FedSoc Blog

Frank Fesses Up: Gov’t Shares Blame For Financial Crisis


by Publius,
Posted September 27, 2013, 11:10 AM

Paul Sperry at Investor's Business Daily writes:

In a startling admission, the architect of the biggest regulatory hit on Wall Street since the New Deal now agrees with critics that Washington deserves as much blame for the financial crisis as Wall Street.

Former Democratic Rep. Barney Frank, co-author of the Dodd-Frank Wall Street Reform and Consumer Protection Act, said in a recent forum on the crisis that the government — through its decades-long national homeownership campaign and affordable housing goals — "propelled" lenders and investors to excesses they would not have otherwise gone to in the absence of such political incentives.
Frank, former chairman of the House Financial Services Committee, made the stunning remarks at the close of a 90-minute panel discussion hosted by the American Action Forum and held earlier this month in Washington.

The forum, "AftertheFall:FiveYearsAfterLehman'sCollapse,WhereAreWeNow?", http://www.c-span.org/Events/Barney-Frank-Douglas-Holtz-Eakin-Look-Back-at-Financial-Crisis/10737441405-1/was sparsely attended, with little media coverage. Frank, typically, started off calling Wall Street bankers "immoral," and subprime lending and securitization "criminal."

But soon, Frank dropped several unexpected bombshells in response to questioning by the moderator, CNBC anchor Steve Liesman.
Asked about the government's affordable housing goals compelling Fannie Mae and Freddie Mac before the crisis to devote more than half their portfolios to riskier nonprime mortgages for low-income borrowers, Frank blurted out: "No more goals, no more telling the private sector" how to invest in the housing market.

"Barney," Liesman asked, "are you suggesting that the goals of Fannie Mae and Freddie Mac, the concept of promoting homeownership, was something that contributed to the crisis?"

"Yes, it was, very much so — and Bill Clinton did it, and George Bush did it, everybody did it," Frank said.
But the former Boston lawmaker was quick to claim he wanted to build affordable "rental" housing for the poor, not encourage low-income Americans to buy homes, and bucked the government's homeownership drive.
"I've been critical of that," Frank insisted. "Homeownership is a good thing (but) it should not be the way that poor people build up equity."
But that's not what he said before the crisis.

In a series of House banking panel hearings in 2003, for instance, he applauded Fannie and Freddie for meeting affordable housing goals, and called "exaggerated" fears the mortgage giants were overexposed to subprime loans.

Frank also strenuously opposed GOP efforts to reform Fannie and Freddie, because he thought it would curtail their "mission" to provide mortgages to low-income borrowers. (His committee oversaw banking agencies including HUD, Fannie's and Freddie's regulator.)
"I do not want the same kind of focus on safety and soundness that we have in OCC (Office of the Comptroller of the Currency) and OTS (Office of Thrift Supervision)," Frank said in a Sept. 25, 2003, hearing. "I want to roll the dice a little bit more in this situation towards subsidized housing."

In 2007, on the eve of the crisis, he even co-sponsored a bill that would have compelled government-sponsored Fannie and Freddie to expand the supply of affordable mortgage credit .
Returning to the affordable housing goals, Liesman asked, "If these government incentive programs created distortions (in the housing and mortgage markets), would Wall Street have done quite as badly as it did in the absence of the political incentives that were out there?"
Said Frank: "Qualitatively, yes; quantitatively, maybe no. They had been pushing that way. Fannie and Freddie may have helped them do it more."

In fact, Fannie and Freddie led the subprime securities market, holding over 40% of it in 2004. When the mortgage crisis hit in 2008, 74% of U.S. subprime and other low-quality loans were on the books of government agencies, chiefly Fannie and Freddie, says former chief Fannie credit officer Edward Pinto.

After Liesman said, "I think ... we're kind of in agreement that the government sector propelled the private sector to some of its excesses," Frank conceded: "Yeah, they started it, and Fannie and Freddie were propellants. And the rhetoric of homeownership .. ."
Liesman followed up by questioning Washington's justification for punishing Wall Street with onerous new regulations, enforced by an army of new bank examiners and investigators deployed by a powerful new credit watchdog agency authorized by Dodd-Frank—the Consumer Financial Protection Bureau.

"If the government political process propels the private sector to excess it wouldn't otherwise have gone to," he asked, "is Dodd-Frank then too tough on Wall Street and somewhat, in parts, unnecessary?"

Frank scrambled to protect his namesake law.

"Nothing we did penalized them (Wall Street bankers) for Fannie and Freddie's mistakes," he said, adding there's "really nothing (in the new law) that tells the private sector what to do."

He also claimed to have put Fannie and Freddie "out of business." But the toxic twins are still in business, unreformed by Dodd-Frank. And the government's affordable housing goals are still in force, pushing Fannie and Freddie and the FHA making risky nonprime loans.
Though Frank blamed the government's affordable housing goals and homeownership campaign, he refused to implicate the Community Reinvestment Act in the mortgage crisis.

President Clinton tightened enforcement of the anti-redlining law in 1995, forcing banks to expand home loans in low-income urban neighborhoods in the years leading up to the crisis. Frank lobbied to expand it even further.

"I agree that the government (contributed to the crisis) — and it was Fannie and Freddie and it was the Clinton administration and the Bush administration and members of Congress on homeownership — but I think all of us agree that ... . the (CRA) was no problem."
Many economists, in fact, do not agree. A recent study by the National Economic Research Bureau found that the CRA led to "a clear pattern of increased defaults for loans" made by covered banks in the run-up to the crisis.

More, the 1990s law authorizing HUD to enforce affordable housing goals at Fannie and Freddie — a law that Frank backed—mandates that Fannie and Freddie "assist insured depository institutions to meet their obligations under the Community Reinvestment Act."

In 2000, HUD ordered the mortgage twins to ramp up their CRA underwriting. In turn, Fannie and Freddie executives in the 2000s solicited originators for more and more CRA loans, which later turned toxic. Thus, many argue that the CRA was in fact at the heart of the crisis.
Frank at one point cracked about getting a bumper sticker for his car that says: "Things Would Have Sucked Worse Without Me."
He might need more than a bumper sticker to convince people of that.

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