We wouldn’t be doing our job if we couldn’t report some articles that are meant to give you a balanced view of what we are going through. The sky is falling right? Well read this article.
Dennis Walsh, President and CEO of Money Concepts, wrote this.
Let’s look at a timeline of a crisis:
· In 1938, the Federal National Mortgage Association (Fannie Mae) was formed as a government agency designed to fill some gaps in mortgage lending left by the wave of bank defaults in the Great Depression. Fannie Mae could now purchase and sell mortgages to financial institutions that wished to diversify their regional mortgage portfolios.
· In 1968, the Congress, in an effort to get Fannie Mae’s liabilities off the government balance sheet, sold them off to private investors. Fannie Mae, a private company could now also raise money through bond issues (guaranteed by the government) and distribute profits to executives and shareholders. This structure allowed for private profits and public losses.
· In 1970, to deal with regulatory problems in getting mortgage money to California, the Federal Home Loan Mortgage Corporation (Freddie Mac) was formed as a government agency.
· In 1977, the Community Reinvestment Act became law. This law was intended to make credit services available to low income individuals and individuals in urban areas.
· In 1989, Freddie Mac was sold to private shareholders.
In 1992, Congress created the Office of Federal Housing Enterprise Oversight to oversee Fannie Mae and Freddie Mac.
· In 1995, the Community Reinvestment Act was significantly revised. This new regulation was designed to force financial institutions into providing greater credit services to the needs of the community. The regulations provided no specific criteria for compliance. A financial institution’s compliance was determined by the bureaucrat investigating the institution. The government’s strong arm was on.
· In 1999, The Gramm-Leach-Bliley Act of 1999 passed the Senate with 90 votes and was signed into law by Bill Clinton. While this Act had little to do with the current crisis, it has become a myth that is not reflected in reality. This Act did not create CDOs or change rules for bank’s leverage ratios.
· In 1999, Harold Raines, the former Clinton administration budget director, was named the CEO of Fannie Mae. In the same year, he began a “pilot program” to provide mortgages to individuals with low to moderate incomes. Subprime mortgages could now be written by banks’ and mortgage companies and then sold to Fannie Mae. It was during this time that Fannie Mae morphed from a market maker of mortgages to a buyer, with incredible leverage, of mortgages. Fannie Mae then held these mortgages in their portfolio for the larger spreads. While banks are allowed to lend $10 for every $1 in assets, Fannie was leveraging $100 for every $1 in assets. This was leverage of gargantuan proportions and extremely risky. In essence, Fannie Mae became a hedge fund.
· Under Mr. Raines leadership, Fannie Mae (in a move reminiscent of Enron) cooked its books by over $10.6 billion. Mr. Raines was forced to take an early retirement in December of 2004 after the accounting scandal became public. Fannie Mae paid over $50 million in bonuses to Mr. Raines. As of today, he has not been charged with any crime. Timothy Howard, the CFO at the time of the “cooked books” resigned in 2005. He received $1.4 million in salary and bonuses, totaling $16.8 million during his 15 year stent.
· Lawrence Summers, Treasury Secretary under President Bill Clinton sounded the alarm bells in 1999. Few listened. Mr. Summers was recently quoted: “What Went Wrong? The illusion that the companies were doing virtuous work made it impossible to build a political case for serious regulation. When there were social failures, the companies always blamed their need to perform for the shareholders. When there were business failures, it was always the result of their social obligations. Government budget discipline was not appropriate because it was always emphasized that they were “private companies”. But market discipline was nearly nonexistent given the general perception – now validated – that their debt was government backed. Little wonder that with gains privatized and losses socialized enterprises have gambled their way into financial catastrophe.”
· In a run-up to Y2K, the Federal Reserve followed an easy-money, easy-credit policy, pumping money into the system.
· In 2003, the two GSEs dominated the mortgage debt market owning over 50 percent of all mortgages.
· In 2003, the Bush Administration suggested a regulatory overhaul of the housing finance industry. The administration was encouraging tighter regulation of the two GSEs. According to the New York Times in an article published September 11, 2003, it stated: “The Bush Administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago. Under the new 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 are the two largest players in the mortgage lending industry.” The Administration also wished to change the fact that the President of the United States had the authority to appoint directors of Fannie Mae and Freddie Mac. political patronage at its worst. The reform went nowhere.
· In 2003, Barney Frank (D-MA), ranking member of the House Financial Services Committee said, “These two entities – Fannie Mae and Freddie Mac – are not facing any kind of financial crisis. The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.” August 25, 2008, Mr. Frank told Money Magazine “Fannie Mae and Freddie Mac are better off than the markets think. part of the problem is rumormongering by short sellers.”.
· In 2004, Alan Greenspan, the then Chairman of the Federal Reserve, promoted the adoption and expansion of the adjustable-rate mortgage (ARM) when rates were near their all time lows. That same year, he claimed “securitization by Fannie and Freddie allows mortgage originators to separate themselves from almost all aspects of risk associated with mortgage lending”. In fairness to Mr. Greenspan, in his last testimony as the Fed Chairman, in his inevitable style, he warned of Fannie and Freddie holding of mortgages on their books
· The Federal Housing Enterprise Regulatory Reform Act of 2005, SB 190 set forth the following regulatory provisions: 1) assessment authority; 2) authority to limit non mission-related assets; 3) minimum and critical capital levels; 4) risk-based capital test; 5) capital classifications and under-capitalized enterprise; 6) enforcement actions and penalties; 7) golden parachutes; and 
reporting. It never made it out of the committee. The bill was sponsored by Senators Chuck Hagel (R-NE), Elizabeth Dole (R-NC), John McCain (R-AZ) and John Sununu (R-NH). All Republicans on the committee voted for the Act and all Democrats voted no. Without being able to hit the 60 vote threshold, the bill did not go to the floor for a vote.
· On February of 2005, Chris Dodd (D-CT), now Chairman of the Senate Banking Committee called President Bush to “immediately reconsider his ill advised” reform proposal to rein in Fannie Mae and Freddie Mac. Barney Frank (D-MA), Chairman of the House Financial Services Committee, said that the President’s suggestion for a strong independent regulator of Fannie and Freddie was “inane”!
· In 2008, the two GSEs funded 70 percent of all new mortgages.
· In September of 2008, the Federal Government was forced to take over Fannie Mae and Freddie Mac at a cost of over $200 billion to the taxpayers.
Throughout history, “greedy” people have tried to make as much money as possible. The question is not whether greed exists. it does. it always has. The question is whether or not the GSEs created an environment that allowed our current problems to exist and grow. Can we really blame low income individuals for wanting to buy a home. or banks for making these loans and selling them to the GSEs for a profit. or builders for building? I suppose we can.they should have all known better. But without GSEs setting the stage, the show would not have gone on. Without the government’s “well meaning” attempt to change the rules of economics, this mess could not have occurred. Unfortunately, it will take the government to help improve the situation.
