Fund Your Utopia Without Me.™

07 October 2010

Who Are You Going To Believe? Your Lyin' Eyes or St. Barney of Wellesley

As far back as 1991, Barney Frank was pushing Fannie Mae to break its rules, lower its standards, and buy risky loans. As The Boston Globe reported in November 1992, he helped to convince Fannie Mae to make “substantial concessions” on its rules regarding multiple-family-home mortgages, despite data from Fannie itself showing that the “default rate on mortgages on two-family homes is twice that of single-family homes, and the rate for three-deckers is five times the rate for single-family dwellings.” During the Clinton years, the time when the foundation was being poured for the financial meltdown, Fannie and Freddie were growing by leaps and bounds. They underwrote more than a trillion dollars in mortgages, and Fannie reported double-digit growth, every year. In assessing what—if any—responsibility the Clinton administration had for the financial crisis, Clinton himself would later tell ABC News’s Chris Cuomo:

"I think the responsibility that the Democrats have may rest more in resisting any efforts by Republicans in the Congress or by me when I was president to put some standards and tighten up on Fannie Mae and Freddie Mac."

- Bill Clinton, 25 September 2008

Whether he knew it or not, Clinton was going against virtually all press outlets that had been pointing fingers at Republicans since financial crisis had begun, and likely much to the dismay of such folk, he actually agreed with a Fox News segment:

BRIT HUME, HOST: In the recent spate of government bailouts, buyouts and rescues, the federal takeovers of mortgage giants Fannie Mae and Freddie Mac are arguably the biggest of them all. And those two firms are also arguably the biggest reason for the credit crisis in the first place. So the question arises -- how did this come to be? Chief Washington correspondent Jim Angle reports.
JIM ANGLE, CHIEF WASHINGTON CORRESPONDENT (voice-over): There is one nagging question behind all the debate over how to get out of this mess.
CHRIS DODD (D-CT), SENATE BANKING COMMITTEE CHMN: American taxpayers are angry and they demand to know how we arrived at this moment.
ELIZABETH DOLE (R), NORTH CAROLINA SENATOR: My constituents, and indeed taxpayers across the nation are asking how we arrived at this crisis. It is infuriating.
ANGLE: But Senator Dole and others think they know the answer, and it's something the Senate tried to fix three years ago but was thwarted.
DOLE: To the mismanagement of Fannie Mae and Freddie Mac, which was made possible by weak oversight and little accountability.
MEL MARTINEZ (R), FLORIDA SENATOR: A lot of what we're dealing with today has its origins in Fannie Mae and Freddie Mac.
ANGLE: Fannie Mae and Freddie Mac, backed by the federal government, buy mortgage loans from the lenders who make them. But four years ago, both were in trouble over shoddy accounting. Fannie Mae Chief Franklin Raines, President Clinton's former budget director, was fired. To placate those in Congress who watched over them, Fannie and Freddie promised to do more to help poor people get mortgages. That led them to buy riskier and riskier home loans from private lenders creating incentives for everyone to make shakier loans.
PETER WALLISON, AMERICAN ENTERPRISE INSTITUTE: The problem is that they encouraged very bad mortgages to be made by banks and other institutions, because Fannie and Freddie would buy them.
ANGLE: Eventually, they bought trillions of dollars worth of mortgages, a substantial portion of them based on poor credit, then resold many of them to financial institutions who thought they were safe because the federal government was behind them.
WALLISON: As a result of this appearance that they were backed by the government, people never paid very much attention to the assets they were acquiring or the risks they were taking.
ANGLE: And so shaky mortgages spread throughout the system. But in 2005, the Senate Banking Committee, then chaired by Republican Richard Shelby, tried to rein in the two organizations bypassing some strong new regulations.
WALLISON: Which would have prevented Fannie and Freddie from acquiring this bad -- these bad mortgages. It actually gave a new regulator for Fannie and Freddie the kinds of powers that a bank regulator had.
ANGLE: All the Republicans voted for it. All the Democrats, including the current chairman, Senator Chris Dodd, voted against it, and that was after Fed Chairman Alan Greenspan had issued a stark warning to senators that Fannie and Freddie were playing with fire. Greenspan said without stronger regulations, "We increase the possibility of insolvency and crisis. Without restrictions on the size of Fannie Mae and Freddie Mac, we put at risk our ability to preserve safe and sound financial markets in the United States."
ANGLE: Which turned out to be exactly right, but because Democrats blocked it, those new regulations never got consideration by the full Senate and died. So that's how we got into this mess, and how we missed a chance to avoid it. Getting out of it now, of course, will be a lot more difficult -- Brit.
HUME: Oh, boy. Thanks, Jim.

During the early years of the Bush administration, from 2001 to 2003, Fannie Mae dropped its lending requirements and began buying zero-down-payment and interest-only mortgages. Warren Buffett told investors that he dumped Fannie and Freddie’s stock because he was worried about potential “icebergs.” The Wall Street Journal criticized Fannie’s financial machinations in an editorial headlined “Fannie Mae Enron?”

A report from the Congressional Budget Office found that 37 percent of the benefits Fannie and Freddie received from their special relationship with the government—some U S D 3.9 billion—went to enriching Fannie and Freddie executives and shareholders rather than reducing the cost of loans for home buyers. A member of the House Financial Services Committee, Richard Baker (Republican of Louisiana), warned that, if Fannie and Freddie’s growth was left unchecked, their combined outstanding debt would exceed the total of all public debt held by the U.S. Treasury in 2005. The president of the Federal Reserve Bank of St. Louis warned that Fannie and Freddie were undercapitalized and “posed a fundamental risk to the continuing stability of our financial system.” The head of Freddie Mac, Leland Brendsel, was forced to resign in the wake of a massive accounting scandal.

None of this happened under a rock. It was all covered by first-tier mainstream news organizations. So what was Barney Frank’s reaction to all of this? Was he worried about Fannie and Freddie’s finances? Was he concerned about their unchecked growth? Was he anxious about what would happen if Fannie and Freddie failed, and how it would affect not only the U.S. Treasury but also the pension funds and the mutual funds that held your retirement accounts and invested in Fannie and Freddie’s bonds?

Barney Frank, the powerful Massachusetts Democrat and ardent supporter of Fannie Mae, summed it up perfectly back in March 2005. He had just delivered a luncheon speech on housing at the Four Seasons Hotel in Georgetown.

Walking up from the lower-level conference room where he had addressed the Institute of International Bankers, Frank was asked whether he had considered the possible downsides to the homeownership drive.

Was he afraid, for instance, that easy lending programs could wind up luring many of his constituents into homes they could not ultimately afford?

Was he concerned that, after the groundbreaking and ribbon-cutting ceremonies were forgotten, the same people he had put into homes would be knocking on his door, complaining of being trapped in properties and facing financial ruin?

Frank brushed off the questioner. “We’ll deal with that problem if it happens,” he barked.


On September 10, 2003, the House Committee on Financial Services met to hear the Treasury Department’s plea for a new, tougher regulator to oversee Fannie Mae and Freddie Mac. In Frank’s opening statement to the committee, he said:

"I want to begin by saying that I am glad to consider the legislation, but I do not think we are facing any kind of a crisis. That is, in my view, the two government-sponsored enterprises we are talking about here, Fannie Mae and Freddie Mac, are not in a crisis. We have recently had an accounting problem with Freddie Mac that has led to people being dismissed, as appears to be appropriate. I do not think at this point there is a problem with a threat to the Treasury."

I must say we have an interesting example of self-fulfilling prophecy. Some of the critics of Fannie Mae and Freddie Mac say that the problem is that the Federal Government is obligated to bail out people who might lose money in connection with them. I do not believe that we have any such obligation. And as I said, it is a self-fulfilling prophecy by some people.

So let me make it clear, I am a strong supporter of the role that Fannie Mae and Freddie Mac play in housing, but nobody who invests in them should come looking to me for a nickel—nor anybody else in the federal government. And if investors take some comfort and want to lend them a little money because they like this set of affiliations, good, because housing will benefit. But there is no guarantee, there is no explicit guarantee, there is no implicit guarantee, there is no wink-and-nod guarantee. Invest, and you are on your own."

Two weeks later, the Financial Services Committee met to consider a bill that would implement the Treasury Department’s recommendations. Frank voted against it, saying: “I do not want the same kind of focus on safety and soundness that we have in O.C.C. [Office of the Comptroller of the Currency] and O.T.S. [Office of Thrift Supervision]. I want to roll the dice a little bit more in this situation towards subsidized housing.”

The bill died in the committee. And in the two years that followed, still more red flags appeared. The Fed released a report finding that Fannie and Freddie had done little to increase home ownership or reduce the cost of mortgages. Franklin Raines was forced out as C.E.O. of Fannie Mae after an investigation found that Fannie Mae was cooking its books to trigger executive bonuses. Alan Greenspan warned that, if Fannie and Freddie’s “expansion continues unabated” there was the possibility of risk to the entire financial system. As the drumbeat of these warnings continued, Fannie and Freddie were still operating under their old regulator. And Raines’s successor at Fannie Mae, Daniel Mudd, began engaging in what would later be described as “an orgy of junk mortgage development.”

So, again, how did Barney Frank react to all of this? In June 2005, virtually every major newspaper in America carried stories warning about the housing bubble. It was the subject of 15 articles in The New York Times alone. Yet here is how Barney Frank saw the world on June 27, when he delivered a speech on the House floor in favor of a resolution celebrating National Homeownership Month:

"This is a very important resolution, particularly at this time, because we have, I think, an excessive degree of concern right now about home ownership and its role in the economy.

Obviously, speculation is never a good thing. But those who argue that housing prices are now at the point of a bubble seem to be missing a very important point. Unlike previous examples, where substantial excessive inflation of prices later caused some problems, we are talking here about an entity, home ownership, homes, where there is not the degree of leverage that we have seen elsewhere.

This is not the dot-com situation. We had problems with people having invested in business plans for which there was no reality and people building fiber-optic cable for which there was no need. Homes that are occupied may see an ebb and flow in the price at a certain percentage level, but you will not see the collapse that you see when people talk about a bubble.

So those of us on our committee in particular will continue to push for home ownership.

Four months later, in October 2005, the Finance Committee met yet again to consider legislation that would appoint a new overseer for Fannie and Freddie. As Stephen Labaton reported in The New York Times, the new regulator would “have the authority to set capital requirements, reject new business products being offered by the companies and limit their portfolio holdings.” This time, Frank voted for the bill in the committee, before he voted against it on the House floor.

What caused him to change his mind? Something about finance? Subprime mortgages? A loophole that would allow another set of Fannie and Freddie executives to walk off with yet another round of government-subsidized U S D 90 million paydays?

Alas, the answer to all those questions is no. When the bill left the committee, it contained an amendment stipulating that 3 1/2 percent of Fannie and Freddie’s profits—around U S D 350 million—would go to a fund to promote affordable housing. Nonprofit organizations could apply for the money and receive cash grants.

To be fair, more than 600 nonprofit and religious groups opposed the restrictions, including the N.A.A.C.P. and Catholic Social Services. As Frank mused to his colleagues on the House floor, he would vote against the bill because it “unequivocally says no faith-based institution may apply unless we have a faith-based institution that worships housing.” So what was really going on here? What was really at stake? Eventually, Frank got around to the crux of the matter: “All we are saying is that nonpartisan voter registration and get-out-the-vote should be permitted uses, in other words, what the gentleman from Ohio talked about. We had the gentleman from Florida read the ACORN Plan. That plan by ACORN would have made them ineligible to participate in this fund.”

Frank offered to compromise and said he would vote for the bill if the wording were changed to say that affordable housing should be only “one” of the grant applicant’s purposes, as opposed to its only purpose. On the House floor he argued:

"Again, voting and residence are very closely linked in America. You vote from your home. In some cases you might vote in your home, if you are in an elderly development… . If you have a housing development, you cannot, under this manager’s amendment, help the old people in the development vote. You cannot invite somebody in to do voter registration. They can come in on their own, but you cannot cooperate. Again, I want to emphasize and I would say to my Republican friends, this is a bill that has a lot of bipartisan support. We have some partisan differences in other areas than housing, but this one got pretty bipartisan.

What happened is this: there are people who do not like affordable housing."

And this, in short, explains how a bill that was supposed to prevent the scandal-ridden Fannie Mae and Freddie Mac from causing a system-wide financial crisis somehow devolved into an argument about voter registration.

The bill passed the House by 220 to 196, with 99 percent of the Republicans supporting and 100 percent of the Democrats opposed. The Senate version never got out of the committee. In 2005, government-sponsored-enterprise reform was dead. On January 4, 2007, Frank became chairman of the House Finance Committee. But by then it was too late. The subprime mortgages had been written; the housing bubble had started to deflate. We had long passed the point of avoiding the catastrophe that was to come.

Frank’s defense of his record during the run-up to the crisis can be whiplash inducing. In one breath, he argues that he wanted to pass a bill reforming Fannie and Freddie but was thwarted by Republicans. In the next, he contends that, if the Republicans really wanted to appoint a tougher regulator, they were in the majority and surely could have done it— failing to mention that Republicans didn’t have the super majority necessary to override a party-line vote. Barney Frank believed—and still believes—that home ownership is a fundamental part of the American Dream. We all do. But to say he played no role in the housing bubble and bears no responsibility at all for the failure of Fannie Mae and Freddie Mac is, fundamentally, wrong.

The reform bill made it out of the Republican-controlled House even with 100% of Democrats voting against it. It died in the Senate because the GOP did not have enough votes to break a threatened filibuster.