The credit mess and who is to blame

Barney (Queer) Frank and Chris Dodd should be charged with fraud. Both have lied
about Fannie Mae and Freddie Mac. Bad government policy and empty suit types like
Barack Obama in authority. These people above are the stupid sob's that have caused
the current problem because there was a fix and they said no there is no problem
and stopped the fix for Fannie Mae and Freddie Mac. Democrate idiots. Bill Clinton
today said that the democratic congress was to blame for the current crisis. Even
the know liar is telling the truth about his fellow democrats.

For the Credit Mess
By CHARLES W. CALOMIRIS and PETER J. WALLISON Article
wallstreet journal.com

Many monumental errors and misjudgments contributed to the acute
financial turmoil in which we now find ourselves. Nevertheless, the
vast accumulation of toxic mortgage debt that poisoned the global
financial system was driven by the aggressive buying of subprime and
Alt-A mortgages, and mortgage-backed securities, by Fannie Mae and
Freddie Mac. The poor choices of these two government-sponsored
enterprises (GSEs) -- and their sponsors in Washington -- are largely
to blame for our current mess.

How did we get here? Let's review: In order to curry congressional
support after their accounting scandals in 2003 and 2004, Fannie Mae
and Freddie Mac committed to increased financing of "affordable
housing." They became the largest buyers of subprime and Alt-A
mortgages between 2004 and 2007, with total GSE exposure eventually
exceeding $1 trillion. In doing so, they stimulated the growth of the
subpar mortgage market and substantially magnified the costs of its
collapse.

It is important to understand that, as GSEs, Fannie and Freddie were
viewed in the capital markets as government-backed buyers (a belief
that has now been reduced to fact). Thus they were able to borrow as
much as they wanted for the purpose of buying mortgages and mortgage-
backed securities. Their buying patterns and interests were followed
closely in the markets. If Fannie and Freddie wanted subprime or Alt-A
loans, the mortgage markets would produce them. By late 2004, Fannie
and Freddie very much wanted subprime and Alt-A loans. Their
accounting had just been revealed as fraudulent, and they were under
pressure from Congress to demonstrate that they deserved their
considerable privileges. Among other problems, economists at the
Federal Reserve and Congressional Budget Office had begun to study
them in detail, and found that -- despite their subsidized borrowing
rates -- they did not significantly reduce mortgage interest rates. In
the wake of Freddie's 2003 accounting scandal, Fed Chairman Alan
Greenspan became a powerful opponent, and began to call for stricter
regulation of the GSEs and limitations on the growth of their highly
profitable, but risky, retained portfolios.

If they were not making mortgages cheaper and were creating risks for
the taxpayers and the economy, what value were they providing? The
answer was their affordable-housing mission. So it was that, beginning
in 2004, their portfolios of subprime and Alt-A loans and securities
began to grow. Subprime and Alt-A originations in the U.S. rose from
less than 8% of all mortgages in 2003 to over 20% in 2006. During this
period the quality of subprime loans also declined, going from fixed
rate, long-term amortizing loans to loans with low down payments and
low (but adjustable) initial rates, indicating that originators were
scraping the bottom of the barrel to find product for buyers like the
GSEs.

The strategy of presenting themselves to Congress as the champions of
affordable housing appears to have worked. Fannie and Freddie retained
the support of many in Congress, particularly Democrats, and they were
allowed to continue unrestrained. Rep. Barney Frank (D., Mass), for
example, now the chair of the House Financial Services Committee,
openly described the "arrangement" with the GSEs at a committee
hearing on GSE reform in 2003: "Fannie Mae and Freddie Mac have played
a very useful role in helping to make housing more affordable . . . a
mission that this Congress has given them in return for some of the
arrangements which are of some benefit to them to focus on affordable
housing." The hint to Fannie and Freddie was obvious: Concentrate on
affordable housing and, despite your problems, your congressional
support is secure.

In light of the collapse of Fannie and Freddie, both John McCain and
Barack Obama now criticize the risk-tolerant regulatory regime that
produced the current crisis. But Sen. McCain's criticisms are at least
credible, since he has been pointing to systemic risks in the mortgage
market and trying to do something about them for years. In contrast,
Sen. Obama's conversion as a financial reformer marks a reversal from
his actions in previous years, when he did nothing to disturb the
status quo. The first head of Mr. Obama's vice-presidential search
committee, Jim Johnson, a former chairman of Fannie Mae, was the one
who announced Fannie's original affordable-housing program in 1991 --
just as Congress was taking up the first GSE regulatory legislation.

In 2005, the Senate Banking Committee, then under Republican control,
adopted a strong reform bill, introduced by Republican Sens. Elizabeth
Dole, John Sununu and Chuck Hagel, and supported by then chairman
Richard Shelby. The bill prohibited the GSEs from holding portfolios,
and gave their regulator prudential authority (such as setting capital
requirements) roughly equivalent to a bank regulator. In light of the
current financial crisis, this bill was probably the most important
piece of financial regulation before Congress in 2005 and 2006. All
the Republicans on the Committee supported the bill, and all the
Democrats voted against it. Mr. McCain endorsed the legislation in a
speech on the Senate floor. Mr. Obama, like all other Democrats,
remained silent. (In other words he voted present as is his coward way)

Now the Democrats are blaming the financial crisis on "deregulation."
This is a canard. There has indeed been deregulation in our economy --
in long-distance telephone rates, airline fares, securities brokerage
and trucking, to name just a few -- and this has produced much
innovation and lower consumer prices. But the primary "deregulation"
in the financial world in the last 30 years permitted banks to
diversify their risks geographically and across different products,
which is one of the things that has kept banks relatively stable in
this storm.

As a result, U.S. commercial banks have been able to attract more than
$100 billion of new capital in the past year to replace most of their
subprime-related write-downs. Deregulation of branching restrictions
and limitations on bank product offerings also made possible bank
acquisition of Bear Stearns and Merrill Lynch, saving billions in
likely resolution costs for taxpayers.

If the Democrats had let the 2005 legislation come to a vote, the huge
growth in the subprime and Alt-A loan portfolios of Fannie and Freddie
could not have occurred, and the scale of the financial meltdown would
have been substantially less. The same politicians who today decry the
lack of intervention to stop excess risk taking in 2005-2006 were the
ones who blocked the only legislative effort that could have stopped
it.

Mr. Calomiris is a professor of finance and economics at Columbia
Business School and a scholar at the American Enterprise Institute.
Mr. Wallison, a senior fellow at the American Enterprise Institute,
was general counsel of the Treasury Department in the Reagan
administration.