“Financial Deform: So-Called U.S. bank Reform Does Little But Hurt Taxpayers”

“Financial Deform: So-Called U.S. bank Reform Does Little But Hurt Taxpayers”

May 04, 2010
Originally published in Calgary Herald

The CEO of Goldman Sachs, the Wall Street firm the
SEC has accused of fraud, has endorsed the so-called
financial “reform” bill backed by U.S. President Barack Obama and congressional
leaders.

The bill would enrich Goldman Sachs at the expense of taxpayers and smaller
competitors. While the bill contains lots of red tape and fees that will harm
insurance policyholders and Main Street, it contains selective “carve-outs” from
consumer-protection laws for cronies of Senator Chris Dodd. Dodd recently
attracted criticism for financial and ethical lapses, such as his receiving “a
sweetheart deal on an Irish ‘cottage’ from a crooked stock-trader” and “two
preferential discount mortgage interest deals from the now-bankrupt
Countrywide.” Goldman Sachs is the fourth-largest donor to Democratic campaigns,
ranking just below public-employee unions and trial lawyers in its massive
support for liberal politicians.

The financial bill contains goodies for Big Labour and “too big to fail”
banks and financial institutions, at the expense of taxpayers and competing
firms.

Obama has collected millions from Wall Street special interests, his
administration contains many Wall Street lobbyists, and he supported the
unnecessary US$700-billion bank bailout. But now, he’s pushing a deceptive
financial regulation bill with phony rhetoric about “reform,” claiming it is
“not legitimate” to point out that the bill could lead to yet more bailouts and
government takeovers.

Obama’s legislation would do nothing to rein in the worst offenders behind
the mortgage crisis, the government-subsidized mortgage giants Fannie Mae and
Freddie Mac, while enriching left-wing lobbying groups and community organizers,
and giving the government the permanent ability to bail out and take over Wall
Street firms.

Obama’s proposed financial rules overhaul does absolutely nothing about
Fannie Mae and Freddie Mac, admits Obama’s Treasury Secretary, tax cheat Timothy
Geithner, even though he admits “Fannie and Freddie were a core part of what
went wrong in our system.” Worse, the Obama administration lifted the
US$400-billion limit on bailouts for Fannie and Freddie, so they could continue
to buy up junky mortgages at taxpayer expense, and showered their executives
with US$42-million in compensation. The Obama administration is now expanding
the bailouts of these mortgage giants so that they can lavish pay on their CEOs
and reduce the payments of deadbeat mortgage borrowers. (At the direction of the
Obama administration, Freddie Mac is now running up US$30-billion in losses to
bail out mortgage borrowers, some of whom have high incomes. Federal regulators
sought to make Freddie Mac hide the resulting losses from the SEC and the public.)

Fannie and Freddie helped spawn the mortgage crisis by acting as loan
toilets, buying up risky mortgages and thus creating an artificial market for
junk. As The Wall Street Journal reported”

“From the time Fannie and Freddie began buying risky loans as early as 1993,
they routinely misrepresented the mortgages they were acquiring, reporting them
as prime when they had characteristics that made them clearly subprime.”

Why did they buy these risky loans? They put up with Clinton-era
affordable-housing regulations that required them to buy up lots of risky loans,
in order to curry favour on Capitol Hill and thus retain their annual
$10-billion in tax and other special privileges (which they possessed owing to
their status as “Government-Sponsored Enterprises” or GSEs). They paid their
CEOs millions in the process, and engaged in massive accounting fraud—US$6.3
billion at Fannie Mae alone—to increase the size of their managers’ bonuses. As
GSEs, they were exempt from the capital requirements that apply to private
banks, so they did not have enough reserves to cover their losses when their
mortgages started defaulting.

Banking expert Peter J. Wallison, who prophetically warned against the risky
practices of Fannie Mae and Freddie Mac for years, says that Obama’s proposals
will lead to “bailouts forever” and give big, politically-connected banks that
are “too big to fail” the ability to drive smaller rivals out of business at the
expense of consumers and taxpayers. His colleague Alex Pollock notes Obama has
not lived up his administration’s claims that it would back reform of Fannie Mae
and Freddie Mac.

Obama claims it will not lead to more bailouts, but even congressional
Democrats admit that it will. As Congressman Brad Sherman (D-Calif.) admitted,
the “bill has unlimited executive bailout authority…. The bill contains
permanent, unlimited bailout authority.”

Government pressure on banks to make loans in economically-depressed
neighbourhoods was another key reason for the mortgage meltdown and the
financial crisis. If Obama has his way, that pressure will increase. The House
earlier approved Obama’s proposal to create a politically correct entity called
the Consumer Financial Protection Agency. “The agency would be in charge of
enforcing the Community Reinvestment Act, a law that prods banks to make loans
in low-income communities.” It would do so without regard for banks’ financial
safety and soundness, even though the Community Reinvestment Act was a key
contributor to the financial crisis.

Obama’s proposed financial regulations would also harm retail banking
operations used by middle-class people and small businesses.