Saturday, September 20, 2008

Let It Raine

Our financial system sucks. Alright, maybe it doesn’t suck, but let’s be honest; it’s seen much, much better times. I remember when a can of soda was a quarter. It was right around the time I walked up hill both ways. When you reach my age, the knees start to go, you don’t remember your friend’s names, and you can’t eat a large pepperoni pizza without feeling like a beached whale afterwards. The times, they are changing.

Fannie, Freddie, WaMu, AIG, Bear Stearns, you name it; chances are if it’s a financial institution then it’s not doing so hot. Former Fed Chair Alan Greenspan says this is the worst financial crisis he’s seen. And in response, politicians are playing the name game. Senator Biden says it’s the fault of the Bush tax cuts, which makes almost as much sense as blaming world hunger on said tax cuts. Senator McCain and Governor Palin say its Wall Street’s “unbridled corruption and greed.” Senator Obama repeats what Treasury head Henry Paulson says, but that’s only because he hasn’t had his roundtable on what’s going on yet – he’ll get back to us once Paulson makes his next statement.

I maintain that they’re all wrong. I have a different name, and while you can’t even pin the whole thing on him, if we made a list of names, his contend for everyone’s top spot. He’s not a Wall Street fat cat. Although people are blaming Wall Street in droves, no one has put forth a name because it appears that, at least this time, they haven’t broken any laws. My guy is Frank Raines, and he’s not even in the business these days.

Raines was given the job of running Fannie Mae from 1998 to 2004. He made it his top priority to open up the mortgage market to anyone who wanted one, even if they had poor credit, no assets, and no down payment - our defender of the American Dream. What a hero. He did it by loosening lending standards, because the way to fix something illegal is to make it legal (think illegal immigration).

Thanks to Jimmy C, it used to be that banks had to prove that they were not giving loans to minorities for the reason that they were minorities by approving loans to minorities and “community groups” (who coincidentally were staffed by the far-left) along the lines of those that Senator Obama used to get his start (that’s a whole other post). It was called vast extortion of US Banks at the time and set us on the path to where we are today.

Still, banks were happy to issue such loans and pass them on to Fannie, who gobbled up these terrible loans and bundled them with good ones and sold them to a Wall Street eager to buy because Fannie was considered a government-back monstrosity too big to fail. Oops.

The current crisis stems from loans issued to people who could never afford them. While the Democrats on the Hill love to blame predatory lenders, were it not for their own crowd including Presidents Carter and Clinton, and the man the latter appointed, Frank Raines, the lenders would not have been allowed to give money to people who couldn’t afford to pay it back. When the bad mortgages were added the stew, and because of the new accounting rules stemming from Enron (an effort led by the prophetic Democrats), the bad mortgages can not be removed, and the pot was soured. More liberal relativism - if they want a house, they can have it (only they really can't).

Of course the stew may not have been gone bad had Raines followed a good recipe. When you open the shop to anyone who wants to take at will, you don’t stay in business for very long. How does the American Dream look now?

There are other considerations, like the end of the housing boom. But the system takes care of these kinds of events. The reason the system can not cope this time is because of the big dose of toxins injected into it by Washington. In 2005, the first fiscal year after Raines left, Fannie revealed that its earning statement showed over $10 billion that it couldn’t find a source for. The Bush Administration pushed for reforms but was rebuffed by the Democrat-controlled Congress. You see, Fannie (and Freddie) has some pretty good lobbyists. They get along well with people like Christopher Dodd and Barney Frank and Barak Obama because they give them millions in campaign contributions – Dodd and Obama are the top 2 recipients of contributions from Mae.

We were forewarned in 2005 with this information. Senator McCain then sponsored legislation to counter what he said was “the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.” Was he right? Yes. But needless to say, the legislation: rebuffed.

Raines, he was investigated heavily and settled for $24 million. That’s a lot of money unless you earned $90 million, $52 of which part of a compensation package based on fraudulent earnings statements that oversold his effectiveness.

Let’s keep blaming Wall Street. It covers all manner of sins. But more importantly, let's learn from these mistakes: only borrow money if you can pay it back, and only loan money to people who can afford to pay it back.


Lucky said...

Good thoughts on Raines. Here's one more side of the story to consider:

The attacks in New York seven years ago spooked the economy, and the stock market lost trillions of dollars in valuation over the year and a half leading up to the occupation of Iraq. The solution of the Federal Reserve, led by Greenspan, was to lower the target rate to 1% and keep it there for a year. Banks were practically giving away money for free! Suddenly, people who formally couldn't afford a mortgage were jumping in with both feet, and the new buying volume pushed up housing valuations dramatically. As rates were readjusted upwards again by the Fed, the same homeowners with adjustable mortgages were squeezed into foreclosure, as their monthly payments double and tripled. If Greenspan wants to weigh in on the problems these days, he should be pointing one of his fingers at himself.

Sleep Now In The Fire said...

Lucky, I appreciate your comment, and I don't necessarily disagree that Greenspan played a part. I would note though that the reason adjustable rate mortgages were squeezed into foreclosure had a lot more to do with the fact that they were bundled with bad mortgages to make them palitable as mortage backed securities, a practice undertaken by Fannie Mae under Raines. Certainly, Greenspan helped people who couldn't afford mortgages buy them by lowering the rate, but he also helped people who could afford them, a tactic undertaken to stimulate growth in the economy. Had the original strategy to bundle mortgages not been taken, Greenspan's decision would not have had that kind of of negative effect.