Risky loans


Who's to blame for the current meltdown of the financial sector, caused by the dependence of so many corporate balance sheets on defaulting home mortgages?

Since for the past eight years the White House has been occupied by a Republican -- and one with low approval ratings, at that -- many may be inclined to agree with Democratic House Speaker Nancy Pelosi that the fault lies with "failed Republican do-nothing policies."

In fact, the Community Reinvestment Act of 1977 was enacted by a Democratic Congress and signed by Democrat Jimmy Carter, and it was under Democrat Bill Clinton in 1995 that the real regulatory pressure began to build on America's banks to meet regulatory quotas for loan-making to unqualified buyers in low-income communities -- well-meaning social policy enforced by requiring bankers to take the very billion-dollar risks that have now come home to roost.

There were plenty of warnings that too much of this bad debt was piling up -- especially at mortgage giants Fannie Mae and Freddie Mac.

But The Wall Street Journal reports that in 2000, when Rep. Richard Baker proposed Fannie Mae and Freddie Mac reform, powerful Democrat Barney Frank dismissed it as unnecessary. The New York Times reports that a Bush administration proposal in 2003 to reform Fannie Mae and Freddie Mac found Rep. Frank insisting, "I do not believe that we're facing any kind of crisis."

Warned in April 2004 that Fannie Mae and Freddie Mac could collapse, Rep. Barney Frank replied, "I think Wall Street will get over it."

Over in the Senate, the biggest recipients of financial largess from employees and political action committees of Fannie Mae and Freddie Mac over their careers have been not President Bush and Sen. John McCain, but Democratic Senate Banking Committee Chairman Chris Dodd ($165,000) -- whio also worked to quash reform -- and Barack Obama ($125,000), followed by John Kerry and Hillary Clinton.

Who are the friends of the fat-cat bankers?

(Note last week's original bailout plan included tens of billions of dollars for nonprofit "affordable housing advocacy" outfits, including Sen. Obama's longtime patron, Acorn.)

Yet at the same time Sen. Obama was pocketing money from these institutions -- and retaining their former chiefs as his advisiors -- some Republicans, including Sen. McCain, were fighting to reform them.

"One of the major government privileges granted to GSEs is a line of credit with the United States Treasury," Republican Rep. Ron Paul of Texas warned the House Financial Services Committee in September 2003. "According to some estimates, the line of credit may be worth over $2 billion. This explicit promise by the Treasury to bail out GSEs in times of economic difficulty ... distorts the allocation of capital."

Sen. McCain was another leading advocate of reform of the "Government-Sponsored Enterprises" (GSEs) -- years ago.

"For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac ..." Sen. McCain said on the Senate floor on May 25, 2006. "The GSEs need to be reformed without delay."

That was three years ago. But the well-paid Democrats refused to listen, back when there was still time. And so the Federal Housing Enterprise Regulatory Reform Act of 2005 -- co-sponsored by Sen. McCain -- went nowhere.

Nevada Rep. Jon Porter has plenty of justification for his call to probe these circircumstances -- including a search for possible criminal wrongdoing.

Yes, many of Sen. McCain's fellow Republicans -- and many on Wall Street looking to turn a quick buck -- share the blame. They've controlled either the White House or Congress or both for much of the past 14 years. Even faced with Democratic foot-dragging, why didn't Republicans act to repeal the mandates that encouraged and even required these risky loans?

For that matter, even today -- with near unanimity that the nation faces a "crisis" -- why hasn't Congress done the equivalent of plugging the leaks before starting to bail the boat? Why haven't they repealed the Community Reinvestment Act of 1977, along with all the ancillary banking regulations piled on under President Clinton in the late 1990s, which not only allowed but actually required banks to demonstrate to government regulators that they'd extended credit to a "sufficient" number of potentially risky borrowers, even if that meant allowing those borrowers to use their welfare and unemployment checks to qualify for a loan?

 

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