Why our financial system nearly collapsed – UPDATED

Yes, I know is voice is grating, yes I know he can be too rude by half on his program, but take the time to listen to this audio of last Friday’s Mark Levin show. (H/T Ace) You want the breakdown of what happened and why it happened? Levin gives it to you in plain language. Listen to it, even if you really don’t want to. I didn’t want to, but it’s important that we understand what happened, here, historically, that we don’t simply succumb to spin. Look past Levin’s politics and his cranky yelling, and just get the history.

He talks about how the foundation for the crisis was laid down in 1977 by Jimmy Carter (a point which the editors of Investor’s Business Daily go into here) and the Community Reinvestment Act (CRA) which came into being under his watch.

Levin talks about how the sub-prime mortgages began to take off with Bear Sterns in the 1990’s, which is again explained in more detail here [All Emphasis Mine – admin]:

To hear today’s Democrats, you’d think all this started in the last couple years…the Carter-era Community Reinvestment Act forced banks to lend to uncreditworthy borrowers, mostly in minority areas.

Age-old standards of banking prudence got thrown out the window. In their place came harsh new regulations requiring banks not only to lend to uncreditworthy borrowers, but to do so on the basis of race.

These well-intended rules were supercharged in the early 1990s by President Clinton. Despite warnings from GOP members of Congress in 1992, Clinton pushed extensive changes to the rules requiring lenders to make questionable loans.

Lenders who refused would find themselves castigated publicly as racists. As noted this week in an IBD editorial, no fewer than four federal bank regulators scrutinized financial firms’ books to make sure they were in compliance.

Failure to comply meant your bank might not be allowed to expand lending, add new branches or merge with other companies. Banks were given a so-called “CRA rating” that graded how diverse their lending portfolio was.

Explains Levin: “the federal government compelled this activity, compelled this behavior” beginning January 31, 1995, under Clinton administration regulatory revisions which authorized sub-prime loans in the secondary market – loans with no savings, no collateral, to back them up. The first securitization of CRA loans began in 1997, with Bear Stearns.

Meanwhile, Congress gave Fannie and Freddie the go-ahead to finance it all by buying loans from banks, then repackaging and securitizing them for resale on the open market.

…With those changes, the subprime market took off. From a mere $35 billion in loans in 1994, it soared to $1 trillion by 2008.

Wall Street eagerly sold the new mortgage-backed securities. Not only were they pooled investments, mixing good and bad, but they were backed with the implicit guarantee of government.

Fannie Mae and Freddie Mac grew to become monsters, accounting for nearly half of all U.S. mortgage loans…As they grew, Fannie and Freddie grew heavily involved in “community development,” giving money to local housing rights groups and “empowering” the groups, such as ACORN, for whom Barack Obama once worked in Chicago.
[…]
Since 1989, Fannie and Freddie have spent an estimated $140 million on lobbying Washington. They contributed millions to politicians, mostly Democrats, including Senator Chris Dodd (No. 1 recipient) and Barack Obama (No. 3 recipient, despite only three years in office).

There is plenty of blame to go around. Well-intentioned people started the ball rolling – with a very noble idea; break down the wall of discrimination that was keeping middle class minorities from owning their own homes. That was a good notion; others exploited the good intentions, and also strong-armed banks to do more and more. Wall street got greedy. The folks funny Fanny & Fred got greedy. We homeowners and the general public got greedy. Everyone wanted easy money and lots of credit, and no one wanted to think to much about what was backing it up; whether there were sufficient securities behind all the loans.

Levin also talks about how President Bush tried – in 2003 – to get Congress to pay attention to the household finance markets and Freddie and Fanny, and his ideas never got out of committees. This is how he was rebuked by Barney Frank, among others,

The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.

Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry.

The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios.

The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac — which together have issued more than $1.5 trillion in outstanding debt — is broken. A report by outside investigators in July concluded that Freddie Mac manipulated its accounting to mislead investors, and critics have said Fannie Mae does not adequately hedge against rising interest rates.
…
“These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis,” said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. “The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”

Representative Melvin L. Watt, Democrat of North Carolina, agreed.

“I don’t see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing,” Mr. Watt said. – [all emphasis mine – admin]

Here’s Investor’s Business Daily, again:

Congress has been surprisingly passive. As Sen. Majority Leader Harry Reid put it, “no one knows what to do” right now.

Funny, since it was a Democrat-led Congress that helped cause the problems in the first place.

When House Speaker Nancy Pelosi recently barked “no” at reporters for daring to ask if Democrats deserved any blame for the meltdown, you saw denial in action. Pelosi and her followers would have you believe this all happened because of President Bush and his loyal Senate lapdog, John McCain. Or that big, bad predatory Wall Street banks deserve all the blame.

“The American people are not protected from the risk-taking and the greed of these financial institutions,” Pelosi said recently, as she vowed congressional hearings.

Only one problem: It’s untrue.

Yes, banks did over-leverage and take risks they shouldn’t have. But the fact is, President Bush in 2003 tried desperately to stop Fannie Mae and Freddie Mac from metastasizing into the problem they have since become.
[…]
It’s pretty clear who was on the right side of that debate.

As for presidential contender John McCain, just two years after Bush’s plan, McCain also called for badly needed reforms to prevent a crisis like the one we’re now in.

“If Congress does not act,” McCain said in 2005, “American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system and the economy as a whole.”

Sounds like McCain was spot on. But his warnings, too, were ignored by Congress.

Levin insists that it is disingenuous to suggest that political parties should not be mentioned – that accountability demands it. I understand why people would prefer to keep politics out of any solution that comes about, this really should be above political sniping. But I see the press already trying to pin all of this on poor President Bush – the guy who tried to reform this nonsense in 2003. Bush has been blamed with a lot; should be blamed for a lot, but it seems to me that it is simply “too easy” and also plain falsehood to simply dump all of this on Bush’s shoulders.

Levin quotes the GOP senate in 2003 on their worries and their desire to address the coming problem. He also quotes the Democrats who blocked it. He has a lot of citations, here are a few:

In August of 2007, Sen. Chuck Schumer (D-NY) and Sen. Chris Dodd (D-CT), heading the Senate Banking Committee argued to life the portfolio cap from Freddy & Fannie to create more loans and allow F&F to buy more sub-prime mortgages “to calm the market.”

Senate Majority Leader Harry Reid, (D-NV) in 2005, in response to an effort by the GOP to trim Fanny & Freddy’s portfolios: “The legislation from the Senate banking committee, passed today on a party line vote by the Republican majority, includes measures that could cripple the ability of Fannie Mae and Freddie Mac to carry out their mission of expanding homeownership,” said Sen. Harry Reid, D-Nev., the Senate Minority Leader Thursday…”While I favor improving oversight by our federal housing regulators to ensure safety and soundness, we cannot pass legislation that could limit Americans from owning homes and potentially harm our economy in the process,” Reid said.

Writing in the Wall St. Journal with Mayor Michael Bloomberg, Sen. Chuck Schumer (D-NY) argued to reduce the regulations passed after Enron. He plays an audio clip of Schumer trashing Bush and trying to get what he wants.

Do listen to Levin. He gets loud and shrill sometimes; he is certainly passionate. But he is also very, very informative, especially about the “corrosive cronyism,” as Levin describes it. I had not realized that so many of Barack Obama’s top financial advisors are people who made millions running Fan & Fred. And yes, that’s troubling. It would be troubling if it was true of McCain’s campaign, too. But it’s more troubling about Obama, because Obama has not done anything. He’s running for president on 140 days of experience in the Senate. It feels, increasingly, like he’s simply being put into place to maintain the status quo.

They wouldn’t work together in 2003 or 2005, but Schumer is making bi-partisan noises. One hopes he means it. Really. But one also cannot but remember how the Democrats in the Senate – led by Schumer – filibustered just about everything that Bush tried to do, whether it was address this problem, address Social Security, address the energy situation (we still don’t have the upgraded power grids we needed in 2003) they filibustered like mad on EVERYTHING until they got into power in 2007, at which time they stopped legislating at all, which may in the end be to our benefit. Remember those words: DEMOCRAT FILIBUSTERS. They used the filibuster constantly to prevent Bush from doing anything.

Gateway Pundit notes: repeated attempts in 2008 by the Bush administration to prevent what happened last week Couldn’t get the Dems to pay attention.

And please note: Social Security? The thing Congress would not work with Bush on, because they put partisanship before country? Obama is busily walking back his plans, there. You know…it’s okay to pray for wisdom for our leadership. They seem to need it.

UPDATE: Doug Ross gives you the history of the crisis, in pictures.

Meanwhile: Paulsen, like McCain, says the fundamentals of our economy are sound.

Instapundit links to the proposed bail out legislation.

Lorie Byrd calls McCain The Paul Revere of the F&F disaster, at least in this campaign.

Ace notes that Obama’s finance chair is “the queen of sub-prime mortgages” and notices that the Huffpo talked about that back in February of ’08.

The New Yorker talks about the recklessness of Lehman Brothers and Bear Sterns

Melissa Clothier has more thoughts and a good round-up

Rick at Brutally Honest: Who is responsible?