August 28, 2015 8:01 AM
As the Dodd-Frank “financial reform” celebrated its fifth anniversary this summer, just about every financial business—as well as many nonfinancial firms—have come under its thumb. This is true whether or not these companies had anything to do with the financial crisis.
Community banks and credit unions that had nothing to do with the subprime mortgage meltdown suddenly found that they couldn’t issue mortgages to creditworthy borrowers, thanks to provisions such as “qualified mortgage” and “qualified residential mortgage” mandates enforced by the Consumer Financial Protection Bureau, the unaccountable new agency created by Dodd-Frank. Stable insurance companies such as MetLife that never faltered during the crisis and served policy holders for decades suddenly found themselves subject to bank-like capital requirements that even liberal Democrats like Sherrod Brown said was inappropriate.
(MetLife is currently challenging the authority of Dodd-Frank’s Financial Stability Oversight Council (FSOC) in a lawsuit. The Competitive Enterprise Institute (CEI) has a separate lawsuit challenging the constitutionality of both FSOC and the CFPB that garnered a partial victory recently in the D.C. Circuit Court of Appeals.)
Yet Fannie Mae and Freddie Mac, the two government-sponsored enterprises that many observers—from American Enterprise Institute scholar Peter Wallison to New York Times business columnist Gretchen Morgenson—say were the proximate cause of the crisis still face no requirement for any type of capital cushion.
July 9, 2015 11:49 AM
A new report by the Federal Reserve Bank of New York has found that the massive investment in grants and student loans by the federal government is a major contributor to the unbridled growth in the cost of attending college.
College tuition rates have consistently risen faster than inflation for some 25 years. One theory for the rise, dubbed the “Bennett hypothesis,” was put forward by Ronald Reagan secretary of education William Bennett, who argued that hikes in government student aid simply gave colleges a free pass to hike tuition.
Now, the New York Fed’s research suggests there’s some merit to the idea, and that it means the government could be spending billions on education to no effect.
“While one would expect a student aid expansion to benefit recipients, the subsidized loan expansion could have been to their detriment, on net, because of the sizable and offsetting tuition effect,” the paper concludes.
On average, the report finds, each additional dollar in government financial aid translated to a tuition hike of about 65 cents. That indicates that the biggest direct beneficiaries of federal aid are schools, rather than the students hoping to attend them.
As Neff notes, this finding is consistent with some earlier studies on the subject, such as a 2012 paper by Harvard and George Washington University economists, and a 2007 paper that found that higher Pell Grants drove up tuition at private schools as well as out-of-state tuition for public schools.
Earlier, Andrew Gillen, research director of the Center for College Affordability and Productivity, also reached the conclusion that federal financial aid fuels college tuition increases. In a colloquy on Gillen’s research, I concurred in this conclusion, while also noting that increased federal regulation has also fueled tuition increases—as have rules and red tape imposed by states and accreditation agencies. (A recent report by college presidents notes that under the Obama administration, the Education Department has flooded the nation’s schools with new rules that have never been properly vetted or codified, in violation of the Administrative Procedure Act.)
Education analyst Neal McCluskey of the Cato Institute cited four additional studies showing that increased government spending on student aid results in large tuition increases.
In 2011, Virginia Postrel wrote at Bloomberg News about how federal subsidies intended to make college more affordable have instead encouraged rapidly rising tuitions.
May 18, 2015 5:05 PM
Last year, an overhaul of Fannie Mae and Freddie Mac called Johnson-Crapo—named after then Senate Banking Committee Chairman Tim Johnson (D-S.D.) and Ranking Member Mike Crapo (R-Idaho)—went down in flames after observers found that the bill was not reform, but a massive expansion of the government’s role in housing.
One of the most vocal opponents of Johnson-Crapo was Sen. Richard Shelby (R-Ala.), who voted against the bill in the Senate Banking Committee and blasted it in his statement in committee and it media interviews. “Shelby Opposes Massive New Regulator and Taxpayer Exposure in Housing Regulation Bill,” exclaims the headline of a press release from Shelby’s office on the date of the Senate Committee vote on May 15, 2014.
Though the bill narrowly passed the committee, support for the bill died on the vine and it was never even brought to the Senate floor for a vote. The bill was torpedoed after vocal opposition from Shelby as well as that from 26 leaders of conservative and free-market groups who signed a letter blasting Johnson-Crapo that was coordinated by the Competitive Enterprise Institute. In addition to CEI, signatories included the Club for Growth, Americans for Tax Reform, Freedom Works, and the American Family Association.
March 19, 2015 10:30 AM
This Sunshine Week, the administration that swept into office promising to be the “most transparent” in history was just judged by a major news service as least transparent of modern presidencies.
An analysis by the Associated Pres found that “the Obama administration set a record again for censoring government files or outright denying access to them last year under the U.S. Freedom of Information Act.” The AP adds that the administration “also acknowledged in nearly 1 in 3 cases that its initial decisions to withhold or censor records were improper under the law - but only when it was challenged.”
But FOIA requests are just the tip of the iceberg for this administration’s secrecy, much of which has nothing to do with the legitimate exception of national security. In Dodd-Frank, the administration set up the Consumer Financial Protection Bureau and the Financial Stability Oversight Council—the constitutionality of both of which are now subject to a lawsuit from the Competitive Enterprise Institute and other parties—to be exempt from many open meetings and (especially with FSOC) open records requests.
But probably the most egregious example of this administration’s practicing of secrecy concerns its management of the government-sponsored housing enterprises (GSEs) Fannie Mae and Freddie Mac. In August 2012, then–Treasury Secretary Tim Geithner issued the “Third Amendment” to the GSE conservatorship. The Third Amendment would require all of the GSEs’ profits to be siphoned off to the U.S. Treasury Department in perpetuity—even after the GSEs paid back what they owed to taxpayers.
This arbitrary action has spawned more than 20 lawsuits from Fannie and Freddie’s private shareholders. The suits charge the administration with everything from violating the Administrative Procedure Act to unconstitutionally taking property without just compensation.
The Third Amendment has also raised concerns that the profit sweep is leaving Fannie and Freddie with very little capital reserves, furthering the chance for more taxpayer bailouts should something go awry with the housing market again. See this excellent paper by Cato Institute Director of Financial Regulation Studies Mark Calabria and former FDIC General Counsel Michael Krimminger on this point.
February 3, 2015 2:26 PM
Ed Pinto had a depressing and revealing op-ed in The Wall Street Journal Friday about how the Obama administration is artificially creating markets for risky mortgages, using the Federal Housing Finance Agency and the government-controlled mortgage giants, Fannie Mae and Freddie Mac. Not only will this put taxpayers at risk, but it will burden prudent homebuyers through “cross-subsidies” for risky borrowers “subsidized by less-risky loans.”
Long ago, Pinto worked as an executive and credit manager at Fannie Mae before it began buying up massive amounts of risky mortgages to pursue short-run profits and meet federal affordable-housing mandates.
As Pinto notes in “Building Toward Another Mortgage Meltdown,” Federal Housing Finance Agency Director Mel Watt has pushed for a resurgence in risky mortgage loans, and hinted at more mischief to come in his January 27 testimony to the House Financial Services Committee, in which he “told the committee” that he expects to release by “March new guidance on the ‘guarantee fee’ charged by Fannie Mae and Freddie Mac to cover the credit risk” on the loans they acquire.
As Pinto points out,
In the Obama administration, new guidance on housing policy invariably means lowering standards to get mortgages into the hands of people who may not be able to afford them. Earlier this month, President Obama announced that the Federal Housing Administration (FHA) will begin lowering annual mortgage-insurance premiums ‘to make mortgages more affordable and accessible.’
Government programs to make mortgages more widely available to low- and moderate-income families have consistently offered overleveraged, high-risk loans that set up too many homeowners to fail. In the long run-up to the 2008 financial crisis, for example, federal mortgage agencies and their regulators cajoled and wheedled private lenders to loosen credit standards. They have been doing so again. When the next housing crash arrives . . . homeowners and taxpayers will once again pay dearly.
Even progressive media like the Village Voice have reported on how the Department of Housing & Urban Development—especially Clinton’s HUD Secretary Andrew Cuomo—spawned the mortgage crisis by pressuring lenders and the mortgage giants to promote affordable housing, helping “plunge Fannie and Freddie into the subprime markets without putting in place the means to monitor their increasingly risky investments.” A 2011 book by The New York Times’ Gretchen Morgenson also chronicles how “it was Fannie Mae and the government housing policies it supported, pursued, and exploited that brought the financial system to a halt in 2008.”
But the Obama administration learned nothing from this, and has expanded this risky, “affordable-housing” push. Pinto notes, lowering mortgage-insurance premiums for risky borrowers is the centerpiece of a “new affordable-lending effort by the Obama administration,” which led to the “the latest salvo in a price war between two government mortgage giants to meet government mandates”:
Fannie Mae fired the first shot in December when it relaunched the 30-year, 97% loan-to-value, or LTV, mortgage (a type of loan that was suspended in 2013). Fannie revived these 3% down-payment mortgages at the behest of its federal regulator, the Federal Housing Finance Agency (FHFA)—which has run Fannie Mae and Freddie Mac since 2008, when both government-sponsored enterprises (GSEs) went belly up and were put into conservatorship. . . .
As Pinto notes,
Mortgage price wars between government agencies are particularly dangerous, since access to low-cost capital and minimal capital requirements gives them the ability to continue for many years—all at great risk to the taxpayers. Government agencies also charge low-risk consumers more than necessary to cover the risk of default, using the overage to lower fees on loans to high-risk consumers. Starting in 2009 the FHFA released annual studies documenting the widespread nature of these cross-subsidies. The reports showed that low down payment, 30-year loans to individuals with low FICO scores were consistently subsidized by less-risky loans.“
In 1997, for example, HUD commissioned the Urban Institute to study Fannie and Freddie’s single-family underwriting standards. The Urban Institute’s 1999 report found that “the GSEs’ guidelines, designed to identify creditworthy applicants, are more likely to disqualify borrowers with low incomes, limited wealth, and poor credit histories; applicants with these characteristics are disproportionately minorities.” By 2000 Fannie and Freddie did away with down payments and raised debt-to-income ratios. HUD encouraged them to more aggressively enter the subprime market, and the GSEs decided to re-enter the “liar loan” (low doc or no doc) market, partly in a desire to meet higher HUD low- and moderate-income lending mandates.
January 30, 2015 3:31 PM
“Wall Street Chips Away at Dodd-Frank,” blared a recent front-page headline in The New York Times about bipartisan measures that have passed the U.S. House of Representatives and/or been signed into law that ever-so-slightly lighten the burden of the so-called financial reform rammed through Congress in 2010. “GOP Pushes More Perks For Wall Street...” reads the home page of The Huffington Post under the picture of establishment pillar, Jamie Dimon, CEO of JP Morgan Chase.
Yet, what these articles don’t say is that the firms putting their resources on the line to challenge Dodd-Frank in court are the furthest thing from Wall Street high rollers. They are decades-old firms selling stable, time-tested financial products to everyday consumers.
At first glance, the national insurance firm MetLife and the Texas community bank State National Bank of Big Spring might seem to have little in common. But they both are solid financial firms that never took a bailout and never had their hand in the toxic mortgages—spurred on by the government-sponsored enterprises Fannie Mae and Freddie Mac and mandates of the Community Reinvestment Act—that caused the financial crisis.
And now, the firms are both doing their customers and all Americans a favor by bringing suit against Dodd-Frank’s Financial Stability Oversight Council (FSOC), one of the many opaque entities in Dodd-Frank that lack accountability to Congress and the public.
In its lawsuit brought this month, MetLife raised many of the same constitutional issues as did State National Bank in its pending legal challenge brought in 2012 in collaboration with the Competitive Enterprise Institute, at which I work. CEI and the conservative seniors group 60 Plus Association are co-plaintiffs with the bank, and CEI attorneys are working with the esteemed C. Boyden Gray—the former White House Counsel—in providing representation to the parties.
In an open letter to its customers that ran in full-page ads in The New York Times, Washington Post, and Wall Street Journal, MetLife CEO Steven Kandarian explained his objections to the firm being designated as a “systemically important financial institution,” or SIFI, by FSOC. “We do not believe MetLife poses systemic risk, and we are concerned that our designation will harm competition among life insurers and lead to higher prices and less choice for consumers.” In that sense, a court victory for MetLife would greatly benefit the public as well.
To its credit, MetLife is rejecting not only the burdens of being designated a SIFI but also the benefits—benefits that seem to eagerly embraced by both MetLife’s competitors (such as the infamous AIG) as well as the biggest banks. Being designated a SIFI means the federal government considers MetLife to be “too big to fail,” making it subject to the same Dodd-Frank bailout regime set up for big Wall Street banks like Goldman Sachs and JPMorgan Chase.
As CEI, 60 Plus Association, and the State National Bank argue in our legal challenge to the Dodd-Frank Act, the SIFI designation confers on a firm a strong competitive advantage, as investors and creditors know the government won’t let it fail.
We argue that the tiny State National Bank “is injured by the FSOC’s official designation of systemically important nonbank financial companies, because each additional designation will require the Bank to compete with yet another financial company—i.e., a newly designated nonbank financial company—that is able to attract scarce, fungible investment capital at artificially low cost.”
January 8, 2015 12:24 PM
“If it keeps moving, regulate it. And if it stops moving, subsidize it.” So said Ronald Reagan in 1986.
Reagan was describing the unintended effects of government policy. But for the Obama administration, this formula seems to be the modus operandi of its policy making.
Take mortgages, for instance. After the Dodd-Frank financial overhaul was rammed through the Democrat-controlled Congress in 2010, the Consumer Financial Protection Bureau—a bureaucracy created by the Dodd-Frank to be unaccountable almost by design—implemented the law’s “qualified mortgage” (QM) provisions.
The QM provisions were so costly and complex that community banks and credit unions—as far away as one could get from the causes of financial crises—sharply decreased or even abandoned altogether the creation of new mortgages. The U.S. House of Representative responded last year by passing overwhelmingly bipartisan legislation to scale back Dodd-Frank’s QM, but the bill became one of over 400 that never moved from then-Senate Majority Leader Harry Reid’s desk.
Yet today, in a much-heralded speech on housing in Phoenix, President Obama is expected not to join the bipartisan effort to take on the Dodd-Frank regulations keeping mortgages from moving, but to create new subsidies that not only may be ineffective at moving the housing market but would be harmful to the nation’s fiscal health, as they bulk up the government-backed housing agencies that fueled the housing crisis.
According to press reports, the administration’s plan consists of cutting premiums borrowers pay for mortgage insurance for mortgages backed by the Federal Housing Administration (FHA) by 50 basis points. This move comes despite the FHA’s insurance reserves being already below required levels.
Not only did the FHA have to get a direct $1.7 billion public bailout from the Treasury last year, it has received—according to a new Politico investigation—an estimated $73 billion in hidden bailouts through budget “reestimates” that don’t require official action. In the Politico expose of the FHA and other government credit program, reporter Michael Grunwald explains that “reestimates don’t require a public announcement or a congressional appropriation; agencies just use what’s known as their ‘permanent indefinite authority’ to stick the shortfalls on the government’s tab.”
November 18, 2014 2:18 PM
As CEI brings suit before the D.C. Circuit Court of Appeals tomorrow challenging the constitutionality of unaccountable bureaucracies created by the Dodd-Frank “financial reform” law of 2010, it looks like we may have some high-profile company in litigation against Dodd-Frank’s Financial Stability Oversight Council (FSOC).
The FSOC is a secretive, unaccountable task force of financial bureaucrats of various agencies created to designate banks and other financial firms “systemically important,” or too-big-to-fail. In September, the FSOC preliminarily decreed insurer MetLife a “systemically important financial institution,” or SIFI.
As CEI argues in our legal challenge to the Dodd-Frank Act (including the FSOC’s role of identifying risk), the SIFI designation confers on a firm a strong competitive advantage, as investors and creditors know the government won’t let it fail. That’s why big banks and MetLife competitor American International Group (AIG), which have already received billions in taxpayer bailouts, have eagerly embraced their SIFI status.
But MetLife, to its credit, has publicly stated that it is not too big to fail and does not want the special privileges that come with SIFI status, nor the regulatory costs. MetLife chairman and CEO Steven A. Kandarian declared last year, “I do not believe that MetLife is a systemically important financial institution.”
Now, The Wall Street Journal reports that “MetLife Inc. doesn’t want to be tagged as “systemically important” and is preparing to possibly take the U.S. government to court to avoid it, people familiar with the matter said.” The insurance firm has hired Eugene Scalia, attorney with Gibson, Dunn & Crutcher, who has put forth successful suits against other provisions of Dodd-Frank.
September 17, 2014 8:17 AM
Congress hasn’t voted just yet on the Continuing Resolution that includes the Export-Import Bank’s reauthorization. But we already know that it will pass this week, and Ex-Im will get a new lease on life, probably through June. We’ll have this fight all over again next spring and summer. But the fight has already taught an important lesson: more agencies should have automatically expiring charters. Ending or reforming Ex-Im would never have been a possibility if its charter didn’t have an expiration date. I make that point in a piece in Investor’s Business Daily:
Institutions matter. The rules of the game have a lot to do with how people play it — imagine what basketball strategy would look like if the three-point shot was changed to five points, or how baseball strategy would change if hitters could strike out on a foul ball.
The rules an agency issues aren't the only ones that matter. Rules governing the agencies themselves are just as important. If more agencies had a built-in check such as an automatic sunset that forced a periodic congressional reauthorization vote, they would have an incentive to behave better and pursue their missions in a less burdensome way.
The fight over Ex-Im isn't over. Even with Ex-Im's temporary new lease on life, reformers will still have won an important victory in tamping down its excesses.
September 11, 2014 12:21 PM
A vote on the Continuing Resolution, which includes the controversial Export-Import Bank reauthorization was originally scheduled for today, but has been pushed back to next week. So the combat continues over how long the Ex-Im reauthorization will last, and what other conditions might included as part of the deal. In today’s Washington Times, National Association of Manufacturers President Jay Timmons and I have dueling op-eds, with Timmons favoring reauthorizing Ex-Im, and me wanting to end it. The Wall Street Journal also weighed in with an editorial this morning, sharing my skepticism of Ex-Im.
Timmons makes three points in his piece that deserve a response. First, he argues that Ex-Im fills in gaps in private financing:
Ex-Im Bank provides financing that is critical to fill gaps when private-sector financing for small and large manufacturers is not available.
If Ex-Im makes a profit, as Timmons argues it does, then surely private banks would welcome an opportunity to make money for themselves by lending to more exporting businesses and their customers. If Ex-Im loses money, as the Congressional Budget Office convincingly argues, then there is no financing gap to be filled, and Ex-Im is financing too many insolvent projects.
Second, Timmons commits the “but other governments do it, too” fallacy: