Sunday, September 21, 2008

Understanding the Current Financial Crisis is VITAL...

Understanding the current financial crisis/meltdown is vital, especially for Conservatives and Libertarians...because it’s a Liberal one and there are people deliberately seeking to obfuscate that fact.
It's natural for people to seek to explain things in ways that fir their own preconceived notions, so you here Liberals talking about - "the failure of the free market," despite the fact that we haven't had a Free Market in America since around 1910. Others look to the President, despite the fact that it is Congress and ONLY Congress that controls the government's purse strings - tax policies, banking policies, Fannie and Freddie and, in fact, the federal budget.

As to the recent “Mortgage Meltdown,” John Fund recently wrote, “The two institutions (Fannie Mae and Freddie Mac) have long been run not by bankers but by retired political figures, predominantly Democrats. From 1991 to 1998, Fannie Mae was headed by James Johnson, a longtime aide to former Democratic vice president Walter Mondale. Johnson’s successor, Franklin D. Raines, had served as budget director to Bill Clinton. Jamie Gorelick, vice chair of Fannie Mae from 1998 to 2003, served as deputy attorney general in the Clinton administration.
"These figures have paid themselves impressive private-sector salaries. Johnson earned US$21-million in just his last year at Fannie Mae. Raines earned US$90-million for five years’ work at Fannie Mae. Gorelick got US$26-million.
“Yet the companies never had to meet the discipline of the private marketplace. They paid no taxes, and they had access to a line of credit at the Treasury department. More ominously for today’s crisis: They were not required to provide anything like the level of information about their internal operations expected of a privately owned company.
“This non-transparency allowed Fannie Mae to engage in serious accounting fraud, overstating its earnings by more than US$6-billion over the Raines years — overstatements that incidentally justified the company’s lavish compensation packages. (Both Johnson and Raines incidentally also received below-market mortgages from the large mortgage company — and major Fannie Mae beneficiary — Countrywide Mortgage.)
“The loss of confidence that struck the markets this week has been gathering for years. It is the natural byproduct of the bad practice of merging private business with government power.
“As so often happens with large scandals, the cost will fall on everyone except the responsible parties. In 2006, federal regulators sued Franklin Raines and two other Fannie Mae executives to recover US$115-million of compensation. The case was settled for US$3-million, plus the surrender of some (now probably valueless) stock options and other contingent benefits. The US$3-million was paid from Fannie Mae’s own insurance.

This was coupled with calls through the 1980s and 1990s by LIBERAL Democrats to outlaw red-lining (charging higher interest rates in high-foreclosure areas) AND basing loan rates and approvals solely on credit scores – AGAIN, THAT’S “Credit Socialism.” In 1999 Phil Gramm proposed a Bill (the Gramm-Leach-Bliley Act) that allowed banks to offer a wider, actually "full array" of financial services, from banking and lending to a host of investment vehicles. This had been a trend within the banking community for years leading up to that point. STILL, the Gramm-Leach-Bliley Act is not related to, let alone responsible for the current meltdown. The impetus for the mortgage meltdown was what appears to be ineptitude that rises to the level of MALFEASANCE at both Fannie Mae and Freddie Mac, the subsequent "packaging of bad paper" (high risk loans) as "government-backed mortgage instruments, which ultimately led to the recent wave of SHORT-SELL attacks on many financial services companies.
Prior to the Gramm-Leach-Bliley Act, of November 1999, most financial services companies were already offering both saving and investment opportunities to their customers. On the retail/consumer side, a bank called Norwest led the charge in offering all types of financial services products in 1986. American Express attempted to own almost every field of financial business (although there was little synergy among them). Things culminated in 1998 when Travelers, a financial services company with everything but a retail/commercial bank, bought out Citibank, creating the largest and the most profitable company in the world. The move was technically illegal and provided impetus for the passage of the Gramm-Leach-Bliley Act.
Also prior to the passage of the Act, there were many relaxations to the Glass-Steagall Act. For example, a few years earlier, commercial Banks were allowed to get into investment banking, and before that banks were also allowed to get into stock and insurance brokerage. Insurance underwriting was the only main operation they weren't allowed to do, something rarely done by banks even after the passage of the Act.
Much consolidation occurred in the financial services industry since, but not at the scale some had expected. Retail banks, for example, do not tend to buy insurance underwriters, as they seek to engage in a more profitable business of insurance brokerage by selling products of other insurance companies. Other retail banks were slow to market investments and insurance products and package those products in a convincing way.
Crucial to the passing of the Gramm-Leach-Bliley Act was an amendment made to the GLBA, stating that no merger may go ahead if any of the financial holding institutions, or affiliates thereof, received a "less than satisfactory [sic] rating at its most recent CRA exam", but this was assailed by the Clinton administration as “having a detrimental impact on minority businesses.” Gramm-Leach-Bliley expanded banking's scope, but it did not cause the incompetence and malfeasance at Fannie and Freddie, nor the subsequent disastrous fallout.
This is NOT a Democratic scandal in my view, it is overwhelmingly a LIBERAL-Democratic scandal, as McCain and G W Bush sought to overhaul and reform (cut-back) Fannie Mae and Freddie Mac in 2003 and 2005, while LIBERALS like Chris Dodd, Charles Rangel and Barney Franks sought to preserve the failing policies of “Credit Socialism.”

ALL of the current financial crises and there are TWO (the mortgage/credit crisis and the short-selling spurred demise of good performing companies).

The first (the credit crisis) created the opportunities for the 2nd among some investors.

Fannie Mae and Freddie Mac have always been derided by many Americans (including myself), basically, those who'd never had a problem getting a conventional mortgage) as “lenders of last resort,” or “lenders to losers.” Now, it appears that they were far, FAR worse – doling out MILLION DOLLAR mortgages to well-connected (mostly connected to Liberal Democrats) people who were poor credit risks for those amounts! They also doled out hundreds of billions of dollars in high risk “bad loans/mortgages” which was, in effect, “credit socialism.”

What BOTH those mismanaged entities did was to (1) by their ability to get special, lower rates from the Fed, they were able to unfairly compete against private lenders, thereby forcing those institutions to find “creative financing” ways to sell their loans and (2) they “packaged paper” (bad loans) and sold these as “government backed” mortgage securities to our own brokerage houses, to our banks and to financial institutions abroad! Those two things CREATED the current “mortgage/credit crisis.”

In other words, the failures at Fannie Mae and Freddie Mac were entirely responsible for the “mortgage meltdown.”

The widespread infection of those failing “government-backed mortgage instruments” created the opportunity for some investors (smart ones) to “SHORT” or short-sell financial stocks (banks, brokerages, etc.). There is NOTHING either illegal or unethical about short-selling.

In this case, the short-selling did actual harm to some very well-run and still profitable companies like Lehman Brothers, Wachovia Bank, Bank of America, etc. because with HUGE investors (like say Hedge Funds as a for instance) all SHORTING those stocks, the stock price drops, just as a betting line would drop when a huge amount of money is dropped on or in favor of the underdog. With their stock prices falling, these institutions could no longer borrow money and ALL institutions need to borrow money – so they were forced with either finding merger partners OR closing their doors...OR getting a government bailout!

The short-sellers have certainly reaped a lot of financial harm, BUT it’s not their fault – their motive was profit and a “return on investment” NOT deliberately doing any harm to others. There was nothing malicious about the short-selling. They saw an opportunity and took advantage of it. It’s as simple as that.

The real underlying cause of this entire train wreck was the utter ineptitude and massive corruption at Fannie and Freddie (BOTH, as John Fund correctly notes, “the domain of Liberal Democrats”. It was the “credit socialism” – creating credit out of thin air for people (poorer people) who didn’t warrant or deserve it, that created the current crisis.

To their credit, G W Bush and John McCain tried mightily to reform (scale back) Fannie Mae and Freddie Mac in 2003 ( and again in 2005 ( – I believe that Obama joined with Barney Franks and Chris Dodd in opposition to those reforms. To this day, the Obama campaign is surrounded by some of the Fannie Mae villains (Franklin Raines and Jim Johnson, to name two).

Since January of 2007 (the last two years) we’ve had, for better or worse, “the Pelosi-Reid economy.” They’ve supported the so-called and misnamed “stimulus package,” the bailouts, etc.

With Pelosi-Reid, TWO very LIBERAL Democrats, running Congress, it’s no wonder we’ve seen a return to disastrous Keynesian policies.

The results of the last two years are ALL on them!

Without question, the American economy has NOT “improved” since 2005-2006, it has gotten markedly WORSE due to the Pelosi-Reid return to Keynesian policies and the undermining of the economy by mismanagement and malfeasance at Fannie Mae and Freddie Mac and the “credit socialism” they sought to use to engage in some social engineering with.

THANKS to Solange for inspiring this post.


Rachel said...

This is NOT a Democratic scandal in my view, it is overwhelmingly a LIBERAL-Democratic scandal, as McCain and G W Bush sought to overhaul and reform (cut-back) Fannie Mae and Freddie Mac in 2003 and 2005, while LIBERALS like Chris Dodd, Charles Rangel and Barney Franks sought to preserve the failing policies of “Credit Socialism.”

I agree with you on this, especially since the Dem Congress just basically admitted 1) they have no clue and 2) they don't care.

But how do you explain AIG et al? And is it wise to bail them out? I do. We did it to S&L banks in 1987 and I think if we don't bail them out, we'll have worse consequences.

JMK said...

Hi Rachel!

Ironically enough, I looked up Hank Greenberg (founder of AIG) back in 2005, when the survivors of the Bronx “Black Sunday” fire, which forced five firefighters out a window on the floor above a raging fire wound up in the “Hank Greenberg Pavilion at the Cornell-Weill Medical Center.

At any rate, it turns out that Maurice (Hank) Greenberg founded and built A.I.G. (American Insurance Group) which is a sprawling empire which acquired hundreds of businesses all over the world. Many of A.I.G.’s subsidiaries wrote insurance of various types. Others made home loans and leased aircraft. The diverse array of companies were more valuable under a single corporate parent like A.I.G., because their business cycles offset each other, giving A.I.G. a relatively smooth stream of revenue and income.

AIG became embroiled in the mortgage crisis, as some of its insurance companies ended up with mortgage-backed securities on their books, but the real trouble involved the insurance that its financial products unit offered investors for complex debt securities.

Its stock tumbled faster this year as first the debt securities lost value, and then the insurance contracts, called credit default swaps, came under a cloud and this began the short-selling of AIG stock by investors, which in turn kept AIG from getting the loans it needed as its stock price plummeted.

The NY Times said, "The Fed’s extraordinary rescue of A.I.G. underscores how much fear remains about the destructive potential of the complex financial instruments, like credit default swaps, that brought A.I.G. to its knees."

Aside from the tens of thousands of AIG jobs that would’ve been lost, I think the Fed felt that letting this insurance/financial giant collapse would’ve been disastrous for the economy’s ability to recover from the sub-prime debacle.

I don’t know if this bailout was a good idea or not, but I’m not nearly as sanguine as Ron Paulwas when he asserted the other day that we “need to let this dying system fall.”

I tend to agree with you - at this point we almost HAD TO bail them out, even though that rewards failure at the expense of people who continue to "do the right things."

Ron Paul sees the complete free market as the only viable alternative, but the vast majority of the American people have grown accustomed to the security and stability that modern Corporatism has provided.

What this all shows is that EVERYTHING involved in this crisis goes back to the gross incompetence and probable malfeasance at Fannie Mae and Freddie Mac and the reems of “bad paper” they laid off on an unsuspecting market.

The results of that “bad paper” (high risk debt) hitting the market was FIRST, the sub-prime mortgage meltdown, followed by the short-selling, by investors, of those stricken financial institutions.

The entire calamity can be traced back to Fannie’s and Freddie’s incompetence or WORSE!

A good piece on this was done by Mike’s America;

AND by David Frum;

I'm not blaming the likes of Barack Obama, even though I believe he voted with the Democrats (Franks and Dodd in 2005's effort to halt the GOP's reform efforts of Fannie and Freddie at that time).

This calamity is NOT really about either Obama or McCain, but about an ideology...a FAILED ideology called "credit socialism," whereby influential Liberals in government handed over Fannie Mae and Freddie Mac to their own kindred spirits (Raines, Gorelick and Jim Johnson were all Liberal Dems) who espoused "credit socialism" - creating credit out of thin air, ostensibly to benefit the poorest and most high-risk Americans at the expense/risk of EVERYONE else.

The major supporters of that ideology were Chris Dodd and Barney Franks and some other high-profile Liberals in Congress.

But this is bigger than just politics, its an ideology (a FAILED ideology) that was thrust upon unwary and largely unwilling Americans without their consent or even their knowledge, by supposedly well-intentioned, would-be "social engineers."

I think it's vital that the truth comes out about this and that if there was provable malfeasance at Fannie and Freddie that it be prosecuted and those responsible imprisoned for it.

Although I don't hold out all that much hope for that!

WomanHonorThyself said...

hello my friend...The two institutions (Fannie Mae and Freddie Mac) have long been run not by bankers but by retired political figures, predominantly Democrats. ..absolutely the source of the current fiasco and the Dems deny it in spades!!!!!!!!

JMK said...

The worst thing about this entire fiasco is that a failed ideology "credit socialism" - giving poorer/high risk borrowers money their incomes and credit ratings did not warrant "instead of direct wealth transfers" was embraced by BOTH political and business elites and the American people were never even given a say in this.

Fannie Mae and Freddie Mac wrote so many high risk "bad loans" and then packaged them as "government-backed mortgage instruments" to private sector financial institutions (banks, brokerages and insurers)...when the Fed raised interest rates in response to global pressures on the dollar, the entire "sub-prime" mess collapsed.

Now we're looking at close to a $1 TRILLION bailout.

Yes, BOTH G W Bush and John McCain and a number of other Conservatives (both Democratic Conservatives and Republicans) sought to reform Fannie and Freddie but failed due to extensive lobbying by those semi-federal agencies and their extreme Left-wing apologists - Barney Franks and Chris Dodd....BUT BOTTOM-LINE the GOP had BOTH Houses of Congress AND the Presidency in 2003 and 2005 and STILL couldn't get these reforms through!

They also failed to rid the country of the AMT (the Alternative Minimum Tax) despite having both Houses of Congress and the Executive branch....the question that MUST be asked by Conservatives over that is, "WHY?

There was a confluence of failures here.

Rachel said...

giving poorer/high risk borrowers money their incomes and credit ratings did not warrant "instead of direct wealth transfers" was embraced by BOTH political and business elites and the American people were never even given a say in this.

The problem is I don't think Americans, if given the vote, would have gone against it. After all, it would be "for the People"

JMK said...

"The problem is I don't think Americans, if given the vote, would have gone against it. (Rachel)

I think, sad to say, you're right, Rachel.

We ARE definitely suckers for "the children," "the poor" and "the people," even though in most cases it's none of those who benefit, so much as a few well-connected people, be they a few "lucky" CEOs who get to crash companies and walk away with hundreds of millions of dollars, or armies of government bureaucrats who get most of the government funding for "helping."

I remember a few years ago Libertarians complaining about the $3 TRILLION wealth transfer from the middle class to "the poor," over the past thirty years in transfer payments and social programs, well we're about to have a $1 TRILLION transfer of wealth in one felt swoop - some of it going to bailout private financial companies that were stuck with tons of "bad paper" from a couple of quasi-governmental agencies and some to people who recklessly got in over their heads with mortgages.

I really don't understand the "I was snookered" argument by borrowers.

My wife and I got a mortgage a few years ago and were told that we could get the amount we got on either one of our incomes, suggesting they would've lent us more than double what we took out!

We'd done the math (very simple math - computing mortgage costs, property taxes, utilities, living expenses, etc. against our combined incomes) - and found the amount we borrowed (in keeping with the OLD lending rules, "n o more than two and a half times your combined incomes) to be the MAX we were comfortable with, when all the other expenses were factored in!

It wasn't at all hard to do, and quite frankly, I don't feel sorry for people who borrowed more than they could repay, to be honest, I feel angry with them.

I really don't get it.

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