Monday, March 5, 2012

Geithner covers for corruption on Pennsylvania Avenue

Charles Kadlec has an excellent essay, "Geithner Covers for Corruption on Pennsylvania Avenue," in the recent issue of Forbes. He makes it quite clear that, contrary to Geithner's assertion in his recent WSJ op-ed, the recent financial crisis had its origins not in a lack of regulation, but in extensive meddling by the federal government in the housing and lending market over many years. The last thing we need is more federal oversight and intervention in free markets. An excerpt:

[Kadlec to Secretary Geithner:] First, your essay glosses over the central role the federal government played in creating the crisis. In particular, the government through Fannie Mae and Freddie Mac directed $5.2 trillion of capital to increase the supply of mortgages. In addition, it passed a law that required banks to make billions of dollars in loans to individuals that were unlikely to pay off the loans, in the end with 0% down.
In 1998, Fannie Mae announced it would purchase mortgages with only 3% down. And, in 2001, it offered a program that required no down payment at all. Between 2001 and 2004, subprime mortgages grew from $160 billion to $540 billion. And between 2005 and 2007, Fannie Mae’s acquisition of mortgages with less than 10% down almost tripled. These loans are now known as “subprime” and “alt A” loans. At the time they were made, Fannie Mae and Freddie Mac encouraged their issuance by lowering their standards and buying them up from the now vilified mortgage brokers, S&Ls, banks and Wall Street investment banks.
Second, your claim that increased regulatory oversight would have prevented the crisis requires a credulous belief in the wisdom and courage of those in power. Regulators with all of the necessary powers have failed in their most basic task of preventing fraud including Bernie Maddoff’s Ponzi scheme, and now the still unexplained disappearance of $1.6 billion of customer money at MF Global. Yet, you ask us to believe tens of thousands of pages of new regulations will somehow empower you and other elite public servants to prevent another financial crisis?
As we know now, you and the other members of the Federal Open Market Committee in 2006 did not grasp the implications of the then faltering housing market for the general economy or the health of the banking system. As a consequence, you and your colleagues did not use the powers you had to head off the financial crisis when there was still plenty of time to act.

The self-regulatory check normally provided by markets on activities that are likely to lose money — lenders backing away — was simply blocked by the government’s intervention in the capital markets. As you must know, six top executives of Fannie Mae and Freddie Mac have been charged by the Securities and Exchange Commission with securities fraud for hiding the size of the purchases of low quality mortgages from the market.
This activity was not due to a lack of regulation or oversight as you claim. Both companies are under the direct supervision of a federal regulator and Congress. At the time these loans were being purchased by these two Government Sponsored Enterprises, their actions were defended by many in Congress who, led by Senator Chris Dodd and Congressman Barney Frank, saw such reckless lending as a successful government initiative.


William said...

"In 1998, Fannie Mae announced it would purchase mortgages with only 3% down. And, in 2001, it offered a program that required no down payment at all. Between 2001 and 2004, subprime mortgages grew from $160 billion to $540 billion. And between 2005 and 2007, Fannie Mae’s acquisition of mortgages with less than 10% down almost tripled."

#1 We have to remember that these laws were pasted by Republican and Democratic members of Congress - bipartisan s upport. Extremely few members of congress did not support these measures - so it was not a Pennsylvania Avenue initiative.

#2 Fannie May was a private company with an elected Board and executives responsible to their shareholders. If you ask them what happened, they have said that they were merely competing with other mortgage companies and doing as they did when they loosened their underwriting requirements.

#3 President George W Bush II was very pleased to be known as the "Home Ownership President". Perhaps that is what the author meant by Pennsylvania Avenue.

I do agree that their were enough oversight regulations on the books that the Federal Reserve, Comptroller of the Currency and FHA should have taken action on the extremely loose underwriting standards that evolved to the point of being ridiculous. But then we must remember that Alan Greenspan was Chairman of the FED during most of the years mentioned and he believed firmly that markets were self correcting and that market participants would weed-out the irresponsible actors.

This was the same Alan Greenspan who took no action during the inflation of the bubble when he could have at a minimum raised margin interest rates to tame rampant speculation.


Scott Grannis said...

William: let it be clear that I blame politicians on both sides of the aisle for the housing mess. No party is free of corruption, and no party has a spotless record when it comes to terrible policy errors.

John said...

For another angle on the causes of the financial crisis, here is Weissman and Donahue:

Wall Street’s Best Investment: Ten Deregulatory Steps to Financial Meltdown

Squire said...

One day the bible of liberalism, the NYT, had an editorial that communities with higher home ownership had better education and crime outcomes. It immediately became the new cause of the government to make a more utopian state. My point is not that liberals cannot tell the difference between cause and effect.

My point is I was there every day. And everyday financial advisors, all of them, told clients that the government will back Freddie and Fannie. It was only a technicality that these agencies were private then. They were directed to carry out the new cause.

And I remember clearly Geo. W. Bush on the news saying there were not enough people owning their homes. That they set a goal of one million more minorities owning their homes. And I remember how horrible I felt realizing he was a dufus.

Today, another decree from Barrack Christina Kirchner Obama that points will be halved on refi’s and veterans who had robosigning foreclosures will be given some of their lost equity back.

They can’t leave it alone.

Unknown said...

Well at least foreclosure sales and starts jumped dramatically in January (MoM increase of about 28%).

Maybewe will start working through the 6M plus homes that are delinquent and in the "shadow inventory".

Not until we work through this backlog can we get past this mess.

Siobhan said...


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Steve K said...
This comment has been removed by the author.
Steve K said...

The main point here, is the regulatory bureaucracy was short circuited by the politicians in congress and the whitehouse. I have seen the youtube videos of Barney Frank pooh-poohing the testimony of the inspector generals telling the Bank Oversight committee that Fannie and Freddie was in extremely bad shape and there was potential fraud by management. There is also a youtube video of this same inspector general called to a special meeting with the Congressional Black Caucus ( attended by Barack Obama) and being read the riot act for doing his job.

As the Forbes article states, the government created the subprime loan, the Zero down/negative amt. loan, and the NINJA loan.

Obama is finding false villians to fill his redistributionist goals.