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| Bush Administration Warnings About Fannie and Freddie Went Unheeded |
| Wednesday, October 08, 2008 |
For years President Bush's Administration warned of financial turmoil at a housing government-sponsored enterprise (GSE)and suggested plans aimed at reducing the risk that Fannie Mae or Freddie Mac would encounter. President Bush called for reform 17 times in 2008. The warnings went unheeded, his attempts to reform the supervision of these entities were thwarted by the legislative maneuvering of those who denied there were even any problems.
2001
April: The Administration's FY02 budget declares that the size of Fannie Mae and Freddie Mac is "a potential problem," because "financial trouble of a large GSE could cause strong repercussions in financial markets, affecting Federally insured entities and economic activity."
2002
May: The President calls for the disclosure and corporate governance principles contained in his 10-point plan for corporate responsibility to apply to Fannie Mae and Freddie Mac. (OMB Prompt Letter to OFHEO, 5/29/02)
2003
January: Freddie Mac announces it has to restate financial results for the previous three years.
February: The Office of Federal Housing Enterprise Oversight (OFHEO) releases a report explaining that "although investors perceive an implicit Federal guarantee of [GSE] obligations," "the government has provided no explicit legal backing for them." As a consequence, unexpected problems at a GSE could immediately spread into financial sectors beyond the housing market. ("Systemic Risk: Fannie Mae, Freddie Mac and the Role of OFHEO," OFHEO Report, 2/4/03)
September: Fannie Mae discloses SEC investigation and acknowledges OFHEO's review found earnings manipulations.
September: Treasury Secretary John Snow testifies before the House Financial Services Committee to recommend that Congress enact "legislation to create a new Federal agency to regulate and supervise the financial activities of our housing-related government sponsored enterprises" and set prudent and appropriate minimum capital adequacy requirements.
October: Fannie Mae discloses $1.2 billion accounting error.
November: Council of the Economic Advisers (CEA) Chairman Greg Mankiw explains that any "legislation to reform GSE regulation should empower the new regulator with sufficient strength and credibility to reduce systemic risk." To reduce the potential for systemic instability, the regulator would have "broad authority to set both risk-based and minimum capital standards" and "receivership powers necessary to wind down the affairs of a troubled GSE." (N. Gregory Mankiw, Remarks At The Conference Of State Bank Supervisors State Banking Summit And Leadership, 11/6/03)
2004
February: The President's FY05 Budget again highlights the risk posed by the explosive growth of the GSEs and their low levels of required capital, and called for creation of a new, world-class regulator: "The Administration has determined that the safety and soundness regulators of the housing GSEs lack sufficient power and stature to meet their responsibilities, and therefore…should be replaced with a new strengthened regulator." (2005 Budget Analytic Perspectives, pg. 83)
February: CEA Chairman Mankiw cautions Congress to "not take [the financial market's] strength for granted." Again, the call from the Administration was to reduce this risk by "ensuring that the housing GSEs are overseen by an effective regulator." (N. Gregory Mankiw, Op-Ed, "Keeping Fannie And Freddie's House In Order," Financial Times, 2/24/04)
June: Deputy Secretary of Treasury Samuel Bodman spotlights the risk posed by the GSEs and called for reform, saying "We do not have a world-class system of supervision of the housing government sponsored enterprises (GSEs), even though the importance of the housing financial system that the GSEs serve demands the best in supervision to ensure the long-term vitality of that system. Therefore, the Administration has called for a new, first class, regulatory supervisor for the three housing GSEs: Fannie Mae, Freddie Mac, and the Federal Home Loan Banking System." (Samuel Bodman, House Financial Services Subcommittee on Oversight and Investigations Testimony, 6/16/04)
2005
April: Treasury Secretary John Snow repeats his call for GSE reform, saying "Events that have transpired since I testified before this Committee in 2003 reinforce concerns over the systemic risks posed by the GSEs and further highlight the need for real GSE reform to ensure that our housing finance system remains a strong and vibrant source of funding for expanding homeownership opportunities in America… Half-measures will only exacerbate the risks to our financial system." (Secretary John W. Snow, "Testimony Before The U.S. House Financial Services Committee," 4/13/05)
2007
July: Two Bear Stearns hedge funds invested in mortgage securities collapse.
August: President Bush emphatically calls on Congress to pass a reform package for Fannie Mae and Freddie Mac, saying "first things first when it comes to those two institutions. Congress needs to get them reformed, get them streamlined, get them focused, and then I will consider other options." (President George W. Bush, Press Conference, The White House, 8/9/07)
September: RealtyTrac announces foreclosure filings up 243,000 in August – up 115 percent from the year before.
September: Single-family existing home sales decreases 7.5 percent from the previous month – the lowest level in nine years. Median sale price of existing homes fell six percent from the year before.
December: President Bush again warns Congress of the need to pass legislation reforming GSEs, saying "These institutions provide liquidity in the mortgage market that benefits millions of homeowners, and it is vital they operate safely and operate soundly. So I've called on Congress to pass legislation that strengthens independent regulation of the GSEs – and ensures they focus on their important housing mission. The GSE reform bill passed by the House earlier this year is a good start. But the Senate has not acted. And the United States Senate needs to pass this legislation soon." (President George W. Bush, Discusses Housing, The White House, 12/6/07)
2008
January: Bank of America announces it will buy Countrywide.
January: Citigroup announces mortgage portfolio lost $18.1 billion in value.
February: Assistant Secretary David Nason reiterates the urgency of reforms, says "A new regulatory structure for the housing GSEs is essential if these entities are to continue to perform their public mission successfully." (David Nason, Testimony On Reforming GSE Regulation, Senate Committee On Banking, Housing And Urban Affairs, 2/7/08)
March: Bear Stearns announces it will sell itself to JPMorgan Chase.
March: President Bush calls on Congress to take action and "move forward with reforms on Fannie Mae and Freddie Mac. They need to continue to modernize the FHA, as well as allow State housing agencies to issue tax-free bonds to homeowners to refinance their mortgages." (President George W. Bush, Remarks To The Economic Club Of New York, New York, NY, 3/14/08)
April: President Bush urges Congress to pass the much needed legislation and "modernize Fannie Mae and Freddie Mac. [There are] constructive things Congress can do that will encourage the housing market to correct quickly by … helping people stay in their homes." (President George W. Bush, Meeting With Cabinet, the White House, 4/14/08)
May: President Bush issues several pleas to Congress to pass legislation reforming Fannie Mae and Freddie Mac before the situation deteriorates further.
"Americans are concerned about making their mortgage payments and keeping their homes. Yet Congress has failed to pass legislation I have repeatedly requested to modernize the Federal Housing Administration that will help more families stay in their homes, reform Fannie Mae and Freddie Mac to ensure they focus on their housing mission, and allow State housing agencies to issue tax-free bonds to refinance sub-prime loans." (President George W. Bush, Radio Address, 5/3/08)
"[T]he government ought to be helping creditworthy people stay in their homes. And one way we can do that – and Congress is making progress on this – is the reform of Fannie Mae and Freddie Mac. That reform will come with a strong, independent regulator." (President George W. Bush, Meeting With The Secretary Of The Treasury, the White House, 5/19/08)
"Congress needs to pass legislation to modernize the Federal Housing Administration, reform Fannie Mae and Freddie Mac to ensure they focus on their housing mission, and allow State housing agencies to issue tax-free bonds to refinance subprime loans." (President George W. Bush, Radio Address, 5/31/08)
June: As foreclosure rates continued to rise in the first quarter, the President once again asks Congress to take the necessary measures to address this challenge, saying "we need to pass legislation to reform Fannie Mae and Freddie Mac." (President George W. Bush, Remarks At Swearing In Ceremony For Secretary Of Housing And Urban Development, Washington, D.C., 6/6/08)
July: Congress heeds the President's call for action and passes reform of Fannie Mae and Freddie Mac as it becomes clear that the institutions are failing. |
posted by Jay Are @ 11:12:00 AM   |
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| 2 Comments: |
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How absurd.
Banks around the world are going belly up. We are hearing about trillions of dollars of investments in suspect “credit default swaps,” high leverage by banks making leveraged buyout loans, assets held “off balance sheet” so investors would not hear about them, mortgage-backed paper rated at AAA when it should have been DDD, and according to this blog, it is all caused by loans made to poor people. To be sure, some mortgage loans made to poor are now in default, but can you show with statistics that the rate of default of the poor is higher than the middle class? In fact, in terms of money, the rich probably have the most bad loans, as one of the articles below shows.
And yes, in 2004, four years ago, the Democrats did not see that there was a problem. They did not have perfect foresight. (Our secretary of the treasury did not think there was a crisis on Wall Street five or six weeks ago.)
Do you suppose that if a Democrat had got up in 2004 and said that “credit default swaps should be regulated” or that AIG was risky, any Republican would have listened to him? And the Republicans were in charge of Congress during the time when the Democrats were said in this article to have “blocked” legislation. How did the minority party block legislation without the support of members of the majority party?
Democrats however had been urging regulation of COMMERCIAL mortgage lenders, and Republicans had blocked that. By far the bulk of sub-prime loans originated in COMMERCIAL MORTAGE FIRMS.
The following two articles destroy the MYTH that Fannie and Freddie were the main cause of the crisis:
First
From the Wall Street Journal
OCTOBER 1, 2008
The GOP Blames the Victim
Capitalism sure is fragile if subprime borrowers can ruin it.
By THOMAS FRANK
Two weeks ago, I wrote that the breakdown of the nation's financial industry was undeniably a self-induced injury; that it would finally force conservatives to own up to the wrongheadedness of their deregulatory project; that they couldn't possibly blame the disaster on any of their traditional bogeymen…..
There is no doubt that Fannie and Freddie enabled the subprime neurosis, but for certain conservatives they are virtually the only malefactors worth noting. The dirge goes like this: Fannie and Freddie were buying up subprime mortgages, and they were doing it for (liberal) political reasons. Mortgage originators thus had no choice but to hand out mortgages like candy. Had market forces been in charge, loans would, no doubt, have been administered with a rigor and sternness to make John Calvin blanch.
I asked Bill Black, a professor of economics and law at the University of Missouri-Kansas City and an authority on the Savings and Loan debacle of the 1980s, what he thought of the latest blame offensive. He pointed out that, for all their failings, Fannie and Freddie didn't originate any of the bad loans -- that disastrous piece of work was done by purely private, largely unregulated companies, which did it for the usual bubble-logic reason: to make a quick buck.
Most of the mistakes for which we are paying now, Mr. Black told me, were actually made "by four entities that under conservative economic theory should have exercised effective market discipline -- the appraisers, the originators of the mortgages, the rating agencies, and the investment banking firms that packaged the subprime mortgage-backed securities." Instead of "disciplining" the markets, these private actors "served as the four horsemen of the financial apocalypse, aiding the accounting fraud and inflating the housing bubble." It is they, Mr. Black says, who "turned a crisis into a catastrophe."
Ah, but truth is no ally to a conservative with his back to the wall. So much more helpful are the trusty narratives on which the movement was built. So when we have dispatched this first canard, we learn from other conservatives that it is the sub-prime peopl
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How absurd.
Banks around the world are going belly up. We are hearing about trillions of dollars of investments in suspect “credit default swaps,” high leverage by banks making leveraged buyout loans, assets held “off balance sheet” so investors would not hear about them, mortgage-backed paper rated at AAA when it should have been DDD, and according to this blog, it is all caused by loans made to poor people. To be sure, some mortgage loans made to poor are now in default, but can you show with statistics that the rate of default of the poor is higher than the middle class? In fact, in terms of money, the rich probably have the most bad loans, as one of the articles below shows.
And yes, in 2004, four years ago, the Democrats did not see that there was a problem. They did not have perfect foresight. (Our secretary of the treasury did not think there was a crisis on Wall Street five or six weeks ago.)
Do you suppose that if a Democrat had got up in 2004 and said that “credit default swaps should be regulated” or that AIG was risky, any Republican would have listened to him? And the Republicans were in charge of Congress during the time when the Democrats were said in this article to have “blocked” legislation. How did the minority party block legislation without the support of members of the majority party?
Democrats however had been urging regulation of COMMERCIAL mortgage lenders, and Republicans had blocked that. By far the bulk of sub-prime loans originated in COMMERCIAL MORTAGE FIRMS.
The following two articles destroy the MYTH that Fannie and Freddie were the main cause of the crisis:
First
From the Wall Street Journal
OCTOBER 1, 2008
The GOP Blames the Victim
Capitalism sure is fragile if subprime borrowers can ruin it.
By THOMAS FRANK
Two weeks ago, I wrote that the breakdown of the nation's financial industry was undeniably a self-induced injury; that it would finally force conservatives to own up to the wrongheadedness of their deregulatory project; that they couldn't possibly blame the disaster on any of their traditional bogeymen…..
There is no doubt that Fannie and Freddie enabled the subprime neurosis, but for certain conservatives they are virtually the only malefactors worth noting. The dirge goes like this: Fannie and Freddie were buying up subprime mortgages, and they were doing it for (liberal) political reasons. Mortgage originators thus had no choice but to hand out mortgages like candy. Had market forces been in charge, loans would, no doubt, have been administered with a rigor and sternness to make John Calvin blanch.
I asked Bill Black, a professor of economics and law at the University of Missouri-Kansas City and an authority on the Savings and Loan debacle of the 1980s, what he thought of the latest blame offensive. He pointed out that, for all their failings, Fannie and Freddie didn't originate any of the bad loans -- that disastrous piece of work was done by purely private, largely unregulated companies, which did it for the usual bubble-logic reason: to make a quick buck.
Most of the mistakes for which we are paying now, Mr. Black told me, were actually made "by four entities that under conservative economic theory should have exercised effective market discipline -- the appraisers, the originators of the mortgages, the rating agencies, and the investment banking firms that packaged the subprime mortgage-backed securities." Instead of "disciplining" the markets, these private actors "served as the four horsemen of the financial apocalypse, aiding the accounting fraud and inflating the housing bubble." It is they, Mr. Black says, who "turned a crisis into a catastrophe."
Ah, but truth is no ally to a conservative with his back to the wall. So much more helpful are the trusty narratives on which the movement was built. So when we have dispatched this first canard, we learn from other conservatives that it is the sub-prime peopl
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How absurd.
Banks around the world are going belly up. We are hearing about trillions of dollars of investments in suspect “credit default swaps,” high leverage by banks making leveraged buyout loans, assets held “off balance sheet” so investors would not hear about them, mortgage-backed paper rated at AAA when it should have been DDD, and according to this blog, it is all caused by loans made to poor people. To be sure, some mortgage loans made to poor are now in default, but can you show with statistics that the rate of default of the poor is higher than the middle class? In fact, in terms of money, the rich probably have the most bad loans, as one of the articles below shows.
And yes, in 2004, four years ago, the Democrats did not see that there was a problem. They did not have perfect foresight. (Our secretary of the treasury did not think there was a crisis on Wall Street five or six weeks ago.)
Do you suppose that if a Democrat had got up in 2004 and said that “credit default swaps should be regulated” or that AIG was risky, any Republican would have listened to him? And the Republicans were in charge of Congress during the time when the Democrats were said in this article to have “blocked” legislation. How did the minority party block legislation without the support of members of the majority party?
Democrats however had been urging regulation of COMMERCIAL mortgage lenders, and Republicans had blocked that. By far the bulk of sub-prime loans originated in COMMERCIAL MORTAGE FIRMS.
The following two articles destroy the MYTH that Fannie and Freddie were the main cause of the crisis:
First
From the Wall Street Journal
OCTOBER 1, 2008
The GOP Blames the Victim
Capitalism sure is fragile if subprime borrowers can ruin it.
By THOMAS FRANK
Two weeks ago, I wrote that the breakdown of the nation's financial industry was undeniably a self-induced injury; that it would finally force conservatives to own up to the wrongheadedness of their deregulatory project; that they couldn't possibly blame the disaster on any of their traditional bogeymen…..
There is no doubt that Fannie and Freddie enabled the subprime neurosis, but for certain conservatives they are virtually the only malefactors worth noting. The dirge goes like this: Fannie and Freddie were buying up subprime mortgages, and they were doing it for (liberal) political reasons. Mortgage originators thus had no choice but to hand out mortgages like candy. Had market forces been in charge, loans would, no doubt, have been administered with a rigor and sternness to make John Calvin blanch.
I asked Bill Black, a professor of economics and law at the University of Missouri-Kansas City and an authority on the Savings and Loan debacle of the 1980s, what he thought of the latest blame offensive. He pointed out that, for all their failings, Fannie and Freddie didn't originate any of the bad loans -- that disastrous piece of work was done by purely private, largely unregulated companies, which did it for the usual bubble-logic reason: to make a quick buck.
Most of the mistakes for which we are paying now, Mr. Black told me, were actually made "by four entities that under conservative economic theory should have exercised effective market discipline -- the appraisers, the originators of the mortgages, the rating agencies, and the investment banking firms that packaged the subprime mortgage-backed securities." Instead of "disciplining" the markets, these private actors "served as the four horsemen of the financial apocalypse, aiding the accounting fraud and inflating the housing bubble." It is they, Mr. Black says, who "turned a crisis into a catastrophe."
Ah, but truth is no ally to a conservative with his back to the wall. So much more helpful are the trusty narratives on which the movement was built. So when we have dispatched this first canard, we learn from other conservatives that it is the sub-prime peopl