Wednesday, September 24, 2008

The Bailout Plan - Who blocked the Reform?

Wow... It looks like the proposals to restructure the mortgage system, and specifically Fannie and Freddie, were all made before... back in 2005. Even then some of our legislators recognized how these organizations were leading us toward crisis, and wanted to take action then to limit risk. S. 190--109th Congress (2005): Federal Housing Enterprise Regulatory Reform Act of 2005, (database of federal legislation) (accessed Sep 24, 2008)

The bill was introduced by Senators Chuck Hagel (R-NE), Elizabeth Dole (R-NC), John McCain (R-AZ), and John Sununu (R-NH).

It addressed such things as risk, appropriate capital levels, reporting transparency, and even executive golden parachutes!

Talk about prescient!

It was introduced in January of that year, but rather than being debated or voted upon, it was sent back to Chris Dodd's (D-) banking committee. It never got back out of that committee.

On May 25, 2006, an accounting scandal perpetrated by Fannie's management to the tune of $10.6 billion came to light, and Sen. McCain used the news as an opportunity to reiterate to the Senate the risk to taxpayers of these entities and the need for reform, calling for action on Hagel's propose bill.

The response? The Democrat controlled Senate forced the bill to "go-away" by a procedural rule. Dodd's banking committee demanded the bill be returned with an amendment late in the 109th congress. The action was a delaying tactic as the 109th congress then closed session, which meant the bill would be swept off the books. Dead.

It was later (April 2007) re-introduced by Sen. Chuck Hagel, Dole, and two other Republicans in amended form in the current 110th congress, as S. 1100. This revised bill provides for even more reform, including reporting on fraudulent loans, and measures to detect and eliminate conflict-of-interest lobbying.

This bill was read out twice and sent back over to Sen. Chris Dodd's committee, where it again languishes. S. 1100--110th Congress (2007): Federal Housing Enterprise Regulatory Reform Act of 2007, (database of federal legislation) (accessed Sep 24, 2008)

What can we say now in retrospect? Well, it would seem to me that Republicans in the Senate at least had some inkling about what trouble we were steering toward and tried (in vain) to wake up Democrat leadership to get action taken before it was too late.

It's too late.

I've said previously that Fannie and Freddie are key lynchpins which fostered the climate which lead to this crisis, and were instrumental in disconnecting the risk feedback mechanism which would have caused originating lenders to demand higher credit standards from potential borrowers.

As the Senate and House debate now on the merits of the administration's bailout proposal, just keep it in mind that it was Sen. Dodd's committee which blocked earlier efforts for reform to head off just such a disaster. He helped to break this system and now he is trying to represent himself as your man to champion its fixing. To that I say, bollocks! If it weren't for him, we might have had the reform needed to halt the bubble's growth before it popped. That would have been saving the taxpayer!

For shame. Resign sir, that is the only way for you to preserve any honor.

A check of related bills shows that the House of Representatives a mixed record on the fundamentals of this crisis. To Democrat credit, it seems Rep. Barney Frank (D-MA) was key to spearheading a bipartisan bill to get some Fannie and Freddie reform done. His bill was debated and passed. Republicans largely voted nay, as the bill contained in the opinions of many dissenting, unneccessary earmarks (notably for ACORN, the Democrat voter registration drive organization alledged to have committed certain past frauds) and directed the GSE to set asside $3 billion in funds, creating an effective tax on prospective homebuyers.

But later, Rep. Maxine Waters (D-CA) introduced a bill which sought to greatly expand the GSEs ablity to provide credit to greater numbers of citizens who would fall into the "subprime" category. A horrible bill, debated and passed, perhaps helped to exacerbate (it provided for alternatives to borrowers unable to provide sufficient credit histories, for example) the type of shameful lending practices which have got us here. H.R. 1852--110th Congress (2007): Expanding American Homeownership Act of 2007, (database of federal legislation) (accessed Sep 24, 2008)

That bill was passed with strong bipartisan support. Only some (less than half) Republican representatives objected and voted nay.

It can be said that while both parties' hands are dirty in this mess, only a brave few Republicans had the fiscal sense to oppose the very type of market distorting policies which got us here.

Keep this sort of thing in mind. Elections are coming.

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