Emily Carlino – 10/8/08

This page was last updated on October 9, 2008.

Let us have some of the $700 trillion; Emily Carlino; Beaver County Times; October 8, 2008.

Note to the Times. The bailout is $700 billion, not $700 trillion.

Below is a detailed critique of the subject letter.

“I do not agree with the bailout.

“Wall Street executives brought this problem on themselves at the expense of working Americans. I think government should give the American people part of the $700 billion and let us spend it.

“We deserve it since it is our money anyway. Watch the stock market go up when we can afford to buy a new house, new car, send our children to college, health care, gasoline to get back and forth to work, heat our homes and, last and not least, feed our families.

“I am sure that the executives who run these companies that need to be bailed out have no problem with any of the above-mentioned problems we face everyday.”

[RWC] Ms. Carlino appears to believe the Democrat/media propaganda claiming the mess was brought on by “Wall Street executives.” Don’t get me wrong; “Wall Street executives” played a role, but not the central role.

At the center of the problem are Fannie Mae and Freddie Mac, GOVERNMENT sponsored enterprises and Democrat creations going back to FDR (Fannie Mae – 1938) and LBJ (Freddie Mac - 1968). The idea behind Fannie/Freddie was to promote home ownership by people who were poor credit risks. Further, Fannie/Freddie are not subject to the same accounting rules as the private sector. Remember the 2002 Sarbanes/Oxley bill that was supposed to tighten up accounting rules in the wake of Enron, et cetera? Fannie/Freddie were exempted from those rules.

Let’s move to the Community Reinvestment Act of 1977, created by a Democrat-controlled Congress and a Democrat President (Jimmy Carter). Though the stated intent of the bill was to crack down on race-based “redlining,” it’s effect was to encourage loans to poor credit risks. If the feds determined that you didn’t meet the credit needs of your entire community, your bank charter could be revoked.

Let’s move to the 1990s. Through Attorney General Janet Reno, the Clinton administration threatened legal action against lending institutions if the feds didn’t believe the institutions were making enough high-risk loans. Of course, the feds never used the term “high-risk.” Instead, we got the euphemism “subprime.”

Even with the threat of government action, why would lending institutions put their viability at risk? That’s where Fannie/Freddie come in. Banks could make the high-risk loans and sell them to Fannie/Freddie, thus making a profit on the high-risk loans without being exposed to the risk.

If Fannie/Freddie bought the high-risk loans, why wasn’t the damage limited to Fannie/Freddie? Well, those rascals at Fannie/Freddie didn’t just sit on the high-risk loans they bought. Fannie/Freddie mixed the high-risk loans with solid loans to form something called the mortgage-backed security. Fannie/Freddie (and also some private firms) then sold these mortgage-back securities as investments to financial companies around the world. Because the good and bad loans were all mixed together, investors had no way of knowing how much of their investment was bad. Uncertainty is a killer in the financial world.

Let’s also not forget the role played by ordinary citizens to take out loans they knew they could not afford. As far as I’m concerned, people who took loans they couldn’t afford don’t qualify as victims.

Though I don’t know how big an effect it had, so-called “mark to market” asset accounting had an impact. This standard went into effect in late 2007. “Mark to market” means an asset, like a house, must be valued at its current market value. While that makes sense for shares of stock, it doesn’t make sense for real estate. Here’s what I mean. Let’s say under normal circumstances you could expect to sell your house for $100,000. What if I told you the house had to be sold immediately instead of the normal amount of time it usually takes to sell a house? Yep, you’re not going to get your $100,000. Further, what if you had no intention of selling your house in today’s market? In both of these cases your house would be undervalued. That’s part of the problem with the properties behind mortgage-backed securities (MBS). Even though the owners had no intention of selling their houses, the houses had to be marked down below their “true value.” This makes it appear the properties are worth less than they really are, causing holders of MBS (like financial businesses) to take a huge hit to their asset calculation. When your liabilities exceed your assets, you’re bankrupt.

Should “Wall Street executives” have known better? Of course, and most did. To ignore the central role of government entities and policy in this mess, however, is to focus on the symptom instead of the disease.

So where were Republicans when all this was going on? In 2001, President Bush’s 2002 budget (his first) raised an alarm about Fannie Mae and Freddie Mac and testimony before Congress by Treasury Secretary Snow raised the alarm again in 2003. Alan Greenspan also raised alarms in 2003 and 2005. Democrats, led by Rep. Barney Frank (D-MA), Sen. Chris Dodd (D-CT), and Sen. Chuck Schumer (D-NY), resisted all efforts to reign in Fannie Mae and Freddie Mac. Indeed, during a 2003 hearing, Mr. Frank 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.” I came across a Youtube video showing clips of congressional testimony in 2004 regarding Fannie Mae and Freddie Mac. This video shows Democrats strongly defending Fannie/Freddie while Republicans and the regulator were sounding the alarm and pushing to rein in Fannie/Freddie.

Even Bill Clinton acknowledges the Democrat link. In a recent interview, Mr. Clinton said, Democrats for years have been “resisting any efforts by Republicans in the Congress or by me when I was President to put some standards and tighten up a little on Fannie Mae and Freddie Mac.” While what Mr. Clinton said about “Republicans in the Congress” is historically accurate, I’m not so sure about his claim about himself. I say that because it was Clinton Administration policy to “encourage” Fannie Mae, Freddie Mac, and private lending institutions to make high-risk (aka “subprime”) mortgages. “[T]ighten[ing] up a little on Fannie Mae and Freddie Mac” and pushing high-risk mortgages would have been inconsistent positions.

If Republicans knew what was going to happen, why didn’t they make a much bigger stink about it? I suspect some Republicans were afraid to press the issue because Democrats in the hearings showed they were going to play “the race card.” As you’ll see in the aforementioned video, one Democrat (Lacy Clay – Missouri) referred to the hearings as the “political lynching of Franklin Raines [then-Fannie Mae CEO].” A black Democrat referring to the “lynching” of a black man was done specifically to send the message that supporters of Fannie Mae/Freddie Mac reform would be branded as racists. Should the Republicans have forced the filibuster and endured the charges of racism? Absolutely.

Finally, in addition to being Fannie/Freddie’s defenders, Democrats were also the biggest beneficiaries of political contributions from Fannie Mae and Freddie Mac employees, with Messrs. Dodd and Barack Obama being #1 and #2 on the list with more than $100,000 each. Further, former high-ranking officials {Franklin Raines [vice chairman (1991 – 1996) and CEO (1999 – 2004)] and Jim Johnson [vice chairman (1990 – 1991) and chairman & CEO (1991 – 1998)]} of Fannie Mae are Obama advisors.