‘Crony cap­i­tal­ism’ crackup

The Washington Times Weekly - - Commentary -

Lend­ing money to peo­ple who prob­a­bly won’t pay it back isn’t good busi­ness. If you wrap crummy loans in a clever pack­age, they’re still crummy loans.

Your typ­i­cal Wal-Mart shop­per un­der­stands this. But the Mas­ters of the Uni­verse on Wall Street and in Wash­ing­ton ev­i­dently didn’t.

There are a lot of peo­ple to blame for the sub­prime mort­gage cri­sis. The Fed­eral Re­serve Board un­der Chair­man Alan Greenspan (1987-2006) pur­sued what seems in hind­sight clearly to have been way too loose a mon­e­tary pol­icy. Banks were awash with money to lend, and got care­less in how they lent it.

Os­ten­si­bly to aid the poor, the Clin­ton ad­min­is­tra­tion and Congress en­cour­aged lenders to give mortgages to bad credit risks. The com­bi­na­tion of easy money and ex­pan­sion of the num­ber of bor­row­ers by ex­tend­ing loans to bad credit risks sent hous­ing prices through the roof, cre­at­ing the bub­ble whose burst­ing has led to this cri­sis.

Congress in 1999 re­pealed the law that es­tab­lished a bright line be­tween com­mer­cial and in­vest­ment banks. This meant bad in­vest­ments by banks could jeop­ar­dize de­pos­i­tors.

Wall Street cre­ated “de­riv­a­tives” which mul­ti­plied prof­its in good times, but which also mul­ti­plied risk if there were de­faults.

Most im­por­tant was cor­rup­tion and mis­man­age­ment at the Fed­eral Na­tional Mort­gage As­so­ci­a­tion (Fan­nie Mae) and the Fed­eral Home Loan Mort­gage Corp. (Fred­die Mac), which to­gether con­trolled 90 per­cent of the secondary mort­gage mar­ket.

Once your bank has lent you money to buy a house, it can’t lend the money again un­til you pay it back. But if your bank sells your mort­gage, it can make an­other loan right away. Without the secondary mar­ket, most of the funds for home mortgages would dry up.

Fan­nie and Fred­die went broke be­cause they had bought bil­lions of dol­lars worth of sub- prime mortgages, on which bor­row­ers de­faulted when the hous­ing bub­ble popped. Fan­nie bought most of its bad mortgages from Coun­try­wide Fi­nan­cial, whose CEO, An­gelo Mozilo, gave sweet­heart loans to se­nior ex­ec­u­tives of Fan­nie Mae.

Fan­nie and Fred­die cooked their books so se­nior ex­ec­u­tives would be paid mil­lions of dol­lars in bonuses to which they were not en­ti­tled. In­ad­e­quate reg­u­la­tion kept the book-cook­ing from be­ing dis­cov­ered un­til the cri­sis had be­come a catas­tro­phe.

Pres­i­dent Bush pro­posed reg­u­la­tory re­forms in 2003, but Congress took no action. In 2005, John McCain and three other Repub­li­can se­na­tors pro­posed a strong re­form bill. It died when Democrats threat­ened a fil­i­buster.

Democrats op­posed re­form in part be­cause they feared it would mean fewer loans to poor peo­ple. “Fan­nie Mae and Fred­die Mac are not fac­ing any kind of fi­nan­cial cri­sis,” Rep. Bar­ney Frank, Mas­sachusetts Demo­crat, told the New York Times when the Bush bill was in­tro­duced. “The more pres­sure there is on th­ese com­pa­nies, the less we will see in terms of af­ford­able hous­ing.”

Democrats and some Repub­li­cans op­posed re­form be­cause Fan­nie and Fred­die were very good at greas­ing palms. Fan­nie spent $170 mil­lion on lob­by­ing since 1998, and $19.3 mil­lion on po­lit­i­cal con­tri­bu­tions since 1990.

The prin­ci­pal re­cip­i­ent of Fan­nie Mae’s largess was Sen. Chris Dodd, Con­necti­cut Demo­crat and chair­man of the Se­nate Bank­ing Com­mit­tee. No. 2 was Sen. Barack Obama. Sen. Dodd was also the sec­ond-largest re­cip­i­ent in the Se­nate of con­tri­bu­tions from Coun­try­wide’s PAC and its em­ploy­ees. The No. 1 se­na­tor on Coun­try­wide’s list? Barack Obama.

Fan­nie Mae CEO Franklin Raines was forced to re­sign in De­cem­ber 2004 be­cause of “ac­count­ing ir­reg­u­lar­i­ties.” The Wash­ing­ton Post re­ported July 16 the Obama cam­paign has called Mr. Raines “seek­ing his ad­vice on mort­gage and hous­ing pol­icy mat­ters.”Mr. Obama ap­pointed Mr. Raines’ pre­de­ces­sor, James John­son, as head of his vice pres­i­den­tial search com­mit­tee, un­til he was also im­pli­cated in “ac­count­ing ir­reg­u­lar­i­ties,” and it was re­vealed he re­ceived cut-rate loans from Coun­try­wide.Chicago bil­lion­aire Penny Pritzker, chair­man of Mr. Obama’s fi­nance com­mit­tee, was chair­man of the now de­funct Su­pe­rior bank when it be­gan cook­ing the books to con­ceal losses from sub­prime mortgages. The hold­ing com­pany her fam­ily owned col­lected $200 mil­lion in div­i­dends on phony prof­its.

The trou­ble with crony cap­i­tal­ism isn’t cap­i­tal­ism. It’s the cronies.

Jack Kelly, a syndicated colum­nist, is a for­mer Marine and Green Beret and a for­mer deputy as­sis­tant sec­re­tary of the Air Force in the Rea­gan ad­min­is­tra­tion. He is na­tional se­cu­rity writer for the Pittsburgh (Pa.) Post-Gazette.

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