Dems block banking regulations?

January 11, 2009 9:03 AM

In a discussion that I had with my brother over the holidays, he explained to me how the banking /investment failure was all the democrats fault. After picking myself up off the floor, he continued to explain to me how the dems blocked a bill that the republicans were trying to get through the senate to increase regulations on banks and their investment practices. After much googling, I am still unable to find what he could be referring to. Does this bill sound familiar to anyone?

I'm pretty sure he wouldn't have made this up, and there is a chance that something like this happened that I wasn't aware of, but it seems to me if this were the case, republicans would have been trumpeting this fact wide and clear, say around election time... Anybody?

posted by newpotato to Law & Government (31 answers total)

Best answer: The Financial Services Regulation Act deregulated a lot of the banking industry. Bill Clinton signed it into law and so some Republicans blame it on him, even though it was passed by a Republican congress.
posted by desjardins at 9:17 AM on January 11, 2009

"Barack's advisors wrote bill" (warning: Free Republic link)
posted by desjardins at 9:20 AM on January 11, 2009

I believe the bill in question was a regulatory one for Fannie Mae and Freddie Mac. This was percolating around Fox News at the beginning of this mess, when those were the largest parts of the whole mess.

Here's a blog link:
newsbusters.org

White House Link:
whitehouse.gov

It basically ceased to be a talking point when they were found to be two somewhat rotten apples in a very large barrel.
posted by zabuni at 9:24 AM on January 11, 2009

I'd also add that the legislation intended to increase regulation of FNM and FRE was originally lobbied for by the Countrywides and WaMu's of the world to weaken their main competitor. It was not some attempt to rein in the out of control housing market, but rather increase the private sector's ability to compete in the conforming home loan market.
posted by JPD at 9:27 AM on January 11, 2009

Well to be fair - at the time they wanted to weaken them because they had a government backed guarantee. That's not exactly a level playing field.
posted by Pants! at 9:44 AM on January 11, 2009

Response by poster: Okay, this is interesting.
I'm pretty sure the links zabuni provides are what my brother was referring to, as he gets all his news from Fox (referenced in the link) because, in his words "all the other networks are biased".
In reading those to links, it appears as if my brother is right, the dems blocked a bill that would have increased regulations on fanniemae and freddiemac. At this point, I'm even more confused as to why they would have done that. I'm not buying into that whole "everybody has a right to own their own home" argument that they put forth..
JPD sheds some light on the reason it might have been blocked, so as not to strengthen the perhaps more unscrupulous lenders, but is that it? Or is there some more basic underlying reason that I'm just not getting here?
posted by newpotato at 9:58 AM on January 11, 2009

Ah, yes, the "poor black folks brought down Wall Street" argument. You see, they forced Wall Street to lend that money and take enormous risks.

The case for all of this was put in place hurriedly right after the bubble burst.

Its not true because (1) the real problem was deriviatives based on the sub-prime mortgages; and (2) the Bush administration pushed Fannie and Freddie (two apples in a very large barrel) to make those loans.

The credit default swap agreements are at the core of this mess and they were part of legislation passed by a Republican congress and shepereded through by Texas Senator Phil Gramm, McCains's primary economics advisor. I think the bill was called the Commodity Futures Modernization Act. It made Credit Default Swaps unregulatable by the federal government.

Will have more to post with links when I get off this Blackberry.
posted by Ironmouth at 10:12 AM on January 11, 2009 [4 favorites]

BTW -- you might find this Vanity Fair article from the current issue (February 2009) to be of interest: Fannie Mae’s Last Stand (one-page, print version).
posted by ericb at 10:14 AM on January 11, 2009

I think the bill was called the Commodity Futures Modernization Act.

Commodity Futures Modernization Act of 2000

"In substance, it appears that the leadership of the Republican-controlled Senate and House incorporated the deregulation of credit default swaps into an omnibus budget bill (without hearings or recorded votes) at a time when the outgoing president [Clinton] was in no position to veto anything."

CBS: 60 Minutes: Credit Default Swaps [video | 12:26].
posted by ericb at 10:20 AM on January 11, 2009

TIME magazine: The Monster That Ate Wall Street -- "How credit default swaps—an insurance against bad loans—turned from a smart bet into a killer."
posted by ericb at 10:47 AM on January 11, 2009

Its not true because (1) the real problem was deriviatives based on the sub-prime mortgages;

Can you explain this? How do derivatives cause problems?

The Financial Services Regulation Act deregulated a lot of the banking industry. Bill Clinton signed it into law and so some Republicans blame it on him, even though it was passed by a Republican congress.

And, how does changing the ownership regulations of banks and investment houses hurt anything?
posted by gjc at 10:48 AM on January 11, 2009

What I do with two siblings who watch fox and trot out this lunacy or that is say to them "You know, you might be right" and then shift the conversation on toward our beautiful new niece or whatever other interest we share.

I learned the magic phrase "You know, you might be right" from an old buddy of mine, Vinny, wise beyond his years, lots of fun, sparkle in his eye. When you tell someone that they might be right, you've totally de-fused the situation, you haven't ceded anything nor demanded that they do so, you've left them their right to hold whatever idea they have. And you haven't entered into a fight, which is what they really want.
posted by dancestoblue at 10:50 AM on January 11, 2009 [15 favorites]

Can you explain this? How do derivatives cause problems?

Credit Default Swaps -- the unregulated default insurance black market -- haven't really caused the problem yet. The true derivative that nuked the system was CDOs. These allowed risk to be offloaded from the "mortgage lenders" to 3rd party investors who got sold a pig in a poke (with Wall Street being the intermediary and taking its ~30% vig).

'm not buying into that whole "everybody has a right to own their own home" argument that they put forth.>/i>

Pro-Home is like Pro-Child, Pro-Family. The saying in Congress is never make a vote you have to explain in the next election.
posted by troy at 11:01 AM on January 11, 2009

This American Life has a few really excellent programs about the economy. This one in particular provides a very balanced view that essentially says it was both parties' fault.
posted by easy_being_green at 11:11 AM on January 11, 2009

It's the : Federal Housing Enterprise Regulatory Reform Act of 2005. Here's the clearest link I could find, unfortunately a Daily Kos link: http://www.dailykos.com/story/2008/9/20/21195/8886 (not thrilled about this Daily Kos link, but it was one of the clearer links I could find)

I think blaming the depression on either party completely is wrong. That said, I put the lion's share of the fault on Republicans. Bottom line: They completely knew about the problems presented by Fannie and Freddie, did nothing about it, made these sorts of loans the centerpiece of our economy, and, most importantly, were the only ones that could have addressed the problem (being the majority party). This bill was killed before it was even ever up for discussion, so - there you go. After it was killed, McCain and Dole signed onto it and championed it, which was too little too late.
posted by xammerboy at 11:14 AM on January 11, 2009

The true derivative that nuked the system was CDOs.

This is a simple and funny explanation (Powerpoint) of the mortgage loan crisis and the role of CDOs in that crisis.
posted by jayder at 11:20 AM on January 11, 2009 [1 favorite]

Best answer: To answer the question, what the wingnuts are going on about is the 2005 Federal Housing Enterprise Regulatory Reform Act Of 2005. This only concerned Freddie Mac and Fannie Mae (known as the "GSE"s, or "government-sponsored enterprises", which had more solid slightly less insane underwriting standards than the rest of the industry and thus had a decreasing role to play in the bubble inflation of 2003-2007.

Due to the Fannie Mae Accounting Scandal, FNM was actually already prevented from participating in the worst of the boom. Plus, of course, the conforming limit is the limit that GSEs would take, and while I don't have numbers handy the real killers are going to be all the bad loans made to high-FICO borrowers speculating in high-value ($500K+) real estate with stated-income / stated-asset zero-down negative-amortization loans.

These are the loans that killed Wachovia, Wamu, and put Citigroup at death's door.
posted by troy at 11:21 AM on January 11, 2009

Response by poster: Okay, so from reading the VF article I conclude that the Bush admin didn't want to regulate Fannie and Freddie, but rather take them down completely,
and that those voting against the reulations were not just democrats, but also republicans, and that the main reason they voted against it was because of fear of the power of fannie mae, and also fear that bringing it down would cause a housing crisis.
Is this right or am I once again missing something?
I am aware that it was derivitives and other mortgage backed securities that were the main cause of the crisis, but since my bro brought up this aspect of the whole debacle, this is what I was looking for more information about.
Dancestoblue, I like your strategy, but I'm not sure if I can actually pull it off. I like hearing their points of views on things, I keep hoping that one day they will actually be able to back them up with a cohesive argument. I thought that maybe this might have been it.
Someday...Someday.. what is very funny to me right now is that now my brother is making noises of high tailing it out to some property that I bought in Australia (in part so that I could escape the evil Bush regime) so that he can escape the evil Obama regime.
posted by newpotato at 11:27 AM on January 11, 2009

Read this on the GSEs' role in the disaster by the late, great blogger "Tanta" on Calculated Risk.
posted by troy at 11:36 AM on January 11, 2009

and that the main reason they voted against it was because of fear of the power of fannie mae, and also fear that bringing it down would cause a housing crisis.

these two are related. Monkey with the lending system in 2005 and then have everything go boom in 2006-2007 gives your 2008 opponents (both primary and general) something to put in their 30-second TV ads front & center. The housing market was living on borrowed time in late 2005.
posted by troy at 11:46 AM on January 11, 2009

Best answer: The Vanity Fair article is really interesting. Some of it is a bit far fetched - e.g., the gov't took over Freddie and Fannie 'because they have four months' to do so rather than because the two were in financial difficulty. But it does try to explain why Bush's numerous efforts to rein in Freddie and Fannie never really came to fruition, even with a Republican majority congress.

Okay, so from reading the VF article I conclude that the Bush admin didn't want to regulate Fannie and Freddie, but rather take them down completely

That's what the article implies but it's a bit of a reach. Even within the article, it sounds like Greenspan convinced Bush of the risk of the GSEs rather than that Bush had some innate wish to eliminate them: "And then there was Fed chairman Alan Greenspan. He was friendly with Raines, had regular lunches with him, and came to the grand Christmas parties at Raines’s home—but he never got past his deep suspicion of the G.S.E.’s. To wit: the portfolio business was a ticking time bomb,and who needed Fannie and Freddie anyway?" The article implies it's a small government philosophical thing, but Bush is not that rabid of a small government guy.

and that those voting against the reulations were not just democrats, but also republicans,

Fair enough. FTA: "...No new legislation for regulation of the G.S.E.’s made it through Congress. While it is true that votes often broke along partisan lines, with the Democrats siding with Fannie and Freddie, it’s also true that Republicans often broke ranks..."

and that the main reason they voted against it was because of fear of the power of fannie mae, and also fear that bringing it down would cause a housing crisis.

Yes, the article says so but I think that's also a bit of a reach. I hate to sound cynical about Congress but if they voted on something that the President proposed and Greenspan endorsed, given Greenspan's reputation at the time they would have at least some political cover if a housing crisis ensued. The article also says it was due to campaign contributions, which I think is closer to the truth. And...I haven't researched it anywhere but I suspect it simply boiled down to a quid pro quo for votes of some sort.
posted by txvtchick at 12:34 PM on January 11, 2009

As long as you are reading about this stuff, the latest New Yorker has an extremely entertaining profile of Rep. Barney Frank, who is blamed by many Republicans for screwing up mortgage regulation.

Here's the relevant passage to your question:

"In 2004, it was Bush who started to push Fannie and Freddie into subprime mortgages, because they were boasting about how they were expanding homeownership for low-income people. And I said at the time, ‘Hey—(a) this is going to jeopardize their profitability, but (b) it’s going to put people in homes they can’t afford, and they’re gonna lose them.’ ”
(In a recent op-ed piece in the Wall Street Journal, Lawrence B. Lindsey, a former economic adviser to President Bush, wrote that Frank “is the only politician I know who has argued that we needed tighter rules that intentionally produce fewer homeowners and more renters.”)
...
In 2005, while the Democrats were still in the minority, Frank contributed to a bipartisan effort to put his objectives—tighter regulation of Fannie and Freddie and new funds for rental housing—into law. At the time, Fannie and Freddie were regulated by a small agency within the Department of Housing and Urban Development; the bill proposed to create an independent agency to monitor their operations. Frank and (Republican) Michael Oxley, who was then chairman of the Financial Services Committee, achieved broad bipartisan support for the bill in the committee, and it passed the House. But the Senate never voted on the measure, in part because President Bush was likely to veto it.
“If it had passed, that would have been one of the ways we could have reined in the bowling ball going downhill called housing,” Oxley told me. “Barney, to some extent, is misunderstood—with this image of him as a fierce partisan. He is an institutionalist. He believes in the House and in the process. He eschews the grandstanding style that so many members use and prefers to work behind the scenes and get something done."
posted by CunningLinguist at 12:46 PM on January 11, 2009

Karl Rove was just pushing this line in a recent WSJ opinion piece (not that he's by any mean the first. A refutation of Rove.
posted by Good Brain at 1:03 PM on January 11, 2009

I think blaming the depression on either party completely is wrong.

I don't think that word means what you think it does.

http://en.wikipedia.org/wiki/Depression_(economics)
posted by gjc at 1:38 PM on January 11, 2009

Response by poster: After reading the three articles, all with interestingly different viewpoints, this is what I'm walking away with:

The cause of the bulk of the current credit crises is not the underlying securities.

To the extent that it is, Fannie Mae and Freddie Mac make up only a small portion, so the crisis would have happened regardless, even if the the bill to increase oversight had passed.

The bill didn't pass because both democrats and republicans at the time (in the Republican controlled house) didn't want it to pass because it would look bad for them the next election cycle.

Except for Barney Frank, who was prescient enough to realize that the problem was too many people who shouldn't own homes were owning homes, and he wants even tighter regulations, which ultimately wouldn't matter because the big comedown was going to happen anyway.

That's it until the next link to the next article gets posted. Thanks for all the information though, I'm glad there's people out there who understand this much better than I do.
posted by newpotato at 2:07 PM on January 11, 2009

A mild tangent, but responding to this:

Dancestoblue, I like your strategy, but I'm not sure if I can actually pull it off. I like hearing their points of views on things, I keep hoping that one day they will actually be able to back them up with a cohesive argument.

You could try what my father does, then. He actually doesn't cede ground in an argument as such -- but he does acknowledge when the other person has made a good point. He's the kind of guy who likes to play devil's advocate and get spirited debates going for fun, and used to do this a lot with me when I was in college. And this is precisely what he was doing -- seeing if I was able to back up what I had to say with a cohesive argument.

But when he acknowledged that something I said was a "good point," it always diffused anything. In fact, he tended to give up after that too. Try saying it while looking very thoughtful, like you now need to go and ponder what they've just said a while...
posted by EmpressCallipygos at 2:09 PM on January 11, 2009

Private sector loans, not Fannie or Freddie, triggered crisis
posted by pmurray63 at 2:58 PM on January 11, 2009

Dancestoblue -- I would favorite your comment 1000 times if I could!
posted by wittgenstein at 3:35 PM on January 11, 2009

Re: Barney Frank
"In 2004, it was Bush who started to push Fannie and Freddie into subprime mortgages, because they were boasting about how they were expanding homeownership for low-income people. And I said at the time, ‘Hey—(a) this is going to jeopardize their profitability, but (b) it’s going to put people in homes they can’t afford, and they’re gonna lose them.’ ”

This is really disingenuous of of Frank. Yes, Bush pushed for increased home ownership and lending to low income and minority borrowers, but it was at least partly in an attempt to slow growth. From a 7/16/04 WSJ article (I found through Lex-Nex but can't find a free version):

"Administration officials also are pushing other initiatives, including an increase in the percentage of business that Fannie and Freddie reserve for low- and moderate-income families, which the companies say is excessive...The Bush administration - its case aided by an accounting scandal at Freddie Mac last year - has been more aggressive in seeking to rein in Fannie and Freddie. The legislation it has sought, without success, would create a new federal regulator to control the companies' capital requirements, block them from entering new lines of business and wind them down in the event of insolvency...Some Democrats dismiss the administration's initiatives as part of a broader effort by conservatives to trim government support for housing. "What's the argument for restricting what [the companies] do over all except you don't like them?" says Representative Barney Frank of Massachusetts, the top Democrat on the House Financial Services Committee.

In 2005, while the Democrats were still in the minority, Frank contributed to a bipartisan effort to put his objectives—tighter regulation of Fannie and Freddie and new funds for rental housing—into law...Frank and (Republican) Michael Oxley, who was then chairman of the Financial Services Committee, achieved broad bipartisan support for the bill in the committee, and it passed the House. But the Senate never voted on the measure, in part because President Bush was likely to veto it.

That is also misleading. From the New York Times in 2005, regarding the same bill:

"Differences between the House and Senate versions, however, could doom the legislation if not reconciled. The Senate bill would require the companies to slowly divest most of their $1.5 trillion investment portfolios. The House bill leaves portfolio limits to the discretion of the new Federal Housing Finance Agency. Fannie Mae and Freddie Mac have lobbied against the imposition of such limits, particularly since their portfolios account for most of their earnings. The strict limits on portfolio size in the Senate version have been sought by the Bush administration and by Alan Greenspan..."
posted by txvtchick at 4:08 PM on January 11, 2009

Paul Krugman has specifically addressed Fannie and Freddie's role (or lack thereof) in the crisis. This lead to this good overview.
posted by idb at 9:05 PM on January 11, 2009

Barry Ritholtz has also addressed this in various post.

See: http://www.ritholtz.com/blog/2008/12/more-cra-idiocy/

What I found interesting was how systematically the republicans were lying about what the CRA was:

---
In the 1960s and 70s, banks would redline neighborhoods. They would literally put a map on a wall, and with a red magic marker, draw a redline enveloping certain neighborhoods. If you lived within the redlined areas, regardless of your income, credit score, assets, debt servicing ability, if you were in the redlined area you could not qualify for a mortgage.

Although Redlining was made illegal by the Fair Housing Act of 1968, the practice still surreptitiously continued. The Community Reinvestment Act of 1977 was the next attempt to stop redlining. There were two main aspects of the CRA: First, it required banks to apply the same lending criteria in all communities. Credit Score, Loan-to-value, percentage of monthly take home, etc. had to be the same across different areas.

Second, the Community Reinvestment Act required banks to make good faith attempts to loan the money back to its own depositors. If you open up a branch in Harlem, you cannot suck up all the local business and residents’ cash, and then turn around and only lend it out to Tribeca condo buyers. You must make a fair attempt to loan the money locally. Banks have no obligation to open branches in Harlem, but if they did, they are required to at least try to lend the locals back their own money.
---

See also: http://www.ritholtz.com/blog/2008/11/visual-guide-to-the-financial-crisis/

and : http://www.ritholtz.com/blog/2008/10/misunderstanding-credit-and-housing-crises-blaming-the-cra-gses/
posted by Arthur Dent at 8:23 AM on January 12, 2009