It appears we've put the the foxes in charge of guarding the hen house. In a story that describes President Obama's "broad indictment" of the financial services industry we learn that Congressman Barney Frank has taken up the cause of regulatory oversight.
'Among those at Wednesday's meeting at the White House was House Financial Services Committee Chairman Barney Frank. The Massachusetts Democrat has already begun working on legislation that would establish a regulator to oversee the kind of systemic risks that led to the market free fall last year.
Frank has proposed that the task be placed in the hands of the Federal Reserve.'
There's a name to keep in mind: Barney Frank. But let's skip back -- oh let's say ten years -- shall we? The date is September 30, 1999. The New York Times reports that Fannie Mae is easing credit requirements.
'In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.
The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.'
Easing credit restrictions was generally applauded. It extended the hope of home ownership to folks who might otherwise be unable to attain it, but the Times also noted that there were those who believed this was not without risk.
'In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.
''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.'''
The alarm bells that went off nearly ten years ago did not go entirely unheeded. In 2003 the Bush administration pushed for much stricter oversight of Fannie Mae and Freddie Mac.
'The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.
Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry.
The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios.
The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac -- which together have issued more than $1.5 trillion in outstanding debt -- is broken. A report by outside investigators in July concluded that Freddie Mac manipulated its accounting to mislead investors, and critics have said Fannie Mae does not adequately hedge against rising interest rates.
''There is a general recognition that the supervisory system for housing-related government-sponsored enterprises neither has the tools, nor the stature, to deal effectively with the current size, complexity and importance of these enterprises,'' Treasury Secretary John W. Snow told the House Financial Services Committee in an appearance with Housing Secretary Mel Martinez, who also backed the plan.'
'After the hearing, Representative Michael G. Oxley, chairman of the Financial Services Committee, and Senator Richard Shelby, chairman of the Senate Banking Committee, announced their intention to draft legislation based on the administration's proposal. Industry executives said Congress could complete action on legislation before leaving for recess in the fall.
''The current regulator does not have the tools, or the mandate, to adequately regulate these enterprises,'' Mr. Oxley said at the hearing. ''We have seen in recent months that mismanagement and questionable accounting practices went largely unnoticed by the Office of Federal Housing Enterprise Oversight,'' the independent agency that now regulates the companies.
''These irregularities, which have been going on for several years, should have been detected earlier by the regulator,'' he added.
The Office of Federal Housing Enterprise Oversight, which is part of the Department of Housing and Urban Development, was created by Congress in 1992 after the bailout of the savings and loan industry and concerns about regulation of Fannie Mae and Freddie Mac, which buy mortgages from lenders and repackage them as securities or hold them in their own portfolios.'
So what exactly happened to Bush administration efforts to adequately regulate Fannie Mae and Freddie Mac? We continue reading the September 11, 2003 Times article, and find that efforts to better regulate Fannie and Freddie were opposed by none other than Barney Frank.
'''These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.'''
But that was then. This is now. Now we are in the crisis that Congressman Frank couldn't imagine then, and now he wants to oversee systemic risk in financial markets. The horses are gone! Lock the barn! Hindsight is 20-20 but we're about nine years late. The financial turmoil predicted in September 1999 became a reality in September 2008.
'After a week of political tumult and deepening economic anxiety, congressional leaders yesterday rallied support for an historic proposal that would grant the government vast new powers over Wall Street and offer fresh help to homeowners at risk of foreclosure.
The proposed legislation, which is scheduled for a vote today in the House, would authorize Treasury Secretary Henry M. Paulson Jr. to initiate what is likely to become the biggest government bailout in U.S. history, allowing him to spend up to $700 billion to relieve faltering banks and other firms of bad assets backed by home mortgages, which are falling into foreclosure at record rates.'
In a casual aside the morning after President Obama's speech to congress, a local radio newscaster said it was widely believed our current economic crisis was caused by the lack of government regulation of the financial industry. Translation: The cause of our crisis is Republican preference for free market policies. Unbridled capitalism is to blame. Never mind that there is no such thing.
While there is truth to the charge that there were regulatory failures, it was not Republicans who were opposed regulatory reform. Nor were Republicans sitting on the sidelines twiddling their thumbs. They were actively trying to reduce risks posed by over-leveraged mortgage backed securities. That didn't happen.
It's depressing. Almost every time somebody from the Obama administration opens his mouth the stock market takes a hit. We watch as the "biggest government bailout in U.S. history" keeps getting bigger.