Wagging the Dog With Fannie Mae: Republicans Explain the Financial Crisis With Racist Mythology

"Is this video a lie?" wrote someone in response to my last piece on HuffPost. No, "lie" is an inadequate description. I uploaded the video link, seen by two million people before me, and gasped at the artful perversion of history. It was like a post-millennium version of The Birth of a Nation. In that silent film classic, a pivotal scene is prefaced by the title card:

"AN HISTORICAL FACSIMILE of the State House of Representatives of South Carolina as it was in 1870."

Then we see black legislators in session, drinking whiskey, eating chicken, resting bare feet on their desks, and leering after white women. As J. Lapper wrote:

"This is also the first instance of "bait and switch" in the film. Prior to this, as noted above, [Director D.W.] Griffith used 'historical facsimiles' to give the film an air of historical accuracy...The subversive logic being, 'Earlier we saw facsimiles of Sherman's March, Lee's surrender and Lincoln's assassination. We know those are true. This must be too.'"

The updated "historical facsimile" from NakedEmperorNews.com, is just as dishonest and just as racially incendiary, since it has the semblance of reasonableness and reality. The hero at the Congressional hearings is the courtly southern gentleman, Republican Richard Baker, whose calls for regulatory oversight are drowned out by the shiftless uncouth blacks: Maxine Waters, Gregory Meeks, Lacy Clay, Artur Davis and Fannie Mae CEO Franklin Raines, aided by one white guy, Barney Frank.

[Update at 9:00 am October 10, 2008: Yesterday John McCain echoed this video by saying, "Democrat members of Congress fought against reform and it is a matter of record and hearings that they said everything was fine." Barney Frank was one of the "willing co-conspirators."]

To appreciate the mendacity of the video, you need to understand the history of what happened at Fannie Mae, and the causes of the current financial crisis. You'd be hard pressed to get that knowledge from mainstream media, whose piecemeal reporting comes across like blind men describing an elephant.

Into this void of understanding, Republicans have sought to absolve themselves of blame with a racist mythology that has gone viral. George Will, a chief proponent, neatly summarized the narrative on This Week last Sunday:

"In fact, much of the crisis we're in today is because the government set out to fiddle the market. That is, we had regulation in effect with legislation that would criminalize as racism and discrimination if you didn't lend to nonproductive borrowers. We had Fannie Mae and Freddie Mac existed to rig the housing market because the market would not have put people in homes they could not have afforded."

Will's narrative is about as accurate as D.W. Griffith's portrayal of Reconstruction. Fox News invokes it constantly. The ABC commentator invokes four different phenomena, none of which he understands:

1. The financial problems of Fannie Mae and Freddie Mac,
2. The mission of Fannie and Freddie,
3. The Community Reinvestment Act,
4. The greater mortgage crisis.

To refute the lie, we need to address these issues one at a time.

What does the video have to do with Fannie Mae's collapse? Nothing.

The best way to understand what happened is to start off with an understanding of when things happened. Therein lies the bait-and-switch. The financial problems at Fannie Mae began after these Congressional hearings, which were conducted a few weeks before the November 2004 elections. Fannie Mae's troubles were caused by Daniel Mudd, who reversed the policies of his predecessor, Franklin Raines, when he became CEO in December 2004. The New York Times laid it out very clearly:

"[B]y the time Mr. Mudd became Fannie's chief executive in 2004, his company was under siege. Competitors were snatching lucrative parts of its business. Congress was demanding that Mr. Mudd help steer more loans to low-income borrowers. Lenders were threatening to sell directly to Wall Street unless Fannie bought a bigger chunk of their riskiest loans.

"So Mr. Mudd made a fateful choice. Disregarding warnings from his managers that lenders were making too many loans that would never be repaid, he steered Fannie into more treacherous corners of the mortgage market, according to executives.
[...]
"Between 2005 and 2008, Fannie purchased or guaranteed at least $270 billion in loans to risky borrowers -- more than three times as much as in all its earlier years combined, according to company filings and industry data."

Democrats Supported Regulatory Oversight But Objected to a White House Power Grab

So if the October 2004 hearings did not address concerns associated with Fannie's risky mortgages, what was everyone talking about? Something quite different, though an ignoramus like George Will could easily conflate the two concepts. An Administration report had skewered Fannie for engaging in some dodgy accounting practices - relating to timing differences over the recognition of income - which had a slight impact on its overall financial metrics. Fannie and its management deserved to be criticized and increased regulatory oversight was absolutely appropriate. But what the House Democrats in the video were objecting to was the Administration's level of overkill. From how they saw things, the Bush Administration was using the pretext of regulatory oversight to accomplish a power grab that would compromise the mission of Fannie Mae. Here's what Barney Frank said at the time:

"I believe we were well on the way, the chairman and I and the staffs, to putting together a bill that would have enhanced the regulator and could have passed. What stopped progress on a new bill was the Bush administration's determination to go beyond safety and soundness and into provisions that would have restricted the housing function.

"To the extent that people played games [with accounting rules] to get bonuses, I'm outraged. People making that much money, let me put it this way, at the level of compensation of the top officers of Fannie Mae, they should get bonuses if they rush into a burning building a rescue a kid, maybe a cat, but not for doing their job. I think it is unseemly of them to be getting bonuses in the first place for doing what they're getting paid very well to do.
[...]
"To the extent that there was manipulation, that is very wrong and should be penalized. But I've seen nothing in here that suggests that the safety and soundness are at issue, and I think it serves us badly to raise safety and soundness as a kind of a general shibboleth, when it does not seem to be the issue."

Banks Governed by The Community Reinvestment Act Were Not The Ones Who Caused the Subprime Market to Expand

Daniel Gross in Slate attacks a lot of the same mythology discussed herein, focusing specifically on phony claims pertaining to the Community Reinvestment Act, which has been around for 30 years and never affected the soundness of the mortgage markets. The CRA never suggested that anyone compromise credit standards and it didn't apply to the mortgage lenders or investment banks who were pumping up subprime mortgages.

Hank Paulson: The mortgage crisis was caused by events that began during the run up to the 2004 election and ended soon after the Democrats took Congress in early 2007.

Again, to understand what happened, begin with understanding when things happened. In this regard, there's no secret. Everyone in financial services knows when and how things happened. Hank Paulson's report to the President reflected the common knowledge expressed by Treasury, the Fed, the SEC and the CFTC:

"The turmoil in financial markets clearly was triggered by a dramatic weakening of underwriting standards for US. subprime mortgages, beginning in late 2004 and extending into early 2007. "[Italics in original text.]

We see this in all the numbers. According to a survey by the New York Fed, about 77% of subprime mortgages and 85% of Alt-A mortgages were issued after 2004. What happened in 2004? Subprime mortgage securitizations were able to take off because, as Bloomberg reported, in August 2004 Moody's and Standard and Poor's loosened their standards for rating mortgage backed securities, which had traded in a highly liquid market for almost 20 years. The impact of the rating agencies' practices cannot be overstated. To date, banks have recognized about $500 billion in losses on subprime mortgages, the lion's share of which were packaged in securities originally rated AAA, i.e. presumed to always be salable at close to par.

In 2004 short term interest rates, reduced by Alan Greenspan to stimulate the economy going in to the election cycle, reached their lowest point, enabling certain buyers to get variable rate mortgages at teaser rates of 3% for the first two years.

Nowhere in Paulson's report will you find anything that suggests that the financial crisis was triggered by, as George Will put it, regulation that compelled lending to "non-productive borrowers" or by Fannie or Freddie, which had been around for decades, "rigging the housing market."

As a final aside, you may remember this little gem from the McCain campaign. It's an ad that claims Obama relied on economic advice from Franklin Raines, which wasn't actually true. What do you think McCain was getting at?

ADDENDUM at 12:15 am October 11. On Bill Maher tonight Stephen Moore of The Wall Street Journal op-ed page just repeated the defamatory smears referenced in the video directly to Maxine Waters.

Comments

[MaryT63]

I have donated to the dnc, obama camp, and dscc. I am pretty upset none of these clowns have come out to explain fannie and freddie part in this mortgage meltdown. Why are they taking the hit for the republicans blunders. It's a well known fact that repubs have been on a steady path to eliminate all the new deal programs.
Going after fannie and freddie was one of the last conquests. They did, in 2003, when they oust Raines on some trump up accounting scheme charges. The repubs put their team in charge. The dems were and had been in a minority for over ten years. So why are the dems allowing the repubs to paint this crap completely on them. McCain said 'you will know their names - frank and dodd'. What does the dnc say - nothing. Sure both parties took campaign money from fannie and freddie. McCain's campaign manager was a paid lobbyist for freddie up to Jone '08.
Now the poor minorities get blamed for taking down the global economy - that's pretty impressive!!

[Bongborg]

This white boy ain't buyin' it. I live in Alabama. I have heard ignorant poor white trash blame blacks for everything possible and impossible. Now I am hearing ignorant rich educated trash do the same thing.

[FrankN]

I believe the expression was "find a scapegoat" when, in Europe and Russia, the Jews were blamed for any misfortune that society faced. We're seeing modern conservatives update that tradition of persecuting minorities.

[arrogantsob]

George Will wrote in his column that China was drilling for oil off the coast of Cuba. This was picked up by Dick Cheney and the next thing you know was that conservative radio listeners were all up in arms about this outrage against America. Of course it was all a lie just as this article was a lie. George Will has forfeited his veracity based on the oil story he made up. You just can't trust him to tell the truth.

[pons1595]

When I was in high school in 1961 was when I saw so much hatred being generated by a political contest. As a Catholic, I saw the hatred being roused by the Republicans against JFK because he was a Roman Catholic, with slurs like the Pope will take over the governing of our country. Republicans haven't strayed very from their past. The political party of shame continues its decent into shame and ignominy; the pathetic old lady who said Obama was an Arab was led to her mental instability by the man standing in front of her--McCain and his bandit in crime, Sancho Panza [at least that's what George Will called her in an article yesterday http://www.realclearpolitics.com/articles/2008/10/a_landslide_coming.html]. Another example of how the Republican's sense of political fair play works--back in Dallas on the day JFK came to visit, an ad in their paper said: "Wanted for Treason" and displayed a picture of JFK below it. When it comes to Republicans and their right-wing partners in crime--not much has changed

[kapo]

Few people understand clearly the more sophisticated financial products they use. It is like a car, people drive them but dont need to understand them. My experience with the financial sector is that few vendors fully understan the products they sell either. Each one of us has an area of competence, but has little understanding beyond that. This works for us as long as the overall system works. That requires there be a few people with a good overview, who also have the power and the guts to manage the system effectively. Those guys either fell asleep or didn't exist.

[Nommo]

Warning to white people. If Black people, being approximately 12% of the population can send this nation to the precipice, you'd all better hope and pray we don't really just get plain downright malevolent.
"'Do not attempt to adjust the picture. We will control the horizontal and the vertical..." Wagging of the tail, that is. Maybe Funkadelic was right...

[RingWorlder]

Beautifully stated. Signed - Older White Dude

[MrTessier]

Great article, but it does leave me with one point I would have liked to have explained. I'm about to research it, but the community reinvestment act, you say, did not apply to mortgage lenders or investment banks. And Fannie and Freddie don't actually issue mortgages, if I understand it right. So who did the act apply to? I think I get the rest of the explanation, wonderfully done by the way, but I am not really clear on that point.

[David Fiderer - Huffpost Blogger]

See David Fiderer's Profile

The CRA only applied to depository institutions like banks or savings & loans. It did not apply to mortgage lenders like Countrywide, or to investment banks that packaged and securitized those mortgages. Daniel Gross' piece in Slate describes it clearly.http://www.slate.com/id/2201641/

[itolduso]

In my little section of 'paradise', blacks make up only 3 % of the population, over 1 in 4 mortgages is in default, and way too many of those are owned by wealthy speculators that lined up at pre-construction sales events to bid on 'units' in hopes of cashing in on the real estate pyramid scheme - then simply walked away from their deposits when the market tanked. Funny how nobody remembers them- they used to make the news all the time, the articles helped drive the frenzy.

[watchandwait]

You are so RIGHT!!!! Plus, what people are failing to realize is that the greed of the mortgage lenders is a big part of this. In the past nine years or so, it seemed as if everybody and their mother was getting into the real estate/mortgage business. Some of these people I wouldn't trust to pick up my garbage once a week, but now they were setting up shop to help people get mortgages. And I heard those "you don't need money down" or "we'll work with you" stories. I for one just couldn't get past one of the well-connected neighborhood idiots now being able to write and effect a mortgage for someone. It felt like an accident waiting to happen then, and has since come to fruition.

[DennyCrane]

It's a win-win for Republicans. Not only can they shift the blame for the housing mess onto minorities and, by extension, onto Democrats who, in the eyes of Republicans, give special treatment to minorities, but it's also a win because they can associate it with Obama, by linking him to former Fannie CEO, Franklin Raines, who just also happens to be black. Since so many whites are reluctant to vote for a black candidate, the more the election becomes about race, the better for McCain. Blacks caused the subprime mess. A black guy screwed up Fannie Mae. That black guy is in league with Obama. Obama is also black and has a Muslim middle name. This kind of reasoning works on the simple-minded and unfortunately, America is full of simple-minded folk.

[SSBN617]

Just to clarify,
The thinking actually goes like this. The Democrats (and some Republicans) with good intentions, allowed this crisis to develop.
Now those same hypocrites (Pelosi, Frank etc. )are claiming that it is the result of "failed Bush policies". And therefore, this crisis helps Democrats, including of course, Barack Obama.
Has nothing to do with race as much as you might wish it did. Raines and Mudd are both the same regardless of pigment with Mudd actually worse.
Sub-prime loans are the issue regardless of their original purpose or who got them. The blame lies with the lenders, and their enabler. I have not really seen too many people "blaming" the borrowers, regardless of their race.
BTW your "America is full of simple-minded folk" is what makes people come up with the elitist label for "folk".

[shulamite]

Yes, well if the white folk buy into this, they deserve everything they get (in terms of financial disaster).

[dwillisno1]

Thanks for the excellent explanation. The proof of the racial overtones is in the consistent statements that link the problem to the borrowers. How easy and accurate would it be to simply state "too many loans were made to too many people who couldn't afford to repay them." No need too identify who those people were or are. Not by minority status locality or economic status. My children are not minority and are struggling lower middle class like me. They have mortgages that they can't repay, although at the time they borrowed they could. Rising interest rates and declining dollar value have caught up to them..When I bought my house the lender told me how much I could afford to borrow, period. I could not get a loan for more. And they verified every thing I stated on the application. This is more the fault of the lenders and mortgage agents than the borrowers. Many borrowers like me have been taught that lenders won't lend more than the borrower can afford. Apparently that is no longer true.

[watchandwait]

You are right...add to that the fact that these lenders also have buried somewhere in the "fine print" the fact that they can/will jack up the interest rate and/or monthly payment at the slightest provocation. Been paying your mortgage on time (or early) for five years but get sick and miss your deadline by a day or two? All of a sudden, your ARM kicks in, or they start asking for more principal, or you get hit with a crazy high late fee. A lot of lower and middle-income people understand the relationship with credit is a delicate dance and handle credit responsibly. At the same time, they trust that if they make a single, relatively small mistake that is easily rectified, then the damage to the debtor-creditor relationship is minimal. However, the greed of these companies kicks in at the slightest infraction; so, when you're on a relatively fixed income (be it $26K or $78K) and your payments increase (as little as 10% in some circumstances), that relationship is on its way to being destroyed forever. I stand by my argument that creditors allowed this to happen because they figured the number of defaults/writeoffs would never compromise the number of successful, long-standing credit relationships (and their bottom line).

[PioneerKing]

DAVID:

what do you expect the republicans to accept the blame?

what is deplorable is that the Democrats are not explaing what Freddie and Fannie really do and the Democrats are not explaining how small a percentage of the bad mortgages are a part of Fannie and Freddie's portfolios

what the democrats are not also pointing out is how every single person of color in this country could have received a home loan -- defaulted on that loan -- and that loss still not equated to the losses on Wall Street.

the entire amount of the defaulted mortgages -- including whites and non-whites has been identified as approximately 300 billion, not chump change but a lot less than the 700 billion and counting that will go to Wall Street

what the Democrats have not explained to America is that this bubble that has burst is simply the collaspe of the ponzi scheme that is Wall Street -- why the heck does our marktes consist of companies/offerings that are nothing more than shell games?

explain how firms such as Goldman and Morgan can be considered tradeable options? my gosh this was a disaster in the making and nothing less

the American stock markets became models of other countries and greed merchants to be used to pimp a legalized ponzi scheme -- the market is crashing because the values are fradulent visages of shady accounting practices -- it's simply an out of control shell game writ large

[JackLivigni]

Blaming CRA for the subprime crisis is the new GOP talking point aimed at blaming Democrats and African Americans for the financial crisis in the Country. It is part of the attempt to polarize people against Democrats for the congressional races, and rural white voters in swing states against Obama.

CFMA - Country First My Ass!

[mmahamngttia]

The GOP Elephant in the room is that the Republicans controlled the House, Senate and the Presidency in 2004.

Democtratic Congressmen were irrelevant - What could "those" Democrats (or "that one") possibly do to stop Republicans from passing stricter legislation at will?

[noamjunior]

even if it were true, what does it say about McCain's leadership that he couldn't do anything about it even though he had congressional majorities
See,even the con lie here doesn't even make their guy look any better really

[Jjc2006]

Well good luck with debunking the myths of the right wing. The media has been supporting their myths for years and for one reason. Our millionaire pundit class is not about protecting democracy....they are about protecting their own pocketbooks and sense of power.
I have yet to hear one pundit take on the so called "hero" Ronald Reagan. This man supported the violent govenments of South and Central America including Pinochet who "disappeared" thousands of people who dared wanted a voice in their country's future.
The only media pundit who tried to challenge the myth of W's service was fired.
The so called liberal MSNBC adored W all during the run up to 2000. WHY? CDS?
Whatever.
The myth of the "maverick" hero is still being pushed. McCain remains the same petulant military "frat" boy type he akways was. The media lies and spins for the right because they love their plutocracy.

[Mike789]

Well put. And maybe the MSM sees making the race an ostensive "close one" , "Ttoo close to call", supports ratings. I'm glued to CSPAN in the a.m. and BookTV over the weekends.