Oversight - The Blind Leading The Stupid
As our Congress gets ready to vote on a $700 Billion bailout ($2667 for every man, woman and child) for the "credit crisis", Congress assures us that they have put in provisions for increased "oversight." They blame Wall Street and clueless or greedy consumers for creating this mess. Their assurances of oversight, however, should be concerning because no one in Congress or the Administration seems to appreciate where the credit crisis started. Who is to blame - Democrats . . . and Republicans. Since our elected officials created this mess - how can we have any confidence that they can fix it - or that there will be proper oversight.
In 1992 Congress mandated that Fannie Mae and Freddie Mac - (two quasi government businesses where politicians send their friends as political rewards) - increase their purchases of mortgages to low-income and medium income borrowers. In the late 1990s, the success of the program was heralded. It was referred to as "one of the hidden success stories of the Clinton era" by the LA Times in 1999. Fannie and Freddie were required to devote 42% of their portfolios to such loans. Congress was applying pressure to increase even more of the risky loans, while Fannie argued that a higher target would produce more loan defaults by pressuring banks to accept unsafe borrowers.
In 1999 Franklin Raines from the Clinton Administration took over Fannie Mae. Over the next six years Raines managed to make $90 million from Fannie Mae, while another Clinton official - Jamie Gorelick walked out with $75 million. They finally had to resign and Fannie Mae ended up paying a $400 million civil fine for accounting irregularities - i.e. overstating earnings. Mr. Raines is apparently now an economic adviser to Sen. Obama. That is all we need is more fudging of the books in Washington.
While the Democrats set Fannie Mae and Freddi Mac - as well as the market as the whole - on the same course as the Titanic, the Republicans assumed the helm and did . . . well - nothing.
Fannie Mae and Freddie Mac were able to survive because property values kept going up. If someone got in over their head on a mortgage, they could sell the house for more than they bought it before foreclosure. The cook the books scandal at Fannie Mae should have been a wakeup call for Republicans. They had control of both houses of Congress and the Administration. So where was the oversight? Even Fannie may had predicted six years earlier that pushing these loans would result in more defaults. Numerous financial types were warning that this train wreck was coming.
So who do we trust for oversight? The Bush administration that has been asleep at the wheel for the last 8 years? Senator Dodd, the chair of the Senate Banking Committee? You know, the guy who has been the No. 1 recipient of Fannie Mae political contributions and received sweetheart loans from Countrywide - the first mortgage company to tank when property values started to drop.
Compounding the loan debacle, Congress passed the Sarbanes-Oxley act several years ago. Put in place in response to Enron, the act has accounting practices that are amplifying the current problem. Companies must report their assets in current market value. Because no one wants sub-prime mortgage back securities, many companies must post massive losses, even though the mortgages behind the securities are worth many times the current trading prices. For example, Merrill Lynch recently sold over $30 Billion in mortgage-backed securities for 22 cents on the dollar. If you have securities backed by $25 Billion in mortgages, the current value is not a little over $5 Billion. You just lost $20 Billion - even though the odds are that only a few percentage points of home owners will actually default on their loans.
Simply put, the American people cannot trust any of our politicians to exercise oversight over the largest bailout in American history. They have already loaded it up with money for special interests and will fail again as they trade real oversight for campaign contributions.
Should the Wall Street gurus who bought these risky loans be fired? Sure, right after the people who started the problem in the first place - Congress.
Yes, once again, the inmates are running the asylum - and they have your unlimited access to your checkbook.
In 1992 Congress mandated that Fannie Mae and Freddie Mac - (two quasi government businesses where politicians send their friends as political rewards) - increase their purchases of mortgages to low-income and medium income borrowers. In the late 1990s, the success of the program was heralded. It was referred to as "one of the hidden success stories of the Clinton era" by the LA Times in 1999. Fannie and Freddie were required to devote 42% of their portfolios to such loans. Congress was applying pressure to increase even more of the risky loans, while Fannie argued that a higher target would produce more loan defaults by pressuring banks to accept unsafe borrowers.
In 1999 Franklin Raines from the Clinton Administration took over Fannie Mae. Over the next six years Raines managed to make $90 million from Fannie Mae, while another Clinton official - Jamie Gorelick walked out with $75 million. They finally had to resign and Fannie Mae ended up paying a $400 million civil fine for accounting irregularities - i.e. overstating earnings. Mr. Raines is apparently now an economic adviser to Sen. Obama. That is all we need is more fudging of the books in Washington.
While the Democrats set Fannie Mae and Freddi Mac - as well as the market as the whole - on the same course as the Titanic, the Republicans assumed the helm and did . . . well - nothing.
Fannie Mae and Freddie Mac were able to survive because property values kept going up. If someone got in over their head on a mortgage, they could sell the house for more than they bought it before foreclosure. The cook the books scandal at Fannie Mae should have been a wakeup call for Republicans. They had control of both houses of Congress and the Administration. So where was the oversight? Even Fannie may had predicted six years earlier that pushing these loans would result in more defaults. Numerous financial types were warning that this train wreck was coming.
So who do we trust for oversight? The Bush administration that has been asleep at the wheel for the last 8 years? Senator Dodd, the chair of the Senate Banking Committee? You know, the guy who has been the No. 1 recipient of Fannie Mae political contributions and received sweetheart loans from Countrywide - the first mortgage company to tank when property values started to drop.
Compounding the loan debacle, Congress passed the Sarbanes-Oxley act several years ago. Put in place in response to Enron, the act has accounting practices that are amplifying the current problem. Companies must report their assets in current market value. Because no one wants sub-prime mortgage back securities, many companies must post massive losses, even though the mortgages behind the securities are worth many times the current trading prices. For example, Merrill Lynch recently sold over $30 Billion in mortgage-backed securities for 22 cents on the dollar. If you have securities backed by $25 Billion in mortgages, the current value is not a little over $5 Billion. You just lost $20 Billion - even though the odds are that only a few percentage points of home owners will actually default on their loans.
Simply put, the American people cannot trust any of our politicians to exercise oversight over the largest bailout in American history. They have already loaded it up with money for special interests and will fail again as they trade real oversight for campaign contributions.
Should the Wall Street gurus who bought these risky loans be fired? Sure, right after the people who started the problem in the first place - Congress.
Yes, once again, the inmates are running the asylum - and they have your unlimited access to your checkbook.
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