Big government, progressive politics caused mortgage crisis
Having spent 40 years on Wall Street, I had a ringside seat to watch the financial crisis unfold over many years.
The Bush administration was not at fault, but Barack Obama was an important contributor.
Let me explain.
President Franklin Roosevelt created Fannie Mae in 1935 to free up bank capital; Freddie Mac came later.
In 1968, President Lyndon Johnson, wanting to remove Fannie Mae from the government balance sheet, made it a public company, thereby socializing its risks and privatizing its profits.
The Community Reinvestment Act (1977), meant to encourage lending to high-risk borrowers, often minorities, allowed radical groups like ACORN — Association of Community Organizations for Reform Now — to force banks to make subprime loans.
The landmark case, Buycks-Roberson vs. Citigroup (Chicago, 1994), alleged discriminatory mortgage lending against minorities, with then-attorney Barack Obama suing with ACORN.
Loan applications from Citibank showed poor credit histories and prior defaults.
The case settled in 1998 but the die was cast.
Under President Bill Clinton, the Department of Housing and Urban Development relaxed credit standards, requiring banks to make a requisite number of loans to low- and moderate-income borrowers. In 2000, Clinton effectively deregulated credit-default swaps which led later to AIG's insolvency.
In 2005, the Senate Banking Committee tried to reform Fannie Mae and Freddie Mac, but were blocked by Democrats.
Fannie and Freddie's growth fueled Wall Street's securitization of subprime loans (rated by incompetent agencies) by becoming the primary customers of AAA-rated subprime mortgages.
By late 2006, they constituted almost half of all housing loans. The inevitable defaults and crisis followed.
Big government policies and "progressive" politics were the cause.