For more than a
decade, President Bush and/or Congressional Republicans have controlled
Washington. During these Bush-McCain Republican years, Americans have seen
their dreams of homeownership and a secure retirement gambled away by reckless
economic policies that put Wall Street and special interests ahead of middle
class families. Not only did the Bush Administration ignore the warning
signs about risky mortgages, they encouraged the very practices that are at the
heart of the current economic crisis and stood in the way of efforts that would
have prevented the crisis.
The
epicenter of the current market turmoil has been caused by risky mortgages that
the Bush Administration failed to regulate. Beginning in 2000, Federal Reserve Governor Edward Gramlich warned that
predatory lending would "jeopardize the twin American dreams of owning a
home and building wealth." (1/18/02) In 2006, Moody's Economy.com warned
that "problems in the mortgage-backed market would spill over into the
rest of the U.S. fixed income and stock markets... The turmoil in the U.S.
financial markets would immediately reverberate around the world, engendering a
global financial event." (Moody's Economy.com, October 2006) Moreover,
the Federal Reserve staff observed a prolonged loosening of standards for
mortgages starting in late 2003. (Federal Reserve staff briefing for Senate
Banking, Housing, and Urban Affairs Committee staff, 3/20/07)
Republican-appointed
regulators turned a blind-eye to the early warning signs of an unstable mortgage
market. Instead of heeding the
warnings and working with Congressional Democrats to protect American
consumers, regulators ignored these warnings, failed to enforce existing
protections, and actually encouraged Americans to take out risky mortgages.
·
No oversight from Bush
Administration. "There was a
lack of regulatory oversight during the Bush administration ... that's one of
the reasons we are in the mess that we are in... Many bad mortgage loans and
other loans were made in part because regulators were not empowered and were
not playing their proper role." (Mark Zandi, NPR, 9/16/08)
· Former Federal Reserve Chairman, under the Bush
Administration, encouraged risky mortgages -- and just "didn't really get
it." In 2004, former Federal
Reserve Chairman Alan Greenspan continued to encourage higher-risk mortgages:
"American consumers might benefit if lenders provided greater mortgage
product alternatives to the traditional fixed-rate mortgage... The traditional
fixed-rate mortgage may be an expensive method of financing a home."
(2/23/04) Later, when "[a]sked why he didn't speak out, if he knew these
practices were going on or even suspected that there was something illegal or
shady, Greenspan admits, 'While I was aware a lot of these practices were going
on, I had no notion of how significant they had become until very late. I
didn't really get it until very late in 2005 and 2006.'" (CBS News,
9/13/07)
· Bush regulators encouraged risky mortgages despite
warnings from Senate Democrats. Senators
Dodd and Sarbanes warned Chairman Greenspan about the dangers of promoting the
use of nontraditional mortgages: "Adjustable rate mortgages, for a low income
constituency, [are] a nightmare." (Senator Dodd, Senate Banking Committee
hearing, 2/24/04) "[The Federal Reserve] is pushing adjustable rate mortgages...and
throwing this risk back on the consumer...in effect, downing the 30 year fixed
rate mortgage and pushing up the adjustable rate mortgage." (Senator Sarbanes,
Senate Banking Committee hearing, 2/24/04)
· Bush regulators to blame for spike in risky mortgages. "When consumers hear[d] from a Fed chairman
that it makes little sense to take on fixed rate debt...[n]ot by coincidence, the
adjustable rate portion of newly originated mortgage debt shot up... And should
asset-dependent, saving-short, overly indebted American consumers feel at risk
if the Fed assures them that there is no housing bubble?" (Morgan Stanley
Chief Economist Stephen Roach, 4/22/05)
Instead of protecting Americans' savings, President Bush and his Republican
allies promoted Social Security privatization, placing not only homeownership
at risk, but retirement security at risk. "You will be able to achieve the objective of getting a better rate
of return on your money and have more money available for you on retirement
than if it had sat in the Social Security trust." (President Bush, 2/4/05)
"[I]t's not risky." (President Bush, 1/11/05)
· "Over time, the securities markets are the best,
safest way to build substantial personal savings." (Vice President Cheney,
1/13/05)
· "As part of Social Security reform, I believe that
private savings accounts are a part of it - along the lines that President Bush
proposed." (Senator McCain, Wall Street Journal, 3/3/2008) "Without privatization, I don't
see how you can possibly, over time, make sure that young Americans are able to
receive Social Security benefits." (Senator McCain, 12/04)
Bush-McCain
Republicans "denied, denied, denied" the growing economic and housing crisis
until it was too late.
· In late 2007, President Bush told Americans that the
economy was stable: "[I]t looks we're headed for a soft landing."
(White House morning press briefing, 8/9/07)
· Treasury Secretary Henry Paulson played down the
subprime market turmoil, saying the economic fallout will "be painful to some
lenders, but it is largely contained." (MarketWatch, 3/13/07) Later that year,
still, Secretary Paulson "did not see anything that caused him to reconsider
his view that the economic damage from the housing correction was 'largely
contained.'" (Reuters, August 1, 2007)
· Federal Reserve Chairman Ben Bernanke maintained that
"troubles in the subprime sector on the broader housing market will
likely be limited." (Forbes, 5/17/07)
· As late as September 2008 and despite all evidence to
the contrary, Senator John McCain argued that "[t]he fundamentals of our
economy are strong." (9/15/08)
Arguing
that they had it under control, the Bush Administration fought Congressional
Democrats' efforts to address the housing crisis. "Treasury Secretary Henry Paulson said U.S.
financial markets are emerging from the credit crunch and that 'the worst is
likely to be behind us'... Mr. Paulson's comments, made in an interview
Tuesday, reflect Treasury's view that the administration and the Fed have
already taken steps necessary to quell the situation. Bolstering that notion,
the White House Tuesday threatened to veto [housing] legislation..." (Wall
Street Journal, "Paulson Sees Credit Crisis Waning," 5/7/08)
The
Bush Administration repeatedly blocked Government Sponsored Enterprises (GSE)
reform. In the 108th Congress, the
House Financial Services Committee reached an agreement to markup legislation
originally scheduled for October 8, 2003. However, on October 7, 2003, the
Treasury Department announced its opposition to this agreement, killing
progress on GSE reform. (Congressional Research Service, "Improving the
Effectiveness of GSE Oversight: Legislative Proposals in the 108th Congress.")
In
the 109th Congress, Democrats supported bipartisan legislation
drafted by the Republican Chairman of the House Financial Services Committee,
Representative Oxley, which would have given the new GSE regulator broad
authority over setting capital requirements and limiting portfolio size. This
bill passed the House 331-90. Senate Democrats supported and offered the bill
in the Senate, but the Bush Administration opposed it and the bill did not
receive Republican support in the Senate. According to Mr. Oxley, the White
House gave Congress and the GSE reform legislation "a one-finger salute."
· "'We missed a golden opportunity that would have
avoided a lot of the problems we're facing now, if we hadn't had such a firm
ideological position at the White House and the Treasury and the Fed,' Mr.
Oxley says." (Financial Times, 9/11/08)
· GSE reform "wasn't a priority of this
Administration's. They quite frankly put it on the back burner. And now we
see what we have." (Douglas Holtz-Eakin, NPR, 9/16/08)
Despite
the assertions of Bush-McCain Republicans, GSEs did not ignite the subprime
fire, they were swept up in a fire started by unregulated financial
institutions. Even though they
blocked GSE Reform, Bush-McCain Republicans are now attempting to deflect blame
for the nation's mortgage mess by asserting erroneously that GSE's, alone, are
at fault. In truth, the Bush Administration's failure to regulate financial
institutions on Wall Street is a root cause of our current economic crisis. "Wall
Street had recently jumped into the market for risky mortgages. Firms like Bear
Stearns, Lehman Brothers and Goldman Sachs had started bundling home loans and
selling them to investors -- bypassing Fannie... In the previous year, Fannie
had already lost 56 percent of its loan-reselling business to Wall Street and
other competitors." (New York Times, October 5, 2008)
Republican-appointed
regulators failed to prevent unsafe and unsound practices at the GSEs. If indeed GSEs are partly to blame for the mortgage
crisis, President Bush appointed or retained every financial regulator in
charge of overseeing the GSEs, banks, and the securities markets since 2001,
long before subprime mortgage usage began to explode. Moreover, in addition to
controlling the executive branch, Republicans have controlled both houses of
Congress charged with oversight of financial regulators during nearly every
year of this period. Further, the GSE regulators charged with ensuring safety
and soundness at the Office
of Federal Housing Enterprise Oversight (OFHEO) and the Department
of Housing and Urban Development (HUD) were also appointed or retained by
President Bush.
To save themselves, Bush-McCain
Republicans have erroneously blamed efforts to expand homeownership to low- and
moderate-income Americans for the credit crisis. In desperation to escape responsibility and
accountability for years of regulatory neglect and fiscal incompetence,
Bush-McCain Republicans have shamefully attempted to offer the Community
Reinvestment Act (CRA) as a scapegoat for the nation's economic turmoil. The
CRA is not to blame, however, because -- as it is acknowledged by the Bush
Administration's own Federal Reserve -- the CRA only requires safe and sound
lending practices and actually penalizes predatory and reckless lending.
· "The Community Reinvestment Act is intended to
encourage depository institutions to help meet the credit needs of the
communities in which they operate, including low- and moderate-income
neighborhoods, consistent with safe and sound operations.... The CRA does not
require institutions to make high-risk loans that jeopardize their safety. To
the contrary, the law makes it clear that an institution's CRA activities
should be undertaken in a safe and sound manner." (Federal Reserve Board
website, available here.)
· The CRA did not require mortgage companies to offer
loans for no money down, or relax underwriting standards, or encourage mortgage
brokers to aggressively seek out new markets. CRA penalizes banks for reckless, irresponsible, and otherwise
predatory lending. Subprime lending grew faster in institutions that did
not have to meet the conditions of the CRA. (National Community Reinvestment
Coalition)
Moreover, the majority of subprime loans were made by
institutions not covered by the CRA. The CRA has been in place since 1977 -- long before subprime mortgages at the heart of the
current crisis were ever made. Most subprime loans were originated and
securitized by non-CRA financial institutions such as non-bank mortgage
companies and investment banks. Only about 25 percent of subprime loans were
made by institutions covered by CRA.
Bush-McCain
Republicans were openly hostile to sound regulation of financial markets by the
Securities and Exchange Commission (SEC), opting instead to left Wall Street
regulate itself.
·
Former Federal
Reserve Chairman Greenspan argued against regulation of the risky securities
market. The derivatives
market has exploded from $106 trillion in 2002 to $531 trillion today -- 38
times the size of the U.S. annual economic output. Instead of increasing
regulatory vigilance over this market, the Federal Reserve argued against
regulation. "[D]erivatives have been an extraordinarily useful vehicle to
transfer risk from those who shouldn't be taking it to those who are willing to
and are capable of doing so...[S]hould these be regulated, well, indeed for the
United States they are obviously regulated to the extent that banks, being the
crucial creators of these derivatives, are regulated by the banking agencies,
but not beyond that. The reason why we think it would be a mistake to go
beyond that degree of regulation is that these derivative transactions are
transactions amongst professionals... one major bank will know far more about its
customer...than we could conceivably know as regulators." (Alan Greenspan, Senate
Banking Committee Hearing, 7/16/03)
·
The Bush
Administration and Congressional Republicans understaffed and underfunded key
regulatory offices at the SEC. In 2004, the
Office of Risk Assessment (ORA) was established to "anticipate, identify, and
manage risks, focusing on early identification of new or resurgent forms of
fraud and illegal or questionable activities." Unfortunately, SEC Chairman Cox
left the Directorship of the ORA vacant from December 12, 2006 until February
28, 2008. Moreover, the SEC only had two employees working under Chairman Cox
despite the Fiscal Year 2006 budget request to eventually hire fifteen
full-time staff. (Securities and Exchange Commission, available here)
Democrats are fighting
for increased funding and manpower at the SEC to police the financial markets.
Democrats asked
appropriators for a 5% increase in FY 2009 SEC funding. In May, 2008, ten
Democrats on the Senate Banking Committee wrote a letter to the Chair and Ranking
Member of the Senate Appropriations Subcommittee on Financial Services and
General Government asking for a $50 million increase (5.5%) above the
President's SEC budget request. (Letter to Senators Durbin and Brownback from
Senate Banking Democrats, 5/7/08) The letter notes that the President's
proposal, when adjusted for inflation, is effectively a budget freeze at a time
when the SEC is dealing with the explosion of complex financial securities and
the fallout of the subprime mortgage crisis. The letter also references an
Op-Ed by former SEC Chairmen Donaldson, Levitt, and Ruder, called "Muzzling the
Watchdog," which says that the SEC "lacks the money, manpower, and tools it
needs to do its job." (New York Times, 4/29/08) Because of the Senate
Democrats' action, the Senate Appropriations Committee passed a Financial
Services Appropriations bill with a $25 million increase over the President's
budget request. (S.3260, Financial Services and General Government
Appropriations Act, 2009)
In the face of Republican
obstructionism, Democrats
have worked to protect Americans from risky mortgages.
· Democrats enacted a law to protect Americans from
abusive mortgages. In 1994, under a
Democratic Congress and Democratic White House, Congress enacted the Home
Ownership and Equity Protection Act ("HOEPA"), which requires the
Federal Reserve to prohibit unfair and deceptive lending practices by both
federally- and state-regulated mortgage lenders. HOEPA requires the Federal
Reserve to issue regulations to prohibit abusive and deceptive practices. It
took the Fed 14 years to finally implement these regulations, after the
Senate Banking Committee urged them to do so through numerous hearings and
several letters.
· Democrats fought to protect homeowners from risky mortgages. Since 2000, Senators Sarbanes, Schumer, and Dodd
have repeatedly introduced legislation to protect against predatory lending.
None has ever had a Republican cosponsor in the Senate.
· Bush Republicans blocked housing legislation as the
crisis deepened. Even after reaching
a bipartisan agreement on the Foreclosure Prevention Act, and its
successor, the Housing and Economic Recovery Act of 2008 (HERA) in June,
some Republican Senators delayed the final passage of the legislation for
weeks. Between the two bills, Republicans conducted six filibusters to prevent
the passage of this legislation. In addition, the White House issued numerous
veto threats against both bills.
· Democrats enacted housing legislation to preserve
homeownership and reform the GSEs.
The HERA legislation enacted in July created a foreclosure rescue program (HOPE
for Homeowners); expanded the FHA program to reach many more borrowers;
provided funds for foreclosure prevention counseling and for local governments
to buy and rehab foreclosed properties. It also created a much stronger
regulator for Fannie Mae, Freddie Mac, and the Federal Home Loan Banks (GSEs).