Home > Cande = Conjecture & Exaggeration, Fande = Fact & Evidence, The Economy > Republicans made the Financial Crisis worse

Republicans made the Financial Crisis worse

George W. Bush, President of the United States from January 2001 to January 2009

Hank Paulson, CEO of Goldman Sachs until George W. Bush appointed him as Treasury Secretary of the United States in 2006

picture sources:

http://www.google.com/imgres?imgurl=http://www.topnews.in/files/george-w-bush,property%3Dposter.jpg&imgrefurl=http://www.topnews.in/people/george-w-bush&h=580&w=481&sz=60&tbnid=gJq5o2TEXw4D8M:&tbnh=134&tbnw=111&prev=/images%3Fq%3Dgeorge%2Bw.%2Bbush&zoom=1&q=george+w.+bush&hl=en&usg=__KZr_QK_46qVYXJbgGw4Msdh9t88=&sa=X&ei=kWhATcDPBI3GsAPX1rS9CA&ved=0CFYQ9QEwCQ

http://www.google.com/imgres?imgurl=http://blog.youwalkaway.com/wp-content/uploads/2010/08/henry-paulson-03.jpg&imgrefurl=http://blog.youwalkaway.com/hank-paulson-argues-against-subsidizing-housing/&h=360&w=540&sz=74&tbnid=Zw2WV7CmQyED3M:&tbnh=88&tbnw=132&prev=/images%3Fq%3Dhank%2Bpaulson&zoom=1&q=hank+paulson&hl=en&usg=__UXa53USItUDqOdXKrECAqsygPgY=&sa=X&ei=KmlATYi4I4KosAPW-cWnCA&ved=0CD4Q9QEwBA

source: http://www.nytimes.com/2011/01/26/business/economy/26inquiry.html?adxnnl=1&src=ISMR_HP_LO_MST_FB&adxnnlx=1296065495-7fGGK0wekZHf729jjhEEUA

EXCERPTS in italics from The New York Times:

While the panel, the Financial Crisis Inquiry Commission, accuses several financial institutions of greed, ineptitude or both, some of its gravest conclusions concern government failings, with embarrassing implications for both parties. But the panel was itself divided along partisan lines, which could blunt the impact of its findings….

The majority report finds fault with two Fed chairmen: Alan Greenspan, who led the central bank as the housing bubble expanded, and his successor, Ben S. Bernanke, who did not foresee the crisis but played a crucial role in the response. It criticizes Mr. Greenspan for advocating deregulation and cites a “pivotal failure to stem the flow of toxic mortgages” under his leadership as a “prime example” of negligence.

It also criticizes the Bush administration’s “inconsistent response” to the crisis — allowingLehman Brothers to collapse in September 2008 after earlier bailing out another bank,Bear Stearns, with Fed help — as having “added to the uncertainty and panic in the financial markets.”

Like Mr. Bernanke, Mr. Bush’s Treasury secretary, Henry M. Paulson Jr., predicted in 2007 — wrongly, it turned out — that the subprime collapse would be contained, the report notes.

Democrats also come under fire. The decision in 2000 to shield the exotic financial instruments known as over-the-counter derivatives from regulation, made during the last year of President Bill Clinton’s term, is called “a key turning point in the march toward the financial crisis”….

The report could reignite debate over the influence of Wall Street; it says regulators “lacked the political will” to scrutinize and hold accountable the institutions they were supposed to oversee. The financial industry spent $2.7 billion on lobbying from 1999 to 2008, while individuals and committees affiliated with it made more than $1 billion in campaign contributions.

The report does knock down — at least partly — several early theories for the financial crisis. It says the low interest rates brought about by the Fed after the 2001 recession;Fannie Mae and Freddie Mac, the mortgage finance giants; and the “aggressive homeownership goals” set by the government as part of a “philosophy of opportunity” were not major culprits.

On the other hand, the report is harsh on regulators. It finds that the Securities and Exchange Commission failed to require big banks to hold more capital to cushion potential losses and halt risky practices, and that the Fed “neglected its mission.”

It says the Office of the Comptroller of the Currency, which regulates some banks, and the Office of Thrift Supervision, which oversees savings and loans, blocked states from curbing abuses because they were “caught up in turf wars”….

It quotes Citigroup executives conceding that they paid little attention to mortgage-related risks. Executives at the American International Group were found to have been blind to its $79 billion exposure to credit-default swaps, a kind of insurance that was sold to investors seeking protection against a drop in the value of securities backed by home loans. AtMerrill Lynch, managers were surprised when seemingly secure mortgage investments suddenly suffered huge losses.

By one measure, for about every $40 in assets, the nation’s five largest investment banks had only $1 in capital to cover losses, meaning that a 3 percent drop in asset values could have wiped out the firm. The banks hid their excessive leverage using derivatives, off-balance-sheet entities and other devices, the report found. The speculative binge was abetted by a giant “shadow banking system” in which the banks relied heavily on short-term debt.

“When the housing and mortgage markets cratered, the lack of transparency, the extraordinary debt loads, the short-term loans and the risky assets all came home to roost,” the report found. “What resulted was panic. We had reaped what we had sown.”

The report, which was heavily shaped by the commission’s chairman, Phil Angelides, is dotted with literary flourishes. It calls credit-rating agencies “cogs in the wheel of financial destruction.” Paraphrasing Shakespeare’s “Julius Caesar,” it states, “The fault lies not in the stars, but in us.”

Of the banks that bought, created, packaged and sold trillions of dollars in mortgage-related securities, it says: “Like Icarus, they never feared flying ever closer to the sun.”

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For Perspective:

More from Matt Taibbi...

EXCERPT:

http://www.rollingstone.com/politics/story/26793903/the_big_takeover/print

http://broadcatching.wordpress.com/2009/04/06/matt-taiibi-the-big-takeover-rolling-stone-magazine/

The situation worsened in 2004, in an extraordinary move toward deregulation that never even got to a vote. At the time, the European Union was threatening to more strictly regulate the foreign operations of America’s big investment banks if the U.S. didn’t strengthen its own oversight. So the top five investment banks got together on April 28th of that year and — with the helpful assistance of then-Goldman Sachs chief and future Treasury Secretary Hank Paulson — made a pitch to George Bush’s SEC chief at the time, William Donaldson, himself a former investment banker. The banks generously volunteered to submit to new rules restricting them from engaging in excessively risky activity. In exchange, they asked to be released from any lending restrictions. The discussion about the new rules lasted just 55 minutes, and there was not a single representative of a major media outlet there to record the fateful decision.

Donaldson OK’d the proposal, and the new rules were enough to get the EU to drop its threat to regulate the five firms. The only catch was, neither Donaldson nor his successor, Christopher Cox, actually did any regulating of the banks. They named a commission of seven people to oversee the five companies, whose combined assets came to total more than $4 trillion. But in the last year and a half of Cox’s tenure, the group had no director and did not complete a single inspection. Great deal for the banks, which originally complained about being regulated by both Europe and the SEC, and ended up being regulated by no one.

Once the capital requirements were gone, those top five banks went hog-wild, jumping ass-first into the then-raging housing bubble. One of those was Bear Stearns, which used its freedom to drown itself in bad mortgage loans. In the short period between the 2004 change and Bear’s collapse, the firm’s debt-to-equity ratio soared from 12-1 to an insane 33-1. Another culprit was Goldman Sachs, which also had the good fortune, around then, to see its CEO, a bald-headed Frankensteinian goon named Hank Paulson (who received an estimated $200 million tax deferral by joining the government), ascend to Treasury secretary.

And the Fed isn’t the only arm of the bailout that has closed ranks. The Treasury, too, has maintained incredible secrecy surrounding its implementation even of the TARP program, which was mandated by Congress. To this date, no one knows exactly what criteria the Treasury Department used to determine which banks received bailout funds and which didn’t — particularly the first $350 billion given out under Bush appointee Hank Paulson.

The situation with the first TARP payments grew so absurd that when the Congressional Oversight Panel, charged with monitoring the bailout money, sent a query to Paulson asking how he decided whom to give money to, Treasury responded — and this isn’t a joke — by directing the panel to a copy of the TARP application form on its website. Elizabeth Warren, the chair of the Congressional Oversight Panel, was struck nearly speechless by the response.

“Do you believe that?” she says incredulously. “That’s not what we had in mind.”

Another member of Congress, who asked not to be named, offers his own theory about the TARP process. “I think basically if you knew Hank Paulson, you got the money,” he says….

That’s the essence of the bailout: rich bankers bailing out rich bankers, using the taxpayers’ credit card.

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Fande = Fact & Evidence; Cande = Conjecture & Exaggeration

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