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GSE Meltdown Time Line

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The fall of Fannie Mae is a story about what happens when government gets into the business of running a business.

Freddie Mac and Fannie Mae

The Federal National Mortgage Association (Fannie) and the Federal Home Loan Mortgage Corp. (Freddie) are publicly held, for-profit corporations that were legislated into existence by Congress and operate with a congressional charter to help lower- and middle-income Americans buy homes. (They are often referred to as government-sponsored enterprises, or GSEs.) Fannie was founded in 1938 as a federal agency and became a for-profit company in 1968. Freddie, started in 1970, offered shares to the public in 1989.

The central idea behind the GSEs was that they would encourage home-ownership by buying mortgages from banks. This was in an era when federal law forbade interstate banking–which meant that most banks were necessarily small. When Fannie or Freddie bought a mortgage, it freed up the bank’s limited capital, allowing it to make more loans. The purchase also relieved the bank of both the credit risk and the interest rate risk–that is, of having to worry that people might default, or that interest rates might rise during the life of the loan. Fannie and Freddie are one reason America is one of only two countries where lenders offer 30-year fixed rate mortgages. (Denmark is the other, by the way.)

Their congressional charters give Fannie and Freddie advantages unmatched to this day and as such Fannie and Freddie dominate the mortgage market. The more mortgages the GSEs buy, the faster their profits can grow. Since 1995, Fannie and Freddie’s holdings of residential debt have grown an average of 20% a year, and together they now carry $1.5 trillion in home loans and mortgage securities on their books–more than the top ten commercial banks combined. Thanks in large part to this growth, Fannie has had double-digit profit gains for the last 17 years–and an average return on equity of 25%. But the GSEs’ size has people increasingly worried about what might happen if anything went wrong–and not just to Fannie and Freddie but to the entire financial system.
Source:The Fall of Fannie Mae

Fannie’s financial moves generated more than $100 million a year in fees for Wall Street firms. By late 1998, Fannie guaranteed a stunning $1 trillion of mortgages and held $376 billion of mortgages and mortgage-backed securities on its own books. Critics looked at its portfolio and saw huge potential risks that would likely be borne by taxpayers if anything went wrong. Financial consultant and prominent GSE critic Bert Ely was among those who argued that Fannie has created a moral hazard; namely, that if everyone thinks the government will rescue the GSEs, the companies aren’t subject to market discipline.

The chain of events that eventually brought Frank Raines down starts with Enron. When the Enron scandal exploded, Freddie Mac, which had employed Enron’s accounting firm, Arthur Andersen, quickly fired the firm and hired new accountants. In the fear-ridden environment of 2002, the new accountants, PricewaterhouseCoopers, scrubbed Freddie’s books. The result of that scrutiny was Freddie’s admission, about a year later, that it had understated its profits for years, in an effort to smooth out earnings. The company agreed to a $5 billion restatement and ousted many of its top executives, including Brendsel.

Just days before the Freddie crisis had erupted into public view, the Office of Federal Housing Enterprise Oversight (OFHEO)–the agency that regulates the GSEs–had pronounced Freddie’s internal controls “accurate and reliable.”

The White House gets involved

The CNN Money article The Fall of Fannie Mae

explains the common view in Washington is that the White House turned on Fannie Mae because it’s seen as a Democratic Party stronghold. It also offers another view which explains that after Enron, the White House wanted to avoid being drug into another business scandal and looked to see where it was vulnerable. With the events at Freddie Mac, the other GSE, it is easy to see why Fannie Mae came under scrutiny.

The boards of these GSEs became its first target. Under their charters, five of the 18 directors on each board are appointed by the President. In 2003 chief of staff Andrew Card was put in charge of a group to study the matter. The White House decided that it would not reappoint any presidential directors to either GSE board. (The posts are now vacant.) It also decided that their books needed to be cleaned up and they needed stronger oversight.

A Wall Street Journal report, filed in April 2002 by staff reporter John D. McKinnon, had this to say about the Bush White House initiative.

The White House stepped up the pressure for tighter oversight of Fannie Mae and Freddie Mac, warning that their “gigantic” size is creating risks for financial markets, while the benefits they confer on ordinary homebuyers are relatively small.

Gregory Mankiw, chairman of the White House Council of Economic Advisers, told state bank supervisors at a conference here that because of their perceived government ties, the companies enjoy a subsidy that “creates a source of systemic risk for our financial system” that must be closely monitored.

His remarks signaled a new phase in the Bush administration’s aggressive effort this year to improve regulation of the two government-sponsored enterprises in the wake of an accounting blowup at Freddie Mac. Amid signs that congressional action on the administration’s oversight proposal has stalled for the remainder of this year due to resistance from the companies and their supporters, Mr. Mankiw’s speech suggested the administration will continue to push its bill next year, and could even ratchet up its demands.

The White House’s new strategy appears to be to reach over Congress’s head to appeal directly to financial markets, in hopes of turning up the heat on the companies and closing the deal on a bill. That approach could help the administration offset the close ties that Fannie Mae and Freddie Mac have cultivated over the years with members of the congressional committees that oversee them.

In his speech, crafted with the assistance of an administration working group headed by White House Chief of Staff Andrew Card, Mr. Mankiw warned that the huge growth in the housing enterprises’ securities issuances raises risks for the stability of financial markets and even financial institutions that hold their debt.

“This risk arises because the subsidy has allowed the GSEs to become gigantic,” Mr. Mankiw said. “Even a small mistake in GSE risk management could have ripple effects throughout the financial system.”

The government sponsored enterprises buy and sell mortgages and mortgage-backed securities on the secondary market. Mr. Mankiw noted that the debt they issue to finance their operations more than tripled between 1995 and 2002, to $2.2 trillion. “If recent trends continue, GSE debt will soon exceed the privately held debt of the federal government,” he noted, adding that the companies’ risk management so far has been “largely successful.”

Mr. Mankiw raised doubts about the size of the benefit the housing enterprises confer. That is because only part of the government subsidy is passed along to the public in the form of lower mortgage interest rates, he said. The rest, he added, “goes to executive compensation and to shareholder profits.”

Administration officials worry that demanding significant changes in GSE operations in the wake of the Freddie Mac blowup could roil the housing market and possibly even delay the nascent economic recovery. In effect, the administration appears to be willing to risk a reduction in the benefits that Fannie and Freddie bring to the housing market in return for tighter regulation.

In response to Mr. Mankiw’s remarks, Fannie Mae and Freddie Mac officials maintained that they are in broad agreement with the administration on the need for a strong regulator for the companies.

The White House became part of a loose alliance that took on the Fannie Mae machine in a way no one had before. A short list of examples:

    • In late 2003, Federal Reserve economist Wayne Passmore released a paper that put the value of the government’s implied guarantee of the GSEs at as much as $164 billion. This subsidy “accounts for much of the GSEs market value,” wrote Passmore, who added that “the GSEs’ implicit subsidy does not appear to have substantially increased home-ownership or homebuilding.” He also argued that the GSEs did very little to lower mortgage costs.

    • HUD toughened its low-income housing goals for Fannie and Freddie–and then insisted the GSEs meet the new requirements. HUD had long felt that Fannie and Freddie were not doing enough to promote affordable housing. “HUD had permitted Fannie and Freddie to consistently dispute our findings and challenge us publicly,” says Alphonso Jackson, the current head of HUD. “Not on my watch and not under this President.” (“You just cannot appreciate how truly bad this is,” a Fannie employee complained in an e-mail to a Republican staffer, referring to the prospect of HUD having more clout.)

    • In the summer of 2004 the Justice Department rendered an opinion–which Fannie and Freddie had viewed as bad news–that Treasury could actually limit future debt issuance by the GSEs.

    • Administration operatives began making anti-Fannie arguments to key opinion makers, such as the editorial boards of major newspapers. They seem to have had an impact. Over the past year anti-GSE editorials have appeared in key papers–not just the Wall Street Journal, but also the Washington Post,the Los Angeles Times, and the Christian Science Monitor.

Scandal at Fannie Mae

In a Wall Street Journal analysis, the failure of the GSE’s began shortly after their 2003 and 2004 accounting scandals. Senior executives at Fannie Mae manipulated accounting to collect millions of dollars in undeserved bonuses and to deceive investors. The government-sponsored mortgage company was fined $400 million.

Franklin Delano Raines once a prominent Democrat and CEO of Fannie Mae, and Leland Brendsel, the CEO of Freddie Mac were removed from their assigned office in the wake of the multibillion-dollar accounting scandal. Source:The Fall of Fannie Mae

Many Warnings Ignored

Spanning a period of 6 years, President Bush and his Administration have not only warned of the systemic consequences of failure to reform GSEs but also put forward thoughtful plans to reduce the risk that either Fannie Mae or Freddie Mac would encounter such difficulties.

Beginning as early as 2001, the President made repeated attempts to reform the supervision of these entities but was thwarted by the legislative maneuvering of those who emphatically denied there were problems with the GSEs.

The mounting and overwhelming evidence points to the fact many Democrats chose to drive while their eyes were closed, ignoring call after call to fix the problem and in some cases, belligerently and arrogantly denying any problem existed with their policies.

Some segments of the media recognize the Democrats are largely at fault and point to the new oversight laws pushed largely by Republicans.

When you read about who benefits by their relationship with these 2 failed GSEs, you then begin to understand why there was little motive to reform “the hands that fed them”.

The Washington Times gets it wrong

The Washington Times incorrectly accused the White House of ignoring warnings of trouble ahead for government-sponsored enterprises (GSEs) and neglecting to “adopt any reform until this summer,” when it was too late.

“Neither the White House nor Congress heeded the warnings, Fannie and Freddie retained strong bipartisan support during the 1990s and early part of this decade.” (Editorial, “Hear, See And Speak No Evil About Fannie And Freddie,” The Washington Times, 10/9/08)

After The Washington Times published their pablum about the events The White House responded with a report of the facts which should forever be referenced by historians, and is posted here. The Washington Time’s version of history should stand as an example of why true journalism in the United States is dead.

The Time Line of Events

This televised report aired in September 2004 and can be viewed here. In the space of four minutes, it attempts to time line the events leading to the greatest economic failure since the Great Depression and is the inspiration for what follows below.

A significant portion of the events leading up to the Fannie Mae and Freddy Mac debacle begins in – believe it or not – 1977


The Community Reinvestment Act (or CRA, Pub.L. 95-128, title VIII, 91 Stat. 1147, 12 U.S.C. § 2901 et seq.) is a United States federal law designed to encourage commercial banks and savings associations to meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods. Congress passed the Act in 1977 to reduce discriminatory credit practices against low-income neighborhoods, a practice known as redlining. The Act requires the appropriate federal financial supervisory agencies to encourage regulated financial institutions to meet the credit needs of the local communities in which they are chartered, consistent with safe and sound operation. To enforce the statute, federal regulatory agencies examine banking institutions for CRA compliance, and take this information into consideration when approving applications for new bank branches or for mergers or acquisitions.

And who signed this beautiful piece of legislation into law? The original Act was passed by the 95th United States Congress and signed into law by President Jimmy Carter in 1977.


In 1995 Clinton loosened housing rules by rewriting the Community Reinvestment Act, which put added pressure on banks to lend in low-income neighborhoods. It is the subject of heated political and scholarly debate whether any of these moves are to blame for our troubles, but they certainly played a role in creating a permissive lending environment. He also signed the Commodity Futures Modernization Act, which exempted credit-default swaps from regulation.

Clinton admitted that his Administration could have done more to “set in motion some more formal regulation of the derivatives market,” but he vehemently denied that the repeal of Glass-Steagall or his Administration’s housing policies helped spur the financial crisis.


September In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

November: Clinton signs banking overhaul measure.  Congress passed the bipartisan measure November 5, opening the way for a blossoming of financial “supermarkets” selling loans, investments and insurance. Proponents had pushed the legislation in Congress for two decades, and Wall Street and the banking and insurance industries had poured millions of dollars into lobbying for it in the past few years.  “It was sweaty, it was tense, but it had momentum,” Sen. Charles Schumer (D-New York) said of the final bargaining session. He and Sen. Christopher Dodd (D-Connecticut) whose states are home to Wall Street and the banking industry (New York) and the insurance industry (Connecticut), helped broker the agreement.


April: The Bush Administration’s FY02 budget request in April 2001 raised red flags about Fannie Mae and Freddie Mac and declares that the size of the GSE’s is “a potential problem,” because “financial trouble of a large GSE could cause strong repercussions in financial markets, affecting Federally insured entities and economic activity.”

“Uncertainties about the Federal Government’s liability have increased in some areas. Consolidation has increased bank size, and deregulation has allowed banks to engage in many risky activities. Thus, the loss to the deposit insurance funds can turn out to be unusually large in some bad years. The potential loss needs to be limited by large insurance reserves and effective regulation. The large size of some GSEs is also a potential problem. Financial trouble of a large GSE could cause strong repercussions in financial markets, affecting Federally insured entities and economic activity.”

Source: Fiscal Year 2002, Analytical Perspectives, Budget of the United States Government, Topic: Implications For Federal Programs, page 142, para 6.

From the same document, page 144, last paragraph:

“Federal agencies also need to monitor other developments that may affect program efficiency. For example, many loans guaranteed by the Government are securitized. Securitization may reduce the lenders’ incentives to screen and monitor borrowers if they believe that guaranteeing agencies do not properly track the performance of securitized loans. To prevent this adverse effect, the Government needs well-organized databases and modern monitoring systems.”


May: President Bush calls for the disclosure and corporate governance principles contained in his 10-point plan for corporate responsibility to apply to Fannie Mae and Freddie Mac.  (OMB Prompt Letter to OFHEO, 5/29/02)

The Bush Administration warned that financial problems with the organizations could spread well beyond the housing sector and proposed to Congress that they create a new regulatory agency to supervise Fannie and Freddie.


January: Freddie Mac announces it has to restate financial results for the previous three years.

February: The Office of Federal Housing Enterprise Oversight (OFHEO) releases a report explaining that “although investors perceive an implicit Federal guarantee of [GSE] obligations,” “the government has provided no explicit legal backing for them.”  As a consequence, unexpected problems at a GSE could immediately spread into financial sectors beyond the housing market.  (”Systemic Risk: Fannie Mae, Freddie Mac and the Role of OFHEO,” OFHEO Report, 2/4/03)

On Sept. 10, 2003, Rep. Frank objected, stating, “Fannie Mae and Freddie Mac are not in a crisis. The more people, in my judgment, exaggerate a threat of safety and soundness, the more people conjure up the possibility of serious financial losses to the treasury, which I do not see. I think we see entities that are fundamentally sound financially” But the more pressure there is, then the less I think we will see in terms of affordable housing.” The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”  (Stephen Labaton, “New Agency Proposed To Oversee Freddie Mac And Fannie Mae,” The New York Times, 9/11/03 For link to this article, see “proposes a new agency” for Sept 11, 2003, below.)

House Ways and Means Committee Chairman Frank continued to lead the government charge that that would ultimately create the GSE meltdown. When speaking about new terms to lower lending standards of Fannie Mae and Freddie Mac Frank said,

I do think I do not want the same kind of focus on safety and soundness that we have in OCC [Office of the Comptroller of the Currency] and OTS [Office of Thrift Supervision]. I want to roll the dice a little bit more in this situation towards subsidized housing.

Fannie Mae discloses SEC investigation and acknowledges OFHEO’s review found earnings manipulations.

Treasury Secretary John Snow testifies before the House Financial Services Committee to recommend that Congress enact “legislation to create a new Federal agency to regulate and supervise the financial activities of our housing-related government sponsored enterprises” and set prudent and appropriate minimum capital adequacy requirements.

On September 11, 2003, the day after Rep Frank’s pathetic defense of Fannie Mae and Freddie Mac, the Bush administration proposes a new agency to oversee the troubled GSEs.

The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac — which together have issued more than $1.5 trillion in outstanding debt — is broken. A report by outside investigators in July concluded that Freddie Mac manipulated its accounting to mislead investors, and critics have said Fannie Mae does not adequately hedge against rising interest rates.

Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry.

The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios.

*Note* With this, we see that the Bush administration had accurately diagnosed the problem in the lending market and had a plan to address it. Fannie Mae and Freddie Mac reluctantly supported the plan. However, Democrats objected.

Among the groups denouncing the proposal today were the National Association of Home Builders and Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing.

”These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis,” said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ”The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”

Representative Melvin L. Watt, Democrat of North Carolina, agreed.

”I don’t see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing,” Mr. Watt said.

The Democrats had forced lenders to assume more risk at lower interest rates in the 1990s, as this Investors Business Daily article points out, and they didn’t want to countenance an end to their populist policies:

But it was the Clinton administration, obsessed with multiculturalism, that dictated where mortgage lenders could lend, and originally helped create the market for the high-risk subprime loans now infecting like a retrovirus the balance sheets of many of Wall Street’s most revered institutions.

Tough new regulations forced lenders into high-risk areas where they had no choice but to lower lending standards to make the loans that sound business practices had previously guarded against making. It was either that or face stiff government penalties.

The untold story in this whole national crisis is that President Clinton put on steroids the Community Redevelopment Act, a well-intended Carter-era law designed to encourage minority homeownership. And in so doing, he helped create the market for the risky subprime loans that he and Democrats now decry as not only greedy but “predatory.”

Yes, the market was fueled by greed and overleveraging in the secondary market for subprimes, vis-a-vis mortgaged-backed securities traded on Wall Street. But the seed was planted in the ’90s by Clinton and his social engineers. They were the political catalyst behind this slow-motion financial train wreck.

And it was the Clinton administration that mismanaged the quasi-governmental agencies that over the decades have come to manage the real estate market in America.

It was the Bush administration that wanted to rein in the madness in the credit markets, and the Democrats who wanted to extend the Clinton policies that created the crisis we have now. After the collapse, these same Democrats want to shift blame back to the administration that wanted to increase oversight and curtail risk in lending practices while reducing patronage at the giant GSEs.

Although the Bush administration isn’t completely blameless in letting this get out of hand, clearly the origins of the disaster and the efforts to keep bad policies in place fall on the Democrats in this case.

October 2004

OFHEO released results of its continuing investigation. The “Special Examination of Fannie Mae” was a dense 211 pages packed with technical accounting details. But the message was clear: OFHEO accused Fannie Mae of both willfully breaking accounting rules and fostering an environment of “weak or nonexistent” internal controls. OFHEO focused on exactly the issue that the skeptics had earlier noticed, which was Fannie’s use of accounting rules to defer derivative losses onto its balance sheet. Except OFHEO said that Fannie hadn’t just bent the rules, it had broken them.

What got the most attention, though, was OFHEO’s charge that in 1998, when an internal model said Fannie would need to recognize a roughly $400 million expense, Fannie only recognized $200 million. That, OFHEO charged, allowed the company to report earnings of $3.23 per share, which meant that Fannie paid out a total of about $27 million in bonuses. Both the SEC and Justice quickly announced their own investigations.

Two weeks later Falcon and Raines faced off against each other in a hearing before the House subcommittee on capital markets, which was chaired by Baker. Consider the circumstances. Falcon was Fannie’s regulator and had leveled serious charges, amounting to fraud, against Fannie Mae. Most CEOs would have seen the wisdom of humility at this point, but Raines showed little. “These accounting standards are highly complex and require determinations on which experts often disagree,” he said, adding that “there were no facts” that supported OFHEO’s charge that Fannie executives had deferred an expense in 1998 to earn bonuses.

And most of the Democrats present agreed with him. “This hearing is about the political lynching of Franklin Raines,” said Congressman William Lacy Clay of Missouri. Massachusetts Congressman Barney Frank said, “I see nothing in here that suggests that safety and soundness are an issue.” Other Democrats complained that the mere fact of releasing the report could increase the cost of home-ownership.

“Is it possible that by casting all of these aspersions … you potentially are weakening this institution in the market, that you are potentially weakening the housing market in this country?” Congressman Artur Davis of Alabama demanded. When Falcon tried to answer, Davis acted like a prosecutor grilling a hostile witness. He wanted a one-word answer: yes or no. “Is that possible?” he asked again.

“I have never seen anyone treated as disrespectfully as Armando Falcon was by the Democrats and by Franklin Raines,” recalls one congressional aide. Adds Andrew Cuomo: “I credit him for not folding and not caving and not running, because he took a tremendous beating.”

One of the few bad moments for Fannie came when Baker released information showing that over five years, Fannie had paid its 20 top executives a combined $245 million in bonuses. In 2002 its 21 top executives each earned more than $1 million in total compensation. Even the Democrats winced.

Fannie had one last card to play. Back in April, Republican Senator Kit Bond of Missouri, a member of the Senate Appropriations Committee, had spurred the HUD inspector general to investigate OFHEO. (One of Bond’s staffers, John Kamark, is a Fannie supporter who plays poker with Bill Maloni, Fannie’s former chief lobbyist and current consultant.) Although the report had only been finished the previous day, and wasn’t public, it was clear at the hearing that some members of Congress had already been briefed on it.

The report does not put Falcon or OFHEO in a flattering light. It quotes a “confidential source” inside OFHEO saying that Falcon’s top deputy would become “almost gleeful” whenever Fannie’s stock declined. This same source said that “OFHEO was trying to embarrass Fannie Mae.” In other words, OFHEO wasn’t just regulating Fannie Mae, it was out to get Fannie Mae. “This makes it difficult to assess the reliability of recent allegations by OFHEO against Fannie Mae,” declared Congressman Frank.

It is true that the SEC would never have done some of the things OFHEO did. But OFHEO supporters say the agency had to play hardball. It was an outgunned regulator trying to investigate one of the nation’s most politically powerful companies. And Fannie was being Fannie. For instance, one of the complaints Fannie’s allies leveled at OFHEO was that it released the results of an ongoing investigation to the public, something no real regulator would do. But there is an explanation. One source close to the events says OFHEO had told Fannie’s board that it wouldn’t release the report. But the OFHEO people learned that Fannie lobbyists were telling members of Congress that the report was inconsequential and Falcon wouldn’t release it because he didn’t want to exonerate Fannie. And so OFHEO released the report.

For his part, Falcon refused to be moved by the barrage of criticism from his fellow Democrats. To him the problems at Fannie were reminiscent of the S&L crisis. He told a friend that the Democrats were “so blinded by their loyalty to Fannie that they can’t see what’s really happening. If they want to repeat history, I won’t be part of it.”

Wall Street, of course, was every bit as blind. After the hearing, analyst Bob Napoli at Piper Jaffray wrote: “We thought Frank Raines in particular made excellent points countering OFHEO accusations, in some cases directly contradicting OFHEO assertions.” Jonathan Gray of Sanford Bernstein wrote that the “allegations lack cogency,” and said, “Plausible charges against FNM are immaterial, while material charges are implausible.” (And he noted that “a John Kerry victory would improve the political climate.”)

And then Frank Raines overplayed his hand one last time. In a highly unusual move, Fannie insisted that the SEC review OFHEO’s accounting allegations. Fannie hired the powerful law firm of Wilmer Cutler to help it make its case; Bill McLucas, the lead partner on the Fannie team, was formerly the SEC’s chief enforcement officer. The potential danger of this request was obvious: In a worst-case scenario, if the SEC completely sided with OFHEO, Fannie would have to restate earnings going back to 2001. And the restatement would be massive–an estimated $9 billion in losses. Some Fannie people referred to the restatement possibility as the “ultimate penalty.” But, in truth, they really did not seem to think that the SEC would rule against them.

Source:CNN Money

In March 2008, John Lott explains the underlying causes of the debacle. Forcing lenders to make questionable loans and blocking tougher regulation of the government-supported entities was a recipe for collapse, and Lott explained it six months before it happened.

October: Fannie Mae discloses $1.2 billion accounting error.

Senator Thomas Carper (D-DE) refuses to acknowledge any necessity for GSE reforms, saying “if it ain’t broke, don’t fix it.”  (Sen. Carper, Hearing of Senate Committee on Banking, Housing, and Urban Affairs, 10/16/03)

November: Council of the Economic Advisers (CEA) Chairman Greg Mankiw explains that any “legislation to reform GSE regulation should empower the new regulator with sufficient strength and credibility to reduce systemic risk.”  To reduce the potential for systemic instability, the regulator would have “broad authority to set both risk-based and minimum capital standards” and “receivership powers necessary to wind down the affairs of a troubled GSE.”  (N. Gregory Mankiw, Remarks At The Conference Of State Bank Supervisors State Banking Summit And Leadership, 11/6/03)


In February of 2004, Alan Greenspan, then chairman of the US Federal Reserve, warned  that the nation’s two big government-sponsored mortgage institutions pose a “systemic risk” that could cost taxpayers dearly in the future.

The danger, he said, is that that the companies are using the implicit Federal backstop to assume more risk and finance their expansion through increased volumes of debt.

“There is a general belief in the marketplace that these securities are backed by the full faith and credit of the United States government,” Mr Greenspan testified at a hearing of the Senate Banking Committee.

Fannie Mae officials quickly lashed back at Mr Greenspan, complaining that many of Mr Greenspan’s criticisms were based on a Federal Reserve study that it called “seriously flawed.”

“We, of course, disagree with most of his conclusions,” said Jayne Shontell, Fannie Mae’s senior vice president for investor relations. “We believe that the testimony does not appreciate the role of our mortgage portfolio and the impact of his proposal.”

February: The President’s FY05 Budget again highlights the risk posed by the explosive growth of the GSEs and their low levels of required capital and calls for creation of a new, world-class regulator:  “The Administration has determined that the safety and soundness regulators of the housing GSEs lack sufficient power and stature to meet their responsibilities, and therefore … should be replaced with a new strengthened regulator.”  (2005 Budget Analytic Perspectives, pg. 83)

February: Then-CEA Chairman Mankiw cautions Congress to “not take [the financial market’s] strength for granted.”  Again, the call from the Administration was to reduce this risk by “ensuring that the housing GSEs are overseen by an effective regulator.”  (N. Gregory Mankiw, Op-Ed, “Keeping Fannie And Freddie’s House In Order,” Financial Times, 2/24/04)

April: Rep. Frank ignores the warnings, accusing the Administration of creating an “artificial issue.”  At a speech to the Mortgage Bankers Association conference, Rep. Frank said “people tend to pay their mortgages.  I don’t think we are in any remote danger here.  This focus on receivership, I think, is intended to create fears that aren’t there.”  (“Frank: GSE Failure A Phony Issue,” American Banker, 4/21/04)

June: Then-Treasury Deputy Secretary Samuel Bodman spotlights the risk posed by the GSEs and calls for reform, saying “We do not have a world-class system of supervision of the housing government sponsored enterprises (GSEs), even though the importance of the housing financial system that the GSEs serve demands the best in supervision to ensure the long-term vitality of that system.  Therefore, the Administration has called for a new, first class, regulatory supervisor for the three housing GSEs:  Fannie Mae, Freddie Mac, and the Federal Home Loan Banking System.”  (Samuel Bodman, House Financial Services Subcommittee on Oversight and Investigations Testimony, 6/16/04)


Again in 2005, Alan Greenspan stated, “If we fail to strengthen our GSE regulation, we increase the possibility of crisis.”

April: Then-Secretary Snow repeats his call for GSE reform, saying “Events that have transpired since I testified before this Committee in 2003 reinforce concerns over the systemic risks posed by the GSEs and further highlight the need for real GSE reform to ensure that our housing finance system remains a strong and vibrant source of funding for expanding homeownership opportunities in America … Half-measures will only exacerbate the risks to our financial system.”  (Secretary John W. Snow, “Testimony Before The U.S. House Financial Services Committee,” 4/13/05)

July: Then-Minority Leader Harry Reid rejects legislation reforming GSEs, “while I favor improving oversight by our federal housing regulators to ensure safety and soundness, we cannot pass legislation that could limit Americans from owning homes and potentially harm our economy in the process.” (“Dems Rip New Fannie Mae Regulatory Measure,” United Press International, 7/28/05)


To that end in May 2006, Sen. John McCain cosponsored regulations to tighten oversight, stating, “The GSEs need to be reformed without delay.”

Below are John McCain’s words before congress in 2006 when he spoke about the Federal Housing Enterprise Regulatory Reform Act of 2005

The United States Senate May 25, 2006 Sen. John McCain [R-AZ]:

Mr. President, this week Fannie Mae’s regulator reported that the company’s quarterly reports of profit growth over the past few years were “illusions deliberately and systematically created” by the company’s senior management, which resulted in a $10.6 billion accounting scandal. The Office of Federal Housing Enterprise Oversight’s report goes on to say that Fannie Mae employees deliberately and intentionally manipulated financial reports to hit earnings targets in order to trigger bonuses for senior executives. In the case of Franklin Raines, Fannie Mae’s former chief executive officer, OFHEO’s report shows that over half of Mr. Raines’ compensation for the 6 years through 2003 was directly tied to meeting earnings targets. The report of financial misconduct at Fannie Mae echoes the deeply troubling $5 billion profit restatement at Freddie Mac. The OFHEO report also states that Fannie Mae used its political power to lobby Congress in an effort to interfere with the regulator’s examination of the company’s accounting problems. This report comes some weeks after Freddie Mac paid a record $3.8 million fine in a settlement with the Federal Election Commission and restated lobbying disclosure reports from 2004 to 2005. These are entities that have demonstrated over and over again that they are deeply in need of reform.

For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac–known as Government-sponsored entities or GSEs–and the sheer magnitude of these companies and the role they play in the housing market. OFHEO’s report this week does nothing to ease these concerns. In fact, the report does quite the contrary. OFHEO’s report solidifies my view that the GSEs need to be reformed without delay. I join as a cosponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005, S. 190, to underscore my support for quick passage of GSE regulatory reform legislation. If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole. I urge my colleagues to support swift action on this GSE reform legislation.

The bill passed the Republican-controlled committee on a party-line vote, with all Democrats voting in opposition. The Democrats killed the measure in Committee by threatening a Democrat filibuster to prevent a full Senate Vote. The legislation was subsequently withdrawn.

The bill was re-introduced in 2007


April: The Federal Housing Enterprise Regulatory Reform Act of 2007 ((S.1100)) was introduced April 12, 2007 when it was referred to the Senate Committee on Banking, Housing, and Urban Affairs. At the time, the committee is made up of the following members:

  • Chairman: Senator Christopher Dodd [D-CT]
  • Ranking member: Sen. Richard Shelby [R-AL]
  • Sen. Daniel Akaka [D-HI]
  • Sen. Evan Bayh [D-IN]

According to a report by Associated Press, Freddie Mac paid a Republican consulting firm $2 million to kill the legislation.

Freddie Mac secretly paid a Republican consulting firm $2 million to kill legislation that would have regulated and trimmed the mortgage finance giant and its sister company, Fannie Mae, three years before the government took control to prevent their collapse.

In the cross hairs of the campaign carried out by DCI of Washington were Republican senators and a regulatory overhaul bill sponsored by Sen. Chuck Hagel, R-Neb. DCI’s chief executive is Doug Goodyear, whom John McCain’s campaign later hired to manage the GOP convention in September.

Freddie Mac’s payments to DCI began shortly after the Senate Banking, Housing and Urban Affairs Committee sent Hagel’s bill to the then GOP-run Senate on July 28, 2005. All GOP members of the committee supported it; all Democrats opposed it.

In the midst of DCI’s yearlong effort, Hagel and 25 other Republican senators pleaded unsuccessfully with Senate Majority Leader Bill Frist, R-Tenn., to allow a vote.

“If effective regulatory reform legislation … is not enacted this year, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system and the economy as a whole,” the senators wrote in a letter that proved prescient.

Unknown to the senators, DCI was undermining support for the bill in a campaign targeting 17 Republican senators in 13 states, according to documents obtained by The Associated Press. The states and the senators targeted changed over time, but always stayed on the Republican side.

In the end, there was not enough Republican support for Hagel’s bill to warrant bringing it up for a vote because Democrats also opposed it and the votes of some would be needed for passage. The measure died at the end of the 109th Congress.

Read the AP report here.

August: President Bush emphatically calls on Congress to pass a reform package for Fannie Mae and Freddie Mac, saying “first things first when it comes to those two institutions.  Congress needs to get them reformed, get them streamlined, get them focused, and then I will consider other options.”  (President George W. Bush, Press Conference, the White House, 8/9/07)

August: Senate Committee on Banking, Housing and Urban Affairs Chairman Christopher Dodd ignores the President’s warnings and calls on him to “immediately reconsider his ill-advised” position.  (Eric Dash, “Fannie Mae’s Offer To Help Ease Credit Squeeze Is Rejected, As Critics Complain Of Opportunism,” The New York Times, 8/11/07)

December: President Bush again warns Congress of the need to pass legislation reforming GSEs, saying “These institutions provide liquidity in the mortgage market that benefits millions of homeowners, and it is vital they operate safely and operate soundly.  So I’ve called on Congress to pass legislation that strengthens independent regulation of the GSEs – and ensures they focus on their important housing mission.  The GSE reform bill passed by the House earlier this year is a good start.  But the Senate has not acted.  And the United States Senate needs to pass this legislation soon.”  (President George W. Bush, Discusses Housing, the White House, 12/6/07)


February: Assistant Treasury Secretary David Nason reiterates the urgency of reforms, saying “A new regulatory structure for the housing GSEs is essential if these entities are to continue to perform their public mission successfully.”  (David Nason, Testimony On Reforming GSE Regulation, Senate Committee On Banking, Housing And Urban Affairs, 2/7/08)

March: President Bush calls on Congress to take action and “move forward with reforms on Fannie Mae and Freddie Mac.  They need to continue to modernize the FHA, as well as allow State housing agencies to issue tax-free bonds to homeowners to refinance their mortgages.”  (President George W. Bush, Remarks To The Economic Club Of New York, New York, NY, 3/14/08)

April: President Bush urges Congress to pass the much needed legislation and “modernize Fannie Mae and Freddie Mac.  [There are] constructive things Congress can do that will encourage the housing market to correct quickly by … helping people stay in their homes.”  (President George W. Bush, Meeting With Cabinet, the White House, 4/14/08)

May: President Bush issues several pleas to Congress to pass legislation reforming Fannie Mae and Freddie Mac before the situation deteriorates further.

  • “Americans are concerned about making their mortgage payments and keeping their homes.  Yet Congress has failed to pass legislation I have repeatedly requested to modernize the Federal Housing Administration that will help more families stay in their homes, reform Fannie Mae and Freddie Mac to ensure they focus on their housing mission, and allow state housing agencies to issue tax-free bonds to refinance sub-prime loans.”  (President George W. Bush, Radio Address, 5/3/08)
  • “[T]he government ought to be helping creditworthy people stay in their homes.  And one way we can do that – and Congress is making progress on this – is the reform of Fannie Mae and Freddie Mac.  That reform will come with a strong, independent regulator.”  (President George W. Bush, Meeting With The Secretary Of The Treasury, the White House, 5/19/08)
  • “Congress needs to pass legislation to modernize the Federal Housing Administration, reform Fannie Mae and Freddie Mac to ensure they focus on their housing mission, and allow State housing agencies to issue tax-free bonds to refinance subprime loans.”  (President George W. Bush, Radio Address, 5/31/08)

June: As foreclosure rates continued to rise in the first quarter, the President once again asks Congress to take the necessary measures to address this challenge, saying “we need to pass legislation to reform Fannie Mae and Freddie Mac.”  (President George W. Bush, Remarks At Swearing In Ceremony For Secretary Of Housing And Urban Development, Washington, D.C., 6/6/08)

July: Congress heeds the President’s call for action and passes reform legislation for Fannie Mae and Freddie Mac as it becomes clear that the institutions are failing.

September: Democrats in Congress forget their previous objections to GSE reforms, as Senator Dodd questions “why weren’t we doing more, why did we wait almost a year before there were any significant steps taken to try to deal with this problem? … I have a lot of questions about where was the administration over the last eight years.”  (Dawn Kopecki, “Fannie Mae, Freddie ‘House Of Cards’ Prompts Takeover,” Bloomberg, 9/9/08)

2009 – The lessons and the continuing fallout

October 6, 2009

Hoover Institution research fellow Peter Schweizer releases his new book “Architects of Ruin: How Big Government liberals wrecked the global economy and how they will do it again if no one stops them.”

In it, Schweizer documents how progressive and Democratic politicians and radical activists used the federal government to force lending institutions to give mortgages to clearly unqualified poor and minority applicants caused the economic meltdown of 2008. He explains how a coalition of left-wing activists, liberal politicians, and “do-good capitalists” on Wall Street leveraged government power to achieve their goal of broadening homeownership among minorities and the poor. The results were not only devastating to the economy, but hurt the very people they were supposedly trying to help.

The book documents how it wasn’t “deregulation of the financial markets” or “out-of-control capitalism,” as depicted by purveyors of the conventional wisdom, it was too much politically correct regulations mandating that lenders throw out common sense and decades of experience in order to make loans that were almost certain to go unpaid.

When asked if the financial collapse caused by free-market capitalism and deregulation run amok, as liberals claim, Schweizer says,

Not on your life. What we are really witnessing is a massive failure of social engineering by liberals.

The effort was launched during the Carter administration (see above) but really gained momentum and a head of steam during the Clinton years. Although the Bush administration continued and even expanded the practice and as already detailed above, in 2001, Bush launched efforts to bring a stop to it by calling for major reforms and oversight boards.

The story begins in the 1960s with Saul Alinsky, the legendary Chicago rabble-rouser who trained his acolytes in highly aggressive techniques of community activism. Alinsky’s disciples—along with race-baiting activists like Jesse Jackson—seized on the “redlining” controversy of those years to argue that banks were guilty of racial discrimination. In the 1970s, with the help of liberal senators like Ted Kennedy and William Proxmire, legislation was passed that put bankers under the thumb of local activists.

In the Clinton years, a new generation of liberal technocrats came to power in Washington and on Wall Street. Schweizer describes how a powerful phalanx of elite liberals, including Bill Clinton, Robert Rubin, Andrew Cuomo, Barney Frank, Chris Dodd, Janet Reno, Deval Patrick, Henry Cisneros, Barack Obama, Nancy Pelosi, Ted Kennedy, Charles Schumer, and many others, aggressively pushed banks to make trillions of dollars in loans to individuals who should never have received them.

Meanwhile, Clinton forged a new form of state capitalism in which the big Wall Street financial companies were repeatedly bailed out—with their profits intact—from a series of costly errors, leading them to take ever larger risks. Both financial policies had profoundly distorting effects. The result was the bursting of twin bubbles in mortgages and mortgage-backed derivatives, in turn leading to a global economic collapse.

This tale of liberal “Robin Hood capitalism run wild” has never been told. But more than just a story about the past, it is also an urgent warning about the future. For today, the very same people who planted the seeds of the collapse are back in Washington, tasked with cleaning up the mess and determined to use the crisis they caused as cover for a massive overhaul of the American economic system.

These people have learned nothing from their past mistakes and are busy applying the same methods to other sectors of the economy—health care, the auto industry, real estate (again!), and above all the promotion of “green” technologies—inflating bubbles that are sure to bring about another crisis. Ordinary Americans who foot the bill for the last state-capitalist bubble have reason to be afraid—very afraid—of the inevitable result.

Schweizer’s work goes on to detail how White House Chief of Staff was paid “more than $46,000 an hour as a board member for Freddie Mac.”

Schweizer also illuminates on a long-forgotten class-action lawsuit filed in 1994 by three young trial lawyers, one of whom just happens to be sitting in the Oval Office today as president. The case was Selma S. Buycks-Roberson v. Citibank Federal Savings Bank.

In the suit, Obama and his colleagues claimed in the suit that Citibank had had rejected loan applications by the plaintiffs simply because they were black, or because they lived in predominantly black neighborhoods. In short, the suit was one of thousands filed during the 1990s claiming racial bigotry, not poor credit histories, explained high rejection rates among minorities applying for mortgages.

After four years of haggling, Citibank settled with Buyck, a Chicago woman, out of court. She received $60,000. Obama and the other lawyers on the plaintiff side got $950,000.

Such outcomes help put in perspective why the class-action trial lawyers spend millions of dollars every year lobbying Congress and state governments either to protect the lucrative turf they already have, or to create profitable new lines of litigation.

And it also helps explain why they have so much money to contribute to politicians like Obama who aid their efforts. Supporting medical malptractice caps in health care reform would put a serious crimp in one of the plaintiffs lawyers’ most lucrative litigation areas. And if that happened, where would the lawyers get the money to contribute to the politicians who help them?

October 27, 2009:

Frank proposes resolution authority

In a report released by Politico, House Financial Services Chairman Barney Frank (D-Mass.) has released the latest version of the most complex piece of the financial reform puzzle: solving the “too big to fail” problem by giving the federal government more powers to wind down major financial firms.

Frank’s bill seeks to avoid the kinds of massive taxpayer bailouts that characterized last year’s financial crisis by empowering the federal government to wind down any financial firm, no matter how large, complex or interconnected.

“We’re going to have death panels. But they’re going to have death panels that are going to put to death these institutions before they can cause us problems, not old people,” — Frank said in a CNN interview Tuesday.

Under Frank’s vision, shareholders and unsecured creditors would have to pay for the failure, not taxpayers, according to a summary of the bill. The legislation would require resolution costs to come first from the failed firm’s assets “at the expense of shareholders and creditors,” with any additional cost to be paid from an after-the-fact assessment on the remaining large financial firms.

But as we all know, except for perhaps Frank, the costs of these penalties will ultimately be passed on to the consumer in the form of bank processing and administration fees.

Frank’s proposal reeks of a “let the bank fail and allow the market to absorb the consequences” tactic which the Feds dismissed earlier in the crisis, preferring to instead follow their “too big to fail” philosophies.

The bill’s proposal for an oversight council to act as the so-called “systemic risk regulator” to keep an eye on the overall health of the financial industry also sounds suspiciously like Bush’s proposals first advanced in 2001 (see above). The council would be directed to identify risky firms and financial activities, and have the power to slap tougher rules and standards on those firms.

Frank said Tuesday morning on CNN that the systemic risk council would also have the power to break up a company “if its too big.”

Frank’s use of the term “systemic risk” mirrors comments made in April 2005 when Secretary of the Treasury John Snow repeated call for GSE reform, saying

“Events that have transpired since I testified before this Committee in 2003 reinforce concerns over the systemic risks posed by the GSEs and further highlight the need for real GSE reform to ensure that our housing finance system remains a strong and vibrant source of funding for expanding homeownership opportunities in America … Half-measures will only exacerbate the risks to our financial system.”

Then house Minority Leader Harry Reid rejected the legislation saying ” we cannot pass legislation that could limit Americans from owning homes and potentially harm our economy in the process.”

Frank’s proposed Council and Fed Board would be banned from publicly releasing a list of “systemically significant” institutions – a major concern in the industry which fears that those singled out would be penalized by the market.

If these institutions were to be publicly singled out, it might have positive results on the market as banks would have a built-in incentive to engage in policies which minimize risk to themselves.

November 01, 2009:

After struggling for months to avert bankruptcy, lender CIT Group has filed for Chapter 11 protection in an attempt to restructure its debt while trying to keep badly needed loans flowing to thousands of mid-sized and small businesses.

CIT made the filing in New York bankruptcy court Sunday, after a debt-exchange offer to bondholders failed. CIT said in a statement that its bondholders overwhelmingly opted for a prepackaged reorganization plan which will reduce total debt by $10 billion while allowing the company to continue to do business.

Additional Recources:
CIT Files Bankruptcy, and Retailers Get Nervous

President Bush Tried to Rein In Fan and Fred

What Should Bush Have Done?

Obama seeks to blame Bush for financial crisis

President Bush Tried to Rein In Fan and Fred
Why Obama Will ‘Own’ the Recession
Blame Fannie Mae and Congress For the Credit Mess
Data Show Federal Policy Triggered Mortgage Meltdown

Written by Ben

March 22, 2009 at 11:17 am

9 Responses

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  1. This time line will continue to be updated as I collect more information.

    Added: On September 11, 2003, the day after Rep Frank’s pathetic defense of Fannie Mae and Freddie Mac, the Bush administration proposes a new agency to oversee Freddie Mac and Fannie Mae. … …

    Augmented 2003, 2004, added 2007, 2008, The Washington Times gets it Wrong, Conclusion. I think I’m done (but probably not).

    Updated 2006 to include John McCain’s introductory speech about Federal Housing Enterprise Regulatory Reform Act of 2005
    Updated 1999 by adding the events of November

    22Oct09 – Updated 2005 to include reference to a report by Associated Press, Freddie Mac paid a Republican consulting firm $2 million to kill the legislation.

    03Nov09 – Added Entry for October 6, 2009 under section 2009 – The lessons and the continuing fallout

    07Jan10 – Added 1995.


    March 22, 2009 at 11:45 am

  2. Ben….

    Interesting posting…. you indeed point out some important events – but your analysis skips a lot of important details as well. Your portrayal of Bush as the shining star of reason is exaggerated. Certainly, he gave a few speeches in which he spoke about the looming problem – but he really did not push major legislation to address the problem either.

    We all know that the Bush administration was quite capable of moving legislation when it wanted to – look at how his behavior in pushing for the Patriot Act and
    for the Iraq invasion. Did he mount similar efforts to increase financial regulation? No – hardly.

    In fact, at times he worked against reform – largely because of lobbying efforts by business and Wall Street. For example – here is a quote from an excellent and detailed wiki article

    “President Bush advocated the “Ownership Society.” According to the New York Times, “he pushed hard to expand home ownership, especially among minorities, an initiative that dovetailed with his ambition to expand the Republican tent — and with the business interests of some of his biggest donors. But his housing policies and hands-off approach to regulation encouraged lax lending standards.” He insisted that Fannie Mae and Freddie Mac (the GSE) meet low-income housing goals and advocated government loans to help low-income homeowners make down-payments. The Bush administration also replaced Fannie and Freddie’s chief regulator in 2003 immediately after the regulator published a report warning of the risks posed by the GSE.[68]”

    Certainly many others in government had roles in the crisis – including lots of Democrats – but Bush (and his administration) hardly had clean hands.

    Note that the Washington Times is in fact quite a conservative paper – so it seems odd that they would blame Bush for something unless the case were very strong – their bias is indeed strongly to the right.

    — hippieprof


    September 11, 2009 at 8:29 pm

  3. The chronicle of events surrounding the sub-prime mortgage crisis exposes the conduct, roles and policies of the army of Democrats whose involvement led to the meltdown of the GSEs known as Fannie Mae and Freddie Mac. It shows there was warning after warning made by numerous experts who stated that if their policies did not change those institutions and America’s banking system could face serious if not irreparable harm. It shows that rather than heeding these warnings and humbly agreeing there was something wrong with their policies, the Democrats demonstrated a state of denial and belligerently, arrogantly and ignorantly defended them with hubris. You may have read that in spite of a myriad of calls from politicians and experts alike to change their lending policies and clearly showing they are a danger to America’s financial system, policies which flooded the banking system with unsecured debt, they chose instead to stay the course.

    After reading all of this, to engage in subterfuge by suggesting I am attempting to paint Bush as some kind “shining star of reason”, obviously intended to deflect attention away from the behavior of the many incompetent and clueless Democrats responsible for what many could accurately call the crime of the century is to willingly gloss over the actions of those directly responsible for the economic conditions we face today.

    To call upon your oft used colloquialism… “Get real”.

    To suggest that Mr.Bush gave more than “a few speeches” on the dangerous policies ofFreddie Mac and Fannie Mae inaccurately paints the many warnings spanning many years as minor rhetoric. To the contrary, President Bush called

    for the disclosure and corporate governance principles contained in his 10-point plan for corporate responsibility to apply to Fannie Mae and Freddie Mac. The Bush Administration warned that financial problems with the organizations could spread well beyond the housing sector and proposed to Congress that they create a new regulatory agency to supervise Fannie and Freddie.

    While citing a Wiki source which serves to support your point that the Bush administration worked against reform, let me point out that the next paragraph of your source states,

    Mr. Bush did foresee the danger posed by Fannie Mae and Freddie Mac, the government-sponsored mortgage finance giants. The president spent years pushing a recalcitrant Congress to toughen regulation of the companies, but was unwilling to compromise when his former Treasury secretary wanted to cut a deal. And the regulator Mr. Bush chose to oversee them …. pronounced the companies sound even as they headed toward insolvency. -[NY Times Opinion Piece, “White House Philosophy Stoked Mortgage Bonfire” ]

    To be clear, while President Bush was pursuing liberal policies to promote home ownership, he was at the same time against the nature of the lending policies of Fannie Mae and Freddie Mac which lead to the meltdown.
    In December of 2007, Mr Bush said,

    Congress needs to pass legislation strengthening the independent regulator of government-sponsored enterprises like Freddie Mac and Fannie Mae, so we can keep them focused on the mission to expand home ownership

    He even mentioned GSE reform in the 2007 State of the Union address.

    How did Fannie and Freddie counter such efforts? They flooded Washington with lobbying dollars, doled out tens of thousands in political contributions and put offices in key congressional districts. Not surprisingly, these efforts worked. Leaders in Congress did not just balk at proposals to rein in Fannie and Freddie. They mocked the proposals as unserious and unnecessary.

    The Bush administration took a lot of pride that homeownership had reached historic highs,Mr. Snow said in an interview. But what we forgot in the process was that it has to be done in the context of people being able to afford their house. We now realize there was a high cost. [ ]

    The Times article shows to his credit, Mr. Bush was concerned with home ownership and push hard to help first time buyers. He persuaded Congress to spend up to $200 million a year to help first-time buyers with down payments and closing costs. To his possible discredit, he also pushed to allow first-time buyers to qualify for federally insured mortgages with no money down an idea which rests upon the ability to meet the mortgage payments coupled with a strong financial footing. That due diligence falls solely at the feet of the lending institutions.

    Corporate America, eyeing a lucrative market, delivered in ways Mr. Bush might not have expected, with a proliferation of too-good-to-be-true teaser rates and interest-only loans that were sold to investors in a loosely regulated environment.” The SEC was lax in their duties to police this market behavior and conceded that self-regulated investment banks contributed to the crisis.
    [ ]

    Efforts to control GSE were thwarted by intense lobbying by Fannie Mae and Freddie Mac.
    [ ]

    In April 2005, Secretary of the Treasury John Snow repeated call for GSE reform, saying “Events that have transpired since I testified before this Committee in 2003 reinforce concerns over the systemic risks posed by the GSEs and further highlight the need for real GSE reform to ensure that our housing finance system remains a strong and vibrant source of funding for expanding homeownership opportunities in America … Half-measures will only exacerbate the risks to our financial system.” Then house Minority Leader Harry Reid rejected legislation saying ” we cannot pass legislation that could limit Americans from owning homes and potentially harm our economy in the process.” A 2005 Republican effort for comprehensive GSE reform was threatened with filibuster by Senator Chris Dodd (D-CT). [ ]”

    The president did push rules aimed at forcing lenders to more clearly explain loan terms. But the White House shelved them in 2004, after industry-friendly members of Congress threatened to block confirmation of his new housing secretary.

    To the point of the chronicle of events,

    In reality, Fannie Mae and Freddie Mac were among the principal culprits of the housing crisis, and Mr. Bush wanted to rein them in before things got out of hand. Rather than a failure of capitalism, the housing meltdown shows what’s likely to happen when government (GSEs) grants special privileges to favored private entities that facilitate bad actors and lousy practices.

    So while President Bush policies may have, as the New York Times piece eludes,”stoked (the) mortgage bonfire” the assertions “that the housing meltdown resulted from unbridled capitalism under a president opposed to all regulation” are a myth. And while Mr. Bush’s housing policies can be shown to be faulty in places, his role in the demise in the economy pales when compared to the roles of other prominent liberals across the isle.


    September 14, 2009 at 11:44 am

  4. So – what you are saying is essentially this:

    1) Special interests lobbied heavily to protect their cash cow…. (This is of course exactly what I am suggesting the insurance industry is currently doing in its attempts to derail health care reform. It happens all the time in Washington. If you recognize it in one instance, why are you unwilling to recognize it in another?)

    2) Bush caved to those special interests and really didn’t push much in the way of change – especially after 2004 – even though he had majorities in both houses until 2006. He caved even though he apparently knew (by your telling) that we were headed for serious trouble – even though he apparently knew that we would all continue to suffer under the existing system. (This is exactly the opposite of what Obama is doing – he is fighting the special interests in the insurance industry so that we don’t continue to suffer under their system.)

    So remind me – which one is the real leader?

    — hippieprof


    September 14, 2009 at 12:00 pm

  5. History continues to show the significance of the President’s role of the failure of the GSE’s known as Freddie Mac and Fannie Mae pales when compared to the roles of a plethora of Democrats. In spite of Bush’s leadership to attempt to thwart disaster and the years of warnings by many experts much wiser than them, the Democrats continued to ignore, chide and dismiss them. These Democrats held the reigns of policy making for the GSEs. The hypocrisy shines through after “suddenly” seeing the light from Obama’s leadership by showing a determination to change those policies which lead to the mess his party “inherited”, as he is fond of putting it. It’s his party’s bed; they made it; we get to sleep in it.

    Even the mainstream media understand the culpability of the Democrats involved and the party in general.


    September 15, 2009 at 9:14 am

  6. Excellent! You proved my what I have been saying all along! Nicely done….


    December 21, 2009 at 9:16 pm

  7. […] reform makes not a mention of GSE’s. For the last decade, Democrats have consistently blocked reform of Fannie and Freddie. Fannie kept buying up sub-prime mortgages, securitized them and then selling […]

  8. Hippieprof….don’t know what you teach but you can’t be benefiting society…of course that was never a concern of the left….


    September 5, 2010 at 9:30 pm

  9. Definitely, what a fantastic website and informative posts, I definitely will bookmark your blog.All the Best! eebaeefeeegk


    May 19, 2014 at 10:20 pm

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