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This page was last modified on Wednesday, July 10, 2013 01:28:02 PM 

How the housing market and economy got this bad--An excellent summary by Jerry Morton

 

Sub Prime Chronology and Timeline

1936 John Maynard Keynes publishes "(General Theory of Employment, Interest, and Money.")

Keynes advanced the idea that the nation‟s economic woes could be cured by an activist government.

1937 Franklin Roosevelt initiates Fannie Mae (Democratic Controlled Congress)

a. FDR Keynesians policies prolong the Great Depression. (Steve Forbes page 280)

1970 Richard Nixon initiates Freddie Mac (Democratic Controlled Congress).

a. Nixon proclaimed "We are all Keynesians now". (Steve Forbes Page 279).

b. Most of Nixon‟s Keynesians policies fail. (Steve Forbes page 280).

1977 Congress passed the "Community Reinvestment Act" (CRA). Jimmy Carter

 

a. This addressed alleged discriminations by banks in making loans to poor people and minorities in the inner cities. (Redlining).

b. This act required banks to offer credit to their entire market area and not just wealthier neighborhoods.

c. Real World Lesson is that Governments actions intended to help people often set the stage for even greater hardship down the road. (Page 43. Steve Forbes.)

 

1982 Congress Passed the "Alternative Mortgage Transactions Party Act "(AMTPA).

This allowed non-federally chartered housing creditors to write adjustable-rate mortgages. Among the new mortgages loan types created and gaining in popularity in the early 1980‟s were adjustable-rate, option adjustable-rate, balloon-payment and interest- only mortgages.

1986 Allen Greenspan becomes chairman of the Federal Reserve Ronald Reagan (Democratic Controlled Congress)

 

1989 Congress amended the "House Mortgage Disclosure Act". George H. Bush

 

a. This required banks to collect racial data on mortgage applications. (Democratic Controlled Congress)

1992 Boston Federal Reserve Bank Study. George H. Bush

a. This study alleged systemic discrimination -- (study badly flawed.) This study became the standard for "Government Policy" (Democratic Controlled Congress)

1992 The Department of Housing and Urban Development pressured two government chartered corporations to purchase (Securitize) large bundles of these loans for diversifying the risk, and making more money available to banks in order for them to make further risky loans. George H. Bush

1. Fannie Mae

2. Freddie Mac (Democratic Controlled Congress)

 

1992 Congress passed "The Federal Housing Enterprises Financial Safety and Soundness Act". George H. Bush

 

a. This mandated that Freddie Mac and Fannie Mae buy loans from people of low and moderate incomes. This was done by Henry Cisneros, Clinton Housing Secretary. (Democratic Controlled Congress).

 

1996 Henry Cisneros sets 42% quota of Freddie and Fannie.

2000 Andrew Cuomo, Henry‟s successor, up the amount to 50%

 

This Act and the actions of Freddie Mac and Fannie Mae created a secondary market for the SUB PRIME housing loans

 

1995 Clinton Administration: The Clinton Administration Treasury Department issued regulations tracking loans by neighborhoods, income groups, and races to rate the performance of Banks. Bill Clinton

a. This encouraged statist-aligned groups Like ACORN and Neighborhood Assistance Corporation) to file petitions, threaten, slow, and prevent banks from conducting business. It became a form of legal extortion.

b. This action by groups and banks became known as "SUB PRIME. It allowed pools of money to be available for banks to make loans. (Republican Controlled House/Democratic Controlled Senate

1995 SUB PRIME LOANS: This term was coined at this time. It made available 100% financing to poor and low income people without having to show a credit score, or income documentation. Bill Clinton (Republican Controlled House/ Democratic Demo Controlled Senate)1995 The Clinton Administration Treasury Department established the "Community Development Financial Institutions Fund". Bill Clinton

a. This FUND provided banks with Tax Payer Dollars to encourage even more Risky Loans. (Republican Controlled House/Democratic Controlled Senate)

1. Top Democratic Congressional People involved.

a. Barney Frank (House Representative from MA)

b. Christopher Dodd (Senator from CT)

c. Charles Schumer (Senator from NY)

b. All three and others ignored several warnings of pending disaster as "Being Overstated".

c. All three and others opposed all efforts to force Freddie Mac and Fannie Mae to comply with usual business and oversight practices. (Republican Controlled House/Democratic Controlled Senate)

1995 "DERIVATIVE". Bill Clinton

a. Term coined to identify the by-product of government intervention and social engineering.

b. Outcome: this turned SUB-PRIME mortgages markets into a ticking time bomb that would magnify the housing bust by "ORDERS OF MAGNITUDE"

c. AIG: This group invested heavily into Derivatives. (Republican Controlled House/Democratic Controlled Senate)

 

Bill Clinton’s Three Big Mistakes:

1997: Bill Clinton changed to the amount of taxes a homeowner had to pay on the sale of his or her home, up to 500,000. This change made buying and selling a home for profit the most compelling investment in America by tax standards. (First Big Mistake)

1999: Bill Clinton repealed the Glass-Steagall Act of 1933. The "Act" split the investment banking and brokerages from commercial banks. (Second Big Mistake)

1999: Bill Clinton signed into law the Gramm-Leach-Bliley Act, which not only allowed Citigroup to exist but also eliminated key barriers between bankers, who were supposed to limit risks, and investments bankers, who were supposed to take them. (Third Big Mistake)

September 30, 1999 The Clinton Administration puts pressure on Fannie Mae to ease credit requirements on loans that it purchased from banks and other lenders. The purpose is to expand mortgage loans among low and moderate income people and to satisfy its stock holders who want to maintain the phenomenal growth in profits. This involves 24 banks and 15 markets.

a. Also, banks, thrift institutions, and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrows.

b. Fannie Mae has expanded home ownership for millions in the 1990‟s by reducing down payment requirements.

1. Demographic information is sketchy.

2. Credit ratings are below business standards.

3. Fannie Mae takes on more risk

a. Franklin Raines (CEO and Chairman) tells it is good.

4. Fannie Mae does not lend money to consumers, rather it purchase loans from banks that made the loan on what is called the secondary market.

5. Home ownership explodes.

a. Hispanics up 87.2% between 1993-1998.

b. African-American increased by 71.9%

c. Asian Americans increased by 46.3 %

d. Non-Hispanic Whites increased only 31.2%

6. HUD is investigating allegations of racial discrimination in the automated underwriting system used by Fannie Mae and Freddie Mac to determine credit worthiness of credit applicants.

 

 

7. Franklin Raines earns 100 Million in bonuses from Freddie Mac. Jamie Gorelick earns 75 million in bonuses from Fannie Mae. (Republican Controlled Congress)

 

2001 Federal Reserve Board’s Role in the SUB-PRIME housing bust cannot be overstated. George W. Bush

 

a. The Pacific Research Institute "Robert P. Murphy" explains that the Federal Reserve slashed interest rates starting in June 2001 from 6.5% to 1.0% in 2003.

b. It was the lowest since 1982

c. Alan Greenspan and new fed chairman Ben Bernanke discovered their easy money policy became too inflationary, (they the Fed.), began raising interest rates up from 1.0% in 2004 to 5.25% in June 2006. This resulted in an artificially and inappropriate manipulation of the housing market and contributed to the destabilization of the economy. Now everything is ripe for collapse. (Republican Controlled Congress).

d. 2000 and 2001: The Federal Reserve kept interest rates too low for too long.

e. 2000 and 2001: The Federal Reserve started printing more money, triggering inflation in home values.

Real World Lesson: Thus the damage that occurs when government artificially protects people from the consequences of their high risk behavior Known as "Moral Hazard". The help often exacerbates the problem. Government policies with Freddie Mac and Fannie Mae did exactly this. Government tried to make Capitalism a "FAIR MARKET" rather than letting it be a "FREE MARKET".

The two markets are different and often interchanged. Government does this often and has proven to be wrong every time. (Steve Forbes Pages 40-41.) The Free Market (Capitalism) only works without Government interference. Thus Freddie Mac and Fannie Mae, Both Government Controlled and Subsidized, skewed the Housing Market causing an imbalance worldwide.

The Impact of Freddie Mac and Fannie Mae cannot be overstated. Both were responsible for some 1.6 Trillion Dollars worth of less-than-prime mortgages by 2008 from banks and mortgage brokers, who packaged them as securities and sold them to investors. (Steve Forbes Page 42).

 

Government Mistakes/Disasters:

1. Federal Reserve Monetary Policy (Early 2000) (Alan Greenspan/Ben Bernanke)  

a. Low interest rates

b. "Easy money‟

2. The Government created mortgage giants Freddie Mac and Fannie Mae inflate the balloon even further. (2000-2007)

a. 1.6 Trillion in assets

b. 2004 was the 20 largest corporation in America

c. Second largest financial institution in America

d. Freddie and Fannie Securities rated "Triple A"

3. Government succession of regulatory failures (2000-2007)

a. Regulators refused to back off "Mark-to-Market" or „Fair value" accounting rules. This forced companies to change how profit and loss statements were reported.

b. "Mark-to-Market" encouraged undervaluation of assets. Including perfectly good loans.

c. Hedge Funds smelling blood started shorting financial stocks.

d. The Bush administration did not comprehend the damage caused by "Mark –to-Market".

e. Securities and Exchange Commission removal of the "uptick rule" in July of 2007... The maniacal short selling that helped drive down both insurance and banking stocks was made possible by still another governmental misstep. "Removal of the Uptick Rule". The uptick rule was enacted back in 1938 to stop bear raids that devastated companies in the 1920‟s-1930‟s. (Steve Forbes pages 70-73).

f. Failure of the SEC to enforce "The Ban on Short Selling". This allowed naked or short sellers to sell stock without possessing the shares. Real World Lesson: People blame the private sector during economic disasters. Yet government policy causes the worst instances of economic brutality. (Steve Forbes Page 75).

2002: Sarbanes-Oxley (The Public Accounting Reform and Investor Protection Act).

 

a. This produced a host of economically destructive and unintended consequences.

b. Over 700 prosecutions since 2002 and not one related to Sarbanes-Oxley Act. (Steve Forbes page 181-182).

 

September 11, 2003 Bush Administration submits plan to make a New Regulatory Agency to assume oversight of (The Housing Finance Industry) those mortgage lenders. (Fannie Mae and Freddie Mac). The effort is the most comprehensive reform since the savings and loan crises a decade ago.

a. The agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac.

b. It would have the authority, (now congress has the authority), to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business.

c. The plan is an admission of how broken Fannie Mae and Freddie Mac are.

d. An outside accounting audit (July) showed Freddie Mac manipulated its accounting to misled investors and Fannie Mae does not adequately hedge against rising interest rates.

e. Congressional resistance followed the plan.

1. The National Association of Home Builders denounced the plan.

2. Congressional Democrats denounce the plan.

 Barney Frank (House Representative from MA.) Ranking Democrat on the Financial Services Committee. (These two entities are not facing any kind of financial crises). Congress takes no action. (Republican Controlled House/Democratic Controlled Senate) 2004

 

Government Investigations on Fannie Mae and Freddie Mac. They found massive fraudulent bookkeeping at Fannie Mae. Yet the congress held no hearings, no one went to jail, and business continued as usual. More loans to unqualified buyers. (Republican Controlled Congress)

 

Real World Lesson: Real World Experience suggests that "Free Markets" encourage less corruption. Government control "Fair Markets" produces more wrong doing and more corruption. (Steve Forbes Page 44).

March 2008: Bear Sterns, The brokerage house that had pioneered the securitization of mortgages, failed.

September 15, 2008: Lehman Brothers failed. Bush administration let it go into bankruptcy.

September 2008 The Government takes over the foundering "Federal National Mortgage Association" (Known as Fannie Mae). Thus ending a 9 year warning of pending collapse. (Democratic Controlled Congress)

 

 2008-2009 Troubled Asset Relief Program (TARP) (787 Billion) George W. Bush

a. TARP originally enacted so government could buy risky or non performing loans from financial institutions. But the mission changed within weeks.

b. The government began using the money to buy equity positions in financial institutions, presumably to inject cash directly into these entities.

c. Oversight panel cannot account for 350 billion of the TARP money.

d. 495 banks and other institutions have accepted TARP funds. (As of March 11, 2009).(Dick Morris Page 76)

e. Federal Reserve provide assistance to:

1. Bear Sterns 30 billion

2. AIG 150 Billion

3. Fannie Mae and Freddie Mac 200 Billion

4. Citigroup 20 Billion

5. Commercial Paper Markets 245 Billion

6. Money Markets 540 Billion

f. According to Bianco Research president "James Bianco", The federal bailout far exceeds nine of the costliest events in American History.

1. Marshall Plan 12.7 Billion 115.3 Billion (AFI)

2. Louisiana Purchase 15 million 217 Billion(AFI)

3. Race to the Moon 36.4 Billion 237 Billion (AFI)

 

4. S&L Crises 153 Billion 236 Billion (AFI)

5. Korean War 54 Billion 454 Billion (AFI)

6. The New Deal 32 Billion (est.) 500 Billion (est.) (AFI)

7. Invasion of Iraq 551 Billion 597 Billion (AFI)

8. Vietnam War 111 Billion 698 Billion (AFI)

9. NASA 416 Billion 851.2 Billion (AFI)

g. George W. Bush signed the 152 Billion Economic Stimulus Act (2008)

h. George W. Bush signed the 300 Billion Housing and Economic Recovery Act (2008)

i. Barak Obama and Congress have signed and started the 2009 American Recovery and Reinvestment Act (Approximately about 1 trillion). (Democratic Controlled Congress)

Thursday December24, 2009: The Federal Housing Finance Agency approved Michael Williams (Fannie Mae CEO) and Charles Haldeman (Freddie Mac CEO) pay bonus of 4 million and 6 million according to the Wall Street Journal. (Democratic Controlled Congress)

 

March 17, 2009: Chris Dodd (Chairman of the Senate Banking Committee) criticized the bonus given to AIG Group Inc. Suggest taxing them.

 

a. Wrote the language into the initial bill in the first place, but denied he did it.

b. Dodd received 103,000 dollars in political campaigns from AIG.

c. March 18, 2009 Dodd reluctantly admits writing in the AIG bonus language.

d. Dodd total campaign funds from AIG is 238,418.

 

February 12, 2010: Alan Greenspan claims he didn‟t cause the Housing Bubble. He claims it was a global meltdown. Not everyone agrees. Most think the weak Fed monetary policies were a major cause which was under Greenspan‟s control. (Democratic Controlled Congress)

2010 Judicial Watch obtains documents under "The Freedom of Information Act" that shows Senior Bush Administration Officials repeatedly warned congress (2003-2006) of the shenanigans at Fannie Mae and Freddie Mac. The documents prove that congress took no action on any of these warnings. (Republican Controlled Congress in 2004)/(Democratic Controlled Congress in 2010)

May 3, 2010: Fed Transcript: Bernanke soft on Inflation.

 

This Article says Ben Bernanke Acknowledges a missed call about the path of inflation. In June of 2004 Bernanke finally threw in the towel at a meeting of the Feds policy setting Federal Open Market Committee citing "Rules of Forecasting" borrowed from former Fed colleague Laurence Meyer. The article also shows Bernanke fully endorsed the gradual rate-raising pace undertaken by the Fed that many now believe allowed a dangerous house price bubble to inflate. (Money new.com; 5/3/2010).

 

Sources:

1. Liberty and Tyranny (Mark R. Levin) Pages 68-73.

2. Catastrophe (Dick Morris and Eileen McGann) Pages 76, 81-83, Appendix TARP recipients. Notes pages 338-339.

3. Snopes.com; Reprint of September 30, 1999 Subprime article."Fannie Mae Eases Credit To Aid Mortgage Lending". "Credit Canard".

4. MoneyNews .com: Printed article "Fannie, Freddie CEO‟S May Still Get Millions in Pay"

5. Judicial Watch News letter: Stop the Cover up of the Fannie Mae and Freddie Mac Scandals." 2010.

6. How Capitalism will Save us" (Steve Forbes and Elizabeth Ames); Pages 40-44, 69-75,176-184, 279-280.