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View Full Version : Elections NY Times 2003: Bush Admin Proposes New Oversight Of Freddie/Fannie (Dems Oppose)


RINGLEADER
09-18-2008, 01:04 AM
Not saying one side or the other is wholly to blame but Pelosi's statement that the Dems bear no responsibility is looking thinner and thinner. Especially when you get to the end of this article on the proposed regulations that were being proposed for Freddie/Fannie:

---clip---

Significant details must still be worked out before Congress can approve a bill. 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.

''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.''

Representative Melvin L. Watt, Democrat of North Carolina, agreed.

''I don't see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing,'' Mr. Watt said.

http://query.nytimes.com/gst/fullpage.html?res=9E06E3D6123BF932A2575AC0A9659C8B63&sec=&spon=&partner=permalink&exprod=permalink

Logical
09-18-2008, 01:10 AM
...
http://query.nytimes.com/gst/fullpage.html?res=9E06E3D6123BF932A2575AC0A9659C8B63&sec=&spon=&partner=permalink&exprod=permalink

2003, I could be wrong but I think the house and Senate were both controlled by Republicans and the President was a Republican. Why do they have an excuse, the Dems could not have stopped that legislation if they had wanted to do so.

RINGLEADER
09-18-2008, 01:18 AM
2003, I could be wrong but I think the house and Senate were both controlled by Republicans and the President was a Republican. Why do they have an excuse, the Dems could not have stopped that legislation if they had wanted to do so.

Didn't say they had an excuse. Actually said the opposite. But it WAS the Democrats who were at the forefront against anything that tightened lending practices. Or, to be more accurate, certain Democrats.

They should get all the scorn heaped upon them that this unraveling has caused -- as should Bush. Some on the right point to deregulation by Clinton in 99, which may have started the ball rolling, but Bush/Republicans could have stopped it or at least restricted elements as you rightly point out.

alnorth
09-18-2008, 01:36 AM
Pretty much this. For the Democrats in congress to try to say they had no blame with a straight face takes a lot of gall or amnesia. No political entity was more dedicated to relaxing requirements and making sure poor unqualified borrowers could get mortgages. Maybe equal (remember Bush's "ownership society" or whatever that was?) but they can hardly claim higher ground.

Amnorix
09-18-2008, 07:06 AM
They should get all the scorn heaped upon them that this unraveling has caused -- as should Bush. Some on the right point to deregulation by Clinton in 99, which may have started the ball rolling, but Bush/Republicans could have stopped it or at least restricted elements as you rightly point out.

For the record, BOTH houses of Congress were in Republican hands in 99, no? So how does Clinton single-handedly own this deregulation? Answer: he doesn't.

In fact, the name of the deregulation bill is GRamm-Leach-Bliley. Guess what party they're all from. Let me save you the trouble:

Congress will soon consider the conference report on the bill developed by Senator Phil Gramm (R-Texas), and Representatives Jim Leach (R-Iowa.), Thomas Bliley (R-Va.).

http://www.ncpa.org/pd/regulat/pd110299e.html

So it was Republicans who "got the ball rolling" by drafting the bill, no?

BUT, in point of fact, both sides own banking deregulation. The Republicans drafted it, both parties voted for it by solid majorities, and a Democratic President signed it into law (though I think it had enough votes to overcome a veto, that isn't all that important).

dirk digler
09-18-2008, 07:12 AM
For the record, BOTH houses of Congress were in Republican hands in 99, no? So how does Clinton single-handedly own this deregulation? Answer: he doesn't.

In fact, the name of the deregulation bill is GRamm-Leach-Bliley. Guess what party they're all from. Let me save you the trouble:

Congress will soon consider the conference report on the bill developed by Senator Phil Gramm (R-Texas), and Representatives Jim Leach (R-Iowa.), Thomas Bliley (R-Va.).

http://www.ncpa.org/pd/regulat/pd110299e.html

So it was Republicans who "got the ball rolling" by drafting the bill, no?

BUT, in point of fact, both sides own banking deregulation. The Republicans drafted it, both parties voted for it by solid majorities, and a Democratic President signed it into law (though I think it had enough votes to overcome a veto, that isn't all that important).

Yep. I went over this in another thread but the jist of it was the first bill after it came out of conference was voted mostly on party lines 55 Republicans voted for it and 45 Dems against with McCain voting for it.

After it went back to comittee and sit for 6 months the final vote was 90-8 with only 1 person NOT voting at all. Guess who decided just not to vote? John McCain

The final bill 1 republican voted no and 7 Dems voted no including Russ Fiengold and Barbara Boxer to name a couple.

I agree though that both parties really screwed the pouch but John McCain was there all the way while Obama really had no part in it. In fact in early 2006 Obama submitted a bill to fix the lending practices of these mortgages companies because he started to see what was happening before alot of others else did.

KCJohnny
09-18-2008, 07:16 AM
''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.''

Representative Melvin L. Watt, Democrat of North Carolina, agreed.

''I don't see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing,'' Mr. Watt said.

http://query.nytimes.com/gst/fullpage.html?res=9E06E3D6123BF932A2575AC0A9659C8B63&sec=&spon=&partner=permalink&exprod=permalink

Maybe purchasing votes by distributing federal largesse is not the best way to build a government program. Cheap (unrealistic) credit was/is as much to blame for the financial crisis as any other factor. Saddling people with debt they cannot really afford is hardly 'helping the poor'. Building the jobs base with tax incentives for small businesses and limited regulation helps poor families. Feel-good, highly symbolic gestures like raising the minimum wage or garaunteeing home loans for people who can't afford the property are not very helpful.

tiptap
09-18-2008, 08:55 AM
http://bigpicture.typepad.com/comments/2008/09/regulatory-exem.html

The losses incurred by Bear Stearns and other large broker-dealers were not caused by "rumors" or a "crisis of confidence," but rather by inadequate net capital and the lack of constraints on the incurring of debt.

--Lee Pickard, former director, SEC trading and markets division.

>

Is Financial Innovation just another word for excessive and reckless leverage?

Apparently so.

As we learn this morning via Julie Satow of the NY Sun, special exemptions from the SEC are in large part responsible for the huge build up in financial sector leverage over the past 4 years -- as well as the massive current unwind

Satow interviews the above quoted former SEC director, and he spits out the blunt truth: The current excess leverage now unwinding was the result of a purposeful SEC exemption given to five firms.

You read that right -- the events of the past year are not a mere accident, but are the results of a conscious and willful SEC decision to allow these firms to legally violate existing net capital rules that, in the past 30 years, had limited broker dealers debt-to-net capital ratio to 12-to-1.

Instead, the 2004 exemption -- given only to 5 firms -- allowed them to lever up 30 and even 40 to 1.

Who were the five that received this special exemption? You won't be surprised to learn that they were Goldman, Merrill, Lehman, Bear Stearns, and Morgan Stanley.

As Mr. Pickard points out that "The proof is in the pudding three of the five broker-dealers have blown up."

So while the SEC runs around reinstating short selling rules, and clueless pension fund managers mindlessly point to the wrong issue, we learn that it was the SEC who was in large part responsible for the reckless leverage that led to the current crisis.

You couldn't make this stuff up if you tried.

Here's an excerpt from The Sun:

"The Securities and Exchange Commission can blame itself for the current crisis. That is the allegation being made by a former SEC official, Lee Pickard, who says a rule change in 2004 led to the failure of Lehman Brothers, Bear Stearns, and Merrill Lynch.

The SEC allowed five firms the three that have collapsed plus Goldman Sachs and Morgan Stanley to more than double the leverage they were allowed to keep on their balance sheets and remove discounts that had been applied to the assets they had been required to keep to protect them from defaults.

Making matters worse, according to Mr. Pickard, who helped write the original rule in 1975 as director of the SEC's trading and markets division, is a move by the SEC this month to further erode the restraints on surviving broker-dealers by withdrawing requirements that they maintain a certain level of rating from the ratings agencies.

"They constructed a mechanism that simply didn't work," Mr. Pickard said. "The proof is in the pudding three of the five broker-dealers have blown up."

The so-called net capital rule was created in 1975 to allow the SEC to oversee broker-dealers, or companies that trade securities for customers as well as their own accounts. It requires that firms value all of their tradable assets at market prices, and then it applies a haircut, or a discount, to account for the assets' market risk. So equities, for example, have a haircut of 15%, while a 30-year Treasury bill, because it is less risky, has a 6% haircut.

The net capital rule also requires that broker dealers limit their debt-to-net capital ratio to 12-to-1, although they must issue an early warning if they begin approaching this limit, and are forced to stop trading if they exceed it, so broker dealers often keep their debt-to-net capital ratios much lower.

Chalk up another win for excess deregulation . . .

>

Source:
SEC's Old Capital Approach Was Tried - and True
Lee A. Pickard
SECTION: VIEWPOINTS; Pg. 10 Vol. 173 No. 153
American Banker, August 8, 2008 Friday
http://www.americanbanker.com/article.html?id=20080807ZAXGNH3Y&queryid=2110207978&

Ex-SEC Official Blames Agency for Blow-Up of Broker-Dealers
They constructed a mechanism that simply didn't work'
JULIE SATOW,
NY Sun, September 18, 2008
http://www.nysun.com/business/ex-sec-official-blames-agency-for-blow-up/86130/

American Banker excerpt after the jump.

Lee A. Pickard, former director, SEC trading and markets division, on Leverage and Net Capital exemptions :

A brutal combination of bad financial decisions and serious misjudgments about the inherent value and liquidity of securitized instruments, coupled with the use of excessive leverage, contributed to the demise of Bear Stearns and seriously weakened the capital structure of other major broker-dealers.

The Securities and Exchange Commission oversees the financial condition of all broker-dealers, and it used from 1975 to 2004 a "net capital rule" as its primary tool to ensure that broker-dealers had adequate capital bases and sufficient liquidity.

The rule, which I participated in formulating, required that every broker-dealer compute its net capital daily by doing two things. First, it had to value all liquid assets at market prices and then subject that value to a "haircut" of a specified percentage, depending on the assets' expected market risk. (A 30-year Treasury bond was carried for net capital purposes at 94% of its market value because changes in interest rates would affect its market value; riskier securities were subject to bigger haircuts.) Second, the broker-dealer was limited in the amount of debt it could incur, to about 12 times its net capital, though for various reasons broker-dealers operated at significantly lower ratios.

The SEC's basic net capital rule, one of the prominent successes in federal financial regulatory oversight, had an excellent track record in preserving the securities markets' financial integrity and protecting customer assets. There have been very few liquidations of broker-dealers and virtually no customer or interdealer losses due to broker-dealer insolvency during the past 33 years.

Under an alternative approach adopted by the SEC in 2004, broker-dealers with, in practice, at least $5 billion of capital (such as Bear Stearns) were permitted to avoid the haircuts on securities positions and the limitations on indebtedness contained in the basic net capital rule. Instead, the alternative net capital program relies heavily on a risk management control system, mathematical models to price positions, value-at-risk models, and close SEC oversight.

As the SEC itself has noted, this alternative program requires significant judgment, as contrasted with the numerical tests and capital charges (the haircuts) imposed on broker-dealers under the basic net capital rule. The alternative approach also requires substantial SEC resources for complex oversight, which apparently are not always available.

The SEC has maintained that the Bear Stearns collapse was precipitated by rumors and an unprecedented crisis of confidence, driven by lack of liquidity for the large securities positions it held. If, however, Bear Stearns and other large broker-dealers had been subject to the typical haircuts on their securities positions, an aggregate indebtedness restriction, and other provisions for determining required net capital under the traditional standards, they would not have been able to incur their high debt leverage without substantially increasing their capital base.

The losses incurred by Bear Stearns and other large broker-dealers were not caused by "rumors" or a "crisis of confidence," but rather by inadequate net capital and the lack of constraints on the incurring of debt.

The SEC should reexamine its net capital rule and consider whether the traditional standards should be reapplied to all broker-dealers. Moreover, broker-dealer losses should give the SEC pause regarding its recent proposal effectively to abandon the objective debt ratings of nationally recognized statistical rating organizations in favor of "subjective" tests of broker-dealers in determining adequate levels of regulatory net capital.

As the Bear Stearns collapse showed, no broker-dealer is "too big to fail" unless the federal government comes to the rescue.

Garcia Bronco
09-18-2008, 09:03 AM
For the record, BOTH houses of Congress were in Republican hands in 99, no? So how does Clinton single-handedly own this deregulation? Answer: he doesn't.

In fact, the name of the deregulation bill is GRamm-Leach-Bliley. Guess what party they're all from. Let me save you the trouble:

Congress will soon consider the conference report on the bill developed by Senator Phil Gramm (R-Texas), and Representatives Jim Leach (R-Iowa.), Thomas Bliley (R-Va.).

http://www.ncpa.org/pd/regulat/pd110299e.html

So it was Republicans who "got the ball rolling" by drafting the bill, no?

BUT, in point of fact, both sides own banking deregulation. The Republicans drafted it, both parties voted for it by solid majorities, and a Democratic President signed it into law (though I think it had enough votes to overcome a veto, that isn't all that important).

Clinton signed that sucker with a smile. Republicans and Democrats alike are responsible for this crap.

RINGLEADER
09-18-2008, 09:44 AM
For the record, BOTH houses of Congress were in Republican hands in 99, no? So how does Clinton single-handedly own this deregulation? Answer: he doesn't.

In fact, the name of the deregulation bill is GRamm-Leach-Bliley. Guess what party they're all from. Let me save you the trouble:

Congress will soon consider the conference report on the bill developed by Senator Phil Gramm (R-Texas), and Representatives Jim Leach (R-Iowa.), Thomas Bliley (R-Va.).

http://www.ncpa.org/pd/regulat/pd110299e.html

So it was Republicans who "got the ball rolling" by drafting the bill, no?

BUT, in point of fact, both sides own banking deregulation. The Republicans drafted it, both parties voted for it by solid majorities, and a Democratic President signed it into law (though I think it had enough votes to overcome a veto, that isn't all that important).


Said some on the right are saying that.

But the thrust of your point is entirely correct.

The Dems pushed for the relaxation but the Republicans certainly did nothing to play adult either.

mlyonsd
09-18-2008, 10:20 AM
Same goes for repealing the Glass-Steagall Act btw.

Reid likes to bash Gramm on it but voted to repeal it anyway. The Senate passed the repeal 90-8 and Clinton signed the bill.