The Mortgage Crisis Was And Is A Predictable Result Of Corrupt Conservative Policy Inside The Beltway
Politics is so much easier when there are guys with white hats and guys with black hats-- or guys with red t-shirts and guys with blue t-shirts. The real world is more complex. Generally speaking, the Democrats are the good guys and the Republicans are the bad guys. But that model is woefully inadequate for making a series of rational judgments about who to support with cash, who to volunteer for, who to vote for, or even who just to root for. Issues like the DC Conservative Consensus come into play, as does the whole corruption thing. Recall how Jack Abramoff-- briber extraordinaire, and if he doesn't know, who does?-- defined bribery in his post-prison book Capitol Punishment:
[C]ontributions from parties with an interest in legislation are really nothing but bribes. Sure, it's legal for the most part. Sure, everyone in Washington does it. Sure it's the way the system works. It's one of Washington's dirty little secrets-- but it's bribery just the same...
Conservative values extol greed, selfishness and corruption as a positive good and conservative politicians can fall back on an Ayn Rand philosophical justification for ripping off the public and for every kind of corruption imaginable. Republicans routinely do. What about conservative Democrats? Only the most naive partisan would believe that Democrats in DC are any less corrupt the Republicans. The entire raison d'être for the Blue Dogs coalition and for the New Dems, for example, is corruption. Go back to Abramoff's definition above. Both conservative Democratic alliances exist to offer support for corporate agendas in return for cash payments. There are no Blue Dogs and-- I'm sorry to say-- almost no members of the New Dems who are not corrupt. Nor are there more than the tiniest handful of Republicans who are not corrupt. It's bipartisanship at it's Beltway apex. And, among other things, it led directly to the mortgage meltdown and the current economic crisis.
Let me turn to Joshua Holland and his brilliant book, The Fifteen Biggest Lies About The Economy for a moment to reiterate one of the biggest lies of all, namely that the housing crisis was caused by poor people and that the big Wall Street banks were victims. We started the discussion last week but Holland went on from there:
In 2010, former Fed chairman [and deranged Ayn Rand acolyte] Alan Greenspan offered a bit of historical revisionism to a House committee investigating the causes of the financial crisis, telling lawmakers, “In 2002, I expressed concern... that our extraordinary housing boom, financed by very large increases in mortgage debt, cannot continue indefinitely... I warned of the consequences of this situation in testimony before the Senate Banking Committee in 2004.”
Writing in the Washington Post, Dana Milbank offered a corrective with some of the highlights of Greenspan’s congressional testimony at the peak of the housing bubble. In 2005, Greenspan told lawmakers, “A bubble in home prices for the nation as a whole does not appear likely.” He added, “Home price declines... were they to occur, likely would not have substantial macroeconomic implications,” and explained that “nationwide banking and widespread securitization of mortgages make it less likely that financial intermediation would be impaired.”
In English, that last bit meant “Banks won’t get into serious trouble even if things do go to hell,” and we know how well that prediction turned out. If Greenspan could be so wrong and the smart people at the Washington Post and the New York Times couldn’t see this huge, dangerously inflated housing bubble, how was your average couple trying to get a place to live or the small investor looking for a few bucks in rental income supposed to make a rational decision about how much debt to take on? That’s not a defense of individuals who got in over their heads; it’s simply an important bit of context.
The narrative that the real estate crash and the subsequent recession were the fault of borrowers, especially poor and middle-income borrowers-- while members of the financial community were innocent victims-- is not only revisionism of the worst kind, but it’s an especially egregious lie.
The obvious sin of this claim is that it shifts responsibility for the mess away from those who created it, but what makes it even more disgraceful is that conservatives have long argued that efforts to increase home ownership among low-income families and communities of color was the “free market” thing to do (and have, to some degree, negated the need for a decent social safety net). It was George W. Bush, not Vladimir Lenin, who said in a 2002 speech, “We have a problem here in America... a homeownership gap,” and said, “we’ve got to work together to close [the gap] for the good of our country.” This was standard American Enterprise Institute–quality conservative fare.
Blaming individuals is easy, though-- it’s not hard to understand how people could borrow a bunch of cash they were later unable to pay back. The real cause of the housing crash is, of course, a far more complicated tale. Yet it’s a story that ultimately represents the abject failure of conservative economic mythology, so it’s important to understand.
The bottom line: lenders used ludicrously lax standards to write loans to just about anybody, and people certainly got in over their heads. Yet as business reporter Andrew Leonard wrote, beginning in the 1990s, “The incentive for everyone to behave this way came from Wall Street-- where the demand for (debt-backed securities) simply couldn’t be satisfied. Wall Street was begging the mortgage industry to reach out to the riskiest borrowers it could find, because it thought it had figured out a way to make any level of risk palatable.” He added, “Wall Street traders, hungry for more risk, fixed the real economy to deliver more risk, by essentially bribing the mortgage originators and ratings agencies to... make bad loans on purpose. That supplied (Wall Street) speculators the raw material they needed for their bets, but as a consequence threw the integrity of the whole housing sector into question.”
Although the U.S. housing market is worth somewhere in the neighborhood of $10 trillion, it was Wall Street’s wheeler-dealers-- with lobbyists and congressional allies keeping regulators out of their business-- who built a house of cards out of “exotic” mortgage-backed products and other “derivatives” worth as much as sixty times that figure. It was paper wealth backed by little more than the irrational belief that what goes up will never come down. These instruments, which Warren Buffet called “the real Weapons of Mass Destruction,” were estimated to be “worth” roughly twelve times the output of the entire global economy.
This is how a drop in the U.S. housing market could precipitate such widespread economic pain worldwide. It wasn’t silly borrowers who were to blame-- if not for the huge overhang of “toxic” securities Wall Street had created, even a ridiculously high rate of default in this country’s subprime mortgage market wouldn’t have stunned the entire global economy.
Now, in light of the above, I want to steer you towards Mike Lux's assertion that the hubbub over the settlement talks with the Big Banks seems to have settled own and the reporters have gone home, but that the banksters and their corrupt political handmaidens are not only far from vanquished, but ready to wreak havoc on society all over again. "Unpunished" is certainly interpreted as permission to rob and steal again... with impunity.
Let’s start with talking about why so many activists and organizations like the Campaign for a Fair Settlement and the New Bottom Line pushed so hard for a more aggressive investigation in the first place. No matter how those first settlement talks with the banks turned out, it was always clear that whatever the number government negotiators got would be tiny compared to the scope of the $700 billion dollar underwater mortgage problem homeowners and our entire economy is faced with. And we were right: the $25 billion is a drop in the bucket, about 3 percent of the way to a solution. The far bigger question is what would happen next, because our national economy will continue to be weighed down heavily by this deeply damaged housing market unless there are much deeper mortgage write-downs.
There are two big ways for more mortgage write-downs to happen, and two big goals progressives should have for the financial fraud task force. The former pair first: most mortgages are owned by either Fannie and Freddie, or by the big bank conglomerates on Wall Street. The first way for massive mortgage write-downs to happen is either for Fannie and Freddie acting administrator Ed DeMarco to change his policies on write-downs, or for him to be replaced by Obama making a recess appointment of someone who would change the policies. That’s why many groups have launched a Fire DeMarco campaign, and many others keep banging on his door to ask him to change direction. There is some dissent on this among people who know the banking issue, because some banks own second liens on these mortgages and could benefit as a result. It’s a fair point, and anything that can be done to structure Fannie and Freddie write-downs in a way to not help the big banks is important to do. But my view is that maximizing the write-downs is critical, that homeowners and the overall economy need these write-downs too badly to spend an inordinate time worrying that some banks may benefit as a result. (Wall Street bankers find many different ways to hedge their bets and diversify their holdings, meaning they sometimes find ways to profit even on things that are actually good for people. Go figure.)
The other way for big write-downs to happen is if the financial fraud task force can squeeze the big banks on all the fraud they have committed, and get them to agree to writing down a much bigger pot of money-- in the hundreds of billions, not the tens-- in exchange for a legal release on some fraud claims (although definitely not all) by the government. Which leads to my next major point: that of goals for this fraud task force.
The two goals for the task force as far as the progressives I am talking to are these: write-down money and prosecution for crimes committed. Some people think these are mutually exclusive. I don’t, and neither should task force members. Based on what we already know from news reports and other legal action, it is clear that if the task force is aggressive and tough enough in their negotiations, they can through subpoenas and depositions find thousands of separate violations of punishable financial fraud. Much of that can be used to force the bankers to the table for real negotiations about hundreds of billions of dollars in mortgage write-downs, but investigators will also find plenty of fraud so egregious that the high rollers in these firms ought to be going to jail as well. Indicting, perp walking, and sending some of these top execs to prison is important, because if wealthy and powerful people can continually violate the law with impunity, they will in fact keep doing just that, and our financial system will be permanently at risk.
The question now is whether the task force will be effective in bringing bankers to justice, and in forcing bigger write-downs. But this is a real question, and I think it is important for the American people to understand what is going on in there. To all of us on the outside who have been working on these issues, things don’t seem to be moving very fast. We need to know the answers to some very important questions, including:
-Is there an executive director, coordinator, or clear manager of any kind in place to drive this process forward aggressively? There was discussion for a while of Rep. Brad Miller (D-N.C.), a great consumer advocate, playing such a role, but that talk seems to have died out and I am still not clear how they are managing this in the meantime.
-Will any more staff resources beyond the very modest numbers announced when the task force was unveiled be appointed?
-Of the staff resources that were appointed, are all of them actually assigned and working? If not, how many are actually doing any work? If not, why (the hell) not?
-Are task force leaders keeping a close eye on statute of limitation issues to make sure we can actually prosecute the most important cases of bank fraud that exist out there?
-After the first flurry of subpoenas, we haven’t to my knowledge seen any more come down. Why not? Seems like there is plenty to investigate, why the hold-up on more subpoenas?
-At least some of the members of the task force have said they want to be aggressive and fast moving in this investigation. Are there people putting road blocks up? If so, why aren’t they being cleared away? Who has point responsibility for clearing the road blocks out of the way?
Here’s the most important question in my mind: is the White House paying enough attention to this? I know from my experience in the Clinton White House that once a decision is made to move forward on a major new initiative like the settlement and fraud task force, that sometimes the sense of urgency fades and senior staff tend to move on to new issues, problems, and crises-- they assume whoever they appointed to do things is taking care of it. That is natural enough given all the demands on the White House, and I sense it may have happened here. But I fear for my friends in the Obama White House that this is going to come back and bite them in the ass in a really serious way if they aren’t paying a lot of attention to it. One of the greatest weaknesses the President has going into election season, both with swing and base voters, is the lingering feeling that he and his team have been too soft on the Wall Street guys that took down this economy. The big banks making record profits and handing out record bonuses the year after taxpayers bailed them out, and while the overall economy has been terrible, has left a lasting impression with voters. The failures of the HAMP program, the flurry of bad press around the Suskind book, the unwillingness to recess appoint Elizabeth Warren as the head of Consumer Financial Protection Bureau (even though the person Obama appointed, Rich Cordray, has been terrific, he has nowhere near the profile or cachet with activists following the issue as Warren), and the lack of any prosecution of Wall Street big shots has steadily added to that image. So if nothing happens with this task force any time soon, it will be a huge disappointment and a very big deal to people and organizations working on the issue, to the reporters who know the financial beat, and to voters in general. In an election season dominated by discussion of Mitt Romney’s Wall Street background, for the President to be vulnerable on this issue would be a terrible mistake, and the way they get strong on it is to have a successful task force.
Here’s the electoral component of this that almost no one is thinking about: there are 11,000,000 underwater homeowners right now, many of them families with multiple voters living there. There are a ton of them in key swing states like Nevada, Florida, Ohio, Pennsylvania, North Carolina, Wisconsin, and Colorado. In my mind, they are very likely to be swing voters: screwed over by Wall Street, but not feeling like either party is helping them much. They have heard about the settlement, but $25 million doesn’t go very far when there’s $700 million in negative equity, so they aren’t likely to get much help, which will make them even more irritable-- it could be HAMP all over again in terms of promises of help made but not delivered. Holding the banks accountable, and delivering a big new round of write-downs, is going to look awfully good to those voters and their neighbors who don’t want more foreclosed homes on the block.
My advice to my friends at the White House is to pay a lot of attention to this sooner rather than later, and to light a fire under anyone involved in the task force who may be throwing those road blocks up.
The task force needs to show some visible progress, some real movement that is obvious to people, sooner rather than later on this. If they move aggressively forward, I believe based on conversations with legal experts that it is entirely possible the banks can be forced to write down $200-300 billion in mortgages before the end of the year. That would not only help those underwater homeowners but would be a dramatic boost to the entire rest of the economy because of the extra cash it would put in homeowners’ pockets and the major boost it would be to the overall housing market. The big banks can certainly afford it: according to an SEIU report, in 2010 alone just the six biggest banks gave out an estimated $143 billion in bonuses. Given that these write-downs would be cumulative over many years, $200-300 billion might mean smaller bonus checks and profit margins, but it is nothing that would break the bank. And here’s the other thing: if you write down these mortgages and stabilize the housing market, all those toxic assets the big banks hold will start to look healthier soon, so the banks would even get some of that money back.
This issue has faded from the headlines, but it is a huge deal-- for the homeowners who remain stuck underwater, for the housing market and economy as a whole, and for the President’s re-election chances. Let’s hope these questions get answered soon, and in a good way. And let’s hope the task force can get its act together to force another big settlement, and some perp walks as well, before it is through.
And Inside-the-Beltway, the Sword of Damocles hanging over all of this is the glaring fact that the Financial Industry has pretty much bought Congress. Not counting the $4,859,192,569 they've spent on lobbying in the same period, this is what has been spent on direct bribes to federal elected officials since 1989-- more than any other industry or sector:
And this year, the bribery is keeping up smartly. So far in this cycle the Finance Industry has spent in the neighborhood of $200 million, almost all of it to corrupt conservatives, overwhelmingly Republicans, of course, but plenty of table scraps to buy enough Democrats off as well. This cycle only-- so not career-long, just for this election cycle-- the 5 most egregious bribe-takers from the Financial Sector are:
John Boehner, Speaker of the House- $2,048,550
Eric Cantor, Republican Majority Leader- $1,083,050
Spencer Bachus, Republican chairman of the House Financial Services Committee- $841,725
Jeb Hensarling, Wall St. shill on the House Financial Services Committee- $652,347
Ed Royce, Wall St. shill on the House Financial Services Committee- $621,360
Who ever heard of Ed Royce (R-CA)? Why do the banksters give him so much money? He's a very senior Republican who sits on both the Subcommittee on Capital Markets, Insurance and Government-Sponsored Enterprises and the Subcommittee on Financial Institutions and Consumer Credit. He basically represents the big Wall Street banksters on both subcommittees and has never-- not once-- voted the interests of working families in his district. He always-- 100% of the time-- votes and advocates for the special interests of the Wall Street predators, who, as we see, continue to reward him handsomely. (The banksters and insurance crooks have given Royce $4,025,461 since Orange County first elected him in 1992.)
The same goes for another barely known corrupt conservative, Jeb Hensarling of Texas. He's the vice chair under Bachus of the Financial Services
Hensarling hasn't had a serious challenge for reelection ever and isn't expected to have one this November either. Royce, on the other hand, may have his first serious battle for reelection ever. The newly redrawn 39th CD has a non-white majority (33% Hispanic and 29% Asian) and Royce is being challenged by a Harvard-educated very popular neighborhood boy, Jay Chen, who's fluent in Spanish and who we'll be talking to here at DWT very soon.