Whose Responsible For Economic Mess?

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wenty years ago, a scandal involving Barney Frank took nearly a year to unfold. The Massachusetts congressman ultimately admitted that a male homosexual prostitute operated out of his Capitol Hill apartment—without his knowledge, Frank claimed. The U.S. House of Representatives reprimanded Frank for fixing the prostitute’s 33 parking tickets. Now, Frank is the focus of another sordid mess, one that may take a decade to unfold. And his influence peddling as chairman of the House Committee on Financial Services goes to the very heart of the economic crisis, which has plundered Americans’ retirement funds and left taxpayers on the hook for untold trillions of dollars. While there is plenty of blame to go around, some of those who accuse former President George W. Bush and the Republicans had better take a long look in the mirror. That includes Barney Frank and a boatload of his Democratic allies.

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on their compliance. Experts lined up to warn Congress of an impending crisis. Dr. Lawrence H. White, a professor of economic history at the University of Missouri-St. Louis, described the impact of the new regulations: “[R]egulators could now deny a bank with a low CRA rating [the] approval to merge with another bank—at a time when the arrival of interstate banking made such approvals especially valuable—or even to open new branches.” To avoid such sanctions, banks had to show concrete numbers. “There would be no more A’s for effort,” City Journal reported. “Only results—specific loans, specific levels of service—would count. … Bank examiners would use federal home-loan data, broken down by neighborhood, income group, and race, to rate banks on performance.” Moreover, the new rules empowered Left-wing community groups to virtually extort money from banks by giving them a voice in the CRA ratings. “Complaints from community organizations would now count against a bank’s CRA rating,” wrote White in a CATO publication. “Groups like ACORN (the Association of Community Organizations for Reform Now) began actively pressuring banks to make loans under the threat that otherwise they would register complaints in order to deny the bank valuable approvals.” The National Community Reinvestment Coalition (NCRC)— an association of such groups— clearly recognized their newfound power, imploring member groups to submit “timely comments.” But that was just the beginning for groups like ACORN. The

The roots of the sub-prime market crash go back to 1977, when President Jimmy Carter signed into law the Community Reinvestment Act (CRA), passed by a Congress even more heavily Democratic than today’s.

One point on which all sides agree is that the economic meltdown began with the collapse of the housing market—specifically, “subprime,” low-interest loans to people who lacked adequate credit, income, assets or down payment and couldn’t make their monthly payments when the interest rates jumped. In a March 2008 memo to President Bush, Former Treasury Secretary Henry Paulson singled out sub-prime mortgages as “the primary trigger of recent events.” The roots of the sub-prime market crash go back to 1977, when 18

President Jimmy Carter signed into law the Community Reinvestment Act (CRA), passed by a Congress even more heavily Democratic than today’s. CRA encouraged banks to extend credit to poor and minority homebuyers, something they had been reluctant to do, preferring instead to seek sure-fire profits for investing in suburban areas. But

for its first 18 years, CRA’s impact was minimal. Banks had to report how much money they lent back into neighborhoods from which they collected deposits, as well as show that they had reached out to their communities by advertising in minority newspapers and serving on community boards. But the Clinton administration changed all that. In September 1994, a new set of regulations emerged that would score banks

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widespread trend of mega-mergers among major banks—which required positive CRA ratings for approval—gave these groups the perfect opening to make demands. “By intervening—even just threatening to intervene—in the CRA review process,” stated City Journal in 2000, “Left-wing nonprofit groups have been able to gain control over eye-popping pools of bank capital, which they in turn parcel out to individual low-income mortgage seekers.” How much money did groups like ACORN receive to do subprime loans? The Senate Banking Committee “estimated that, as a result of CRA, $9.5 billion so far has gone to pay for services and salaries of the nonprofit groups involved.” That included $760 million to ACORN from the Bank of New York, $3 billion from the Bank of America to the Bostonbased Neighborhood Assistance Corporation of America and so on throughout the country. Indeed, for multi-billion-dollar banks, Husock said, “CRA lending is simply a price of doing business—even if some of the mortgages must be May 2009

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written off.” But others warned that the cost of doing business would prove to be too steep. William A. Niskanen, former chairman of the Cato Institute, warned that Clinton’s “new regulations would be very costly to the economy, to the banking system, and to the communities they serve.” Harvard professor Hal Scott told a Washington audience in 1995, “bank safety and soundness may be significantly eroded.” And then the damage began to show. In 2000, Jeffery Gunther of the Federal Reserve Bank of Dallas conducted a highly detailed analysis of the impact of CRA on lending activity. “The analysis,” he reported in the journal Regulation, “shows that aggressive lending strategies help CRA ratings but hurt safety and soundness ratings” of banks. CATO amplified the findings in a 2001 report to lawmakers, and found that 15 percent of CRA-related loans were unprofitable, marginally unprofitable or breakeven, compared to just 1 percent for all other loans. Former U.S. Sen. Phil Gramm, R-

victim s of carte r , clinton, con g r es s ACORN member Angelica Newby protests outside a Federal Reserve Bank building in Doral, Fla., in 2008, blaming President George W. Bush for the foreclosure crisis, unaware that he tried to undo the damage inflicted by past Democrat presidents and Congresses.

Texas, sponsored a banking reform bill to fix the CRA problem, but the Clinton administration threatened a veto. In the end, the changes made to CRA were insignificant. “Unfortunately,” Gunther of the Federal Reserve predicted in 2000, “the conflict between CRA and safety and soundness may not receive the remedial attention it requires until the next round of widespread asset quality problems.” How right he was.

Frank to the rescue Today’s economic mess would not be what it is without the hyperactive involvement of Fannie Mae and Freddie Mac, the mammoth— and now failed—governmentsponsored enterprises. While CRA got the sub-prime ball rolling, Fannie and Freddie turned it into an industry—with a lot of support from friendly politicians, primarap / wide world photos

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sign of the times The posting of a sign on this newly constructed home indicates that the owners are more than 90 days past due on their mortgage payments.

ily Democrats. That’s where Barney Frank entered the scene. As Fox News has reported, “Although Frank now blames Republicans for the failure of Fannie and Freddie, he spent years blocking GOP lawmakers from imposing tougher regulations on the mortgage giants.” In 1991, the Boston Globe reported that Frank successfully lobbied Fannie Mae to purchase mortgages on two- and threefamily homes—despite default rates that were two-to-five times higher than single-family homes. Incidentally, that is also the year that Frank’s homosexual partner, Herb Moses, was hired by Fannie Mae. Moses was later described by National Mortgage News as a “mortgage guru” who designed many of Fannie Mae’s affordable housing programs. According to the Business and Media Institute, Frank and Moses ended their relationship just months after Moses left Fannie Mae in 1998. 20

© Najlah Feanny / Corbis

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In 1994, Frank fought off an attempt by his own party to regulate Fannie, as President Clinton’s Department of Housing and Urban Development (HUD) sought to rein in the giant lender. Last fall, in the midst of the market freefall, Clinton alluded to this when he said, “I think the responsibility that the Democrats have may rest more in resisting any efforts by Republicans in the Congress or by me when I was president, to put some standards and tighten up a little on Fannie Mae and Freddie Mac.” However, just two years later,

in 1996, Clinton’s administration reversed course and became a cheerleader for Fannie’s profligate ways. Economist Russell Roberts of George Mason University described how that happened. “For 1996, the Department of Housing and Urban Development (HUD) gave Fannie and Freddie an explicit target—42 percent of their mortgage financing had to go to borrowers with income below the median in their area. The target increased to 50 percent in 2000 and 52 percent in 2005.” But that was just the beginning of the risk that taxpayers were assuming. Roberts continues, “For 1996, HUD required that 12 percent of all mortgage purchases by Fannie and Freddie be ‘special affordable’ loans, typically to borrowers with income less than 60 percent of their area’s median income. That number was increased to 20 percent in 2000 and 22 percent in 2005. The 2008 goal was to be 28 percent.” The Clinton administration’s push toward sub-prime loans was verified by The New York Times in 1999, which reported that “Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people.” The road toward meltdown was firmly in place.

Top Congressional Recipients of Political Donations from Fannie Mae and Freddie Mac, 1989-2008 (includes PAC and employee donations) U.S. Sen. Christopher Dodd, D-Conn., $165,400 U.S. Sen. Barack Obama, D-Ill., $126,349 U.S. Sen. John Kerry, D-Mass., $111,000 Source: OpenSecrets.org (based on Federal Election Commission data through Sept. 2, 2008) l Citizen

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Dubious duo Starting in 1997, the connection between CRA and Fannie became even more direct. That’s when Fannie began guaranteeing sub-prime mortgages sold as a package to financial institutions, many of whom failed to adequately understand the risk they were purchasing. Now, taxpayers are picking up the tab—to the tune of hundreds of billions of dollars—as the federal government purchases some of the worst of these securities. By the time the 2000s rolled around, more and more economists were expressing concern about the stability of Fannie and Freddie. But not Barney Frank—who has received more than $42,000 in campaign contributions from Fannie and Freddie. He shot down reform efforts throughout the Bush administration. Karl Rove told Fox News: “For five years, I was part of an effort at the White House to fight this, and our biggest opponents on the Hill who blocked this every step of the way were people like (U.S. Sen.) Chris Dodd and Barney Frank. And Fannie and Freddie are the $200 billion contagion at the center of this.” In mid-March, former Vice President Dick Cheney echoed that sentiment to CNN: “We had, in fact, tried to deal with Fannie Mae and Freddie Mac some years before, with major reforms that were blocked by Democrats on the Hill—Barney Frank and Chris Dodd.” To say, as Frank and others have repeatedly, that Republicans are to blame and that Democrats worked to stop the sub-prime abuses is a complete reversal of the record. Collectively, at last count, Americans have lost a total of $8 trillion in retirement funds and home values as a result of the sub-prime crisis. The least they should get in return is the truth about its cause. l

‘Frank’ assurances on Freddie and Fannie In opposing efforts to reform Fannie Mae and Freddie Mac over the years, Congressman Barney Frank repeatedly assured Americans that concerns were unwarranted. Here he is, in his own words. 2000 Concerns about Fannie and Freddie are “overblown” and there is “no federal liability there whatsoever.” 2002 “I do not regard Fannie Mae and Freddie Mac as problems … I regard them as great assets.” 2003 “These two entities—Fannie Mae and Freddie Mac—are not facing any kind of financial crisis. The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.” 2003 “I want to roll the dice a little bit more in this situation towards subsidized housing. . . .” 2003 “I believe there has been more alarm raised about potential unsafety and unsoundness than, in fact, exists.” 2003 “There is no federal guarantee” of Fannie and Freddie obligations.

2003 “I do not think we are facing any kind of a crisis.” 2003 Fannie and Freddie pose no “threat to the Treasury.” Suggesting such could become “a self-fulfilling prophecy.” 2004 “I think Wall Street will get over it” if Fannie and Freddie collapse. l Primary sources: The Wall Street Journal, Washington Post, The New York Times Paid for by Focus on the Family Action.

Paid for by Focus on the Family Action.

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