The whole thing was made inevitable by the 1977 Community Reinvestment Act, which was supposed to provide credit, including home ownership opportunities to underserved populations and commercial loans to small businesses, and enforced by FDIC, OCC, OTS, and FRB. Under the act, every lender is evaluated to determine if it has met the credit needs of its entire community, with the government using the evaluation to decide whether the lender should be premitted to apply for deposit facilities, including mergers and acquisitions. That's a nice sword of Damocles to hold over a bank. In 1995, the Clintons pushed the regulators' to look into institutions' performance in helping to meet community credit needs.
The Clinton Administration's regulatory revisions of January 31, 1995 substantially increased the number and aggregate amount of loans to small businesses and to low- and moderate-income borrowers for home loans. The revisions allowed lenders of subprime mortgages to issue securities. The Bush administration tried to institute changes to the oversight, but was opposed by Democrats, including Barack Obama. My favorite quote, and one that will haunt the Dems (or would if there were an MSM outlet that would publicize it) came from Barney Frank
, who is now trying to set himself up as a subject matter expert on the banking crisis:
"These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis, the more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing."
Naturally, this being a Democratic scandal, they are blaming the Republicans for not keeping them from screwing up. Oh, and no Democratic scandal would be complete without a certain amount of Clinton cronyism. Two Clintonistas ran Fannie Mae into the ground while lining their pockets: Franklin Delano Raines and Jamie Gorelick (who had no previous training nor experience in finance, but was still appointed Vice Chairman of FNMA from 1997 to 2003). Her compensation for those six years was over $26 million, despite a $10 billion accounting scandal.
Speaking to Business Week in the March 25, 2002 issue, Gorelick said, "We believe we are managed safely. We are very pleased that Moody's gave us an A-minus in the area of bank financial strength -- without a reference to the government in any way. Fannie Mae is among the handful of top-quality institutions."
And then there's Franklin Delano Raines.
The Office of Federal Housing Enterprise Oversight (OFHEO), the regulating body of Fannie Mae, accused him of shifting losses (to the tune of $9 billion) so that he and his fellow executives could snag bonuses. They filed suit against him in 2006 in order to recover some or all of the $50 million in payments made to Raines based on the overstated earnings, with civil charges demanding $110 million in penalties and $115 million in returned bonuses from Raines and two other executives, J. Timothy Howard, Fannie's former chief financial officer, and Leanne G. Spencer, Fannie's former controller. The final settlement was for fines of $3 million (paid by Fannie's insurance policies) a donation of the proceeds from the sale of $1.8 million of his Fannie stock and to give up stock options (which have no value) and giving up $5.3 million of "other benefits" said to be related to his pension and forgone bonuses, which the Wall Street Journal called "paltry settlement." In 2003 alone, Raines's compensation was over $20 million. Fannie Mae also paid a record $400 million civil fine. Meanwhile, Raines received loans for over $3 million while CEO of Fannie Mae below market rate loans from Countrywide Financial.
And, the icing on the cake, care to guess what Raines is doing now? You got it! He's one of Barack Obama's chief economic advisers.
Think that this information just might make for an interesting debate? Hope that John McCain is briefed up on it.