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The 2008 Recession


What caused the 2008 banking crises, job loss, housing foreclosures, and ultimately the recession that accompanied the crises? We can all agree that the “housing bubble” triggered the banking problems but how did America get to this place in history? Greed, ignorance, intolerance, and political posturing played a large part in the problem. Short-sighted thinking with little regard to the unintended consequences of government policies paved the way for a distructive atmosphere in the banking industry and led to preditory lending practices and outright fraud. This is a summary of events that helped to lead us down the path to crises.

1977:
Jimmy Carter initiated and signed the Community Reinvestment Act (CRA). This had massive opposition from the banking community but the bill was pushed through by the Democrats. The new law required banks to ensure that low-income families could obtain loans and put the banks at risk of penalties if they did not perform well under this new law.

The new law forced banks to find ways to provide loans to people who could not afford to purchase a home under the laws that were currently in place. Low down-payments gave way to loans that did not require a down payment and later to loans that did not even require proof of employment or means to pay back the loan. The CRA was a result of a president who lacked the competence to envision the unintended consequences of a law that would end up hurting millions of Americans by forcing banks to offer risky loans to unqualified borrowers. This would be bad enough if it stopped here but the loans ended up being guaranteed by the tax payers and many of the practices still continue today. 

1989:
The Financial Institutions Reform Recovery and Enforcement Act of 1989 (FIRREA) was enacted in the wake of the savings and loan crisis of the 1980s. It established the Resolution Trust Corporation (RTC) to close hundreds of insolvent thrifts and provided funds pay out insurance to their depositors. The new law also created the Federal Housing Finance Board (FHFB) as an independent agency to oversee the 12 federal home loan banks (also called district banks). In general, the new law was intended to add some oversight to the CRA.

Mid -1990’s:
The regulation grew to monstrous proportions during the Clinton administration, obsessed as it was with multiculturalism. Amendments to the CRA in the mid-1990s dramatically raised the amount of home loans to unqualified low-income borrowers. The revisions also allowed for the first time the securitization of CRA-regulated loans containing subprime mortgages. The changes came as radical housing rights groups led by ACORN lobbied for such loans. A young public-interest lawyer in Chicago by the name of Barack Obama represented ACORN at the time. HUD, in turn, pressured Fannie Mae and Freddie Mac to purchase more subprime mortgages, and Fannie and Freddie, in turn, donated to the campaigns of leading Democrats like Barney Frank and Nancy Pelosi who suppressed investigations into fraud at the agencies. Soon, investment banks such as Bear Stearns were aggressively hawking the securities as guaranteed. Wall Street’s pitch was that Mortgage-backed Securities (MBSs) were as safe as Treasuries, but with a higher yield.

The mortgage lenders didn't care because they were going to sell the bad loans to other banks. The banks also saw a way to increase their profit by repackaging the loans as MBSs. The investors and traders were not worried because the MBSs were backed by Fannie Mae and Freddie Mac and their implicit government guarantees. In short, nobody analyzed the danger of such risky loans. The banks were only doing what the regulators in Washington wanted them to do.

1991:
ACORN took over the House Banking Committee room for two days to protest efforts to scale back the CRA. Most significant of all, ACORN was the driving force behind a 1995 regulatory revision pushed through by the Clinton Administration that greatly expanded the CRA and laid the groundwork for the Fannie Mae, Freddie Mac borne financial crisis we now confront. Barack Obama was the attorney who represented ACORN in this effort. With this new authority, ACORN used its subsidiary, ACORN Housing, to promote subprime loans more aggressively.

1992:
After returning from Harvard Law School, Barack Obama organized and directed a voter registration and education campaign targeted at minority and low-income voters in Cook County, Illinois. This was called Project Vote, an organization that works in partnership with ACORN. He recruited and managed 10 paid staff and 700 volunteers. He helped raise $200,000 for the project, coordinated a companion multi-media campaign, and established office and reporting systems. This resulted in approximately 150,000 newly registered voters in the 1992 Presidential election.

1993-1996:
In 1993, President Clinton ordered new regulations for the CRA, which would increase access to mortgage credit for inner city and distressed rural communities. The new rules went into effect in 1996 and brought race into the equation and required lending institutions to provide data on specific neighborhoods, income groups, and race. Under the new regulation, community groups could collect a fee from banks that did not receive a satisfactory CRA rating.

1994:
Obama represented ACORN in the Buycks-Roberson vs Citibank Federal Savings Bank, 1994 suit against redlining. Most significant of all, ACORN was the driving force behind a 1995 regulatory revision pushed through by the Clinton Administration that greatly expanded the CRA and laid the groundwork for the Fannie Mae, Freddie Mac borne financial crisis we now confront. Barack Obama was the attorney who represented ACORN in this effort. With this new authority, ACORN used its subsidiary, ACORN Housing, to promote subprime loans more aggressively

1998 - 1999:
Banks begin making thousands of bad loans, $0 down, no documentation, loans for 120% of property value (1998 - 2008). Executives at Fannie Mae received huge bonuses if loan targets were met. Franklin Raines and Jamie Gorelick from the Clinton Administration are appointed to run Fannie Mae.  Also, President Clinton supported and signed the 1999 repeal of the Glass-Steagall Act, a law dating back to the Great Depression that separated banking from high-risk financial speculation.  Robert Rubin, who had been Clinton's first treasury secretary, helped broker the final deal on Capitol Hill that enabled the repeal legislation to pass.  The repeal of the law paved the way for banks to invest in risky investments like mortgage-backed securities and collateralized debt obligations that played a role in the 2008 financial meltdown.

2001:
The Administration's 2002 budget declares that the size of Fannie Mae and Freddie Mac is a potential problem, because financial trouble of a large GSE (Government-Sponsored Enterprise) could cause strong repercussions in financial markets, affecting federally insured entities and economic activity.

2002:
The Office of Management and Budget (OMB) called for the disclosure and corporate governance principles contained in the President's 10-point plan for corporate responsibility to apply to Fannie Mae and Freddie Mac.

In 2002 Kathleen C. Engel and Patricia A. McCoy published a study of the predatory lending implications of the CRA, noting that by the late 1990s, predatory high cost mortgages to “gullible borrowers” were leading to foreclosures against low-income people of color and the elderly. They found evidence of such lending practices by CRA covered banks, both directly in their own lending and indirectly in buying other parties’ predatory loans as investments or to help them obtain CRA compliance credit.

2003:
In an article for the New York Post, economist Stan Liebowitz writes that the CRA encouraged a loosening of lending standards throughout the banking industry with no verification of income or assets; little consideration of the applicant's ability to make payments; no down payment. He notes that the Fannie Mae Foundation singled out Countrywide Financial, whose commitment to low-income loans had grown to $600 billion by early 2003, as a "paragon" of a nondiscriminatory lender who works with community activists, following "the most flexible underwriting criteria permitted." The chief executive of Countrywide is said to have "bragged" that in order to approve minority applications, "lenders have had to stretch the rules a bit”.

2003:
“The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.” "New Agency Proposed To Oversee Freddie Mac And Fannie Mae," ( The New York Times, 9/11/03). Republican senators introduced a bill to place regulation of Fannie Mae and Freddie Mac, the two biggest U.S. providers of mortgage financing, in the Treasury Department. “The success of these organizations has a direct effect on the stability of the American economy,” Sen. Charles Hagel (R-Neb.), one of the sponsors of the bill, said. “The new regulator in the Treasury Department would be better equipped to oversee these large financial institutions,” Hagel said. Sens. Elizabeth Hanford (R-N.C.) and John E. Sununu (R-N.H.) are co-sponsors of the bill. Hagel’s bill would call the new regulator the Office of Federal Enterprise Supervision. Congress is questioning whether the two government- chartered, shareholder-owned companies, which own or guarantee 42% of the $7-trillion U.S. mortgage market, are properly regulated. House Financial Services Committee Ranking Member Barney Frank (D-MA) strongly disagrees with the Administration's assessment, saying "these two entities – Fannie Mae and Freddie Mac – are not facing any kind of financial crisis … The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing." (Stephen Labaton, "New Agency Proposed To Oversee Freddie Mac and Fannie Mae). That follows revelations that Freddie Mac had accounting errors and employee misconduct related to a restatement of earnings for the last three years. The Office of Federal Housing Enterprise Oversight, a part of the Department of Housing and Urban Development (HUD), regulates Fannie Mae and Freddie Mac. Democrats eventually killed the proposal. The current meltdown in the mortgage industry is a direct result of giving mortgages to people who could not pay them back, a practice protected by Congressional Democrats.

2004:
Congress investigates the Enron Collapse, Executives Jeff Skilling & Ken Lay go to jail for fraudulent book keeping. Congress responds with the Sarbanes-Oxley Act, which added more heavy regulation of corporations but did not add any additional oversight to the banking industry.

2004:
An OMB (Office of Management and Budget) investigation finds massive fraudulent bookkeeping at Fannie Mae.

1999-2005:
Fannie Mae gives millions to Democratic causes, examples: Jesse Jackson & ACORN. Fannie Mae pays millions to 354 Congressmen and Senators, from both parties. Top Four Recipients: Sen. Christopher Dodd, (D-CT) Chairman of the Banking, Housing, & Urban Affairs Committee Sen. Barack Obama, (D-IL) Federal Financial Management Committee Sen. Chuck Schumer, (D-NY) Chairman of the Finance Committee Rep. Barney Frank, (D-MA) Chairman of the House Financial Services Committee.

2005:
John McCain said, “If Congress does not act, 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”. NONE of the Top Four Recipients supported the legislation. Minority Leader Harry Reid rejects legislation reforming GSEs, "while I favor improving oversight by our federal housing regulators to ensure safety and soundness, we cannot pass legislation that could limit Americans from owning homes and potentially harm our economy in the process."

Democrats blocked the Reform Act and the bill never even made it out of committee.

2007:
John McCain tried again to regulate Fannie Mae and Freddie Mac in 2007 but was blocked again by the democrats.

2008:
George Bush asks Congress to pass legislation reforming Fannie Mae and Freddie Mack before the situation gets worse. "Americans are concerned about making their mortgage payments and keeping their homes. Yet Congress has failed to pass legislation I have repeatedly requested to modernize the Federal Housing Administration that will help more families stay in their homes, reform Fannie Mae and Freddie Mac to ensure they focus on their housing mission, and allow state housing agencies to issue tax-free bonds to refinance sub-prime loans". (President George W. Bush, Radio Address, 5/3/08).

"[T]he government ought to be helping creditworthy people stay in their homes. And one way we can do that – and Congress is making progress on this – is the reform of Fannie Mae and Freddie Mac. That reform will come with a strong, independent regulator. (President George W. Bush, Meeting With The Secretary Of The Treasury, the White House, 5/19/08)

"Congress needs to pass legislation to modernize the Federal Housing Administration, reform Fannie Mae and Freddie Mac to ensure they focus on their housing mission, and allow State housing agencies to issue tax-free bonds to refinance subprime loans". (President George W. Bush, Radio Address, 5/31/08)

President Bush asks Congress in June of 2008 to take the necessary measures to address the banking problem, stating "we need to pass legislation to reform Fannie Mae and Freddie Mac". (President George W. Bush, Remarks At Swearing In Ceremony For Secretary Of Housing And Urban Development, Washington, D.C., 6/6/08). It should be noted that both the House and the Senate were controlled by the Democrat Party during this time.

In July of 2008, Congress heeds the President's call for action and passes reform legislation for Fannie Mae and Freddie Mac as it becomes clear that the institutions are failing.

In September of 2008 Senator Dodd questions "why weren't we doing more, why did we wait almost a year before there were any significant steps taken to try to deal with this problem"? (Dawn Kopecki, "Fannie Mae, Freddie 'House Of Cards' Prompts Takeover," Bloomberg, 9/9/08). Apparently, Senator Dodd has a very short memory as well as a short attention span.

Treasury Secretary Henry Paulson and FHFA Director James Lockhart seized control of Fannie Mae and Freddie Mac less than a month after Lockhart, whose job is to oversee the companies, declared them ”adequately capitalized'' under law.

The Troubled Asset Relief Program, commonly referred to as TARP was created to keep the financial sector from collapsing. Over seven hundred billion dollars was allocated to provide funds to keep Fannie Mae, Freddie Mac, and other financial institutions from going under due to the mortgage crisis.


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