The Economic Crisis: Failed Government Regulation and Racial Scapegoating

“The evidence is overwhelming. This crisis is a direct consequence of years of regulatory failures by government officials” said Senator Christopher Dodd (D-Conn.) Dodd continued, “the dominant players were not Fannie and Freddie, but the Wall Street firms and their other private sector partners; the mortgage brokers and the unregulated lenders”. At the U.S. Senate Committee on Banking, Housing, and Urban Affairs hearing on “The Genesis of the Current Economic Crisis”, the overall consensus of Senators and panel members was that government regulation failures and Wall Street investors were to blame.

Dodd said, “no one can say that the nation’s financial regulators were not aware of the threats posed by reckless sub-prime lending to homeowners, communities, and indeed the entire country. That threat had already been recognized by Congress”. Senator Robert Casey (D-Pa.) said he was troubled by the fact the Treasury Department wants to commit $250 billion to aid banks without “planning to modify a single loan”. Casey suspects that banks are now holding back on modifying loans because they’re waiting to see if they can sell them to the Treasury Department first, which he believes is the worst things that can happen right now.

The Honorable Marc H. Morial, President and CEO of the National Urban League, said that he wanted to, “set the record straight about what I call the Financial Weapon of Mass Deception: the ugly and insidious and concerted effort to blame minority borrowers for the nation’s current economic straits”. Morial blamed a few conservative reporters such as Fox News’ Neil Cavuto and the Washington Post’s Charles Krauthammer for, “telling the world that this crisis in not the result of a failure of regulation, but the fault of minority borrowers who bit off more than they could chew”. Morial said, “while minorities and low-income borrowers received a disproportionate share of sub-prime loans, the vast majority of sub-prime loans went to white and middle and upper income borrowers.”

U.S. headed off economic cliff

Former U.S. Comptroller General under Presidents Bill Clinton and George W. Bush David M. Walker said the U.S. needs to "get our financial house in order."

Talking about the bailout package, Walker said the government gave the Treasury Department $700 billion not for what they knew, but "for what they didn't know." Walker added that American citizens were not initially okay with the bailout package because it "overreached and under-communicated." He said the American people were not given reason as to why this was being done.

Reacting to the presidential candidates' economic proposals, Walker said both candidates would make the national debt worse. He said both would do "zip" in digging the U.S. out of its current fiscal hole.

Walker said it is possible that the subprime loan crisis could spread to the government. He warned that if it did, "No one's going to bail out America." To avoid this possibility, he recommended the next president create a "credible, capable, bipartisan fiscal commission."

Housing market took risks

Bush Economic Adviser Keith Hennessey said an "oversupply of houses" has contributed to the significant downturn in housing markets. He said that as long as there is an oversupply, a downturn will continue.

At a summit on housing, Hennessey said that mortgages have been "sliced and diced." Hennessey said these bad mortgages have contributed to "downside risk" in the economy, which has culminated recently in the bailout bill by Congress.

Federal Housing Administration (FHA) Commissioner Brian Montgomery said the FHA's goal for homeowners is "sustained ownership." He said the goal is not to give homes to those who financially cannot handle the costs. He called the subprime loan crisis "fool's gold" for its low initial costs followed by higher costs later.

Montgomery, who also is Assistant Secretary of Housing of the U.S. Department of Housing and Urban Development (HUD), said the goals of HUD are to "try and save the hundreds of thousands in foreclosure," and to maker sure the current housing crisis "never happens again."

HUD Director of Single Family Program Development Meg Burns talked about two programs recently enacted designed to help homeowners. She said both the "Housing and Economic Recovery Act of 2008" and the "Hope for Homeowners" rollout are designed to create fair payments for both borrowers and lenders. She said one difference between the two is that the Housing and Recovery Act is designed to help those "in a state of delinquency" due to job loss or medical problems, while Hope for Homeowners is for those "who should never have become homeowners in the first place."

Burns's advice to all homeowners who are having financial difficulties is to "call your lender."

Taxpayers flip bill for AIG

“The problem is not that we threw money at the economic crisis but instead that we threw money to financial institutes and looked like we have walked away afterwards,” Rep. John Mica (R-Fl) said during The House Committee on Oversight and Government Reform hearing on “The Causes and Effects of the AIG Bailout.” Chairman Henry Waxman (D-Calif) said that because of employees receiving bonus’s larger then that of the CEO’s yearly income.

Two former CEO’s of AIG, Martin Sullivan and Robert Willumstad, testified on behalf of AIG, placing blame on accountants and marked to market rules for the reason why AIG went bankrupt. “AIG never suffered one dollar of realized lost, it was the accountants that did not let the bonds mature to their potential value,” Sullivan said while trying to explain why AIG had problems.

Waxman criticized AIG on the way bonuses were given out to their employees. One employee, Joe Cassano, was terminated after his division had imploded but was still allowed to keep up to $34 million in unvested bonuses and AIG had put him on a $one million a month retainer. “ It boggles my mind that Cassano not only received over $280 million in his eight years of employment but that he is still receiving money after he was terminated.” Waxman said about Cassano.

The committee also criticized AIG’s week-long retreat for company executives at a exclusive resort a week after the federal bailout occurred. AIG reported to have paid the resort over $440,000, including nearly $200,000 for rooms, over $150,000 for meals, and $23,000 in spa charges. “I can’t understand how executives thought it would be a good idea to take all their employees, even those that were at fault for this whole mess, to a swanky resort to relax while the American taxpayers payed the bill,” Rep. Elijah Cummings (D-MD) said criticizing Sullivan for agreeing with AIG executives for the retreat.

The House Committee on Oversight and Government Reform are planning more hearings in the following weeks. The next hearings will be with shareholders, hedge funds and Fannie Mae and Freddie Mac. The committee is hoping that the following hearings will help them find out “where to place the much needed blame.”

Who's to blame for Lehman Brothers bankruptcy?

The general consensus was "jail not bail" for Lehman Brothers CEO Richard Fuld, Jr., at a hearing by the House Committee on Oversight and Government Reform on the causes and effects of the Lehman Brothers bankruptcy. This view was held by the Committee, panel, and Code Pink protestors (who were eventually thrown out of the hearing). Congressman Jim Cooper (D-Tenn.) said, "Is this Wallstreet or a casino? Lehman did not find itself in this situation by accident. It as the unlucky draw of a consciously made gamble." Dr. Luigi Zingales of the University of Chicago pointed out that by bailing out these investment banks, we are giving them incentive to gamble at the cost of taxpayers down the line.

Nell Minow of the Corporate Library said that Fuld, "intentionally surrounded himself with people who are complicit. These were people who were getting side payments from the company. They had no incentive to provide any kind of independent oversight." Minow said that by doing so, Fuld created a false idea of the value of his company. These false ideas created high leverage rates, leaving little security in times of economic trouble, and eventually the downfall of Lehman Brothers. Minow proposed a general rule be mandated to pay executives based on the value of business rather than the volume of business. Peter Wallison of the American Enterprise Institute agreed that the only protection taxpayers have at this point is more government regulation.

Additionally, Congressman Dennis Kucinich (D-Ohio) said, "there is an apparent conflict of interest permitting Treasury Secretary Paulson, former CEO of Goldman Sachs, to be involved in these discussions on the survival of Lehman Brothers." The panel agreed it was clear that Goldman Sachs benefits from Lehman Brothers going under, due to the competitive market they're in. As long as Goldman Sachs' interest is in Paulson's pocket, Kucinich says, his role in the bailout goes "against the free market."