There is a long 20th century history of Wall Street protests in America. After all, Wall Street is the financial center of the country. Today, we’re in a financial crisis so Wall Street (or its financial center equivalent in other cities) is the logical place to protest, right? Actually, we think it’s a poor second to Lafayette Park across from the White House where the current crisis was hatched and nurtured. No, this isn’t an anti Obama screed. His predecessors (several of them) are far more to blame for the current economic disarray in which we find ourselves, although we think his proposed remedies are anything but remedial.
“Occupy Wall Street” and “Wall Street Greed” are great memes. They are highly memorable and easily passed on as a rallying cry and, unsurprisingly, President Obama and the left has sought to adopt them. Of course, the protestors are an outgrowth of the wider sense of entitlement many young people have developed including quotas (disguised under the term “diversity”). As George Will stated in his column in The Washington Post on October 13, 2011:
Demands posted in [Occupy Wall Street’s] name include a ‘guaranteed living wage income regardless of employment’; a $20‑an‑hour minimum wage (above the $16.00 entry wage the UAW just negotiated with GM); ending ‘the fossil fuel economy’; ‘open borders’ so ‘anyone can travel anywhere to work and live’; $1 trillion dollars for infrastructure; $1 trillion dollars for ‘ecological restoration’; ‘free college education’, and forgiveness of ‘all debt on the entire planet.’
But abuses by Wall Street are an affect, not the cause of the current economic disarray. As anyone who has read our essays knows, we carry no brief for Wall Street excesses or those of the various Government Sponsored Enterprises (GSE’s) that are the real culprits here, but Wall Street was simply the vehicle by which the White House, Congress, the Fed and the Washington bureaucracy carried out very ill advised objectives. As is by now well known, the seeds of our current discontent were sowed a quarter century ago when President Jimmy Carter signed the Community Reinvestment Act (CRA). This legislation and the regulatory policies that it set in motion may have been well intentioned, but as history teaches, roads paved merely with good intentions often lead to where no one wants to go.
The government, whether controlled by Republicans or Democrats, has for a quarter century, pursued the altruistic, but terribly flawed policy that every American should own his or her home. It seemed a win/win for every politician and every voting homeowner. How noble. How naïve.
As is so often the case when government promotes a central-planning-agenda- driven initiative, sooner or later, it winds up distorting the marketplace to the general detriment of the people. That’s why we consume outrageous acreage of arable land growing food to burn for fuel. Welcome to modernity. That’s why farmers are paid not to grow crops, and that’s why banks were rewarded not to concern themselves with creditworthiness when considering mortgage applications. Unlike ethanol and farm subsidies, however, increasing the percentage of home ownership in America seemed like a no brainer. What could be possibly wrong with that? Well, as it turns out, plenty. It was a very dangerous objective to pursue. Economic growth produces the household income that enables people to own rather than rent their own homes. Pushing people into home ownership in the absence of their ability to afford to buy a home is an exercise in very expensive futility.
Sam Zell, one of America’s most astute real estate investors observed in a recent interview that the economy performs best when homeownership, as a percentage of all households, falls with within a range of 62 to 64 percent.
Periodically, Zell says, “The political system encourages a much higher level, without regard to affordability. This time, we took home ownership to 69 percent, which means that people who simply cannot afford houses were able to buy them. Every time we go above that 62 to 64 percent range, there are economic consequences, and this time was no different.”
“There was also another political element to the residential market collapse,” he continued. “In 2000, Fannie and Freddie carried no subprime loans, and they carried very few subprime loans until the financial steamboat in 2004, whereupon Barney Frank told us to encourage affordable housing and he would protect us from defaults. So, Fannie Mae went from 0 in subprime loans to 40 percent. These political drivers of the financial crisis are overlooked.” Ironic isn’t it that this is the same Barney Frank who co-authored the Dodd-Frank bill, which now forms the basis of all bank and financial regulation. Is this a great country or what?
The mischief promulgated by Freddie and Fannie cannot be overstated. These government-sponsored enterprises take a back seat to no one when it comes to abuse, and, let’s face it, greed. While Wall Street deserves its share of criticism, let’s dwell for a moment on government as an instigator and an enabler at the very center of the housing crisis.
During the Clinton years, the President appointed some of his Administration’s top people to senior executive positions at Fannie Mae. For example, he placed his former budget director, Franklin Raines, into the CEO slot at Fannie Mae. Jamie Gorelick, a Clinton Administration senior lawyer was handed the Vice Chairmanship at Fannie Mae. Clinton then went on to appoint others to board positions at Fannie. Executives’ compensation formulas were quickly restructured in order to incentivize them to maximize the number of mortgages Fannie Mae purchased.
Compensation wasn’t the only thing Fannie Mae and Freddie Mac restructured. They showed they could work the political system with contributions as effectively as any Wall Street banker. They specifically targeted those who they knew would make strong allies. Chris Dodd who chaired the Senate Committee with oversight responsibility for Fannie and Freddie’s operations was the largest recipient of the GSE’s largess. Democratic heavyweight, John Kerry was next in the handout recipient line and none other than Democratic Senate newcomer Barack Obama quickly shot up to third place in the campaign piggyback sweepstakes. On the House side, oversight heavyweight Barney Frank was a regular recipient of the GSEs’ handouts and extolled the virtues of these houses of cards up until the time they came tumbling down.
Given that Fannie’s earnings are a function of the spread between its cost of borrowing (to buy these mortgages) and the fees it receives from the mortgages it purchases, they enjoyed a license to, shall we say, do very well as long as homeowners made their mortgage payments. Fannie Mae was, in effect, living off of the illusion that the government backed it, so its cost of borrowing was rock bottom.
So what drove the GSE’s rush into subprime mortgages? The key, of course, is that the restructured senior executive compensation was based on the profitability of the enterprises (the spread between the GSE’s rock-bottom borrowing costs and the interest paid on the mortgages they held). So in the ten years from 1994 to 2004, Raines earned $90 million in salary and bonuses. Gorelick who was appointed by Clinton in 1997 to her post at Fannie Mae (having had no prior financial experience) pocketed, in short order, another $26 million. All the while, Fannie Mae’s top twenty-one executives averaged $1 million each.
Well, with that kind of juice swirling around, Fannie Mae, which became the single greatest market for so many of the lousy mortgages the banks were writing (pursuant to government policy and pressure) wasn’t above bending an accounting rule here and there. By the time the SEC finally lowered the boom on Fannie Mae, it had found that they had misstated earnings by about $10.6 billion from 1998 through 2004. The result was a company (of sorts) whose managers engaged in one questionable maneuver after another, including two transactions with investment banking firm, Goldman Sachs Group Inc. that improperly pushed $107 million of Fannie Mae earnings into future years. The aim, the Office of Housing Enterprise Oversight said, was always the same: To shape Fannie Mae’s books, not in response to accepted accounting rules, but in a way that made it appear that the company had reached earnings targets, thus triggering the maximum possible payout for Raines and other top executives.
While the housing crash that triggered the current economic crisis cannot be laid at President Obama’s feet, it is disingenuous of him to try to paint, at every opportunity, President Bush with that odious stain. Bush, in September 2003, according to the New York Times (yes you read that correctly) pushed for the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade earlier.
“Under the Bush Administration plan,” the New York Times wrote, “a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry,
“The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios.
“The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac — which together have issued more than $1.5 trillion in outstanding debt — is broken. A report by outside investigators in July concluded that Freddie Mac manipulated its accounting to mislead investors, and critics have said Fannie Mae does not adequately hedge against rising interest rates.
“Among the groups denouncing the proposal today were the National Association of Home Builders and Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing.”
Yes, Wall Street hopped onto the mortgage gravy train and, in the process, mortgaged themselves to the hilt. When the system crashed under the weight of all the shameful mortgages that were written, the American taxpayer came to the rescue and received a loud raspberry in return. That’s surely worth a protest. But all of this is, in the final analysis, the result of horrid policy, developed, pampered and nurtured in Washington. All things considered, Zoccotti Park in New York isn’t a bad place to protest, but it doesn’t hold a candle to Lafayette Park in Washington.