As the mortgage mess unravels and takes down more and more of the players, bits and pieces of information become available about who played central roles, and who benefited the most from unscrupulous lending schemes. One suprising conclusion that I drew is that much of this was in the making during the Clinton years, and that Bush, while he did nothing to prevent the system from collapsing, cannot be blamed for having caused it. Some of the players that I found mentioned over and over again in the news coverage are in the sphere of influence of the democratic party.
|Role||Chairman of the Federal Reserve 1987 to 2006|
|Responsibilities||Failed to realize that the asset bubble was at least in part caused by his “easy money” low-interest rate policy. Many experts believe that he was directly responsible for the housing bubble and many earlier bubbles during his tenure (e.g. MSN Money columnist William A. Fleckenstein).|
|Quote||“The housing boom will inevitably simmer down.”|
Daniel H. Mudd
|Role||CEO of Fanny Mae since 2004|
|Responsibilities||Failed to understand Fannie’s risk exposure and possible consequences from a collapse of the housing market; caved to pressure from politicians, investment firms, and mortgage companies to increase risky sub-prime mortgage lending. Operated his Fannie for 2 years without a chief risk officer, then hired Enrico Dallavecchia, only to fire him when he began to warn about the overheated market. Judging from quotes in this New York Times article, he seems to still not realize that, as the person in charge, it would have been his responsibility to see the obvious. Others did, and he ignored their warnings. As a result, Fannie Mae became unable to honor its guarantees to lenders.|
|Quote||“The market was changing, and it’s our job to buy loans, so we had to change as well.”|
Franklin D. Raines and J. Timothy Howard
|Role||Former CEO and CFO of Fannie Mae (until 2004)|
|Responsibilities||Expanded Fannie Mae by opening up the firm for riskier mortgages. Mr. Raines made about $90 million between 1998 and 2004, while Mr. Howard was paid about $30.8 million. Both resigned in 2004 amidst allegations of accounting fraud, arguably motivated by the prospect of reaching bonus payout triggers with their reported profits. Fannie’s earnings over 3 years had to be restated by a mere $9 billion. The Office of Federal Housing Enterprise Oversight declared that the $9 billion earnings hit had left the company “significantly undercapitalized.”(Business Week)|
|Quote||“Don’t bail out Fannie Mae and Freddie Mac. They have more than enough capital to meet their cash obligations [...]” (Raines in the Washington Post on 7/16/2008)|
Angelo R. Mozilo
|Role||Founder & Former Chairman and CEO of Countrywide Financial, Founder of IndyMac Bank|
|Responsibilities||Mozilo appears to have been at the center of the sub-prime mortgage boom. He grew his business to the nation’s largest mortgage lender by playing his political ties to democratic Senators and his friends at Fannie Mae. Some sources claim that Countrywide accounted for a quarter of Fannie Mae’s business at one point.
Since Countrywide was listed on the NYSE in 1984, Mozilo has sold $406 million worth of its stock, mostly obtained through stock option grants. $129 million of this was realized in the 12 months ending August 2007. James Johnson and Franklin Raines, both former Fannie Mae CEOs, are said to repeatedly have received preferential loans from Countrywide. Barack Obama recruited both of them as financial advisors for his campaign – the optics is anything but helpful.
Interesting side note: Mozila also founded IndyMac, which was one of the earlier casualties of the crisis. North Dakota senator Kent Conrad (D) and Connecticut senator Chris Dodd also received preferential loans from Countrywide.
|Quote||“You need us more than we need you, and if you don’t take these loans, you’ll find you can lose much more.” (Mozilo to Fannie Mae CEO Mudd)|
|Role||US Senator, Chairman of the Senate Banking Committee|
|Responsibilities||Dodd was one of the many beneficiaries of Mozilo’s preferential loans. He is the politician who received the most campaign contributions from Fannie Mae and Freddie Mac. He also received from Countrywide. Several of the statements that he made during the months leading up to the Fed’s Fannie Mae and Freddie Mac takeover make his judgement appear somewhat questionable.
On the other hand, Dodd seems to have been instrumental to the engineering of the bail-out plan, which received substantial input from BofA and Countrywide (if you believe this). This whole thing gets scarier – now the banks write their own bailout plan?
|Quote||“I don’t believe I did anything wrong.” (Dodd to the Danbury News-Times)|
|Role||Massachusetts Congressman, Chairman of the House Financial Services Committee|
|Responsibilities||Frank has a long-standing involvement with Fannie and Freddie. He was romantically involved with Herb Moses, an executive at Fannie Mae, in the 90s. He has received campaign contributions from both firms, and he has supported them in many ways. Most notably, he has been lobbying for reducing the amount of regulation, and he has been pushing for loosening lending standards. Some believe that Barney Frank created the preconditions for the lending crisis through his policies in the early 90′s (see this interview of Rupert Murdoch on Fox – where else?).
Surprisingly, Frank as recently as today (10/7) said in an interview on WBUR that he is very much in favor of more regulation in the financial system.
|Quote||“I’m not worried about Fannie and Freddie’s health, I’m worried that they won’t do enough to help out the economy”|
James B. Lockhart
|Role||Director of the Office of Federal Housing Enterprise Oversight|
|Responsibilities||The Office of Federal Housing Enterprise Oversight (OFHEO) is a federal regulator with oversight authority of Fannie Mae and Freddie Mac. Lockhart, thrown in by the Bush administration in the last minute to salvage Fannie and Freddie, did too little too late. He adjusted the companies’ lending standards so they could purchase as much as $40 billion in new subprime loans did not help, either. Lockhart is Director of the new Federal Housing Finance Agency (FHFA) and effectively runs Fannie and Freddie since the take-over.|
|Role||Former CEO of American International Group (AIG)|
|Responsibilities||Unbelievable what we read about this guy in various news reports. Sullivan joined AIG in ’71 and replaced Executives Hank Greenberg as CEO in 2005.
Under his tenure, AIG increased the sale of Credit Default Swaps, taking on risks that ultimately brought the company down. Sullivan urged exclusion of the money-losing AIG financial products unit when calculating executives’ bonuses, dumped an auditor who warned about things going on in their products division, while netting millions in salaries and bonuses. Some sources report a $47 million severance package, not counting another $17 million in pensions and deferred compensation.
|Role||former Texas Senator (until 2002)|
|Responsibilities||Gramm pushed the Commodity Futures Modernization Act through the legislature in 2000, which deregulated the Credit Default Swaps and other derivatives. Most economists agree that the risks of mortgage derivatives were not well understood and their wide-spread use was a major contributor to the financial markets meltdown of 2008.
Gramm, an executive at UBS bank, is an advisor to the McCain campaign and is being touted as his candidate for the treasury secretary. Wow – scary!
|Quote||“You’ve heard of mental depression. This is a mental recession. We have sort of become a nation of whiners.” (Gramm to the Washington Times)|
Also entering the stage at the last minute: Henry Paulson, Ben Bernanke
To sum it up in one sentence (two, actually)
What we see is a pattern of greedy executives who were enabled and helped by self-serving lawmakers on both sides of the political spectrum, and a failure of government oversight due to poorly qualified, unwilling, unskilled, and unmotivated regulators. Let this go on for 20 years, and the mess is perfect.