Rant #17 - Back Off, Socialist Punks! Congress Tries to go Blackjack with the Same Failed Hand...

This week, Lehman Brothers went bankrupt, Washington Mutual inched closer to the cliff and AIG received an $85 billion bailout that gives the Federal Reserve an 80% stake in AIG’s equity funds. The credit crisis has reached a new level as relatively few bad mortgages are affecting normal, predictable, theoretically “safe” investments like money markets, bonds and pension funds.

In a previous article, I decried the Federal takeover of Fannie and Freddie, and I still stand by this on principle. But the problem goes much deeper than this. The problems have been mounting for many years and have been affected by many variables, but the largest factors that figure into today’s economic quagmire consist of a single bill, a single political Party and a single Senator that was shot down by his colleagues. While no single factor is solely to blame for these problems we’re suffering with today, there are significant benchmarks and individuals that factor into this:

In 1977, the Community Reinvestment Act was passed by a Democrat-controlled Congress and President Carter as a way to make low to middle income borrowers (LMI) qualify for the types of home financing good borrowers have access to. After years of criticism by both sides of the aisle for being too vague and not accomplishing what it was supposed to do, President Clinton finally led a charge to pass a “modernization” amendment to the Act that called on the Treasury to report within two years how to fix the loopholes and “insufficiencies” in the system, and make it easier for LMI borrowers to get home loans.

Finally, in 2001 Congress passed revisions to the actual act that allowed Fannie Mae and Freddie Mac and other banks (including much smaller banks, for the first time) to qualify for government support for these types of loans, by virtue of being able to dump these types of mortgages on obligated bankers at Fannie and Freddie. Meanwhile, through the 90's the seeds of corruption under the guise of good intentions were laid by a man named Franklin Raines. The result was the beginning of a housing boom, as tens of thousands of new homeowners poured into the homeownership market. The natural economic cycle combined with this regulatory change to fuel growth that was exacerbated by the Federal Reserve lowering the discount rate to 1% by 2005-2006. Meanwhile, Fannie and Freddie became the largest lobbyists in D.C., pushing for promotion of programs that helped to fuel their growth and their earnings. The CEO’s of these mortgage behemoths were being compensated based upon earnings, which led to falsely reported earnings for many years in a row. Risky loans abounded and banks were flush in hundreds of millions of cash (with no call for “windfall profits taxes”, by the way…), and only a select few saw the rising tide coming.

One of those people were Senator John McCain, of Arizona. In 2005, seeing the negative effects of these two loosely regulated banks and showing a distaste for the blatant lobbying habits of these same two, McCain sought to introduce a bill that would establish a separate, independent committee to oversee the two banks and recommend impartial changes, and strip governance of them from the Department of Housing and Urban Development, and give it to this newly formed committee. The law passed the Republican-controlled House but faltered in the Senate, which was unable to pass it due to the inability of Republicans to overcome blockage by Senate Democrats. The bill died.

Sounding today like a prophet, McCain said the following in introducing the bill to the Senate Committee that oversees finance:

“Mr. President, this week Fannie Mae’s regulator reported that the company’s quarterly reports of profit growth over the past few years were “illusions deliberately and systematically created” by the company’s senior management, which resulted in a $10.6 billion accounting scandal.

The Office of Federal Housing Enterprise Oversight’s report goes on to say that Fannie Mae employees deliberately and intentionally manipulated financial reports to hit earnings targets in order to trigger bonuses for senior executives. In the case of Franklin Raines, Fannie Mae’s former chief executive officer, OFHEO’s report shows that over half of Mr. Raines’ compensation for the 6 years through 2003 was directly tied to meeting earnings targets.

The report of financial misconduct at Fannie Mae echoes the deeply troubling $5 billion profit restatement at Freddie Mac. The OFHEO report also states that Fannie Mae used its political power to lobby Congress in an effort to interfere with the regulator’s examination of the company’s accounting problems.

This report comes some weeks after Freddie Mac paid a record $3.8 million fine in a settlement with the Federal Election Commission and restated lobbying disclosure reports from 2004 to 2005. These are entities that have demonstrated over and over again that they are deeply in need of reform.

For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac–known as Government-sponsored entities or GSEs–and the sheer magnitude of these companies and the role they play in the housing market.

OFHEO’s report this week does nothing to ease these concerns. In fact, the report does quite the contrary. OFHEO’s report solidifies my view that the GSEs need to be reformed without delay. I join as a cosponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005, S. 190, to underscore my support for quick passage of GSE regulatory reform legislation.

If Congress does not act, 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.”

Today, Congress failed to pass a bailout plan for financial markets, and the U.S. stock market responded with an 800 point drop followed by several other international markets doing the same as they opened later in the day.

We now face a serious crisis in credit and liquidity and Congress insists that the only solution is more oversight and government control of hundreds of thousands of bad mortgages.

Barack Obama is refusing to take a hard line on this proposal so he can claim plausible deniability later, but he comes from the same cloth of governing philosophy that believes Government can best serve the needs of the people in such affairs. As everything shakes out and new revelations come to light on how this mess began and strengthened, we are seeing that not only is Obama comfortable with the idea of a virtual government "takeover", but is surrounded by the very people who brought about this crisis to begin with. Barack Obama received over $126,000 in contributions and financial support from 2004-2008, second only in total receipts to Senator Christopher Dodd, who collected only a few thousand more dollars, but spread over 19 years. This means that Barack Obama received the support of Fannie and Freddie lobbyists and their appendages at a rate 4 times that of any other Senator. This is terrifying to realize that Fannie and Freddie (who have now been revealed to have literally broken the law and falsified documents and forged signatures to drive up earnings and bonuses for Execs) saw something in Senator Obama that would lead them to support him far and above any other legislator in the House OR the Senate.

The corrupt executive at Fannie Mae who began this culture of deception is now considered part of the inner circle of Barack Obama's economic advisory panel, as Barack seeks his advice in housing and finance.

Unless you want the government to be landlord to your neighbors and becoming the single largest investor in the world, using your money, then I suggest you apply all necessary and accessible pressure on your Congressmen to continue standing on the principle of truly free markets and taxpayer protection. It was Congress meddling in the natural affairs and time-tested mechanisms of the financial investment market that set the motion for this collapse, the last thing we need is another intervention by the very entity that screwed this up to begin with.

The problem today is a financial system crippled by the mistakes learned by private institutions 80 years ago. The reason we suffer today is because once again, socialists tried to hijack a free system for their own cause, whether legitimate or not. Let's not make the same mistake again by letting the fools get another crack at it.