Tuesday, September 16, 2008

Let the Blame Game Begin!

In the midst of the worst credit crisis since the Great Depression, House Speaker Nancy Pelosi appeared on CNBC, not to provide insightful commentary on how we will overcome the challenges that confront us, but instead to cast blame on President Bush for failing to mandate sufficient regulation to prevent the implosion of the housing bubble. She claimed that he, and implicitly all Republicans, promoted the growth of “irresponsible” sub-prime lending and single handedly destroyed the U.S. financial system. This disingenuous slander fails to be corroborated by historical evidence. President Bush, in fact, demanded reforms of Fannie Mae and Freddie Mac following the accounting scandals that plagued the two firms in 2002 – 2003. The corrupt executives of the GSEs pocketed millions in bonuses by managing earnings and cooking the books. The following New York Times article sets the record straight.

“The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.

Under the plan, disclosed at a Congressional hearing today, a new agency would be 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.

The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios.

The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac -- which together have issued more than $1.5 trillion in outstanding debt -- is broken. A report by outside investigators in July concluded that Freddie Mac manipulated its accounting to mislead investors, and critics have said Fannie Mae does not adequately hedge against rising interest rates.”

- New York Times, September 11, 2003, “
New Agency Proposed to Oversee Freddie Mac and Fannie Mae

Clearly President Bush sought to reign in the GSEs abuse of their implicit government guarantee, shore up their capital, and limit their expansion into more risky products. The legislation was squashed by Democrats leading to unfettered growth by Fannie Mae and Freddie Mac, eventually including the purchase and guarantee Alt-A and sub-prime loans. The influential lobbying machine of Fannie and Freddie, which spent over $120 million in the past decade trying to influence Congress, swayed the Democrats to preserve the status quo and use the GSEs to promote their social agendas. According to the New York Times article, “supporters of the companies said efforts to regulate the lenders tightly under those agencies might diminish their ability to finance loans for lower-income families.”

I would suggests that a decoupling of risk and return, facilitated by excessive global liquidity, lead to the growth of complex securities that were marketed as low credit risk by manipulative financiers. It was these few bad actors, and their co-conspirators at the rating agencies, that orchestrated the ultimate scheme to magically compile risky securities into complex financial instruments that investors, even the most experienced and sophisticated, clearly didn’t understand. Many have now paid the price through the evaporation of their personal fortunes and the loss of their jobs. Conversely, Nancy Pelosi and her cohort of sellouts have collected hundreds of thousands from the GSEs while blocking the reforms necessary to protect the American financial system. Her actions, as well as those of other prominent Democrats, have contributed greatly to the turmoil that threatens the stability of the global economy.