Peter Wallison

Obama Uses Phony Rhetoric About Financial ‘Reform’ to Push Bill That Enriches Special Interests and Perpetuates Bailouts

by Hans Bader on April 23, 2010

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

President Obama has collected millions from Wall Street special interests, his administration is chock full of 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 (as economists and banking experts like Peter Wallison have demonstrated).

Obama’s legislation would do nothing to curb the abuses of the worst offenders behind the mortgage crisis, the government-subsidized mortgage giants Fannie Mae and Freddie Mac, even as it would enrich the politically connected liberal Wall Street firm Goldman Sachs (recently accused of fraud), enrich left-wing lobbying groups and community organizers, and give 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.

Congress Moves to Reinflate the Housing Bubble That Caused the Financial Crisis

by Hans Bader on October 19, 2009

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

Veteran political commentator Michael Barone reports that liberal congressional leaders are pushing policies to “inflate the housing bubble again,” even though “our financial system broke down because we had, thanks to government policies, a housing bubble.”

Congressional leaders are ignoring warnings from experts across the political spectrum, such as conservative Peter Wallison’s October 16 piece in the Wall Street Journal, titled “Barney Frank, Predatory Lender,” and liberal Charles Lane’s recent piece in the Washington Post, “Doubling Down On the Wrong Housing Policy.”  (Wallison, a banking expert, prophetically warned for years about the risky practices of the government-sponsored mortgage giants, Fannie Mae and Freddie Mac, which were at the core of the financial crisis, and later had to be bailed out by taxpayers at a cost of around $200 billion.)

The Obama administration is also busy promoting the junky, risky mortgages that fueled the housing bubble, showing that it has learned nothing from history.

In the Washington Examiner, Meghan Cox Gurdon explains how housing policies affected two sisters, one responsible and one irresponsible.  The financially-irresponsible sister, who was unable to manage her own finances, and had recently defaulted on a small car loan, ended up getting a taxpayer-subsidized mortgage.  Meanwhile, the responsible sister and her husband were unable to obtain a mortgage loan, despite having an “excellent credit rating” and money for a large downpayment.

Deregulation Didn’t Cause the Financial Crisis, But It Might Help Solve It

by Hans Bader on October 1, 2008 · 5 comments

in Bailout Watch, Economy, Legal, Precaution & Risk

Banking expert Peter Wallison explains why deregulation didn’t cause the financial crisis, while Steven Malanga explains how government regulators foolishly pressured banks to drop prudent lending criteria as “discriminatory,” resulting in risky lending that caused the crisis. 

Peter Wallison was one of the few people who warned for years about the risky practices of the government-sponsored mortgage giants, Fannie Mae and Freddie Mac, which helped spawn the mortgage crisis.  Liberal Congressional leaders turned a deaf ear to his pleas for reform, blocking reform legislation and claiming that the leadership of the fraud-ridden Fannie Mae was “outstanding,” while Fannie Mae was busy engaged in accounting fraud to enrich its managers (who remain liberal power-brokers), and political bullying.  (Congressman Barney Frank’s role in causing the mortgage crisis is chronicled in the Boston Globe).

Yesterday, the SEC reformed mark-to-market accounting rules to make them less rigid.  [CORRECTION:  THE SEC JUST "CLARIFIED" THE RULES.  IT'S NOT CLEAR THAT THE SEC CHANGED THE RULES SUBSTANTIVELY AT ALL.  THE NEWS STORY I LINKED TO MADE IT SEEM LIKE A REFORM, BUT IT WASN'T MUCH OF A REFORM].  Those rules have apparently contributed to the financial panic and frozen credit markets.  The SEC should also revisit wasteful regulations governing the minutiae of companies’ “internal controls,” which cost the economy $35 billion per year.

Community organizers like the fraud-ridden ACORN used regulations like the Community Reinvestment Act to pressure lenders into making billions of dollars worth of bad loans.

Lehman bankruptcy: In capitalism, failure is not a dirty word

by John Berlau on September 15, 2008 · 6 comments

in Economy, Legal, Nanny State, Politics as Usual, Precaution & Risk

My reaction to Lehman Brothers’ declaring of Chapter 11 bankruptcy and the refusal of Treasury Secretary Hank Paulson and others to take extraordinary Bear Stearns-like measures for the government to prop the firm up can be summed up in three words: It’s about time!

Business failure is not only a permissible outcome of capitalism, it’s a necessary one. As the great economist Joseph Schumpeter has written, the process of “creative destruction” is essential for the market to function. For innovation to flourish and the standard of living of the populace to improve, the market must be free to reward success and punish failure.

As Schumpeter wrote in his 1942 book Capitalism, Socialism and Democracy, there is an ongoing “process of industrial mutation — if I may use that biological term — that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in, and what every capitalist concern has got to live in.”

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