With his fraud lawsuit last week against Bank of America, New York Attorney General Andrew Cuomo has joined the long queue of politicians blaming bankers as the chief culprits in creating the financial panic and recession. We dealt with the merits of those BofA charges on Saturday, but that isn’t the end of this story. There’s also the not so small matter of Mr. Cuomo’s own role in promoting policies that fed the housing mania and set the stage for the meltdown.

Before he pursued statewide office in New York, Andrew Cuomo was Secretary of Housing and Urban Development during Bill Clinton’s second term. And lest you think his tenure is forgotten, the HUD Web site has an instructive item in its Archives section.

Entitled, “Highlights of HUD Accomplishments 1997-1999,” the document chronicles the “accomplishments under the leadership of Secretary Andrew Cuomo, who took office in January 1997.”

HUD’s Web visitors learn that in 1999 “Secretary Cuomo established new Affordable Housing Goals requiring Fannie Mae and Freddie Mac—two government sponsored enterprises involved in housing finance—to buy $2.4 trillion in mortgages in the next 10 years. This will mean new affordable housing for about 28.1 million low- and moderate-income families. The historic action raised the required percentage of mortgage loans for low- and moderate-income families that the companies must buy from the current 42 percent of their total purchases to a new high of 50 percent—a 19 percent increase—in the year 2001.”

It’s a sign of Washington’s continuing failure to examine its own failures that HUD still views such a policy as an “accomplishment.” It’s as if the Pentagon described Pearl Harbor as a victory.

The Village Voice has much more on Mr. Cuomo’s actions at HUD here.

Bottom line the Federal Government and Federal Reserve are every bit as culpable as bankers are in creating this mess… Andrew Cuomo is just one of several prominent political figures who have to answer for his role his roll in creating the financial crisis. Unfortunately, I doubt Washington’s policy makers will ever admit to their culpability, it’s much easier to demonize and scapegoat Wall Street’s greedy bankers.

Peter Schweizer does a good job of laying out the anatomy of the crisis in Architects of Ruin: How big government liberals wrecked the global economy—and how they will do it again if no one stops them. If you haven’t read it, I’d suggest picking up a copy.

• Political pressure led to the erosion of responsible lending practices: In the early 1990s, Fannie and Freddie began to come under considerable political pressure to lower their underwriting standards, particularly on the size of down payments and the credit quality of borrowers. (p.6)
• Lower down payments led to housing prices that outpaced income growth: Once government-sponsored efforts to decrease down payments spread to the wider market, home prices became increasingly untethered from any kind of demand limited by borrowers’ ability to pay.  Instead, borrowers could just make smaller down payments and take on higher debt, allowing home prices to continue their unrestrained rise.  Some statistics help illustrate how this occurred.  Between 2001 and 2006, median home prices increased by an inflation-adjusted 50 percent, yet at the same time Americans’ income failed to keep up.  (p. 11)
• Members of an “affordable housing” coalition shared profits with political allies to help legitimize their business practices: Fannie Mae created and used The Fannie Mae Foundation to spread millions of dollars around to politically-connected organizations like the Congressional Hispanic Caucus Institute.  It also hired well-known academics to give an aura of academic rigor to policy positions favorable to Fannie Mae.  One paper coauthored by now-Director of the Office of Management and Budget Peter Orszag, concluded that the chance was minimal that the GSEs were not holding sufficient capital to cover their losses in the event of a severe economic shock.  The authors suggested that “the risk to the government from a potential default on GSE debt is effectively zero,” and that “the expected cost to the government of providing an explicit government guarantee on $1 trillion in GSE debt is just $2 million.” (p.7)
• The Government Sponsored Enterprises led the way into the housing crisis: Fannie Mae and Freddie Mac were leaders in risky mortgage lending.  According to an analysis presented to the Committee, between 2002 and 2007, Fannie and Freddie purchased $1.9 trillion of mortgages made to borrowers with credit scores below 660, one of the definitions of “subprime” used by federal banking regulators. This represents over 54% of all such mortgages purchased during those years. (p.24)

Democrats, I’m sure, will call the report a partisan hatchet job and blame the housing market meltdown entirely on greed and mismanagement on Wall Street… Greed and mismanagement undoubtedly played a part but, that does not excuse government policy makers from culpability. The policy and regulatory decisions made by the Federal Government and the Federal Reserve played principle roll in laying foundation upon which this house of cards built. They have to be called to account for their actions along with Wall Street.

Back when the housing mania was taking off, Massachusetts Congressman Barney Frank famously said he wanted Fannie Mae and Freddie Mac to “roll the dice” in the name of affordable housing. That didn’t turn out so well, but Mr. Frank has since only accumulated more power. And now he is returning to the scene of the calamity — with your money. He and New York Representative Anthony Weiner have sent a letter to the heads of Fannie and Freddie exhorting them to lower lending standards for condo buyers.

You read that right. After two years of telling us how lax lending standards drove up the market and led to loans that should never have been made, Mr. Frank wants Fannie and Freddie to take more risk in condo developments with high percentages of unsold units, high delinquency rates or high concentrations of ownership within the development.

Fannie and Freddie have restricted loans to condo buyers in these situations because they represent a red flag that the developments — many of which were planned and built at the height of the housing bubble — may face financial trouble down the road. But never mind all that. Messrs. Frank and Weiner think, in all their wisdom and years of experience underwriting mortgages, that the new rules “may be too onerous.”

Here we go again… Umm, congressman you do remember we how got into this mess don’t you? On the off chance you’ve forgotten it was, among other things, lowered lending standards that helped inflate the housing market to unrealistic levels.The last thing we thing we should be doing is repeating the mistakes that got us here.

Simply put Fannie Mae and Freddie Mac are political creature and they have no better friend than Barney Frank. Congressman Frank needs to explain why he pushed Fannie Mae and Freddie Mac into underwriting loans to people who couldn’t afford them and then resisted every attempt to to tighten oversight of Fannie and Freddie.

Until he’s called to account for his actions in helping to create this mess he’s free to keep pushing the same bad ideas over and over.

In short, we have spent more bailouts than we did on World War 2!

Related

• Speaking of doom, what if Obama only makes it worse? – John Ibbitson, Globe and Mail
• Geithner Is Overreaching on Regulatory Power – Francis X. Diebold and David A. Skeel Jr., Wall Street Journal

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.

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:

House Financial Services Committee hearing, Sept. 25, 2003:

Rep. Gregory Meeks, (D., N.Y.): . . . I am just pissed off at Ofheo [Office of Federal Housing Enterprise Oversight] because if it wasn’t for you I don’t think that we would be here in the first place.

And Freddie Mac, who on its own, you know, came out front and indicated it is wrong, and now the problem that we have and that we are faced with is maybe some individuals who wanted to do away with GSEs in the first place, you have given them an excuse to try to have this forum so that we can talk about it and maybe change the direction and the mission of what the GSEs had, which they have done a tremendous job. . .

Ofheo Director Armando Falcon Jr.: Congressman, Ofheo did not improperly apply accounting rules; Freddie Mac did. Ofheo did not try to manage earnings improperly; Freddie Mac did. So this isn’t about the agency’s engagement in improper conduct, it is about Freddie Mac. Let me just correct the record on that. . . . I have been asking for these additional authorities for four years now. I have been asking for additional resources, the independent appropriations assessment powers.

This is not a matter of the agency engaging in any misconduct. . . .

Rep. Waters: However, I have sat through nearly a dozen hearings where, frankly, we were trying to fix something that wasn’t broke. Housing is the economic engine of our economy, and in no community does this engine need to work more than in mine. With last week’s hurricane and the drain on the economy from the war in Iraq, we should do no harm to these GSEs. We should be enhancing regulation, not making fundamental change.

Mr. Chairman, we do not have a crisis at Freddie Mac, and in particular at Fannie Mae, under the outstanding leadership of Mr. Frank Raines. Everything in the 1992 act has worked just fine. In fact, the GSEs have exceeded their housing goals. . . .

Rep. Frank: Let me ask [George] Gould and [Franklin] Raines on behalf of Freddie Mac and Fannie Mae, do you feel that over the past years you have been substantially under-regulated?

Mr. Raines?

Mr. Raines: No, sir.

Mr. Frank: Mr. Gould?

Mr. Gould: No, sir. . . .

Mr. Frank: OK. Then I am not entirely sure why we are here. . . .

Rep. Frank: I believe there has been more alarm raised about potential unsafety and unsoundness than, in fact, exists.

While we’re on the topic of calling out Democrats for their part in creating our financial crisis someone needs to hold Harry Reid accountable for the remarks he made to reporters yesterday.

While pressing for passage of the bailout bill Senator Reid told reporters one of the country’s premier insurance company’s was on the verge of bankruptcy.

“We don’t have a lot of leeway on time,” Reid told reporters in the Capitol. “One of the individuals in the caucus today talked about a major insurance company – a major insurance company — one with a name that everyone knows that’s on the verge of going bankrupt. That’s what this is all about.”

To his credit Senator Reid, is backing off that statement. According to Jim Manley, a spokesman for the Nevada Democrat “Senator Reid is not personally aware of any particular company being on the verge of bankruptcy. He has no special knowledge about [a bankruptcy] nor has he talked to any insurance company officials.”

“Rather, his comments were meant to refer to the conditions in the financial sector generally. He regrets any confusion his comments may have caused,” Manley added.

Unfortunately, the damage has already been done… As of 12:15 p.m. today the S&P Insurance 500 was down 4.5%, or $15 billion.