Obama Helped Block Fannie Reform, Leading to Present Crisis

BHO was bought and paid for by Fannie. Read this piece for chapter
and verse. Or just go back to your fantasy of BHO as a reformer.


How the Democrats Created the Financial Crisis: Kevin Hassett

Commentary by Kevin Hassett

Sept. 22 (Bloomberg) -- The financial crisis of the past year has
provided a number of surprising twists and turns, and from Bear
Stearns Cos. to American International Group Inc., ambiguity has been
a big part of the story.

Why did Bear Stearns fail, and how does that relate to AIG? It all
seems so complex.

But really, it isn't. Enough cards on this table have been turned over
that the story is now clear. The economic history books will describe
this episode in simple and understandable terms: Fannie Mae and
Freddie Mac exploded, and many bystanders were injured in the blast,
some fatally.

Fannie and Freddie did this by becoming a key enabler of the mortgage
crisis. They fueled Wall Street's efforts to securitize subprime loans
by becoming the primary customer of all AAA-rated subprime-mortgage
pools. In addition, they held an enormous portfolio of mortgages

In the times that Fannie and Freddie couldn't make the market, they
became the market. Over the years, it added up to an enormous
obligation. As of last June, Fannie alone owned or guaranteed more
than $388 billion in high-risk mortgage investments. Their large
presence created an environment within which even mortgage-backed
securities assembled by others could find a ready home.

The problem was that the trillions of dollars in play were only low-
risk investments if real estate prices continued to rise. Once they
began to fall, the entire house of cards came down with them.

Turning Point

Take away Fannie and Freddie, or regulate them more wisely, and it's
hard to imagine how these highly liquid markets would ever have
emerged. This whole mess would never have happened.

It is easy to identify the historical turning point that marked the
beginning of the end.

Back in 2005, Fannie and Freddie were, after years of dominating
Washington, on the ropes. They were enmeshed in accounting scandals
that led to turnover at the top. At one telling moment in late 2004,
captured in an article by my American Enterprise Institute colleague
Peter Wallison, the Securities and Exchange Comiission's chief
accountant told disgraced Fannie Mae chief Franklin Raines that
Fannie's position on the relevant accounting issue was not even ``on
the page'' of allowable interpretations.

Then legislative momentum emerged for an attempt to create a ``world-
class regulator'' that would oversee the pair more like banks,
imposing strict requirements on their ability to take excessive risks.
Politicians who previously had associated themselves proudly with the
two accounting miscreants were less eager to be associated with them.
The time was ripe.

Greenspan's Warning

The clear gravity of the situation pushed the legislation forward.
Some might say the current mess couldn't be foreseen, yet in 2005 Alan
Greenspan told Congress how urgent it was for it to act in the
clearest possible terms: If Fannie and Freddie ``continue to grow,
continue to have the low capital that they have, continue to engage in
the dynamic hedging of their portfolios, which they need to do for
interest rate risk aversion, they potentially create ever-growing
potential systemic risk down the road,'' he said. ``We are placing the
total financial system of the future at a substantial risk.''

What happened next was extraordinary. For the first time in history, a
serious Fannie and Freddie reform bill was passed by the Senate
Banking Committee. The bill gave a regulator power to crack down, and
would have required the companies to eliminate their investments in
risky assets.

Different World

If that bill had become law, then the world today would be different.
In 2005, 2006 and 2007, a blizzard of terrible mortgage paper
fluttered out of the Fannie and Freddie clouds, burying many of our
oldest and most venerable institutions. Without their checkbooks
keeping the market liquid and buying up excess supply, the market
would likely have not existed.

But the bill didn't become law, for a simple reason: Democrats opposed
it on a party-line vote in the committee, signaling that this would be
a partisan issue. Republicans, tied in knots by the tight Democratic
opposition, couldn't even get the Senate to vote on the matter.

That such a reckless political stand could have been taken by the
Democrats was obscene even then. Wallison wrote at the time: ``It is a
classic case of socializing the risk while privatizing the profit. The
Democrats and the few Republicans who oppose portfolio limitations
could not possibly do so if their constituents understood what they
were doing.''

Mounds of Materials

Now that the collapse has occurred, the roadblock built by Senate
Democrats in 2005 is unforgivable. Many who opposed the bill
doubtlessly did so for honorable reasons. Fannie and Freddie provided
mounds of materials defending their practices. Perhaps some found
their propaganda convincing.

But we now know that many of the senators who protected Fannie and
Freddie, including Barack Obama, Hillary Clinton and Christopher Dodd,
have received mind-boggling levels of financial support from them over
the years.

Throughout his political career, Obama has gotten more than $125,000
in campaign contributions from employees and political action
committees of Fannie Mae and Freddie Mac, second only to Dodd, the
Senate Banking Committee chairman, who received more than $165,000.

Clinton, the 12th-ranked recipient of Fannie and Freddie PAC and
employee contributions, has received more than $75,000 from the two
enterprises and their employees. The private profit found its way back
to the senators who killed the fix.

There has been a lot of talk about who is to blame for this crisis. A
look back at the story of 2005 makes the answer pretty clear.

Oh, and there is one little footnote to the story that's worth keeping
in mind while Democrats point fingers between now and Nov. 4: Senator
John McCain was one of the three cosponsors of S.190, the bill that
would have averted this mess.