Deregulation and the Bailout

"If Congress does not act, American taxpayers will continue to be exposed to the

enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the

overall financial system, and the economy as a whole."

— John McCain, 2005

On Oc. 1, 2008, the U.S. Senate passed yet another version of the bailout bill that now runs a largely unread 450 pages, up from the President’s 3-page brief, up from the Senate’s 45-page first draft, and up from the 110-page House version. The Senate bill also raises the amount of funding to $850 billion.

The defeat of the House version of the bailout bill last Monday can be traced to discontent with past social-engineering legislation, in particular, the Community Reorganization Act of 1977.

Over 30 years, that law has resulted in a feeding frenzy by Washington officials, Wall Street corporate officers, and banker bandits. The House vote against the bill had some strange bed fellows, including 95 Democrat Representatives, among them, five committee chairs, starting with John Conyers, D-Mich., chair of the House Judiciary Committee, and four sub-committee chairs.

Their resounding “no” votes were joined by those of 133 Republicans, responding to phone call and e-mails from their constituents around the country. Voting for the bill were 140 Democrats and 65 Republicans. Democrat apologists, uncharacteristically supportive of a bill hand-delivered to Capitol Hill by Republican President George Bush’s Treasury secretary, intimated that those Americans opposing the bill were “the great unwashed,” incapable of comprehending the fine points of financial crisis.

The House and Senate Democrats erred in announcing they had a “deal” without the input of House Republicans. House Minority Leader John Boehner, R-Ohio, stated that, had it not been for the support of Sen. John McCain, R-Ariz., at the White House meeting on Sept. 26, 2008, the Democratic congressional leaders would have run over him like a freight train.

At the White House meeting, McCain is said to have demanded that GOP negotiators consider alternatives, such as a workout, rather than a bailout, although he has since voted for the Senate bill.

The post-vote spin by House Speaker Nancy Pelosi, D-Calif., Senate Majority Leader Richard Reid, D-Nev., and House Financial Services Committee Chair Barney Frank, D-Mass., blamed the defeat on the Republican president.

She was right that House Republicans insisted on changes to the original House bill, which had allocated millions of dollars to labor unions, ACORN (Association for Community Organization Now), and La Raza ("The Race," a leftist Hispanic group advocating illegal immigration). The House Republicans got these “earmarks” deleted, but in the process the House bill got longer. In the end, Pelosi, Frank, and “call-me-if-you-need-me” Barack Obama, D-Ill., were incapable of delivering 95 Democratic dissenters, not even the 12 they needed. How come?

Was the House chamber haunted by the ghosts of deregulation past?

Roots of Deregulation

The starting point for the 2008 financial debacle has its roots in the Carter administration, when President Jimmy Carter’s philosophy of deregulation was advanced by an obliging Democrat majority in the Senate and House. Deregulation spread to airlines, trucking, oil and natural gas, and long-distance phone calls resulting, for starters, with the break-up of AT&T. Deregulatory legislation included reorganization of government, the Community Reinvestment Act of 1977 (CRA, as in CRAZY, for it is at the heart of the current banking crisis).

Another deregulatory piece of legislation was the Depository Institutions and Money Control Act of 1980 (DIDMCA), which authorized Savings and Loan Associations (S&Ls) that ended in scandal and their demise. DIDMCA removed interest rate ceilings on deposit accounts and expanded acquisition, development, and construction loans. It is amazing what damage was done in four short years (1976-1980).

CRA was the creature of ACORN lobbyists and a pliant Democrat-controlled U.S. Senate and House. ACORN, a radical left “community-organizing” enterprise, specializes in voter fraud, through its satellites, such as Project Vote — yes, the same ACORN and Project Vote that community organizer Obama worked for in Chicago and the same ACORN for which attorney Obama provided legal counsel upon his return from Harvard.

The ACORN strategy, as recently exhibited in Michigan, floods voting districts with new voter registrations, among them false names, repeat names, names of children, and names of the deceased, to overwhelm elections personnel. This is right in line with the Cloward-Piven strategy taught by two Columbia University professors, which calls for flooding election offices with new voter registrations, thus compromising their verification. The goal was to change the U.S. political landscape to a socialist state.

In this election year, ACORN workers are implementing the Cloward-Piven strategy. In addition to those fraudulent registrations that go undetected, ACORN gains a basis for court challenges to impede the vote-counting process. In four states, ACORN workers have been convicted of voter fraud. ACORN has had to pay fines and is the subject of ongoing court proceedings and investigations.

ACORN has managed to thrive as well during Republican administrations and Republican-controlled Congresses. The current Bush administration, through various government agencies, private foundations, and philanthropies, has awarded millions of dollars to ACORN.

Meanwhile, banks and other lending institutions complain that they are being strong-armed by the CRA to disregard sound lending, risk management, and financial practices in the name of affirmative action for minorities. Credit checks, employment verifications, income verifications, ability to pay, and down payments are waived in the name of ending discrimination.

Describing a real estate closing, a lawyer admitted that the buyer was doomed to foreclosure, lacking the income to cover mortgage payments, utilities, insurance, and taxes. The real estate team got their commissions, the mortgage broker got his percentage, the bundler trading mortgages as securities got his money, and today the taxpayer is getting the bill.

Overvalued, subprime properties are high risk because of lax risk management and underwriting protocols. Bundled together, these anti-discrimination mortgages now total more than $4 trillion of toxic paper spread across the globe.

Fannie Mae & Freddie Mac

Deregulation in the housing field has failed not for lack of oversight alone but for lack of foresight — putting people into homes they cannot afford and encouraging people to live beyond their means. Cheerleading this endeavor was Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Company) — government-chartered institutions.

Fannie Mae was created in 1938 (under Democratic President Franklin Delano Roosevelt) to help bring the nation out of the Great Depression. A secondary mortgage agency authorized to make loans and loan guarantees, it bought mortgages and sold them as securities.

In 1970 (under Republican President Richard Nixon), Congress chartered Freddie Mac as a competitor of Fannie Mae. The income of Freddie Mac is made from money guarantee fees on loans that it purchases and secures as mortgage-backed security bonds. By assuming the risk of the borrower’s payments, Freddie Mac provides liquidity to banks and lending institutions enabling them to make even more risky new mortgage loans.

In January 1995, the Clinton administration increased the number and aggregated amount of subprime loans, which allowed the creation of lenders such as Countrywide and IndyMac Bancorp, Inc., as they no longer had to mitigate loan risks with savings deposits.

Today Fannie Mae and Freddie Mac remain public-traded companies on the New York Stock Exchange representing an estimated $6 trillion in mortgage paper. On Sept. 7, 2008, the Federal Housing Finance Agency (FHFA) placed both Fannie Mae and Freddie Mac into federal conservatorship.

Up until the end, Fannie Mae and Freddie Mac continued making campaign contributions to members of Congress, their favorites being Senator Chris Dodd, D-Conn., chair of the Senate Banking Committee and former presidential candidate, and a young senator by the name of Barack Obama.

The Hartford Courant reported that Sen. Dodd has received $6 million in the last two years from financial sector firms. In 2004, during a House of Representatives hearing on these two quasi-government institutions, Barney Frank and his Democrat colleagues dismissed talk of the failure by then Fannie Mae President Franklin Raines and Chief Financial Officer Timothy Howard to properly supervise the Fannie Mae operation.

Raines, a former Clinton official, left Fannie Mae with a $90 million golden parachute, and Howard left with an estimated $20 million chute. Former Fannie Mae executive, Jim Johnson, left with a $28 million parting gift. Raines and Johnson are both Obama advisers. A federal grand jury and the Securities and Exchange Commission (SEC) are belatedly looking into irregularities at Fannie Mae and Freddie Mac.

McCain, in 2004 and 2005, expressed his concerns about the financial well-being of both entities, but the Democrats blocked any efforts to monitor Fannie Mae and Freddie Mac. Senator Chuck Hagel, R-Neb., introduced the Federal Housing Enterprise Regulatory Reform Act of 2005, with McCain as one of three co-sponsors. Despite McCain’s warning of coming peril, the Democrats killed the bill, led by Dodd and aided and abetted by Senator Joe Biden, D-Del.

The federal conservatorship of Fannie Mae and Freddie Mac and current grand jury and SEC investigations raise questions regarding the judgment of the Democrat Congress. The constant harangue by Obama and the Democrats that the current financial crisis is attributable to John McCain and Republican deregulation is fallacious. Today’s viciously partisan Democrat Congressional leadership, who refused to see the writing on the wall, bear a large portion of the blame, along with community organizers, for this financial meltdown.

James Walsh is a former federal prosecutor.