Economic Crisis of 2008 - Where Does Blame Lay

The current financial crisis on Wall Street and, ultimately, Main Street USA, is among the worst fiscal disasters in U.S. history. The $700 billion bailout being discussed on Capitol Hill is a devastating blow to American capitalism and free enterprise. However ill conceived and decidedly anti-American in nature, it may be the only way to prop up not only our economy but, eventually, the world economy.

One thing is of utmost importance for our lawmakers to consider in all of this is where to lay the blame. Not so much to direct a disapproving finger and waggle it, but to correct the mistakes that brought us to this point. Congress and the Bush administration need to act quickly to construct and pass a comprehensive bill in a short period of time. But they must also establish the reasons for the failures just as quickly. Hopefully, but not likely, these two goals will be accomplished at the same time.

Back in 1977 President Jimmy Carter ushered a bill into law with little public notice. It was the Community Reinvestment Act. The CRA was designed to get lending institutions to take the monies deposited into them back into the community in the form of residential and small business loans. This was done to revitalize communities across the country and allow low to middle income families to realize the dreams of owning a home and/or small business. The law had provisions to make sure banks would continue to comply by making these CRA loans necessary in order for mergers and acquisitions to go through.

Over the years, however, with the intensity of bigger and bigger banking institution mergers and decentralized lenders (such as internet loan originators), the CRA was not kept up to sped. More and more these loans were being granted to more and more borrowers who would not be able to satisfy their debt. On top of all this, there came the practice of bundling and selling off these debts as bonds. Gone was the community aspect the law had in mind.

Flash forward to the 1990's, when Fannie Mae and Freddie Mac became the over-sized depositories of bundled sub-prime, high risk loans. Soon it was determined that these two privately run, government sponsored entities were being run inefficiently, and, together, had issued more than $1.5 trillion in outstanding debt.

In September of 2003, the Bush administration proposed a bill that would create a new agency within the Treasury Department that would assume supervision of these two giants. The new agency would have authority to set one of two capital reserve requirements, exercise authority over new lines of business and be able to determine if the two companies were adequately managing the risks of their huge and growing portfolios.

This proposal was then shot down by Congress. Senator Barney Frank (D-MA), the ranking Democrat at the time on the Financial Services Committee, stated that Fannie Mae and Freddie Mac were "not facing any kind of financial crisis." He further said, "'The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''

Also on the side against this proposal was North Carolina Representative Melvin Watts. He said, "'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.''

They were obviously mistaken.

Franklin Raines, then CEO of Fannie Mae, endorsed the plan but wanted to limit some of the proposed features. A year later, he would accept what he termed "early retirement" amid allegations of accounting irregularities and an overestimation of the company's worth (in order to boost top executives' bonus pays, including his own). Meanwhile, he walked away with an estimated bonus somewhere in the neighborhood of $50 to 90 million.

In 2005, Sen. John McCain (R-AZ) proposed a bill (The Federal Housing Enterprise Regulatory Reform Bill of 2005) that would, once again, be about reigning in Fannie Mae and Freddie Mac due to what McCain describes as "Fannie Mae employees deliberately and intentionally manipulated financial reports to hit earnings targets in order to trigger bonuses for senior executives." He also stated in his co-sponsorship of this bill that the financial misconduct of Fannie Mae "echoes the deeply troubling $5 billion profit restatement at Freddie Mac. The OFHEO (Office of Federal Housing Enterprise Oversight) 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."

The Congressional Democrats killed the bill in committee, keeping it from seeing a full Senate vote.

Couple the outdated CRA, with accounting fraud within the lending bodies, Congress' refusal to act in 2003 and again in 2005, and you have the foundation for the disaster we are witnessing befalling our financial markets.

On top of these facts is the disturbing lack of moral oversight of Congressional leaders considering the OFHEO report of 2005 which stated that the lobbying of Congress allowed interference with the regulator's examination of Fannie Mae and Freddie Mac's financial books. Among the current recipients of the largest donations are members such as Sen. Dodd (D-CT), Sen. Kerry (D-MA) and Sen. Obama (D-IL), the former and latter being the number one and number two recipients respectively of Fannie Mae lobbyist monies.

Not only do lawmakers need to quickly come up with the necessary means to prop up our economy, they need to correct the fundamental problems that led to the disaster in the first place. Point fingers, lay blame, but more importantly, fill in the holes uncovered, seal up the cracks and bring the lending practices more in line with the industry as it is today and not some ideological socialist program that it started out.

Sources:

NYTimes
New Agency Proposed to Oversee Fannie Mae and Freddie Mac
September 11, 2003
http://query.nytimes.com/gst/fullpage.html?res=9E06E3D6123BF932A2575AC0A9659C8B63&sec=&spon=&pagewanted=2

Think on these things
http://bellalu0.wordpress.com/2008/09/17/bush-and-mccain-proposed-oversight-of-fannie-mae-and-freddie-mac/

Wikipedia
http://en.wikipedia.org/wiki/Jimmy_Carter