Posts Tagged ‘$800 billion’

The Hell With It. Let’s Just Go Off The Damn Fiscal Cliff. Because You Just Can’t Negotiate With These People.

November 17, 2012

I just got through writing an article calling for a compromise on the tax hike Obama is demanding.  I already have to eat my words.

It is frankly hard to believe how pathologically Democrats prove themselves to be on a constant basis, even as much as I distrust Democrats and call them liars to their faces.

Realize that Democrats – and particularly Obama – have been saying that we need to hike taxes on the rich.  In order to do what?  In order to reduce the deficit, they said.  A nice, noble-sounding reason.  I mean, how can you possibly be against wanting to reduce the deficit???

Here’s a headline of Obama demagoguging tax hikes on the rich under the pretense that it would be to reduce the deficit:

Obama proposes $1.5tn tax hike to cut deficit
US president announces a number of measures aimed at reducing deficit in next 10 years, saying rich should pay more tax.
Last Modified: 19 Sep 2011

Here’s Obama over a year later, preaching the same message:

Obama says deficit plan must include higher taxes for wealthy
By Amie Parnes and Russell Berman – 11/09/12 03:51 PM ET

President Obama called on Congress on Friday to reduce the deficit in “a balanced and responsible way” in his first public remarks since winning reelection.

The president said Congress should extend the current tax rates for 98 percent of Americans, but raise taxes on households with annual income of more than $250,000.

Obama did not talk about higher tax rates in his speech, but said he would not accept a deal that cut spending and entitlements but did not ask wealthier households to pay more taxes.

“If we’re serious about reducing the deficit, we have to combine spending cuts with revenue and that means asking the wealthiest Americans to pay a little more in taxes,” Obama said. “That’s how we did it in the 1990s when Bill Clinton was president, that’s how we can reduce the deficit while still making the investments we need to build a strong middle class and a strong economy.”

But Democrats are LIARS and you simply cannot do a deal with these liars because they have no integrity at all in any way, shape or form.

Take a look at this:

Senate Democrats say deficit package must include stimulus
By Alexander Bolton – 11/14/12 01:42 PM ET

Senate Democrats, feeling confident from their net gain of two seats in last week’s election, say any deficit-reduction package negotiated in the coming weeks must include stimulus measures.

They have yet to decide which prime-the-pump measures to push, but are mulling options such as new infrastructure spending and an extension of the payroll tax holiday.

Some Republicans are likely to balk at the notion that a package to cut the deficit would include new spending. But Democrats argue the No. 1 concern for voters is job creation and that the government needs to take a more aggressive role in spurring the economy.

“We need to do something on stimulus as part of the overall fiscal cliff,” said Sen. Charles Schumer (D-N.Y.), the Senate Democrats’ chief political strategist. “We have to do something because the economy is not growing fast enough in the first year or two.”

Democrats are liars, and they are particularly liars ANYTIME they say ANYTHING about cutting government spending.  Period.

Obama is the selfsame president who promised to cut the deficit in half by the end of his first term and instead tripled that deficit.  And now they’re already at it again just days since they ran a campaign based entirely on lies.

Democrats are now implicitly acknowledging that the “hike taxes so we can pay down the deficit” was a lie and a ruse from the deceitful party of lies and ruses.  Now they’re saying, “People who believe what we say are fools, so we have no qualms about lying in every single ‘promise’ we make.  We’ll promise one thing and then do another, and if you’re dumb enough to believe us then doom on you!”

Here’s another headline to show you just how damn far Obama is from “compromise” while he demonizes the Republicans for not compromising:

Obama Demands $1.6 Trillion More In Taxes Posted
by Adam English on the Wealth Wire
Wednesday, November 14th, 2012

President Obama will begin budget negotiations on Friday morning but moving twice as far away from Republican interests. Instead of the $800 billion in extra federal revenue from tax hikes,Obama will be calling for a whopping $1.6 trillion.

On the other side of the table, House Speaker John Boehner hasn’t specified a revenue target, but he has said he would be willing to accept new tax revenues. He is still unwilling to consider higher tax rates.

As a condition for the possible concession, Boehner continues to insist that Democrats accept structural changes to entitlement programs which are causing long-term budget concerns.

President Obama just attended a meeting with union officials and other activists and will be meeting with CEOs of a dozen companies today. Many executives have already voiced grave concerns about the consequences of the looming standoff over the fiscal cliff.

73% of participants of a Wall Street Journal CEO conference earlier this week said their primary concern was the fiscal cliff.

How the hell do you actually move TWICE as far away to the left from your previous bargaining posture while simultaneously self-congratulating yourself for “compromising” and demonizing the party that HASN’T moved twice as far to the right on their bargaining position?  I don’t know, but with the help of the worst media propaganda since Goebbels, Obama has managed to do it.

Statement of fact: “The offer is twice as high as a deal Obama scuttled last year, suggesting he may be prepared to let talks fail again.”  That deal – which took Boehner to the breaking point – called for $800 billion in tax hikes.  Now Obama is demanding tax hikes that will be TWICE as high as last time.  While somehow trying to simultaneously claim that HE is the one willing to compromise!

Republicans – you know – “the obstructionists” – have offered Obama revenues that match what he says he needs by eliminating and/or capping deductions.  And it turns out that Obama HIMSELF has argued that what the Republicans are proposing is a solution:

The idea of curbing tax breaks isn’t new. Tax policy experts have touted it for  years and Democrats, including President Obama, have proposed it in one form or  another. That’s why it may offer a key to resolving the fiscal cliff.

So this isn’t about raising revenue; this is about targeting one group of people to punish them for daring to try to be successful in America.  This is about an out-of-control government demanding more and more control.  This is about pure demagoguery, pure and simple.

The fact of the matter is that Obama has DOUBLED DOWN on his demand while the Republicans have offered a surprising concession in being willing to increase government revenues.  But because we live in a world that Joseph Goebbels would love, the media STILL portrays Obama as the man who is “compromising” even though he is in fact demanding TWICE as much and the Republicans as “obstructionists” even though they are massively compromising.

I’m not the only human being who can see the massive, galling, astonishing hypocrisy and dishonesty from the Democrat Party, am I?

It doesn’t matter if the Republicans come to the table willing to compromise or not; they are demonized anyway, just the same.  So why compromise?

If Democrats want tax hikes, let’s give them to EVERYBODY.  If you want somebody else to pay more taxes, dammit, YOU should pay higher taxes.

I was looking for some way forward for Republicans and some way out of this fiscal cliff mess.  But let’s just go off that damn cliff.  Because there is no possible way to negotiate with people as deceitful and dishonest and disingenuous as Democrats have proven themselves to be.  And because “the cliff” can’t be any worse than the direction Obama wants to take America, anyway.

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AEI Article: How Fannie And Freddie Blew Up The Economy

January 23, 2010

Below is a very good article that everyone should read to better understand why the economy imploded in 2008: it was as a result of literally decades of risky and in frankly socialist decisions implemented primarily by GSEs Fannie Mae and Freddie Mac.

But allow me to say a few words before getting to the full article.

I compiled the following to respond to the typical liberal charge that “the economic collapse in 2008 was Bush’s fault”:

The Democrat Party/lamestream media narrative is that Bush was responsible for the economic meltdown because it “happened during his watch.” There was never once a mention that it happened during Nancy Pelosi’s and Harry Reid’s watch. Because that particular narrative doesn’t fit their leftist agenda.

I can very easily explain why Democrats were the primary cause of the 2008 collapse.

I can even give you the story in video, namely an 11 minute video titled “Burning Down the House: What Caused Our Economic Crisis?”

Or how about watching John Stossel explain what happened in a 5 1/2 minute ABC 20/20 piece?

Do you really want to know the true origins of the financial collapse? Then please do a little reading and start learning. The mortgage market collapsed in 2008 because of its biggest player: Fannie Mae, which held some 60% of the mortgages. And Democrats were entirely behind the policies that led to the collapse of Fannie Mae and the private mortgage industry that bought Fannie’s mortgage-backed securities. Investors were falsely led to believe that the bonds they were buying were guaranteed implicitly by the federal government.

Here are the words of Mortimer Zuckerman – a liberal, an Obama supporter, a billionaire, a trustee of the Council on Foreign Relations, and the owner of a couple major news sources:

What about Fannie Mae and Freddie Mac that got there with the support of the Democrats in Congress. That’s what kicked off the great housing bubble; that’s what started this whole thing rolling down the hill. Did they ever talk about that kind of excess in the congress? No…..this isn’t something that is just due to the “Wall Street community”.

George Bush called for reform of the housing finance market 17 times in 2008 alone — and Democrats ignored him. They had been blocking his every effort to prevent disaster ever since Bush first tried to do so beginning in 2003. At that time, Democrat Barney Frank led the effort to block reform, saying:

These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis,” said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ”The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”

George Bush and John McCain repeatedly warned that if we didn’t address the situation, we would suffer a financial collapse.

John McCain wrote an urgent letter in 2006 that read:

These are entities that have demonstrated over and over again that they are deeply in need of reform. For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac—known as Government-sponsored entities or GSEs—and the sheer magnitude of these companies and the role they play in the housing market. OFHEO’s report this week does nothing to ease these concerns.

In fact, the report does quite the contrary. OFHEO’s report solidifies my view that the GSEs need to be reformed without delay. I join as a cosponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005, S. 190, to underscore my support for quick passage of GSE regulatory reform legislation. If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.

John McCain signed another letter that ended with these words:

With the fiscal challenges facing us today (deficits, entitlements, pensions and flood insurance), Congress must ask itself who would actually pay this debt if Fannie or Freddie could not?

Substantial testimony calling for improved regulation of the GSEs has been provided to the Senate by the Treasury, Federal Reserve, HUD, GAO, CBO, and others. Congress has the opportunity to recommit itself to the housing mission of the GSEs while at the same time making sure the GSEs operate in a manner that does not expose our financial system, or taxpayers, to unnecessary risk. It is vitally important that Congress take the necessary steps to ensure that these institutions benefit from strong and independent regulatory supervision, operate in a safe and sound manner, and are primarily focused on their statutory mission. More importantly, Congress must ensure that the American taxpayer is protected in the event either GSE should fail. We strongly support an effort to schedule floor time this year to debate GSE regulatory reform.

And they DID fail. They massively, massively failed.

Only about a month before the whole system crashed, Barney Frank went on the record and said this:

REP. BARNEY FRANK, D-MASS.: “I think this is a case where Fannie and Freddie are fundamentally sound, that they are not in danger of going under. They’re not the best investments these days from the long-term standpoint going back. I think they are in good shape going forward.”

They sure were, you fat, miserable, loathsome, obscene, disgusting, slobbering, lying toad.

The top three headlines under the Google search “Fannie Mae collapse”:

Freddie, Fannie Scam Hidden in Broad Daylight

Financial Markets Reeling from Fannie & Freddie Collapse and Evitable Government Bailout

Fannie Mae and Freddie Mac: Too big not to fail

But as our economy exploded along with the boondoggle housing finance market artificially sustained by Fannie and Freddie, the Democrats demagogued the Republicans. And the lamestream media duly reported it as though it were all the liberal’s-god-socialist-big-government’s truth.

So to answer your question, it was DEMOCRATS who led us into this mess. Just as it is DEMOCRATS who are now making the mess far worse.

I would point out in addition that Republicans deserve condemnation because they lacked the political courage and the political will to oppose enormously risky Democrat policies rather than face the demagoguery that they were “racist” for not allowing low-income minorities to own their own homes.  So they allowed the Democrats to keep expanding the Community Reinvestment Act, and allowed them to keep expanding the portfolio of Government Supported Enterprises Fannie Mae and Freddie Mac.

The following AEI article from Peter Wallison and Charles Calomiris is also available as a PDF file.

The Last Trillion-Dollar Commitment
The Destruction of Fannie Mae and Freddie Mac

By Peter J. Wallison, Charles W. Calomiris  |  AEI Online
(September 2008)

The government takeover of Fannie and Freddie was necessary because of their massive losses on more than $1 trillion of subprime and Alt-A investments.

The government takeover of Fannie Mae and Freddie Mac was necessary because of their massive losses on more than $1 trillion of subprime and Alt-A investments, almost all of which were added to their single-family book of business between 2005 and 2007. The most plausible explanation for the sudden adoption of this disastrous course–disastrous for them and for the U.S. financial markets–is their desire to continue to retain the support of Congress after their accounting scandals in 2003 and 2004 and the challenges to their business model that ensued. Although the strategy worked–Congress did not adopt strong government-sponsored enterprise (GSE) reform legislation until the Republicans demanded it as the price for Senate passage of a housing bill in July 2008–it led inevitably to the government takeover and the enormous junk loan losses still to come.

Now that the federal government has been required to take effective control of Fannie and Freddie and to decide their fate, it is important to understand the reasons for their financial collapse–what went wrong and why. In his statement on September 7 announcing the appointment of a conservator for the two enterprises, Treasury Secretary Henry M. Paulson pointed to their failed business models as the reason for their collapse. This was certainly a contributing element, but not the direct cause. The central problem was their dependence on Congress for continued political support in the wake of their accounting scandals in 2003 and 2004. To curry favor with Congress, they sought substantial increases in their support of affordable housing, primarily by investing in risky and substandard mortgages between 2005 and 2007.

As GSEs, Fannie and Freddie were serving two masters in two different ways. The first was an inherent conflict between their government mission and their private ownership. The government mission required them to keep mortgage interest rates low and to increase their support for affordable housing. Their shareholder ownership, however, required them to fight increases in their capital requirements and regulation that would raise their costs and reduce their risk-taking and profitability. But there were two other parties–Congress and the taxpayers–that also had a stake in the choices that Fannie and Freddie made. Congress got some benefits in the form of political support from the GSEs’ ability to hold down mortgage rates, but it garnered even more political benefits from GSE support for affordable housing. The taxpayers got highly attenuated benefits from both affordable housing and lower mortgage rates but ultimately faced enormous liabilities associated with GSE risk-taking. This Outlook tells the disheartening story of how the GSEs sold out the taxpayers by taking huge risks on substandard mortgages, primarily to retain congressional support for the weak regulation and special benefits that fueled their high profits and profligate executive compensation. As if that were not enough, in the process, the GSEs’ operations promoted a risky subprime mortgage binge in the United States that has caused a worldwide financial crisis.

The special relationship with Congress was the GSEs’ undoing because it allowed them to escape the market discipline–the wariness of lenders–that keeps corporate managements from taking unacceptable risks.

The peculiar structure of the GSEs–shareholder-owned companies with a public mission–reflected a serious confusion of purpose on the part of the Lyndon Johnson administration and the members of Congress who created this flawed structure in 1968. In seeking to reduce the budget deficits associated with the Vietnam War and Great Society programs, the administration hit upon the idea of “privatizing” Fannie Mae by allowing the company to sell shares to the public. This, according to the budget theories of the time, would take Fannie’s expenditures off-budget, while allowing it to continue its activities with funds borrowed in the public credit markets. But turning Fannie into a wholly private company was not acceptable either. Various special provisions were placed in Fannie’s congressional charter that intentionally blurred the line between a public instrumentality and a private corporation. Among these provisions: Fannie was given a line of credit at the Treasury; the president could appoint five members of its board of directors; and its debt could be used, like Treasury debt, to collateralize government deposits in private banks.

Fannie’s congressional charter and its unusual ties to the government ensured that the market would recognize its status as a government instrumentality: that despite its private ownership, the company was performing a government mission. Because it was highly unlikely that the U.S. government would allow one of its instrumentalities to default on its obligations, Fannie was perceived in the capital markets to have at least an implicit government backing and was thus able to borrow funds at rates that were only slightly higher than those paid by the U.S. Treasury on its own debt offerings. In 1970, the Federal Home Loan Bank Board created Freddie Mac to assist federal savings and loan associations in marketing their mortgages; Freddie was also allowed to sell shares to the public in 1989 and became a competitor of Fannie Mae under a congressional charter that established an identical special relationship with the government.

The special relationship, codified by these unique charters, required the GSEs to pursue another inherently conflicted mission that pitted their shareholders against the taxpayers. To the extent that their government backing allowed the GSEs to take excessive financial risks, it was the taxpayers and not the shareholders who would ultimately bear the costs. That result–the privatization of profit and the socialization of risk–has now come to pass. U.S. taxpayers are now called upon to fill in the hole that reckless and improvident investment activity–fueled by inexpensive and easily accessible funds–has created in the GSEs’ balance sheets. The special relationship was also the GSEs’ undoing, because it allowed them to escape the market discipline–the wariness of lenders–that keeps corporate managements from taking unacceptable risks. Normally, when a privately held company is backed by the government (for example, in the case of commercial banks covered by the Federal Deposit Insurance Corporation), regulation is the way that the government protects the taxpayers against the loss of market discipline. When Fannie Mae was privatized in 1968, however, no special regulatory structure was created to limit the taxpayers’ exposure to loss. The Johnson administration officials who structured the privatization may not have realized that they were creating what we recognize today as a huge moral hazard, but when Fannie became insolvent (the first time) in the high-interest-rate environment of the early 1980s, policymakers recognized that the company represented a potential risk to taxpayers.

In 1991, as Congress finally began the process of developing a regulatory regime for the GSEs, congressional interest in supporting affordable housing was growing. At this point, Fannie Mae initiated its first foray into affordable housing–a relatively small $10 billion program, probably intended to show Congress that the GSEs would support affordable housing without a statutory mandate. Nevertheless, Congress added an affordable housing “mission” to the GSE charters when it created their first full-time regulator, the Office of Federal Housing Enterprise Oversight (OFHEO). The new agency had only limited regulatory authority. It was also housed in the Department of Housing and Urban Development (HUD), which had no regulatory experience, and it was funded by congressional appropriations, allowing the GSEs to control their regulator through the key lawmakers who held OFHEO’s purse strings.

The new affordable housing mission further increased the congressional policy stake in the GSEs, but it also initiated a destructive mutual dependency: Congress began to rely on Fannie and Freddie for political and financial support, and the two GSEs relied on Congress to protect their profitable special privileges. In later years, attention to the political interests of Congress became known at the GSEs as “management of political risk.” In a speech to an investor conference in 1999, Franklin Raines, then Fannie’s chairman, assured them that “[w]e manage our political risk with the same intensity that we manage our credit and interest rate risks.”[1]

Benefits to Congress

Managing their political risk required the GSEs to offer Congress a generous benefits package. Campaign contributions were certainly one element. Between the 2000 and 2008 election cycles, the GSEs and their employees contributed more than $14.6 million to the campaign funds of dozens of senators and representatives, most of them on committees that were important to preserving the GSEs’ privileges.[2] And Fannie knew how to “leverage” its giving, not just its assets; often it enlisted other groups that profited from the GSEs’ activities–the securities industry, homebuilders, and realtors–to sponsor their own fundraising events for the GSEs’ key congressional friends. In addition to campaign funds, the GSEs–Fannie Mae in particular–enhanced their power in Congress by setting up “partnership offices” in the districts and states of important lawmakers, often hiring the relatives of these lawmakers to staff the local offices. Their lobbying activities were legendary. Between 1998 and 2008, Fannie spent $79.5 million and Freddie spent $94.9 million on lobbying Congress, making them the twentieth and thirteenth biggest spenders, respectively, on lobbying fees during that period.[3] Not all of these expenditures were necessary to contact members of Congress; the GSEs routinely hired lobbyists simply to deprive their opponents of lobbying help. Since lobbyists are frequently part of lawmakers’ networks–and are often former staffers for the same lawmakers–these lobbying expenditures also encouraged members of Congress to support Fannie and Freddie as a means of supplementing the income of their friends.

The failure to adopt meaningful GSE reform in 2005 was a crucial missed opportunity.

In the same vein, Fannie and Freddie hired dozens of Washington’s movers and shakers–at spectacular levels of compensation–to sit on their boards, lobby Congress, and in general help them to manage their political risk. (An early account of this effort was an article entitled “Crony Capitalism: American Style” that appeared in The International Economy in 1999.[4] A later version of the same point was made in Investor’s Business Daily nine years later.[5]) The GSEs also paid for academic research to assure the public that the GSE mission was worthwhile and that the GSEs posed minimal risks to taxpayers. For example, Nobel laureate Joseph Stiglitz coauthored an article in 2002 purporting to show that the risk of GSE default producing taxpayer loss was “effectively zero.”[6]

One of the most successful efforts to influence lawmakers came through community groups. Both Fannie and Freddie made “charitable” or other gifts to community groups, which could then be called upon to contact the GSEs’ opponents in Congress and protest any proposed restrictions on the activities or privileges of the GSEs. GSE supporters in Congress could also count on these groups to back them in their reelection efforts.

But these activities, as important as they were in managing the GSEs’ political risks, paled when compared to the billions of dollars the GSEs made available for spending on projects in the congressional districts and states of their supporters. Many of these projects involved affordable housing. In 1994, Fannie Mae replaced its initial $10 billion program with a $1 trillion affordable housing initiative, and both Fannie and Freddie announced new $2 trillion initiatives in 2001.[7] It is not clear to what extent the investments made in support of these commitments were losers–the GSEs’ profitability over many years could cover a multitude of sins–but it is now certain that the enormous losses associated with the risky housing investments appearing on Fannie and Freddie’s balance sheet today reflect major and imprudent investments in support of affordable housing between 2005 and 2007–investments that ultimately brought about the collapse of Fannie and Freddie.

Even if the earlier affordable housing projects were not losers, however, they represented a new and extra-constitutional way for Congress to dispense funds that should otherwise have flowed through the appropriations process. In one sense, the expenditures were a new form of earmark, but this earmarking evaded the constitutional appropriations process entirely. An illustration is provided by a press release from the office of Senator Charles E. Schumer (D-N.Y.), one of the most ardent supporters of the GSEs in Congress. The headline on the release, dated November 20, 2006–right in the middle of the GSEs’ affordable housing spending spree–was “Schumer Announces up to $100 Million Freddie Mac Commitment to Address Fort Drum and Watertown Housing Crunch.” The subheading continued: “Schumer Unveils New Freddie Mac Plan with HSBC That Includes Low-Interest Low-Downpayment Loans. In June, Schumer Urged Freddie Mac and Fannie Mae Step Up to the Plate and Deliver Concrete Plans–Today Freddie Mac Is Following Through.”[8] If this project had been economically profitable for Fannie or Freddie, Schumer would not have had to “urge” them to “step up.” Instead, using his authority as a powerful member of the Senate Banking Committee–and a supporter of Fannie and Freddie–he appears to have induced Freddie Mac to make a financial commitment that was very much in his political interests but for which the taxpayers of the United States would ultimately be responsible.

Of course, Schumer was only one of many members of Congress who used his political leverage to further his own agenda at taxpayer expense and outside the appropriations process. The list of friends of Fannie and Freddie changed over time; while the GSEs enjoyed broad bipartisan support in the 1990s, over the past decade, they have become increasingly aligned with the Democrats. This shift in the political equilibrium was especially clear in the congressional reaction to the GSEs’ accounting scandals of 2003 and 2004.

The Accounting Scandals

Fannie and Freddie reaped significant benefits from the careful management of their political risk. In June 2003, in the wake of the failures of Enron and WorldCom, Freddie’s board of directors suddenly dismissed its three top officers and announced that the company’s accountants had found serious problems in Freddie’s financial reports. In 2004, after a forensic audit by OFHEO, even more serious accounting manipulation was found at Fannie, and Raines, its chairman, and Timothy Howard, its chief financial officer, were compelled to resign.

It is eloquent testimony to the power of Fannie and Freddie in Congress that even after these extraordinary events there was no significant effort to improve or enhance the powers of their regulator. The House Financial Services Committee developed a bill that was so badly weakened by GSE lobbying that the Bush administration refused to support it. The Senate Banking Committee, then under Republican control, adopted much stronger legislation in 2005, but unanimous Democratic opposition to the bill in the committee doomed it when it reached the floor. Without any significant Democratic support, debate could not be ended in the Senate, and the bill was never brought up for a vote. This was a crucial missed opportunity. The bill prohibited the GSEs from holding portfolios of mortgages and mortgage-backed securities (MBS); that measure alone would have prevented the disastrous investment activities of the GSEs in the years that followed. GSE immunity to accounting scandal is especially remarkable when it is recalled that after accounting fraud was found at Enron (and later at WorldCom), Congress adopted the punitive Sarbanes-Oxley Act, which imposed substantial costs on every public company in the United States. The GSEs’ investment in controlling their political risk–at least among the Democrats–was apparently money well spent.

Nevertheless, the GSEs’ problems were mounting quickly. The accounting scandal, although contained well below the level of the Enron story, gave ammunition to GSE critics inside and outside of Congress. Alan Greenspan, who in his earlier years as Federal Reserve chairman had avoided direct criticism of the GSEs, began to cite the risks associated with their activities in his congressional testimony. In a hearing before the Senate Banking Committee in February 2004, Greenspan noted for the first time that they could have serious adverse consequences for the economy. Referring to the management of interest rate risk–a key risk associated with holding portfolios of mortgages or MBS–he said:

To manage this risk with little capital requires a conceptually sophisticated hedging framework. In essence, the current system depends on the risk managers at Fannie and Freddie to do everything just right, rather than depending on a market-based system supported by the risk assessments and management capabilities of many participants with different views and different strategies for hedging risks.[9]

Then, and again for the first time, Greenspan proposed placing some limit on the size of the GSEs’ portfolios. Greenspan’s initial idea, later followed by more explicit proposals for numerical limits, was to restrict the GSEs’ issuance of debt. Although he did not call for an outright reduction in the size of the portfolios, limiting the issuance of debt amounts to the same thing. If the GSEs could not issue debt beyond a certain amount, they also could not accumulate portfolios. Greenspan noted:

Most of the concerns associated with systemic risks flow from the size of the balance sheets that these GSEs maintain. One way Congress could constrain the size of these balance sheets is to alter the composition of Fannie and Freddie’s mortgage financing by limiting the dollar amount of their debt relative to the dollar amount of mortgages securitized and held by other investors. . . . [T]his approach would continue to expand the depth and liquidity of mortgage markets through mortgage securitization but would remove most of the potential systemic risks associated with these GSEs.[10]

This statement must have caused considerable concern to Fannie and Freddie. Most of their profits came from issuing debt at low rates of interest and holding portfolios of mortgages and MBS with high yields. This was a highly lucrative arrangement; limiting their debt issuance would have had a significant adverse effect on their profitability.

In addition, in January 2005, only a few months after the adverse OFHEO report on Fannie’s accounting manipu-lation, three Federal Reserve economists published a study that cast doubt on whether the GSEs’ activities had any significant effect on mortgage interest rates and concluded further that holding portfolios–a far risker activity than issuing MBS–did not have any greater effect on interest rates than securitization: “We find that both portfolio purchases and MBS issuance have negligible effects on mortgage rate spreads and that purchases are not any more effective than securitization at reducing mortgage interest rate spreads.”[11] Thus, the taxpayer risks cited by Greenspan could not be justified by citing lower mortgage rates, and, worse, there was a strong case for limiting the GSEs to securitization activities alone–a much less profitable activity than holding MBS.

The events in 2003 and 2004 had undermined the legitimacy of the GSEs. They could no longer claim to be competently–or even honestly–managed. An important and respected figure, Alan Greenspan, was raising questions about whether they might be creating excessive risk for taxpayers and systemic risk for the economy as a whole. Greenspan had suggested that their most profitable activity–holding portfolios of mortgages and MBS–was the activity that created the greatest risk, and three Federal Reserve economists had concluded that the GSEs’ activities did not actually reduce mortgage interest rates. It was easy to see at this point that their political risk was rising quickly. The case for continuing their privileged status had been severely weakened. The only element of their activities that had not come under criticism was their affordable housing mission, and it appears that the GSEs determined at this point to play that card as a way of shoring up their political support in Congress.

From the perspective of their 2008 collapse, this may seem to have been unwise, but in the context of the time, it was a shrewd decision. It provided the GSEs with the potential for continuing their growth and delivered enormous short-term profits. Those profits were transferred to stockholders in huge dividend payments over the past three years (Fannie and Freddie paid a combined $4.1 billion in dividends last year alone) and to managers in lucrative salaries and bonuses. Indeed, if it had not been for the Democrats’ desire to adopt a housing relief bill before leaving for the 2008 August recess, no new regulatory regime for the GSEs would have been adopted at all. Only the Senate Republicans’ position–that there would be no housing bill without GSE reform–overcame the opposition of Senators Christopher Dodd (D-Conn.), the banking committee chairman, and Schumer.

The GSEs’ confidence in the affordable housing idea was bolstered by what appears to be a tacit understanding. Occasionally, this understanding found direct expression. For example, in his opening statement at a hearing in 2003, Representative Barney Frank (D-Mass.), now the chairman of the House Financial Services Committee, referred to an “arrangement” between Congress and the GSEs that tracks rather explicitly what actually happened: “Fannie and Freddie have played a very useful role in helping to make housing more affordable, both in general through leveraging the mortgage market, and in particular, they have a mission that this Congress has given them in return for some of the arrangements which are of some benefit to them to focus on affordable housing.”[12] So here the arrangement is laid out: if the GSEs focus on affordable housing, their position is secure.

Increased Support for Affordable Housing

Affordable housing loans and subprime loans are not synonymous. Affordable housing loans can be traditional prime loans with adequate down payments, fixed rates, and an established and adequate borrower credit history. In trying to increase their commitment to affordable housing, however, the GSEs abandoned these standards. In 1995, HUD, the cabinet-level agency responsible for issuing regulations on the GSEs’ affordable housing obligations, had ruled that the GSEs could get affordable housing credit for purchasing subprime loans. Unfortunately, the agency failed to require that these loans conform to good lending practices, and OFHEO did not have the staff or the authority to monitor their purchases. The assistant HUD secretary at the time, William Apgar, later told the Washington Post that “[i]t was a mistake. In hindsight, I would have done it differently.” Allen Fishbein, his adviser, noted that Fannie and Freddie “chose not to put the brakes on this dangerous lending when they should have.”[13] Far from it. In 1998, Fannie Mae announced a 97 percent loan-to-value mortgage, and, in 2001, it offered a program that involved mortgages with no down payment at all. As a result, in 2004, when Fannie and Freddie began to increase significantly their commitment to affordable housing loans, they found it easy to stimulate production in the private sector by letting it be known in the market that they would gladly accept loans that would otherwise be considered subprime.

Although Fannie and Freddie were building huge exposures to subprime mortgages from 2005 to 2007, they adopted accounting practices that made it difficult to detect the size of those exposures. Even an economist as seemingly sophisticated as Paul Krugman was misled. He wrote in his July 14, 2008, New York Times column that

Fannie and Freddie had nothing to do with the explosion of high-risk lending. . . . In fact, Fannie and Freddie, after growing rapidly in the 1990s, largely faded from the scene during the height of the housing bubble. . . . Partly that’s because regulators, responding to accounting scandals at the companies, placed temporary restraints on both Fannie and Freddie that curtailed their lending just as housing prices were really taking off. Also, they didn’t do any subprime lending, because they can’t . . . by law. . . . So whatever bad incentives the implicit federal guarantee creates have been offset by the fact that Fannie and Freddie were and are tightly regulated with regard to the risks they can take. You could say that the Fannie-Freddie experience shows that regulation works.[14]

Here Krugman demonstrates confusion about the law (which did not prohibit subprime lending by the GSEs), misunderstands the regulatory regime under which they operated (which did not have the capacity to control their risk-taking), and mismeasures their actual subprime exposures (which he wrongly states were zero). There is probably more to this than lazy reporting by Krugman; the GSE propaganda machine purposefully misled people into believing that it was keeping risk low and operating under an adequate prudential regulatory regime.

One of the sources of Krugman’s confusion may have been Fannie and Freddie’s strange accounting conventions relating to subprime loans. There are many defi-nitions of a subprime loan, but the definition used by U.S. bank regulators is any loan to a borrower with damaged credit, including such objective criteria as a FICO credit score lower than 660.[15] In their public reports, the GSEs use their own definitions, which purposely and significantly understate their commitment to subprime loans–the mortgages with the most political freight. For example, they disclose the principal amount of loans with FICO scores of less than 620, leaving the reader to guess how many loans fall into the category of subprime because they have FICO scores of less than 660. In these reports, too, Alt-A loans–which include loans with little or no income or other documentation and other deficiencies–are differentiated from subprime loans, again reducing the size of the apparent GSE commitment to the subprime category. These distinctions, however, are not very important from the perspective of realized losses in the subprime and Alt-A categories; loss rates are quite similar for both, even though they are labeled differently. In its June 30, 2008, Investor Summary report, Fannie notes that credit losses on its Alt-A portfolio were 49.6 percent of all the credit losses on its $2.7 trillion single-family loan book of business.[16] Fannie’s disclosures indicate that when all subprime loans (including Alt-A) are aggregated, at least 85 percent of its losses are related to its holdings of both subprime and Alt-A loans. They are all properly characterized as “junk loans.”

Beginning in 2004, after the GSEs’ accounting scandals, the junk loan share of all mortgages in the United States began to rise, going from 8 percent in 2003 to about 18 percent in 2004 and peaking at about 22 percent in the third quarter of 2006. It is likely that this huge increase in commitments to junk lending was largely the result of signals from Fannie and Freddie that they were ready to buy these loans in bulk. For example, in speeches to the Mortgage Bankers Association in 2004, both Raines and Richard Syron–the chairmen, respectively, of Fannie and Freddie–“made no bones about their interest in buying loans made to borrowers formerly considered the province of nonprime and other niche lenders.”[17] Raines is quoted as saying, “We have to push products and opportunities to people who have lesser credit quality.”

There are few data available publicly on the dollar amount of junk loans held by the GSEs in 2004, but according to their own reports, GSE purchases of these mortgages and MBS increased substantially between 2005 and 2007. Subprime and Alt-A purchases during this period were a higher share of total purchases than in previous years. For example, Fannie reported that mortgages and MBS of all types originated in 2005–2007 comprised 49.8 percent of its overall book of single-family mortgages, which includes both mortgages and MBS retained in their portfolio as well as mortgages they securitized and guaranteed. But the percentage of mortgages with subprime characteristics purchased during this period consistently exceeded 49.8 percent, demonstrating that Fannie was substantially increasing its reliance on junk loans between 2005 and 2007. For example, in its 10-Q Investor Summary report for the quarter ended June 30, 2008, Fannie reported that mortgages with subprime characteristics comprised substantial percentages of all 2005–2007 mortgages the company acquired, as shown in table 1. Based on these figures, it is likely that as much as 40 percent of the mortgages that Fannie Mae added to its single-family book of business during 2005–2007 were junk loans.

If we add up all these categories and eliminate double counting, it appears that on June 30, 2008, Fannie held or had guaranteed subprime and Alt-A loans with an unpaid principal balance of $553 billion. In addition, according to the same Fannie report, the company also held $29.5 billion of Alt-A loans and $36.3 billion of subprime loans that it had purchased as private label securities (non-GSE or Ginnie Mae securities).[18] These figures amount to a grand total of $619 billion–approximately 23 percent of Fannie’s book of single-family business on June 30, 2008–and reflect a huge commitment to the purchase of mortgages of questionable quality between 2005 and 2007.

Freddie Mac also published a report on its subprime and Alt-A mortgage exposures as of August 2008. Freddie’s numbers were not as detailed as Fannie’s, but the company reported that 52 percent of its entire single-family credit guarantee portfolio was from book years 2005–2007 (slightly more than Fannie) and that these mortgages had subprime characteristics, as shown in table 2. Based on these figures, it appears that as much as 40 percent of the loans that Freddie Mac added to its book of single-family mortgage business during 2005–2007 also consisted of junk loans.

Freddie’s disclosures did not contain enough detail to eliminate all of the double counting, so it is not possible to estimate the total amount of its subprime loans from the information it reported. Nevertheless, we can calculate the minimum amount of Freddie’s exposure. In the same report, Freddie disclosed that $190 billion of its loans were categorized as Alt-A and $68 billion had FICO credit scores of less than 620, so that they would clearly be categorized as subprime. Based on the limited information Freddie supplied, double counting of $7.6 billion can be eliminated, so that as of August 2008, Freddie held or had guaranteed at least $258 billion of junk loans. To this must be added $134 billion of subprime and Alt-A loans that Freddie purchased from private label issuers,[19] for a grand total of $392 billion–20 percent of Freddie’s single-family portfolio of $1.8 trillion.

A New Trillion-Dollar Commitment

Between 2005 and 2007, Fannie and Freddie acquired so many junk mortgages that, as of August 2008, they held or had guaranteed more than $1.011 trillion in unpaid principal balance exposures on these loans. The losses already recognized on these exposures were responsible for the collapse of Fannie and Freddie and their takeover by the federal government, and there are undoubtedly many more losses to come. In congressional testimony on September 23, James Lockhart, the director of their new regulator, the Federal Housing Finance Agency, cited these loans as the source of the GSEs’ ultimate collapse, as reported in the Washington Post:

Fannie Mae and Freddie Mac purchased and guaranteed “many more low-documentation, low-verification and non-standard” mortgages in 2006 and 2007 “than they had in the past.” He said the companies increased their exposure to risks in 2006 and 2007 despite the regulator’s warnings.

Roughly 33 percent of the companies’ business involved buying or guaranteeing these risky mortgages, compared with 14 percent in 2005. Those bad debts on mortgages led to billions of dollars in losses at the firms. “The capacity to raise capital to absorb further losses without Treasury Department support vanished,” Lockhart said.[20]

Although a large share of the subprime loans now causing a crisis in the international financial markets are so-called private label securities–issued by banks and securitizers other than Fannie Mae and Freddie Mac–the two GSEs became the biggest buyers of the AAA tranches of these subprime pools in 2005-07.[21] Without their commitment to purchase the AAA tranches of these securitizations, it is unlikely that the pools could have been formed and marketed around the world. Accordingly, not only did the GSEs destroy their own financial condition with their excessive purchases of subprime loans in the three-year period from 2005 to 2007, but they also played a major role in weakening or destroying the solvency and stability of other financial institutions and investors in the United States and abroad.

Why Did They Do It?

Why did the GSEs follow this disastrous course? One explanation–advanced by Lockhart–is that Fannie and Freddie were competing for market share with the private label securitizers and had to purchase substantial amounts of subprime mortgages in order to retain their position in a growing market. Fannie and Freddie’s explanation is that they were the victims of excessively stringent HUD affordable housing goals. Neither of these explanations is plausible. For many years before 2004, Fannie and Freddie had followed relatively prudent investment strategies, even with respect to affordable housing, but they suddenly changed their approach in 2005. Freddie Mac’s report, for example, shows that the percentage of mortgages in its portfolio with subprime characteristics rose rapidly after 2004. Tables 1 and 2 show that for each category of mortgages with subprime characteristics, most of the portfolio of loans with those characteristics was acquired from 2005 to 2007. For example, 83.8 percent of Fannie’s and 90 percent of Freddie’s interest-only loans as of June 2008 were acquired from 2005 to 2007, and 57.5 percent of Fannie’s and 61 percent of Freddie’s loans with FICO scores of less than 620 as of June 2008 were acquired from 2005 to 2007. It seems unlikely that competing for market share or complying with HUD regulations–which contained no enforcement mechanism other than disclosure and delay in approving requests for mission expansions–could be the reason for such an obviously destructive course.

Instead, it seems likely that the event responsible for the GSEs’ change in direction and culture was the accounting scandal that each of them encountered in 2003 and 2004. In both cases, they lost their reputation as well-managed companies and began to encounter questions about their contribution to reducing mortgage rates and their safety and soundness. Serious observers questioned whether they should be allowed to continue to hold mortgages and MBS in their portfolios–by far their most profitable activity–and Senate Republicans moved a bill out of committee that would have prohibited this activity.

Under these circumstances, the need to manage their political risk became paramount, and this required them to prove to their supporters in Congress that they still served a useful purpose. In 2003, as noted above, Frank had cited an arrangement in which the GSEs’ congressional benefits were linked to their investments in affordable housing. In this context, substantially increasing their support for affordable housing–through the purchase of the subprime loans permitted by HUD–seems a logical and even necessary tactic.

Unfortunately, the sad saga of Fannie and Freddie is not over. Some of their supporters in Congress prefer to blame the Fannie and Freddie mess on deregulation or private market failure, perhaps hoping to use such false diagnoses to lay the groundwork for reviving the GSEs for extra constitutional expenditure and political benefit in the future. As the future of the GSEs is debated over the coming months and years, it will be important to remember how and why Fannie and Freddie failed. The primary policy objective should be to prevent a repeat of this disaster by preventing the restoration of the GSE model.

Peter J. Wallison (pwallison@aei.org) is the Arthur F. Burns Fellow in Financial Policy Studies at AEI. Charles W. Calomiris (cc374@columbia.edu) is a visiting scholar at AEI and the Henry Kaufman Professor of Financial Institutions at Columbia Business School.

Messrs. Wallison and Calomiris wish to thank Edward Pinto, a former chief credit officer of Fannie Mae, for his assistance in deciphering the GSEs’ descriptions of their mortgage exposures. AEI research assistant Karen Dubas worked with the authors to produce this Financial Services Outlook.

Download file Click here to view this Outlook as an Adobe Acrobat PDF.

Notes

1. Quoted in Niles Steven Campbell, “Fannie Mae Officials Try to Assuage Worried Investors,” Real Estate Finance Today, May 10, 1999. See also Binyamin Appelbaum, Carol D. Leonnig, and David S. Hilzenrath, “How Washington Failed to Rein In Fannie, Freddie,” Washington Post, September 14, 2008.

2. Common Cause, “Ask Yourself Why . . . They Didn’t See This Coming,” September 24, 2008, available at www.commoncause.org/site/pp.asp?c=dkLNK1MQIwG&b=4542875 (accessed September 29, 2008).

3. Center for Responsive Politics, “Lobbying: Top Spenders,” 2008, available at www.opensecrets.org/lobby/top.php?indexType=s (accessed September 26, 2008).

4. Owen Ullmann, “Crony Capitalism: American Style,” The International Economy (July/August 1999): 6.

5. Terry Jones, “‘Crony’ Capitalism Is Root Cause of Fannie and Freddie Troubles,” Investor’s Business Daily, September 22, 2008.

6. Joseph E. Stiglitz, Jonathan M. Orszag, and Peter R. Orszag, “Implications of the New Fannie Mae and Freddie Mac Risk-Based Capital Standard,” Fannie Mae Papers 1, no. 2 (March 2002), available at www.sbgo.com/Papers/fmp-v1i2.pdf (accessed September 29, 2008). Interestingly, Stiglitz today is an outspoken critic of GSE risk-taking. According to Stiglitz, GSE risk-taking was a predictable consequence of the structure of the GSEs and their financial structure and compensation schedules. “We should not be worried about [GSE] shareholders losing their investments. In earlier years, they were amply rewarded. The management remuneration packages that they approved were designed to encourage excessive risk-taking. They got what they asked for. Nor should we be worried about creditors losing their money. Their lack of supervision fuelled the housing bubble and we are now all paying the price.” (Joseph Stiglitz, “Fannie’s and Freddie’s Free Lunch,” Financial Times, July 24, 2008.)

7. Funding Universe, “Fannie Mae–Company History,” available at www.fundinguniverse.com/company-histories/Fannie-Mae-Company-History.html (accessed September 29, 2008); Funding Universe, “Freddie Mac–Company History,” available at www.fundinguniverse.com/company-histories/Freddie-Mac-Company-History.html (accessed September 29, 2008); and Business Wire, “Fannie Mae’s $2 Trillion ‘American Dream Commitment’ on Course with Over $190 Billion in Targeted Lending,” news release, March 14, 2001, avail-able at http://findarticles.com/p/articles/mi_m0EIN/is_2001_March_14/ai_71707186/ (accessed September 29, 2008).

8. Office of Senator Charles E. Schumer, “Schumer Announces up to $100 Million Freddie Mac Commitment to Address Fort Drum and Watertown Housing Crunch,” news release, November 20, 2006, available at www.senate.gov/~schumer/SchumerWebsite/pressroom/record.cfm?id=266131 (accessed September 29, 2008).

9. Alan Greenspan, “Proposals for Improving the Regulation of the Housing Government Sponsored Enterprises” (testimony, Committee on Banking, Housing and Urban Affairs, U.S. Senate, 108th Cong., 1st sess., February 24, 2004), available at www.federalreserve.gov/boarddocs/testimony/2004/20040224/ default.htm (accessed September 29, 2008).

10. Ibid.

11. Andreas Lehnert, Wayne Passmore, and Shane M. Sherlund, “GSEs, Mortgage Rates and Secondary Market Activities” (Finance and Economic Discussion Series 2005-07, Divisions of Research & Statistics and Monetary Affairs, Federal Reserve Board, Washington, DC, January 12, 2005), 1, available at www.federalreserve.gov/Pubs/feds/2005/200507/200507pap.pdf (accessed September 29, 2008).

12. Quoted in Gerald Prante, “Barney Frank on Fannie Mae and Freddie Mac in 2003,” Tax Policy Blog, September 17, 2008, available at www.taxfoundation.org/blog/show/23617.html (accessed September 29, 2008).

13. Carol D. Leonnig, “How HUD Mortgage Policy Fed the Crisis,” Washington Post, June 10, 2008.

14. Paul Krugman, “Fannie, Freddie and You,” New York Times, July 14, 2008.
15. Office of the Comptroller of the Currency, Federal Reserve Board, Federal Deposit Insurance Corporation, Office of Thrift Supervision, “Expanded Guidance for Subprime Lending Programs,” 2001, available at www.federalreserve.gov/Boarddocs/SRletters/2001/sr0104a1.pdf (accessed September 29, 2008).

16. Fannie Mae, “2008 Q2 10-Q Investor Summary,” August 8, 2008, available at www.fanniemae.com/media/pdf/newsreleases/2008_Q2_10Q_Investor_Summary.pdf (accessed September 29, 2008).

17. Neil Morse, “Looking for New Customers,” Mortgage Banking, December 1, 2004.

18. Fannie Mae, “2008 Q2 10-Q Investor Summary,” 20.

19. Freddie Mac, “Freddie Mac Update,” August 2008, 30, available at www.freddiemac.com/investors/pdffiles/investor-presentation.pdf (accessed September 29, 2008).

20. Zachary A. Goldfarb, “Affordable-Housing Goals Scaled Back,” Washington Post, September 24, 2008.

21. James Lockhart, “Reforming the Regulation of the Government Sponsored Enterprises” (testimony, Committee on Banking, Housing and Urban Affairs, U.S. Senate, 110th Cong., 2nd sess., February 7, 2008), 6, available at www.ofheo.gov/media/testimony/2708LockharttestimonyWeb.pdf (accessed September 29, 2008).

The economic implosion of our economy due to Fannie and Freddie’s losses continues.  From an AP article published Friday, January 22:

The two companies, which have been run by the government since they almost collapsed in September 2008, have required $111 billion in federal aid to stay afloat. Late last year the Obama administration pledged to cover unlimited losses through 2012 for both companies, lifting an earlier cap of $400 billion.

The “unlimited losses” amounts to an EXPANSION from the $800 BILLION that Congress was going to authorize.  Which is even more than the $787 billion stimulus, which was the largest government outlay in the history of the human race until the black hole of Fannie Mae and Freddie Mac beat it out.

It’s time to learn the truth.

With Eyes Finally Wide-Open, Reconsider Why The Economy Collapsed In The First Place

December 31, 2009

We are now able to see that from the very beginning of the Obama administration, the Republican Party has again and again demonstrated that they were completely right and Democrats were completely wrong.  Whether you look at the stimulus, cap-and-trade, bogus climate change claims, health care, or terrorism, Americans now solidly agree that Republicans were represent the people; and that Democrats do NOT represent the people.

Right now, a solid plurality of Americans thinks the stimulus (that 99% of Republicans voted against) harmed the economy.  And the people are starting to realize what an ideological partisan slush fund the stimulus was (also predicted by Republicans).

When Obama was elected, unemployment was at 6.6%.  He promised that his stimulus would prevent unemployment from reaching 8%.  And now it’s at 10%, and it’s going to get higher.

Obama demagogued Bush’s spending.  But Bush deficits -bad as they were – were only 2-3% of GDP.  Obama’s deficits are 12.8% of GDP – which is five to six times higher.

Now that your eyes are finally beginning to open wide and see Obama and the Democrats for who and what they truly are, let me point out a few things about the past collapse.

What Americans – and particularly Americans who actually vote – need to realize is that Democrats were trying to do this kind of crap and play these kind of games all along.  They were trying to do it throughout the Bush years, when George Bush tried 17 times to regulate the out of control and Fannie-Mac-and-Freddie-Mae-dominated housing mortgage markets – and Democrats thwarted him over and over again.

Why do I mention the Government Supported Enterprises (GSEs) Fannie Mae and Freddie Mac?  Because they were at the very heart of the mortgage meltdown.

The LA Times writes on May 31, 1999 that:

Lenders also have opened the door wider to minorities because of new initiatives at Fannie Mae and Freddie Mac–the giant federally chartered corporations that play critical, if obscure, roles in the home finance system. Fannie Mae and Freddie Mac buy mortgages from lenders and bundle them into securities; that provides lenders the funds to lend more. . . .

LaVaughn M. Henry, Ph.D. Director, U.S. Economic Analysis The PMI Group, Inc. December 9, 2008, pointed out:

The Role of the GSEs is to provide liquidity and stability to the U.S. housing and mortgage markets. Step 1 Banks lend money to Households to purchase and refinance home mortgages Step 2 The GSEs purchase these mortgage from the banks Step 3 GSEs bundle the mortgages into mortgage-backed securities Step 4 GSEs sell mortgage-backed and debt securities to domestic and international capital investors Step 5 Investors pay GSEs for purchase of debt and securities Step 6 GSEs return funds to banks to lend out again for the issuance of new mortgage loans.

It was steps 3-5 that messed us up.  Fannie and Freddie bought mortgages – including many mortgages that poor and minority homeowners couldn’t begin to afford under the mandate of the Community Reinvestment Act – bundled them such that no one could assess their risk, and then sold them to private companies such as Bear Stearns and Lehman Brothers.  Fannie and Freddie were exempt from SEC [Securities and Exchange Commission] regulations.   The GSEs could bundle up mortgages, which would then be rated AAA, with no requirement to make clear what was in the bundle.  Private companies believed that the bundled securities were guaranteed, since they were essentially being sold by the federal government.

But there were many who predicted that this system – created and maintained by Democrats – could explode.

From the New York Times in September 30, 1999:

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980’s.“

”From the perspective of many people, including me, this is another thrift industry growing up around us,”
said Peter Wallison a resident fellow at the American Enterprise Institute. ”If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.” . . .

And that is precisely what happened.  There was a downturn (and there will ALWAYS be downturns, won’t there?), and Fannie and Freddie were so leveraged that they collapsed and caused the collapse of the entire industry.  Financial experts anxiously pointed out that a decline of only 1.3% would bankrupt Fannie and Freddie because they were leveraged to the tune of 60%? to 78%.

Democrats were the priests and acolytes of the GSE system.  They protected it, and they were the ones who pressed all the buttons and pulled all the levers.

Keven Hasset concludes an article titled, “How the Democrats Created the Financial Crisis“, concludes by saying:

Now that the collapse has occurred, the roadblock built by Senate Democrats in 2005 is unforgivable. Many who opposed the bill doubtlessly did so for honorable reasons.  Fannie and Freddie provided mounds of materials defending their practices.  Perhaps some found their propaganda convincing.

Watch this video showing how Goerge Bush and John McCain repeatedly warned of the economic collapse (length=4 min):

Watch this video of Democrats protecting and covering for Fannie Mae (length=8 min):

Here’s a video entitled “Burning Down the House: What Caused Our Economic Crisis?” (length=11 min)

And then we find that Barack Obama was in bed with Fannie and Freddie and their shockingly risky policies:

Who really exploded the economy in 2008, liberals or conservatives? Who do you think?  The liberal mainstream media allowed Democrats to blame George Bush simply because he was president at the time, never mentioning that the Democrats who controlled both the House and the Senate relentlessly opposed everything Bush tried to do; and it allowed Democrats to not have to account for the fact that they’d been in complete control of both the House and the Senate.  But remember that the economy went from outstanding to collapsed during the two years (2006-2008) that the Congress was under Nancy Pelosi and Harry Reid.  The unemployment rate was 4.4% when Republicans last ran Congress.  What is it now, three years of Nancy Pelosi and Harry Reid later?

Few people understand how huge Fannie and Freddie are, or how deeply burrowed they are in the mortgage industry.  But let me put it to you this way: the federal government now underwrites 9 out of 10 residential mortgages.

John McCain tried to warn us in 2006:

I join as a cosponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005, S. 190, to underscore my support for quick passage of GSE regulatory reform legislation. If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.

But he was ignored.

When George Bush first tried to regulate an already out-of-control liberal bastion of Fannie and Freddie, Barney Frank led the united Democrat opposition and said:

”These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis,” said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ”The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”

And just before Fannie and Freddie collapsed and brought down the entire housing mortgage industry with it creating the economic meltdown, Barney Frank – continuing to stop any regulation of Fannie and Freddie – said this:

REP. BARNEY FRANK, D-MASS.: I think this is a case where Fannie and Freddie are fundamentally sound, that they are not in danger of going under. They’re not the best investments these days from the long-term standpoint going back. I think they are in good shape going forward.

Fannie Mae and Freddie Mac went completely bankrupt, and had to be bailed out by the government.  It had been Fannie and Freddie which had the sole authority to buy mortgages, bundle them into the mortgage-backed securities which ultimately exploded, and sell those securities to private companies (as I have already shown).  Just as it was Fannie and Freddie which had been the seller of subprime loans.

Democrats demonized and demagogued Republicans by blaming them for a mess that DEMOCRATS created.  And Republicans were to blame primarily because they didn’t do enough to stand up and courageously oppose the disaster that Democrats had created

A couple weeks ago the New York Times reported that Fannie and Freddie would get a whopping $800 billion to cover losses incurred under the Obama administration (and see another article on this $800 billion fiasco here):

Fannie Mae and Freddie Mac, which buy and resell mortgages, have used $112 billion — including $15 billion for Fannie in November — of a total $400 billion pledge from the Treasury. Now, according to people close to the talks, officials are discussing the possibility of increasing that commitment, possibly to $400 billion for each company, by year-end, after which the Treasury would need Congressional approval to extend it. Company and government officials declined to comment.

But it turned out that that was wrong.  Fannie Mae and Freddie Mac weren’t going to get $800 billion.  That won’t be nearly enough.  They are going to get an unlimited amount of funding (potentially in the trillions):

From the Wall Street Journal, December 26, 2009:

The Obama administration’s decision to cover an unlimited amount of losses at the mortgage-finance giants Fannie MaeFreddie Mac over the next three years and stirred controversy over the holiday.

A Newsbuster article, entitled, “Relief Without Limits,” provides an excellent resource of facts and commentary on this incredible and terrifying development.

Remember the righteous outrage of Democrats and the Obama administration over the compensation of CEOs of private banks?  The Democrats don’t seem to mind when Fannie and Freddie execs get huge compensation packages.

The monster rises yet again, and larger and uglier and more dangerous than it has ever been before.  And just like the first time it collapsed, Democrats are in total control of it.  Fannie and Freddie stock went up significantly as the news was announced.  Watch it dwindle back to zero by the end of 2010.

We’re facing another tsunami of foreclosures in 2010.  And three mortgages get worse for every single one that improves.

And even uber-liberal sources like the Huffington Post are acknowledging that Obama’s policies have utterly failed:

Anatomy of a Failed Foreclosure Program (dated 12-07-09)

Just how badly is President Obama’s $75 billion foreclosure program working out? Consider these newly-released numbers: Out of every 100 homeowners who came to JPMorgan Chase for help under the program, just 15 have or will likely receive a permanent payment reduction.

What happened to the other 85? For every 100 trial plans initiated from April through September 2009 under the Home Affordable Modification Program:

  • 29 borrowers did not make all required payments under their trial plan;
  • 20 borrowers did not submit all documents required for underwriting;
  • 31 borrowers submitted all required documents but the documents did not meet HAMP underwriting standards, due to such things as missing signatures or nonstandard formats;
  • 4 borrowers were or are likely to be rejected for undisclosed reasons;
  • 1 borrower will not or is not likely to get their payment lowered.

The data comes from the prepared remarks bank officials plan to make Tuesday before the House Financial Services Committee. The testimony was posted Monday on the committee’s website.

It adds up to a brutal illustration of just how the HAMP program, which is supposed to reduce troubled homeowners’ monthly payments to 31 percent of their income, is failing.

Failing.  As in “failing grade.”  As in failed Obama presidency.

You still don’t know the half of it.  Obama’s $75 billion mortgage modification bailout is costing taxpayers an average of $870,967 PER HOUSE when the average house is worth only $177,900.

Famed analyst Meredith Whitney predicted that unemployment would rise to 13% or higher primarily due to the failure to contain the failure to deal with the mortgage industry:

Unemployment is likely to rise to 13 percent or higher and will weigh on the economy for several years, countering government efforts to stabilize the banking industry, analyst Meredith Whitney told CNBC. […]

“We underestimate how much the whole economy is dependent on the mortgage industry, and that has to change,” Whitney said. “This is what happens when you delay the inevitable. We’re buying time here, but we’re not restructuring the economy.”

Under the radar, and against the objections of Republicans that was primarily covered only by C-SPAN, Democrats implemented and then fiercely protected policies that were almost guaranteed to doom our economy.  When the meltdown finally occurred, the same Democrats who created the black hole in the first place flooded the airwaves and blamed George Bush – whom they had already vilified and brought down through unrelenting attacks using the Iraq War as their main foil.

The propaganda worked, and Barack Hussein Obama – a politician who is more beholden to corrupt and frankly un-American entities like Fannie Mae and Freddie Mac, ACORN, and the SEIU than any president in history.

And now we’re truly paying for our stupidity.

Obama is taking the same policies that imploded our economy, and multiplied them by a factor of ten.  It’s only a matter of time before his policies create a rotten floor for our economy to plunge through all over again — only this time far, far worse than before.

Someone might say, “But look, Obama is rebuilding the economy.  He’s brought back the stock market, and things are getting better.”

First of all, they really aren’t getting better, and the Dow can drop a lot faster than it can rise (history lesson: there were several rises and crashes of the stock market during the Great Depression).  And second of all, if you loan me a few billion dollars to spread around, I can temporarily bring up the production of my local economy, too.

Just don’t expect either me or Barack Hussein to repay the loan when it comes due.

Obama has been compared – and has compared himself – to FDR.  We now know that for all of FDR’s popularity, his “reforms” during the Great Depression were massive failures which actually kept the United States in depression for seven years longer than if he’d done nothing at all.

Henry Morganthau, FDR’s Treasury Secretary, said in May 1939, after nearly seven years in office:

“We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong… somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises… I say after eight years of this Administration we have just as much unemployment as when we started… And an enormous debt to boot!”

In believing the propaganda and lies of the Democrats and Barack Obama, Americans may have well placed the nation in a hole that it very may well not be able to climb out of.