There are so many pieces to the government’s role in the financial crisis -- it’s tough to narrow down. But fundamentally the government’s deference to financial markets kept regulators from effective oversight. Alan Greenspan’s admission he was wrong is telling. He believed lending institutions would act in their own self interest to protect shareholder equity. He also didn’t think regulators were any smarter than the people in the market.
The Federal Reserve could have been the first line of defense in the subprime meltdown. It was clear that many subprime borrowers would never be able to repay their loans once the interest rates adjusted. Consumer advocates lobbied for the Fed to use its authority to crack down on predatory lending. Regulators grappled with trying to define “subprime” and deferred to industry concerns that credit would become less available, instead of consumer groups' concerns that people get loans they could afford in the first place.
As I explain in Part 2 of "Anatomy of a Financial Crisis," the last line of defense for investors in what were potentially risky mortgage backed securities products was the credit default swap. Regulators believed the credit default swap acted as insurance and worked to spread the risk. Trouble was without any oversight, the “insurance” providers like AIG didn’t have the capital to back up the bets.
Comments
I appreciated the series on the Financial Meltdown, however, I was disappointed by your reluctance to name those in government whose actions may have started it all and those whose inactions allowed it to continue. The San Francisco Chronicle had no such fears. They named individuals as well as government over-sight agencies and their actions, or inactions, that caused the whole sorry mess. Here is their story:
Article from San Francisco Chronicle
For those interested in what really is causing our economic crisis this is a great article published by the San Francisco Chronicle. I cannot
believe that such an extremely liberal newspaper in the most liberal town in our nation had it in them to publish this within 40 days of the election. The article is factually accurate and worth the read...........
'The average American listening to all the news of bank failures, and Fannie Mae and Freddie Mac (who?) being taken over by the government, and now a 'bail-out' of large, privately owned and well known companies, is at first bewildered, and then angry. The average American should be furious.
But whom should Americans be furious? That seems to be the big question as political fingers are pointing in every direction. Was it greedy CEO's with their 'golden parachutes?' Was it the Democrats? Was it the Republicans? Was it Wall Street? (Who, exactly IS 'Wall Street?') The simple answer is that it is all of the above.
Treasury Secretary Henry Paulson, Jr., and Federal Reserve Chairman Ben S. Bernanke were on Capital Hill taking a verbal beating from some of
the very people who should not be asking the questions, but answering them and answering those questions under oath.
Senator Chris Dodd, (D-Conn.) and Congressman Barney Frank, (D-Mass.)are the first two who should be grilled, not by fellow politicians, but
by an independent and hopefully very lever,angry, and mean attorney hired by the American people. No one from the present Justice Department need apply. Both should be asked how much money they have taken from lobbyists hired by the CEO's of Freddie Mac and Fannie Mae.
Since that is public record, they should then be asked what Fannie and Freddie got in return for that money.
Barney Frank should be questioned about his House Bill, H.R. 3838, that is clearly designed to keep Fannie and Freddie afloat as long as possible despite all the signs that there was serious trouble ahead.
But all his bill did was make the hole bigger in the side of the Titanic. Basically all H. R. 3838 did was: 'To temporarily increase the portfolio caps applicable to Freddie Mac and Fannie Mae, to provide the necessary financing to curb foreclosures by facilitating the refinancing of at-risk subprime borrowers into safe, affordable loans, and for other purposes.'
Barney Frank and his counterpart in the Senate, Chuck Schumer, (D-N.Y.)did everything they could to delay and cover-up the outright fraud and
book-cooking that was going on within Freddie and Fannie.
As far back as 2003, Freddie and Fannie were $9 billion dollars in debt because of bad loans that continued to be accepted on a daily basis.
Pressure from liberals in Congress to continue giving out bad loans was relentless and for years it continued with CEO's, who happen to be friends of Dodd, Frank, Schumer, and Clinton, leaving with millions in their bank accounts as the companies they ran went under.
The truth is that this financial disaster for the American taxpayer didn't begin under George Bush, or Bill Clinton, or George Herbert Walker Bush, or Ronald Reagan. It started under Jimmy Carter . It started with the passing of The Community Reinvestment Act in 1977.
Basically, this act pushed local community banks and lenders, to 'bend'the rules a little and give loans to low-income families. Like many liberal schemes, it seemed like a good idea at the time. There was a provision that protected the nervous lender in the clause that stated that loans should be given 'in a safe and sound manner.' This gave the bank some leeway and choice in the loans that were given out.
Under Bill Clinton, The Community Reinvestment Act was revised. Basically, the revision started to put pressure on lenders to take more financial risks. It was felt that lenders were not being 'fair' to minorities and the poor who only wanted to share in the American dream of owning their own home. Janet Reno began to outwardly threaten banks and mortgage lenders with prosecution if home loans were not approved for those who wanted to purchase homes that, in truth, they could not
afford.
Fearing federal retribution, loans started being approved for people who had no down-payment, no jobs, no collateral, and absolutely no hope of ever being able to meet any mortgage payment after the grace period of low interest ran out.
Then, the greed took over. Banks would 'bundle' up loans, good and bad,and sell them to Fannie Mae and Freddie Mac, making all their money up
front for loans they knew would default eventually. As these loans did default, in larger and larger numbers, even Fannie and Freddie could no longer stand up under the hemorrhage of money loss. Wall Street panicked and so did the federal government.
Were there warning signs that a disaster was looming? Of course, there were. But there was money to be made and politicians and CEO's alike
were not about to give up the gravy train of money being crammed in their pockets. The CEO's of Freddie and Fannie would hire lobbyists to
slip money into the pockets of Senator Chris Dodd, (D-Conn.), chairman of the Senate banking committee, who was supposed to be overseeing the
banking industry, to the tune of $133,900 since 1989. Barack Obama was number two at the trough with over $120,000 which was no small feat since he has only been in the Senate for three years. Dodd and Obama were closely followed by the last Democratic nominee, John Kerry,(D-Mass.) and then Senator Hillary Clinton, (D-N.Y.)
What were these lobbyists buying for the millions they sprinkled around the Senate and House of Representatives? They were buying a blind eye.
They were buying little or no oversight into the juggernaut that has finally crashed on the heads of the American taxpayer. CEO's got rich,
politicians got rich and they got votes, being able to tell minorities and the poor, 'See what we are doing for you?' For years, the red flags
were stuffed under the desk and ignored.
Early in his administration, George Bush sounded an alarm over the small amount of working capital Fannie and Freddie had on hand. He urged them to sell more shares to increase their reserve in funding and put them on more stable ground. He urged them to be more selective in the loans they bought. This suggestion was declined because the
current stockholders would not make as much profit.
Franklin Raines, the Fannie Mae CEO from 1999 to 2004, decided to retire early, taking millions with him, under a cloud of accusations that he had cooked the books to make it appear the company was making money instead of going head-long into debt. Another player in this
financial kabuki dance is Jamie Gorelick. That name should ring a bell with every American. She seems to surface right at the heart of every
American disaster in the last 15 years. Ms. Gorelick was vice-chair of Fannie Mae from 1997 to 2003. Like all the others, she left with
millions in her pocket while declaring that Fannie Mae 'is among the handful of top-quality institutions.'
The next year it was found that Fannie was $9 billion dollars in the red. Oddly, this $9 billion had been overlooked in the books Ms.
Gorelick and Mr. Raines kept.
Let's put Mr. Raines and Ms. Gorelick on the stand. The American people deserve to hear how much they gave lobbyists to pass on to their
friends in Congress to keep the blinders on. That number is a staggering $16.2 million dollars since 1997. That amount bought very large blinders. And, it bought time. It bought time for the likes of Raines and Gorelick to make their millions and bow out before the bottom fell out.
Republican nominee John McCain raised the alarm two years ago but his plan for more oversight was killed in the Democrat-controlled committee.
Over 20-year span, McCain took $20,000 but this did not stop him from voicing his concerns. The problem was that Democrats didn't want to hear about it.
President Bush's warnings were also ignored. Should Bush have done more? Yes. Unfortunately, Bush was distracted by the 9/11 attack and wars in
Afghanistan and Iraq . So now, nearly every hour Americans watch as a pompous Chris Dodd or Barney Frank struts to a microphone to declare the 'failed economic policies of the Bush administration are responsible for this mess.'
No, Senator, he is not. YOU and your greedy friends are responsible. It took three decades to reach the point of no return and some were there
with their hands out nearly all of those years.
The Federal Bureau of Investigation is launching a full investigation into all of this. This investigation will abruptly end should Barack
Obama win in November. The last thing Democrats want is the American people learning how complicit so many of them are in the illegal
practice at Fannie and Freddie that led to the taxpayers bearing the brunt of the their unbridled greed.
While politicians want oversight over the 'bail-out,' there has been little outcry for an investigation into how all this evolved.
It's time for Americans to go to their windows and throw them open and yell, 'We are mad as hell and we aren't going to take it anymore!'
Then, in November, vote the lot of them out of office.'
Mistakes of Governance
With timely pre-election closure of *Financial Melt Down*, should we now consider the smaller political compromises of economic prophylaxis before larger compromises of impending remedies loom menacingly larger?
What is your list of remaining threats?
1. Inhuman population overload
2. Structural conflict of Interest
3. Schizoid Governmental Regulations from infighting & policy reversal
4. ?
5. ?
Thirty to forty years ago United States Gross National Products (GNP) was 40% of all global productions. As of today United States Gross Domestic Products (GDP) stands as 20% of all global production of goods and services.
In recent years emerging economic powers, China and India producing final products at such low cost, that USA and the European can never match, and selling them to the USA and Europe at prices that no domestic manufacturers can compete with.
As free trade expand, more manufacturing jobs migrating to China and India and as communication channels become cheaper so are the servicing jobs. Such jobs migration out of the United States is not replaced by new training or jobs in green industries that are slow coming, take years to build and implement.
The blue color and middle class of America are loosing their jobs in alarming rate and do not have a good prospect for the future, many reaching poverty and facing bleak future.
China has managed, in few years, to have hundreds of billions dollars of trade surplus and shortly will reach trillions. The thirst and need for energy to continue, 10% to 12% annual growth force China to partner, which ever way, with oil producing countries which, bring us to our first concern:
Political tension and confrontation with China as to threat to our national security due to our energy need for our economy and strong defense. Second, with trillions of surplus dollars, China will embark on predatory acquisitions, especially in recession time, of raw material and distribution of USA companies. Such acquisitions will complete the circle of total control of what we consume, who produce it and from whom we buy it. Third, profits of Chinese companies, generated from sales of products and services to the United States, will be control by communist government with central decision makers.
Therefore, Future China economic power will be able to change the political structure and the economic landscape of the United States.
In a pure economic theory, countries that mange to accumulate substantial trade surplus will buy products and services from countries with deficit trade balances and both currencies will move toward equilibrium. Not so with China, they will not do so. China will only buy and invest in companies that can provide them with raw material or distribute their final products so they will be able to control all phases of production and sales of products. All other purchases they will do from their domestic market, unless it is absolutely necessary to buy from others.
China will not allow their currencies to fluctuate on the free market and artificially control and set its exchange rate to their own advantage. Not playing by the rules of free trade and free economic theory will only further place United States and European countries at risk of becoming economically week and dependent. It is also danger to our national security, which must be dependent on strong economy and tax revenue to fund programs to such end.
RECESSION
Each recession has its own character and variables which are unique to it. The current recession is the most worrisome, more than any others in the past. Billions of dollars continue to be spending to support the Iraq war and no end insight. The capital value continues to shrink due to declining real estate values, foreclosures and tight financial market, slow and stringent loans approval to new buyers. Food prices continue to increase while increase in salaries is stagnant. Gasoline prices continue to be high causing net income losses in almost every industry.
The last two causes will characterize this recession worse than any other since the last depression of 1929. Seventy percent of our energy need and consumption comes from undemocratic and unstable oil producing countries. Any slight unrest in these countries will spike the oil prices which are already at unaffordable level for the working class.
As a result, department stores, supermarkets, restaurants and small business will be less frequent visited by the consumers and small businesses will start go out of business, department stores and big outlets will have hard time staying in the black. Health care insurance coverage will further decline and discretionary spending ratio to income will be the lowest since the 1929 depression.
College graduates between 1989 and 2004 had on the average $4,357.00 in credit cards debt, nearly a quarter of all bankruptcies in 2006 were filed by people ages 24 to 34. (Los Angeles Times April 27, 2008 issue). This is only the beginning. As the economy will shrink so the tax revenue to support education, social services, roads and bridges repairs, other infrastructure and basic service such as police, sanitation, water and power, prison and such.
Bankruptcies are at all time high and government bailing out the financial institutions at the tax payer’s expense increasing the budget deficit to record high that will result in less money spend on vital services we need.
The middle class in the United States will not be called middle class but rather will be classified as “LOW CLASS” trying to survive the daily living. Democracy can not be sustained with out a middle class and our system of government surely will change. United States will not be a super power but a part of a union of several countries embracing the same or similar system of government.
As for China, declining economies of the west and poor purchasing power of its currencies will create over supply of cheap goods that the west will not be able to afford due to economic hardship. China will loose its double digit growth and recession will set in.
Global warming will cause disastrous imbalances in our weather that will cripple the world economically, especially in China. Think of only one; today melting snow in Asia is the source of water for two billion people.
It is not the end of it, it is not even the beginning of the end but it is the end of the beginning.
WHAT TO DO
Up to 1970 United States was a producing nation thereafter we became consuming nation. We have consumed our surplus and became heavily in debt and continue to do so. We have to stop doing so and change course.
United States ought to start planning to be self sufficient in food, energy, employment and eliminate all waists that cost and pollute. We have to be completely independent from any imports and self-sufficient in all our basic needs. Our standard of living will be reduced to a level that we never experienced for the last 100 years; it will be small price to pay considering the alternatives.
We will not be able to help countries that will be falling to the devastation of the global environmental changes, over populated and economically bankrupt unless, it will be within the union of the western countries which United States will be part of.
We have to realize that free trade is not free trade when countries like China, India, Korea and a like using protection to their products while we let them sell us every thing with no tariff. It is time to do away with free trade.
Our daily living will change dramatically to basic and more wholesome. At the beginning changes will be hard but as time will pass people will appreciate life in the real sense of it.
Cohen & Associates
Yoel Cohen
Let us see if we can sum this up, just trying to keep things straight.
• Banks/Lenders create super easy financing for people
• Tons of people get into the housing market and values increase
• Foreclosures start and the financial market blames 5% of the housing
market for the failure within our market.
• Oil/gas goes up.
• Government gets in and begin a round of bailouts, about $2.5
Trillion (don't forget the banks are borrowing from both ends the
people and the Federal reserve).
• This has now affected the world because Banks/Lenders sold this to
other investors around the world.
• Foreclosures increase as time goes on.
• Fed rushes in to approve $700B bailout.
• Bailout still brings down market
• Federal Government bends over backwards in trying to correct this issue.
• Federal Government destroys investor confidence in the market so
people began to pull out.
• Banks/Lenders still do nothing to assist in correcting issue.
• Bank/Lenders fight over and buy up so-call weaker banks (???)
• Foreclosures and job loss continue to happen.
• Bailouts do nothing still!
• Banks/Lenders still doing nothing, but hands are out!
Government states that they should not be governing private business,
but yet they are involved??? Why is that they want one side but not
the other.
No matter who is at fault, if business continues to take and not “pay it forward”.
We will continue on this path…
I think the biggest issue here is the banks/lenders have been very reluctant to do anything, in concern with this current crisis as they are at the center of it. Not unlike our Government, which has turned itself into a pretzel over the last several months doing everything it can so that this can be avoided or lessen the blow we may feel. Which as everyone stated was due to banks/lenders creation of exotic products.
So what am I really saying until these business’s do something to assist the economy. No matter what our government does will not make a change. All you are doing is feeding the greed, I understand you are trying to help this matter, but if they continue to do nothing but take from you and force you (our government) into bending over until you can see your feet. Will not assist the people you have promised to help. That is one of the main reasons why everyone in our county is in an uproar.
Please return to the table and review the process that you have taken and what business has done. You will come to the same concussion that I have.
The problem isn’t with our government or its process, but with the same industries that discovers or takes advantage of the laws/policies that our government creates in order to benefit during either affect of U.S. economic change.
dropping the up-tick rule...