[Vision2020] an important Communiqué from The No Weatherman
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Sat Oct 18 07:19:13 PDT 2008
Obama Voted 'Present' on Mortgage Reform
The only banking 'deregulation' in recent years was that of Fan and Fred.
By PETER J. WALLISON
In each of the first two presidential debates, Barack Obama claimed
that "Republican deregulation" is responsible for the financial
crisis. Most viewers probably accepted this idea, especially because
Republicans generally do favor deregulation.
But one essential fact was missing from the senator's narrative: While
there has been significant deregulation in the U.S. economy during the
last 30 years, none of it has occurred in the financial sector.
Indeed, the only significant legislation with any effect on financial
risk-taking was the Federal Deposit Insurance Corporation Improvement
Act of 1991, adopted during the first Bush administration in the wake
of the collapse of the savings and loans (S&Ls). FDICIA, however,
substantially tightened commercial bank and S&L regulations, including
prompt corrective action when a bank's capital declines below adequate
levels and severe personal fines if management violates laws or
If Sen. Obama had been asked for an example of "Republican
deregulation," he would probably have cited the Gramm-Leach-Bliley Act
of 1999 (GLBA), which has become a popular target for Democrats
searching for something to pin on the GOP. This is puzzling. The
bill's key sponsors were indeed Republicans, but the bill was
supported by the Clinton administration and signed by President
Clinton. The GLBA's "repeal" of a portion of the Glass-Steagall Act of
1933 is said to have somehow contributed to the current financial
Adopted early in the New Deal, the Glass-Steagall Act separated
investment and commercial banking. It prohibited commercial banks from
underwriting or dealing in securities, and from affiliating with firms
that engaged principally in that business. The GLBA repealed only the
second of these provisions, allowing banks and securities firms to be
affiliated under the same holding company. Thus J.P. Morgan Chase was
able to acquire Bear Stearns, and Bank of America could acquire
Merrill Lynch. Nevertheless, banks themselves were and still are
prohibited from underwriting or dealing in securities.
Allowing banks and securities firms to affiliate under the same
holding company has had no effect on the current financial crisis.
None of the investment banks that have gotten into trouble — Bear,
Lehman, Merrill, Goldman or Morgan Stanley — were affiliated with
commercial banks. And none of the banks that have major securities
affiliates — Citibank, Bank of America, and J.P. Morgan Chase, to name
a few — are among the banks that have thus far encountered serious
financial problems. Indeed, the ability of these banks to diversify
into nonbanking activities has been a source of their strength.
Most important, the banks that have succumbed to financial problems —
Wachovia, Washington Mutual and IndyMac, among others — got into
trouble by investing in bad mortgages or mortgage-backed securities,
not because of the securities activities of an affiliated securities
firm. Federal Reserve regulations significantly restrict transactions
between banks and their affiliates.
If Sen. Obama were truly looking for a kind of deregulation that might
be responsible for the current financial crisis, he need only look
back to 1998, when the Clinton administration ruled that Fannie Mae
and Freddie Mac could satisfy their affordable housing obligations by
purchasing subprime mortgages. This ultimately made it possible for
Fannie and Freddie to add a trillion dollars in junk loans to their
balance sheets. This led to their own collapse, and to the development
of a market in these mortgages that is the source of the financial
crisis we are wrestling with today.
Finally, on the matter of deregulation and the financial crisis, Sen.
Obama should consider his own complicity in the failure of Congress to
adopt legislation that might have prevented the subprime meltdown.
In the summer of 2005, a bill emerged from the Senate Banking
Committee that considerably tightened regulations on Fannie and
Freddie, including controls over their capital and their ability to
hold portfolios of mortgages or mortgage-backed securities. All the
Republicans voted for the bill in committee; all the Democrats voted
against it. To get the bill to a vote in the Senate, a few Democratic
votes were necessary to limit debate. This was a time for the
leadership Sen. Obama says he can offer, but neither he nor any other
Democrat stepped forward.
Instead, by his own account, Mr. Obama wrote a letter to the Treasury
Secretary, allegedly putting himself on record that subprime loans
were dangerous and had to be dealt with. This is revealing; if true,
it indicates Sen. Obama knew there was a problem with subprime lending
— but was unwilling to confront his own party by pressing for
legislation to control it. As a demonstration of character and
leadership capacity, it bears a strong resemblance to something else
in Sen. Obama's past: voting present.
Mr. Wallison is a senior fellow at the American Enterprise Institute.
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