“I think that’s all fine and good but here’s what I think, in the next 47 days you can fire the whole trickle-down, on-your-own, look-the-other way crowd in Washington who has led us down this disastrous path. Don’t just get rid of one guy. Get rid of this administration, Get rid of this philosophy. Get rid of the do-nothing approach to our economic problem and put somebody in there who’s going to fight for you.” -Barack H. Obama
With the explosion of news coming out of the financial markets these days you could be led to believe the United States is on the verge of a massive economic collapse on par with the Great Depression. The stock market plunges 500 points one day on the news of AIG’s impending failure then rebounds 700 points the next two days. Markets in other countries have to be closed because they are rising too fast! All this on the news that the Federal Government is coming to the rescue with hundreds of billions of our dollars by assuming control of still more of the mortgage industry. Ahh, the smell of socialism comes to America and Wall Street rejoices. With the collapse of the mortgage industry, a lot of politicians are calling for heads to roll. Somebody should have said something…right? Somebody should have done something…right? Well my friends, somebody did say something and somebody did do something. Step inside a twisted tale Hollywood could have never imagined, yet most assuredly, will vote for…
The Federal National Mortgage Association, aka Fannie Mae, was created in 1938 as part of President Franklin Delano Roosevelt’s New Deal. Ironically, it was originally created to bail out failing banks after the collapse of the national housing market in the wake of the Great Depression. Borrowers were defaulting on mortgages not unlike they are in the current situation. Fannie Mae was established in order to provide local banks with federal money to finance home mortgages in an attempt to raise the level of home ownership and the availability of affordable housing. It operated like a national savings and loan, allowing local banks to charge low interest rates on mortgages for the benefit of home buyers.
In 1968, due to economic pressure created by the Vietnam War, President Lyndon B. Johnson privatized Fannie Mae in order to remove it from the federal budget. At this point, Fannie Mae began operating as a GSE (Government Sponsored Enterprise), generating profits for stock holders while enjoying the benefits of exemption from taxation and oversight as well as implied government backing.
The Federal Home Mortgage Corporation, aka Freddie Mac, was created in 1970 also as a GSE privately owned and operated by shareholders and financially backed by the Federal Government. These government protections include access to a line of credit through the U.S. Treasury, exemption from state and local income taxes and exemption from SEC oversight. Freddie Mac was created largely for the purpose of preventing Fannie Mae from operating as a monopoly.
Although these entities have been getting all the media attention due to their recent failures, the true culprit of the mortgage debacle is something called The Community Reinvestment Act, signed into law by Jimmy Carter in 1977! The CRA allowed banks to lend money based on minority status, not the ability to repay the loans. Banks who were given federal money to lend were assessed ratings that were not based on the soundness of the risk of their loans, but on the number of loans given to minorities. President Bill Clinton took the CRA even farther by committing U.S. banks to make available nearly one TRILLION dollars for inner-city and low-income mortgages and real estate development projects.
Banks were required to furnish a certain percentage of their loans to low income minorities, regardless of their inability to re-pay the loans, and the banks’ ratings were tied to these loans. In other words, the banks could not maintain a high rating unless they participated in this disastrous practice. Government coercion at its finest! The standard 20% down-payment rules were eliminated. New terms of length were installed, abolishing the traditional 20 year mortgage and giving loans of up to 40 years!
Left wing community groups like ACORN were allowed to set up offices to help minorities qualify for loans and banks were required to accept the information provided by ACORN. Information that was often false! Borrowers, who often made as little as $30K a year, were listed as having incomes of over $70K in order to qualify and the banks were required to accept that information without question. There were even loans like NINJA (no income, no job or assets) loans. Unstable income, such as child support payments or welfare payments, were allowed to be considered part of the borrowers income! How dependable is that for a source of income? This was a disaster waiting to happen. Somebody should have said something! Somebody should have done something! Unfortunately those who opposed the Clinton Administration’s Financial Modernization bill were often called bigots for opposing these lending practices that were, on their face, designed to encourage minority participation in home ownership. The reality was that this became a pet banking system for the democratic party and some of its most questionable allies.
Enter Franklin Raines, Vice-Chairman at Fannie Mae from 1991 to 1996. In 1996 he joined the Clinton Administration as the Director of the U.S. Office of Management and Budget, where he served until 1998. In 1999, he returned to Fannie Mae, but this time it was as the CEO, the first black man to head a Fortune 500 company. In 2004 Raines accepted what was called an “early retirement” after a report from The Office of Federal Housing Oversight found numerous accounting discrepancies in Fannie Mae’s operation. Raines tried to take his money and run, but he did not get away.
Raines was accused by The Office of Federal Housing Enterprise Oversight, the regulating body of Fannie Mae, of widespread accounting errors, which included the shifting of losses so senior executives, such as himself, could earn large bonuses. Exactly the behavior that led to the infamous ENRON scandal. In 2006, the OFHEO initiated a lawsuit against Raines in order to recover some or all of the $50 million in payments made to Raines based on the falsified earnings statements. He is accused of overstating Fannie Mae’s assets to the tune of 6.3 billion dollars.
Then there is the case of James A. Johnson. The same Office of Federal Housing Enterprise Oversight report from September 2004 found that, during Johnson’s tenure as CEO, Fannie Mae 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 in compensation.
With all these shenanigans going on in government sponsored entities you would think somebody would have wanted to get involved. Somebody should have said something…right? Well, somebody did, as this report from 2003 indicates:
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.
The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac – which together have issued more than $1.5 trillion in outstanding debt – is broken. A report by outside investigators in July concluded that Freddie Mac manipulated its accounting to mislead investors, and critics have said Fannie Mae does not adequately hedge against rising interest rates. -New York Times
Though the President was attempting to take action he was of course met with criticism from the usual cast of characters whose statements now seem rather foolish:
“These two entities are not facing any kind of financial crisis. The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.” -Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee.
”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.” -Representative Melvin L. Watt, Democrat of North Carolina
That’s keeping your eye on the ball. Why do you think these democrats were so defensive of this particular enterprise? Why would they go out on a limb to defend the indefensible? As always those who sought to criticize the operations of Fannie Mae and Freddie Mac were accused of bigotry and hostility to the poor. Still, somebody else did dare to say something in 2005:
Mr. President, this week 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.
The Office of Federal Housing Enterprise Oversight’s report goes on to say that Fannie Mae employees deliberately and intentionally manipulated financial reports to hit earnings targets in order to trigger bonuses for senior executives. In the case of Franklin Raines, Fannie Mae’s former chief executive officer, OFHEO’s report shows that over half of Mr. Raines’ compensation for the 6 years through 2003 was directly tied to meeting earnings targets. The report of financial misconduct at Fannie Mae echoes the deeply troubling $5 billion profit restatement at Freddie Mac.
The OFHEO report also states that Fannie Mae used its political power to lobby Congress in an effort to interfere with the regulator’s examination of the company’s accounting problems. This report comes some weeks after Freddie Mac paid a record $3.8 million fine in a settlement with the Federal Election Commission and restated lobbying disclosure reports from 2004 to 2005. These are entities that have demonstrated over and over again that they are deeply in need of reform.
For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac-known as Government-sponsored entities or GSEs-and the sheer magnitude of these companies and the role they play in the housing market. OFHEO’s report this week does nothing to ease these concerns. In fact, the report does quite the contrary. 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, S. 190, 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.
I urge my colleagues to support swift action on this GSE reform legislation.
Who was this man who dared to present legislation to gain control of these two GSE entities that were running amok? Senator John S. McCain. It looks like he was ahead of the curve on this economic crisis just like he was ahead of the curve on the need for more troops in Iraq. What were the objectives of this bill?
In lieu of the Office of Federal Housing Enterprise Oversight of the Department of Housing and Urban Development (HUD), an independent Federal Housing Enterprise Regulatory Agency which shall have authority over the Federal Home Loan Bank Finance Corporation, the Federal Home Loan Banks, the Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (Freddie Mac); and the Federal Housing Enterprise Board.
Sets forth operating, administrative, and regulatory provisions of the Agency, including provisions respecting: (1) assessment authority; (2) authority to limit nonmission-related assets; (3) minimum and critical capital levels; (4) risk-based capital test; (5) capital classifications and undercapitalized enterprises; (6) enforcement actions and penalties; (7) golden parachutes; and (8) reporting.
Like the Bush administration’s attempt to reign in the renegade GSE’s two years earlier, this bill failed to get through congress. In fact it died in committee. Is it a coincidence that the ranking Democrat on the committee (and its current chairman) is also the number one recipient of campaign contributions from Fannie Mae? Senator Chris Dodd received $165,400 in contributions from the wayward GSE. It appears to be money well spent as it helped Fannie Mae and Freddie Mac navigate the hostile waters of republican meddling. After the Democrats retook the House and Senate in 2006 it looked like smooth sailing. Well, until the housing market hit its zenith and started to slow down, causing home values to go down and these dubious mortgages to accelerate their defaulting.
Which brings us to the conclusion of our master deception. How does this play out to the voters in this year’s presidential election? Well, there is an interesting twist to the final act in this drama. Consider this statement concerning the action the government is now taking to try and rescue the situation:
“One of the central requirements that I have consistently set in evaluating any intervention under this new legislation is that such action protect taxpayers and not bail out senior management from Fannie Mae and Freddie Mac. Multi-million dollar severance payments for the executives who helped steer these institutions into the current crisis situation would violate the spirit of the authority granted by Congress to the Treasury Department and would violate the public’s trust.” -Barack H. Obama
It would appear from this statement that Barack Obama feels that the executives of these companies are the villains. Strange, when one considers that both Franklin Raines and James Johnson, the two CEO’s who profited from the fraudulent and misrepresented reporting at Fannie Mae, have found themselves working for… Barack Obama! That’s right. Mr. Obama, who claims to be worried about violating the public’s trust, has found it within himself to trust these two criminal CEO’s to work with his campaign. I guess the reason he did not want the government to bail out the senior officials of these companies is because he wanted to bail them out himself! And this from a man who claims his “judgement” qualifies him for the presidency.
James A. Johnson was tapped by Obama to head his search committee to choose his Vice President. Perhaps another disastrous failure in and of itself considering the result. And though Obama is attempting to deny that Franklin Raines is actually one of his economic advisers, Raines has already confirmed that he has had several “conversations” with Obama regarding economic policy and, ironically, the mortgage crisis. I guess you can say Obama showed good “judgement” by consulting an “expert” on the subject. This is extremely disconcerting when one considers that presidents generally pick their staff and cabinet from the pool of people who advise them during their campaigns. How does the prospect of Franklin Raines’ and James Johnson’s hands fondling the federal treasury appeal to you?
Obama also has dirty hands when it come to being a recipient of some of Fannie Mae’s “generosity” regarding political contributions. Fannie Mae donated $126,349 to Obama. Second only to Senator Dodd, and we know what “favors” they received from him. What, praytell, do they expect to receive from Obama? With the taxpayers on the hook for billions of dollars, why would Obama accept contributions from such a source? In fairness, the list of Senators and representatives that have received contributions from Fannie Mae and Freddie Mac from 1989 to 2008 is a long one. John McCain himself received $21,550. But Obama has only been in the senate since 2004! Yet he is the second largest recipient! So much for change you can believe in.
In conclusion, Fannie Mae and Freddie Mac, combined with enhancements to The Community Reinvestment Act, have been creations and favored pets of democrats and Clinton administration appointees. It was an illusion that on its face appeared to be designed to make mortgages available to people who were ill suited to pay for them. Hidden from public view, it was a banking system to funnel money to left wing operations and democratic operatives who were handsomely rewarded for their misreporting and misrepresenting of the going’s on within their criminal enterprise.
Remember when Nancy Pelosi came in as Speaker of the House and promised the most ethical House of Representatives ever? Where are the prosecutions? The investigations? Funny how she loses interest in such ethical matters when its the Democrats who are on the take. Gotta restart those “impeach Bush” hearings again!
Try as he might, there is no way Barack Obama can lay this crisis at the feet of the Bush administration or John McCain. Both men made valiant attempts at intervening. Somebody should have said something. They did. Somebody should have done something. They did. Unfortunately too many others were looking out for their own interests and not the taxpayers. Don’t be deceived any further. It is Barack Obama and his sycophants whose lips are firmly wrapped around Fannie Mae’s nipples…and you know what that sucking sound is!