Sunday, October 24, 2010

Frequently Assumed Falsehoods: Barney Frank Caused the Financial Meltdown

You know, a lot of these email messages keep saying that Barney Frank caused the recent financial crisis.
They say a lot of things that aren't true, don't they?

Well, yeah.  But they say it a lot.
I hear you.  Doesn't mean it's true.

Well, did he actually do anything that might make people say this?
There are a few things.  But it's almost impossible to say that these things caused the financial crisis.

They keep on mentioning Barney Frank's opposition to regulation of Fannie Mae and Freddie Mac as the cause of the meltdown.
They can say that.  But it seems pretty darned unlikely to anyone who looks at facts, rather than just bulk-forwarding emails that support whatever beliefs they already had.

Probably.  You know these emails.  But why would Fannie Mae and Freddie Mac be involved in such a scheme?
Well, they did create and securitize mortgage-backed securities.  And, as you know, mortgage-backed securities provided a central role in the financial crisis.

Aha!  So, if there were better regulation on Fannie Mae and Freddie Mac, the mortgage-backed securities would not have failed, and the economic crisis wouldn't have happened, right?  And Barney Frank opposed this regulation?
We'll get to the second part of that question later.  But for the fist part?  Uh... No.  Fannie Mae and Freddie Mac were far from the only companies producing mortgage-backed securities.  Little companies like Countrywide, Goldman Sachs, Lehman Brothers, and many others also created these securities.  And sold them aggressively.

Okay, so Fannie Mae and Freddie Mac didn't create all of these toxic assets.  But they made some pretty risky loans in low-income neighborhoods, didn't they?
Depends what you mean by "pretty risky".  If you mean the floating rate, low down payment, interest only (or negative amortizating), or no-documentation types of loans made to folks with low credit scores?  They took less risk than the private market did.

Private market?  You mean that the Government was producing these toxic assets?
Fannie Mae and Freddie Mac were started by the government, under FDR's administration.  But, until the meltdown occurred, they were private companies.  Many investors, however, thought they were safer than private companies, under the assumption that the government might bail them out if they got into trouble.

But - the government DID bail them out.  So that assumption turned out to be correct!
True.  But they also bailed out AIG, which was threatening to go bankrupt in it's attempt to securitize mortgage based securities that were not issued by Fannie and Freddie.   I don't think anyone had reason to believe AIG had government support...

Okay, so Fannie Mae and Freddie Mac were only part of the problem.  So, what did Barney Frank do to cause so much trouble?
He's made some awkard statements, and done some awkward things.  And he did hold a role on the congressional committee that these regulations would have come from.

Okay... What regulation did he block?
As far as I can tell?  None.

Okay, maybe I asked the wrong question.  What regulation is he accused of blocking?
Well, in 2003, the Bush administration suggested moving supervision of Fannie Mae and Freddie Mac from congress to a division of the Treasury department.

And Barney Frank objected, right?
He initially expressed objections.

Well, why?
Well, the Bush Administration implied that Fannie Mae needed more capital reserves, in case it's underlying investments went bad.  He expressed concern that tightened capital reserves = less money to loan = less of a support mechanism for home sales in poorer areas.  As he said, ''These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis. The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''

Wait - Fannie and Freddie needed government bailouts.  So there was a financial crisis.
Yeah, with 20/20 hindsight, that's a pretty regrettable quote to make.  But if so many people didn't believe in the safety of mortgage-backed securities, the financial crisis wouldn't have happened.  He was as wrong as most people were back then.

Is there any other reason that Barney Frank might have been against this?
I can't read minds.  I can only read what he's written, and make some assumptions based on what he did.

Well, I heard that his boyfriend was a Fannie Mae executive.
Yes.  He had a 11-year domestic partnership with Frank Moses.  The conservative blogosphere has varied statements regarding what role he had in the organization - some saying that he was Vice Chairman of New Product development, others saying he was a vice president.  They all cite the National Mortgage News as the source of this information.  Unfortunately, I'm unable to find any articles from them mentioning his name.  (You can try searching yourself at this website.)  Nor has the reference been linked to by any articles that normally cross-reference their sources.  (An example here.)

Isn't this a conflict of interest?
I think it might be worthy of further investigation.  But, considering we don't even know what Frank Moses' role was, it's hard to figure out what legislation Barney Frank may have proposed or voted on upon the advice of his domestic partner at the time.  And no one in the conservative blogosphere has made any specific links between Frank Moses' specific interests and specific actions of Barney Frank.  Other than vague insinuations that such a thing might have happened, based on the fact that they were an open homosexual couple.

Personally, I think the easier explanation of Barney Frank's actions is that he had a consistent record of advocacy for affordable housing measures.  Even when these measures were financially problematic.

That's it?
Well, when there are relationships, people consider them.  For example, when George W. Bush was a governor, no one criticized him for his educational policy initiatives because his wife was an educator.  They may have considered this connection when evaluating his statements and policies.  And they would be correct in doing so.

But no one claimed that a sitting governor's statements were corrupted by his relationship, or insinuated that he should remain silent on educational policy because of his "conflict of interest".

But... it's unseemly.
Well, maybe.  But their relationship was open and public.  Any statements Barney Frank would make could be considered in this light.  No one did - until the financial crisis hit.

And he accepted a lot of campaign contributions from Fannie Mae.  Isn't that kind of unseemly?
Yes, he did accept campaign contributions from Fannie Mae.  He's on the Financial Services committee - if anyone's going to get a contribution, it would be the members of that committee.

Now, as to whether such things should be allowed?  That's a legitimate area of debate, in my humble opinion.

Wait -- my paranoid brain is thinking --
Uh, oh...

Fannie Mae makes a ton of money at the height of the mortgage craze, and donates tons of money to politicians that let it go underregulated.  Fannie Mae goes under, and gets government bailouts.  So the Democrats created a giant campaign slush fund (the campaign donations) at the people's expense (the bailout), right?
Uhhm... that's an interesting conspiracy theory.  It's got a couple of fatal flaws though.

Oh, yeah?  What?
Well, for one, they spent a lot of money on Republicans too.  The Democrats got 7% more, yes.  That's $336,000 more (by my calculation) for the entire Democratic party than the Republican party.  It's more - but in competitive congressional races, spread out for the entire party?  It doesn't add up to much.

But it's still buying influence!
Apparently not enough.  Read the article again: Fannie Mae lobbied in favor of the Bush Administration proposal.  If Barney Frank were influenced by Fannie Mae's contributions, or by his boyfriend, wouldn't he have been more inclined to speak in favor of the proposal that their company favored?

Well, okay.  But he still blocked regulatory reform!
I don't see how he could.

Of course, he could block regulatory reform!  He's a powerful senator in the Financial Services committee!
At the time this legislation was proposed, he was the ranking minority member.  Giving him the awesome power of casting one vote.

But he could block the legislation, right?
No.  House subcommittee votes, even on procedural matters such as tabling a bill, are on majority vote.  And Barney Frank held one minority vote.  He didn't have the power to kill anything.

But - he worked with other people to block the bill in subcommittee, right?
No.  He takes credit for creating a compromise - increasing funds for other affordable housing initiatives, while providing Fannie Mae with oversight from the executive (rather than legislative) branch of government.  He voted for the compromise legislation in subcommittee.

So, he blocked it in the House, right?
Well, he voted against it on the floor.  According to him, a Republican amendment stripped out funding for affordable housing, and the compromise was essentially shot.  At least according to Barney Frank's tastes.

However, he didn't block it.  The legislation passed the house.  Over his "no" vote.

So - he worked with his buddies in the Senate to block the bill, right?
I can't find any evidence that he did.  The bill was tabled in the Senate - ostensibly because Bush threatened to veto the bill.  Apparently, the compromise legislation was still too generous for the sitting president.

So let me get this straight.  He made some statements skeptical of the need for Fannie and Freddie to be reformed.  But he voted a reform bill out of subcommittee, and it passed the house over his objections.  However, the Senate tabled the bill because the president threatened to veto it.   So, how did he block legislation that would have regulated Fannie Mae and Freddie Mac?
Beats me.  And it doesn't even answer the question of whether this oversight may have actually prevented their collapse - all it did was change the office that regulated their business.  And this argument doesn't address whether Fannie Mae's collapse was necessary for the current financial mess to occur.  After all, Fannie Mae wasn't the only producer of the "toxic" mortgage-backed securities.  There was a lot of market demand for them, after all.

Oh.  Well, thank you, Scott Grey, for your insightful analysis.
Thank you.  Feel free to email it to your right-wing friends (under the terms of the Creative Commons license, of course!).  Not that they'll listen.  But it might buy you a few seconds of quiet.