Housing Bubble, Financial Crisis – What Happened, Who is Responsible

“I don’t mind cleaning up the mess that some other folks made, that’s what I signed up to do”Barack Obama (D-IL), October 20, 2009

“I think that the responsibility that the Democrats had may rest more in resisting any efforts by Republicans in the Congress, or by me when I was President, to put some standards and tighten up a little on Fannie Mae and Freddie Mac.”Former President Bill Clinton (D-AR), September 25, 2008

Like a lot of my Democratic colleagues I was too slow to appreciate the recklessness of Fannie and Freddie. I defended their efforts to encourage affordable homeownership when in retrospect I should have heeded the concerns raised by their regulator in 2004. Frankly, I wish my Democratic colleagues would admit when it comes to Fannie and Freddie, we were wrong.”Congressman Artur Davis (D-AL) , September 30, 2008


President Obama is using the financial crisis to make Americans doubt themselves, their values, and the very system they had believed enabled their specialness.  In the vacuum of this doubt, he is moving his agenda to radically alter the fiber of what it means to be American. – TJ Hancock (American)


Government Sponsored Enterprises: The Heartbeat of the Financial Crisis


Fannie, Freddie … Somebody’s aunt and uncle caused the financial crisis?

Government Sponsored Enterprises (GSEs) essentially control the mortgage market.  Fannie Mae, Freddie Mac and Ginnie Mae are the three main GSEs. When someone gets a mortgage from a bank or mortgage broker, that lender can hold the mortgage, but more often sells it to a GSE. The ability to sell the mortgage generates much of the mortgage volume we see today. Brokers can not hold mortgages, and banks can not tie a majority of their funds up for roughly 30 years.  When you originate or refinance a mortgage, ask about what role Fannie Mae plays in your obtaining to obtain the loan, you are very likely to hear that it is quite significant.  Today, Fannie and Freddie alone either own or guarantee roughly more than half of the nation’s outstanding mortgage total (the ratio would be higher if not for estimated private arrangements).  Among new originations, government or government “sponsored” organizations have a hand in 9 of 10, according to the Wall Street Journal.

GSEs get the money to buy mortgages from selling bonds to investors…you, me, mutual funds, etc. Because GSEs are linked to the US federal government, which has the safest credit rating in the world (currently), investors buy those bonds while demanding low interest payments in return. Someone who gets a mortgage pays much higher interest rates than GSEs do. GSEs therefore raise money at low rates and purchase mortgages that pay higher rates. They keep some of the mortgages, and resell the rest just as the banks did with them. One big difference… when Fannie Mae, for example, resells a mortgage it has purchased — it typically guarantees the payments. Whether Fannie keeps the mortgages, or guarantees and resells them, it assumes the risks that the mortgage holder may not be able to repay, or that the interest rate environment could change, leaving it stuck with worse-than-market payment terms.

The more mortgages GSEs buy, the more profits they can make…assuming everyone pays their mortgage on time. Fannie must pay its creditors on time, but the people who get the mortgages are not always able to do the same. There comes a point at which simply buying mortgages to generate additional revenues becomes counter productive for Fannie.

If GSEs obey standard accounting rules, investors would know right away if that point of diminishing returns is being reached. As we learned this decade with the Enron, WorldComm, and Bernie Madoff scandals, if a company wildly violates those rules, management could paint nearly any picture it designs, at least until something radically changes to make the problem impossible to hide. By far the largest and most active of the GSEs…Fannie Mae would put the entire economic system at risk if its management pulled a Madoff. Because Fannie is government sponsored, that could never happen unless some very powerful force assisted the cover up, either overtly or inadvertently.

In the case of the housing crisis, that power, as President Clinton stated above, was the Democrat party. Democrats united to steadfastly resist many repeated efforts to effectively increase transparency with regard to GSE accounting and mortgage market activities. In a nutshell, as Congressman Artur Davis stated — who was one of those Democrat on the House Financial Service Committee — they were worried that increased transparency would slow GSEs’ mortgage buying, because investors might stop giving money to GSEs so freely and at such low interest rates.

It really began in the mid-1990s

Financial crises just do not happen overnight and for no special reason. The changes to the GSE system that really enabled the financial crisis began in the mid-1990s. No one change, especially at the beginning, caused the crisis by itself, but all the pieces were essentially in place by the wind down of the Enron scandal in 2001. At that point, it became a matter of reversing course in Washington, which can be a curiously difficult thing to do.

In 1995, the Clinton Administration changed the law governing GSEs’ mission — the Community Reinvestment Act (CRA) — to encourage more lending in poor neighborhoods. Previously, the CRA directed government to monitor banks’ lending practices to make sure they did not violate fair lending rules in poor neighborhoods. With the 1995 change, the government published each bank’s lending activity and started giving bank ratings based primarily upon the amount of lending it performed in poor neighborhoods. These changes empowered community organizations, such as ACORN, to pressure banks to increase lending activities in poorer neighborhoods — which involved reducing mortgage loan standards — or face backlash from those organizations’ private and political associates. For instance, if Chase made 100 mortgages in a poor Chicago district, and Countrywide 150, the government would likely give Chase a lower CRA rating, and community organizers could pressure politicians to make it more difficult for Chase to get licensed to do full ranges of business in new areas of the country. Low CRA ratings could also disadvantage Chase with regard to government lending programs and make it more difficult for Chase to participate in mergers and acquisitions.

Through Fannie Mae, the government controlled banks’ mortgage lending activity rates. As long as Fannie was willing to buy these mortgages, banks had no problem lowering their standards if necessary, making the loans and selling them off to Fannie Mae. Banks could even buy the mortgages back from Fannie Mae, with Fannie’s payment guarantee, thereby eliminating the credit risk (as long as Fannie was government backed). Now, if the US federal government is behind Fannie – and the government has a perfect credit record – there is really little worry for banks, so they might as well make all the mortgages Fannie Mae is willing to buy, and purchase all the guaranteed debt Fannie puts up for sale. However, to the extent investors ever believed Fannie was just like any other company — without the US government guaranteeing its debts, at least in bulk — well that would be a different story. The risks involved would go from theoretically near zero, to well, who knows… Throughout the Congressional debate on GSE regulations in 2003-2005, senior Congressional Democrats repeatedly inferred — even directly stated on at least one public occasion — the US federal government would bail Fannie Mae out if required.

In written law, the US government only 100% guarantees Ginnie Mae. The other major two GSEs, Fannie Mae and Freddie Mac, exist in more of a grey area. Nothing explicitly states the federal government is 100% behind them, but it has always been implied. That is why statements of top government officials in the run up to the bubble are so very important, as are actions like the US President personally appointing Fannie’s CEO and directors.

From 1993-1999, the Clinton Administration replaced many of Fannie Mae’s key executives, including the CEO, the CEO’s number two, and nearly half the board of directiors. As a government sponsored enterprise (GSE), the President had the authority to make those appointments. The board, which increasingly consisted of Presidential appointments, then worked with the new CEO to change Fannie Mae executives’ salary structures in order to incentivize them to reach higher mortgage targets. More specifically, the board promised senior executive millions in bonuses each year as long as Fannie reported certain earnings figures. Just a quick reminder… Fannie’s ability to reach earnings targets is directly related to the number of mortgages it buys, as long as those mortgages do not default or as long as Fannie executives do not recognize negative changes in the payment flow.

Between 1994 and 2004, Fannie executives improperly reported $10.6 billion of earnings. Franklin Raines, the Clinton-appointed CEO, received over $90 million. Jamie Gorelick — a top Clinton Administration lawyer whom he appointed in 1997 to be Fannie Mae vice chairman despite having no formal financial experience – received over $26 million. Just by way of reference, in 2002, 21 senior Fannie Mae executives received over $1 million each.

Just before Mr. Clinton curiously appointed Jamie Gorelick to the lucrative Fannie Mae post in 1997, she had authored a very significant and controversial legal document that came into sharp focus on 9-11. Her policy, which became known as the “Gorelick Wall” established barriers that prevented federal anti-terrorist criminal investigators from accessing various federal records and databases…one of the top causes for the 9-11 intelligence failure. And Jamie Gorelick’s curious appointments did not stop with Fannie Mae… Democrats selected her to serve on the 9-11 Commission; the official government investigation into what happened from an intelligence standpoint, and why. She was in the perfect spot to head off the “Gorelick Wall” from being a cause celeb in the 9-11 Commission’s final report.

The only way to change the structure put in place in before 2000 would have been to forcibly replace the board of directors and senior management…but for that, the President would need hard evidence that justified cause.  As far as Washington insiders publicly knew, all Fannie Mae was doing was helping poor people buy homes and, in the process, boosting economic activity. Who could argue with that? Certainly not any nationally-elected politician.


That evidence finally came in 2004, despite fierce Democrat party efforts to prevent it and their systematic attacks on people who tried to bring it to light. Even after the evidence was in clear public view, Democrats continued to resist any changes to the regulatory structure that would have slowed GSEs mortgage lending activity.

Franklin Raines moves Fannie into Subprime


The Clinton Administration’s 1995 CRA changes authorized GSE’s to buy subprime mortgages, which it began to do in 1997. “Subprime” means that the person receiving the loan has a poor credit record and/or very low income compared to the loan size.

Almost immediately, Fannie began to loosen its standards, requiring people to show lower wealth amounts in order to qualify for mortgages. By 1997, Fannie Mae was offering to buy 97% loan-to-value (LTV) mortgages. If a mortgage is $300,000 on a house worth $500,000, the LTV is 60% (3/5). The higher the mortgage relative to the house value, the higher the LTV. In other words, in 1997, Fannie started offering to buy mortgages that required recipients to put barely any money down. Fannie’s subprime backing caused the percentage of all new US mortgages that were of subprime quality to rise to 13% by 1999, versus 5% in 1994 when the Clinton Administration changed the CRA. According to a 2002 Housing Department report, “From 1993 to 1998, the number of subprime refinance increased tenfold.”

As Fannie’s CEO, Franklin Raines explained in 1999, “Fannie Mae has expanded home ownership for millions of families in the 1990’s by reducing down payment requirements. Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.”

A September 1999 New York Times article describing the situation stated, “Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.” That stockholder pressure was primarily through the board of directors, much of which was Clinton appointed, and specifically due to the earnings-based compensation program the directors structured.

The chart below shows the dramatic rise in home ownership rates during Mr. Raines’ tenure, from 1995 to December 2004, after roughly 25 years at roughly constant levels. This chart is what the Democrat party fell in love with, and represented what Congressional Democrats so fiercely defended in committee hearings about regulating Fannie. The vast majority of the rise happened before George W. Bush became President.

Clinton GSE Framework Leads to the Rise of ACORN in Chicago

“You’ve got only a couple thousand bucks in the bank. Your job pays you dog-food wages. Your credit history has been bent, stapled, and mutilated. You declared bankruptcy in 1989. Don’t despair: You can still buy a house.” – so said an April 1995 Chicago Sun Times article that directed people with very poor credit to contact to a group of “community organizers” called ACORN.

Recall, the Clinton CRA changes focused on numbers of mortgages made inside poor neighborhoods, not the credit quality or safety and soundness. If people came to ACORN seeking a mortgage, ACORN referred them on to a bank, and if that bank denied the application, ACORN would make sure it was fully accounted for in the government CRA rating.

As shown in the table below, the impact of Chicago community organizers was quick and dramatic. While reckless subprime lending increased a bit in most major cities, the Chicago explosion was relatively off the charts. These numbers came a July 2002 Housing and Urban Development (HUD) report titled, from “Subprime Foreclosures: The Smoking Gun of Predatory Lending?” They track the number of home mortgage borrowers who did not pay back their loans. HUD is the government department that oversees GSE activities.

The first person President Clinton appointed to Fannie Mae’s board of directors was William Daley in 1993 — son of Chicago’s legendary Richard M. Daley and brother of Chicago Mayor, Richard Daley who holds the position to this day since 1989. During the 2008 Democrat Presidential primaries, William Daley was a strong Barack Obama supporter. At the height of the housing bubble, in 2004-2005, William Daley was “Midwest Chairman” of key mortgage market player JP Morgan Chase, and was primarily tasked with overseeing Chase’s takeover of another key player in the Chicago-region mortgage market, Bank One.

2002 – 2005:

The Bush Administration and Republicans Push to Regulate GSEs


The Enron Scandal Uncovered it All

Fannie Mae’s success reaching amazing housing goals began to come under scrutiny in 2002, in the wake of accounting scandals at Enron and Fannie’s GSE cousin, Freddie Mac. Enron had filed for bankruptcy late in 2001, after regulators proved management used illegal accounting to spice reported earnings. Freddie Mac and Enron had the same auditor. When it was found that Enron’s auditor was complicit, there was significant concern about Freddie who had a close relationship with that auditor since 1970. Freddie had to change auditors in February 2002. The new one, PriceWaterhouseCoopers, took as its first task a major scrubbing of Freddie’s books.

PriceWaterhouse quickly found that Freddie used improper hedge accounting with regard to Treasuries. The rules governing this process are rather straight forward, so Freddie’s violations stuck out like a sore thumb.

Freddie’s management reported unaudited record earnings for the 2002 fiscal year, putting PriceWaterhouse in a make or break position of either certifying that report, or invalidating it and issuing its own. In 2002, it was highly suspect for any major mortgage house to post record earnings. Interest rates had moved sharply lower. By all rights and reason, the move should have negatively affected GSE’s earnings, since the companies that buy mortgages lose money when they are forced to reinvest the proceeds of mortgage interest payments at lower rates. When Freddie and Fannie kept posting higher earnings that just met management compensation incentive targets, Wall Street investors became skeptical. Short positions — which involve “selling” stock and then “buying” it back later, hopefully at a lower price — in Fannie Mae began to rise sharply. When Republican Senator Chuck Hagel (R-NE) asked for details on how many losses Fannie accounted for in the negative interest rate environment, the company said the information was “confidential and proprietary.”

By then, auditors were deep into another Freddie accounting scandal. Management had improperly failed to recognize declines in value on a meaningful portion of the $260 billion in mortgages it owned. Through its accounting methods, management was squeezing optimal earnings out of the machine, but illegally glossing over Freddie’s true financial position…health…in other words, it was juicing the income statement by bastardizing the balance sheet.


The Freddie Mac Scandal Caused Democrats to Circle the Wagons

By June 2003, the Freddie accounting investigation had forced management to admit to having misstated $5 billion of earnings. Of course, many analysts and investors began to look very closely at Fannie’s accounting.

Republicans moved swiftly to enact a stronger GSE regulatory framework… Democrats dug trenches and defended. Please recall – if investors become more skeptical about Fannie’s health, they would not purchase as many of Fannie’s repackaged mortgage securities, at least not at market-low interest rates. That situation would reduce Fannie’s ability to buy mortgages, particularly in the risky subprime market. This was something Democrats wanted to avoid, at severe cost if necessary. One way to counter the increased risk perception was to directly state that, while the government does not guarantee Fannie’s individual securitized mortgage issues, the federal government would, in fact, step in to bail Fannie out if it got into serious financial trouble. During a Congressional hearing, Barney Frank (D-MA) stated, “I think we see entities that are fundamentally sound financially and withstand some of the disastrous scenarios. And even if there were a problem, the federal government doesn’t bail them out.”  

At risk for Democrats included the following:

  1. Democrats had changed the law governing Fannie Mae’s mission (the CRA) to pressure management to take more risks, but did nothing to adapt the regulatory structure to the new mission. Allowing the discovery of aggressive accounting at both Freddie and Fannie, without a fight, would place Democrat party at political risk ahead of a Presidential election cycle.
  2. Democrats had appointed Fannie’s senior executives and much of the board of directors, who would had to have been involved with the illegalities – and may easily be publicly viewed as such if no fight had been put up to reframe the issue.
  3. Publicly, Democrats fiercely defended the increased home ownership rates in poor neighborhoods, which were based upon investors having trust in purchasing Fannie’s repackaged mortgages. This easy access to funding would dry up if investors viewed investments in the securities Fannie issued as increasingly risky.
  4. The CRA changes had significantly boosted community organizers, such as ACORN, which were rapidly becoming a Democrat party power base.
  5. Local Democrat-linked political power brokers, such as Valerie Jarrett and friends, were making fortunes in the Chicago subprime housing market, where ACORN was a major player.

Clinton appointee Franklin Raines, and Congressional Democrats moved swiftly with the “best defense is a good offense” strategy. They painted anyone who presented evidence against Fannie Mae as being motivated by politics or greed. The same day auditors released the full Freddie Mac report, Franklin Raines held a press conference in which he accused Freddie of impeding Fannie’s lofty mission by causing “collateral damage.” Fannie’s management changed the Frequently Asked Questions section of the company’s website to include the following statement: “Fannie Mae’s reported financial results follow Generally Accepted Accounting Principles to the letter…. There should be no question about our accounting.” They were wrong.

In October 2003 — less than four months after Freddie’s admission — Mr. Raines wrote a letter to Treasury Secretary John Snow that began,

Dear John,

From the beginning of our discussions, you and I have agreed to avoid disrupting the capital markets by indicating a wish to change Fannie Mae’s charter, status, or mission. After complaining about a comment that Raines said a high Treasury official had made about Fannie’s government-extended line of credit, he wrote, “The result of his comment was that trading in our debt came to a halt for an extended period of time. I am disappointed and hope we can change course.

Very truly yours, Frank.”

According to renown financial market and (at the time) Fortune Magazine reporter, Bethany McLean, “In political terms, the letter was an astonishment — what other CEO would dare dress down the Treasury Secretary, much less address him as “Dear John?”

Clinton Changed the GSE’s Mission but Not the Framework that Oversaw It


The Clinton Administration changed GSEs’ mission to become far more active, but did nothing to adapt the regulatory structure to the new mission. GSEs were “regulated” by the Office of Federal Housing Enterprise Oversight (OFHEO), which was a part of HUD – Housing and Urban Development. Congress essentially controlled OFHEO, because Congress had life or death control over OFHEO’s funding. The regulator was customarily in a middling position, careful not to make statements too strong in any direction, especially as political battle lines became more distinct, for risk of having its funding cut, delayed, or in any way becoming an issue. Fannie Mae controlled one of the most powerful Washington lobbies in existence – for OFHEO to take on Fannie Mae would have been like an entry level employee openly accusing a senior executive…Fannie’s violations were so significant, that is exactly what OFHEO wound up doing.


Republicans Move Swiftly and Strongly

In the wake of the Enron scandal, President Bush put his Chief of Staff, Andrew Card, in charge of a team to investigate potential GSE mortgage market problems. Mr. Card led a joint White House – Treasury Department team that recommended the President not reappoint any directors to either GSE board; that Fannie’s accounting methods needed to be thoroughly scrutinized, and that GSEs needed much stronger regulatory oversight.  HUD Secretary, Mel Martinez, got Fannie Mae to raise the downpayment requirement on newly constructed houses from only 3% to 10% — if a house was appraised at $500,000, the builder would have to commit $50,000 to the project instead of just $15,000.

On September 11, 2003, President Bush sent Congress a sweeping GSE regulation proposal; the first of what U.S. News & World Report counted was 17 times President Bush would call on Congress to regulate GSEs. The proposed regulations would have averted the worst national crisis since, well, 9-11…had they been inacted. Let’s let the New York Times tell the story, as it reported the day of the White House proposal:

The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago. Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry. The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios. The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac — which together have issued more than $1.5 trillion in outstanding debt — is broken.”

The new lines of business aspect had a backstory. From the beginning of the Clinton CRA changes through 1998, Fannie’s assistant director for product initiatives was Herb Moses, who was — in their words — “spouse” with Barney Frank (D-MA), the Democrats’ ranking member on the House Financial Services Committee, which oversaw GSEs.

The War Over Housing Market Regulation Goes Full Tilt

The Bush proposal generated bills in the House and Senate. According to the Congressional Research Service, each bill would have replaced the weak GSE regulator with one that was independent of Congressional political pressures and independently responsible for GSE “safety, soundness, and mission regulation.” If the new regulator determined that Fannie or Freddie was in financial distress, it could put them into receivership, limiting their activities until safety and soundness could be regained.

Receivership was a key provision, because it would be a strong step towards separating GSE liabilities from the US federal government — and telling the financial markets that the federal government not bail Fannie Mae out if it took met financial difficulties due to taking on inordinate risk. If Fannie essentially went bankrupt, it was strongly implied – even stated outright by Democrats during 2003 Congressional hearings – that the US federal government would back Fannie. The receivership would eliminate politicians’ ability to “dance the Potomac two-step” on the issue…publicly stating the government does not guarantee Fannie’s individual securitized mortgages, while also stating the government stands behind Fannie in the event that Fannie runs into serious financial trouble. In absence of government backing, Fannie would have to act more like an independent company in charge of its own risk profile. Any investor doing business with Fannie Mae would therefore have to do the same. Receivership would be akin to bankruptcy reorganization, in which investors were often not paid what they put in.

In August 2003, Barney Frank (D-MA) — ranking Democrat on the House Financial Services Committee and the person who generaled the Democrat strategy with regard to GSE regulation — argued strongly to make it easier for people/speculators to get new house construction loans while putting less money up as collateral. In a mid-August letter to Fannie Mae, Mr. Frank urged Fannie to withdraw the underwriting guidelines that the Bush Administration had successfully gotten Fannie to strengthen (raising the principal/collateral commitment from 3% to 10%). He wrote, the Bush-inspired “changes could make manufactured housing too expensive for many Americans.” Mr. Frank was successful; Fannie announced in February 2004, it would lower the capital requirement from 10% to 5%… the move became effective December 1, 2004, two weeks before the SEC released a scathing report on Fannie’s improper accounting. Easy money on new house constructions turned out to be one of the prime causes of the housing overexpansion that helped define the bubble.

The House Financial Services Committee began debate on September 11, 2003 and held multiple hearings over the next several weeks. In supporting the bills, Republicans focused on GSE’s potential impact on the broader financial system. Democrats focused solely on the mortgage lending targets, stating there was no risk to the broader financial system because the federal government would bail out the GSEs if necessary.

Here are a few representative quotes on how those hearings went:


Sen. Charles Schumer (D, NY): “And my worry is that we’re using the recent safety and soundness concerns, particularly with Freddie, and with a poor regulator, as a straw man to curtail Fannie and Freddie’s mission.”

Rep. Maxine Waters (D-CA): “nearly a dozen hearings where, frankly, we were trying to fix something that wasn’t broke… In fact, the GSEs (Fannie, Freddie) have exceeded their housing goals. What we need to do today is to focus on the regulator, and this must be done in a manner so as not to impede their affordable housing mission – a mission that has seen innovation flourish, from desktop underwriting (no formal analysis) to 100% loans (no collateral).”


Rep. Maxine Waters (D, CA), speaking to Housing and Urban Development Secretary Mel Martinez: “Secretary Martinez, if it ain’t broke, why do you want to fix it? Have the GSEs ever missed their housing goals?”


Rep. Barney Frank (D-MA): “I don’t 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). I want to load the dice a little bit more in this situation towards subsidized housing.”


Rep. Barney Frank (D-MA): “I think we see entities that are fundamentally sound financially and withstand some of the disastrous scenarios. And even if there were a problem, the federal government doesn’t bail them out.”

Rep. Gregory Meeks (D-NY): To OFHEO head, Armando Falcon, “The question that represents is the confidence that your agency has with regard to regulating these GSEs… Why should I have confidence; why should anyone have confidence in you as a regulator at this point?”

Rep. Gregory Meeks (D-NY): “I’m just pissed of at OFHEO (the regulator), because if it wasn’t for you I don’t think that we’d be here in the first place…you’ve given them an excuse to try to have this forum so that we can talk about it and maybe change the direction and the mission of what the GSEs had, which they’ve done a tremendous job.

Barney Frank (D-MA): “I worry about increasing the capital requirements…I’d like to get Fannie and Freddie more deeply into helping low income housing and possibly moving into something that’s more explicitly a subsidy (taxpayer money used as principle in subprime mortgages). My concern is that this would not what would be a regulator’s or Treasury’s idea of what would be the best way of promoting safety and soundness… “

Barney Frank (D-MA) even went so far as to suggest the issue of Fannie Mae regulation should rest in the hands of Fannie’s CEO:

Barney Frank: Let me ask [George] Gould and [Franklin] Raines on behalf of Freddie Mac and Fannie Mae, do you feel that over the past years you have been substantially under-regulated? Mr. Raines?

Franklin Raines: No, sir.

Barney Frank: Mr. Gould?

George Gould: No, sir. . . .

Barney Frank: OK. Then I am not entirely sure why we are here. . . .

When Republican Christopher Shays challenged Franklin Raines on Fannie Mae’s 3% capital ratio — how much money Fannie had on hand versus the amount of mortgage liabilities it owned – which was dangerously low by private market standards, Mr. Raines responded “our assets are so riskless, we could have a capital ratio of under 2%.” His claim was that Fannie’s subprime mortgage portfolio involved less risk than the typical private bank’s loan portfolio.

Democrat Delay Tactics: There was a particularly illustrative example of Democrat Party administrative tactics during the September 25, 2003 House Financial Services Committee hearing, in which Paul Kanjorski (D-PA) argued it should take a very long time for Congress to debate any serious GSE regulation.  Steve Bartlett, President of the Financial Services Rountable — an organization that represents practically every major US bank — responded,  

“Mr. Kanjorski, our organization and our companies have been quite concerned about this from a safety and soundness as well as mission, for the last several years. We have communicated that concern, but recently that concern seems to have been highlighted by a number of factors.   So yes sir, I believe there is an urgency to the tune of some $3.3 trillion that is either owned or guaranteed by these two agencies…We think they are not being properly regulated, and we believe that with $3.3 trillion, you don’t want to wait too long, and so now is the time to act.”

Mr. Kanjorski then continued as if Mr. Bartlett had never spoken, and brought up something Franklin Raines had suggested Congress debate, saying, “I could anticipate it taking weeks and weeks and weeks just to do that.

A few minutes after this exchange, Mr. Bartlett tried to persuade David Scott (D-GA) that Democrat statements of concern about regulation potentially impacting Fannie’s mortgage lending “mission” was becoming empty, stating,  

“It’s gotten to a $3.3 trillion overhang over the nation’s economy, and unless strong, independent regulation is provided, the housing goals for Fannie and Freddie will go in the tank, because the system will ultimately not…will be in jeopardy.”


The Campaign Against Regulation Grows More Daring


Fannie Mae’s “Astounding” National Television Ad

On March 31, 2004, the day before the Senate Banking Committee was scheduled to begin debating GSE regulations, Franklin Raines had Fannie Mae run the following advertisement on national television. Featuring a worried looking Hispanic couple, a man said, “Uh-oh.”

Woman: “What?”

Man: “It looks like Congress is talking about new regulations for Fannie Mae.”

Woman: “Will that keep us from getting that lower mortgage rate?”

Man: “Some economists say rates may go up.”

Woman: “But that could mean we won’t be able to afford the new house.

Man: “I know.”

Senator Chuck Hagel (R-NE) responded at the hearings. “Here is an organization that was created by the Congress … spending money questioning the Congress’s right to take a serious look at oversight … I find it astounding. Astounding!”

President Bush Tries to Act Despite a Stonewalling Congress


ACORN v. Bush

With such fervent Democrat resistance, the Bush Administration continued to do what it could within the Executive Branch. In February 2004, the Office of the Comptroller of the Currency (OCC) tried to strengthen its GSE oversight. The Democrat party and its allies, such as ACORN, moved swiftly and strongly. In a March press conference, Barney Frank (D-MA) stated, “We cannot accept and leave alone this sweeping decision by a federal regulator to substantially diminish the role state-elected and appointed officials have in protecting their economies and their consumers.” On April 7, Senator John Edwards (D-NC) introduced legislation to quietly nullify the OCC regulations. On April 30, 32 House Democrats and three Republicans co-sponsored a bill to do the same. In a May 3 letter to Congress, ACORN strongly supported the effort to nullify the regulations, arguing, “the OCC has shut down the laboratories of democracy and its actions place citizens around the nation at risk of becoming victims of predatory lending or other unfair practices.” On September 15, Democrats went after the OCC directly, introducing legislation that would have given Congress stronger power over the bureau. With Republicans holding a majority in Congress, the bill never had a chance of passing, but the move provided a forum for Democrats to reshape the issue from being about Fannie Mae to being about anyone who suggested Fannie be effectively regulated.

In April 2004, the Bush Administration fought against a bill introduced to the House by Garry Miller (R-CA) and Barney Frank (D-MA) to eliminate the $290,319 ceiling on mortgage size that the Federal Housing Administration could insure. The bill set far higher cielings, according to each local housing market and influenced by local community organizations. For instance, in San Francisco, the insured limit would soar to $568,000. Fannie Mae’s chief economist testified in favor of the bill, which never made it out of Republican-controlled committee.

In the summer 2004, Bush had the Treasury obtain legality opinions from the Justice Department and Congressional Budget Office about limiting Fannie’s ability to issue debt. Congressional Democrats were up in arms, led by Barney Frank (D-MA). At a September 2004 Freddie Mac conference, he stated, “I think they would run into an absolute firestorm if they did that.” According to National Mortgage News, Rep. Frank went on to suggest lowering the income levels borrowers needed to have before receiving mortgages of certain sizes.

“Special Examination of Fannie Mae” Put Democrats into Crisis Mode

Just days before the Freddie Mac crisis erupted into public view, the Office of Federal Housing Enterprise Oversight (OFHEO) – the agency charged with regulating GSEs – had stated Freddie’s internal controls were “accurate and reliable.” With ample egg on his face, OFHEO’s director, Democrat Armando Falcon, was determined to be certain before giving Fannie Mae a clean bill of health. In February 2004, he obtained White House funding to hire accounting giant Deloitte & Touch to scrub Fannie books. Deloitte assigned to lead the project the same person who had led a similar investigation of Enron a few years earlier. The Bush Administration also proposed increasing OFHEO’s budget from $40 million to $59 million.

On September 22, 2004, the OFHEO released “Special Examination of Fannie Mae,” which stated management had purposely broken accounting rules and established a dysfunctional and ineffective process for developing accounting policies that involved “weak or nonexistent” internal controls. The report blamed much of the problem on an executive compensation structure that rewarded management for meeting goals tied to earnings-per-share, a metric subject to manipulation by management.”

Between 1994 and 2004, according to the report, Fannie Mae improperly reported $10.6 billion in earnings. From 1998 through 2004, Fannie management reported earnings per share (EPS) figures that triggered the maximum bonus payouts they had set for themselves. As described by OFHEO later, management of Fannie Mae set earnings-per-share targets. And every quarter, they manipulated — or every year, they manipulated the earnings to hit those numbers because their bonuses were based on them. And every year, they got their maximum bonuses…Fannie Mae’s executives were precisely managing earnings to the one-hundredth of a penny to maximize their bonuses.”

Franklin Raines responded to the OFHEO report by questioning the regulator’s abilities and jurisdiction. He also requested that the SEC arbiter between Fannie Mae’s and OFHEO’s positions. Mr. Raines appeared confident this move would support him: he hired the powerful law firm of Wilmer Cutler to help make his case…Bill McLucas, Cutler’s lead partner on the case, had deep SEC connections from his former role as the agency’s chief enforcement officer.

Meawhile, Congressional Democrats went after OFHEO directly… The Washington Post referred to the situation as a gutsy David (OFHEO) taking on Goliath. In November 2004, Barney Frank (D-MA), senior Democrat on the House Financial Services Committee, stated continued OFHEO funding was “inappropriate due to the controversial nature of the OFHEO report. In a November 2004, he bluntly called for a detailed public investigation of OFHEO, stating “It is clear that a leadership change at OFHEO is overdue.” In June, Mr. Frank had supported the Bush request for additional OFHEO funding…in November, after the September “Special Examination” report, he reversed that support and called for a leadership change.

The SEC Blows the Lid Off Fannie Mae Fraud

On December 15, the SEC’s chief accountant, Donald Nicolaisen released the agency’s findings; a scathing indictment of Fannie Mae. It concluded, during the period under our review, from 2001 to mid-2004, Fannie Mae’s accounting practices did not comply in material respects with the accounting requirements.” According to eyewitnesses Franklin Raines looked stricken at the meeting in which Mr. Nicolaisen released the findings. He tried to defend his actions, and his representatives argued that the business was too complicated to account for with any exactness. To this, Mr. Nicolaisen’s response was, “Many companies out there get it right,” and he held up a sheet of paper. He told the Fannie team, if the four corners of the sheet represented what was possible under legal accounting rules, and the center was perfect compliance, you weren’t even on the page.”

After using a brief “Enron defense,” claiming senior management — who received practically all the monetary benefit of the improper accounting — had absolutely no idea what was going on and therefore no responsibility – Franklin Raines resigned as Fannie CEO. Of the $90+ million in compensation from 1998 through 2003 as Fannie CEO, $52 million was for reporting fraudulent earnings numbers. according to OFHEO. In his resignation, he stated, Although to my knowledge, the company has always made good faith efforts to get its accounting right, the SEC has determined that mistakes were made. By my early retirement, I have held myself accountable.” Mr. Raines definition of “accountable” never included an admission of responsibility, an apology, or an offer to return his $90+ million in compensation as Fannie CEO.

Congressional hearings

Despite resounding evidence that Fannie Mae was grossly fraudulent, Artur Davis (D-AL) re-asserted statements by his Democrat colleagues from the previous year, that the investigative focus should be on the regulator, rather than on the Fannie’s violations, “so as not to impede the affordable housing mission.” He asked Mr. OFHEO’s chief, Armando Falcon, Is it possible that by casting all of these aspersions…you potentially are weakening this institution in the market, that you are potentially weakening the housing market in this country? When Mr. Falcon tried to answer, Mr. Davis acted like a prosecutor grilling a hostile witness. He wanted a one-word answer: yes or no. Is that possible?” he asked again. Mr. Davis would later publicly regret his stance.

In the words of a Fortune Magazine article that reviewed the hearings:

Most CEOs would have seen the wisdom of humility at this point, but Raines showed little. “These accounting standards are highly complex and require determinations on which experts often disagree,” he said, adding that “there were no facts” that supported OFHEO’s charge that Fannie executives had deferred an expense in 1998 to earn bonuses. And most of the Democrats present agreed with him. “This hearing is about the political lynching of Franklin Raines,” said Congressman William Lacy Clay of Missouri. (William Lacy is a black man, accusing his opponents of attempting to lynch another black man, Franklin Raines.) Massachusetts Congressman Barney Frank said, “I see nothing in here that suggests that safety and soundness are an issue.” Other Democrats complained that the mere fact of releasing the report could increase the cost of home-ownership… Falcon refused to be moved by the barrage of criticism from his fellow Democrats. To him the problems at Fannie were reminiscent of the S&L crisis. He told a friend that the Democrats were “so blinded by their loyalty to Fannie that they can’t see what’s really happening. If they want to repeat history, I won’t be part of it.”




Democrats’ Last Line of Defense Was Impenetrable

Under Senate rules, any legislation not passed into law by the end of the session automatically expires, and that’s exactly what Democrat stonewalling achieved. The 108th Congress ended in January 2005, and with it, the Senate bill. Senator Charles Hagel (R-NE) re-introduced the on January 26, 2005, with the co-sponsorship of John McCain (R-AZ), Elizabeth Dole (R-NC) and John Sununu (R-NH).

As a new bill, it had to go through committee again before coming up for full Senate vote. Alan Greenspan testified at these hearings in April 2005, stating, We at the Federal Reserve remain concerned about the growth and magnitude of the mortgage portfolios of the government-sponsored enterprises, which concentrate interest rate risk and prepayment risk at these two institutions and makes our financial system dependent on their ability to manage these risks” … “To fend off possible future systemic difficulties, which we assess as likely if G.S.E. expansion continues unabated, preventive actions are required sooner rather than later.”

The Senate Committee for Banking, Housing and Urban Affairs passed the legislation on a party-line vote on July 28, 2005… all 11 Republicans voted in favor of the new regulations; all 9 Democrats voted against. The Senate bill took a stronger approach than the House measure, in that it gave the new regulator broad power over the kinds of assets Fannie and Freddie would be allowed to hold. By 2005, GSEs held or guaranteed $1.5 trillion in mortgage debt, having grown the amount by a 20% annual rate since President Clinton’s 1994 GSA changes.

At this point, GSE regulation had passed through the full House and through Senate committee… essentially all that remained was the full Senate to pass it. This was Democrats’ last line of defense, and it was impenetrable.

Under Senate Rule 22, any Senator can filibuster a piece of legislation simply by threatening to do so, without having to formally stand at the podium and read the phone book or anything like that. Such a “filibuster” requires 60 Senators to break, as we have seen more recently with regard to the Health Care legislation. In other words, the minority party can force approval of any bill to require 60 votes, rather than the usual 50.

In the 109th Congress of 2005, there were 55 Republican Senators — five Democrats would have had to have supported the GSE regulatory bill. Chris Dodd (D-CT), ranking Democrat on the Senate Committee for Banking, Housing and Urban Affairs — and the Democrat party general with regard to GSE regulation strategy — let it be known that he recommended opposition to the bill. Every one of Mr. Dodd’s Democrats had opposed the bill in committee, and not one Democrat from the larger Senate offered support to bring the legislation to the floor. Barack Obama (D-IL) had joined the Senate in January 2005 and was among the people de-facto supporting the “filibuster.”

At the time, Democrats were using the Rule 22 filibuster with extraordinary regularity and effect. Democrats and Republicans were in tense negotiations with regard to ending many filibusters on Bush judicial nominees.

By mid 2006, the Senate Republican sponsors of the regulatory bill became frustrated, as it would expire with the coming of the 109th Congressional session. On May 5, 2006, they wrote an open letter to Senate leadership that began, “We are concerned that if effective regulatory legislation for the housing-finance government sponsored enterprises (GSEs) is not enacted this year, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.”

Despite the evidence presented by OFHEO, Deloitte & Touche, the SEC, and several financial analysts, Democrats never wavered in shielding Fannie Mae from effectively increased regulation or transparency. Despite the regulatory bills passing out of committees in the House and Senate, and passing the full House, it never had a chance of being enacted as long as Senate Democrats remained unified in opposition — it needed five Democrats; none stepped forward.

Democrats Admitted Responsibility, Then Recanted When Obama Consolidated Power

Bill Clinton summed up the role of fierce Democrat opposition to GSE regulation in a moment of candor on Good Morning America (relevant section at -2:25 on the video), in September 2008,  

“I think that the responsibility that the Democrats had may rest more in resisting any efforts by Republicans in the Congress, or by me when I was President, to put some standards and tighten up a little on Fannie Mae and Freddie Mac.”

He said nothing about Democrats’ role in actively causing the system crash.

On September 30, 2008, Representative Artur Davis (D-AL), who had vehemently defended Fannie Mae against regulatory efforts in 2003-2004, echoed President Clinton’s sentiments.  

“Like a lot of my Democratic colleagues I was too slow to appreciate the recklessness of Fannie and Freddie. I defended their efforts to encourage affordable homeownership when in retrospect I should have heeded the concerns raised by their regulator in 2004. Frankly, I wish my Democratic colleagues would admit when it comes to Fannie and Freddie, we were wrong.”  

He did not explain how he was “slow” to realize Freddie’s recklessness, which was essentially proven by 2003…or for that matter, Fannie’s which was well proven in 2004.

Political Contributions — Personal Payola

From 1995 – 2008, Democrats Chris Dodd, Barack Obama and John Kerry received more Fannie Mae money that any politician. Remarkably, Obama places as number two despite having been in the Senate less than four years, versus Kerry’s 23 and Dodd’s 34.

The top three recipients of Fannie Mae political contributions were #1 Chris Dodd (D-CT), the Democrat leader on the Senate Banking Committee responsible for Fannie Mae regulatory legislation; #2 Barack Obama (D-IL), an up and coming politician who, as one of Democrats’ few winners in the 2005 Congressional elections, was key to maintaining Democrats’ regulatory legislation – Mr. Obama also had deep ties to the local Chicago political machine from which ACORN, a major Fannie supporter, had become a powerful force in recent years; #3 John Kerry (D-MA) who nearly became President in 2004 and whose support would have been key in preventing investigations into Fannie’s illegal accounting that masked its central role in financial crisis.

As a quasi-governmental agency, Fannie’s official contributions, in form of PAC money, needed to be at least somewhat evenly spread between the parties. What made the Fannie political contributions so focused on key Democrats was the money given by senior Fannie executives who had, after all, been receiving millions in target-based compensation, and who were also directly knowledgeable of Fannie’s/their accounting being, as the SEC’s chief accountant put it, “off the page.” This list is really the most important indicator of linkage between what Fannie improprieties and Congressional individuals:

Senator Chris Dodd (D-CT)


As the Democrat Party’s Senate strategy general with regard to GSE regulation, Mr. Dodd – in the end – was the single person most responsible for assuring Fannie Mae was not effectively regulated, because he was the one responsible for making sure Senate Democrats held the line. Also key to that process; the Democratic Whip at the time, Harry Reid (D-NV).

  1. Countrywide payola: Mr. Dodd received questionably favorable treatment from one of the housing bubble’s top non-GSE subprime offenders, Countrywide Financial. Countrywide established a special V.I.P. program under which it extended highly favorable loan terms to a highly targeted list of influential people. Mr. Dodd’s special terms would save him an estimated $75,000 over the loans’ 30-year life. Congress then wrote legislation governing Countrywide’s takeover by Bank of America – much of that legislation being done in the Senate committee Mr. Dodd chairs.
  2. Bank of America payola and crisis coverup links: In the year-and-a-half after Democrats regained the Senate in January 2006 and Mr. Dodd became committee chairman — covering the period in which his committee wrote the Countrywide takeover rules — Bank of America (BofA) gave Chris Dodd over $70,000…or more than $1,000 per week. Only Barack Obama and Hillary Clinton received more BofA money during the election cycle…and they ran for President. Bank of America has long and deep subprime and ACORN ties, partnering with ACORN since 1990 (according to ACORN). In 2008, the US federal government bailed Bank of America out of mortgage-related near insolvency. Later that year, BofA gave ACORN of Chicago $2 million. BofA has been one of ACORN’s largest extra-government funding sources.

Mr. Dodd defended his blocking of strict Fannie Mae regulations to the last moment… even beyond, after it was clear the agency had moved the global economy to the precipice. In July 2008, he stated, “there is no reason for the kind of reaction we are getting. The fundamentals are sound – these institutions are sound, they have adequate capital, they have access to that capital, and this is a reason for people to have confidence in these GSEs, in Fannie and Freddie.” In September 2008, he stated, “if this is merely ideologically driven, as some have suggested, to merely eliminate these programs altogether, forget what they have looked like, then this could be a real problem.”

Barney Frank (D-MA)

As ranking House Financial Services Committee ranking Democrat, Mr. Frank led Dems’ House effort to loosen mortgage lending standards and defend GSEs from Republican regulation attempts. He also made statements to lead investors to believe that, while the federal government would not guarantee individual Fannie mortgage issues, it would fund Fannie if buying Fannie Mae’s securities involved little risk because the implied federal guarantee was quite real. For instance, the 2003 committee statement, “I think we see entities that are fundamentally sound financially and withstand some of the disastrous scenarios. And even if there were a problem, the federal government doesn’t bail them out.”

From roughly 1978 through 1998, Mr. Frank was in a serious romantic relationship with Herb Moses, referring to him as his “spouse.” According to the February 23, 1998 issue of National Mortgage News, “Moses was the assistant director for product initiatives at Fannie Mae and had been at the forefront of relaxing lending restrictions at the company for rural customers.”

Of the eight appearances Barney Frank made on the three broadcast networks during the January-September 2008 presidential election cycle, not one even touched upon his role in the Fannie Mae crisis. Only six of the appearances dealt with the economy in general. Of those six, two — including a feature April 6, 2008 appearance on CBS’s “60 Minutes” — focused on Mr. Frank’s opposition to a manned Mars mission.

Barack Obama (D-IL)

Barack Obama had three strong impacts on the financial crisis, placing him easily in the top 20 people to have caused it.

  1. ACORN: Mr. Obama’s ACORN links go back far and deep. In 1995, when the Clinton Administration was changing the CRA, he was on a team of lawyers representing ACORN in a suite against Illinois’ Republican governor with regard to motor voter provisions. According to Chicago ACORN leader Toni Foulkes in early 2004, “we asked him to help us with” that lawsuit. “Since then, we have invited Obama to our leadership training sessions to run the session on power every year, and, as a result, many of our newly developing leaders got to know him before he ever ran for office…By the time he ran for US Senate, we were old friends.” Mr. Foulkes goes on to detail how ACORN helped Mr. Obama become Senator.
  2. Fannie Mae payola: Despite having been in the Senate only four years, Mr. Obama was the politician to receive the most campaign contribution money from Fannie Mae executives. He was also the Senator who received the second highest total from Fannie employees and the company’s official PAC in during the entire 1995-2008 period…this, despite having been in the Senate less than four of those years. Numbers’ one (Dodd) and three (Kerry) were both Senators the entire time.
  3. Opposition to regulation: When Mr. Obama joined the Senate in January 2005, he joined the Democrat opposition in blocking the regulation that had passed the House and Senate committee, and preventing it from reaching the Senate floor Had he supported the regulation and led only four of his Democrat colleagues to do the same, the Fannie Mae bubble would have deflated in 2005, rather than exploding in 2007.
  4. Franklin Raines: In July and August 2008, the Washington Post cited Franklin Raines as being employed by the Obama campaign. When the McCain campaign made that news an issue, the Obama campaign denied the report’s accuracy. The Post then agreed with the Obama campaign that the reports were not well sourced.

 Rahm Emanuel (D-IL) — Barack Obama’s Chief of Staff

When Rahm Emanuel joined the House of Representatives in January 2003, Democrats gave him a seat on the Financial Services Committee, where he served under Barney Frank blocking effective GSE regulation efforts.  Democrats also gave Mr. Emanuel a seat on the subcommittee that directly oversaw Fannie Mae and Freddie Mac – despite having served as Freddie director during the scandalous accounting.  A major initiative at Freddie during Mr. Emanuel’s directorship was campaigning Congress against regulations that would add transparency to the GSE’s financial health or potentially restrict its mortgage lending activities.

Mr. Emanuel was one of the directors President Clinton appointed to Freddie Mac, and he held the position from February 2000 through April 2001, a period in which the company’s accounting violations accelerated significantly.  During the entire directorship, he was also a senior executive at investment firm Wasserstien Perella in Chicago.  According to the Chicago Tribune, Freddie’s management told the directors, including Mr. Emanuel, about their aggressive (illegal) accounting procedures — the directors did not investigate or take any action to stop the improprieties.  Freddie paid its directors extremely well considering some claims its directors were little involved in providing oversight, a director’s primary role … Mr. Emanuel received at least $320,000 in cash and stock over his 14 months with Freddie, equaling well over $40,000 per board meeting.  Mr. Emanuel’s spokeswoman, Sarah Fienberg, explained the compensation by highlighting his deep involvement with Freddie’s mortgage purchase activities.  One of Mr. Emanuel’s fellow Freddie directors, Illinois Attorney General Neil Hartigan, stated Emanuel was heavily involved with convincing other board members of Freddie Mac’s potential to become more politically powerful.  Clinton appointee, Franklin Raines, spearheaded a similar effort as Fannie Mae CEO.

Mr. Emanuel also used his Freddie Mac directorship to drive the GSE’s use as a political fundraising machine.  He helped Freddie design a system under which it hosted mega fundraisers.  Among these was one that Freddie’s CEO, Leland Brendsel, held for Rahm Emanuel in 2002 during Mr. Emanuel’s Congressional campaign.   Mr. Brendsel soon resigned in disgrace following the explosion of Freddie’s accounting scandal.

In the words of a March 26, 2009 Chicago Tribune article:

On Emanuel’s watch, the board was told by executives of a plan to use accounting tricks to mislead shareholders about outsize profits the government-chartered firm was then reaping from risky investments. The goal was to push earnings onto the books in future years, ensuring that Freddie Mac would appear profitable on paper for years to come and helping maximize annual bonuses for company brass.

The accounting scandal wasn’t the only one that brewed during Emanuel’s tenure.

During his brief time on the board, the company hatched a plan to enhance its political muscle. That scheme, also reviewed by the board, led to a record $3.8 million fine from the Federal Election Commission for illegally using corporate resources to host fundraisers for politicians. Emanuel was the beneficiary of one of those parties after he left the board and ran in 2002 for a seat in Congress from the North Side of Chicago.

Another focus of Freddie during Emanuel’s day—and one that played to his skill set—was a stepped-up effort to combat congressional demands for more regulation.  During a September 2000 board meeting—midway through Emanuel’s 14-month term—Freddie Mac lobbyist R. Mitchell Delk laid out a strategy titled “Political Risk Management” aimed at influencing lawmakers and blunting pressure in Congress for more regulation.

Several people have requested the recordings of Freddie’s board meetings under the Freedom of Information Act, including the Chicago Tribune for the above article.  The Obama Administration has refused these requests despite Freddie being a quasi public agency that is currently operating through the graces of a taxpayer bailout.  The legal statute of limitations for this matter will expire early in 2011.

Rahm Emanuel is well known as a Chicago-based Democrat party political power broker.  He began his career with a local community organization and was a key fundraiser for Richard Daley’s 1989 Chicago mayoral campaign; a position Mr. Daley holds to this day.  Mr. Emanuel then spearheaded fund raising for Bill Clinton’s 1992 Presidential campaign, attracting a then-unheard-of $72 million through his connections network.  President Clinton rewarded him with a White House advisory post in 1993, and very soon after appointed Richard Daley’s brother, William, to be a Fannie Mae director.  Inside the Clinton Administration, Mr. Emanuel coordinated political fund flows among Democrat Party politicians and was a key strategist for Clinton-era health care legislation.  He left the Administration in 1998 to join investment banking firm Wasserstien Perella.  In less than four years as a banker, Rahm Emanuel earned $16.2 million by raising funds for investment projects, including real estate, and planning corporate mergers.  In 2000, while Mr. Emanuel was still a banker, President Clinton gave him the Freddie Mac directorship.  This period in the latter Clinton administration years, was arguably designed to be a key acceleration period of the housing/financial crisis.  When his directorship neared expiration in 2001, the Democrat Party gave Mr. Emanuel the nomination to be Congressional representative from a staunchly Democrat Chicago district.  The previous rep, Rod Blagojevich, had resigned to become Illinois governor.

Democrat party re-establishing its mortgage-market political power base

Despite the crisis they enabled, Democrats are attempting, successfully, to restart Fannie’s and Freddie’s ability to take more risk.  The attempt currently has two major parts: fund the agencies/companies with more taxpayer money, and remove regulations that restrict their activities in the high-risk loan market.  Key to the Democrat deregulation push is lowering the capital commitment (raising financial leverage) so people and speculators can get mortgages by putting less of their own funds at risk.  This reduced capital requirement was a hallmark of the Democrats’ deregulation push during the housing bubble, and it has two primary effects… enable people with lower incomes to obtain higher-risk mortgages, and enable investor-speculators (such as Valerie Jarrett pre-Obama Administration) to obtain government-backed mortgages by putting less of their own money at risk.  As the housing bubble popped, many speculators simply walked away from their mortgages because they had so little of their own funds tied up in the transaction…since they obtained the mortgage through a “corporation” of whatever sort, their personal credit records were unaffected.

According to a February 28, 2008 New York Times article:

Democrats in Congress and some mortgage industry officials have been calling on (OFHEO director) Mr. Lockhart to loosen controls over Fannie Mae and Freddie Mac so the companies could play a more active role in the housing market by buying bigger and more risky home loans and securities backed by those mortgages.

On Wednesday, Senator Charles E. Schumer, Democrat of New York, welcomed the lifting of the portfolio caps and called on Mr. Lockhart to go even further by removing the excess capital requirement.

While Democrats have advocated lifting restrictions on Fannie Mae and Freddie Mac, the Bush administration and the Federal Reserve have insisted that the companies deserve close scrutiny because of their large role in the mortgage and financial markets.


The Obama Administration used the 2009 Christmas media lull for several key mortgage-market agenda items, on top of the its Congressional health care legislation.

1) On Christmas Eve the Obama Administration issued executive orders to change the amount – from $400 billion to unlimited — that the US federal government would commit to Fannie Mae and Freddie Mac in the event those agencies/companies could no longer service the mortgages it held/guaranteed.  It also deregulated the total amount of mortgages that Fannie and Freddie can own or guarantee, enabling the GSEs to fully return to the lower-quality, higher-risk segments of the mortgage market.  Fannie and Freddie currently finance roughly three-quarters of all new mortgages.  The order empowers the Obama Administration’s Treasury Department to pressure the GSEs to hold more subprime/non-performing mortgages, instead of clearing the risk off their balance sheets.  According to Edward Pinto, Fannie’s chief credit officer in the latter years of the Regan Administration, They’ve cleared the decks to use Fannie and Freddie as a vessel for whatever they want.”

2) It gave GMAC Financial Services  $3.8 billion of taxpayer funds, on top of the $12.5 billion it had already extended in a bail out.  Until recently, GMAC was General Motors’ finance unit, but it is now a government bank holding company.  The new investment makes the US federal government GMAC’s majority owner.  GMAC suffered badly from risky mortgage market activities but, as what is supposed to be its primary business, it essentially controls the sales network for General Motors and Chrysler cars.

3) The Obama “Pay Czar” made public statements supporting multi-million-dollar incentive-based compensation packages for senior Fannie Mae and Freddie Mac executives…despite exactly that structure having been singled out by regulators as a primary cause of the GSE violations that enabled the housing/financial crisis.  The Obama Administration is incentivizing Fannie’s and Freddie’s CEOs with up to $6 million per year, and senior executives can also receive hefty cash payouts under a similar target-based structure as existed during the bubble.  Both companies/agencies currently operate under taxpayer-funded bailout.  The Pay Czar cited the unique stresses of the jobs, despite the fact that they can now make roughly 12-times more than the President of the United States.

* This is an open study… we will steadily improve it and invite contributions. *


19 Responses to “Housing Bubble, Financial Crisis – What Happened, Who is Responsible”

  1. culturecrusader Says:

    Excellent site. Keep up the good work.

  2. jim Gause Says:

    I was always confused by the crisis. I am partly math-averse (please don’t ask what I do for a living) and balancing a check book gives me more anxiety than it’s worth. I will never own a home and I am coming to terms with that (screaming at the dawn why? why??). This site put it in such clean, uncomplicated terms it makes me proud of the moderators. Good job, and thanks from all the dum-dums of the States!

  3. Mac Says:

    BRAVO! I’m speechless and can’t believe you compiled such an impressively detailed account of the events leading up to the financial fiasco. Superb read!!

  4. Fred Nash Says:

    An excellant timeline. Too bad you didn’t have the video clip of Barney Frank stating that “there’s nothing wrong with Freddie Mac or Fannie Mae.” I have seen it and it would have been great to have been included.

  5. Jim Facciuto Says:

    Want to know the whole stinkin’deal??……read this……and line it up with what the SEC is doing now……..yep, it’s long…but it will put you wise to these guys in Washington D.C. right now……time to change the people, and the system…….reform all of Washington…..and put in the people who will do what WE tell them………

  6. J. Kato Says:

    Why did you intentionally leave out the Gramm-Leach-Bliley Act of 1999? What party were they from? Oh, the fact they were republicans sort of kills your framing of this whole mess on a single party, doesn’t it? In 1999, both the house and senate were controlled by republicans.

    Since you conveniently left it out.

    The bill allows consumer banks (think checking accounts, savings accounts, etc..) to merge with insurance companies and investment companies, so they all can make money. BUT for a bank to qualify to be a part of the program, you had to have a high CRA score, meaning that you had to have a lot of loans written to low income people. The government was effectively telling banks that if they wanted to be allowed to make money off of the investments of the rich, that they had to also be lending money to the poor.

    • tjhancock Says:

      What does that have to do with Dems overtly stonewalling any look into Fannie and Freddie while overtly telling Fannie and Freddie to pump the system with bad loans? I don’t disagree with the spirit of your last comment…Government WAS pumping the system with bad loans. Yes it was. Government is now doing the same with Treasuries. Who was behind that? The Democrat party plain as day. Key points follow:
      1) Politicians’ meddling — not at all Capitalism — enabled and promoted the financial crisis. Yes, Ronald Reagan’s statement that the 9 most terrifying words in the English language are, “I’m from the government, and I’m here to help” was perhaps never so accurately displayed;
      2) The Democrat Party — at a very high level — had a significant, direct and overt role in pushing the financial system into crisis, then executed a plan to benefit from that crisis — plain as day;
      3) At an individual level, several naive and/or unprincipled Republican and Democrat politicians somewhat unwittingly participated. You only need look so far as Artur Davis, one of the key Dems on the House Financial Services Committee, whom Dem leadership directed to run interference on Republican efforts to reign in Fannie and Freddie; once he saw what was really going on, he called it out and has now switched parties — plain as day.

      Putting Barney Frank and Chris Dodd in charge of Financial Market “reform” is yours to come to peace with… Same exact thing Democrat party leadership did by putting Jamie Gorelick on the 9-11 Commission after she wrote the Gorelick Wall that was perhaps the number one factor in the communication breakdown before the attack. Yes, the same Jamie Gorelick Dems made Vice Chairman of Fannie Mae in 1997 without one stitch of high-level financial market experience. Also, yours to come to peace with. The fact that senior Fannie executives — who were cooking the books so badly American taxpayers are still paying the tab — gave Barack Obama, while a first-term Senator, more money than any other politician in the history of Fannie, before or since, followed only by Chris Dodd and John Kerry…also yours…

    • Micah Says:

      In short! Obama the community organizer & Acorn supporter inherited his own mess, thanks to the Democrats in power.

  7. Stogie Says:

    An excellent, fact-filled article that is thoroughly supported by facts. I have linked to it and will quote it whenever I hear Democrats trying to blame the recession on Bush and Republicans.

  8. Brian Says:

    OUTSTANDING ARTICLE!!!! AND extremely terrifying, AND brings my blood to boil! Sad thing is that all of the “pass me the cool-aid” Obama supporters will look at this precise and factual write-up and STILL refuse to see the light. I truly believe we are heading into the first group of next gener’s in history who will look back in deep shame of what their parents left them. What Barney Frank and Chris Dodd have done is criminal however what this Obama administration is doing is quickly becoming unrecoverable. The end days will not start with a bullet or a bomb, it will begin with greed! I sincerely Pray for our country.

  9. Joe Klochan Says:

    TJ. Great article. I was wondering what your background/credentials are.

  10. Anonymous Says:

    […] Mac in 2005, but Barney Frank and Chris Dodd kept that from happening. A little background: Housing Bubble, Financial Crisis – What Happened, Who is Responsible TJ Hancock __________________ Make sure you are right and then go ahead. Davy […]

  11. Karin Clements Says:

    If you have some time and really want some insight into the housing bubble, read this.

  12. Robert Krueger Says:

    I am blown away i have never seen a point by point so well artiqulated thank you very much i will post and re post

  13. larry haverhals Says:

    Ldh. I have been waiting since FIRREA legislation to see this type of analysis on housing issues. Great analysis.

  14. Jennifer Says:

    Excellent read. Great follow-up comments by all.
    Really helps put the Whole Mess into perspective.

  15. Thom Says:

    This is a superior timeline! I’ve begun to share it on Twitter/elsewhere. I’ve said all along Mr. Romney needs to take away Obama’s “I Inherited a Mess” card. Too many voters believe that and Romney/Ryan and the GOP for that matter have done nothing to address it. This blog has done more than any of them combined and it should be their rebuttal blueprint!

  16. Gray Area Says:

    […] paper being forced upon them. GW Bush asked 17 times to fix this problem, but the Congress and the “just say no” Democrats who controlled it from 2007-2010, let the system fail. Irresponsible Congress and misdirection to […]

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: