4 ways Congress caused the financial crisis

[marshabar1]

1) Credit Ratings Agencies. While the crisis does not have a single cause, the behavior of the credit rating agencies is a defining characteristic. It is impossible to imagine the current crisis without the activities of the NRSROs. And, it is difficult to imagine the behavior of the NRSROs without the regulations that permitted, protected, and encouraged their activities. … Rather the evidence is most consistent with the view that regulatory policies and Congressional laws protected and encouraged the behavior of NRSROs.

2) Credit Default Swaps. I am suggesting that the evolution of the CDS market, the fragility of the banks, and the Fed’s capital rules illustrate a key feature of the financial crisis that is frequently ignored. The problems with CDSs and bank capital were not a surprise in 2008; there was ample warning that things were going awry. Senior government policymakers created policies that encouraged excessive risk taking by bankers and adhered to those policies over many years even as they learned about the ramifications of their policies.

3) The SEC and Investment Banks. Consider three interrelated SEC decisions regarding the regulation of investment banks. First, the SEC in 2004 exempted the five largest investment banks from the net capital rule, which was a 1975 rule for computing minimum capital standards at broker- dealers. Second, in a related, coordinated 2004 policy change, the SEC enacted a rule that induced the five investment banks to become “consolidated supervised entities” (CSEs): The SEC would oversee the entire financial firm. Specifically, the SEC now had responsibility for supervising the holding company, broker-dealer affiliates, and all other affiliates on a consolidated basis. Third, the SEC neutered its ability to conduct consolidated supervision of major investment banks. … The combination of these three policies contributed to the onset, magnitude, and breadth of the financial crisis. The SEC’s decisions created enormous latitude and incentives for investment banks to increase risk, and they did.

4) Fannie and Freddie. Deterioration in the financial condition of the GSEs was not a surprise. … But, Congress did not respond and allowed increasingly fragile GSEs to endanger the entire financial system. It is difficult to discern why. Some did not want to jeopardize the increased provision of affordable housing. Many received generous financial support from the GSEs in return for their protection. For the purposes of this paper, the critical issue is that policymakers did not respond as the GSEs became systemically fragile. Again, I am not arguing that the timing, extent, and full nature of the housing bubble were perfectly known. I am arguing that policymakers created incentives for massive risk-taking by the GSEs and then did not respond to information that this risk-taking threatened the financial system.

blogs.reuters.com/james-pethokoukis/2010/05/05/4-ways-congress-caused-the-financial-crisis/

[marshabar1]

"It is difficult to discern why."


This is an eye-opener. I’ve simply added Years in Congress and divided total Fraudie

Mae and Fraudie Mac donations by that number to rank the top 15 recipients by $ per Year. Obama is winner by a ton:

In 2004, after a tip from a whistle blower who was later fired, the Office of Federal Housing Enterprise Oversight (Ofheo) issued a report finding that the government-sponsored entity Fannie Mae had engaged in Enron-like accounting machinations that allowed Fannie to overstate its earnings and underestimate the risk the company faced. The accounting wizardry Fannie engaged in was designed so that Fannie could meet profit targets tomaximize bonus payments to company executives like Clinton administration deputy attorney general Jamie Gorelick and Carter administration assistant director for domestic policy Franklin Raines.

Following his tenure in Democrat Bill Clinton’s White House as Budget Director, Raines returned to Fannie Mae where he served as Chairman and Chief Executive Officer prior to being forced out over accounting fraud allegations that federal authorities claimed were used to pad his own pocket with tens of millions of dollars in un-earned bonuses on top of his multi-million dollar pay. Raines and other top executives drew multi-million dollar salaries at Fannie Mae for many years.

Although he claimed no wrong doing, Raines agreed to settle the suit with the federal government just this year and agreed to pay back a few million of the near $50 million it had been alleged he obtained illegally through bonuses not due from Fannie Mae.

hennessysview.com/business/franklin-raines-criminal-enterprise-and-barack-obama-his-accomplice/



The past just scabs over and the bad guys go on living like kings.

[marshabar1]

Mortgage Giants Leave Legal Bills to the Taxpayers
By GRETCHEN MORGENSON

Since the government took over Fannie Mae and Freddie Mac, taxpayers have spent more than $160 million defending the mortgage finance companies and their former top executives in civil lawsuits accusing them of fraud. The cost was a closely guarded secret until last week, when the companies and their regulator produced an accounting at the request of Congress.

The bulk of those expenditures — $132 million — went to defend Fannie Mae and its officials in various securities suits and government investigations into accounting irregularities that occurred years before the subprime lending crisis erupted. The legal payments show no sign of abating.

Documents reviewed by The New York Times indicate that taxpayers have paid $24.2 million to law firms defending three of Fannie’s former top executives: Franklin D. Raines, its former chief executive; Timothy Howard, its former chief financial officer; and Leanne Spencer, the former controller.

Late last year, Randy Neugebauer, Republican of Texas and now chairman of the oversight subcommittee of the House Financial Services Committee, requested the figures from the Federal Housing Finance Agency. It is the regulator charged with overseeing the mortgage finance companies and acts as their conservator, trying to preserve the company’s assets on behalf of taxpayers.

“One of the things I feel very strongly about is we need to be doing everything we can to minimize any further exposure to the taxpayers associated with these companies,” Mr. Neugebauer said in an interview last week.

It is typical for corporations to cover such fees unless an executive is found to be at fault. In this case, if the former executives are found liable, the government can try to recoup the costs, but that could prove challenging.

Since Fannie Mae and Freddie Mac were taken over by the government in September 2008, their losses stemming from bad loans have mounted, totaling about $150 billion in a recent reckoning. Because the financial regulatory overhaul passed last summer did not address how to resolve Fannie and Freddie, Congress is expected to take up that complex matter this year.

In the coming weeks, the Treasury Department is expected to publish a report outlining the administration’s recommendations regarding the future of the companies.

Well before the credit crisis compelled the government to rescue Fannie and Freddie, accounting irregularities had engulfed both companies. Shareholders of Fannie and Freddie sued to recover stock losses incurred after the improprieties came to light.

Freddie’s problems arose in 2003 when it disclosed that it had understated its income from 2000 to 2002; the company revised its results by an additional $5 billion. In 2004, Fannie was found to have overstated its results for the preceding six years; conceding that its accounting was improper, it reduced its past earnings by $6.3 billion.

Mr. Raines retired in December 2004 and Mr. Howard resigned at the same time. Ms. Spencer left her position as controller in early 2005. The following year, the Office of Federal Housing Enterprise Oversight, then the company’s regulator, published an in-depth report on the company’s accounting practices, accusing Fannie’s top executives of taking actions to manipulate profits and generate $115 million in improper bonuses.

The office sued Mr. Raines, Mr. Howard and Ms. Spencer in 2006, seeking $100 million in fines and $115 million in restitution. In 2008, the three former executives settled with the regulator, returning $31.4 million in compensation. Without admitting or denying the regulator’s allegations, Mr. Raines paid $24.7 million and Mr. Howard paid $6.4 million; Ms. Spencer returned $275,000.

Fannie Mae also settled a fraud suit brought by the Securities and Exchange Commission without admitting or denying the allegations; the company paid $400 million in penalties.

Lawyers for the three former Fannie executives did not respond to requests for comment. A company spokeswoman did not return a phone call or e-mail seeking comment.

In addition to the $160 million in taxpayer money, Fannie and Freddie themselves spent millions of dollars to defend former executives and directors before the government takeover. Freddie Mac had spent a total of $27.8 million. The expenses are significantly larger at Fannie Mae.


www.nytimes.com/2011/01/24/business/24fees.html?_r=1&ref=franklindraines&pagewanted=print

[marshabar1]

[jarhead1976]

The average head of house hold earnings is down by 3% . The earning's for all of Congressional office holders is up, no less than 18%. With insider trading knowledge and all the lobby money hard to go broke as an elected official.

[upstatemom]

May 26, 2011 16:42:24 GMT -5 @jarhead1976 said:

The average head of house hold earnings is down by 3% . The earning's for all of Congressional office holders is up, no less than 18%. With insider trading knowledge and all the lobby money hard to go broke as an elected official.

I find it amazing that so many other people ignore this!!

[pappyjohn99]

We need a few heads on pikes on wall street.

[marshabar1]

Not to mention 12th Street.

[djrick]

"The professors note a previous study showed members of the U.S. Senate did so well they outperformed hedge funds."

globaleconomicanalysis.blogspot.com/2011/05/how-to-beat-market-follow-trades-of-19.html

Where is our Justice Dept on this corruption? MIA, as usual.

[ugonow]

Issa should look into it -----"As Roll Call reported earlier this month, Rep. Darrell Issa (R-CA) has a history of blending his personal business interests with his work as a member of Congress. Companies owned by the Issa family, including a firm called DEI (an acronym for Issa’s initials), set up websites to channel users to Issa’s official congressional campaign website. After Roll Call made an ethical inquiry to Issa, he changed the website.

ThinkProgress has discovered more troubling evidence that Issa may have blended his work as a lawmaker with his own business empire. After founding a successful car alarm company, Issa invested his fortune in a sprawling network of real estate companies with holdings throughout his district. One of Issa’s most valuable properties, a medical office building at 2067 West Vista Way in Vista, California, is called the Vista Medical Center, and was purchased in 2008 for $16.6 million. Described as “a long-term investment,” the property was bought by a company called Viper LLC, a business entity operated by Issa’s family that Issa has up to a $25 million dollar stake in.

Around the same time, Issa made the Vista Medical Center purchase, the congressman began requesting millions of dollars worth of earmarks to widen and improve the highway adjacent to the building. In 2008, he requested $2 million to expand West Vista Way, the road in front of his “long-term investment,” but only received $245,000 from the government. The next year, Issa made another earmark request for improving the West Vista Way highway next to his building. He earmarked another $570,000, bringing his total to $815,000, to add parking lots, widen the road, add bus stops, improve the sewer system, and other utility work. A map showing the location of Issa’s property, and the road, is below:




Issa has said that an “earmark is tantamount to a bribe.” While Issa has handed out earmarks to his campaign donors in the past, in this case, he appears to be helping himself.

Although the highway project has not begun yet (because of local budget problems), the federal money is allocated through Issa’s efforts. Already, a firm representing Issa’s real estate company is advertising the Vista Medical Building and its “Excellent Access with Freeway Visibility.” As ethics experts have explained, lawmakers should avoid earmarks in the immediate area of their own business interests.

Issa’s highway earmarks not only potentially benefit his multi-million dollar medical office building, they provide better access to his other properties in the area. About 2 miles down West Vista Way from the Vista Medical Center, Issa owns a commercial office building worth over $9 million, as well as an adjacent retail office building. The commercial office building leases to a number of different clients, and Issa’s retail building leases to a Hooter’s. All three properties are on the same highway, which Issa plans to retrofit with taxpayer money. "