Too Good To Be True?

One of the things I’ve always tried to keep in mind when blogging (hell, in most things) is that “the more something seems to confirm your opinions, your prejudices, your beliefs, the more skeptical you should be about believing it.” Failing to do that has been the downfall of many people wiser than I am, as they hear something that “sounds” good to them and they run with it — right into a brick wall.

Well, there’s an explanation floating around out there for the whole subprime mortgage/Fannie Mae/Freddie Mac/investment meltdown that, doggone it, does just that — it hits nearly every single one of my core beliefs and wraps them up in a nice, tidy package, with a big blue bow. And while I desperately want to buy into it, I find myself needing to heed the advice I’ve given others (often belatedly) so many times.

The best summation of the facts I’ve found so far is from Captain Ed Morrissey of Hot Air, but I think I can put it into a narrative form here — relying on his superb documentation.

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It all started back in the late 1970s, with that never-ending font of bad things, Jimmy Carter. At that time, banks were occasionally reluctant to make mortgage loans to minorities, especially in certain neighborhoods with certain demographics. (Yes, I’m talking about blacks and Hispanics, and portions of inner cities where they were concentrated.) The Community Reinvestment Act of 1977 wasn’t a bad thing, though — in fact, it was mostly a good move.

The bill required that lending institutions actually serve the whole community where they were located. That meant that they couldn’t just “redline” certain areas and say “we’re not doing business in there.” That worked out pretty well for a couple of decades.

Then along came Bill Clinton.

Clinton’s philosophy seems to be “there’s no such thing as too much of a good thing.” He rammed through a major expansion of the program, requiring lenders to issue more mortgages to low-income and medium-income borrowers, setting quotas for loans the lenders had prior considered too risky. He also enabled lenders to skip balancing the risky loans with customer deposits, meaning that loans suddenly became investment properties in and of themselves.

At the time, critics warned that this could very easily lead to very large numbers of risky loans that would default, which would lead to a “cascade effect” of bad loans taking down lenders and those who had been treating those bad loans as investments.

Gee, that sounds familiar…

The people who helped push through Clinton’s changes listened to the critics — just a little. They agreed that they’d try them out for five years, then review and see how they were working out.

That five-year review came in 2002. The Bush administration was very troubled, worrying that a crash in the housing market triggered by a bunch of risky loans all going bad could lead to a major meltdown in the financial markets. That, coupled with a flawed oversight process, could even take down the giants — Freddie Mac and Fannie Mae.

Oh, pshaw, said the Democrats in Congress.

“These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis,” said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. “The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”

Other Democrats also fought against any revisions to the Clinton Administration’s changes to the Community Reinvestment Act, and they won. Despite Bush’s expressed concerns, the program continued unabated.

So here’s the narrative as I see it:

In the 1970s, Democrats decided that there was discrimination in the banking industry against inner-city minorities, and wrote a law to address it. That worked out pretty well for a while, until 1997, Bill Clinton decided to push it even further. He set up a system that forced lenders to make very risky loans at low interest rates. This meant that each individual loan was less profitable, which meant that when some of those loans started failing, there would be less profit from the successful loans to cover those losses. And since these loans were mandated by the government AND the lenders were being rewarded AND they were allowed to treat them as investment-grade assets, they were passed around and bought and sold on their face value, regardless of their actual likelihood to realize their stated value. Opponents of the plan failed to stop the plan, but did put a “reality check” on it with a mandatory review in five years.

In 2002, that review came due, and the Bush administration — among others — warned that many of the dire predictions were shaping up to be coming true. They urged that at least some of the 1997 reforms needed to be repealed or scaled back, or there could be a massive collapse that would wreak havoc across the entire financial services industry. They were ignored, and Congress chose to leave the matter as is.

In the meantime, a couple of the key players at Fannie Mae got themselves heavily involved in both the subprime mortgage business and Democratic politics. James Johnson, Walter Mondale’s presidential campaign manager, served as Fannie Mae’s chairman from 1991 to 1998. In 2006, he is vice chairman of Perseus LLC (which, I believe, is one of George Soros’ financial creatures — he owns several businesses named after the Greek hero) and served on Barack Obama’s vice presidential search committee.

Johnson was succeeded at Fannie Mae by Franklin Raines. Raines had risen to vice chairman at Fannie Mae before leaving to be Bill Clinton’s budget director, then returned to the top job. He took early retirement in 2004 amid an investigation into accounting irregularities, mainly involving subprime loans. Raines then went on to become a major advisor in Barack Obama’s campaign.

Johnson and Raines were both “Friends Of Angelo,” meaning that they got extremely favorable loans from Countrywide Financial at the direction of Countrywide CEO Angelo Mozilo. Johnson himself scored over $3 million in very, very favorable loans from Countrywide.

A third former Fannie Mae top exec might ring a few bells. Jamie Gorelick was the vice chairman from 1997 to 2003 (straddling both Johnson’s and Raines’ administrations) despite having no background in financing. During her tenure, she took home over $26 million dollars while Fannie Mae underwent a $10 billion accounting scandal. Gorelick had previously served in the Clinton Justice Department, where she was instrumental in constructing the “wall of separation” between foreign and domestic intelligence operations — which kept the CIA and FBI from comparing notes on terrorist threats that might cross our borders. Gorelick was also one of the commissioners who were appointed to investigate the 9/11 terrorist attacks — which struck a lot of us as troublesome, as we thought she would be better as a witness. I would have much preferred her to be answering questions, instead of asking them.

And now we are here today. All the things that the opponents of the Bill Clinton plan expanding Jimmy Carter’s program warned us about in 1997 — and warned us again in 2002 — are coming true. A lot of those high-risk, low-interest loans have gone bad, and have triggered a “domino effect” that have taken out a whole host of businesses, including Freddie Mac and Fannie Mae. President Bush and his administration tried to head it off in 2002, and John McCain’s been warning about it for almost as long, but they were ignored — and their predictions are now coming true. Trying to use the power of the government to trump the enlightened self-interest of the free market and enforce “fairness” and “social justice” has, as it almost always does, led to disaster and made things far worse. The quest for “equality” has once again led to widespread distribution of misery — we’re all equally unhappy, and we’re all equally screwed. Thanks SO much, Democrats.

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Yup, that narrative hits pretty much every single one of my preconceptions, my beliefs, my prejudices, my opinions. Which means that I find myself incredibly suspicious and distrustful of it. As much as I want to believe it, I am afraid to put my faith in it, and want to find the catch. “If it sounds too good to be true, it probably is.”

I’ve said repeatedly that I’m no expert in these matters, so I don’t have any real basis to evaluate the situation. But one way I have of evaluating things that I don’t fully grasp is to look at what people predicted would happen, and compare that to what actually occurred.

Right now, to me it looks like those who opposed the Clinton plan called it nearly perfectly. They didn’t put a timetable on the current crisis, but it’s unfolding just like they predicted in 1997, and repeated in 2002.

Meanwhile, those who championed the Clinton plan — and later denied that it needed any sort of review or revision or even increased scrutiny — are now trying to find ways to blame the current crisis on those who predicted it, and deflect any blame away from themselves.

I don’t like it. It’s too neat, too tidy, too simple. There’s gotta be more to the story, one that doesn’t so conveniently conform my beliefs and confirm my prejudices. Things are never this simple.

Are they?

The Last Undercover