Tag Archives: Dodd

FANNIE and FREDDIE, FRANK and DODD

Central to the recent financial industry troubles are two Government Sponsored Entities (GSE’s) affectionately known as Fannie and Freddie. The formal first name for each is “Federal”, befitting their intimacy with federal folks like Frank and Dodd.

Both of these governmental failures (Fannie and Freddie, not Frank and Dodd) were conceived and created by Congress. They were not the progeny of entrepreneurial private industry.

As one of their own, Congress exempted them from the federal banking regulations applicable to the private sector. The Senate and House banking committees, recently chaired by Frank and Dodd, were given the responsibility for oversight of these, the legislatures own creations.

A shoe store buys shoes at one price and sells them for more. In like manner, F&F borrow money at one price and lend it for more. Their cost to borrow is dependent upon their credit rating. Their credit rating was set by agencies they hired and paid to set their credit rating. The rating agencies decided AAA would be appropriate. Is a picture beginning to form?

A sub-prime loan is by definition one of low creditworthiness. The government was mandating the making of loans to people ill-equipped to meet the payments. In 1999, 42% of mortgage loans were sub-prime. In 2000 Andrew Cuomo, appointed as Secretary of Housing and Urban Development by Bill Clinton, mandated a quantum leap in the number of sub-prime loans that federally chartered banks must award. Forty-two percent was not enough bad loans to satisfy him.

Chairman Greenspan and the Federal Reserve kept interest rates lower than they might have been, which made borrowing attractive. It was generally thought the loans were guaranteed through F&F. Traditional lenders, backed, encouraged, even intimidated by the government enthusiastically joined the fray. The two GSE’s approved loans and provided the money with near total disregard for the ability of the borrower to pay. At the height of the bubble these Government Sponsored Entities were providing mortgage money to applicants called NINJA borrowers, no income, no job, no assets.

Eventually the bubble burst, as all bubbles do. Barney Frank said, read the fine print the loans are not guaranteed.

This was a government sponsored crisis. Don’t ever, ever let anyone convince you this fiasco was the result of anything, anything at all, other than government interference with the free market system.

FRANK-DODD ACT PART TWO, WHAT IT DOES AND DOESN’T DO

We have written that the Act is vague in many respects. However, some of it is specific and some of it is good. For example, it puts an end to “Liars Loans” also called NINJA loans because you could get a mortgage with No Income, No Job and No Assets. Also good is the provision known as the Volcker Rule that puts limits on how far a bank can go in trading in derivatives and swaps for their own account, i.e, how much risk they may take in search of trading profits.

Anyone who listens to the excellent Howard Clark show knows there is need for reform in the credit card industry. We have no details, but the Act purports to bring needed reform here. Sounds good.

What the Act fails to do, and fails completely, is to fulfill its stated purpose. That is to take measures to prevent a recurrence of the financial collapse from which we are all still suffering. Can anyone deny the primary cause was too many sub-prime loans? Fannie Mae, Freddie Mac, Barney Frank, Franklin Raines, Andrew Cuomo and Jamie Garelick were the major players in designing, building, promoting and protecting the house of cards whose inevitable collapse created the crisis. It would be naïve to expect Barney Frank to censure Barney Frank but not to reform Fannie and Freddie is an unmitigated disgrace.

Space here does not allow a complete analysis of the causes and contributors to the crisis and the recession. Fortunately, some excellent, well written articles on the subject were published at Town Hall a year and a half ago. I urge you to click the blue links and read them.

Mortgage Mess Blame Game.

The Day the Democrats Brought Down the World

Pelosi’s Gall

(Confession: I wrote them)

Bob B

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THE FRANK-DODD ACT

The name of the new package of financial regulations is The Frank-Dodd Act. Given what we know about Barney Frank, there must be more than one good joke there, but we have decided to let it be. We are not going to sully this site by saying things like ‘In naming the law, they were wise to use a dash and not an ampersand’.

By the time you read this, the bill may have been signed into law but it will not yet have been written. We say this because much of it is vague, leaving the de facto law up to the regulators to determine. For example, The Act requires each federal agency to establish an Office of Minority and Women Inclusion which is to be responsible for all matters relating to diversity in management, employment and business activities. What does that mean? What is the law? It is not yet written. The law will be, what the agency yet to be formed, says it will be.

The Act establishes a Bureau of Consumer Financial Protection with the power to close down a business that the Bureau determines poses a risk to consumers due to some measure of financial instability, instability as determined by the Bureau. In this regard one might say there is no law to observe, no law you must break for the Bureau to be able to close you down.

“No one will know until this is actually in place how it works”. Now there’s a profound truth coming straight from a Democrat, the man who wrote the bill, a man who knew whereof he spoke.

This law is to the financial industry, what Obamacare is to the health-care industry – an enormous expansion of government control over a significant section of the American economic system. It is ingenious to the extent that it empowers bureaucracies to govern by rule change without the need for legislative action.

Both The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act (all one law known as Obamacare) and the Frank-Dodd Act are major advancements in Obama’s march toward the goal of a grand centrally planned state.

Bob B<!– AddThis Button BEGIN –>

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THE DAILY OUTRAGE

The crescendo of Black Sunday is still ringing in our ears as we return to the routine of an outrage a day from Obama and his minions. Today we have a bonus, two outrages. It is only 6AM so there may be more. (No, I am not wearing pajamas.)

First, pay czar Ken Feinberg, the one who cut pay by 50% for executives at 7 companies last year, has announced he is now going to look at 419 corporations to see if any of their executives are being paid more than he thinks they should be paid. That is the kind of thing czars do.

I didn’t know we bailed out that many companies, or is it we no longer need an excuse to control private industry? Feingold does not have the power of law behind him, yet. But czars are enforcers of rule by fiat, laws are not required. Feingold has four means at his disposal, coercion, corruption, intimidation and polite requests. He may not use all four.

The second outrage is from Chris Dodd who is employing a scorched earth policy of burn what is still standing as you retreat. By now we all know that a sub-prime mortgage is a loan to someone with less than prime (euphemism for “bad”) credit. We also know tragedy struck when this house of cards fell, as one day it had to do. Who built this house of cards? The foundation was a bipartisan effort called the Community Revitalization Act. When it got out of hand Republicans blew a warning whistle but Democrats yelled, Higher! Higher!

The charge for more and more sub-primes was led by Chris Dodd, Barney Frank, Andrew Cuomo, facilitated by Fannie and Freddie with ACORN, Franklin Raines and Maxine Waters cheering it all on. That is until Raines was indicted and found guilty of fraud. To prevent this from happening again Dodd wants to re-structure the private sector. If that works I suggest we regulate the police department to stop criminals from repeating their crimes.

Bob B

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