The Real Financial Villains Will Never Stand Up

Our government blames the victims, not Congressional crooks.

In an article "How the Scapegoats Escaped," the New York Times described mistakes prosecutors made in trying to convict two Bear Stearns hedge fund managers of fraud:

In short, the prosecution blew it - on two counts.  First, in devising the original indictment for conspiracy and securities fraud against the two defendants, Ralph Cioffi and Matthew Tannin, it relied on damning snippets of lengthy e-mail messages that when viewed in their entirety proved to be highly ambiguous.  Second, the prosecution made a reductionist opening argument claiming the men were nothing more than out-and-out liars, needlessly raising the bar in terms of what it had to prove to jurors.

Following Eliot Spitzer's misbegotten example, publicity-hungry prosecutors had released snippets of an email which said "The entire subprime market is toast" when announcing charges.  The prosecutors tried to show that these two men had told investors not to withdraw money from their funds even though they knew the funds were worthless.  When read in its entirety, however, the email showed a fund manager wrestling with trying to figure out what to do in an uncertain market.

The government has worked very hard to claim that the financial crisis was the fault of greedy bankers.  These prosecutors seemed to be trying to make these two men targets of all the public resentment over the $12 trillion of taxpayer money that's gone to bail out financial institutions and politically-connected fat cats, but the jury didn't buy it:

Not so fast, this Brooklyn jury declared.  "The entire market crashed," one juror explained. "You can't blame that on two people."

It's A Media Smoke Screen

We at Scragged respect the jury for acquitting these men of criminal charges.  It's hard to argue that being wrong about the market is a crime, but the government is desperate to keep the taxpayers from realizing where the real fault lies.

With all due respect to the jury, we can indeed blame most of the crash on two people - Representative Barney Frank and Senator Chris Dodd.

Rep. Frank chairs the House committee that oversees banks and Sen. Dodd chairs the corresponding Senate committee.  These men have a great deal of power over the financial system and have used their power to the fullest.

Sen. Dodd, for example, received a sweetheart mortgage loan from Countrywide, one of the banks which collapsed during the financial melt down.  The bank which took over Countrywide has assured the public that they're holding all the records about Sen Dodd's loan so that they can respond to a subpoena whenever anyone gets around to investigating the matter, but so far, Sen. Dodd has managed to quash any and all investigations.

What did Sen. Dodd do for the banks in return?  He relaxed federal regulations and made it easier for banks like Countrywide to write and sell riskier mortgages.  Instead of having to keep the loans they wrote and accept the risk that they might not be paid off, banks were allowed to sell the loans to government agencies.  Selling the loan and ditching the accompanying risk gave them more money to lend again, and the housing bubble grew.

Rep. Frank had the same cavalier attitude towards risk:

I do think I do not want the same kind of focus on safety and soundness that we have in OCC [Office of the Comptroller of the Currency] and OTS [Office of Thrift Supervision], I want to roll the dice a little bit more in this situation towards subsidized housing.

- Rep. Barney Frank, September 23, 2003

When Rep. Frank referred to "subsidized housing," he was talking about Fannie Mae and Freddie Mac, the two government agencies which offer low-cost home loans.  Investors believed that the government would never let those two agencies default, so they offered them money at lower rates than they'd offer to commercial banks which were riskier.  Given that these housing agencies paid less for money than their competitors, it's no surprise that the government has taken over a major portion of the home mortgage market.

Exactly where did our current financial crisis start?  In the home mortgage market, of course.  Ten years ago, the New York Times warned of the coming crash when lending standards were relaxed during the Clinton administration, but Rep. Frank and Sen. Dodd would hear none of it.

Given the ever-increasing risks which Rep. Frank urged the government loan agencies to take, it's no surprise that Fannie and Freddie crashed.  Our total cost for bailing them out has been $111 billion, with more to come.  Our money is being used to subsidize borrowers who took on loans they couldn't afford.

That's not all.  On Nov. 13, the New York Times reported that the Federal Housing Administration, which insures bum loans made by its sister agencies, is running out of cash.

Instead of the traditional 10% or 20% down payments, the FHA insures loans which are made with as little as 3.5% down.  With so little money tied up in the house, buyers have every incentive to walk away when things get tough.  The FHA now admits that it insured many loans made to unqualified borrowers back in 2007 and 2008, which is what its critics have been saying all along.

Lending money to unqualified borrowers is exactly what Rep. Frank meant when he said he wanted the government's housing agencies to "roll the dice a little bit more" back in 2003.  His roll of our dice came up snake eyes, but unfortunately for the taxpayers, the mainstream media are reluctant to pin the blame where it belongs.

Instead of telling us what actually happened, they're helping Rep. Frank and Sen. Dodd deflect blame by making heavily-publicized, but bogus, charges against small-time players.  They're trying to make this look like a market failure which requires government to limit the market instead of admitting that the source of the problem was government interference in the market.

Mr. Obama's Justice Department would rather hassle low-end traders than go after the real villains who happen to be powerful Democrats, of course.  Just more of the usual graft and corruption, Chicago style.

Will Offensicht is a staff writer for and an internationally published author by a different name.  Read other articles by Will Offensicht or other articles on Economics.
Reader Comments
I've copied an article from the British newspaper The Independent. They pretty much get the facts right. I have seen similar material in lots of places, but not in the US. Ask yourself which political party controlled GSE's (that's Government Sponsored Enterprises) like Fannie and Freddie? Why did Jamie Gorelick reap about $10M in gains for sitting on their board for about 9 mos? Is it a coincidence that these entities were run by Democratic luminaries like Franklin Raines and Jim Johnston of Barak's campaign? You'll learn that Bush - to his credit - tried to do something about this, but was thwarted by Barney and Chris. Look at who the recipients of Fannie and Freddie campaign contributions have been over the years - HRC and BHO.

The Article, published Oct 3, 2008:

Of all the characteristics of a successful politician, none is more essential than bare-faced cheek. Never has this been more evident than in the past fortnight, as senior Democrat members of the US legislature have sought to lay all the blame for the country's financial crisis on the executive arm of Government and Wall Street.

Neither of these two institutions is blameless - far from it. Yet when I see such senior Democrats as Barney Frank, Chairman of the House Financial Services Committee, and Christopher Dodd, Chairman of the Senate's Banking Committee, play the part of avenging angels - well, I can only stand in silent awe at the sheer tight-bottomed nerve of it. These are men with sphincters of steel.

What is the proximate cause of the collapse of confidence in the world's banks? Millions of improvident loans to American housebuyers. Which organisations were on their own responsible for guaranteeing half of this $12 trillion market? Freddie Mac and Fannie Mae, the so-called Government Sponsored Enterprises which were formally nationalised to prevent their immediate and catastrophic collapse. Now, who do you think were among the leading figures blocking all the earlier attempts by President Bush - and other Republicans - to bring these lending behemoths under greater regulatory control? Step forward, Barney Frank and Chris Dodd.

In September 2003 the Bush administration launched a measure to bring Fannie Mae and Freddie Mac under stricter regulatory control, after a report by outside investigators established that they were not adequately hedging against risks and that Fannie Mae in particular had scandalously mis-stated its accounts. In 2006, it was revealed that Fannie Mae had overstated its earnings - to which its senior executives' bonuses were linked - by a stunning $9.3 billion. Between 1998 and 2003, Fannie Mae's executive chairman, Franklin Raines, picked up over $90m in bonuses and stock options.

Yet Barney Frank and his chums blocked all Bush's attempts to put a rein on Raines. During the House Financial Services Committee hearing following Bush's initiative, Frank declared: "The more people exaggerate a threat of safety and soundness [at Freddie Mac and Fannie Mae], the more people conjure up the possibility of serious financial losses to the Treasury which I do not see. I think we see entities that are fundamentally sound financially." His colleague on the committee, the California Democrat Maxine Walters, said: "There were nearly a dozen hearings where we were trying to fix something that wasn't broke. Mr Chairman, we do not have a crisis at Freddie Mac and particularly at Fannie Mae under the outstanding leadership of Mr Franklin Raines."

When Mr Raines himself was challenged by the Republican Christopher Shays, to the effect that his ratio of capital to assets (that is, mortgages) of 3 per cent was dangerously low, the Fannie Mae boss retorted that "our assets are so riskless, we could have a capital ratio of under 2 per cent".

Maxine Walters' complaint about previous attempts to bring the great state-sponsored housing finance bodies under stricter control was partly a reference to Bill Clinton's efforts. Last week the former President acknowledged that "responsibility" for the absence of proper regulation rested "with Democrats who were resisting any efforts of Republicans in Congress, and earlier when I was President and tried to impose tighter standards on Fannie Mae and Freddie Mac". Then, as now, members of his own party saw all such initiatives as unwonted attacks on the chances for low-earners, and particularly African-Americans, to own their own homes.

From its inception in 1938 Fannie Mae (and later Freddie Mac) was designed to make housing finance available to "ordinary Americans". This was a noble aim. In the 1970s another Democrat President, Jimmy Carter, introduced legislation which demanded that such bodies enhance their lending to minorities. Again, this was based on a noble idea: to stamp out racism in the mortgage market. Thus by 1998 you had the Federal Reserve Bank of Boston producing a document entitled "Closing the Gap: a Guide to Equal Opportunities Lending", which instructed banks that an applicant's "lack of credit history should not be seen as a negative factor" in obtaining a mortgage. As Stephen Malanga of the Manhattan Institute notes: "Of course the new federal standards couldn't just apply to minorities. If they could pay back loans under these terms, then so could the majority of loan applicants. Quickly, these became the new standards in the industry. As the housing market boomed, banks embraced these new standards with a vengeance. Between 2004 and 2007, Fannie Mae and Freddie Mac became the biggest purchasers of subprime mortgages from all kinds of applicants, white and minority, and most of these loans were based on lending standards promoted by the Government."

One of the few journalists to see where this would lead was Jeff Jacoby, of the Boston Globe. Last week he reminded his readers what he had written in 1995: "Our banks are knowingly approving risky loans to get the feds and the activists off their backs... When the coming wave of foreclosures rolls through the inner city, which of today's self-congratulating bankers, politicians and regulators plans to take the credit?". Jacoby adds now: "Barney Frank doesn't. But his fingerprints are all over this fiasco."

It's true that the improvident lending was not initiated by Fannie and Freddie: their role in this was to buy these loans and sell them on - but then the music stopped. Cynical students of the American political system will note that the biggest recipient of campaign contributions from the munificent duo of Fannie and Freddie over the past 20 years was one Christopher Dodd, Democrat Chairman of the Senate's Banking Committee.

Rather surprisingly, given that he has only been in the Senate for four of those years, the second biggest beneficiary was Barack Obama. In August the Washington Post reported that Obama's presidential campaign team had sought the advice of Franklin Raines "on mortgage and housing policy matters". Perhaps Mr Obama's team just wanted to know where all the bodies are buried - there are rather a lot of them.

The saddest outcome of all this within America - apart from the crippling cost to the nation's taxpayers - is that the very people the Democrats had intended to help will be the biggest victims: for many years to come banks will demand the most stringent terms for mortgages to the least well off.

In the meantime, let us praise Congressman Artur Davis of Alabama, who confessed this week: "Like a lot of my Democrat colleagues I was too slow to appreciate the recklessness of Fannie and Freddie when in retrospect I should have heeded the concerns raised. I wish my Democrat colleagues would admit that we were wrong." I fear Congressman Davis will not go far with this attitude - but at least he will be able to look at himself in the mirror.
November 26, 2009 4:04 PM
Fannie and Freddie got into apartments, too. The Wall Street Journal of Nov 18, page C1 has a diagram showing that F&F had 34% of the multi-family mortgages in 2006 and 84% in 2008. Now that F&F are losing money, it seems that they won't be able to roll over the mortgages on some apartments whose loans are falling due.

What were agencies chartered to help people buy houses doing in apartment financing? All government agencies want to get bigger. If the government takes over health care, this is the sort of thing that will happen.
November 27, 2009 4:00 PM
It is more a commentary on the effectiveness of any government intervention into people's lives, especially in their personal and most private business affairs..
Only if people get defrauded is there any reason for the Feds to be involved, and perhaps even then it may be a local issue; the concept of regulating this or that is bizarre, arcane, and relies on the premise that the people are subservient to government masters, and are incapable of negotiating their own conduct and dealings, let alone entering a contract with another party without oversight.
The author clearly has a personal agenda with Frank and Dodd, and fails to consider the concept that private contracts are private, and failing to mention that is a gross misstep.

November 28, 2009 5:06 PM
The NY Times may FINALLY be catching on! They're blaming congress!

Meet the Real Villain of the Financial Crisis
Blame Congress for the meltdown, not Goldman Sachs.
April 27, 2010 6:15 PM
@Sam.. senator Reid said today regarding reppublican counter measures, "if we cannot debate wall street reform in the Senate, what are we doing here?"
go home Senator, and let the ppl live their lives...
and where were these same Republicans when Sarbanes-Oxley Act of 2002? was being shoved down citizens' throats??
sleeping is ever a danger to our liberty, and thus it is w/ Congress..

April 27, 2010 11:15 PM
Now the Times is including Fannie and Freddie! Are they learning, or is this a fluke?

Say Goodbye to Fannie and Freddie
Two flawed agencies the housing market would be better off without.
August 12, 2010 5:40 PM

The actual facts are leaking out. The MSM wil ignore this, of course, but we're finally catching up to what the British knew long ago.

New study confirms economy was destroyed by Democrat policies
EconomyDecember 21, 2012
By: Robert Moon

A new study from the widely respected National Bureau of Economic Research released this week has confirmed beyond question that the left's race-baiting attacks on the housing market (the Community Reinvestment Act--enacted under Carter, made shockingly more aggressive under Clinton) is directly responsible for imploding the housing market and destroying the economy.

The study painstakingly sorted through failed home loans that caused the housing market collapse and identified an overwhelming connection between them and CRA mortgages.

Again, let's review:

-President Bush went to Congress repeatedly for years warning them that Fannie Mae and Freddie Mac were going to destroy the economy (17 times in 2008 alone). Democrats continuously ignored him, shut down his proposals along party lines and continued raiding the institutions for campaign contributions on their way down.

.Timeline shows Bush, McCain warning Dems of financial and housing crisis; meltdown

Timeline shows Bush, McCain warning Dems of financial and housing crisis; meltdown.-John McCain also co-sponsored urgently critical reforms that would have prevented the housing market collapse, but Democrats shut that down as well, along party lines, and even openly ridiculed anyone who suggested reforms were protect their taxpayer-funded campaign contributions as the economy raced uncontrollably toward the cliff.

-No one was making bad loans to unqualified people until Democrats came along and threatened to drag banks into court and have them fined and branded as racists if they didn't go along with the left's Affirmative Action lending policies...all while federally insuring their losses. Even the New York Times warned in the late 1990s that Democrats continuing to force banks into lowering their standards would lead to this exact catastrophe.

-Obama himself is even on the record personally helping sue one lender (Citibank) into lowering its lending standards to include people from extremely poor and unstable areas, which even one of the left's favorite blatantly partisan "fact-checkers," Snopes, admits (while pretending to 'set the record straight').

-Even The New York Times admitted that there is "little evidence" of any connection between the "Republican" deregulation measures Obama blames, like the Gramm-Bleach-Liley Act (signed into law by a Democrat), and the collapse of the housing market.

But non-Fox media have spent years deliberately and relentlessly inoculating people against the facts, training them to mindlessly blame Bush for being in charge when Democrat policies destroyed the economy. So here we sit, to this day, still watching Obama excuse and shrug off endless economic failures, illegal government takeovers and utter national bankruptcy with zero accountability.

March 23, 2013 5:27 PM
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