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'Crony' Capitalism Is Root Cause Of Fannie And Freddie Troubles


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'Crony' Capitalism Is Root Cause Of Fannie And Freddie Troubles

By TERRY JONES

INVESTOR'S BUSINESS DAILY | Posted Monday, September 22, 2008 4:30 PM PT

 

In the past couple of weeks, as the financial crisis has intensified, a new talking point has emerged from the Democrats in Congress: This is all a "crisis of capitalism," in socialist financier George Soros' phrase, and a failure to regulate our markets sufficiently.

 

Well, those critics may be right — it is a crisis of capitalism. A crisis of politically driven crony capitalism, to be precise.

 

Indeed, Democrats have so effectively mastered crony capitalism as a governing strategy that they've convinced many in the media and the public that they had nothing whatsoever to do with our current financial woes.

 

Barack Obama has repeatedly blasted "Bush-McCain" economic policies as the cause, as if the two were joined at the hip.

 

Funny, because over the past 8 years, those who tried to fix Fannie Mae and Freddie Mac — the trigger for today's widespread global financial meltdown — were stymied repeatedly by congressional Democrats.

 

This wasn't an accident. Though some key Republicans deserve blame as well, it was a concerted Democratic effort that made reform of Fannie and Freddie impossible.

 

The reason for this is simple: Fannie and Freddie became massive providers both of reliable votes among grateful low-income homeowners, and of massive giving to the Democratic Party by grateful investment bankers, both at the two government-sponsored enterprises and on Wall Street.

 

The result: A huge taxpayer rescue that at last estimate is approaching $700 billion but may go even higher.

 

It all started, innocently enough, in 1994 with President Clinton's rewrite of the Carter-era Community Reinvestment Act.

 

Ostensibly intended to help deserving minority families afford homes — a noble idea — it instead led to a reckless surge in mortgage lending that has pushed our financial system to the brink of chaos.

 

Subprime's Mentors

 

Fannie and Freddie, the main vehicle for Clinton's multicultural housing policy, drove the explosion of the subprime housing market by buying up literally hundreds of billions of dollars in substandard loans — funding loans that ordinarily wouldn't have been made based on such time-honored notions as putting money down, having sufficient income, and maintaining a payment record indicating creditworthiness.

 

With all the old rules out the window, Fannie and Freddie gobbled up the market. Using extraordinary leverage, they eventually controlled 90% of the secondary market mortgages. Their total portfolio of loans topped $5.4 trillion — half of all U.S. mortgage lending. They borrowed $1.5 trillion from U.S. capital markets with — wink, wink — an "implicit" government guarantee of the debts.

 

This created the problem we are having today.

 

As we noted a week ago, subprime lending surged from around $35 billion in 1994 to nearly $1 trillion last year — for total growth of 2,757% as of last year.

 

No real market grows that fast for that long without being fixed.

 

And that's just what Fannie and Freddie were — fixed. They became a government-run, privately owned home finance monopoly.

 

Fannie and Freddie became huge contributors to Congress, spending millions to influence votes. As we've noted here before, the bulk of the money went to Democrats.

 

Dollars To Dems

 

Meanwhile, Fannie and Freddie also became a kind of jobs program for out-of-work Democrats.

 

Franklin Raines and Jim Johnson, the CEOs under whom the worst excesses took place in the late 1990s to mid-2000s, were both high-placed Democratic operatives and advisers to presidential candidate Barack Obama.

 

Clinton administration official Jamie Gorelick also got taken care of by the Fannie-Freddie circle. So did top Clinton aide Rahm Emanuel, among others.

 

On the surface, this sounds innocent. Someone has to head the highly political Fannie and Freddie, right?

 

But this is why crony capitalism is so dangerous. Those in power at Fannie and Freddie, as the sirens began to wail about some of their more egregious practices, began to bully those who opposed them.

 

That included journalists, like the Wall Street Journal's Paul Gigot, and GOP congressmen, like Wisconsin Rep. Paul Ryan, whom Fannie and Freddie actively lobbied against in his own district. Rep. Cliff Stearns, R-Fla., who tried to hold hearings on Fannie's and Freddie's questionable accounting practices in 2004, found himself stripped of responsibility for their oversight by House Speaker Dennis Hastert — a Republican.

 

Where, you ask, were the regulators?

 

Congress created a weak regulator to oversee Freddie and Fannie — the Office of Federal Housing Enterprise Oversight — which had to go hat in hand each year to Capitol Hill for its budget, unlike other major regulators.

 

With lax oversight, Fannie and Freddie had a green light to expand their operations at breakneck speed.

 

Fannie and Freddie had a reliable coterie of supporters in the Senate, especially among Democrats.

 

"We now know that many of the senators who protected Fannie and Freddie, including Barack Obama, Hillary Clinton and Christopher Dodd, have received mind-boggling levels of financial support from them over the years," wrote economist Kevin Hassett on Bloomberg.com this week.

 

Buying Friends In High Places

 

Over the span of his career, Obama ranks No. 2 in campaign donations from Fannie and Freddie, taking over $125,000. Dodd, head of the Senate Banking panel, is tops at $165,000. Clinton, ranked 12th, has collected $75,000.

 

Meanwhile, Freddie and Fannie opened what were euphemistically called "Partnership Offices" in the districts of key members of Congress to channel millions of dollars in funding and patronage to their supporters.

 

In the space of a little more than a decade, Fannie and Freddie spent close to $150 million on lobbying efforts. So pervasive were their efforts, they seemed unassailable, even during a Republican administration.

 

Yet, by 2004, the crony capitalism had gone too far. Even OFHEO issued a report essentially criticizing Fannie and Freddie for Enron-style accounting that let them boost profits in order to pay their politically well-connected executives hefty bonuses.

 

It emerged that Clinton aide Raines, who took Fannie Mae's helm as CEO in 1999, took in nearly $100 million by the time he left in 2005. Others, including former Clinton Justice Department official Gorelick, took $75 million from the Fannie-Freddie piggy bank.

 

Even so, Fannie and Freddie were forced to restate their earnings by some $3.5 billion, due to the accounting shenanigans.

 

As we noted, those who tried to halt this frenzy of activity found themselves hit by a political buzz saw.

 

President Bush, reviled and criticized by Democrats, tried no fewer than 17 times, by White House count, to raise the issue of Fannie-Freddie reform. A bill cleared the Senate Banking panel in 2005, but stalled due to implacable opposition from Democrats and a critical core of GOP abettors. Rep. Barney Frank, who now runs the powerful House Financial Services Committee, helped spearhead that fight.

 

Now, with the taxpayer tab approaching $1 trillion or more, we're learning the costs of crony capitalism.

 

In the coming days, an IBD series will look into this phenomenon in greater detail — how we got here, who's responsible, and why nothing was done.

 

http://www.ibdeditorials.com/IBDArticles.a...306978378974502

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This is why I can't stand politics. Insiders found a way to take advantage of an Act that was meant to help deserving minorities become home owners. Now we're in this mess, and parties want to point fingers at the other party. The irony of the whole thing is borderline ridiculous. The very people that gripe about the system took advantage of the system. I whole-heartedly believe George Bush tried to do the right thing; it looks like he tried many times over. It's a shame he couldn't get something done while the Republicans controlled Congress. As uneducated as many Americans are when it comes to this type of problem, Bush will take the majority of the blame which is not good for McCain.

 

I am beginning to wonder how long the Dems have had their plan of undermining the American public, and how many years this plan goes back.

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