Everyone, aside from antediluvian free marketeers, agrees that
to save the U.S. economy, the government must bail out Freddie Mac
and Fannie Mae. No one, particularly not the generic American
taxpayer who will pay for the bailout, is happy about it. And
nearly everyone is wondering how we came to such an absurd
pass.
Everyone, aside from antediluvian free marketeers, agrees that to save the U.S. economy, the government must bail out Freddie Mac and Fannie Mae. No one, particularly not the generic American taxpayer who will pay for the bailout, is happy about it. And nearly everyone is wondering how we came to such an absurd pass.
Who loosened up what regulations to allow lenders to make sub-prime loans to bad credit risks, sparking the sub-prime foreclosure crisis that threatens to sink the U.S. economy? The Glass-Steagall Act was passed in 1933. Its purpose was to separate investment banking from commercial banking, in an effort to prevent a repeat of the Great Depression. In 1977, a Democratic congress passed and then-President Carter signed the Community Reinvestment Act, which required banks and savings and loan companies to make loans to minority borrowers, even if they had bad credit. In the early 1990’s, then-President Clinton ramped up these rules.
Failure to make enough loans merely because individuals or companies had bad credit meant that a bank was not allowed to expand lending, add new branches, or merge with other companies. Lenders who refused to make bad loans to minorities were publicly called racists. Banks were given a CRA rating that graded them, not for the solidity of their investments, but for the diversity of their lending portfolios. Congress authorized Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corporation) to finance it all by buying loans from the banks, then repackaging them as securities to sell on the open market. In 1999, the old Glass-Steagall Act was repealed by the Gramm-Leach-Bliley Act under then-President Clinton. The bill passed easily with bipartisan support: 450-64, counting both chambers.
For two years before its passage, individuals and PACs representing real estate, insurance, and finance sectors had lobbied for the bill and spent $86 million in contributions to lawmakers. Nearly everyone in Congress got a piece of the pie, but those who voted for the bill received on average $180,000 in campaign contributions. Those voting nay received about half that amount, approximately $90,000. John McCain was absent for that vote. Joe Biden supported the bill.
In 2003, President Bush tried to create a new regulatory agency to oversee Fannie Mae and Freddie Mac, who had by then over $1.5 trillion in outstanding debt. The attempt was killed by our bipartisan Congress. In 2005, Sen. John McCain cosponsored the Federal Housing Enterprise Regulatory Reform Act of 2005, S. 190, “to underscore my support for quick passage of GSE regulatory reform legislation.” He warned, “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.”
The attempt was killed by Democrats in Congress. Cui bono? Not the minority borrowers, who are losing their homes in the foreclosure epidemic. But Fannie Mae executives falsified reports on their accomplishments and garnered millions of dollars in bonuses as a result: $26 million for Jamie Gorelick, $50 million for Franklin D. Raines, $21 million for James Johnson.
All these people are democratic operatives. Fannie Mae and Freddie Mac make huge campaign contributions to congress people. The top three recipients are: Christopher Dodd, Democrat, chair of the Senate finance committee, $165,400; Barack Obama, Democrat, Senate, $126,349; John Kerry, Democrat, Senate, $111,000.
It’s interesting that Obama garnered that much money in campaign contributions in three short years. By contrast, Hillary Clinton is only number 12 on the list, with $76,050, and John McCain is number 42 with $21,550.
My in-house political and economic analyst thinks that as the government created this mess, the government should pay for it, kind of like the trees and sidewalks in Gilroy. I think Fannie Mae and Freddie Mac executives, together with the congressmen who received campaign contributions, should foot the bill. Hah. But we agree that we the people need to drastically reduce the size, power and money of the federal government in order to make it less attractive to corruption. And to this end, we recommend viewing the Center for Responsive Politics at OpenSecrets.org, and making a suitable donation. Knowledge is power.
