Recently in Barney Frank Category

GOVERNMENT KNOWS BETTER. SURE.


What catastrophe are we heading towards as the government intrudes more and more into the private sector? Peter Wallison describes clearly how the dumb hand of the government, not the competitve forces of the market, will pick tomorrow's winners.

OPINION MARCH 17, 2009, 7:17 A.M. ET Wall Street Journal

Congress Is the Real Systemic Risk

By PETER J. WALLISON

After their experience with Fannie Mae and Freddie Mac, you'd think that Congress would no longer be interested in creating companies seen by the market as backed by the government. Yet that is exactly what the relevant congressional committees -- the Senate Banking Committee and the House Financial Services Committee -- are now considering.

In the wake of the financial crisis, the idea rapidly gaining strength in Washington is to create a systemic risk regulator. The principal sponsor of the plan is Barney Frank, the chair of the House Financial Services Committee. A recent report by the Group of Thirty (a private sector organization of financial regulation specialists), written by a subcommittee headed by Paul Volcker, also endorsed the idea, as has the U.S. Chamber of Commerce and the Securities Industry Financial Markets Association.

If implemented, this would give the government the authority to designate and supervise "systemically significant" companies. Presumably, systemically significant companies would be those that are so large, or involved in financial activities of such importance, that their failure would create systemic risk.

There are several serious problems with this plan, beginning with the fact that no one can define a systemic risk or its causes. The Congressional Oversight Panel, which was established to advise Congress on the use of the TARP funds, concluded -- with two Republicans dissenting -- that the current crisis is an example of a systemic risk evolving into a true systemic event. After all, virtually all the world's major financial institutions are seriously weakened, and many have either failed or been rescued. If this is not an example of a systemic risk, what is?

The current financial crisis is certainly systemic. But what caused it? The failure of Lehman Brothers occurred long after the market for mortgage-backed securities (MBS) had shut down, and six months after Bear Stearns had to be rescued because of its losses. In other words, the crisis did not arise from the failure of a particular systemically significant institution. The world's major financial institutions had already been weakened by the realization that losses on trillions of dollars in MBS were going to be much greater than anyone had imagined, and before the major asset write-downs had begun. So if this was a systemic event, it was not caused by the failure of one or more major institutions. In fact, it was the other way around: The weakness or failure of financial institutions was the result of an external event (losses on trillions of dollars of subprime mortgages embedded in MBS).

If this is true, what is the value of regulating systemically significant financial institutions? Financial failures, it seems, can be the result, rather than the cause, of systemic events like the one we are now experiencing. Even if we assume that regulating systemically significant companies will somehow prevent them from failing -- a doubtful proposition, given that the heavily regulated banks have been the most severely affected by the current crisis -- we will not have prevented the collapse of a major oil-supplying country, an earthquake or a pandemic from causing a similar problem in the future. All we will have done is given some government agency more power and imposed more costs on financial institutions and consumers.

But increased government power and higher costs are not the worst elements of the proposal to designate and supervise systemically significant companies. The worst result is that we will create an unlimited number of financial institutions that, like Fannie Mae and Freddie Mac, will be seen in the financial markets as backed by the government. This will be especially true if, as Mr. Frank has recommended, the Federal Reserve is given supervisory authority over these institutions. The Fed already has the power -- without a vote of Congress -- to provide financing under "exigent circumstances" to any company, and will no doubt be able to do so for the institutions it supervises.

A company that is designated as systemically significant will inevitably come to be viewed as having government backing. After all, the designation occurs because some government agency believes that the failure of a particular institution will have a highly adverse effect on the rest of the financial system. Accordingly, designation as a systemically significant company will in effect be a government declaration that that company is too big to fail. The market will understand -- as it did with Fannie and Freddie -- that loans to such a company will involve less risk than loans to its competitors. Counterparties and customers will believe that transactions with the company will generally be more secure than transactions with other firms that aren't similarly protected from failure.

As a consequence, the effect on competition will be profound. Financial institutions that are not large enough to be designated as systemically significant will gradually lose out in the marketplace to the larger companies that are perceived to have government backing, just as Fannie and Freddie were able to drive banks and others from the secondary market for prime middle-class mortgages. A small group of government-backed financial institutions will thus come to dominate all sectors of finance in the U.S. And when that happens they shall be called by a special name: winners.

Mr. Wallison is a fellow at the American Enterprise Institute.

Who was responsible for the housing bubble, its collapse and the resulting panic that triggered the present worldwide financial meltdown costing homeowners and investors trillions and millions their jobs?

The prime culprit is Congressman Barney Frank of Massachusetts, as this website has long pointed out. Search for "Barney" and you'll find much documentation for this on the website.

Senator Dodd of Connecticut was also complicit, raking in campaign contributions from Fannie Mae while urging them to package up and sell worldwide with the implicit guranty of the United States the subprime paper Democrats had forced banks to issue to the uncreditworthy.

Though seldom noted Barack Obama was in the forefront of efforts to force banks to make loans they never should have made. Fresh out of law school in the early 1990s he was training community organizers in Chicago (ACORN, no less) how to break up bank board meetings and intimidate bankers and demand they make mortgage loans to credit shaky minorities. Intimidation worked and the disintegration of credit standards, blessed by the Clinton Administration was on. See, for example, this.


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So now that that same Barney Frank wants to seek criminal prosecutions of those responsible, Investor's Business Daily names the prime candidate for the first prosecution: Congressman Frank.

Let The Inquisition Start With Barney Frank

By INVESTOR'S BUSINESS DAILY | Monday, March 9, 2009

Oversight: Congressman Barney Frank says he wants some of those responsible for our current financial meltdown to be prosecuted. And we couldn't agree more. First up in the court dock: Rep. Barney Frank, D-Mass.

Even by the extraordinarily loose standards of Congress, it takes some chutzpah for someone such as Frank to suggest that he'll seek prosecutions for those behind the housing and financial crunch and for what he called "a strongly empowered systemic risk regulator."

For Frank, perhaps more than any single individual in private or public life, is responsible for both the housing market mess and subsequent bank disaster. And no, this isn't partisan hyperbole or historical exaggeration.

But first, a little trip down memory lane.

It was Fannie Mae and Freddie Mac, the two so-called Government Sponsored Enterprises (GSEs), that lay behind the crisis. After regulatory changes made to the Community Reinvestment Act by President Clinton in 1995, Fannie and Freddie went into hyper-drive, channeling literally trillions of dollars into the housing markets, using leverage and implicit taxpayers' guarantees.

In November 2000, President Clinton's Housing and Urban Development Department would trumpet "new regulations to provide $2.4 trillion in mortgages for affordable housing for 28.1 million families." The vehicles for this were Fannie and Freddie. It was the largest expansion in housing aid ever.

Still, from the early 1990s on, many people both inside and outside Washington were alarmed by what they saw at Fannie and Freddie.

Not Barney Frank: Starting in the early 1990s, he (and other Democrats) stood athwart efforts by regulators, Congress and the White House to get the runaway housing market under control.

He opposed reform as early as 1992. And, in response to another attempt bring Fannie-Freddie to heel in 2000, Frank responded it wasn't needed because there was "no federal liability there whatsoever."

In 2002, Frank nixed reforms again. See a pattern here?

Even after federal regulators discovered in 2003 that Fannie and Freddie executives had overstated earnings by as much as $10.6 billion in order to boost bonuses, Frank didn't miss a beat.

President Bush pushed for what the New York Times then called "the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago."

If it had passed, the housing crisis likely would have never boiled over, at least not the extent it did, taking the economy with it. Instead, led by Frank, Democrats stood as a bloc against any changes.

"Fannie Mae and Freddie Mac are not facing any kind of financial crisis," Frank, then the ranking Democrat on the Financial Services Committee, said. "The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing."

It's hard to say why Frank did all this. It could be his close ties to the Neighborhood Assistance Corp., a powerful housing activist group based in Boston, which controls billions in loans. Or that he received some $40,100 in campaign donations from Fannie and Freddie from 1989 to 2008. Or that he has been romantically linked to a one-time executive at Fannie during the 1990s.

Whatever the case, his conflicts are obvious and outrageous, and his refusal to countenance reforms of Fannie and Freddie contributed mightily to today's meltdown. If you're looking for a culprit in the meltdown to prosecute, no one fits the bill better than Frank.

BARNEY FRANK ABUSES POWER TO AID BOSTON BANK

The ham-handed Congressman Barney Frank of Massachusetts continues to take care of his friends and supporters before the interests of all the American people.

Frank, more than any other public official, is responsible for triggering the worldwide financial crisis. As the lead Democrat on financial services in the House of Representatives he pressured fellow Democrats at Fannie Mae and Freddie Mac to buy uncreditworthy mortgage loans from banks and other mortgage lenders, package them up and sell them around the world with the implicit guaranty of the United States government behind them. When the Bush Administration realized the extent of the risk building at the two government-sponsored organizations and sought reform legislation in 2003, 2004, 2005 and 2006, Frank was in the frontlines blocking legislative action, assuring one and all that everything was just hunky dorry. The mushrooming of subprime mortgage loans blew up the housing bubble and when it exploded, the defaults in the subprime mortgage packages owned by foreign governments and investors sent panic roaring around the globe. Trillions of dollars have been lost, including hundreds of billions of dollars in savings by ordinary Americans.

Today's Wall Street Journal reports that as the first round of bailout money was being doled out to banks Barney Frank was pushing the Treasury to put millions into a small Boston minority bank known for its poor banking practices. Treasury officials privately complained, but did the bidding of the powerful Chairman of the House Financial Services Committee.

Read "Political Interference Seen in Bank Bailout Decisions."

We have detailed on several occasions that the present worldwide financial crisis can be traced to Democratic housing policies encouraging and then requiring banks to make mortgage loans to people who really couldn't afford them. Present in the early stages of the drive to force banks to make such loans was Barack Obama, then a schooled community organizer training ACORN operatives in Chicago how to intimidate banks and bankers into making loans they shouldn't. That was back in 1991. Obama-supporting ACORN was among the organizations that pressed the Clinton Administration to toughen up the penalties on banks that "weren't making enough" subprime loans. (ACORN worked for Obama in his first run for Illinois Senate in 1996.)

Understandably, banks didn't want to make loans that had a strong chance of going bad. They wanted to get rid of them. So ACORN spent tens of thousands of dollars lobbying Fannie Mae and Freddie Mac to buy up subprime loans and sell them around the world as U.S. government securities. Also pressing Fannie and Freddie was Barney Frank, Democrat of Massachusetts, and the top Democrat in the House of Representatives on financial matters. Subprime loans rocketed from 2% of total mortgage loans in 2002 to 30% in 2006. Internal reports at Fannie warned that Fannie was getting in too deep with these risky loans, but top brass ignored the warning as Congressional Democrats led by Frank and Democratic Senator Dodd of Connecticut urged them to buy up more.

The demand for housing mushroomed with all the mortgage loan availability. In 2003 President Bush called Congress to rein in Fannie and Freddie, but Democrats led by Frank said everything was fine and no new regulation was needed. Senate Repubicans pushed legisation in 2004, 2005 and 2006, but again Democrats led by Barney Frank said all was peachy keen and no new regulation was needed. All told, Frank and fellow Democrats blocked reform efforts in 2003, 2004, 2005 and 2006. (In 2005 and 2006 Obama was in the U.S. Senate supporting Democratic efforts to block Fannie/Freddie reform. Obama in just two years became the number two recipient of Fannie/Freddie campaign contributions of all time. They must have known he was present at the creation of the subprime mortgage loan boom that resulted in many millions of bonuses for Fannie/Freddie top officials as business skyrocketed.)

The sorry tale is detailed in, among other places on this site, here. The housing bubble collapsed, subprime mortgage loan defaults exploded and rippled through Fannie and Freddie securities around the world. Financial panic ensued, all triggered by the subprime mortgage mirage dissolving.

Yesterday Rush Limbaugh reported that Barney Frank had appeared on MSNBC to discuss the financial crisis and how it all started. In many interviews, Frank had shamelessly blamed it all on Wall Street greed. Now Frank gave Joe Scarborough a different view. Limbaugh's transcript follows:

RUSH: Barney Frank. I want to go to yesterday's audio sound bite roster. Actually, we have stuff from today and yesterday. Yesterday he was on with Chris Cuomo on Good Morning America, and I'll tell you, Barney is getting more and more contentious with his buddies. I mean, the people in the Drive-By Media are Barney's buddies, and he's getting contentious with them, often for no reason (which means he's defensive). But first from MSNBC today, Joe Scarborough's morning show. Scarborough said, "How do we stop the next big bust on Wall Street? We had the '87 crash. We had the Asian crash. We had the dotcom crash and the telecom crash, and now we got the housing bubble crash." I'll tell you the next crash. I just said, folks. We are insane. It was just two months ago that we learned that massive debt that can't be repaid causes bubbles to burst big time. And now we've got trillion-plus dollar or trillion-dollar deficits, promised by Obama, for years. So that's the next one to bust, and Scarborough is asking Barney Frank, "How do we figure out what the hell we're doing on Wall Street?"

FRANK: It's not deregulation. That was not the problem. It was the failure to adopt new regulation for a new phenomenon, the securitization. The biggest part of this problem was subprime loans: money lent to people to make them homeowners who couldn't afford the loans, who should not have been considered to be, in many cases, capable financially of homeowning. Now... Eh... You've gotta recognize reality. We have begun to adopt legislation to prevent that. We can stop the last problem from recurring. Nobody can know what the next problem will be.

RUSH: This is... (laughing) He created the problem! This... Folks, this is more than chutzpah. He created the problem. This is a sound bite that gets you out of your chair. I don't believe I just heard this. He created it. His definition of "affordable housing" was to make sure that people who couldn't pay the loans back got the loans, the mortgages. He forced Fannie Mae, Freddie Mac to do this. ACORN was involved, Obama's group. This was a Democrat Party operation through and through! Instead of answering questions from Joe Scarborough, Barney Frank ought to be answering them as a witness before some other congressional committee. So now we have begun to adopt legislation to prevent this? (laughing) All you can do is laugh. I know some of you people are put out with me because I'm laughing at this, but what are we going to do? You can't go through your life angry all the time like the liberals do, but this...

Trillions of dollars have been lost as a result. Most 401(k)s and other savings have been decimated. Retirements are being postponed. Housing values have shriveled. People have lost their homes. And who was responsible? Know-it-all do-good Democrats who ignored the realities of economics.

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