Obama continues to blame the current financial crisis on “deregulation”. Either Obama knows that claim to be false or he is ignorant of how this crisis evolved:
The path to our current cirisis started with these steps;
Step 1). Mortgage Underwriting standards were lowered – begining in the early 1990′s. http://www.foxnews.com/story/0,2933,424945,00.html
The Federal Reserve’s Board of Governor’s created a new set of standards to govern Mortgage Lending practices. http://www.foxnews.com/story/0,2933,424945,00.html
The Federal Reserve’s involvement in creating this problem gives one reason to question if the Public should trust the Federal Reserve to oversee the proposed bailout.
The lowered standards minimized the importance of a borrowers Credit History, Downpayment, Job History or Income. These “tried and true” criteria were called “outdated”. The Boston Federal Reserve created a Manual outling the “new criteria” in 1992. http://www.foxnews.com/story/0,2933,424945,00.html
These rules were “pushed” by Fannie Mae to the extreme. Those who co-operated were rewarded.
One lender singled out by Fannie Mae for special praise for following these new criteria was Countrywide:
Countrywide tends to follow the most flexible underwriting criteria permitted under [Government Sponsored Enterprises] and FHA guidelines. Because Fannie Mae and Freddie Mac tend to give their best lenders access to the most flexible underwriting criteria, Countrywide benefits from its status as one of the largest originators of mortgage loans and one of the largest participants in the [Government Sponsored Enterprises] programs. When necessary — in cases where applicants have no established credit history, for example — Countrywide uses nontraditional credit, a practice now accepted by the [Government Sponsored Enterprises].
Or take a 1998 sales pitch from Bear Stearns, which also followed the Boston Fed manual:
Credit scores. While credit scores can be an analytical tool with conforming loans, their effectiveness is limited with [Community Reinvestment Act] loans. Unfortunately, [Community Reinvestment Act] loans do not fit neatly into the standard credit score framework… Do we automatically exclude or severely discount … loans [with poor credit scores]? Absolutely not.
Given these lending practices mandated by the Fed and encouraged by Fannie Mae and Freddie Mac, the resulting financial problems for financial institutions such as Countrywide and Bear Stearns are not too surprising.
Noted Economics Professor Stan Liebowitz, University of Texas (Dallas) states, “such reckless behavior by [Fannie Mae and Freddie Mac] has lead to their financial meltdown and to the financial problems for the whole country. During Franklin Raines’ chairmanship of Fannie Mae, they were a major proponent of relaxing standards.”
Step 2). Congress blocked suggested reform aimed at correcting the crisis early on. Take a look at Congressman Barney Frank, Chairman of the House Financial Services Committee, Wikipedia Biography. http://en.wikipedia.org/wiki/Barney_Frank The Bio not only claims that, ” Frank “sits at the center of power.” but boasts, “In 2003, Frank opposed Bush Administration and Congressional Republican efforts for the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis of 1980′s. Under the plan a new agency would have been created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry. “These two entities, Fannie Mae and Freddie Mac, are not facing any kind of financial crisis,” Frank said. He added, “The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.” http://en.wikipedia.org/wiki/Barney_Frank
Also read Senator Christopher Dodd, (Dem CT) Wikipedia Biography. That biography notes, “Dodd was elected to the Senate in the 1980 election“, From 1995 to 1997, he served as General Chairman of the Democratic National Committee.” Dodd is Chairman of the Senate Banking Committee. The biography goes on to note, “The Center for Public Integrity has criticized Dodd for “being the leading advocate in the Senate on behalf of the accounting industry.” Political consultant and commentator Dick Morris wrote that Dodd had received more from accounting firm Arthur Andersen than any other Democrat and bore responsibility for trying to shield accounting firms from investor fraud liability in cases such as the Enron scandal.” Arthur Anderson was forced to surrender it license to practice Accounting in the US. The Biography goes on to note, “Senator Dodd was involved in issues related to the federal takeover of Fannie Mae and Freddie Mac.” “The Housing and Economic Recovery Act of 2008 before Congress in the summer of 2008, Treasury Secretary Hank Paulson sought provisions enabling the Treasury to add additional capital and regulatory oversight over these government sponsored enterprises. Dodd denied rumors these firms were in financial crisis. He called the firms “fundamentally strong” said they were in “sound situation” and “in good shape” and to “suggest they are in major trouble is not accurate” . He suggested observers were panicking “There’s sort of a panic going on today, and that’s not what ought to be. The facts don’t warrant that reaction, in my opinion,” http://en.wikipedia.org/wiki/Christopher_Dodd
The Congress also blocked other legislation intended to tighten accounting standards and increase regualtory oversight of Fannie Mae. http://www.govtrack.us/congress/record.xpd?id=109-s20060525-16&bill=s109-190
Contrary to Obama’s Claim – there have been no Congressional Proposals to de-regulate Fannie Mae or Freddie Mac in the last 10 yrs. Fact – Democrats prevented any regulatory changes proposed to limit Fannie & Freddie’s activities – to return to “traditional mortgage underwriting”.
Step 3). The men appointed to run Fannie and Freddie abandoned their public duties for private gain. One hid his true salary from Congress, two others were accussed of lying to Congress, three have plead guilty to criminal charges and paid millions of dollars in Civil Fines. Three have taken special “VIP Loans” from Countrywide Bank – Countrywide is under FBI investigation for Securities Fraud. To read a more detailed summary of their misconduct see: http://mcauleysworld.wordpress.com/2008/09/21/the-fannie-mae-five-five-key-players-who-broke-the-system/
This informatiopn copmes from public records – either candidate Obama knows his accusations are hollow political spin or he is truely ignorant of what has transpired.
If you can’t admit what caused a problem – you can’t fix the problem.
Filed under: Bailout, Banking, Banking Crisis, Barack Obama, Economic Recovery Plan, Economy, Financial Crisis, Financial Market Recovery, Wall Street Tagged: | Bailout, Barack Obama, Deregulation is not to blame, Financial Crisis, John McCain