How The $$ Crisis Happened: A Historical Look

There has been some finger pointing on this Fannie & Freddie, sub-prime mortgage debacle – but not nearly as much as – oh – the baseball steroid scandal.  Why?  Well a lot of the congressmen to blame are still around and an election is coming up…. So here’s a look at the long road to colapse as well as some of the warnings that could have prevented it.

1977 – Community Reinvestment Act – President Carter & Democratic Congress

The CRA was a result of national pressure for affordable housing, and despite considerable opposition from the mainstream banking community. The CRA mandates that each banking institution be evaluated to determine if it has met the credit needs of its entire community. That record is taken into account when the federal government considers an institution’s application for deposit facilities. The Act charged the Federal Reserve System to implement the CRA through ensuring banks and savings and loans met their CRA obligations. The CRA is also enforced by the “FDIC”, CRA Statute.  –

1989 – Financial Institutions Reform Recovery and Enforcement Act – President Bush Sr. & Democratic Congress

FIRREA was enacted in the wake of the savings and loan crisis of the 1980s. As part of a general reform of the banking industry, it increased public oversight of the process of issuing CRA ratings to banks. It required the agencies to issue CRA ratings publicly and written performance evaluations using facts and data to support the agencies’ conclusions. It also required a four-tiered CRA examination rating system. Fed Chairman, Ben S. Bernanke, states that this law greatly increased the ability of advocacy groups, researchers, and other analysts to “perform more-sophisticated, quantitative analyses of banks’ records,” thereby influencing the lending policies of banks. –

1992 – Federal Housing Enterprises Financial Safety and Soundness Act – President Bush Sr. & Democratic Congress

This required the Federal National Mortgage Association, commonly known as Fannie Mae, and the Federal Home Loan Mortgage Corporation, commonly known as Freddie Mac, to devote a percentage of their lending to support affordable housing. This in part, contributed to increased Fannie Mae and Freddie Mac pooling and selling of such loans as securities , (i.e. securitization), and expanded the secondary market for those loans. –

1993 – Executive Order Regulations Change – President Clinton

In early 1993 President Clinton ordered new regulations for the CRA which would increase access to mortgage credit for inner city and distressed rural communities. The new rules went into effect in 1995 and featured: requiring numerical assessments to get a satisfactory CRA rating; using federal home-loan data broken down by neighborhood, income group, and race; encouraging community groups to complain when banks were not loaning enough to specified neighborhood, income group, and race; allowing community groups that marketed loans to targeted groups to collect a fee from the banks. According to a United States Department of the Treasury study of lending trends in 305 U.S. cities between 1993 and 1998 467 billion dollars in mortgage credit flowed from CRA-covered lenders to CRA-eligible borrowers. The number of CRA mortgage loans increased by 39 percent. Other loans increased by only 17 percent. –

Under the Clinton administration, federal regulators began using the act to combat “red-lining,” a practice by which banks loaned money to some communities but not to others, based on economic status. “No loan is exempt, no bank is immune,” warned then-Attorney General Janet Reno. “For those who thumb their nose at us, I promise vigorous enforcement.”    The Clinton-Reno threat of “vigorous enforcement” pushed banks to make the now infamous loans that many blame for the current meltdown, Richman said. “Banks, in order to not get in trouble with the regulators, had to make loans to people who shouldn’t have been getting mortgage loans.”  –

1994 – Riegle-Neal Interstate Banking and Branching Efficiency Act – President Clinton & Democratic Congress

This repealed restrictions on interstate banking, beginning a wave of bank mergers. This gave advocacy groups power to demand more loans to their constituents because CRA allowed them to charge noncompliance and stop such mergers. Fed Chairman, Ben S. Bernanke, states that over time community groups and nonprofit organizations established “more-formalized and more-productive partnerships with banks.” –

1999  – Bank Deregulation Bill President Clinton & Republican Congress

Deregulation, as a liberal hot word, has been attempted as a scapegoat in this crisis.  This is primarily due to the fact that this is the closest that Democrats can tie Republicans to the banking mess.  In truth, the deregulation helped cushion the meltdown as banks stronger in non-mortgage interests were able to come in and buy up some of the failing banks.  Saving tax payers from bailing out  Merrill Lynch, Bear Stearns, and Lehman Brothers along with Fannie & Freddie.  Also Clinton and 139 Dems seemed pretty happy about it at the time.

Summary Facts: Treasury Secretary Rubin and Deputy Secretary Lawrence Summers both supported the bill. Europe already had so-called universal banking. Big, diversified financial institutions have been weathering the crunch better than anyone else and have occasionally swooped in to lessen the pain – which would have been impossible prior to Gramm’s deregulation. The root of this crisis is subprime loans lavished on people who couldn’t truly afford their homes. –

President Clinton signed into law today a sweeping overhaul of Depression-era [New Deal] banking laws. The measure lifts barriers in the industry and allows banks, securities firms and insurance companies to merge and to sell each other’s products. “This legislation is truly historic,” President Clinton told a packed audience of lawmakers and top financial regulators. “We have done right by the American people.” The bill repeals parts of the 1933 Glass-Steagall Act and the 1956 Bank Holding Company Act to level the domestic playing field for United States financial companies and allow them to compete better in the evolving global financial marketplace.  – Nov 13, 1999 NY Times

2002 – Executive Order Regulations Change – President Bush

In 2002 there was an inter-agency review of the effectiveness of the 1995 regulatory changes to the Community Reinvestment Act and new proposals were considered. The Federal Deposit Insurance Corporation (FDIC), the Board of Governors of the Federal Reserve System, and the Office of the Controller of the Currency put new regulations into effect September of 2005.The regulations were opposed by a contingent of Democrats because the action “undercuts the statutory purpose of the Act for institutions to meet the needs of low and moderate-income persons and communities by OTS.” The regulations included less restrictive new definitions of “small” and “intermediate small” banks. Intermediate small banks were defined as assets of less than $1 billion, adjusted for inflation (small banks can opt for large bank exam). Large banks have their CRA performance evaluated according to lending, investment and service tests. –

2004-07 – Fannie & Freddie

Economists at the Federal Reserve and Congressional Budget Office had begun to study them in detail, and found that – despite their subsidized borrowing rates – they did not significantly reduce mortgage interest rates…  [Then] Fed Chairman Alan Greenspan became a powerful opponent, and began to call for stricter regulation of the GSEs and limitations on the growth of their highly profitable, but risky, retained portfolios. In order to curry congressional support after their accounting scandals in 2003 and 2004, Fannie Mae and Freddie Mac committed to increased financing of “affordable housing.” They became the largest buyers of subprime and Alt-A mortgages between 2004 and 2007, with total GSE exposure eventually exceeding $1 trillion. In doing so, they stimulated the growth of the subpar mortgage market and substantially magnified the costs of its collapse. – wall street journal

2004 – House Hearing On Fannie & Freddie

This is an 8 minute video of excerpts from a House Hearing in 2004.  Don’t let congress re-write history.  See and hear with your own eyes who said and thought what about Fannie & Freddie.

2005 – GSE Reform Bill Filibustered By Senate Democrats

In 2005, the Senate Banking Committee, then under Republican control, adopted a strong reform bill, introduced by Republican Sens. Elizabeth Dole, John Sununu and Chuck Hagel, and supported by then chairman Richard Shelby. The bill prohibited the GSEs from holding portfolios, and gave their regulator prudential authority (such as setting capital requirements) roughly equivalent to a bank regulator. In light of the current financial crisis, this bill was probably the most important piece of financial regulation before Congress in 2005 and 2006. All the Republicans on the Committee supported the bill, and all the Democrats voted against it. Mr. McCain endorsed the legislation in a speech on the Senate floor. Mr. Obama, like all other Democrats, remained silent. – wall street journal

White House Warnings

Many critics say that President Bush should have sounded a louder warning about the coming Fannie and Freddie/GSE crisis.  But compared to congressional leaders that assured us that there was “no problem” and that the GSEs were “sound” GW looks like a genius.  Remember that the people that first created the problem, then missed all the warning signs, are trying to say they are the “only ones” that can “fix it” for us.

  • 2001: 1 warning
  • 2002: 1 warning
  • 2003: 6 warnings
  • 2004: 3 warnings
  • 2005: 1 warning
  • 2007: 5 warnings
  • 2008: 17 warnings before congress acted – White House & Gateway Pundit