McCain and the Meltdown

Good thing to know. I don't think either campaign can win the blame game on this. Both parties, and both candidates to different extents, share some blame. The better question's going to have to be, who will do better for the country going forward on this.

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It's late, so I'm too tired to look it up. What was the "Federal Housing Enterprise Regulatory Reform Act of 2005, S. 190", bill he co-sponsored supposed to do? McCain himself said he was a "de-regulator" so I find it hard to believe he'd co-sponsor a bill that would ADD more regulations onto Freddie and Fannie..

Ok, so I wasn't too tired to look it up from the links in the article.

"1/26/2005--Introduced.

"Federal Housing Enterprise Regulatory Reform Act of 2005 - Amends the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 to establish: (1) in lieu of the Office of Federal Housing Enterprise Oversight of the Department of Housing and Urban Development (HUD), an independent Federal Housing Enterprise Regulatory Agency which shall have authority over the Federal Home Loan Bank Finance Corporation, the Federal Home Loan Banks, the Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (Freddie Mac); and (2) the Federal Housing Enterprise Board.

"Sets forth operating, administrative, and regulatory provisions of the Agency, including provisions respecting: (1) assessment authority; (2) authority to limit nonmission-related assets; (3) minimum and critical capital levels; (4) risk-based capital test; (5) capital classifications and undercapitalized enterprises; (6) enforcement actions and penalties; (7) golden parachutes; and (8) reporting.

"Amends the Federal Home Loan Bank Act to establish the Federal Home Loan Bank Finance Corporation. Transfers the functions of the Office of Finance of the Federal Home Loan Banks to such Corporation.
Excludes the Federal Home Loan Banks from certain securities reporting requirements.

"Abolishes the Federal Housing Finance Board.

htp://www.govtrack.us/congress/bill.xpd?bill=s109-190&tab=summary

This bill sounds like it was a attempt to privatize the regulatory agencies. I fail to see how this bill would have prevented the Freddie & Fannie situation we are in today. Care to elaborate your point? Especially since it says, "Excludes the Federal Home Loan Banks from certain securities reporting requirements."

You found a nice quote, to try to make McCain sound good, Mr Sanders but it doesn't stand up to examination.

I commented on this on an earlier post. From what I can tell the Bush White House first proposed the plan back in 2003. So if the GOP had this as a priority they certainly took their time in getting it into bill form in 2005. And then they couldn't even pass it....

I've spent some time on the internet trying to find an article that's dated from that time period. Practically everything on Google is dated today or yesterday and they all say the same thing- that McCain tackled this problem in 2005 and the Dems blocked it. Maybe the Dems did, but I wanted to try to find a more objective story about the process (back then) as well as the bill itself.

The only thing I could find (so far) is this:

http://www.aei.org/publications/pubID.24591/pub...

From the article:

"But Fannie and Freddie are different from banks in one important way: despite the fact that their securities explicitly state that they are not backed by the federal government, their government charter and mission--plus the government’s past behavior--have persuaded investors that neither company will be allowed to default. Thus, in a very practical sense, all their debt obligations--not just some limited amount corresponding to a bank’s deposits--are seen by U.S. and foreign investors as nearly risk-free, and therefore are not subject to market discipline. In effect, they are given a free pass to take risk. The name for this phenomenon--in which government backing reduces market discipline--is moral hazard, and the GSEs represent moral hazard on steroids.

"OFHEO’s failure, unfortunately, is not something that can be cured by legislation; it is the result of the same deficiency shared by all regulators, and the reason why regulation should not be treated as a panacea. Risk-taking and fraud originate in the decisions of top management, in meetings to which no regulator and few ordinary employees are ever privy. Were it not for the unusual events, outlined below, which put the OFHEO watchdog onto the scent, it is virtually certain that both Fannie and Freddie would still be manipulating their accounts and misleading investors, the public, Congress, and OFHEO itself.

"The first problem with this idea was that, as Alan Greenspan pointed out, tighter regulation only increases the tendency of the markets to believe that Fannie and Freddie are wards of the government: “World-class regulation, by itself,” said Greenspan, “may not be sufficient and indeed . . . may even worsen the situation if market participants infer from such regulation that the government is all the more likely to back GSE debt.”[4] In addition, as noted above, bank regulators are assisted, at least to some degree, by the existence of market discipline, and the new GSE regulator will not have this vital support. So if it were the intention of Congress to give the new regulator as much authority as a bank regulator wields, that would not have been enough. Given the complacent attitude of the capital markets, the new regulator would need more authority than a bank regulator in order to deal effectively with risk-taking by Fannie and Freddie. But the bill ultimately adopted by the House of Representatives in 2005 was deficient in this respect, as in many others. It did not even provide the new GSE regulator with all of the authority of bank regulators.[5]'

In other words the market perceives that Fannie and Freddie's obligations were implicitly guaranteed by the federal government. Investors felt that their dealings with Fannie and Freddie were virtually risk free so they are free to take more risk. The McCain co-sponsored bill did not go far enough to address this and would not have reduced the risk taken by Fannie and Freddie. The real problem is fraud by Fannie and Freddie's accounting and poor oversight. As the article pointed out, regulation (or I might add deregulation in other cases) is not the panacea for all problems.

So there was (and are) very real problems at Fannie and Freddie, but they were caused by fraud and poor oversight. The regulation pushed by the Republicans (and it seemed to have been a half-hearted push) appears not to have adequately addressed the fraud and poor oversight.

I'm no expert on this and I welcome more facts and opinions from others. I also reserve the right to flip flop as more information becomes known. :)

Stockboy, your points here and in that other thread are well taken. I agree that this matter should have had more urgency, and it's disappointing that what was attempted may have been ineffective anyway, and when it was blocked by the opposing party the matter appears to have been dropped. There's no doubt that that itself is a problem- reform is talked about, seemingly, to make voters feel that something is being done, but the reform measures either get dropped or watered down so much as to be meaningless.

From what I can see, the bill that we're discussing was vigorously opposed by certain Democrats, with Barney Frank and Chris Dodd leading the pack (and it's not insignificant that Dodd was the leading recipient of campaign donations from Fannie and Freddie, while he led the committee that dealt with them.) But I think it's also important to note that at this time, the GOP still held a majority in Congress, and it was because some GOP sided with those Dems that nothing could be done. This isn't a partisan thing, it's a corruption and incompetence thing.

At the very least though, you have to give McCain some credit for sounding the alarm (even if he didn't do it loudly or effectively enough) and you have to admit that Obama's claims of McCain being part of the bunch that ignored the problems is just not true. And on the fact that he didn't push hard enough, you have to then ask, why wasn't Obama joining with those who were pushing for something to be done (notwithstanding the fact that I'm not clear on what if anything Obama did say or do on this issue, and I too welcome more information.)

Anyway, thanks, Dennis, for frontpaging this, and thanks for the actual discussion Stockboy instead of dueling talking points.

This might either illuminate or muddy the water ...

http://www.ft.com/cms/s/0/8780c35e-7e91-11dd-b1...

Introduced, but never followed through for debate.

Last Action on this bill: Jul 28, 2005: Committee on Banking, Housing, and Urban Affairs. Ordered to be reported with an amendment in the nature of a substitute favorably.

...hmmm apparently Google foogled me as there seems to be multiple instances and variances on the issue. Needs more looking into for certain.

Well, we can if we want, go back to the Clinton Bubble -- but it's a cheap shot that really doesn't go anywhere. What's happening now is that the Bush administration is rushing to bail out these institutions in large part because it's a Democratic political issue and the GOP would prefer to steal it and claim credit for "salvation" themselves. I see it as wrong for them to bail out all these institutions. And where is the money coming from for these bailouts, and to flood the economy with money? It seems, more debt. So our debt grows, and this constitutes additional deficit spending, so Bush's last year ls likely to feature a deficit in excess of one trillion dollars. Yes, trillion. (Paraphrasing the accountant in Mexico describing over a billion dollars, not a million, missing from PEMEX: [A trillion dollars?] "Si! Con TE!")

And now there's talk of spending a trillion dollars or more to take over bad real estate held by the banks. This is lunacy.

CStanley, thanks for the reply. Yes, I agree with you- McCain deserves credit for sounding the alarm on this issue earlier.... I probably should have mentioned that in my first comment but when I commented it was already way past my bedtime. :)

And I wonder what Obama's position on it was. Yes, the Dems did block it.... but

I won't "give" this one to McCain since, as the article pointed out the bill would not have done much, if anything to actually mitigate any shortcomings with Fannie/Freddie and McCain and the GOP didn't pursue the matter. But I will say he deserves more credit than the Dems on this.

CStanley, thanks again. I was looking forward to your comments on this and appreciate the dialogue. I still reserve the right to change my mind (either way) if/when new information become available. :)

DLS:

"Well, we can if we want, go back to the Clinton Bubble."

we can also hop the wabac machine and go to Nixon and trace our steps up to this point, but to what end. Throwing a snark like that distracts from the issue at hand.

I think we need to look at why it was never Amended/Debated/Voted on- it seems like a good first step- why no follow through?

I agree and also reserve the right to change my mind, SB. Isn't it aggravating that on what should be the number one issue of today, it's impossible to get to the truth about which candidate seems to have had a better handle on things? Truth is, neither of them did enough to head off the current crisis. Hindsight is 20:20, of course, but those who have responsibility for oversight ought to be able to see warning signs and then to act before it's too late.

Like many republican sponsored/written bills, the Title is often the exact opposite of what the legislation actually is. In this case an attempt to turnover regulation of key housing/banking authority to an private company.

Even John McCain can see problems ahead sometimes, his ability to do anything meaningful to mend them without making the problem worse seems to difuse any credit he might have deserved.