Lehman Bros hearing — Rep. Maloney blames deregulation, ignores her own role as Fannie’s enabler

by John Berlau on October 6, 2008 · 2 comments

in Bailout Watch, Odds & Ends, Politics as Usual

At the hearing being held today by the House Oversight and Government Reform Committee, in which former Lehman Brothers CEO Dick Fuld is now testifying, an earlier panel attempted to look at the causes of Lehman’s collapse and the broader credit cirisis. And this gave an opportunity to committee members to ride their various hobby horses.

Rep. Carolyn Maloney’s horse and “whipping boy” was deregulation. She blamed the entire crisis on deregulation, and specifically the repeal of the Depression-era Glass-Steagall law that separated commercial and investment banking. The repeal was done through the Gramm-Leach-Bliley Act, which Maloney neglected to say was passed on an overwhelmingly bipartisan vote and signed by President Bill Clinton in 1999. Clinton, in fact, recently defended the law, saying it didn’t contribute much to the current crisis, and has even alleviated it by allowing banks to save failing brokerages. (Clinton is right, as a Wall Street Journal editorial points out).

But if Maloney wants to know a more proximate cause of the systemic risk from bad mortgages, she should look no further than her own attacks on Competitive Enterprise Institute President Fred Smith when he testified before the House Financial Services Committee in 2000. Maloney was one of many lawmakers who enabled Fannie Mae and Freddie Mac to take excessive risks by ridiculing longtime critics of he government-sponsored enterprises (GSEs) such as Smith. As Smith recalled in a recent op-ed in Investor’s Business Daily, Maloney poo-poohed his argument that Fannie and Freddie’s government privileges could result in a bailout.

Of Smith’s concerns about the GSEs’ long-standing line of credit of $2 billion from the Treasury Department, Maloney declared: “It is really symbolic, it is obsolete, it has never been used,”She asked, “Would you explain why it would be important to repeal something that seems to be of little use?”

Smith answered “as long as the pipeline is there, it is like it is very expandable.” Then he prophetically added, “It is only $2 billion today. It could be $200 billion tomorrow.”

Smith’s written testimony from 2000 is here. The full exchange of Smith and Maloney can be seen at the hearing transcript here.

Speaking of Fannie and Freddie, Rep. John Mica, R-Florida, rightly noted at the hearing that committee chairman Henry Waxman, D-Calif., really should be holding hearings on the GSEs as well as Lehman and the upcoming hearing on American International Group. But a hearing on Fan and Fred would highlight the role of Democrats like Maloney (as well as that of a few Republicans such as Mike Oxley of Sarbanes-Oxley fame) and and cast doubt on liberals’ central argument that this is all the fault of deregulation and the “free market.”

Fortunately, the committee and the audience did get to hear some informative testimony from American Enterprise Institute scholar Peter Wallison, who expounded on the GSEs role in spreading systemic mortgage risk and pointed out that more regulation isn’t always the answer.

Fedup October 7, 2008 at 12:54 am

Will Congress ever quit pointing their finger at private enterprise ?? It is time for Congress to give up their salaries, perks, and bonuses as they demand of private enterprise. Let those fools, scoundrels, and thieves lead by example for once in my lifetime.

Franrose O December 14, 2008 at 8:44 pm

House Oversight Committee in Washington DC on Tuesday, December 9th, where former executives were grilled by Congress over their corporate strategies that led to the near collapse of their companies. What had been done was that the leadership of those companies had invested in mortgage backing for their cash flow. What this means is that they basically bought other people's debts, thinking that would mean instant cash flow, especially when they raised the interest rates on the mortgages that they purchased. When the borrowers started defaulting because they had been lent money by irresponsible lenders, the companies that had bought their debt started teetering towards the brink. House Oversight Committee Chairman Henry Waxman termed their actions over the last few years irresponsible, especially after senior risk managers had questioned the call to make and invest in such loans. The irresponsibility on the part of these large companies is shocking, but it drives home a universal truth – that responsibility and security in your finances is paramount to maintaining financial health. Budget properly, save money, and don't put money in anything that looks too good to be true, because it probably is, and if you need a stop gap because a sudden emergency expense has popped your budgeting bubble, you can get payday loans at reasonable rates to keep your head above water until your next payday. Click to read more on <a title="READ MORE about Fannie Mae and Freddie Mac" rev="vote-for" href="http://personalmoneystore.com/moneyblog/2008/12/10/payday-loans-made-to-the-two-largest-lending-firms-in-the-us/&quot; rel="nofollow">Fast Payday Loans.

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