Many of us have suffered over the last year and are concerned about what may lie ahead this year. More home foreclosures are expected. The housing market’s return to prosperity remains slow, and many who’ve lost their jobs can’t relocate to take another job because their homes are worth less than what they owe for them.
Until Congress declares its independence from campaign contributions from the financial sector it regulates, Americans are not likely to see significant change. It’s not just Republicans giving Wall Street a free pass. The Washington Post reports that the Chair of the Democratic Senate Campaign Committee, Sen. Bob Menendez (D-New Jersey), is rushing to assure Wall Street political donors--such as hedge fund and investment bank executives--that they should not take Democratic calls for stricter regulation of Wall Street practices seriously. Despite the current outrage that Wall Street has engendered and populist calls from both Democrats and Republicans to reform it, Senator Menendez recently told a Post reporter, “I remind them that there is a difference between what is said and what is done.”
Americans are hurting because of a financial system that has rewarded unprecedented risk taking with other people’s money. Deregulation has allowed the financial system to evolve into a world where elite wizards exact exorbitant sums as must-have financial “talent,” even when they have miscalculated, stumbled and harmed countless individuals in the process by taking irresponsible and unconscionable risks.
In 2008 and 2009 Americans averted the equivalent of a crash down a cliff that could have kicked off a financial avalanche. Now, as more and more ordinary Americans lift up their heads from their daily grindstones, they’re smacked in the face by these very financial institutions they’ve saved that are paying exorbitant bonuses to their top “talent” to keep the financial wizardry churning. Their “thanks?”—higher credit card fees, tightened small business credit and near oblivion to the concept of shared sacrifice. The ever-escalating costs of campaigns keep Congressional candidates tied to the institutions they oversee, even though constituents are clamoring for real change that reflects their values.
As a Democratic candidate for the U.S. Senate for the open seat now occupied by Sen. George Voinovich (R-Ohio), I am focused on shining some honest light on how we got into this mess and how we can get out of it. Changes in regulation must benefit not only sustained economic growth for our country, but must make financial institutions work better for everyday Americans.
We must address the conditions that allowed large banks and financial institutions that were freed by Reagan-inspired deregulation to engage in an orgy of greed and risky investments on an unprecedented scale. Congress must work with the financial sector to impose responsible regulations to ensure that the near crash of our financial sector will never happen again. Never again should ordinary Americans and their families suffer for the avarice of a few, and never again should our government protect this unconscionable arrangement.
Congress’ latest stopgap regulations provide for long-term subsidizing of AIG, Fannie Mae and Freddie Mac. Along with large banks and other financial institution recipients of Troubled Asset Relief Program (TARP) funds, these corporations continue to maintain their culture of entitlement that includes lavish compensation packages and huge bonuses to once again “attract the best talent.” That’s because Congress has not called for fundamental changes in our nation’s financial regulation, stuck in the web of complicated financing structures that require expensive wizards to keep it going.
Many financial institutions have paid back the funds we taxpayers lent them, and with good reason. Why do young people eventually quit asking their parents for money? Because they get tired of the strings attached and the lectures and requirements that go with it. I’d venture to say that’s why some banks like Bank of America even sold stock to pay back TARP money early, just in time to meet bonus and compensation program expectations, especially of the “talent” from recently purchased Merrill Lynch.
Our mortgage financing system is still in trouble. It shows on Main Street and in Washington, D.C. and not just on Wall Street. At the heart of this mess are the government-sponsored enterprises chartered by Congress—Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation). And they affect much of the rest of the financial sector.
Fannie Mae was established as a federal agency in 1938 in the aftermath of the Great Depression. It was chartered by Congress in 1968 as a private shareholder-owned company as a way to limit budget deficits during the Vietnam War. In 1970, the government formed Freddie Mac with the goals of making sure that financial institutions have money to lend, that consumers can find affordable financing for a decent home, and that residential mortgage markets remain stable in times of financial crises.
Fannie Mae and Freddie Mac do not originate loans, but rather, operate in the secondary mortgage market, buying loans from a national network of “retail” mortgage lenders (the ones who we see at real estate closings and who approve our loans) and selling securities backed by the mortgages they buy from these primary lenders. In this way, the two government sponsored enterprises free up cash for financial institutions to keep making home loans.
On September 6, 2008, the Federal Housing Finance Agency (FHFA) was appointed as a conservator or overseer of Fannie Mae and Freddie Mac because of concern that their capital assets weren’t sufficient to withstand a surge in loan delinquencies. The U.S. Department of the Treasury had agreed to provide up to $100 billion, then $200 billion and then $400 billion in capital as needed to keep them afloat.
So far the government has provided $60 billion to Fannie Mae and $51 billion to Freddie Mac for a total of $111 billion. But late last year, the government handed what was described as its “ATM card” to Fannie and Freddie. The Treasury Department removed the $400 billion financial cap to keep the companies alive, even though losses are not expected to exceed the government's estimate of $170 billion over 10 years. Beyond 2012, based on the concept of a “flexible formula,” whatever amount of government backing is in place would continue. By making this change before the end of 2009, U.S. Treasury officials avoided having to ask “bailout-weary” Congress for approval.
So, the $400 billion dollar cap has been replaced with a flexible formula to help these two enterprises stand behind the billions of dollars in mortgage-backed securities they sell to investors. That’s like telling the investors who buy Fannie and Freddie’s mortgage-backed securities that the U.S. government will back the securities they buy, no matter how poor a risk they are. When did American consumers ever get a deal like that? Never.
Democrats went along with the setup of this system during the Clinton years because it was easy to lull them on the altruistic notion that now those who’d never had a shot at the American dream could own a home. Unfortunately, many of these Americans didn’t comprehend what the effects of variable rate mortgage payments would be, or they qualified for mortgage payments they couldn’t afford.
Because risky mortgages could be sold to the government-sponsored enterprises, Fannie and Freddie, there was no incentive to thoroughly vet consumers’ ability to pay. Private lenders just kept lending, selling the mortgages (often selling the first month the mortgage was in place), taking our fees and lending again. Why not let the price of houses inflate? That means more money and more lending fees, more mortgages to combine, slice and dice to back the securities, more commissions for their sale and greater bonuses to the financial “wizards” who dreamed up these intricate financial schemes that can barely be explained even to experts.
And the Congress in charge during the boom years that built the system? It wasn’t Democrats.
Mix these financial houses of cards on Wall Street and on Main Street, and it’s a wonder we didn’t experience a full-blown depression in 2008 and 2009.
Although the financial free fall of late last year has been arrested, we’re not out of the woods by far. Together, Fannie Mae and Freddie Mac own or guarantee $5.5 trillion in home loans—almost 31 million home loans, or about half of all mortgages in the U.S. Under the treasury department’s new “ATM” formula, financial support for Fannie and Freddie increases according to how much each firm loses in a quarter.
Where can everyday Americans get a deal like that? For all the Republican rhetoric about decreasing the size of government, I’ve never seen a dole out program like this: American taxpayers are doling out paycheck deductions to those who pay expensive lawyers and accountants to find tax shelters and avoid paying taxes.
If I sound angry, I am, and so are many Americans. Unemployment is at double digits and expected to slightly increase, so the spate of foreclosures will not end soon.
In June of last year, Fannie’s and Freddie’s conservator’s representative said that the size and credit quality of Fannie Mae and Freddie Mac’s then $5.4 trillion in mortgage assets creates “substantial uncertainty” as to their future. Treasury Secretary Timothy Geithner said on June 18, 2009 that the government did not have time then to deal with the future of Fannie and Freddie. The Federal Housing Finance Agency director stated at the time that Fannie and Freddie would need another “year or two” before they would return to profitability.
Options for the future structures of Fannie Mae and Freddie Mac may include liquidation of assets, nationalization, a breakup into several smaller companies, a reorganization as public utilities, or a conversion into insurers for covered bonds backed by mortgages, the White House Office of Management and Budget said in an analysis of the fiscal 2010 federal budget proposal. It’s been well put that, “Until the government makes it plain that it won't seek to restore the pre-crisis status quo, Fannie and Freddie are the living dead, and markets [and consumers] must fear their return as newly invigorated financial monsters.”
Former Treasury Secretary Henry Paulson has admitted that he “punted” the tough choices to the Obama administration, saying that downsizing these two giants (selling them off in pieces to true private ownership or making them into government agencies) must be done by the next Congress. Maybe that’s why the GOP has become the party of “no.” There’s too much wealth at stake at the top. Maybe that’s why some Democrats in Congress seem all too willing to leave the status quo in place and continue to seek the political financial support the financial sector they regulate.
We’ve seen the difficulty of reforming health care, and it’s been confirmed by last week’s report of healthy profits for many of the nation’s top health insurance companies, while millions of Americans remain uninsured and providers continue to be nickled and dimed by tight-fisted insurance reimbursement policies. Reforming mortgage financing and financial regulation will be a titan battle that will make health care reform look like child’s play.
Members of Congress will need courage. Members of Congress will have to shun contributions from those to whom they should never be beholden, who will not only chafe but will lurch against this needed reform, because they have everything to gain from preserving the status quo. Candidates for and members of Congress can start by pledging not to take contributions from individuals and PACs associated with financial institutions that received TARP bailout funds, and from individuals and PACs of recipients of stimulus funds under the American Recovery and Reinvestment Act. I’ve made the promise, and I’ll keep it. I challenge other candidates and incumbents to make that promise now. We need this to restore trust in our government and move our nation forward—for everyone.