Who caused the financial collapse? Just about everyone.
Lewis E. Lehrman
January 14, 2013, Vol. 18, No. 17
The Financial Crisis and the Free Market Cure – Why Pure Capitalism Is the World Economy’s Only Hope by John A. Allison, McGraw-Hill 320 pages, $28
EXCERPT FROM THIS ARTICLE: As the head of a major American bank, Allison was witness to the decisions of government, Federal Reserve leaders, and banking CEOs that led to a huge speculative bubble and the collapse of the financial system, including Fannie Mae, Freddie Mac, virtually the entire cartel of big banks and brokers, and major companies. Allison guides us, with a gimlet eye, through taxpayer-subsidized bailouts of these wards of the state, focusing on a reckless, insolvent, privileged financial oligarchy—subsidized by a feckless Fed, a dilatory Treasury, and a politicized FDIC. The coercive power of the federal government, and the moral hazard of excessive regulation, is dissected and debunked.
To appreciate this landmark work it is necessary to know a bit about the author’s background.
John Allison is not only a banker-entrepreneur; he is also a recognized intellectual leader of American business. Moreover, Allison’s financial expertise is a product of his personal biography: In a mere two decades, he built BB&T (Branch Banking & Trust Co.), a comparatively small Southern bank of $4.5 billion in assets, into a $152-billion financial enterprise, making it one of America’s largest and most profitable banks. But unlike many overpaid, underperforming CEOs, Allison focused his leader-manager skills—at modest compensation—on behalf of his employees, customers, and shareholders. (more…)
Ryan was a voice for Fannie Mae reform while Obama opposed it.
On July 27, 2000, a first-term Congressman from Wisconsin signed his name to the Housing Finance Regulatory Improvement Act. The 30-year-old legislator didn’t have much company. Of 435 Members of the House, only 12 were willing to join Paul Ryan in sponsoring a bill to reduce the taxpayer risks at Fannie Mae and Freddie Mac.
Eight years later to the day, a federal bailout of the two mortgage giants was on its way to the desk of President George W. Bush. Almost $190 billion in taxpayer financing later, the toxic twins of the housing crisis maintain their massive role in mortgage finance.
On Friday, the U.S. Treasury said it is relieving the two government-sponsored enterprises of the requirement to pay regular dividends to taxpayers. Instead, the toxic twins will simply pass to the feds any profits they make. Fan and Fred’s investment portfolios will also have to shrink more quickly, which is very good. But the deal suggests that they will continue to slap taxpayer-backed guarantees on mortgage bonds forever, or until there’s a reformer in the White House.
If only there had been a few more reformers on Capitol Hill in 2000. Fan and Fred and their army of “affordable housing” lobbyists saw to it that the plan backed by Mr. Ryan never made the House floor. The bill would have limited the assets the toxic twins could hold, increased their capital, added new federal oversight, and removed their credit lines at Treasury.
“In order to maintain double-digit growth,” noted Mr. Ryan at a 2000 Congressional hearing, “Fannie Mae will have to take on more and more risk” in order to “increase profitability to shareholders.” He added, “This is not a mission of public policy.”
As the government-fueled housing party heated up, Mr. Ryan continued to warn that many of Fan and Fred’s profit-making activities carried little benefit for homeowners. In 2002, he sponsored a bill to remove the exemptions Fan and Fred enjoyed from the disclosure requirements in federal securities laws.
Mr. Ryan continued his sometimes lonely effort to reform the mortgage giants, for which he endured their usual political wrath. In 2008 he told us that Fannie once called every mortgage holder in his district, claiming falsely that Mr. Ryan wanted to raise the cost of their mortgage and asking if Fannie could tell the Congressman to stop on their behalf. He received some 6,000 telegrams. (See “The Fannie Mae Gang,” July 23, 2008.)
Mr. Ryan’s embrace of reform in his first term in Congress compares favorably to the efforts of a freshman Senator from Illinois in 2005. President Obama likes to pretend he was a warning voice in the wilderness because he later issued vague statements of displeasure once the housing market was already cracking.
What Mr. Obama doesn’t say is that he failed to support any of the serious reform efforts to reduce the role of Fannie and Freddie in the mortgage market. The same is true of old Senate hand Joe Biden. Mitt Romney was never a Washington politician, so he can’t be blamed for the legislative failures of the 2000s.
This history bears further study, as Mr. Obama repeatedly attempts to tie the GOP candidates to Washington’s policy mistakes leading up to the financial crisis. In Iowa this week, the President said that Messrs. Romney and Ryan are proposing the same economic policies “that got us into this mess in the first place.”
The truth is that the President who loves to talk about the “mess” he “inherited” did nothing to prevent it when he had the chance. In contrast, his opponent’s new running mate was an early voice for reforms that might have helped America avoid it.
Peter J. WallisonPeter J. Wallison is Arthur F. Burns fellow in financial policy studies at the American Enterprise Institute.
April 9 – April 16, 2012, Vol. 17, No. 29
EXCERPT FROM THIS ARTICLE: The chairman of this body, [Financial Stability Oversight Council (FSOC)], is the secretary of the Treasury. Right away, this should raise red flags. The secretary, a top officer of every administration, has now been given authority, through the FSOC, over all the financial regulators. To put this in perspective, before Dodd-Frank, Treasury and White House staffs were forbidden to contact the independent regulatory agencies about policy matters, except under special circumstances, for fear of political interference—or the appearance of political interference—in matters of regulatory policy. Under Dodd-Frank, the council is also exempt from the Federal Advisory Committee Act, so its meetings are not open to the press or public…….
Nor is the Treasury secretary’s power under the Dodd-Frank Act limited to control over SIFIs (systemically important financial institution). Any financial firm is subject to seizure by the secretary if he believes that it is in danger of failure and that its failure will cause financial instability. If the firm objects, it can request a court hearing, but the hearing is secret (it’s even a crime to disclose it) and the court has a single day to make a decision. If the court does not act, the secretary can seize the firm and hand it over to the FDIC for liquidation. Needless to say, once that happens, the usefulness of further appeals is vitiated.
All the Republican presidential candidates have called for repeal of the Dodd-Frank Act. Foreign governments are sending delegations to Washington to complain about the act’s Volcker Rule. Eighteen months after the legislation was signed into law, the president had to make a clearly unconstitutional recess appointment in order to get a director for the act’s Consumer Financial Protection Bureau past near-unanimous GOP opposition in the Senate. In the midst of a housing depression, the entire private housing finance system has ground to a halt while waiting for the regulators to define something Dodd and Frank called the Qualified Residential Mortgage. Yet none of these consequential events has moved discussion of the Dodd-Frank Act from the business pages to the front pages, or warranted more than a mention on the evening news. As a result, most Americans have no idea how radical this legislation really is.
The best way to understand the Dodd-Frank Act is to think of it as Obamacare for the financial industry. Like its health care counterpart, it leaves the members of the massive financial services industry as privately owned firms, but blankets them with so much regulation that they are no longer really independent operators. If the act is fully implemented, a U.S. industry once so aggressive and innovative that it came to dominate the world’s financial markets will be reduced to a ward of the U.S. government. The current controversies over the Volcker Rule and the Consumer Financial Protection Bureau, for all the attention they have drawn, are really minor matters compared with the overall structure and effect of the act. Indeed, its most significant elements are hardly discussed at all, even on the business pages. (more…)
Detroit and its public unions head toward bankruptcy.
EXCERPT FROM THIS ARTICLE: That’s because the city, which has twice as many retirees as workers, is spending more on retirement benefits than wages. Pensions make up about two thirds of the public-safety payroll, and many collective-bargaining agreements entitle laid-off workers to pensions. The city has a $600 million unfunded pension liability and a $5 billion—you read that right—liability for retiree health benefits.
The clock’s running out on Detroit. City leaders are up against a $200 million deficit driven by exploding labor costs and may not be able to pay the bills come May. The state of Michigan has just swept in with a deux ex machina. Trouble is, city pols don’t like the strings attached.
Governor Rick Snyder is offering Detroit a “consent agreement,” which includes $100 million of state-backed bonds that would tide the city over until labor agreements can be restructured. The catch: Labor agreements will have to be restructured. The compact between the state and the city would turn over financial decision-making to a nine-member financial advisory board of state and city appointees who would have the authority to amend labor contracts.
Legacy costs are bankrupting Detroit just as they crushed its automakers. Firefighters can retire at 55 and earn 70% of their highest salary plus a 2.25% annual cost-of-living inflator in perpetuity. The result? Employee benefits alone now make up about half of the city’s general fund. Health costs have grown by more than 60% since 2008 while the city’s pension bill has quadrupled to $200 million. (more…)
Republican presidential candidate Mitt Romney campaigns in Portland, Maine. The candidate contends that the Obama administration should sell its ownership in GM and return the money to taxpayers. (Robert F. Bukaty / Associated Press)
I am a son of Detroit. I was born in Harper Hospital and lived in the city until my family moved to Oakland County.
I grew up drinking Vernors and watching ballgames at Michigan & Trumbull. Cars got in my bones early. And not just any cars, American cars.
When the president of American Motors died suddenly in 1954, my dad, George Romney, was asked to take his place. I was 7 and got my love of cars and chrome and fins and roaring motors from him. I grew up around the industry and watched it flourish. Years later, I watched with sadness as it floundered.
Three years ago, in the midst of an economic crisis, a newly elected President Barack Obama stepped in with a bailout for the auto industry. The indisputable good news is that Chrysler and General Motors are still in business. The equally indisputable bad news is that all the defects in President Obama’s management of the American economy are evident in what he did.
Instead of doing the right thing and standing up to union bosses,Obama rewarded them.
A labor union that had contributed millions to Democrats and his election campaign was granted an ownership share of Chrysler and a major stake in GM, two flagships of the industry.The U.S. Department of Treasury — American taxpayers — was asked to become a majority stockholder of GM. And a politically connected and ethically challenged Obama-campaign contributor, the financier Steven Rattner, was asked to preside over all this as auto czar.
This was crony capitalism on a grand scale. The president tells us that without his intervention things in Detroit would be worse. I believe that without his intervention things there would be better. (more…)
You know something’s wrong when a company like MetLife can’t find a buyer for its mortgage unit, fires 4,300 workers, and its stock rises. But such is the condition of America’s housing markets, where the risk of overregulation and litigation are so high that companies would rather abandon a business than take a risk on growing it.
MetLife is an illuminating example. Unlike Bank of America, which bought a shaky subprime lender in Countrywide and then had to take billions in losses when that market evaporated, MetLife got into the mortgage business in 2008 at the bottom of the market and snapped up a platform on the cheap. Its mortgage business soon spanned traditional loan origination, mortgage servicing and more.
Then came Dodd-Frank, the robo-signing pseudo-scandal, the state Attorneys General multibillion-dollar mortgage-servicing settlement talks, and the Obama Administration’s various efforts to halt foreclosures. Housing prices kept falling. In October, the Federal Reserve—which regulates MetLife’s banking subsidiary that backs its mortgage business—told the company it couldn’t return $4.8 billion to shareholders as dividends or stock buybacks until after a round of stress tests. MetLife sold the bank to GE Capital and wanted to sell its mortgage business too, citing an “uncertain marketplace and regulatory environment” despite its rising market share. (more…)
When is a loan between central banks not a loan? When it is a dollars-for-euros currency swap.
By GERALD P. O’DRISCOLL JR.Mr. O’Driscoll, a senior fellow at the Cato Institute, was vice president at the Federal Reserve Bank of Dallas and later at Citigroup.
EXCERPT FROM THIS ARTICLE: First,the Fed has no authority for a bailout of Europe. My source for that judgment? Fed Chairman Ben Bernanke met with Republican senators on Dec. 14 to brief them on the European situation. After the meeting, Sen. Lindsey Graham told reporters that Mr. Bernanke himself said the Fed did not have “the intention or the authority” to bail out Europe. The week Mr. Bernanke promised no bailout, however, the size of the swap lines to the ECB ballooned by around $52 billion
America’s central bank, the Federal Reserve, is engaged in a bailout of European banks. Surprisingly, its operation is largely unnoticed here.
The Fed is using what is termed a “temporary U.S. dollar liquidity swap arrangement” with the European Central Bank (ECB). There are similar arrangements with the central banks of Canada, England, Switzerland and Japan. Simply put, the Fed trades or “swaps” dollars for euros. The Fed is compensated by payment of an interest rate (currently 50 basis points, or one-half of 1%) above the overnight index swap rate. The ECB, which guarantees to return the dollars at an exchange rate fixed at the time the original swap is made, then lends the dollars to European banks of its choosing.
Why are the Fed and the ECB doing this? The Fed could, after all, lend directly to U.S. branches of foreign banks. It did a great deal of lending to foreign banks under various special credit facilities in the aftermath of Lehman’s collapse in the fall of 2008. Or, the ECB could lend euros to banks and they could purchase dollars in foreign-exchange markets. The world is, after all, awash in dollars.
The two central banks are engaging in this roundabout procedure because each needs a fig leaf. The Fed was embarrassed by the revelations of its prior largess with foreign banks. It does not want the debt of foreign banks on its books. A currency swap with the ECB is not technically a loan. (more…)
A dubious prosecution but it helps set the record straight.
By HOLMAN W. JENKINS, JR.
EXCERPT FROM THIS ARTICLE: So where ultimately do Fannie and Freddie rank amid the confluence of ridiculous subsidies, private-sector opportunism and ungovernable global capital flows that contributed to the crisis? Who knows exactly, but the exaggerated ferocity of the debate lately is a reliable Washington hallmark of an argument fading into irrelevancy. The financial crisis isn’t over, and around the world the problem is not housing but governments whose commitments far exceed their resources.
Like amoebas feuding in a drop of water, pundits have been savaging each other all year over whether Fannie Mae and Freddie Mac “caused” the financial crisis. Lately the argument has become apoplectic.
But the question is phrased badly. Three things happened: a housing bubble, a collapse in lending standards, and a global liquidity panic when markets lost trust in the solvency of financial institutions.
Now comes a Securities and Exchange Commission complaint against former Fannie and Freddie executives. The complaint makes plain that Fannie and Freddie held a lot more subprime loans than they publicly called subprime. It makes plain that Fannie and Freddie were co-sponsors with the private sector in driving down underwriting standards. Case in point: Fannie’s backing in 1999 of Countrywide’s “Fast and Easy” program to give buyers loans without proof of their income or assets.
So why do these SEC actions leave us queasy? The lawsuits don’t aim to do justice for the American people, but—very nominally—for Fannie and Freddie’s shareholders, who were supposedly misled by their disclosures. In fact, the complaints utterly miss the target in this regard.
Fannie and Freddie were under political pressure to underwrite loans to poor and minority borrowers. They were eager to do any business that appeared profitable. But investors knew what was going on. Investors’ biggest concern, as the duo’s losses mounted, was their political status. And right up to the moment it seized them, the Bush administration was insisting both were solvent and well capitalized.
Roll Call/Getty ImagesFormer CEOs of Fannie Mae and Freddie Mac in late 2008
