This weekend (bad news is always dumped on the weekends thanks to the innovative manipulation of the 24 hour news cycle by our politicians), we (by “we” I mean anyone who was paying attention) learned that Fannie Mae and Freddie Mac are being placed in government conservatorship.
The Treasury Department is expected to announce as early as this weekend a plan to bail out and recapitalize collapsing home mortgage giants Fannie Mae and Freddie Mac in one of the biggest government rescues in U.S. history. […]
According to media reports citing unnamed sources close to the negotiations, the government is expected to take at least temporary control of Fannie Mae (FNM:
Fannie Mae … and place the troubled firms under the umbrella of the Federal Housing Finance Agency. […]The bailout involves total assets that would dwarf the savings and loan rescue in the 1980s that shook the banking sector to its core. Fannie and Freddie hold roughly $1.5 trillion in direct debt, guarantees on what could be as large as $5 trillion and possibly off-balance sheet obligations that could reach $3 trillion, according to recent estimates from Ladenburg Thalmann & Co.
In effect the federal government will become the manager and owner of the the two largest companies in the United States who participate in the US mortgage market. In some countries this would be considered the nationalization of the mortgage industry since between the two of them, Fannie and Freddie own or guarantee close to $6 Trillion (yes, Virginia, I said Trillion) of the approximately $12 trillion US mortgage market. By anyone’s standards that’s a pretty large chunk of change. Apparently, it was the concerns of large foreign central banks regarding the security of their investments in these mortgage securities which prompted Bush’s Treasury Secretary to step in and assume control.
Of course, since we are governed by a radical right wing conservative party which has disowned the ability of the federal government to do anything which is good or has any value for our country or its citizens (the US military industrial complex being the lone exception in their bizarre belief system), neither the words “nationalization” or “regulation” are being, or will be, uttered by Republican officials. Republican candidates are still running their election campaigns on the themes of smaller government, less government regulation and lower taxes (at least for some of us).
You can bet no Republican will mention the Bush Treasury Department’s desperate action to forestall the collapse of the US secondary mortgage market by taking over Fannie Mae and Freddie Mac. Nor will they point out that this is an inevitable result of the deregulation of our financial institutions, a conservative agenda item since Franklin Roosevelt and his New Deal Congressional majorities first passed legislation forcing the financial snake oil salesmen of the securities and banking industries of their time to clean up their acts.
Despite the fact that our system of government regulation worked well for decades helping to increase both Main Street and Wall Street’s profits by more than 100 fold between 1930 and 1980, the financial gurus on the Right Wing (and most bankers and brokers of all stripes) were never happy with the federal government’s role in insuring that bad loans and bad investments were kept to a minimum, and that the financial ownership and dealings of consumer banks, commercial banks, investment banks and securities firms were were kept separate and for the most part, transparent. First, during the Reagan years they managed to deregulate the Savings and loan industry. Within ten years, that action was the primary factor in the collapse of 747 savings and loan institutions, and led to, at that point, the largest government bailout of any industry in our history.
The upshot: The savings and loan industry essentially doesn’t exist anymore. Their assets were bought up by other, larger institutions in a wave of consolidations and mergers the likes of which we had never seen before in the banking world. The number of bank mergers/consolidations rose by 300% between 1976 and 1998, and the number of independent banking institutions declined by 60 % in that same period.
That rate of consolidation has continued in the Bush years, sparked in part by the elimination of the Glass Steagall Act (the last New Deal legislation prohibiting common ownership of banks by other financial institutions such as Securities and Insurance firms). You might remember that Phil Gramm, McCain’s top economic adviser and renowned financial industry lobbyist for UBS, was the primary force behind killing off the remnants of federal regulation of the financial industry (with an assist from President Bill Clinton and the DLC lobbyist wing of the Democratic party).
In 1933, a few years following the stock market crash, Congress passes the Glass-Steagall Act, in hopes that regulating banks will help prevent market instability, particularly amongst Wall Street banks. The purpose of the act is to separate commercial banks that focus on consumers from investment banks, which deal with speculative trading and mergers.
The Glass-Steagall Act provided the proper oversight and entity separation that would prohibit banks and other financial companies from merging into giant trusts (conflict of interests) — giant trusts or corporations being more powerful, naturally, and having the seemingly limitless capital to lobby their corporate interests, however, with a very myopic scope (particularly when it comes to factoring in potential losses — most banks, as seen in contemporary times, chose not to anticipate losses in the mortgage market; they presumed home prices would continue to appreciate).
In 1999, former Senator Phil Gramm (who is, incidentally, Senator John McCain’s economic adviser and cochairs his presidential campaign) set out to completely gut the Glass-Steagall Act, and did so successfully, replacing most of its components with the new Gramm-Leach-Bliley Act: allowing commercial banks, investment banks, and insurers to merge (which would have violated antitrust laws under Glass-Steagall). Sen. Gramm was the driving force behind the Gramm-Leach-Bliley Act, as he had received over $4.6 million from the FIRE sector (Finance, Insurance and Real Estate donations) over the previous decade, and once the Act passed, an influx of “megamergers” took place among banks and insurance and securities companies, as if they had been eagerly awaiting the passage of Gramm’s Act. […]
Shortly after George W. Bush was elected president, Congress and President Clinton were trying to pass a $384 billion omnibus spending bill, and while the debates swirled around the passage of this bill, Senator Phil Gramm clandestinely slipped a 262-page amendment into the omnibus appropriations bill titled: Commodity Futures Modernization Act. … The essence of the act was the deregulation of derivatives trading (financial instruments whose value changes in response to the changes in underlying variables; the main use of derivatives is to reduce risk for one party). The legislation contained a provision — lobbied for by Enron, a major campaign contributor to Gramm — that exempted energy trading from regulatory oversight. Basically, it gave way to the Enron debacle and ushered in the new era of unregulated securities. Interestingly enough, Gramm’s wife, Wendy, had been part of the Enron board, and her salary and stock income brought in between $900,000 and $1.8 million to the Gramm household, prior to the passage of the Commodity Futures Modernization Act.
As of 2003, financial organizations with assets in excess of $10 Billion owned 73% of all banking industry assets, and organization with assets between $1 Billion and $10 Billion or more hold another 13 %. That’s up from a 43% share by these Super Large Institutions in 1984 at the height of the Reagan era’s first wave of financial consolidation. Think of that. Three quarters of all banking assets are owned by the largest financial companies in America. Indeed, Bank of America alone, with $870 Billion in assets held 9.6% of that total. Just for comparison’s sake the 3,683 smallest banking organizations (i.e., your basic community banks, credit unions, etc., with $100 million in assets or less apiece) accounted as a group for only $192 billion of assets, or less than one quarter of what Bank of America owns!
Yet consolidation of financial assets in the hands of a few mega-corporations is but one consequence of deregulation (still one of the primary planks of the Republican economic platform). For along with massive consolidation, other bad consequences flowed from that lack of governmental oversight and regulation. For example, excessive risk taking by these very same ultra large financial companies, followed by corporate welfare bailouts when many of these bets don’t pay off:
. . . Over the last twenty years, U. S. deregulation of the financial sector has been based on developing what I would call predator financial capitalism, that is to say the systematic encouragement of excessive risk taking (moral hazard) and of corporate greed in general, the development of the pyramidal $2.5 trillion hedge fund industry, the practice of highly-leveraged buyouts (LBOs) of healthy companies with their own high-yield debt, also know as “bootstrap” investments, and the practice of program trading. Moreover, this was a system that was not only risky but also fraught with shady activities.
To accomplish this deregulation or non-regulation of the financial sector and to encourage the over-indebtedness of the U.S. economy, a whole series of safeguards that had been wisely established to prevent a repeat of the financial and economic disasters of the 1930’s were dismantled and cast aside. The last one in line was the reckless abolishment by the U.S. Securities and Exchange Commission (SEC) of the speculative prevention rule called the downtick-uptick rule (which prohibited short-selling when stock prices were falling), in July 2006. Such safeguards had been put in place in order to avoid systemic financial instability, to make financial institutions more responsible to users and to avoid costly government bailouts when large financial institutions fail. Today, we are back to the 1930s with large financial institutions reaping huge profits and paying obscene salaries to their CEOs in good times and with government bailing them out with public money when things turn sour.
In other words, we have reverted under DLC and Republican rule to the “boom and bust” cycles in the financial industry that were experienced in the Gilded Age, the last time Wall Street Speculators essentially controlled our financial markets because of the inability and unwillingness of the Federal Government to impose any controls on what they could or could not do. As anyone who experienced (or who has studied the history of) the Great Depression knows, such unfettered predatory capitalism is a recipe for disaster.
So, what is the point of my little missive this morning besides putting a wet blanket all over your Happy Sunday rest and relaxation? That despite all the punditocracy’s blather on cable TV and elsewhere in the media about Sarah Palin’s star power, McCain’s POW experience and mavericky goodness, and Obama’s elitist, intellectually cool patriotism problem, it’s still “The Economy Stupid!” And the economic policies implemented by our Republican, Business and Wall Street Elites have led us down the path to economic ruin. Bush’s action to let the Treasury assume control of Fannie and Freddie is simply one more indication of how serious matters really are (even if the Bushies and McCain are attempting to avoid any mention of it in the popular media), and of the utter hollowness and bankruptcy of Republican/conservative economic ideas.
If we don’t elect officials who utterly reject that agenda this Fall because of the misdirection and obfuscation the GOP’s lies and propaganda, propaganda all too willingly spread by a compliant and enabling US news media, we, collectively, as Americans, will have only ourselves to blame.