Insider's Game

“Is this video  a lie?” wrote someone in response to my last piece on HuffPost. No, “lie” is an inadequate description. I uploaded the video link, seen by two million people before me, and gasped at the artful perversion of history. It was like a post-millennium version of The Birth of a Nation. In that silent film classic, a pivotal scene is prefaced by the title card:

 

“AN HISTORICAL FACSIMILE of the State House of Representatives of South Carolina as it was in 1870.”

 

Then we see black legislators in session, drinking whiskey, eating chicken, resting bare feet on their desks, and leering after white women. As J. Lapper wrote:

 

“This is also the first instance of “bait and switch” in the film. Prior to this, as noted above, [Director D.W.] Griffith used ‘historical facsimiles’ to give the film an air of historical accuracy…The subversive logic being, ‘Earlier we saw facsimiles of Sherman’s March, Lee’s surrender and Lincoln’s assassination. We know those are true. This must be too.'”

 

The updated “historical facsimile” from NakedEmperorNews.com, is just as dishonest and just as racially incendiary, since it has the semblance of reasonableness and reality. The hero at the Congressional hearings is the courtly southern gentleman, Republican Richard Baker, whose calls for regulatory oversight are drowned out by the shiftless uncouth blacks: Maxine Waters, Gregory Meeks, Lacy Clay, Artur Davis and Fannie Mae CEO Franklin Raines, aided by one white guy, Barney Frank.

 

[Update at 9:00 am October 10, 2008: Yesterday John McCain echoed this video by saying, “Democrat members of Congress fought against reform and it is a matter of record and hearings that they said everything was fine.” Barney Frank was one of the “willing co-conspirators.”]

 

To appreciate the mendacity of the video, you need to understand the history of what happened at Fannie Mae, and the causes of the current financial crisis. You’d be hard pressed to get that knowledge from mainstream media, whose piecemeal reporting comes across like blind men describing an elephant.
Into this void of understanding, Republicans have sought to absolve themselves of blame with a racist mythology that has gone viral. George Will, a chief proponent, neatly summarized the narrative on This Week last Sunday:

 

“In fact, much of the crisis we’re in today is because the government set out to fiddle the market. That is, we had regulation in effect with legislation that would criminalize as racism and discrimination if you didn’t lend to nonproductive borrowers. We had Fannie Mae and Freddie Mac existed to rig the housing market because the market would not have put people in homes they could not have afforded.”

 

Will’s narrative is about as accurate as D.W. Griffith’s portrayal of Reconstruction. Fox News invokes it constantly. The ABC commentator invokes four different phenomena, none of which he understands:

 

1. The financial problems of Fannie Mae and Freddie Mac,
2. The mission of Fannie and Freddie,
3. The Community Reinvestment Act,
4. The greater mortgage crisis.

 

To refute the lie, we need to address these issues one at a time.

 

What does the video have to do with Fannie Mae’s collapse? Nothing.

The best way to understand what happened is to start off with an understanding of when things happened. Therein lies the bait-and-switch. The financial problems at Fannie Mae began after these Congressional hearings, which were conducted a few weeks before the November 2004 elections. Fannie Mae’s troubles were caused by Daniel Mudd, who reversed the policies of his predecessor, Franklin Raines, when he became CEO in December 2004. The New York Times laid it out very clearly:

 

“[B]y the time Mr. Mudd became Fannie’s chief executive in 2004, his company was under siege. Competitors were snatching lucrative parts of its business. Congress was demanding that Mr. Mudd help steer more loans to low-income borrowers. Lenders were threatening to sell directly to Wall Street unless Fannie bought a bigger chunk of their riskiest loans.

 

“So Mr. Mudd made a fateful choice. Disregarding warnings from his managers that lenders were making too many loans that would never be repaid, he steered Fannie into more treacherous corners of the mortgage market, according to executives.
[…]

 

“Between 2005 and 2008, Fannie purchased or guaranteed at least $270 billion in loans to risky borrowers — more than three times as much as in all its earlier years combined, according to company filings and industry data.”

 

Democrats Supported Regulatory Oversight But Objected to a White House Power Grab

So if the October 2004 hearings did not address concerns associated with Fannie’s risky mortgages, what was everyone talking about? Something quite different, though an ignoramus like George Will could easily conflate the two concepts. An Administration report had skewered Fannie for engaging in some dodgy accounting practices – relating to timing differences over the recognition of income – which had a slight impact on its overall financial metrics. Fannie and its management deserved to be criticized and increased regulatory oversight was absolutely appropriate. But what the House Democrats in the video were objecting to was the Administration’s level of overkill. From how they saw things, the Bush Administration was using the pretext of regulatory oversight to accomplish a power grab that would compromise the mission of Fannie Mae. Here’s what Barney Frank said at the time:

 

“I believe we were well on the way, the chairman and I and the staffs, to putting together a bill that would have enhanced the regulator and could have passed. What stopped progress on a new bill was the Bush administration’s determination to go beyond safety and soundness and into provisions that would have restricted the housing function.

 

“To the extent that people played games [with accounting rules] to get bonuses, I’m outraged. People making that much money, let me put it this way, at the level of compensation of the top officers of Fannie Mae, they should get bonuses if they rush into a burning building a rescue a kid, maybe a cat, but not for doing their job. I think it is unseemly of them to be getting bonuses in the first place for doing what they’re getting paid very well to do.
[…]

 

“To the extent that there was manipulation, that is very wrong and should be penalized. But I’ve seen nothing in here that suggests that the safety and soundness are at issue, and I think it serves us badly to raise safety and soundness as a kind of a general shibboleth, when it does not seem to be the issue.”

 

Banks Governed by The Community Reinvestment Act Were Not The Ones Who Caused the Subprime Market to Expand

Daniel Gross in Slate attacks a lot of the same mythology discussed herein, focusing specifically on phony claims pertaining to the Community Reinvestment Act, which has been around for 30 years and never affected the soundness of the mortgage markets. The CRA never suggested that anyone compromise credit standards and it didn’t apply to the mortgage lenders or investment banks who were pumping up subprime mortgages.

 

 

Hank Paulson: The mortgage crisis was caused by events that began during the run up to the 2004 election and ended soon after the Democrats took Congress in early 2007.
Again, to understand what happened, begin with understanding when things happened. In this regard, there’s no secret. Everyone in financial services knows when and how things happened. Hank Paulson’s report to the President reflected the common knowledge expressed by Treasury, the Fed, the SEC and the CFTC:

 

“The turmoil in financial markets clearly was triggered by a dramatic weakening of underwriting standards for US. subprime mortgages, beginning in late 2004 and extending into early 2007. “[Italics in original text.]

 

We see this in all the numbers. According to a survey by the New York Fed, about 77% of subprime mortgages and 85% of Alt-A mortgages were issued after 2004. What happened in 2004? Subprime mortgage securitizations were able to take off because, as Bloomberg reported, in August 2004 Moody’s and Standard and Poor’s loosened their standards for rating mortgage backed securities, which had traded in a highly liquid market for almost 20 years. The impact of the rating agencies’ practices cannot be overstated. To date, banks have recognized about $500 billion in losses on subprime mortgages, the lion’s share of which were packaged in securities originally rated AAA, i.e. presumed to always be salable at close to par.

 

In 2004 short term interest rates, reduced by Alan Greenspan to stimulate the economy going in to the election cycle, reached their lowest point, enabling certain buyers to get variable rate mortgages at teaser rates of 3% for the first two years.

 

Nowhere in Paulson’s report will you find anything that suggests that the financial crisis was triggered by, as George Will put it, regulation that compelling lending to “non-productive borrowers” or by Fannie or Freddie, which had been around for decades, “rigging the housing market.”

 

As a final aside, you may remember this little gem from the McCain campaign. It’s an ad that claims Obama relied on economic advice from Franklin Raines, which wasn’t actually true. What do you think McCain was getting at?