Chris Dodd

Barney Frank Used Influence with Fannie Mae, the Failed Mortgage Giant Bailed Out by Taxpayers

by Hans Bader on May 26, 2011

in Bailout Watch, Economy, Legal, Property Rights

Former House Banking Committee Chairman Barney Frank (D-Mass.) tenaciously opposed efforts to reform Fannie Mae and Freddie Mac, the government-sponsored mortgage giants that were bailed out at a cost to taxpayers of between $148 billion and $363 billion. Now it turns out that he got his boyfriend a “handsomely rewarded gig at Fannie Mae” while Frank “was helping to inflate the housing bubble” by pushing affordable housing mandates and policies that encouraged Fannie Mae to buy up risky mortgages.

Fannie Mae and Freddie Mac engaged in massive accounting fraud and other abuses. But Fannie Mae’s collapse was not entirely due to bad policies of its own making. Pressure from liberal lawmakers like Frank to buy up risky mortgages was also a factor in triggering the mortgage crisis, judging from a story in the New York Times. For example, “a high-ranking Democrat telephoned executives and screamed at them to purchase more loans from low-income borrowers, according to a Congressional source.” The executives of government-backed mortgage giants Fannie Mae and Freddie Mac “eventually yielded to those pressures, effectively wagering that if things got too bad, the government would bail them out.”

Despite his key role in causing the financial crisis, Frank became even more influential after President Obama took office. As the New York Times noted, the massive financial overhaul later passed in response to the financial crisis is “largely the product of extensive conversations” between the Obama administration and “Representative Barney Frank of Massachusetts and Senator Christopher J. Dodd of Connecticut.” That law, known as the Dodd-Frank Act, harms the economy, and violates both the Constitution’s separation of powers, and private property and equal-protection rights.

Frank’s co-sponsor of the Dodd-Frank Act, Senator Chris Dodd, left office in disgrace after ethical lapses. As Victor Davis Hanson notes, Dodd “got a sweetheart deal on an Irish ‘cottage’ from a crooked stock-trader,” “receiving it for hundreds of thousands of dollars less than its market value,” “got two preferential discount mortgage interest deals from the now-bankrupt Countrywide,” “got a sweetheart profit deal from a condo joint-buy with crook Edward Downe, Jr.,” “intervened with the Clinton administration to get the felon Downe pardoned,” and “misrepresented the value of his Irish cottage that he obtained via the agency of the dubious Mr. Kessinger.”

Tim Carney Knows How Washington Works

by Ryan Young on January 21, 2011

in Deregulate to Stimulate, Economy, Politics as Usual, Regulation

Former Warren Brookes Fellow Tim Carney’s latest Washington Examiner column, “Bail them out, regulate them, then work for them,” is a must-read.

Amy Friend, a former staffer for Sen. Chris Dodd, played a large role in writing the Dodd-Frank financial regulation bill. And she just got a new job at a lobbying firm. Tim explains:

There are two types of people on K Street: access people, who can get you in the door; and policy people, who know what’s on every page of every relevant bill and regulation. Friend is the latter. While business will dry up for other Dodd alumni on K Street, Friend is valuable because — to quote one Republican lobbyist — “she knows what’s on page twenty-three-[bleep]ing-hundred of that bill,” and every other page, too.

In other words, Friend didn’t just write a landmark piece of legislation — she wrote her meal ticket.

Tim doubts that Friend is corrupt. But her story is very common in Washington. Lobbying wouldn’t be such a booming business if regulation wasn’t too. And the revolving door between the Hill and K Street can be very profitable, even when no corruption is involved. Most people forget that regulators act just as self-interestedly as the people they regulate.

Many Free Checking Accounts Disappearing Due to Dodd-Frank Financial “Reform” Law

by Hans Bader on September 22, 2010

in Economy, Legal, Politics as Usual, Regulation, Sanctimony, Zeitgeist

The so-called financial “reform” bill that passed Congress — the Dodd-Frank Act — is wiping out many free checking accounts, since many banks can’t afford its red tape unless they either charge a monthly fee, or require a minimum balance of well over $1,000.

Ted Frank’s bank is now charging him a $15 monthly fee and $0.50 per check on his formerly free checking account, thanks to the consumer “protection” red tape in the Dodd-Frank Act, which was recently signed into law by the president.

Earlier, the same thing happened with credit cards, where a law passed by Congress in 2009 had the effect of reviving annual fees and wiping out many cash-back and rewards programs.  Congress passed a law called the CARD Act of 2009 (Credit Card Accountability Responsibility and Disclosure Act) that resulted in some of my wife’s previously-free credit cards charging her an annual fee, or chopping her rebates on purchases (she canceled those cards, and used other cards instead; but some cardholders don’t have other cards without annual fees).  Many, but not all, credit cards have reinstated annual fees or canceled rebates and rewards programs thanks to the CARD Act.  The law effectively forces responsible people to subsidize irresponsible people.  Passed in the name of consumer protection, it actually ripped off many consumers.

Corrupt Mortgage Giants Escape Reform: “Obama Administration Says Fannie, Freddie Reform ‘Too Hard’”

by Hans Bader on May 24, 2010 · 1 comment

in Bailout Watch, Economy, Legal, Nanny State, Personal Liberty, Politics as Usual, Precaution & Risk, Regulation, Sanctimony, Zeitgeist

There won’t be any reform of Fannie Mae and Freddie Mac, the corrupt, government-sponsored mortgage giants that even Obama administration officials admit were at the “core” of “what went wrong” in the financial crisis.

The “Obama Administration says Fannie, Freddie reform” is “‘too hard,’” reports the Washington Examiner.

Last week, the Senate passed a 1,500 page financial “reform” bill.  But it contained no meaningful reform, and won’t do anything to prevent the next financial crisis, as even liberals like Clinton’s Labor Secretary Reich have admitted.

In a party-line vote, Senate Democrats earlier blocked any reform of Fannie Mae and Freddie Mac.

(Obama received $125,000 in contributions from these mortgage giants as a Senator, second only to the corrupt Senator Chris Dodd, who is retiring this year due to his financial scandals.  Dodd is the chief drafter of the financial “reform” bill.)

The so-called financial “reform” bill would give government officials the ability to nationalize businesses that they claim are at risk of failing — and block meaningful judicial review of such seizures by shareholders alleging violations of their constitutional rights.  (That will increase the ability of presidents to shake down businesses for donations to their political allies, since a business in danger of being seized by the government will try to curry favor with government officials, the way the drug manufacturers are currently running ads for Senate Democratic Leader Harry Reid in order to curry favor with him and the Obama administration.)

The financial “reform” bill’s House architect, Barney Frank, boasts that it will create “death panels” for American companies (this is the same Barney Frank who for years blocked any reform of the corrupt mortgage giants Fannie Mae and Freddie Mac).

The Obama administration earlier lifted a $400 billion limit on bailouts for Fannie Mae and Freddie Mac, two mortgage giants known as the Government-Sponsored Enterprises (GSEs).   Soon, they will be receiving much more: “Late last year, the Obama administration pledged to cover unlimited losses through 2012 for Freddie and Fannie,” reports the New York Times.

At the direction of the Obama administration, Freddie Mac ran up more than $30 billion in losses to bail out mortgage borrowers, some of whom have high incomes.  Federal regulators sought to make Freddie Mac hide the resulting losses from the SEC and the public.)  By contrast, the Republican alternative, rejected by the Senate, aimed “to wind down, and break up” the mortgage giants and “limit taxpayer exposure” to their losses.

The Obama administration showered the mortgage giants’ executives with $42 million in compensation.

Fannie and Freddie helped spawn the mortgage crisis by acting as loan toilets, buying up risky mortgages and thus creating an artificial market for junk.  “From the time Fannie and Freddie began buying risky loans as early as 1993, they routinely misrepresented the mortgages they were acquiring, reporting them as prime when they had characteristics that made them clearly subprime.”  They paid their CEOs millions, and engaged in massive accounting fraud — $6.3 billion at Fannie Mae alone — to increase the size of their managers’ bonuses.  As Government-Sponsored Enterprises, they were exempt from the capital requirements that apply to private banks, so they did not have enough reserves to cover their losses when their mortgages started defaulting.

Banking expert Peter Wallison, who warned for years about the risky practices of Fannie and Freddie, said the financial “reform” bill would lead to “bailouts forever,” contrary to Obama’s claims.

Government pressure on banks to make loans in economically-depressed neighborhoods was a major cause of the mortgage crisis.  That pressure will increase under the financial “reform” legislation.  Legislators approved Obama’s proposal to create a new consumer “protection” agency.  But it may harm rather than help consumers.  Why?  “The agency would be in charge of enforcing the Community Reinvestment Act, a law that prods banks to make loans in low-income communities.”  It would do so without regard for banks’ financial safety and soundness, even though the Community Reinvestment Act was a key contributor to the financial crisis.

Democrats Block Reform of Corrupt Mortgage Giants; Fannie Mae and Freddie Mac Will Receive Billions More in Bailouts for Government-Sponsored Enterprises

by Hans Bader on May 12, 2010 · 1 comment

in Bailout Watch, Economy, Employment, Legal, Politics as Usual, Precaution & Risk, Regulation, Sanctimony, Zeitgeist

In a party-line, 56-to-43 vote yesterday, Senate Democrats blocked any reform of Fannie Mae and Freddie Mac, the corrupt, government-backed mortgage giants that even administration officials admit were at the “core” of “what went wrong” in the financial crisis.

President Obama received $125,000 in contributions from Fannie Mae and Freddie Mac executives as a senator, second only to the corrupt Senator Chris Dodd, who is retiring this year over financial improprieties (such as his real estate gift from a lobbyist and “sweetheart mortgage from Countrywide Financial“), yet is the chief drafter of the financial “reform” legislation expected to pass the Senate by next week.

The financial “reform” bill would devastate the venture capital markets needed to create jobs and small businesses, by imposing onerous restrictions on so-called “angel financing.”  It would also give government officials the ability to nationalize businesses that they claim are at risk of failing–and block meaningful judicial review of such seizures by shareholders alleging violations of their constitutional rights.  (That will increase the ability of presidents to shake down businesses for donations to their political allies, since a business in danger of being seized by the government will try to curry favor with government officials.)  The bill’s House architect, Barney Frank, boasts that it will create “death panels” for American companies (this is the same Barney Frank who for years blocked any reform of Fannie and Freddie).

Mortgage giant Fannie Mae is seeking another $8.4 billion in federal bailout money, after the Obama administration earlier lifted a $400 billion limit on bailouts for Fannie Mae and Freddie Mac, two mortgage giants known as the Government-Sponsored Enterprises (GSEs).   Last week, the other GSE, Freddie Mac, asked for $10.6 billion more in bailouts. The Obama administration is certain to approve the new bailout request: “Late last year, the Obama administration pledged to cover unlimited losses through 2012 for Freddie and Fannie,” reports the New York Times.

Obama’s so-called financial “reform” proposal does nothing to reform Fannie Mae and Freddie Mac, admits Obama’s Treasury secretary, Timothy Geithner, who concedes they were “a core part of what went wrong in our system.” (At the direction of the Obama administration, Freddie Mac is now running up $30 billion in losses to bail out mortgage borrowers, some of whom have high incomes.  Federal regulators sought to make Freddie Mac hide the resulting losses from the SEC and the public.)  By contrast, the Republican alternative “aims to wind down, and break up” Freddie Mac and “limit taxpayer exposure” to its losses.

“American taxpayers are paying for $6.8 billion of the Greek bailout” through contributions to an international bailout fund backed by the Obama administration.   Greece is being bailed out by Europe and the international community because it is running up huge budget deficits due to a bloated bureaucracy and government pensions that let many Greeks retire in their 50s. “The Obama administration wants to use U.S. tax dollars to bail out a nation that is in a financial death spiral brought on by years of amazingly irresponsible deficit spending and similar behaviors often found in socialist states.”

Rioters in Greece killed three bank employees last week in their rage over possible budget cuts.  “The protesting civil servant workers trapped the bank employees in a burning building.”

The Obama administration earlier lifted the $400 billion limit on bailouts for Fannie Mae and Freddie Mac, so that they could continue to buy up junky mortgages at taxpayer expense, and showered their executives with $42 million in compensation.

Fannie and Freddie helped spawn the mortgage crisis by acting as loan toilets, buying up risky mortgages and thus creating an artificial market for junk.  “From the time Fannie and Freddie began buying risky loans as early as 1993, they routinely misrepresented the mortgages they were acquiring, reporting them as prime when they had characteristics that made them clearly subprime.”  They paid their CEOs millions, and engaged in massive accounting fraud — $6.3 billion at Fannie Mae alone — to increase the size of their managers’ bonuses.  As Government-Sponsored Enterprises, they were exempt from the capital requirements that apply to private banks, so they did not have enough reserves to cover their losses when their mortgages started defaulting.

Banking expert Peter Wallison, who warned for years about the risky practices of Fannie and Freddie, says Obama’s proposals will lead to “bailouts forever.”  Obama claims that it will not lead to more bailouts.  But as Congressman Brad Sherman (D-Calif.) admitted, the “bill has unlimited executive bailout authority. . .The bill contains permanent, unlimited bailout authority.”

Government pressure on banks to make loans in economically-depressed neighborhoods was a major cause of the mortgage crisis.  If Obama has his way, that pressure will increase.  The House earlier approved Obama’s proposal to create a politically-correct entity called the Consumer Financial Protection Agency. “The agency would be in charge of enforcing the Community Reinvestment Act, a law that prods banks to make loans in low-income communities.”  It would do so without regard for banks’ financial safety and soundness, even though the Community Reinvestment Act was a key contributor to the financial crisis.

Goldman Sachs Endorses Trojan-Horse Financial “Reform” Bill; Bill Has Payoffs for Special Interests

by Hans Bader on April 28, 2010

in Bailout Watch, Economy, Legal, Politics as Usual, Precaution & Risk, Regulation, Sanctimony, Zeitgeist

The CEO of Goldman Sachs, the Wall Street firm accused of fraud by the SEC, has endorsed the so-called financial “reform” bill backed by President Obama and congressional leaders.

The bill would enrich Goldman Sachs at the expense of taxpayers and smaller competitors.  While the bill contains lots of red tape and fees that will harm insurance policyholders and Main Street, it contains selective “carve-outs” from consumer-protection laws for cronies of Senator Chris Dodd.  Dodd recently attracted criticism for financial and ethical lapses, such as his receiving “a sweetheart deal on an Irish “cottage” from a crooked stock-trader” and “two preferential discount mortgage interest deals from the now-bankrupt Countrywide.”  Goldman Sachs is the fourth-largest donor to Democratic campaigns, ranking just below public-employee unions and trial lawyers in its massive support for liberal politicians.

The financial bill contains goodies for Big Labor and “too big to fail” banks and financial institutions, at the expense of taxpayers and competing firms.

As journalist Matt Welch notes, Obama “is lying his face off about financial reform.”

Obama has collected millions from Wall Street special interests, his administration contains many Wall Street lobbyists, and he supported the unnecessary $700 billion bank bailout.  But now, he’s pushing a deceptive financial regulation bill with phony rhetoric about “reform,” claiming it is “not legitimate” to point out that the bill could lead to yet more bailouts and government takeovers.

Obama’s legislation would do nothing to rein in the worst offenders behind the mortgage crisis, the government-subsidized mortgage giants Fannie Mae and Freddie Mac, while enriching left-wing lobbying groups and community organizers, and giving the government the permanent ability to bail out and take over Wall Street firms.

Obama’s proposed financial rules overhaul does absolutely nothing about Fannie Mae and Freddie Mac, admits Obama’s Treasury Secretary, tax cheat Timothy Geithner, even though he admits that “Fannie and Freddie were a core part of what went wrong in our system.” Worse, the Obama administration lifted the $400 billion limit on bailouts for Fannie and Freddie, so that they could continue to buy up junky mortgages at taxpayer expense, and showered their executives with $42 million in compensation.  The Obama administration is now expanding the bailouts of these mortgage giants so that they can lavish pay on their CEOs and reduce the payments of deadbeat mortgage borrowers.  (At the direction of the Obama administration, Freddie Mac is now running up $30 billion in losses to bail out mortgage borrowers, some of whom have high incomes.  Federal regulators sought to make Freddie Mac hide the resulting losses from the SEC and the public.)

Fannie and Freddie helped spawn the mortgage crisis by acting as loan toilets, buying up risky mortgages and thus creating an artificial market for junk.  “From the time Fannie and Freddie began buying risky loans as early as 1993, they routinely misrepresented the mortgages they were acquiring, reporting them as prime when they had characteristics that made them clearly subprime.”

Why did they buy these risky loans?  They put up with Clinton-era affordable-housing regulations that required them to buy up lots of risky loans, in order to curry favor on Capitol Hill and thus retain their annual $10 billion in tax and other special privileges (which they possessed owing to their status as “Government-Sponsored Enterprises” or GSEs). They paid their CEOs millions in the process, and engaged in massive accounting fraud — $6.3 billion at Fannie Mae alone — to increase the size of their managers’ bonuses.  As GSEs, they were exempt from the capital requirements that apply to private banks, so they did not have enough reserves to cover their losses when their mortgages started defaulting.

Banking expert Peter J. Wallison, who prophetically warned against the risky practices of Fannie Mae and Freddie Mac for years, says that Obama’s proposals will lead to “bailouts forever” and give big, politically-connected banks that are “too big to fail” the ability to drive smaller rivals out of business at the expense of consumers and taxpayers.  His colleague Alex Pollock notes that Obama has not lived up his administration’s claims that it would back reform of Fannie Mae and Freddie Mac.

Obama claims that it will not lead to more bailouts, but even congressional Democrats admit that it will.  As Congressman Brad Sherman (D-Calif.) admitted, the “bill has unlimited executive bailout authority. . .The bill contains permanent, unlimited bailout authority.”

Government pressure on banks to make loans in economically-depressed neighborhoods was another key reason for the mortgage meltdown and the financial crisis.  If Obama has his way, that pressure will increase.  The House earlier approved Obama’s proposal to create a politically-correct entity called the Consumer Financial Protection Agency. “The agency would be in charge of enforcing the Community Reinvestment Act, a law that prods banks to make loans in low-income communities.”  It would do so without regard for banks’ financial safety and soundness, even though the Community Reinvestment Act was a key contributor to the financial crisis.

Obama’s proposed financial regulations would also harm retail banking operations used by middle-class people and small businesses.

Center-Right Coalition Letter Opposes Toxic Provisions in Dodd Bill

by John Berlau on April 23, 2010

in Bailout Watch, Culture, Deregulate to Stimulate, Insurance, Labor, Mobility, Nanny State, Personal Liberty, Politics as Usual, Precaution & Risk, Regulation, Zeitgeist

Below is a letter sent today to the Senate that was signed by several prominent groups in the Center-Right Coalition expressing “grave concerns about the ‘Restoring American Financial Stability Act’ and its negative impact on Main Street.” The letter has been signed by a broad spectrum of the Center-Right coalition, including this author on behalf of the Competitive Enterprise Institute; economic conservative stalwarts Grover Norquist and Tim Phillips on behalf of, respectively, Americans for Tax Reform and Americans for Prosperity; and veteran conservative activists Phyllis Schlafly on behalf of Eagle Forum. Also signing on are two energetic new grassroots groups that speak on behalf of much of the Tea Party movement: Tea Party Express and American Grassroots Coalition.

The letter, printed below, highlights what it calls “a by-no-means exclusive list” of major concerns with the bill. These include the bill’s broad definition of “nonbank financial company” that would mean that many “Main Street non-financial businesses would be hit with taxation, regulation, and possible nationalization by the Federal Reserve” (Read more about this here), the proxy access mandates that would usurp state incorporation law and “empower union pension funds and other progressives by forcing companies to fund their Saul Alinsky-style campaigns for a company’s board of directors” (Read more about this here), and the lack of any reforms in the bill of Fannie Mae and Freddie Mac – the two government-created mortgage giants that were “primary causes of the crisis.”

The letter concludes: “While we believe the government should act swiftly to punish financial fraud, it should not diminish Americans’ choices and opportunities in the name of ‘stability.’ We believe that fundamentally, as with health care, although there are a lot of complexities involved, this is about the future of our country. Do we continue living in an America where entrepreneurs and investors can launch new businesses and new ideas — or do we live under a system in which almost every transaction has to be approved by a government agency or czar?!”

April 23, 2010

Dear Senators Reid and McConnell,

As leaders of groups representing millions of Americans that comprise a Center-Right Coalition, we have grave concerns about the “Restoring American Financial Stability Act” and its negative impact on Main Street. While we believe the government should act swiftly to punish financial fraud, it should not diminish Americans’ choices and opportunities in the name of “stability.”

We believe that fundamentally, as with health care, although there are a lot of complexities involved, this is about the future of our country. Do we continue living in an America where entrepreneurs and investors can launch new businesses and new ideas — or do we live under a system in which almost every transaction has to be approved by a government agency or czar?!

Below is a by-no-means exclusive list of our concerns about provisions that hurt Main Street.

1. Main Street non-financial businesses would be hit with taxation, regulation, and possible nationalization by the Federal Reserve: Defenders the $50 billion upfront resolution (bailout) fund argue that the money would come not from general taxpayer funds but fees on “financial institutions.” But putting aside the fact that even taxes on big banks would be passed on to depositors and borrowers, the bill’s definition of “financial institution” subject to the fee and regulation by the Federal Reserve goes far beyond a bank or stockbroker.

Life, home and auto insurers would be subject to this bailout fund fee even though they already pay into state funds for insolvent insurance companies, and the fee would then be passed on to their policy holders. The Federal Reserve would also have the power to define a “nonbank financial company” to encompass any business it deems as “substantially engaged” in financial activity, and experts fear this definition could include energy companies and manufacturers tangentially involved in finance and credit. These firms would be subject not just to the bailout fees, but to the Fed’s new powers of breakup and nationalization for firms it deems “systemic.”

2. “Proxy access” and corporate governance provisions would take power from states and empower progressive interest groups — from unions to animal rights: Even though they have little justification in preventing the next financial crisis, the bill contains “proxy access” provisions that would empower union pension funds and other progressives by forcing companies to fund their Saul Alinsky-style campaigns for a company’s board of directors. Combined with other items federalizing incorporation law — like a mandated majority instead of plurality standard for director votes– this could enable special interest activists to harm the interests of ordinary shareholders and encourage corporate directors to cut deals with them on things like card check, cap-and-trade, and kicking conservative media personalities off the air.

3. What’s not in the bill — any reform of Fannie and Freddie: The bill ignores the two of the primary causes of the crisis: Fannie Mae and Freddie Mac. They’re bigger than ever, and the Obama administration quietly lifted the $400 billion cap on government backing on Christmas Eve — the “Christmas bailout” — so now taxpayers have unlimited liability for them. A bill aiming to prevent the next crisis is woefully insufficient without reform of Fannie and Freddie, and could have the unintended effect of allowing them to carry the risks that other businesses would be barred from taking.

We are happy to meet with you or members of your staff to discuss further these vital concerns.

Sincerely,

Jennifer Hulsey, Co-Founder, American Grassroots Coalition

Dick Patten, President, American Family Business Institute

Tim Phillips, President, Americans for Prosperity

Grover Norquist, President, Americans for Tax Reform

Chuck Muth, President, Citizen Outreach

John Berlau, Director, Center for Investors and Entrepreneurs, Competitive Enterprise Institute

Phyllis Schlafly, President and Founder, Eagle Forum

Colin Hanna, President, Let Freedom Ring

William Greene, President, RightMarch.com

Jim Martin, Chairman, 60 Plus Association

Amy Kremer, Director, Grassroots and Coalitions, Tea Party Express

Cc:

The Honorable Christopher Dodd               The Honorable Richard Shelby

Chairman                                                      Ranking Member

Committee on Banking, Housing,               Committee on Banking, Housing,

and Urban Affairs                                        and Urban Affairs

United States Senate                                    United States Senate

Washington, DC 20510                               Washington, DC 20510

The Honorable Robert Corker

United States Senate

Washington, DC 20510

Obama-Dodd financial bill would further enrich Goldman Sachs

by John Berlau on April 16, 2010 · 35 comments

in Bailout Watch, Politics as Usual

Today, the SEC charged giant investment bank Goldman Sachs with more than $1 billion worth of securities fraud for its dealings in the subprime mortgage market.

Ironically, at the same time the SEC is seeking justice for Goldman’s alleged victims, President Obama and Senate Banking Committee Chairman Chris Dodd (D-Conn.) are pushing a bill would reward the firm with potentially billions of dollars by instituting a so-called “resolution authority” that would, in practice, be a permanent bailout fund.

Supporters of Dodd’s bill maintain that it does not create bailouts because the failing firm’s shareholders would be wiped out and its managers would be fired. But what they don’t say is that the money from the $50 billion resolution fund would be used to frequently give creditors of this firm a better deal than they would have in bankruptcy.

Recall that during the financial implosion of late 2008, Goldman was not bailed out directly by taxpayers, but instead received tax dollars as a creditor of AIG. Goldman received $12.9 billion in the “backdoor bailout” of AIG because of the credit default swaps it owned that AIG had insured. Goldman and other of AIG’s counterparties were paid by the government 100 cents on the dollar in this bailout, whereas creditors in bankruptcy court often get less than 50 cents on the dollar.

So as American Enterprise Institute scholar and Financial Crisis Inquiry Commission member Peter Wallison puts it: “That act—paying off the creditors when the government takes over a failing firm—is a bailout. It doesn’t matter that the management lose their jobs, or that the shareholders get nothing. When the creditors are aware that they will get a better deal with the failure of a large company than they will get with a small one that goes the ordinary route to bankruptcy, that is a bailout.”

To top it off, the fees for the Dodd bill’s resolution fund that would pay off a failing firm’s creditors would come not just from banks but from a broad array of Main Street businesses. Stable life, auto and home insurance companies would have to pay into this fund to subsidize the failure of the next high-roller, and the fees they pay would likely be passed on in the premiums their policy holders pay. And the bill’s definition of  “nonbank financial company” is so broad that it could cover manufacturers only tangentially involved in extending credit, such as those that lease equipment to their customers. This would raise prices and cost Main Street jobs.

All in all, the Goldman indictment should serve as a wakeup call to those who want to ram a bill through Congress without looking at who both its victims and beneficiaries would ultimately be.

Fannie and Freddie finally called to Crisis Commission

by John Berlau on April 9, 2010 · 1 comment

in Bailout Watch, International, Legal, Nanny State, Personal Liberty, Politics as Usual, Sanctimony, Stimulus to Nowhere, Zeitgeist

It is good that the commission, after several months, is finally visiting the role of Government-Sponsored Enterprises, but the setup of today’s hearing is still providing a far from adequate investigation. Former CEO Daniel Mudd came late in the game from 2005 to 2008, and the commission must call Mudd’s predecessor, Franklin Raines, to give testimony about his tenure as CEO in which so many expansions were made and policies were put in place that contributed significantly to the crisis. Having Mudd testify without Raines, would be like hearing only from Ben Bernanke but not Alan Greenspan about the activities at the Federal Reserve.

Still, because of the facts brought forth in Greenspan’s testimony on Wednesday, and the diligent questioning of commissioners< Peter Wallison and Keith Hennessey some revealing facts came out that demonstrate that Fannie and Freddie played an even more significant role in the financial crisis than previously known. These findings could not have come at a better time, as both Obama and lawmakers like House and Senate Banking Committee Chairmen Barney Frank and Chris Dodd want to sweep the GSE’s problems under the rug.

Amazingly, they have no immediate plans to rein in Fannie and Freddie, despite their admonitions of how urgent it is to ram through “financial reform” that would hit a broad swath of financial and nonfinancial companies. And the Obama administration’s “Christmas bailout” of the GSE’s – the December 24 order removing the caps of $200 billion dollars that the Treasury was authorized to spend on each of the two mortgage underwriters – exposes the American taxpayer to unlimited liability for the entities and their potential new missteps.

One of the most important moments of the hearing came in a little-notice moment on Wednesday, during the second panel after the much-discussed testimony of Greenspan. This was when Commissioner Wallison asked Patricia Lindsey, former Vice President of Corporate Risk for now-bankrupt subprime mortgage originator New Century Financial Corporation, about her firm’s dealing with Fannie.

Lindsey confirmed that Fannie directly bought many of New Century’s bad mortgages all through the last decade. This is one more piece of evidence that directly refutes the notion that Fannie and Freddie were late to the subprime party, and pushed there by private sector competitor. One the contrary, it shows that the GSEs were important drivers of the subprime party. (This part of the hearing can be viewed here — http://www.c-span.org/Watch/Media/2010/04/07/HP/R/31521/Financial+Crisis+Inquiry+Cmsn+Public+Hearing.aspx – and occurs at about the 50-minute mark.)

Greenspan himself provided facts that whatever one may think of his other actions – and I think he does bear significant blame for keeping interest rates too low for too long – no one has refuted. He pointed out that the firms purchased 40 percent of all private-label subprime mortgage securities during 2003 and 2004. “To purchase these mortgage-backed securities, Fannie and Freddie paid whatever price was necessary to reach their affordable housing goals,” he said. And Greenspan also noted that “the enormous size of purchases” by the GSEs during this time was not revealed until Fannie reclassified in September 2009 a large part of its prime mortgage portfolio as subprime.

Indeed, According to housing expert Edward Pinto, Fannie’s former chief credit officer who has presented his findings before Congress and should himself be asked to testify before the commission, millions of mortgages to borrowers with credit scores of less than 660 – considered by prominent researchers to be the dividing line for subprime loans — had been labeled by Fannie and Freddie as prime going back as early as 1993. In his writings for the American Enterprise Institute, Commissioner Wallison noted that this misrepresentation by the government-backed mortgage giants could have itself been a major factor in inflating the housing bubble. “Market observers, rating agencies and investors were unaware of the number of subprime and Alt-A mortgages infecting the financial system in late 2006 and early 2007,” he wrote.

Competitive Enterprise Institute President Fred Smith had long warned about the systemic risk Fannie and Freddie posed to the financial system, warning as early as 2000 that their implosion could cause a taxpayer bailout of as much as $200 billion. That turned out to have greatly underestimated the $400 billion the bailout has already cost taxpayers and the possibly hundreds of billions more it will cost them, since the Obama administration removed the cap on Treasury Department assistance.

But at the time, Smith’s was a voice in the wilderness as members of Congress pooh-poohed the notion of Fannie and Freddie ever slipping up. In 2003, Rep. Barney Frank, D-Mass., now chairman of the House Financial Services Committee, even publicly called for the mortgage entities to “roll the dice” on less credit worthy borrowers.

The Bush administration also pushed policies that tilted incentives toward home ownership, and the mistakes of politicians of both parties should be examined in thorough hearings. Unfortunately, it still looks as though politicians are still giving a pass to the fat cats from Washington. But hopefully the rallying cry after these hearings will be “Fix Fannie and Freddie First.”

Government Uses Takeover of Mortgage Giants to Deliberately Increase Their Massive Losses at Taxpayer Expense

by Hans Bader on January 5, 2010

in Bailout Watch, Economy, Politics as Usual, Precaution & Risk, Regulation, Sanctimony

The Wall Street Journal notes that the Obama administration has used the federal government’s bailout of mortgage giants Fannie Mae and Freddie Mac to do the exact opposite of what the federal government claimed it would do when it took them over a year ago.  It took them over in the name of winding down their risky loan portfolios, so they would stop running up losses at taxpayer expense.  But the Obama administration is deliberately making them run up huge losses to help out irresponsible borrowers who potentially might default on their mortgages.  “In today’s Washington, we suppose, it only makes sense that the companies that did the most to cause the meltdown are being kept alive to lose even more money.”

Over Christmas Eve, the Obama administration not only lifted the $400 billion limit on the bailout (and showered their CEOs with cash), but also ended “a key requirement of the 2008 bailout—that Fan and Fred begin shrinking the portfolios of mortgages they own on their own account, which total a combined $1.5 trillion.”

The Obama administration is now deliberately making them lose money:  “the government has directed both companies to pursue money-losing strategies by modifying mortgages to prevent foreclosures. . . Fannie reported last quarter that loan modifications resulted in $7.7 billion in losses.”

“Much of this is being done off the government books,” to hide the costs of the Obama administration’s record deficit spending.  And their CEOs are being paid a fortune, the Journal notes, because “Fannie and Freddie are exempt from the rules” limiting compensation at private banks.

The mortgage crisis was caused partly by the reckless government-sponsored mortgage giants Fannie Mae and Freddie Mac, and partly by the affordable-housing mandates imposed on them.

But Obama’s proposed financial rules overhaul does absolutely nothing about Fannie Mae and Freddie Mac, admits Obama’s Treasury Secretary, Timothy Geithner, even though he admits that “Fannie and Freddie were a core part of what went wrong in our system.”

And banks will now be pressured to make even more risky loans.  The House has approved Obama’s proposal to create a politically-correct entity called the Consumer Financial Protection Agency. “The agency would be in charge of enforcing the Community Reinvestment Act, a law that prods banks to make loans in low-income communities.”  The Community Reinvestment Act was a key contributor to the financial crisis.  But the Administration’s proposal would direct the new agency to enforce the Community Reinvestment Act without regard for banks’ financial safety and soundness.

Obama’s financial-regulation plan is “largely the product of extensive conversations” with two lawmakers responsible for the current financial mess, the corrupt Chris Dodd, and Barney Frank.

Another $75 billion in taxpayer money is already being wasted on mortgage bailouts that economists and real estate experts say is actually harming the economy and the real estate market.

← Previous Entries