The Wrath of Babylon Mystery Orchestra

APPETITE FOR DECEPTION

"I think that's all fine and good but here's what I think, in the next 47 days you can fire the whole trickle-down, on-your-own, look-the-other way crowd in Washington who has led us down this disastrous path. Don't just get rid of one guy. Get rid of this administration, Get rid of this philosophy. Get rid of the do-nothing approach to our economic problem and put somebody in there who's going to fight for you." -Barack H. Obama

With the explosion of news coming out of the financial markets these days you could be led to believe the United States is on the verge of a massive economic collapse on par with the Great Depression. The stock market plunges 500 points one day on the news of AIG's impending failure then rebounds 700 points the next two days. Markets in other countries have to be closed because they are rising too fast! All this on the news that the Federal Government is coming to the rescue with hundreds of billions of our dollars by assuming control of still more of the mortgage industry. Ahh, the smell of socialism comes to America and Wall Street rejoices. With the collapse of the mortgage industry, a lot of politicians are calling for heads to roll. Somebody should have said something...right? Somebody should have done something...right? Well my friends, somebody did say something and somebody did do something. Step inside a twisted tale Hollywood could have never imagined, yet most assuredly, will vote for...

The Federal National Mortgage Association, aka Fannie Mae, was created in 1938 as part of President Franklin Delano Roosevelt's New Deal. Ironically, it was originally created to bail out failing banks after the collapse of the national housing market in the wake of the Great Depression. Borrowers were defaulting on mortgages not unlike they are in the current situation. Fannie Mae was established in order to provide local banks with federal money to finance home mortgages in an attempt to raise the level of home ownership and the availability of affordable housing. It operated like a national savings and loan, allowing local banks to charge low interest rates on mortgages for the benefit of home buyers.

In 1968, due to economic pressure created by the Vietnam War, President Lyndon B. Johnson privatized Fannie Mae in order to remove it from the federal budget. At this point, Fannie Mae began operating as a GSE (Government Sponsored Enterprise), generating profits for stock holders while enjoying the benefits of exemption from taxation and oversight as well as implied government backing.

The Federal Home Mortgage Corporation, aka Freddie Mac, was created in 1970 also as a GSE privately owned and operated by shareholders and financially backed by the Federal Government.  These government protections include access to a line of credit through the U.S. Treasury, exemption from state and local income taxes and exemption from SEC oversight. Freddie Mac was created largely for the purpose of preventing Fannie Mae from operating as a monopoly.

Although these entities have been getting all the media attention due to their recent failures, the true culprit of the mortgage debacle is something called The Community Reinvestment Act, signed into law by Jimmy Carter in 1977! The CRA allowed banks to lend money based on minority status, not the ability to repay the loans. Banks who were given federal money to lend were assessed ratings that were not based on the soundness of the risk of their loans, but on the number of loans given to minorities. President Bill Clinton took the CRA even farther by committing U.S. banks to make available nearly one TRILLION dollars for inner-city and low-income mortgages and real estate development projects.

Banks were required to furnish a certain percentage of their loans to low income minorities, regardless of their inability to re-pay the loans, and the banks' ratings were tied to these loans. In other words, the banks could not maintain a high rating unless they participated in this disastrous practice. Government coercion at its finest! The standard 20% down-payment rules were eliminated. New terms of length were installed, abolishing the traditional 20 year mortgage and giving loans of up to 40 years!

Left wing community groups like ACORN were allowed to set up offices to help minorities qualify for  loans and banks were required to accept the information provided by ACORN. Information that was often false! Borrowers, who often made as little as $30K a year, were listed as having incomes of over $70K in order to qualify and the banks were required to accept that information without question. There were even loans like NINJA (no income, no job or assets) loans. Unstable income, such as child support payments or welfare payments, were allowed to be considered part of the borrowers income! How dependable is that for a source of income? This was a disaster waiting to happen. Somebody should have said something! Somebody should have done something! Unfortunately those who opposed the Clinton Administration's Financial Modernization bill were often called bigots for opposing these lending practices that were, on their face, designed to encourage minority participation in home ownership. The reality was that this became a pet banking system for the democratic party and some of its most questionable allies.

Enter Franklin Raines, Vice-Chairman at Fannie Mae from 1991 to 1996. In 1996 he joined the Clinton Administration as the Director of the U.S. Office of Management and Budget, where he served until 1998. In 1999, he returned to Fannie Mae, but this time it was as the CEO, the first black man to head a Fortune 500 company. In 2004 Raines accepted what was called an "early retirement" after a report from The Office of Federal Housing Oversight found numerous accounting discrepancies in Fannie Mae's operation. Raines tried to take his money and run, but he did not get away.

Raines was accused by The Office of Federal Housing Enterprise Oversight, the regulating body of Fannie Mae, of widespread accounting errors, which included the shifting of losses so senior executives, such as himself, could earn large bonuses. Exactly the behavior that led to the infamous ENRON scandal.
In 2006, the OFHEO initiated a lawsuit against Raines in order to recover some or all of the $50 million in payments made to Raines based on the falsified earnings statements. He is accused of overstating Fannie Mae's assets to the tune of 6.3 billion dollars.

Then there is the case of James A. Johnson. The same Office of Federal Housing Enterprise Oversight report from September 2004 found that, during Johnson's tenure as CEO, Fannie Mae had improperly deferred $200 million in expenses. This enabled top executives, including Johnson and his successor, Franklin Raines, to receive substantial bonuses in 1998. A 2006 OFHEO report found that Fannie Mae had substantially under reported Johnson's compensation. Originally reported as $6-7 million, Johnson actually received approximately $21 million in compensation.

With all these shenanigans going on in government sponsored entities you would think somebody would have wanted to get involved. Somebody should have said something...right? Well, somebody did, as this report from 2003 indicates:

The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.