Monday, September 22, 2008

Democrats Responsible for Financial Crisis Reports Bloomberg

"The economic history books will describe this episode in simple and understandable terms: Fannie Mae and Freddie Mac exploded, and many bystanders were injured in the blast, some fatally." That is how Bloomberg commentator Kevin Hassett describes the current economic crisis on Wall Street.

Fannie and Freddie did this by becoming a key enabler of the mortgage crisis. They fueled Wall Street's efforts to securitize subprime loans by becoming the primary customer of all AAA-rated subprime-mortgage pools. In addition, they held an enormous portfolio of mortgages themselves.

In the times that Fannie and Freddie couldn't make the market, they became the market. Over the years, it added up to an enormous obligation. As of last June, Fannie alone owned or guaranteed more than $388 billion in high-risk mortgage investments. Their large presence created an environment within which even mortgage-backed securities assembled by others could find a ready home.

The problem was that the trillions of dollars in play were only low-risk investments if real estate prices continued to rise. Once they began to fall, the entire house of cards came down with them.

Turning Point

Take away Fannie and Freddie, or regulate them more wisely, and it's hard to imagine how these highly liquid markets would ever have emerged. This whole mess would never have happened.

In 2005, the Senate Banking Committee, under warnings from Alan Greenspan about the unsustainable leveraging of Fannie and Freddie, passed a bill that would have implemented drastic regulations on the quasi-governmental organizations.
The bill gave a regulator power to crack down, and would have required the companies to eliminate their investments in risky assets.

Different World

If that bill had become law, then the world today would be different. In 2005, 2006 and 2007, a blizzard of terrible mortgage paper fluttered out of the Fannie and Freddie clouds, burying many of our oldest and most venerable institutions. Without their checkbooks keeping the market liquid and buying up excess supply, the market would likely have not existed.

But the bill didn't become law, for a simple reason: Democrats opposed it on a party-line vote in the committee, signaling that this would be a partisan issue. Republicans, tied in knots by the tight Democratic opposition, couldn't even get the Senate to vote on the matter.

He blames the kick backs key Democrats received during this period on the government's failures to act.
[M]any of the senators who protected Fannie and Freddie, including Barack Obama, Hillary Clinton and Christopher Dodd, have received mind-boggling levels of financial support from them over the years.

Throughout his political career, Obama has gotten more than $125,000 in campaign contributions from employees and political action committees of Fannie Mae and Freddie Mac, second only to Dodd, the Senate Banking Committee chairman, who received more than $165,000.

Clinton, the 12th-ranked recipient of Fannie and Freddie PAC and employee contributions, has received more than $75,000 from the two enterprises and their employees. The private profit found its way back to the senators who killed the fix.

He closes with this little tidbit.
Oh, and there is one little footnote to the story that's worth keeping in mind while Democrats point fingers between now and Nov. 4: Senator John McCain was one of the three cosponsors of S.190, the bill that would have averted this mess.


chris said...

There might be some truth to this. The Dems control both houses of congress, yet they are not calling for hearings into fannie and freddie. Why? Fannie and Freddie almost brought this nation to its knees. Shouldn't there be hearings into how these entities were run?

I bet if fannie and freddie were linked to republicans there would be investigations.

rosborne said...

In 2005, the House was a Republican majority, the Senate was a Replublican majority and the President was a fasci...DOH! a Republican.

How is it that Democrats killed the bill? There was no filibuster.

Anonymous said...

the bill was killed in committee by the democrats. maybe you should learn a little bit more about how the legislative process works before waxing intellectual.

mikell said...

The bill was killed in committee by a straight party line vote, with the democrates denying the vote to be taken to the floor. easy to fact check. MRR