And my Tea Party was hateful?

Sunday, October 05, 2008

Who caused the Financial Crisis?

Over the past few weeks I have been asked one question time and time again, “How did home mortgages crash the economy and why is the Federal Government bailing out Wall Street?”. Honestly, I did not know. With little background in economics, I did not understand how this pyramid scheme could have existed under federal financial regulations. Every news story discussed the greed of Wall Street and blamed the free market for the stress on Main Street. I continued my research and became more acutely aware that the problem was federally mandated and protected by members of congress who were receiving contributions from Freddie Mac and Fannie Mae. How could I see the pattern of government interference when the media could not? Finally I found my answer.

Barack Obama has a long history as a community organizer and worked closely with groups like ACORN (Association of Community Organizations for Reform Now, http://www.acorn.org/) and received contributions from both Fannie and Freddie. If this story hits the mainstream, Obama’s bid for Presidency would be over. When I began looking into the history of Fannie and Freddie, I did not expect to find a direct connection to Barrack Obama. I did expect that the Democrat Congressional Caucus was deeply involved. How was the greatest economy in the world decimated by the home mortgage? Why is the Federal government throwing more good money after bad?

In the late 1970’s America was attempting to purge racism from every aspect of American life. Segregation was becoming a distant memory, but lending practices and income levels still favored Caucasian Americans. Home ownership was believed to be the key to establishing individual wealth. If minorities were able to receive home loans, these families would be on their way to financial stability required to achieve the American dream.

Under the Carter Administration, congress passed the Community Reinvestment Act of 1977 (CRA). In summary, the CRA required lending institutions to meet “the credit needs of its entire community, including low- and moderate-income neighborhoods”. The CRA provided a rating system to gauge how well lending agencies met the newly established guidelines. Institutions that did not have high CRA ratings were prevented from executing merges or other financial transactions. The individuals targeted by the CRA were not traditionally credit-worthy and the banks had to become creative when extending loans to low income families (who could not afford traditional mortgages).

Enter the “toxic” sub prime loan (hum scary music here). Adjustable Rate Mortgages (ARMs) with very low “teaser” interest rates facilitated “affordable housing” for low-income individuals. Over the decades, one home loan at a time, the CRA has slowly undermined the U.S. economy. The CRA empowered community groups that were designed to confront large banks who failed to issue a sufficient number of loans to minorities in impoverished neighborhoods.
Then, in the wake of the savings and loan crisis, Congress under George H.W. Bush passed the Federal Institutions Reform, Recovery and Enforcement Act (FIRREA) of 1989. The primary cause of the savings and loan crisis was unwise real estate investment (sound familiar). FIRREA made CRA ratings public knowledge which allowed the community organizations that promoted affordable housing to use the CRA rating as a weapon.

Enter ACORN (hum scary music again). FIRREA gave Fannie Mae and Freddie Mac more responsibility for promoting loans to low income families. Fannie and Freddie began to securitize billions of dollars in mortgage backed securities with lending institutions that needed to increase their CRA rating. Armed with public CRA ratings, community organizations such as ACORN hired young, ambitious attorneys like Barrack Obama to levy lawsuits against the banks. In 1995, Buycks-Roberson v. Citibank Fed. Sav. Bank Fair Housing/Lending/Insurance (see Plaintiff’s attorneys) was brought before a Chicago court by a relatively unknown attorney, Barack Obama. This lawsuit forced Citibank to make high risk loans in the intercity of Chicago to individuals who were less-than-credit worthy. Buycks-Roberson v. Citibank served as the legal precedent which required that the lending institutions had to issue bad loans under duress. This lawsuit represents one of several cases where Barack Obama fought on the behalf of the “middle class” while working on the Developing Communities Project (DCP). DCP provided a small paycheck for the up-and-coming politician and provided him with exposure within the community. During this time, Obama taught community leadership programs for ACORN.
To avoid litigation which could prevent the banks from engaging in major financial transactions, the lending institutions began making large donations to groups such as ACORN.

Groups like ACORN, armed with large contributions from both the lending institutions and Federal tax dollars, began their own low-income housing programs. Fannie Mae, Fannie Mac et al began making campaign contributions (pay careful attention to the Congressmen listed in the prior hyperlink) to various Congressional members in order to ensure that federal dollars continued to flow into the program. Meanwhile, Fannie Mae and Freddie Mac are engaging in an Enron-style book-cooking scandal to overstate earnings (note the name of the CEOs) and trigger bonus payments for the CEO’s. Congress passed Sarbanes-Oxley to combat future Enron-style accounting.

Bundled securities were sold from one bank to another with little outcry from the market place. Americans enjoyed easy access to credit. Home prices continued to rise. Profits on Wall Street rose. Joe Q. Public saw increases in his 401k. Congressmen received sweetheart deals from lenders. Fannie, Freddie and other GSE’s were not bound by Sarbanes-Oxley and continued to operate in an under-regulated manner. A decrease in housing prices was the final ingredient required to initiate a major financial crisis. These are listed below.

1. Community Organizations such as ACORN pressure Congress to require that banks issue bad loans and provide federal funding for community groups.
2. Fannie and Freddie cook-the-books while paying Congressmen to look the other way.
3. Fannie and Freddie sell mortgage backed securities to large financial institutions so that they can achieve the federally mandated CRA rating and avoid the ire of community organizations such as ACORN.

This cycle continued until the music stopped. Then, a few of the lending institutions were caught holding the hot-toxic-mortgage potato.

How will this affect your vote this November? Fannie Mae and Freddie Mac regard Barack Obama and the Congressional Black Caucus as family. Obama personally brought to trial, one of the earliest legal precedents that forced the lending institutions to issue bad loans. Jim Johnson, former CEO of Fannie Mae, served on Obama’s Vice-Presidential Selection Committee while Franklin Raines, former CEO of Fannie Mae (who forcibly resigned due to the accounting scandal) served as an advisor on the housing industry (Why is the wolf guarding the hen house?). ACORN, who has been represented in court by Obama, is under federal investigation, in numerous states, for allegations of voter fraud. George W. Bush tried to reform Fannie and Freddie in 2004, but was stopped by the Democrats in Congress (I know it is amazing that W had a good idea). McCain attempted reform as well. When I began trying to understand the financial crisis, I did not believe it would have any direct connection to the Presidential election. Why are the FBI investigations of Fannie and Freddie on page 7d of your local news paper and not on the cover above the fold? Why haven’t the major new agencies reported Obama’s connection to ACORN and Fannie Mae? Why hasn’t anyone reported on his connection to high risk mortgages? Why do polls think Obama is the man to solve this crisis, when he helped cause it?

Providing low-income households with debt they can not afford will not allow these individuals to achieve the American dream. It will create undue stress on borrower. Without reforming the CRA, our credit markets are vulnerable to repeat this crisis. Wall Street needs to make lending decisions based on financial data, not quotas. If we want to help minorities achieve home ownership, we need to improve the schools in inter-cities and promote economic activities in these areas. Congressional oversight of the housing industry has provided us with bankrupt financial institutions and large campaign contributions. People who can not afford their mortgage unfortunately must be foreclosed upon. Until people who can afford the mortgage are placed into those homes, the markets will not improve. It does not matter if the Federal Government or a private bank owns the debt, if the home owners can not pay the obligation.

But no one listens to me
-Patriotic Progeny

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