Whitewashing Fannie Mae

Congress begins its self-absolution campaign.

Henry Waxman’s House Committee on Oversight and Government Reform met Tuesday to examine “The Role of Fannie Mae and Freddie Mac in the Financial Crisis.” Alas, Mr. Waxman didn’t come to bury Fan and Fred, but to bury the truth.

The two government-sponsored mortgage giants have long maintained they were merely unwitting victims of a financial act of God. That is, while the rest of the market went crazy over subprime and “liar” loans, Fan and Fred claimed to be the grownups of the mortgage market. There they were, the fable goes, quietly underwriting their 80% fixed-rate 30-year mortgages when — Ka-Pow! — they were blindsided by the greedy excesses of the subprime lenders who lacked their scruples.

But previously undisclosed internal documents that are now in Mr. Waxman’s possession and that we’ve seen tell a different story. Memos and emails at the highest levels of Fannie and Freddie management in 2004 and 2005 paint a picture of two companies that saw their market share eroded by such products as option-ARMs and interest-only mortgages. The two companies were prepared to walk ever further out on the risk curve to maintain their market position.

The companies understood the risks they were running. But squeezed between the need to meet affordable-housing goals set by HUD and the desire to sustain their growth and profits, they took the leap anyway. As a result, by the middle of this year, the two companies were responsible for some $1.6 trillion worth of subprime credit of one form or another. The answer to Mr. Waxman’s question about their role in the crisis, in other words, is that they were central players, if not the central players, in the creation of the housing boom and the credit bust. Mr. Waxman released some of these documents Tuesday but kept others under wraps. Read the rest…

It’s easy to blame “Wall Street greed” for the mortgage bust, yes it played a part, but we can not ignore the roll played Congress and government regulators in creating the environment that allowed this to happen.

It doesn’t matter what we think, they’re just going to keep printing money, running up the debt and pushing bailout after bailout and stimulus package after stimulus package… none which are going to help get us out our current economic mess.

Any way here’s a few must reads:

First up is Harvey Golub’s Wall Street Journal Op Ed titled “Getting Out of the Credit Mess”

To begin to understand today’s problem, we have to have a sense of how we got there. Between 1994 and second quarter 2008, the U.S, housing stock more than doubled in value from $7.6 trillion to $19.4 trillion. Almost three quarters of that increase was due to a speculative bubble, the root cause of which was government policies designed to increase home ownership, largely among people who would be considered nonprime borrowers — i.e., people without sufficient documented income or employment history and little or no savings or credit history.

The intellectual start of this mess was in a flawed Boston Federal Reserve study published in 1992 that purported to show that minorities were treated less well than whites. That study led to increased political pressure on banks to modify their standards with increased emphasis through the Community Reinvestment Act, and aided by U.S. Department of Housing and Urban Development regulations in the Clinton administration that required parity of outcomes in the lending process.

The effect of all of this meddling was compounded by the lax or incompetent supervision of Fannie Mae and Freddie Mac. All in all, the government got into the business of encouraging and then forcing lending institutions to make mortgage loans to people who could not pay them back. What we ended up with is a failure of government, which we have erroneously termed a failure of capitalism. Read the rest…

The second is a Newsmax.com piece titled “Four Big Lies about the Big Three Automakers” by Dan Weil

Third is a CNSNews.com piece by Matt Hadro titled “Obama’s ‘New Deal’ Not Likely to Cure Economy or Unemployment Rate, Free Market Economists Say”

It’s time our elected leaders faced reality admitted their own culpability in this mess and realized they can’t simply keep printing money and trying to spend our way out of this economic downturn.

My friends,

In the last week or two, I have heard frequently from you that the current financial mess has been caused by the failures of free markets and deregulation. I have heard from you that the lust after profits, any profits, that is central to free markets is at the core of our problems. And I have heard from you that only significant government intervention into financial markets can cure these problems, perhaps once and for all. I ask of you for the next few minutes to, in the words of Oliver Cromwell, consider that you may be mistaken. Consider that both the diagnosis and the cure might be equally mistaken.

Consider instead that the problems of this mess were caused by the very kinds of government regulation that you now propose. Consider instead that effects of the profit motive that you decry depend upon the incentives that institutions, regulations, and policies create, which in this case led profit-seekers to do great damage. Consider instead that the regulations that may have been the cause were supported by, as they have often been throughout US history, the very firms being regulated, mostly because they worked to said firms’ benefit, even as they screwed the rest of us. Consider all of this as you ask for more of the same in the name of fixing the problem. And finally, consider why you would ever imagine that those with wealth and power wouldn’t rig a new regulatory process in their favor.

One of the biggest confusions in the current mess is the claim that it is the result of greed. The problem with that explanation is that greed is always a feature of human interaction. It always has been. Why, all of a sudden, has greed produced so much harm? And why only in one sector of the economy? After all, isn’t there plenty of greed elsewhere? Firms are indeed profit seekers. And they will seek after profit where the institutional incentives are such that profit is available. In a free market, firms profit by providing the goods that consumers want at prices they are willing to pay. (My friends, don’t stop reading there even if you disagree – now you know how I feel when you claim this mess is a failure of free markets – at least finish this paragraph.) However, regulations and policies and even the rhetoric of powerful political actors can change the incentives to profit. Regulations can make it harder for firms to minimize their risk by requiring that they make loans to marginal borrowers. Government institutions can encourage banks to take on extra risk by offering an implicit government guarantee if those risks fail. Policies can direct self-interest into activities that only serve corporate profits, not the public.

Many of you have rightly criticized the ethanol mandate, which made it profitable for corn growers to switch from growing corn for food to corn for fuel, leading to higher food prices worldwide. What’s interesting is that you rightly blamed the policy and did not blame greed and the profit motive! The current financial mess is precisely analogous.

No free market economist thinks “greed is always good.” What we think is good are institutions that play to the self-interest of private actors by rewarding them for serving the public, not just themselves. We believe that’s what genuinely free markets do. Market exchanges are mutually beneficial. When the law messes up by either poorly defining the rules of the game or trying to override them through regulation, self-interested behavior is no longer economically mutually beneficial. The private sector then profits by serving narrow political ends rather than serving the public. In such cases, greed leads to bad consequences. But it’s bad not because it’s greed/self-interest rather because the institutional context within which it operates channels self-interest in socially unproductive ways.

Read the rest…

H/T: Hot Air.

It looks like the gloves are really off, John McCain is going to finally start talking about the economy and going after Barack Obama and Democrats for their roll in the failure of Fannie Mae and Freddie Mac.

Our current economic crisis is a good case in point. What was his actual record in the years before the great economic crisis of our lifetimes?

This crisis started in our housing market in the form of subprime loans that were pushed on people who could not afford them. Bad mortgages were being backed by Fannie Mae and Freddie Mac, and it was only a matter of time before a contagion of unsustainable debt began to spread. This corruption was encouraged by Democrats in Congress, and abetted by Senator Obama.

Senator Obama has accused me of opposing regulation to avert this crisis. I guess he believes if a lie is big enough and repeated often enough it will be believed. But the truth is I was the one who called at the time for tighter restrictions on Fannie Mae and Freddie Mac that could have helped prevent this crisis from happening in the first place.

Senator Obama was silent on the regulation of Fannie Mae and Freddie Mac, and his Democratic allies in Congress opposed every effort to rein them in. As recently as September of last year he said that subprime loans had been, quote, “a good idea.” Well, Senator Obama, that “good idea” has now plunged this country into the worst financial crisis since the Great Depression.

To hear him talk now, you’d think he’d always opposed the dangerous practices at these institutions. But there is absolutely nothing in his record to suggest he did. He was surely familiar with the people who were creating this problem. The executives of Fannie Mae and Freddie Mac have advised him, and he has taken their money for his campaign. He has received more money from Fannie Mae and Freddie Mac than any other senator in history, with the exception of the chairman of the committee overseeing them. Did he ever talk to the executives at Fannie and Freddie about these reckless loans? Did he ever discuss with them the stronger oversight I proposed? If Senator Obama is such a champion of financial regulation, why didn’t he support these regulations that could have prevented this crisis in the first place? He won’t tell you, but you deserve an answer.

It’s about time, raising questions about Obama’s character and his relationships with William Ayers and/or Rev. Jeremiah Wright may be hardball politics but it’s not going to help McCain win the election. This election is now all about the economy and who can best lead a recovery… If John McCain and Sarah Palin are going to have any chance on November 4th they have to win that argument.

Ed Morrissey, Moe Lane, Jim Geraghty and Michelle Malkin have additional thoughts.

Update (5:45 p.m.): Here’s the video:

Oh the irony…

As global markets plunged, President Bush on Monday said “it’s going to take awhile” for the government’s $700 billion financial rescue plan to bolster the troubled U.S. economy. Bush said the purpose of the package was to unlock the nation’s credit freeze “to get money moving again.” But, he added: “We don’t want to rush into the situation and have the program not be effective.” Read the rest…

With all due respect Mr. President don’t you think maybe you should have thought about that before you shoved $700 billion crap sandwich down our throats?

BTW wasn’t that exactly what conservatives were arguing to begin with?

Idiot.

H/T: MM

Top U.S. policy makers emerged from hours of tense negotiations with a clear message just after midnight Sunday morning: A deal to bailout U.S. financial markets has been agreed on and all that remains to be done is to commit the legislation to paper.

Treasury Secretary Henry Paulson, House Speaker Nancy Pelosi (D., Calif.), and Senate Majority Leader Harry Reid (D.), were flanked by key negotiators in the Capitol as they announced that a $700 billion plan to have Treasury buy up toxic assets had been all but finalized after hours of exhausting negotiations.

“I think we’re there,” an exhausted Mr. Paulson said, a sentiment echoed in the statements of negotiators such as House Financial Services Chairman Barney Frank (D., Mass.) and Senate Banking Committee head Christopher Dodd (D., Conn.).

Those present said the bailout plan still needs to be drafted in its final form, a process staff members were expected to continue throughout the night in what one aide called a “marathon drafting session” in Ms. Pelosi’s office just off the rotunda in the Capitol building. A formal announcement is scheduled for some time Sunday, though an exact time and location were not immediately available.

A summary of the tentative agreement released by Ms. Pelosi’s office said the plan “gives taxpayers an ownership stake and profit-making opportunities with participating companies; puts taxpayers first in line to recover assets if a participating company fails; (and) guarantees taxpayers are repaid in full — if other protections have not actually produced a profit.” (See Ms. Pelosi’s summary.)

Additionally, the summary said the legislation will expand the range of firms that can sell troubled assets to the government to include pension plans, local governments and community banks serving “low- and middle-income families.”

A House Democratic aide said the government would be able to receive warrants it could hold until maturity from financial firms on assets received either through auctions or through direct purchases.

I’ll reserve comment until I see a markup of the final bill.

Update: Ed Morrissey has more at Hot Air… It looks like House Republicans were able to get most of the pork removed from the bill.

Update (1:50 p.m. eastern): House Republican Whip Roy Blunt’s office has released a side by side comparison of the new bill versus the Paulson Plan and the Frank-Dodd bill.

The new bill does look more palatable but the devil’s in the details… I what to see the final bill and the conference report before I say yea or nay.

Update (4:10 p.m. eastern): N.Z. Bear @ Porkbusters has the draft bill… (H/T: MM)

Update (6:40 p.m. eastern): Michelle Malkin has an updated draft and a quick and dirty analisys of the bill.

This thing stinks to high heaven… Unfortunately I think this bailout has become a necessary evil – the Bush Administration, Congress and the media have painted us into a corner and if this bill doesn’t pass Secretary Paulson’s dire warnings will ultimately become a self-fulfilling prophecy.

ABC News’ George Stephanopoulos Reports: Treasury Secretary Henry Paulson fears the Wall Street bailout deal is falling apart after a chaotic White House meeting, sources say.

Paulson walked into the room where Democrats were caucusing after today’s meeting at the White House and pleaded with them, “Please don’t blow this up.”

Rep. Barney Frank, D-Mass., chair of the House Financial Services Committee was livid saying, “Don’t say that to us after all we’ve been through!”

House Speaker Nancy Pelosi said, “We’re not the ones trying to blow this up; it’s the House Republicans.”

“I know, I know,” Paulson replied.

Chris Dodd’s trying to pin the blame on McCain:

At a press conference earlier yesterday on Capitol Hill, Senator Dodd and his fellow negotiators claimed they had reached a bipartisan consensus on the plan.

But he claimed that Mr McCain’s involvement threw a spanner in the works.

After the hour-long White House meeting, he said: ‘What has happened here is that we have spent seven straight days to find a rescue plan for the economy.

‘What this looked like was a rescue plan for John McCain. To be distracted for two to three hours by political theatre doesn’t help.’

Democrats said the Republicans were on board with the deal until Mr McCain intervened.

There’s just one problem… McCain didn’t bring up those proposals.

Personally, the Paulson plan is a non-starter with me… I much prefer the alternatives offered by House Republicans:

• Rather than providing taxpayer funded purchases of frozen mortgage assets, we should adopt a mortgage insurance approach to solve the problem.
  
• Currently the federal government insures approximately half of all mortgage backed securities. (MBS) We can insure the rest of current outstanding MBS; however, rather than taxpayers funding insurance, the holders of these assets should pay for it. Treasury Department can design a system to charge premiums to the holders of MBS to fully finance this insurance.
  
• Have Private Capital Injection to the Financial Markets, Not Tax Dollars. Instead of injecting taxpayer capital into the market to produce liquidity, private capital can be drawn into the market by removing regulatory and tax barriers that are currently blocking private capital formation. Too much private capital is sitting on the sidelines during this crisis.
• Temporary tax relief provisions can help companies free up capital to maintain operations, create jobs, and lend to one another. In addition, we should allow for a temporary suspension of dividend payments by financial institutions and other regulatory measures to address the problems surrounding private capital liquidity.
• Immediate Transparency, Oversight, and Market Reform. Require participating firms to disclose to Treasury the value of their mortgage assets on their books, the value of any private bids within the last year for such assets, and their last audit report.
• Wall Street Executives should not benefit from taxpayer funding. Call on the SEC to review the performance of the Credit Rating Agencies and their ability to accurately reflect the risks of these failed investment securities.
• Create a blue ribbon panel with representatives of Treasury, SEC, and the Fed to make recommendations to Congress for reforms of the financial sector by January 1, 2009.

Unfortunately, I think we’ve reached the point where a bailout is necessary evil, I’m not convinced that tax payers should be the ones footing the bill though.Regardless unless they remove the foolish government regulations that effectively force banks to make risky loans we’re going to be right back here somewhere down the road.

Congress reached an agreement in principle on a $700 billion package to bail out the financial industry, leaders from both parties said Thursday. They plan to present the deal to the White House later Thursday, hoping for a vote within days. Lawmakers said there were few hurdles remaining. “There really isn’t much of a deadlock to break,” said Democratic Rep. Barney Frank, chairman of the House Financial Services Committee. Republican Sen. Bob Bennett said the plan is one that can “pass the House, pass the Senate (and) be signed by the president.”

Update: Kevin Smith, a spokesman for House Minority Leader John Boehner, cautions that Republicans in the House haven’t signed on to anything yet.

Update (H/T: Hot Air): All but dead? McCain’s campaign is calling the deal “all but dead“. Boehner’s spokesman says the deal is “non-starter“. And it looks like Paulson also thinks the deal may collapse.