Monday, September 15, 2008

"Hey, Pogo to Your Left!"

A just started war of words might eclipse, in significance, a contentious post World War II debate, which once rocked foreign policy circles, partisan politics, academia, and the media. "Who lost China?” was the trigger question after Mao led his nation towards Communism eschewing western democratic government models.

That belligerent query was tossed around with great smugness and vitriol, especially during our own McCarthy era, when “Reds’ and “Pinko sympathizers” were sought under every bed and in every closet.

My friend, the wise Mr. Z, believes that a new version of the old China blame game has started, but this time with the GSEs being part of the question as the GOP initiates a campaign to blame Democrats for ignoring GSE shortcomings, either as part of the McCain presidential exercise or looking ahead toward shaping George W. Bush’s presidential legacy.

Sunday GSE Smashdown

“Z,” who virtually predicted the Treasury Secretary Henry Paulson’s “Sunday Smashdown,” when he warned about Paulson’s last minute request for GSE takeover authority and analogized it to the hastily passed “Gulf of Tonkin” resolution, which the Johnson Administration then used to declare war formally against the North Vietnamese and their Chinese and Russian allies.

Mr. Z is convinced that the GOP is trying to use confusion surrounding the GSEs to “swift boat" the Democrats.

An excellent example of this was last Friday’s Washington Post, whose editorial tendencies fast are making it “Rupert Murdoch South.” (Maybe it’s an infusion of too many former WSJ staffers who are turning Kay Graham’s paper into an extension of the Heritage Foundation.)

On that day last week, the Post carried, “Where Was Chris Dodd?,” an op-ed piece by two former Bush White House staffers, Al Hubbard, who headed President Bush Council of Economic Advisors from 2005 until 2007, and Noam Neusner, who was a Bush speechwriter from 2002 through 2005.

Hubbard and Neusner chastised Sen. Dodd (D-Ct.), claiming the Senate Banking Chairman long had ignored Bush Administration GSE concerns and managed to lay blame on other congressional Democrats, too.

Dodd and New York’s Chuck Schumer head their list, but for good measure they throw in Hillary Clinton and Barack Obama, who the last time I checked were never on the Senate Banking Committee. They go after House Financial Services Committee Chairman Barney Frank (D-Mass.) and, surprise, surprise; they extol the virtues of GOP Senators Dick Shelby (Ala.), John Sununu (NH.), Chuck Hagel (Neb.) and Elizabeth Dole (NC).

Let’s Blame, uh…Them!

But a closer look will show that “fire, ready, aim” doesn’t work for them in this case. Messrs. Hubbard and Neusner--ignoring the facts that are as plain and searing as today’s headlines--are hoping to deflect true responsibility from their former boss, George W. Bush and his GOP financial regulatory appointees, not only from the GSE woes but the broader real estate driven economic miasma.

Now what is the crux of today's significant real estate problem and the real distortion in Hubbard-Neusner column?

It is simple. They identify the wrong problem and wrong culprits, Fannie and Freddie and the Democrats in Congress. They claim they saw a tree, but missed the forest.

It Wasn’t the GSEs

It wasn't Fannie's and Freddie's structure, market role, or business activities which caused the real estate woes that have wracked our economy. It wasn’t their affordable housing mission. It wasn’t that they invested 55% of their annual business in mortgage loans for low, moderate, and middle income families. It wasn’t their lobbying teams or their corporate compensation.

Hubbard and Neusner couldn’t have been very good at their jobs (kind of goes with being a Bush appointee), because their column totally ignores the real problem, i.e., the creation of hundreds of billions of dollars in subprime mortgages and mortgage backed securities, originated utilizing a cadre of mortgage brokers and sold by a group of Wall Street firms.

The broker originated subprime loans bypassed Fannie Mae and Freddie Mac, which had dealt only in “prime mortgages,” ergo the name “subprime,” and were sent directly to the investment banking firms for their “private label” (once again, meaning non-Fannie or Freddie) payment guarantee.

When those loans began failing with unprecedented velocity, it was this multitude of garbage, brought to the nation by the financial engineers in New York and sold by the same all over the world, which gave birth to the failures and setbacks that have caused untold economic destruction in our nation and internationally.


Look at the destructive subprime root cause of our residential real estate problems and you’ll find GOP fingerprints, handprints, and DNA all over it, both on the regulatory side—through lassitude--and the private sector operationally.

Forget, “Who lost China?” Who invited the subprime mortgage poison into our mortgage finance system and let it seep through hundreds of financial institutions and sicken our entire economy?

Unfettered subprime lending is barely five years old. And it has been responsible for huge financial losses at every major and small bank, the failures of Bear Stearns, Lehman, AIG, Merrill Lynch, and half a hundred smaller banks, the takeovers at Fannie and Freddie (although those had a huge political element to them) and much more.

The resulting losses to American families in net worth, lost jobs, and declining home values, is nearly incalculable. (Please remember that when you vote in November!)

With Apologies to Matt Damon…

OK, blame game, huh? Here, chew on these apples!

Where the hell was Bush Treasury when the subprime rot was beginning to fester? Where was the Bush SEC when it was congealing? Where were Hubbard and the Bush Council of Economic Advisors when subprime was “all the rage?” Where were the Bush Fed appointees when this poison was being created and disseminated throughout the banking system? Where was President Bush? Where was Alan Greenspan, whose vision seemed to fail him when he ran the Fed, only to return to 20-20 standards after his departure?

Nobody really thinks Fannie and Freddie brought on this subprime mess and the resulting calamity. The cancerous systemic risk came from those institutions that were darlings of the Bush Treasury, SEC, Fed, and White House, and by those same Bush regulatory officials who ignored the growth and development of the threat because their historic business buddies were making money hand over fist!

Walt Kelley’s Revenge

If the Bush Administration had been doing even the least bit of oversight of the financial markets, the Wall Street investment banking firms seeking to fill ravenous hedge fund demands for "high yielding investment," the investment houses never could have started this ball rolling and our national economy never would have experienced the seismic problems and losses it has endured over the past two years.

So Messrs Hubbard and Neusner, save us from your spin on what “signals” Chris Dodd or Barney Frank may have missed and your phony concern over what Taxpayers could lose on the trumped up “GSE takeover.” (More about all that in my next blog.)

Crappy mortgage loans produced outside the GSE process in a subverting manner and no Washington oversight from the GOP financial regulatory arms was and is 95%+ of the problem!

If the Republicans, including George W. Bush, John McCain, and Sarah Palin, and their amen choruses want to point fingers over this incredible housing disaster and resulting economic blood letting, at least they should point them in the “right” direction (pun intended).

When the GOP finally summons the honesty about this matter, they will discover what Pogo found out. “We have met the enemy and he is us!”

Maloni 9-15-2008


Anonymous said...

As usual your piece was spot on. I had two additions and two quibbles.

1. Addition #1: The case that the problem was the result of inaction by the Bush Administration to curb subprime lending is strengthened by the relationship between the Republicans and Roland Arnall, the head of subprime lender Ameriquest. Bush appointed him Ambassador to the Netherlands. According to one profile, Arnall and his wife contributed more than $5 million to political causes, mostly to Republicans and including $1million to the Bush inauguration.

2. Quibble #1. I think you confuse "R. Glenn Hubbard" who was the head of the Council of Economic Advisors for Bush with "Allan Hubbard" who authored the article and who did serve on Bush's National Economic Council. I'm sure the article's author, Al Hubbard, welcomes the promotion.

3. Addition #2. It turns out that R. Glenn Hubbard wrote of piece for Fannie Mae arguing that commercial banks pose more systemic risk than did Fannie Mae in part because they are exposed to wider credit spectrum and products. Not sure this helps your argument -- but it remains to be seen how much the credit crunch spreads to non-mortgage assets.


4. Quibble #2. I believe your analysis that the cause of the crisis was the inexplicably bad underwriting and credit decisions of the subprime/Wall Street/Private Label Securities nexus -- and the failure of regulators to stop the madness. But the GSEs cannot escape culpability for their current fate. They destroyed all credibility with their erstwhile supporters by engaging in accounting hubris; despite their vaunted position astride housing and mortgage markets, they failed to see the problems coming and adjust accordingly; they then, in fact, late in the cycle invested in the subprime and ALT A products to which most of their credit losses are attributable; and they failed to raise sufficient capital in a timely matter to stave off the crisis in confidence.

Bill Maloni said...

Thanks for your comments.

In identifying "Al Hubbard," I used the decsription given to him by the Post, "Al Hubbard was director of the National Economic Council and assistant to the President from 2005 to 2007."

Re Fannie's and Freddie's culpability, my first "draft" noted the grievous errors made by senior GSE officials and their boards, putting subprime and Alt A on their books.

I later deleted that--not to shield those officials, whose mistakes I've written about before (and more of whom need to get fired beyond Mudd and Syron)--but because it digressed from my core point that subprime caused the systemic problem.

If the subprime product hadn't been out there or F/F not been permitted by OFHEO to put it on their books, we would be having a different discussion about the GSEs today. And that applies also to Bear, Merrill, AIG, etc. etc.

The Progressive Pragmatist said...

McCain is certainly trying to hang the financial meltdown around the necks of Obama and the Dems, focusing on some BS boilerplate anti-GSE statements that McCain made. He tries to link Obama and the Dems to GSE political contributions. Of course, he doesn't mention the huge counter-lobbying (and campaign donations) by GSE haters at the big commercial and investment banks et al. (see FM Watch/Policy Focus pimps), which largely benefited the Republicans. (And doesn't McCain have some Keating mud on his shoes?) The Arnall connection is a perfect example of dirty hands in the Bush admin.

Also, was it possible for the GSEs to NOT BUY lower quality loans? I don't think so--they would have been pilloried by HUD and the GSE haters, who were always trying to prove that the GSEs were worthless (didn't help lower-income borrowers enough) and unnecessary (Wall St could do it better), and who didn't appreciate the value of a stable and principled secondary market.

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