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September 22, 2008


J. Strupp

Fannie and Freddie lobbyists have been greasing the palms of Washington leadership for years. Doesn't matter which side of the aisle you look. The fact is that the Fannie/Freddie moral hazard dilemma has been the elephant in the room in Washington since their "privatization" and no one did anything to stop this train wreck. I wouldn't start pointing fingers at McCain as if he is solely to blame for this nightmare. Obama wasn't interested in addressing the problem either, especially when everything was on the up and up. Now the blame game starts?

I will say this though: If you would like to examine which side of the aisle was more interested in using these two institutions to push risky loans to debtors that shouldn't obtain them then I'd be interested in your response John.


The main impetus for calling out McCain on these sorts of relationships is the fact that he has opened that door with specious swipes at Obama's connections (and yes, both sides of the aisle are entangled in that web to varying extents).

(From the article: "But last week the McCain campaign stepped up a running battle of guilt by association when it began broadcasting commercials trying to link Mr. Obama directly to the government bailout of the mortgage giants this month by charging that he takes advice from Fannie Mae’s former chief executive, Franklin Raines, an assertion both Mr. Raines and the Obama campaign dispute.")

As far as assigning blame for the current collapse, I certainly recognize that certain Democratic policies/inaction have contributed to the mess; I'm aware of Clinton's strengthening of the Community Reinvestment Act and how Bush apologists attempt to draw a line waaaay back to the 90s; etc. HOWEVER, as will be bandied about in days and weeks to come, it was a series of Bush administration policies and reversals of previous regulatory powers at state and federal levels that created the ideal predatory lending environment.

For instance: In 2003, during the height of the predatory lending crisis, the Bush administration directed the Office of the Comptroller of the Currency (OCC) to invoke a clause from the 1863 National Bank Act to issue formal opinions preempting all state predatory lending laws, thereby rendering them inoperative. The OCC also engaged NEW rules that prevented states from enforcing any of their own consumer protection laws against national banks. The federal government's actions were so egregious and so unprecedented that ALL 50 state attorneys general, and ALL 50 state banking superintendents, actively fought the new rules. (a large chuck of the preceding is quoted from an article by then-Governor of New York, Eliot "Paragon of Virtue" Spitzer. Sigh.)

Another important fact: When you read about the huge number of mortgages that are defaulted on (and walked away from), the vast majority of them are loans written within 6 months to a year before default! The timeline supports the contention that the Bush administration's bank- and loaner-friendly policies (and inaction) brought us to where we are.

But, no, I don't consider the Democrat's response to or anticipation of this state of affairs above reproach; they were meek in their preemptory objections. We are all benefiting from hindsight.

J. Strupp

Point taken on all fronts.

A bit off topic but something to keep your eye on in the near future:

Now that Uncle Sam is on the hook for the balance of illiquid mortgage-backed securites in this country, you can bet that our lending institutions (whatever they want to call themselves now) are in the process of sifting through and identifying every security that poses any sort of market risk. Keep in mind that many (or most) of these illiquid assets have already been written down or have been completely wiped off the balance sheet.

Keep your eye on Q4 and Q1 of 2009 earnings for these companies. I'll bet you ANYTHING they show a HUGE jump in earnings as they pawn off all of their illiquid assets to the taxpayer. Can you imagine the political fallout something like this would create when the American taxpayer realizes that they have just cleaned up the balance sheets of these companies that are now posting HUGE profits just 6 months later? Keep this in the back of your mind until next spring. I have a feeling that this is going to occur.

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