Frank: A Life in Politics from the Great Society to Same-Sex Marriage (39 page)

In my new Financial Services role, I enjoyed the only productive private meeting I ever had with Alan Greenspan. When I became the ranking member, he dutifully invited me to have lunch with him at the Federal Reserve, since I was the leading Democratic member of the committee that had the most to say about his agency—although, in his mind, even that should be very little. At our lunch, I did not find him wholly enthralled with my conversation—until I brought up the subject of the presidency of the World Bank. James Wolfensohn, who had successfully moved the bank in the right direction, was due to leave. Under the informal rules that govern the bank, the United States gets to name its chief executive, subject to a veto in the rare case that the rest of the world finds our pick offensive. I suggested to Greenspan that he recommend to President Bush the appointment of Jim Leach, my Iowa colleague with whom I had worked closely on debt relief for foreign countries. Leach was a liberal Republican and had taken an especially enlightened approach to international financial institutions. As the immediate past chairman of the Financial Services Committee—the Republicans had a six-year limit on chairmanships—Leach had a better chance of maintaining waning Republican support for the institution than any other individual. When I mentioned Leach’s name, Greenspan perked up and blurted out more than he probably wished to say. “That’s a wonderful idea,” he enthused. “That suggestion makes this lunch worthwhile.”

I was disappointed when Bush selected Paul Wolfowitz, not only because he was not Jim Leach, but also because he was Paul Wolfowitz. Wolfowitz was the neoconservative who had been one of Dick Cheney’s closest collaborators in leading us into the Iraq War. I’d been particularly outraged by one of his maneuvers. After the democratically elected Turkish parliament rejected our request to march into Iraq through its territory, Wolfowitz suggested that the Turkish military should pressure the government to change its mind.

I did learn later that the idea I’d given to Greenspan had some force. Leach told me one day as we talked on the floor of the House that with Greenspan’s advocacy, the World Bank decision had come down to a very close one between Wolfowitz and himself. The deciding factor, Leach said he had been told, and it was entirely plausible, was that if he had taken the job and resigned his House seat, it would certainly have gone to a Democrat. Leach had long represented a district that supported Democrats for almost every other office. Indeed, Leach himself would be defeated when the Democrats took control of the House in 2006.

That same election repudiated the Bush administration, elevated Nancy Pelosi to Speaker of the House, and made me the chair of the Financial Services Committee. It was an exciting job—in some respects too exciting. As I took office, the economy was on the brink of the giant meltdown that occurred the following year.

As chairman, I would be closely involved in managing the crisis itself and in devising far-reaching reforms to avert any repetition of the terrible event. I would also find myself in the right wing’s crosshairs as never before. Misunderstanding my years of work on housing issues, some conservatives even held me personally responsible for the cataclysmic collapse of the housing market. Because of the all-important issues at stake; because as a leader in the drive to enact comprehensive financial reform I became a lightning rod for the right wing’s counterattack; and, candidly, because the facts of the case are both highly favorable to my side of the argument and, to my frustration, not nearly as well understood as we should have made them, I go into them in some detail here.

*

After the crash, the most conservative elements in American politics went to great lengths to absolve the private sector of significant responsibility for the crisis that devastated the economy. They did not blame the financial industry for its bundling of loans into securities that relieved lenders of any need to worry about repayment. Or for wildly overleveraged derivatives that were sold by entities—like AIG—that did not come remotely close to having the funds needed to meet their obligations. Or for complex, opaque securities given overly optimistic scores from the rating agencies. Or for heavy liabilities owed by banks that had concealed them on their balance sheets. To the contrary, in conservatives’ version, the private financial sector was more than merely innocent; it had been taken hostage by an oppressive government that forced it to lend money to the undeserving poor so that they could buy homes.

In the conservative narrative, liberals did this by establishing two sets of policies. The first is the combination of statutes and regulatory pressures that allegedly forced private institutions to lend money to people who did not have the economic wherewithal to meet their mortgage obligations. They cite the Community Reinvestment Act as the primary statutory villain.

The second conservative accusation is most authoritatively repeated by President Bush and Vice President Cheney in their memoirs. This charge is that Democrats—with me almost single-handedly in the lead—prevented any reform of Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs) that help subsidize homeownership by buying mortgages. In this ideologically convenient history, we were responsible for keeping the bad loans flowing.

Two of the pillars of the right-wing case—that liberals pushed lenders into making mortgage loans that were highly unlikely to be repaid, and that Democrats blocked Republican efforts to rein in Fannie Mae and Freddie Mac—are more than simply wrong. They stand the historical record on its head. The third—that the crusade to increase homeownership beyond the boundaries of financial sustainability was a liberal creation—is a half-truth with regard to the political community in general, but another example of truth turned upside down as it applies to me.

The right-wing effort to rewrite the record on these issues is driven by more than the urge to score particular points against liberals. Taken together, their blatant misrepresentations form the basis for a larger argument—that our worst economic crisis in eighty years was caused by too much government rather than too little. Ideological necessity has prevented conservatives from being honest about the role of Republican congresses in leaving Fannie Mae and Freddie Mac unreformed,
The Wall Street Journal
’s strong defense of subprime loans, and George W. Bush’s initiatives in support of low-income home ownership. Once the right began to misplace responsibility for the crash, it was hard to stop. They could not put all the blame for the crisis on government policies without having to pretend they had been strongly opposed to those policies but had been overruled by liberals—despite the inconvenient fact that Republicans were in power for the most critical years.

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The relevant history begins in the 1990s. Thirty years earlier, people borrowed money to buy their homes mostly from banks. These were regulated institutions that held the loans until they were paid off. Lenders had strong incentives to be careful about their borrowers. Too many unpaid loans brought intervention by bank regulators, and also hit the institutions in their bottom lines.

Two developments drastically changed this business model. One was the availability of money. As funds became available for mortgages from sources outside the banking system, including oil-producing countries and Asian nations with large balance-of-payment surpluses, institutions flourished that did not need depositors and could keep free of existing regulatory arrangements.

The second factor liberating mortgage lenders from the need to pay careful attention to their borrowers’ finances was the revolution in information technology. Securitization is the process of bundling vast numbers of individual loans into “securities,” which can then be marketed to a wide range of investors. When this became technologically possible, both banks and nonbanks soon saw the advantages of making large numbers of loans and selling them to securitizers, in effect being repaid up front for the loan they’d made. At this point, a borrower’s failure to repay was no longer a problem for the originators, who had passed along the risk to investors. Banks and nonbanks alike had little incentive to screen prospective homebuyers.

In 1994, Democrats responded to these developments by passing the Home Ownership and Equity Protection Act (HOEPA). Bill Clinton signed it enthusiastically. The purpose of HOEPA was to empower the Federal Reserve Board to substitute its supervisory powers for the due diligence bankers were no longer providing. By 2000, it was especially clear that imprudent mortgage lending had reached the point where the Fed’s intervention was needed. But Alan Greenspan refused to use the authority he had been granted by the law. There was little to be done about that. His prestige, and that of the deregulatory philosophy he espoused, was at a very high point, leaving him largely invulnerable to congressional pressure.

With conservative control of the federal government firmly in place, advocates who saw the need to combat predatory lending turned to the states. Liberals took the lead, but there was broad support wherever the abuses prevailed. One of the first states to regulate irresponsible mortgage practices was Georgia, and several others were joining the effort. The financial industry responded in two ways. First, they threatened to drop mortgage loans in states that interfered with their freedom. When that seemed unlikely to succeed completely, they turned to their allies in the Bush administration, who responded enthusiastically. In fairness to Bush, it should be noted that their chief savior was a Clinton appointee, Comptroller of the Currency John Hawke. In 2004, he issued a sweeping new policy that denied states the authority to regulate any aspect of a national bank’s activities except in areas like zoning, building safety, or employment practices. States could no longer prohibit mortgage loans that left borrowers burdened beyond what they could repay. It was one of the boldest examples of the federal preemption of state policymaking discretion in our history.

As the ranking Democrat on the Financial Services Committee, I organized a letter strongly objecting to Hawke’s decree, and in this case, some Republican members were also opposed to the administration’s actions. But with Republican control of Congress, the best we could do was hold one hearing chaired by an antipreemption Republican, Sue Kelly of New York. As with Greenspan’s decision to ignore HOEPA, Republican control of Congress meant that one more avenue for curtailing irresponsible lending was shut down.

There was one remaining course of action: pass legislation to curb damaging mortgage practices. The initiative for such an approach came from North Carolina, where an effective advocacy group called the Center for Responsible Lending was active. Working with them, North Carolina Democrat Brad Miller introduced a subprime bill, with his colleague Mel Watt as the main cosponsor. Miller and Watt lined up sixty-five other Democratic sponsors, including a majority of those on our committee. Encouragingly, the Republican who chaired the relevant subcommittee, Spencer Bachus of Alabama, told us that he shared the belief that some legislation to reform existing practices was necessary. I knew that Bachus’s views on this subject were somewhat more populist than those of most of his colleagues, and I thought we might be able to agree on something.

Regrettably, the discussions dragged on until the late summer of 2006 with no conclusion. The central problem was that Tom DeLay and the Republicans were ideologically opposed. As Sheila Bair, Bush’s appointee to head the FDIC, affirms in her memoir,
Bull by the Horns
:

In 2005, Congressmen Barney Frank and Spencer Bachus (R-Ala.) tried to put together a bipartisan effort to establish national lending standards. However, the effort met stiff opposition from the industry, which complained to the Republican leadership. Bachus was forced to stop negotiating with Frank under pressure from the House GOP leadership.

In summary, liberals made three separate efforts to cut back on loans to people who should not have been getting them: granting the Federal Reserve regulatory authority over mortgages, using state laws and regulations, and adopting a federal subprime statute. Conservative believers in an unregulated market thwarted us every time.

The charge that the Community Reinvestment Act played a key role in the crisis is also an ideological invention. Most relevantly, the CRA applies only to a subset of mortgage lenders—deposit-taking, federally insured banks—and the bad loans were mostly made by entities not covered by the law. As the highly respected British financial journalist Martin Wolf notes in his book
The Shifts and the Shocks
, the U.S. Financial Crisis Inquiry Commission concluded that “only 6 percent of high-cost loans—a proxy for subprime loans—had any connection to the law. Loans made by CRA-regulated lenders in the neighborhoods in which they were required to lend were half as likely to default as similar loans made in the same neighborhoods by independent mortgage originators not subject to the law.” Three of the four Republican appointees to that commission explicitly repudiated the argument that the CRA has been a cause of the problem.

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The story of Fannie Mae and Freddie Mac is less clear-cut, but it also refutes the conservative notion that reckless liberal efforts to expand homeownership destroyed the economy. To begin with, the goal of homeownership for the poor was not a liberal Democratic pipe dream but a widely shared, incessantly voiced bipartisan goal. To quote the economist Mark Zandi’s excellent book
Financial Shock
, “President Bush readily took up the homeownership baton at the start of his administration in 2001.” Second, while some Republicans called for cutting back the role of the GSEs, many of these same officials, led by the president, were simultaneously pushing them to do more for homeownership for low-income people. To quote Zandi again, “To reinforce this effort, the Bush administration put substantial pressure on Fannie Mae and Freddie Mac to increase their funding of mortgage loans to lower-income groups.” And one indisputable fact stands out: Having overwhelmingly voted to revise Fannie and Freddie’s structure in 1992, the Republicans did literally nothing in their twelve years of congressional control from 1995 through 2006 to change it.