Home > Financial Reform > Obama Signs FINREG, but New Laws Leave Out Real Reform

Obama Signs FINREG, but New Laws Leave Out Real Reform

July 26th, 2010


07.26.2010
01.14.2014 Minor editing, repaired/ replaced broken links.

President Obama signing the FINREG Bill with VP Joe Biden (D), Nancy Pelosi (D-CA), Harry Reid (D-NV), Maxine Waters (D-CA), Chris Dodd (D-CT), Barney Frank (D-MA), and others.

Obama Signs FINREG, but New Laws Leave Out Real Reform

original article written by Net Advisor™

The FINREG bill reportedly contains “390,000 words – half the size of the King James Bible.”

— Source: MS-NBC

NOTE: MS-NBC became NBCNews.com. Sometime after this report, the MS-NBC story was listed as “no longer available.” The above quotation can still be found here: Catholic Online, Fox News, and KSHB (NBC Affiliate).

What is most interesting is that during the signing of the controversial 2,319 page Financial Reform Bill (“FINREG”) (pdf), President Obama said, “Because of this law, the American people will never again be asked to foot the bill for Wall Street’s mistakes” (Source: CNN).

Obama implicates that “Wall Street” caused or is the leading source to America’s financial problems, or caused the recession. Both of course would not be accurate claims, and not even the SEC has been able to prove that fact. But in politics, you don’t need proof, you just need a microphone and a TV camera. What is also telling is that regardless of the President’s statements about no more tax-payer funded bailouts, the FDIC seized and bailed out 7 more banks within in a few days since the FINREG legislation was signed (Please see Bank Failure Tracker).

“There will be no more taxpayer-funded bailouts. Period.”

— Source: President Barack Obama, 07-21-2010. Source: CNN (Video: Guardian.UK)

No more bailouts…ever? Now Washington may argue that the FDIC taking over banks are not “bailouts.” However if you take a failed bank and move its assets to another bank, then guarantee that the new bank cannot lose most of the money for taking over the bad banks assets, what would you call this? A bailout.

Will More Laws and Government Control Mean an End to Financial Problems?

The Obama Administration seems to be inferring that by implementing 1000’s of pages of new laws and bigger government, that problems are a thing of the past. The vote on this FINREG bill coincidentally came on the same day as the SEC and Goldman Sachs agreed to settle all claims in the SEC’s case against the firm (Source: MS-NBC).

I don’t know if anyone, including Congress have ever read the FINREG Bill in its entirety, let alone any of the multi-thousand page bills this Administration has pushed since 2009. One has to question what is really in these bills? They are often written in vague language that would allow for interpretation later.

“Laws are a product of legislative compromise, which often means they are vague and ambiguous.”

— Source: The Hill.com

Further, National Public Radio argued, “Rather than adopt clear, concise new guidelines on leverage, systemic risk, derivatives, proprietary trading, and other hot-button issues, Congress embraced ambiguous language and outsourced the relevant rule-making to Washington bureaucrats” (Source: NPR.org).

Blind Faith Required

So, just sign Financial Reform and any bill with the word “reform” after it and we are to assume that it is good for us, as government always knows best how to spend our money and tell us what we can and can’t do for our own safety. Then hope the change we (government) produce is correct. Frankly, one key author of the Finreg bill essentially admitted we don’t know what we are doing:

As Sen. Chris Dodd (D., Conn.) himself told reporters after finalizing the measure, “No one will know until this is actually in place how it works.”

— Source: NPR.org

Now, I am not a lawyer or a legislator but my understanding is that one should not write, let alone pass a law unless we have a reasonable idea what the law is going to do? One thing we do know is that the current Financial Reform bill does not include the central problems of needed reform: Controlling government spending and entitlements.

Unfortunately the Obama Administration and two of the FINREG Bill’s authors, Sen. Christopher Dodd, (D-Conn.), and Rep. Barney Frank, (D-Mass.) also didn’t even bother to address the $5 Trillion government owned mortgage giants Fannie Mae and Freddie Mac. One could also add HUD, FHA, Ginnie Mae in that mix too.

“…the (FINREG) bill would do little to address the root causes of the economic crisis — namely, the lending practices of housing giants Fannie Mae and Freddie Mac — that nearly brought down the American economy almost two years ago.”

— Senate Minority Leader Mitch McConnell (R-KY) Source: Politico

Why is Congress not addressing one of the most expensive part in government overdue for reform? For starters that have no clue what to do.

“We all know Fannie and Freddie can’t stay the way they are; we just don’t know what to do with them…”

— Source: CNBC

Fannie Mae and Freddie Mac were seized in 2008 into a “conservatorship,” allowing the government to control half of the $10 Trillion U.S. mortgage market (Source: Congressional Budget Office (CBO) Report, January 2010, page 4 of the actual report, page 12 in pdf version). This government takeover is placing increased risk on these mortgage agencies.

“With the Federal Housing Administration, Fannie and Freddie are propping up the fragile housing market by guaranteeing nine out of 10 new loans.”

— Source: Financial Times.UK

As for Senator Dodd, he is retiring this year after 30 years in government, however it really looks as if he would likely be defeated in his next election. Better to retire than to lose an election? “The senior Connecticut Democrat will retire in several months after 30 years in national politics. Facing weak poll numbers and a wave of voter disenchantment with incumbents, Dodd decided months ago not to seek reelection” (Source: Reuters).

Fannie Mae has a past of serious accounting scandals, internal corruption and used off-balance sheet accounting.

It was found that in 1997 that Fannie and Freddie were holding combined assets plus “off-balance sheet obligations” in the amount of $1.6 Trillion (Source: Office of Federal Housing Enterprise Oversight (OFHEO), 1998 Report to Congress, Page 73 of the actual report, page 76 of the pdf version, parr 3).

Fannie Mae manipulated its books in 1998 “where the company inappropriately deferred $200 million of estimated expenses, which enabled management to receive full annual bonuses.”

— Source: Washington Post, 09-23-2004

In a 2004 report by the Office of Federal Housing Enterprise Oversight also concluded that Fannie Mae had been lacking proper internal controls and the absence of such had made its accounting policy “dysfunctional” (Source: Washington Post).

As a result of a three year investigation, Fannie Mae engaged in a “$11 Billion accounting scandium,” and subsequently fined $400 million by the SEC, of that $350 million was to be given back to investors who were damaged by Fannie Mae’s fraud. Freddie Mac received a record fine of $125 million by OFHEO for under reporting their earnings by $5 Billion during 2000-2002 (Source: MS-NBC, 05-23-2006).

In 2006, then President and CEO of Fannie May said, “Fannie Mae is a different company than a year ago. We have been humbled, even embarrassed. But we have begun to make significant changes.

We have put in place a new management team, with a new Chief Financial Officer, Controller, and Chief Audit Executive. We are building new Chief Compliance Officer and Chief Risk Officer functions.”

— Source: Fannie Mae, 02-23-2006 NOTE: Fannie Mae moved or deleted the above statement sometime after this report. Copies of the quotation are available here: Fox News, NBC News, The Street.com, USA Today.

Clearly none of these new positions were enough to manage any of the risk that either mortgage giant could effectively handle. The CBO study released earlier this year also showed that “Fannie and Freddie were subject to less onerous capital requirements than other regulated financial institutions ” (Source: Congressional Budget Office, page 4 of the actual report, page 12 in pdf version).

Follow The Money

The single two largest recipients of campaign contributions from Fannie Mae and Freddie Mac were Christopher Dodd and Barack Obama.

— Source: opensecrets.org, 09-11-2008

Conflicts of Interest? Next, The main mission of the Office of Federal Housing Enterprise Oversight (OFHEO) is to ‘ensure the capital adequacy and financial safety and soundness of Fannie Mae and Freddie Mac.’ Although OFHEO is supposed to be an independent committee, the oversight group of 72 people is funded by fees (assessments) from Fannie Mae and Freddie Mac (Source: OFHEO’s 1998 Report to Congress, Page 73 of the actual report, page 76 of the pdf version).

OFHEO’s other objective is to “meet certain affordable goals set annually by the Secretary of Housing and Urban Development (HUD) (Source: OFHEO’s 1998 Report to Congress, Page 73 of the actual report, page 76 of the pdf version).

No Credit. No Problem. HUD Will Finance You.

By 2004, HUD sought to (again, parr 6) to lower credit standards and allow more “low income and minority families” into homes they could not ordinarily afford (Source: Washington Post). This had been an ongoing effort through the Community Reinvestment Act set into law under President Jimmy Carter in 1977 (Source: About.com). The result of this 2004 HUD move created a bigger subprime market to the tune of another $434 Billion for these more risky home loans that government, not Wall Street allowed to happen.

By June 2008, the default rate on those HUD subprime loans was 3 times what the default rates were for non-subprime loans (Source: Washington Post). As soon as someone in government wants to investigate the mortgage mess which they will not, then we will find who are the real fat cats, and who are really responsible in great part in creating the laws that led to the housing bubble. If we did discover the truth of the housing crisis that might lead to some of that government transparency the President promised.

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