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The Whistleblower They Ignored
There aren’t too many genuine heroes to come out of the banking disaster, but Armando Falcon is one of them. You have probably never heard of him, but his testimony Friday before the Financial Crisis Inquiry Commission, available on the commission’s website, is must reading for anyone trying to figure out why U.S. taxpayers had to bail out companies to the tune of hundreds of billions of dollars.
Falcon was the chief regulator attempting to bring order to the houses of Fannie Mae and Freddie Mac during the first four years of this decade, and had he been listened to, a significant part of the housing crisis could have been mitigated. Instead his agency was denied serious regulatory power by Democrats in Congress including liberals such as Reps. Barney Frank and Maxine Waters, both of whom assumed he was undermining public support for more affordable housing.
He wasn’t, and instead was attempting to call attention to the reckless bundling of risky mortgages in which the government-chartered agencies acted like the other too-big-to-fail behemoths that together almost wrecked the entire economy. It was those on the lower end of the income scale who had put their life savings into risky mortgages that were most hurt when the bubble burst.
This is a guy whom Republican congressmen and the Wall Street Journal editorial writers have lionized, and for once they got it right. At least the part about Fannie and Freddie being out of control and their applauding Falcon’s past efforts to rein in the greed of their top executives. Where they go wrong is when they attribute the company’s misbehavior to the alleged liberal do-gooderism of the mostly Democratic Party hacks that ran the enterprises. The reality is that concern for affordable housing goals was simply a convenient mask for unfettered greed.
Conservatives make much of those goals, which both Bill Clinton and George W. Bush endorsed, but objectives of this sort had nothing to do with the sordid behavior of the executives who ran the companies. Asked by the commission to testify on the impact of those goals, Falcon responded:
“Your letter also asked me about the impact of affordable housing goals on the enterprises’ financial problems. In my opinion, the goals were not the cause of the enterprises’ demise. The firms would not engage in any activity, goal fulfilling or otherwise, unless there was a profit to be made. Fannie and Freddie invested in subprime and Alt A mortgages in order to increase profits and regain market share. Any impact on meeting affordable housing goals was a byproduct of the activity.”
The problem with the so-called government-sponsored but essentially private institutions that the conservatives are so happy to vilify and that liberals feel the need to defend is that they represented the worst of both worlds. Although originally chartered by the government, they had morphed into super for-profit monstrosities run by executives whose huge bonuses depended on the price of the company stock. As Falcon put it in his testimony:
“Ultimately the companies were not unwitting victims of an economic down cycle or flawed products and services of theirs. Their failure was deeply rooted in a culture of arrogance and greed.”
In short, they behaved like the other financial conglomerates, but the government-sponsored housing enterprises were protected by powerful members of Congress and what turned out to be a strong guarantee that their bad paper would be covered by the taxpayers.
They do deserve considerable blame for the banking disaster that ensued, and while it is hardly the whole story, it gave the free-market conservatives a convenient target. But it also presents them with a contradiction that they refuse to confront. The housing enterprises failed not because they were do-gooder pubic entities but because they weren’t. Their top executives were driven by the same desire for outlandish profit that their counterparts at AIG and Citigroup had. As Falcon put it referring to then Fannie Mae’s CEO Franklin Raines:
“While all of this political power satisfied the egos of Fannie and Freddie executives, it ultimately served one primary purpose: the speedy accumulation of personal wealth by any means. … In the case of CEO Franklin Raines, he collected over $90 million in total compensation from 1998 to 2003. Of that amount, $52 million was directly tied to achieving earnings-per-share goals. However, the earnings goal turned out to be unachievable without breaking rules and hiding risks.”
It only adds insult to injury to blame the unfettered greed of folks like Raines, and his congressional allies who were lavishly attended to by those agencies, on a concern for the low-income homebuyers who were their main victims.
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25 Comments so far
Show AllV Prof:
"'Instead his agency was denied serious regulatory power by Democrats in Congress including liberals such as Reps. Barney Frank and Maxine Waters, both of whom assumed he was undermining public support for more affordable housing.'
"Really?"
My exact question when I read this. Thank you for your always insightful comments. And questions. Those in either wing of the One Party may have heard the word, altruism, but it went out the other ear.
"Trust those who are seeking the Truth. Doubt those who find it." Andre Gide
Peace, Jack Chase
Um, haven't 'they,' the MSM, ignored nearly every whistleblower? When I think of my top five whistleblowers, they lost their jobs, were ignored by the MSM. Sibel Edmonds recently published an interview in Hustler--the largest publication to pick up her story. So ignoring whistleblowers is exactly what we should expect from a completely corrupt society, one without accountability. Perhaps we should all ponder the trajectory of such a system. What does its 'logic' demand? How does the suppression of information lead to fewer whistleblowers? How does the suppression of information lead to more corruption and demoralization of the entire population?
"I wonder if there's any way to start a financial talk radio show..."
There are already, but they are right wing shows mostly blaming poor people. Dave Ramsey comes to mind. Bill Cunningham is always good for a laugh, too.
Sioux Rose
JILL: Pre-emptive chess moves have been engineered to deflect blame to the targets who actually own solutions. In the manner that certain protests were pre-emptively torn asunder before they were able to produce results, the right has effectively turned the would-be whistleblowers into those to be made responsible. When the fallout begins, those who don't own the wit to connect the dots, have the targets already outlined for them.
The attacks on Acorn are a template. A lot of people are convinced that Obama is a socialist, and they don't even understand what socialism means. A lot of people think that poor people got loans they couldn't afford, and it was THEIR greed that took down the economy. These narrow-minded thinkers have no idea what derivatives are or how the fractional banking system/fed operate. They have been taught that any form of regulation = state control, and they fear the government. They don't understand the degree to which government has been made subservient to the big money interests that get all the puppets elected, or into strategic place.
It would take a MASSIVE re-education program to rectify the impact of an elaborate network of purposeful distortions. And remember, something like 50% believed that Iraq/Saddam attacked the U.S. and that WMD WERE found in Iraq. A similar, if slightly smaller percentage does not believe in evolution.
Intelligent, clear minded persons may be convinced with facts; but thanks to "religiosity" as Bill Maher termed it, which is spreading like a mental virus in the U.S., those qualities are becoming absented from the cognitive equation.
"They don't understand the degree to which government has been made subservient to the big money interests that get all the puppets elected, or into strategic place."
Precisely. We have skipped right over fascism and directly into corporate control of everything including government.
"Cognitive science shows that people make decisions primarily for emotional, not intellectual, reasons. That's why fighting misstatements with mere truthful facts is futile; you do not reach the emotional center where these decisions have been made in the first place."
No doubt about that. Anyone who would rant about some 16th century anti-Catholic writer (whom they have almost certainly never read) out of a generalized anti-Christian bigotry in lieu of actually educating themselves about the actual matter presently at hand, does NOT have their head screwed on straight.
The link cited by the poster above is much more incisive then Scheer's drivellings:
http://www.nakedcapitalism.com/2010/04/rahm-emanuel-and-magnetar-capital-the-definition-of-compromised.html
I second the recommendation.
"Anyone who would rant about some 16th century anti-Catholic writer (whom they have almost certainly never read) out of a generalized anti-Christian bigotry..."
I take it you are referring to the "Calvin" that appears in Scheer's article? This just goes to show how interpretation is dependent on the eye of the beholder, so to speak. I took that comment to be referring to Calvin Coolidge, and the greed that so characterized his administration.
Sioux Rose
Good Evening, Jill: I would never discourage you from doing what your own instincts compel you TO do. We each have a part to play; and I'd like to believe that if each of us creatively played it, then the tide might be changed before that percentage of our species bent on willfully courting Armageddon has a chance to "succeed" with that option...
Visiting Professor: Thank you for the nod, and for elaborating further. If you have not viewed, "Century of the Self" on You Tube, I strongly suggest that you give it a look. It provides a scathing, in-depth view into the ways that advertising learned to play on those human emotions like a skilled concert violinist. We know the result: an obese, ill-informed population FIGHTING its own best interests in many areas. At the moment, I feel dispirited... today's new moon took away all the blinders and I feel like I am being forced to see what's going on in absolute unmitigated detail... and what is there to be seen is almost impossible to view... like gazing into the abyss.
Have you ever heard of Dr. Alberto Viloldo? He was a surgeon who left his medical practice and began to study with the Inca of Peru. He was taken into the tutelage of a high medicine man (a circumstance that runs parallel with the life and accounts of Carlos Casteneda, though some doubt the veracity of his books) and offers shamanic workshops. I am considering taking such a journey... Medicine People taught the OLD ways see things the best educated caucasian NEVER does. I may celebrate my birthday with medicine people in South America... and if I learn anything that might help the understanding of persons in this forum, I will share it. It's costly, so I have to decide if I am ready to make such a commitment. I think desperate times call for really unique measures... for me, this venture has called out to me for some time.
Sioux Rose
Calvin is to Christianity (or Christ's actual teachings) what Rove is to a democracy. It's amazing how many self-professed Christians have utter contempt for the poor. The "Rea-gunization" of Christianity has turned religion into another for-profit enterprise where those who own ostensible signs of status look down on those that don't. What has that done to Christ's call to help the needy and feed the poor? A few token donations, and the modern church with its real estate holdings departs insubstantially from its predecessors with their front doors gilded in gold... as the poor were left starving in the cold streets outside.
Given the way the Vatican protects its priests and assets in place of owning up to the lives ruined by sexual abuse, again we see where and how in the name of religion, great travesties become less the exception, than the rule.
And JILL, I am no longer convinced that laying out the truth via mass media would matter. In astrology the AIR element represents all vehicles and forms of communication. It's fair to say that the AIR medium is so polluted with false ideas, PR, propaganda, conjecture, deflection, rumor, disinformation, etc. that the separating of wheat from chaff is nearly impossible, but to minds so cued to Truth as to, like some kind of expert martial artist, move through it all without getting entangled. Perhaps the Spirit of Bruce Lee will guide us...
Why do you suppose there are so many casinos in poor areas? Why do you suppose there are check day loan sharks throughout poor areas?
The banks, Fannie Mae, and Freddie Mac knew what they were doing.....it was called "Fraud".....They knew that they were authorizing "bad mortgages" and knew that they were going to bundle them ala Solomon Brothers of the 70's (Read: "Liar's Poker" by Michael Lewis) and send them off to European Banks and unknowing investment bankers.......
However, all of those wonderful thieves wound up in new jobs with different banks and Wall Street with higher paychecks and wonderful bonuses.....But, teachers working in the low income schools with severe societal problems, are told "You're fired" because of the poor performance of your students.
Obama's healthcare win is a terrible loss for the average American and companies with over 50 people, that includes thousands of school districts! It was a "Win Win" for private health insurance companies.
Wouldn't it be nice if The Mass Media would stop calling Obama a socialist, liberal, or progressive? He is a Corporate Puppet run by The Council on Foreign Relations and The Tri-Lateral Commission...Obama is AN OPORTUNIST AMERICAN CAPITALIST ......What is Bill Clinton's worth today? How much has Bill Clinton's Foundation taken in in the past 9 years?
Sioux Rose
HERBERT: Excellent post! Here's the real tragi-comic relief: that these same bastards who devised the standards by which they stole from the rest of us, effectively bankrupting this nation, have the NERVE to assume the status that ranks us in terms of our credit-worthy scores! I mean that kind of hubris has to make the Mafia jealous. The same ones stealing pretend to own the moral highground that determines whether the citizen is credit worthy enough to obtain a loan. And whose money is it that they are loaning in some kind of fiscal fraud equivalent to a revolving circus act of massive proportions? OURS!
".....it was called "Fraud".....They knew that they were authorizing "bad mortgages" and knew that they were going to bundle them...and send them off to European Banks and unknowing investment bankers......."
Others may not know that's only half the story. The whole, venal truth is worse than fiction. Goldman, Magnetar, and others were not only peddling this toxic waste (which they knew was toxic because they baked the cake) to credulous investors, but they were also placing simultaneous bets through 'derivatives' with AIG and other insurers, so they could collect double when the dirty bombs exploded. Of course all of this crime---economic terrorism---was laundered, sanitized, and 'legalized' through deregulation ensured by bribery and the purchase of government.
Still, incredibly, there are only sham hearings, no fines, no investigations, no prosecutions, only record bonuses looted from the public treasury. We have regressed to 18th Century France. And when justice for massive crime finally comes directly from the people, I expect it will not be so pretty.
Naked Capitalism is a good financial blog that strips the 'finery' off this corpulent carcass of parasitic capitalism. It's hosted by Yves Smith, former Goldman exec (like Nomi Prins) and author of "ECONNED: How Unenlightened Self-Interest Undermined Democracy and Corrupted Capitalism". Yves has an artcle today about how Magnetar and others conducted their double dealing: "Rahm Emanuel and Magnetar Capital: The Definition of Compromised". The Emanuel-Litowitz connection undoubtedly relates also to Oh-Bummer and very possibly Israel---why there is no action from our witless and feckless DOJ and why Iran again is in the crosshairs. What a web.
http://www.nakedcapitalism.com/2010/04/rahm-emanuel-and-magnetar-capital-the-definition-of-compromised.html
Love NakedCapitalism. That Yves Smith is right on the money.
And what about private for profit insurance insurance which is structured for private gain but chartered and regulated to perform a public task-- providing health care. (The same business model also holds for the "not for profits") It's another case of the worst of all worlds. They are assumed to be able to more efficiently performing public tasks than a big bad government bureaucracy. No tampering with their operations though--after all they are private. What a mind set! It pervades Democratic and Republican politics. For example, after excoriating private health insurers in Pennsylvania for their immoral and possibly illegal practices, Senator Casey of PA turns around in a town meeting and tells those jeering at him, "but I hate government run health care as much as you do." How do you explain this? Let me presume to add some supporting thoughts to the Senator's account. "All I want is for you private Insurance companies is to behave a bit better. If you would just clean up your act a little everything would be fine. I could still claim I am a for profit capitalist with out being embarrassed. You know I'm on your side, even if I am in government. I will never let the government run you out of business but really your behavior is so bad that I have to criticize you just to get some credibility and then I have to defend you to show I am a good capitalist none the less. Don't be so hard on me, I don't know how much longer I can keep this up. How about I give you a big public subsidy, (You don't have to tell me how you use it in specifics--government regulation is bad)--and all you have to do in return is just behave a little more decently so that I am not embarrassed in public when I defend you."
The regulator that tries to get behind this obfuscation not only shows the up the corporation--he does something much worse--hoe shows up the politician. That's why regulation doesn't work. You can see the lack of respect I have for Casey and his ilk and many say I am way too hard on him. After all how could he get elected if he didn't take corporate money and front for them-- this is truly the American way when it comes to politics. Chris Dodd and Barney Frank aren't really much better. The whole Congress is such a foul, foul nest.
I know several people who blame the "irresponsible poor" and the Democrats who supposedly acceded to their "needs" for most of the economic ills of today, for most of the reasons pointed out in the article and many of the comments.
What bothers me is that it seems so easy for these otherwise intelligent people to blame the poor when statistically, given the enormity of the collapse, they are totally irrelevant.
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It is absolutely untrue that CRA had anything to do with the collapse of real estate.
Clinton did contribute, especially by keeping Greenspan, but mainly by getting rid of long term bonds, and indirectly with the war against Yugoslavia.
Blaming CRA is a pure lie invented and put out by the Right Wing and their Right Wing economists, most of whom know nothing of banking.
Under Ronald Reagan the A Team stole everything that was not nailed down. Under Bush 1, Team B entered the national vault with high-tech nail pullers and stole everything that had been nailed down, bolted down, or otherwise attached. Under Bush 2, Team C entered with building blue prints and stole everything they could hock, leaving nothing but the exterior facade. A lot of it was fenced by Clinton.
January 2002 oil = $19 per barrel
August 2008 oil = $147 per barrel
Bundling all sorts of trash was part of the collapse once it got going but it was not the cause.
At no time between 2002 and 2008 was oil in short supply, save for a few temporary futures' spikes.
Note also, as oil went up in USD, USD went down in relation to the Euro and some other currencies.
That was not a supply and demand event.
That was the collapse of USD.
The rise in the price of oil in USD set off the real estate collapse, which set off the mortgage collapse, which exposed the large-scale bundling of worthless mortgages and other credit instruments.
The whole house of cards then began to fall.
Sub-prime was only part of the initial collapse, however. One of the first large mortgage holders to go bankrupt had no subprime at all--none.
What happen there? Sub-prime was keeping the rungs above it inflated.
In some pricey areas people locked into 30 year mortgages on $750,000 purchases lost one third of their market value in a couple of months.
Some of the small scale speculators, with good credit, just walked away.
Resetting ARMs and even ARM student loans made the initial tidal wave even worse.
Finally, there were smaller contributory factors like the Patriot Act, which played a direct role, though not a main one.
Much of this has not got mainstream attention.
The price of oil--i.e. collapse of USD--also had dire effects on the genuine economy, including large layoffs and increased food prices (also a function of oil prices) which in turn added negative feedback to the financial collapse.
As so it goes round and round.
It was predictable but few predicted the actual mechanics beforehand and many still do not grasp them now.
Clinton surely contributed to the whole milieu in which the collapse took place, but Bush and Cheney set it all off with their wars.
The collapse is not over. But if you think things have been catastrophic so far, it is nothing compared to what will happen if the US or Israel attacks Iran.
After the collapse in September 08 oil returned mostly to supply and demand pricing in a now depressed world economy.
Eugene---
Most astute comment.
Meanwhile, looking to the future, the USD is still the fiat currency, and the Euro is looking a bit weak due to several of their countries running up huge and hidden debts that violate Euro rules, with the evident connivance of the likes of Goldman-Sachs. They got caught up in the same global Derivatives bubble we did, some of them now being in far worse condition.
In the event, the USDollar looks pretty good, eh? Of course, that could not possibly have been intentional. I mean, these guys don't use high-speed number-crunching computers or anything. Which ally was screwing which ally?!
But then there was China... And then there was Russia, likewise learning to globalize outside Dollar Hegemony.
(With regards to Henry CK Liu at atimes.com, who seems to be calling for means of exchange based on the intrinic value of human labor, globally, rather than the Pyrrhic value of "Capital.")
But I could be wrong!
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