House Dems Warp Financial Oversight Board
By Matthew Rothschild, October 23, 2009
I was reading the business pages of the New York Times today, and I caught an article at the bottom of Page B3 entitled “Vote Backs a Financial Oversight Body.”
And I thought, great, finally, we’re going to get some much-needed regulation of the banks.
But then I read the fine print.
And it turns out there’s less here than meets the eye.
And that’s because, as the article noted, “a group of Democrats [in the House] with close ties to the banking industry” succeeded in diluting the bill in Barney Frank’s Financial Services Committee.
Originally, the bill would have granted wide authority to the states to regulate banks more vigorously than the federal government has been doing.
But the Democrats in the back pocket of the banks, along with Republicans in the front pocket, didn’t want those pesky states to be able to tell the banks what to do.
So they tried to outlaw entirely the rights of states to impose stiffer regulations.
The House ultimately compromised by allowing the Comptroller of the Currency to override the state regs if they are “significantly” at odds with the federal regs.
Well, what does “significantly” mean?
And why should the Executive Branch be the one to decide this issue?
We’ve seen the catastrophic results that ensue when the Executive Branch is the final word on bank regulation.
Michael Hirsh of Newsweek points out another warping of the bill by the House Democrats. Turns out that Wall Street will still be able to trade some derivatives in the dark.
“Thanks to weeks of intense pressure from Wall Street banks and their customers in corporate America, the bill that was approved on Thursday by Rep. Barney Frank's Financial Services Committee is riddled with exceptions and loopholes, many critics say,” Hirsh wrote. “If it becomes law, Wall Street's finest could be driving truckloads of new derivatives products through those loopholes for years to come.”
So, after Wall Street destroyed the U.S. economy by gambling on derivatives, the Democrats in Congress still are failing to muster the necessary backbone to thoroughly regulate them.
What Sen. Durbin said of Congress a few months ago is still true today: “The banks own this place.”
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Hello Nighttrain, here's an explanation from the Boston Globe. It's from Jeff Jacoby, so you know the leftwing losers will pooh-pooh it. Or try to spin it. But it's true. Neither free markets nor fiscal conservatism got us into this mess. Liberalism did.
"THE PRIVATE SECTOR got us into this mess. The government has to get us out of it."
That's Barney Frank's story, and he's sticking to it. As the Massachusetts Democrat has explained it in recent days, the current financial crisis is the spawn of the free market run amok, with the political class guilty only of failing to rein the capitalists in. The Wall Street meltdown was caused by "bad decisions that were made by people in the private sector," Frank said; the country is in dire straits today "thanks to a conservative philosophy that says the market knows best." And that philosophy goes "back to Ronald Reagan, when at his inauguration he said, 'Government is not the answer to our problems; government is the problem.' "
In fact, that isn't what Reagan said. His actual words were: "In this present crisis, government is not the solution to our problem; government is the problem." Were he president today, he would be saying much the same thing.
Because while the mortgage crisis convulsing Wall Street has its share of private-sector culprits -- many of whom have been learning lately just how pitiless the private sector’s discipline can be -- they weren't the ones who "got us into this mess." Barney Frank's talking points notwithstanding, mortgage lenders didn't wake up one fine day deciding to junk long-held standards of creditworthiness in order to make ill-advised loans to unqualified borrowers. It would be closer to the truth to say they woke up to find the government twisting their arms and demanding that they do so - or else.
The roots of this crisis go back to the Carter administration. That was when government officials, egged on by left-wing activists, began accusing mortgage lenders of racism and "redlining" because urban blacks were being denied mortgages at a higher rate than suburban whites.
The pressure to make more loans to minorities (read: to borrowers with weak credit histories) became relentless. Congress passed the Community Reinvestment Act, empowering regulators to punish banks that failed to "meet the credit needs" of "low-income, minority, and distressed neighborhoods." Lenders responded by loosening their underwriting standards and making increasingly shoddy loans. The two government-chartered mortgage finance firms, Fannie Mae and Freddie Mac, encouraged this "subprime" lending by authorizing ever more "flexible" criteria by which high-risk borrowers could be qualified for home loans, and then buying up the questionable mortgages that ensued.
All this was justified as a means of increasing homeownership among minorities and the poor. Affirmative-action policies trumped sound business practices. A manual issued by the Federal Reserve Bank of Boston advised mortgage lenders to disregard financial common sense. "Lack of credit history should not be seen as a negative factor," the Fed's guidelines instructed. Lenders were directed to accept welfare payments and unemployment benefits as "valid income sources" to qualify for a mortgage. Failure to comply could mean a lawsuit.
As long as housing prices kept rising, the illusion that all this was good public policy could be sustained. But it didn't take a financial whiz to recognize that a day of reckoning would come. "What does it mean when Boston banks start making many more loans to minorities?" I asked in this space in 1995. "Most likely, that they are knowingly approving risky loans in order to get the feds and the activists off their backs . . . When the coming wave of foreclosures rolls through the inner city, which of today's self-congratulating bankers, politicians, and regulators plans to take the credit?"
Frank doesn't. But his fingerprints are all over this fiasco. Time and time again, Frank insisted that Fannie Mae and Freddie Mac were in good shape. Five years ago, for example, when the Bush administration proposed much tighter regulation of the two companies, Frank was adamant that "these two entities, Fannie Mae and Freddie Mac, are not facing any kind of financial crisis." When the White House warned of "systemic risk for our financial system" unless the mortgage giants were curbed, Frank complained that the administration was more concerned about financial safety than about housing.
Now that the bubble has burst and the "systemic risk" is apparent to all, Frank blithely declares: "The private sector got us into this mess." Well, give the congressman points for gall. Wall Street and private lenders have plenty to answer for, but it was Washington and the political class that derailed this train. If Frank is looking for a culprit to blame, he can find one suspect in the nearest mirror.