory reform legislation. 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.” However, the bill never
made it to the floor for a vote. On Jul 28, 2005, the Committee on
Banking, Housing, and Urban Affairs "Ordered [the bill] to be
reported with an amendment in the nature of a substitute
favorably." This action is commonplace and generally indicates the
bill was unable to gather enough votes for cloture, which requires 60
votes. The Republicans at that time
controlled 55 seats. Democrats continue to be
implicated in the financial crisis as it was revealed in 2008 that Senator Chris Dodd (D-CT), along with
Franklin Raines and several other friends of Angelo’s , (Angelo Mozilo was Countrywide’s CEO at the time) took illegal
loans from Countrywide. Dodd’s press secretary said the loans were not given
with preferential treatment due to politics but because he was a good
customer. Countrywide was a huge
financial supporter of Dodd’s while he proposed a bailout in June that would
have rescued troubled companies like Countrywide. Coincidently, Bank of
America – the company that bought Countrywide – is also a big contributor to
Dodd’s campaign. The Heritage Foundation, a conservative think tank in
Washington alleged that Bank of America employees were the actual drafters of
the bailout bill Dodd proposed, the FHA Housing Stabilization and
Homeownership Retention Act of 2008. Democrats say the
allegations are ridiculous and slanderous. They point out that Countrywide is
also a financial supporter of McCain’s and has donated nearly triple Dodd’s
contribution to McCain’s campaign. Countrywide was not the
only company that paid off politicians through campaign donations. According
to the GSEs they directly contributed to both
Democrats and Republicans. Dodd received the most money of any politician a
whopping $133,900 and Dodd is chairman of the Senate committee that has
direct oversight of the GSEs. In fact the GSEs strategically donated to lawmakers that are
currently sitting on committees that primarily regulate the industry. Fifteen
of the top 25 campaign recipients sit on the House Financial Services
Committee, the Senate Banking, Housing & Urban Affairs Committee, or the
Senate Finance Committee. The top three recipients
all received over $100,000. They are Christopher Dodd (D-CT) $133,900,
John Kerry (D-MA) $111,000, and Barack Obama $105,849 (D-IL). So where are they
now? Franklin Raines
(D) – After
adding $190 million to his bank account,
on July 16, 2008, The Washington Post reported
that Franklin Raines had "taken calls from Barack Obama's presidential
campaign seeking his advice on mortgage and housing policy matters."
Neither Raines nor the Obama campaign disputed this reporting until the
McCain campaign picked the story up. James A. Johnson (D) – Originally reported as $6-7
million, Johnson actually added approximately $21 million to his bank
account. On May 22, 2007, Democratic Party officials confidentially
divulged that Obama had asked Johnson "to lead the process" for
selecting Obama's running mate. On June 4, 2008,
Obama announced the formation of a three-person committee to vet vice
presidential candidates, including Johnson. Johnson announced he would step
down from the vice-presidential vetting position on June 11, 2008, in order
to avoid being a distraction to Obama's campaign. In addition to personal
donations, Johnson is a bundler for the Obama campaign, raising
between $200,000 and $500,000. He has also participated in Obama campaign
efforts to recruit former Clinton supporters. Daniel H. Mudd (?) – After being dismissed from Fannie Mae in September of
2008, little is known of his whereabouts. Although the political party
of Mudd is unknown, according to records he did
donate money to Bush in 2004 when he was CEO of Fannie Mae as would have been
expected. Christopher Dodd (D) –
Still serving
his term as a US Senator from the state of Connecticut and continues his
reign as chairman of the Senate Banking, Housing & Urban Affairs
Committee, which has direct oversight of the GSEs.
He accepted $133,900 from the GSEs. He is up for
re-election in 2011. Barney Frank (D) – Still serving as a member of the House of
Representatives from the 4th Congressional District of Massachusetts and
continues to serve as chairman of the House Financial Services Committee,
which has direct oversight of the GSEs. As late a
July of 2008, Frank still claimed the GSEs were
financially stable. He is up for re-election this year. |
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