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:
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?
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.
