None Dare Call it Financial Treason

None Dare Call It Financial Treason ©

by:  Robert F. Beaudine

Those who indulge in independent thought expect indigestion whenever their intake includes today’s journalism.  The rancid lies of both the Democrats and the Republicans spike past the daily requirement.  And when the Fourth Estate colludes with the Left, even more antacid is necessary.

Last April, the press reported that for the 2009-2010 campaign cycle, Goldman Sachs employees and its PAC had contributed almost 70% to Democratic candidates or committees.  Three of the top four donations went to the Democratic National Committee, the Democratic Senatorial Campaign Committee, and the Democratic Congressional Campaign Committee.  The other top donation went directly to the campaign of Democratic Congressman Michael McMahon.

Brian Walsh, a spokesman for the National Republican Senatorial Committee, pointed out the irony of Democratic attacks on Wall Street while their hands are slippery with Wall Street money.  The dismissive response from the Democrats reveals the true nature of modern journalism.  Establishment politicians and their paid spokesmen can spout anything without being held accountable.

Ryan Rudominer, a spokesman for the Democratic Congressional Campaign Committee, likened the credibility of Republican attacks to “Bernie Madoff talking about smart investing.”  It seems whenever the facts hinder the agenda, our politicians distort, dissemble, divert attention, anything but divulge the truth.

The current Administration portrays Capitalism as the ultimate problem with its profit motive embraced by greedy advocates both on Wall Street and in the Republican Party.  President Obama and the Democrats are the champions of financial reform with their equitable distribution of wealth.

But where were the Democrats prior to the mortgage crisis?  What did Barney Frank and Maxine Waters say when the Bush Administration, Treasury Secretary John Snow, Senators Chuck Hagel, Elizabeth Dole, and John Sununu all clamored for regulatory oversight of Fannie Mae and Freddie Mac?

In September 2003, Barney Frank said, “Fannie Mae and Freddie Mac are not facing any kind of financial crisis.”  In October 2004, Maxine Waters said, “Mr. Chairman, we do not have a crisis at Freddie Mac, and particularly at Fannie Mae under the outstanding leadership of Mr. Frank Raines.”

An outstanding leader also knows when it’s time to move on – before the cooked books are uncovered, but not before you receive over $50 million in bonuses.  (Fannie’s earnings were inflated by over $9 billion, and Mr. Raines received over $90 million in compensation for six years of loyal service.)  By leaving before the crisis was manifested, Mr. Raines has been able to distance himself and remains a usable asset behind the scenes.

The Democrats are also culpable for changing the American dream of owning a home into an American right.  This began with the Community Reinvestment Act of 1977, which attempted to reconcile the so-called wrongs of not lending liberally to riskier groups, those businesses and residents in low-to-moderate income neighborhoods.  This, they said, was blatant discrimination.

Our journalists scoff whenever the CRA is mentioned as a factor in the crisis, as if Jimmy Carter could be that stupid.  The truth is, it wasn’t until the mid-1990’s that the banks began to lower their standards because of increasing political pressure.  And during the early years of the twenty-first century, they systematically removed most of the remaining barriers to a home mortgage.

Here, the Democrats dissemble.  They were only trying to help the poor get housing.  That’s minor compared to the bailout of Wall Street under the Bush Administration.

In 1994, during the Clinton Administration, the Riegle-Neal Interstate Banking and Branching Efficiency Act repealed restrictions on interstate banking.  Both Riegle and Neal were Democrats.  They had 21 co-sponsors, a bipartisan group of mostly Democrats (13) that included Barney Frank, Chuck Schumer, and Joe Kennedy II.  This was the first step in creating too-big-to-fail and led to immediate mergers and acquisitions.

This seems counter to the claim that Democrats represent the working class – the underdog – and oppose the big banks.  Shouldn’t they have supported the small banks, which historically have been the best banks?  Or was it more convenient to get the campaign cash?

This Act forced banks with national ambitions to pay attention to their CRA rating.  The CRA rating became a determining factor before any bank could establish an interstate branch.  Lending standards were loosened throughout the banking industry.

The Democrats are guilty, but what about the Republicans and their friends on Wall Street?  We’ve heard of their many crimes together.  Not all, but enough to judge.

In 1999 and 2000, former Republican Senator, Phil Gramm helped deregulate Wall Street with historic legislation.  He was the chairman of the Senate Banking Committee from 1995-2000.  He had the banking experience and the connections with the Street to get things done both for personal enrichment and to benefit the lobbyists that kept him in office.  In a ten-year period, he received over $4 million in campaign contributions from the financial sector.

He championed the Gramm-Leach-Bliley Act, which became law in 1999.  This repealed the safeguards of the Glass-Steagall Act of 1933 that prohibited commercial banks from combining with investment banks and insurance companies.  The conservative culture of the commercial banks was infected by the riskier nature of Wall Street.  And too-big-to-fail became bloated as this Act unleashed another flurry of mergers and acquisitions.

In late 2000, Senator Gramm slipped into the omnibus spending bill a 262-page amendment called the Commodity Futures Modernization Act.  This Act legitimized and then popularized derivatives like credit-default swaps by exempting them from regulation by either the SEC or the Commodity Futures Trading Commission.  (Credit-default swaps are basically an insurance policy against credit default.  The buyer pays the premium, and the seller – the insurer – assumes the risk.  If the loan or security goes into default, the seller pays off the debt.  But unlike typical insurance, a speculator can buy a policy without owning the product – the investment or obligation.)

Those investment houses that bundled subprime mortgages bought the swaps to hedge their risk.  But several insiders saw the impending collapse and made billions buying swaps without any ties to a security.

This is where AIG grabbed a deck in this house of cards.  They were a world leader in insurance products.  They watched as the market for credit-default swaps grew exponentially from billions of dollars to trillions, and they started dealing.  Because they became the sellers of the swaps, they assumed the ultimate risk and ensured their demise.  Yet, without credit-default swaps, subprime mortgage-backed securities wouldn’t have developed into a robust market.

Senator Gramm compounded his corruption by inserting in his bill what’s been dubbed the Enron clause.  A provision deregulated energy futures contracts, which enabled Enron to defraud their investors.  Phil was rewarded for that.  His wife, Wendy, was on the board of Enron.  She was also on the audit committee.  These facts didn’t dissuade John McCain from hiring his good friend to co-chair his presidential campaign of 2008 as his top economic advisor.  If John McCain had won, Phil might have been our Secretary of Treasury.  But we digress.

What about Wall Street’s ratings agencies, Moody’s, Standard & Poors, and Fitch?  Without their blessings and blatant disregard for sound economics the market for subprime mortgage-backed securities would have been speculative.  Internal evidence shows that they knew what they were doing.  Unfortunately, their business model is flawed with a systemic conflict of interest.  Those who issue the investments requiring a rating pay their bills.  Sounds like a sweet setup.

Warren Buffett’s Berkshire Hathaway is Moody’s largest shareholder.  He dismissed their responsibility as one small group among many who missed the warning signs of impending crisis.  These agencies rated subprime mortgage-backed securities with the their highest approval – triple-A.  If they’re not complicit, their analysts are completely incompetent.  Ninety-three percent of the subprime mortgage securities issued in 2006 are now junk status.

There’s enough blame to provide plenty of cover for all the rats to hide under.  Phil Gramm blames bad monetary policy and the politicization of home mortgages.  The Democrats blame the Republicans and their cronies on Wall Street.  The Republicans blame the Democrats.  Consumers blame predatory lending, while the banks blame everybody but themselves.  Because everyone points in a different direction, it’s harder to find our way out of the woods and onto the clear road to both the truth and some possible solutions.

A few people have pointed to the Federal Reserve as the ultimate cause of our economic woes.  They malign the international bankers who continue to guide the policy of the Federal Reserve from one boom-and-bust period to another.

The Fed is the primary perpetrator.  The housing bubble began as the Fed lowered interest rates in January 2001.  For three and a half years, rates were continually reduced until they reached their lowest level in over forty years.  These artificially low rates enticed average Americans to borrow beyond their means and even speculate in the housing market.  But more importantly, Wall Street was showered with easy money.

There was a glut of capital, but the low rates brought low yields on low-risk investments.  Investors searched the world for better returns.  The once conservative Lehman Brothers borrowed billions and invested in commercial real estate at the top of the market.

Mortgages were packaged together and securitized as investments, but they couldn’t satisfy the demand.  The market wanted more mortgage-backed securities.

When credit-default swaps were legitimized, greed overrode judgment, and lending barriers were systematically stripped away.  First, all you needed to qualify for a mortgage was verifiable assets with an unverified but stated income.  Next, all you needed was verifiable assets.  And finally, even assets weren’t necessary as long as your credit score was okay.

As more and more unqualified consumers bought homes and speculators joined the frenzy, the bubble expanded.  In June 2004, the Fed put its finger on the trigger, when it announced its first rate increase in three and a half years.  Two years later, it had raised rates 17 straight times.

Those strapped in an adjustable mortgage rate were squeezed as their rates rose.  Defaults became commonplace.  The Fed didn’t need to pull the trigger.  The credit rating agencies did that for them.  They downgraded billions of dollars of subprime mortgage investments all at once.  Panic replaced greed.  The bubble had ballooned so fast it burst under its own pressure.  And the American consumer was left to pick up the pieces.

Commonsense might say that the bankers knew rates would eventually rise, and a day of reckoning was on the way.  Commonsense might even say that this crisis was manipulated from the start.  But because our educational system was destroyed long ago, commonsense might remain silent.

It’s apparent that risky behavior was endorsed and rewarded and became epidemic.  When the disease overcame all the vital organs of our economy, the rewards ended, and the cries for help began.

The pretended panic of the international bankers persuaded our politicians to mortgage our future and replenish their corporate wealth.  They didn’t allow capitalistic principles to correct the problem, because that would have dramatically reduced their hold on our economy.  The collapse of Wall Street would have devastated the average American, but it was necessary.  We would have survived, and we would have learned our lesson.

The collapse would have been much worse for our morally bankrupt bankers.  They would have been exposed and ultimately purged from our economy.  Instead, they’re back in business as usual.  And now, our printing presses continually churn out lies and lots of money.

Now that the budget is soaring out of control, it’s become fashionable to obscure it with debt-to-GDP ratios, the similar ratios and irrational economics that has led Europe to the brink.  One of Obama’s solutions was to create by executive order the bipartisan National Commission on Fiscal Responsibility and Reform last February.  That sounds like a sure-fire solution.  One goal is to balance the budget, but without including interest payments.  (Not even the Wall Street firms would attempt such nonsense.)  But it’s bipartisan, so it should be good.

The Democrats in Congress have proposed their own brand of financial reforms, which will perpetuate the bailouts.  Small businesses won’t fly as angel investments are curtailed.  And Fannie and Freddie are ignored, except for the continual bailouts.

Are there any real solutions to our financial problems?  For one, as Congressman Dr. Ron Paul has consistently demanded for decades, we need to abolish the Federal Reserve.  The first step in that process would be a full and independent audit of the Fed.  Not just once – this practice should be perpetuated.  The Senate must pass the Vitter amendment, modeled on the house bill.  Once everything is laid to light, the public might then be ready for a better solution.

We need to return to sound economic principles, balance our pork-fed budget, and denounce our disingenuous Keynesian economists who support the international banking system of today.

We need to end the corruption in Washington and fire our conniving politicians.  We need to replace them with honest leaders who are true public servants steeped in history and steadfast in their integrity.

We need to rewrite campaign finance law and outlaw the bribe-men, euphemistically called lobbyists.  (This strange word was coined in 1837 to obscure the true nature of the men waiting in the lobby with bags of cash.  This word should be banned from the English language and replaced with the truth!)

Throughout history, politicians have provided “bread and circuses” to stabilize and soothe the masses and distract them from the deeper questions of life.  Both distraction and ease have become American ways of life.  We prefer to pop a pill to remedy any problem.  But our financial problems are beyond simple corrective measures and will only get worse.  The way out will not be easy.

It has been said that the truth will set you free.  When that doesn’t happen, those troublesome acids are released that sometimes churn the stomach.  Mine has been churning ever since this debacle began.  And I haven’t found a pill that claims it’ll bring relief.  I guess that’s why I had to get this off my chest.