Republicans Counter Democrats' Financial Regulatory Reform Plan

By Celia Canon-Talk Radio News Service

At a press conference on Thursday, Republicans presented their own financial regulatory reform plan to counter proposals made by the Democrats on this issue.

Rep. Jeb Hensarling (R-Texas) said that “The Republican plan will transition Fannie (Mae) and Freddie (Mac) to market competition over a reasonable period of time to help end what the taxpayers are tired of.. and that is bail-out mania.”

Congressman Spencer Bachus (R- Ala) emphasized the weakness of the Democrats’ plan.

“Unfortunately, the administration's plan continues the cycle of bailouts for "too big to fail" financial institutions, furthers the government's role in picking winners and losers, complicates rather than streamlines the current regulatory structure, and keeps taxpayers on the hook for losses caused by imprudent risk-taking on Wall Street,” said Bachus.

Bachus explained that instead, “The Republican plan would direct all failed non-banks to enhanced bankruptcy proceedings. Bankruptcy is a fair and transparent process where the rules are clear and well-established, and which does not require taxpayer funding to bail out the creditors of failed institutions.”

Rep. Shelley Moore Capito (R-Va.) summarized the Republican plan.

“It’s a better protection for our taxpayers, it’s less government involvement, it’s a more orderly transition,” said Capito.

Congresswoman Judy Biggert (R-Ill.) also partook in the presentation of the regulatory plan.

“There’s going to be enforcement and fiscal responsibility for all those that created (crisis),” said Biggert.

Rep. Shelley Moore Capito (R-Va.) summarized the Republican plan.

“It’s a better protection for our taxpayers, it’s less government involvement, it’s a more orderly transition,” said Capito.

Despite the differing plans, both Republicans and Democrats agree on one point: America needs change in the financial system.

Fannie and Freddie ignored advice

Fannie and Freddie ignored advice

While mortgage giants Fannie Mae and Freddie Mac have been bailed out and put under conservatorship, questions still remain over what factors led to the government sponsored enterprises’ (GSE) failure.

Richard F. Syron, CEO of Freddie Mac from 2004 to September, 2008, attributes some of the blame to the nature of the housing market.

“When the dramatic and widespread downturn in housing prices occurred, the pressures on Freddie Mac and Fannie Mae were enormous. The GSEs are in a non-diversified business focused solely on residential housing lending in the United States,” said Syron during a House Oversight and Government Reform Committee hearing.

“As the guarantor of almost half the homes mortgages in the country, it is not at all surprising that these two firms would get hard by the biggest housing collapse in 75 years.”

However, the release of certain documents suggest to some members of Congress that the CEOs were aware of the risks that came with alternative lending, and are therefore responsible for their companies downfall since they did not respond to the warnings.

Rep. Dennis Kucinich (D-Ohio) referenced a series of emails that the committee was provided with that detailed a discussion between former CEO of Fannie Mae Daniel Mudd and the company's Chief Risk Officer. In the email, the Chief Risk Officer accused Fannie Mae of having the weakest control processes he had seen in his career. After the email was initially received the Chief Risk Officer's budget was cut by 16%, a move that he interpreted as being carried out with malice.

"The facts show, gentleman, that many of you at this table did know the risks and that you were warned not to take them and that you ignored your internal advisor, your Chief Risk Officer," said Kucinich.

Causes of crisis

A Zogby poll sponsored by the organization Judicial Watch found that 81.7 percent of Americans believe that political corruption was a major factor that lead up to the current financial crises. According to Thomas Fitton, Judicial Watch’s President, the evidence suggests those 81.7 percent are correct.

“American’s seem to get what the problem is, but because ‘everyone’ is involved, you wont hear a peep about it from the city’s establishment,” said Fitton, speaking at a Judicial Watch panel discussion on the causes of the financial crisis.

“Arguably, the financial crisis is part of the biggest government corruption scandal in our nation’s history, and it doesn’t get much bigger than Fannie Mae and Freddie Mac...the companies took care of both political parties.”

Editor of the Real Clear Markets website John Tamny said that deregulation was not the cause of the crisis, as some democratic leaders are suggesting.

“If you look at the biggest freeze so far in this mortgage meltdown, it’s been of Fannie Mae and Freddie Mac If we ignore first of all the fact that both parties to varying degrees were literally horizontal in bed with these guys, the idea that they didn’t have oversight of their activities is laughable,” said Tamny.

Instead, Tamny attributes the origin of the crisis to the weak dollar.

“Real estate is very commodity like, and just how commodities always do well when the dollar is weak, so does real estate. And with housing making big gains upwards in nominal terms in recent years, Americans logically chased this performance and piled into the housing sector.”

This housing boom resulted in people purchasing risky mortgages under the belief that if they found out they could no longer afford it, they would be able to sell it easily in the empowered real estate market. Eventually, the housing market turned sour, and the housing investments followed.

Senior Fellow at the Cato Institute Alan Reynolds found blaming the recession that is taking place worldwide on U.S. housing to be a ‘bit of a stretch’, and claimed that a spike in oil prices had a role in the crisis, pointing to nine occurrences when oil prices tripled, only to be followed by periods of recession. Reynolds expressed skepticism to a government solution.

“Recessions happen. If energy prices get too high, they have to come down. If home prices get too high, they need to come down. If homebuilders build too many houses, they have to stop building for a while until they get the inventory down..if the governments really knew how to stop, prevent, alleviate recessions, why do we still have recessions?”
John Berlau, Director of the Center for Entrepreneurship said that the initial emphasis the government put on housing in the finance system was not as helpful as originally believed, and instead suggested that they should have focused on getting the poor to save and invest.

Berlau said that Fannie Mae and Freddie Mac were essentially hybrids of government and private industry which had dangerous consequences.

“Fannie and Freddie were kind of the worst of both worlds. They could lobby like the private sector could do, but they were also built by congress and had built in government support where they had a 2 billion dollar line of credit...that made investors think, and it turned out rightly, that if anything happened they would be bailed out by the government.”

New direction for Fannie and Freddie

In early September the two government sponsored mortgage finance companies Fanninie Mae and Freddie Mac were put under the conservatorship, or legal control, of the U.S. government. The CEOs were dismissed and the Federal Housing Finance Agency Director James Lockhart III was installed as a temporary replacement for the board of directors.

"We did not take this action lightly. We counseled with Chairman Bernake...we also consulted with Secretary Paulson. They both concurred with me that conservatorship needed to be undertaken," said Lockhart during a House Financial Services Committee hearing.

"First signs, despite all the market turmoil are that the conservatorships are positive. I am pleased to say that the enterprises are funding costs and the spreads on the {Mortgage Backed Security} have declined."

Lockhart went on to say that since the conservatorship home rates for thirty year mortgages fell below six percent for the first time in 2008.

In order to pursue stability, Freddie Mac and Fannie Mae both had to go through major changes. The CEOs were replaced by former U.S. Bancorp Vice Chairman David Moffit and former Merrill Lynch president Herb Allison. Both companies have severely limited approval of low document and no document loans, and common stock and preferred dividends were eliminated, saving the companies $2 billion. In addition, Lockhart says both CEOs have been urged to be more creative in preventing home forclosures.

White House Briefing

Following the president's statement in the Rose Garden, White House spokeswoman Dana Perino and Director of the National Economic Council briefed the press on the government's increasing role in attempting to restore investor confidence to the struggling financial markets.

Hennessey outlined the steps that have been taken and those that the government would like to happen, "So we've got the conservatorship for Fannie and Freddie. Treasury and Fed worked over the last weekend, they were up in New York working with firms in the industry," he said. "We had the Fed taking steps just a couple days ago to prevent what they would call the disorderly liquidation of AIG, the insurance company. And then the Fed has been increasing significant amounts of liquidity into the financial system to keep things moving."

Hennessey reiterated statements made by President Bush about urging the Congress to pass legislation that would allow the federal government to buy illiquid assets from struggling financial institutions to further increase liquidity.

"The most obvious example of an illiquid asset is a mortgage asset, a mortgage-backed security that's probably lost value as the values of the homes that are underlying those mortgages have declined," he said. "And what's happening is, as those assets have lost value, people don't want to buy them, they become illiquid, it's hard for people to buy and sell them, and so they're stuck on the balance sheets of financial institutions."

Hennessey said that the White House would be in negotiation with congressional leaders over the weekend. Congress and the administration will need to hammer out the details of this authorizing legislation. Hennessey said that they would have to make "significant, substantive progress on the details" over the weekend.

"This is a very bold set of actions, we are calling on Congress to do something that is very big and that we believe needs to be done quickly," he said.