Research Briefing

As Commission Continues To Investigate Causes Of Financial Meltdown, Obama Following Same Path Clinton Did That Led To Crisis

“The Financial Crisis Inquiry Commission Will Return To Public Action Wednesday Morning …The Panel Will Hold Three Days Of Hearings This Week To Probe The Issues Of Subprime Lending And Securitization.” (John Shaw, “US Financial Crisis Panel Ramping Up Probe Of Econ Meltdown,” Market News International, 4/6/10)

FLASHBACK: CLINTON POLICIES ON HOUSING AGENCIES AND FINANCIAL REGULATION PAVED THE WAY FOR FINANCIAL CRISIS IN 2008

President Bill Clinton Admitted His Policies Regarding Fannie Mae, Freddie Mac Paved The Way For Current Financial Crisis. “Clinton … said that Democrats weren’t entirely blameless, stating that they should have highlighted problems with Fannie Mae and Freddie Mac and ‘tried more aggressively to regulate derivatives.’ He also acknowledged that there was possible danger in his administration’s policy of pressing Fannie Mae, the mortgage company, to lower its credit standards for lower- and middle-income families seeking homes. ‘I think, through the lens of this, it looks like that was true,’ Clinton said.” (Walter Alarkon, “Clinton Rejects Blame For Financial Crisis,” The Hill, 9/25/08)

• And Former Clinton OMB Chief Put Fannie Mae In The Business Of Buying Sub-Prime Loans, Resisting Proper Government Oversight.  “Under Raines’s watch, Fannie started a pilot program to buy subprime mortgages and began buying home loans with no-money-down financing … According to a report by Fannie Mae’s regulator—The Office of Federal Housing Enterprise Oversight (O.F.H.E.O.)—Fannie Mae’s lobbyists tried to insert language into an appropriations bill that would have reduced O.F.H.E.O.’s funding until its chief regulator, Armando Falcon, was fired … [W]hen former congressman Richard Baker (Republican of Louisiana) called for a stronger regulator in 2000, Fannie Mae responded by calling his constituents, eliciting an avalanche of letters complaining he was trying to ‘raise mortgage costs.’”(Bruce Feirstein, “100 People To Blame,” Vanity Fair, 9/25/09)

Clinton Also Signed Repeal Of Glass-Steagall Act That Allowed Banks To “Run Into Trouble,” Leading To Their Bailouts. “But 10 years later, the end of Glass-Steagall has been blamed by some for many of the problems that led to last fall’s financial crisis … the huge banks born out of the revocation of Glass-Steagall, especially Citigroup, and the insurance companies that were allowed to deal in securities, like the American International Group, would not have run into trouble had the law still been in place …” (Cyrus Sanati, “10 Years Later, Looking At Repeal Of Glass-Steagall,” The New York Times, 11/12/09)

• Then-Treasury Secretary, Current Obama Economic Adviser, Larry Summers Said Repeal Would Improve Economy. “Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century … This historic legislation will better enable American companies to compete in the new economy.” (Cyrus Sanati, “10 Years Later, Looking At Repeal Of Glass-Steagall,” The New York Times, 11/12/09)

NOW: OBAMA POLICIES HAVE AMERICA HEADING DOWN THE SAME ROAD CLINTON PAVED

Obama Praised Sen. Chris Dodd’s Bill As A “Strong Foundation For Reform” Even Though It Leaves Fannie Mae And Freddie Mac “Untouched.” “[A]fter months of bipartisan work, Senator Chris Dodd and his committee have offered a strong foundation for reform, in line with the proposal I previously laid out ...”; “Home lending giants Fannie Mae and Freddie Mac will be left untouched for now by financial reform legislation, Sen. Bob Corker (R-Tenn.) said Tuesday. Corker … said that the legislation under consideration wouldn’t deal with the two government-administered companies … ‘I would have liked to have seen the Fannie and Freddie reforms in this bill,’ Corker said during an appearance on CNBC. ‘They’re not going to be in this bill.’” (President Barack Obama, “President Obama Urges Action On Financial Reform,” Weekly Address, 3/20/10; Michael O’Brien, “Corker: Fannie And Freddie Left Out Of Financial Reform Bill,” The Hill “Blog Briefing Room,” 3/9/10)

• After Losing Billions In Taxpayer Dollars, Obama Only Promising “More Discussion” And No Action On Fannie And Freddie.  “By now, the Obama administration was supposed to have a plan to reform Fannie Mae and Freddie Mac, the ‘government-sponsored’ mortgage finance enterprises (GSEs) that have been under federal control -- and absorbing $126 billion in federal cash -- for the past 19 months. But last week Treasury Secretary Timothy F. Geithner told the House Financial Services Committee that all he can promise is a ‘public comment’ period starting April 15, in which the various housing interest groups -- and there are a lot of them -- can submit their ideas … In short, after a year of discussion, Mr. Geithner promises more discussion.” (Editorial, “Fannie Maybe,” The Washington Post, 3/29/10)

Obama Also Supports Rep. Barney Frank’s Bill That Would Have Our Economy “Remain Exposed To The Risk Of Bubbles,” Setting Up System Continuing “Too Big To Fail.” “The US House of Representatives on Friday passed a bill aimed at preventing a repeat of the financial crisis that shook the global economy in the fall of 2008 … Although it drew immediate praise from the Obama administration and consumer groups, some financial experts warn that the economy will remain exposed to the risk of bubbles, busts, and firms that are ‘too big to fail.’ The bill spans many markets and regulatory activities: … Gives the government new powers to dismantle large financial firms that fail. Investors in those firms would be exposed to losses during such a wind-down process. But, as regulators will also be trying to protect the economy from spillover effects, some critics of the plan say large firms might receive government assistance rather than bankruptcy-style restructuring.” (Mark Trumbull, “Will House-Passed Financial Reform Bill Leave Big Risks?” The Christian Science Monitor, 12/11/09)

• Rep. Carolyn Maloney (D-NY) Expressed Concern That Obama’s Financial Regulation Legislation Gives Banks That Are “Too Big To Fail” An “Implicit Guarantee” Of A Bailout. “The Obama administration’s plan for ‘systemic risk’ regulation, the heart of the package, has been taking fire from an unlikely source. Manhattan Rep. Carolyn Maloney is a reliable liberal who chairs Congress’s Joint Economic Committee and is an influential member on Financial Services. … But she’s not buying the Obama plan to give the government new authority to rescue large institutions, saying recently, ‘We now have a blueprint that in many ways looks like the problems that we confronted. Many people say that Fannie and Freddie, with their implicit government guarantee, caused many of the problems. So what are we going to come back with? An implicit guarantee that . . . too-big-to-fail banks are going to be guaranteed.’” (James Freeman, “A Blueprint For More Bailouts,” The Wall Street Journal, 8/9/09) 

REPUBLICANS WILL PROTECT TAXPAYERS BY REFORMING FANNIE AND FREDDIE WHILE ENDING BANK BAILOUTS

Republican Financial Reform Plan Would Phase Out Taxpayer Support Of Fannie, Freddie.  “The Republican Substitute phases out taxpayer subsidies of Fannie Mae and Freddie Mac over a number of years and ends the current model of privatized profits and socialized losses … If they are viable … the plan would initiate the process of cutting their ties to the government by winding down the federal subsidies granted through their charters and transitioning Fannie and Freddie into nongovernment backed entities that compete on a level playing field with other private firms.” (“Summary Of Republican Substitute To The Wall Street Reform And Consumer Protection Act,” Committee On Financial Services, Accessed 3/22/10)

Republican Financial Reform Plan Would Establish New Chapter In Bankruptcy Code To Handle Failed Firms, Ending Need For Bailouts. “Provides for the resolution of insolvent non-bank institutions—no matter how large or systemically important—by creating a new chapter of the bankruptcy code to make it more efficient and better suited for resolving large non-bank financial institutions. This new chapter will facilitate coordination between regulators and the courts to ensure technical and specialized expertise is applied when dealing with these complex institutions. Bankruptcy judges would also have the power to stay claims by creditors and counterparties to prevent runs on troubled institutions.” (FSC Republican Staff, “Financial Regulatory Reform Side-By-Side,” Accessed, 3/22/10)