Socialising risk, privatising rewards

It turned out that many of these financial promises weren't worth the fancy paper they were written on. Reich asserts that while the subprime mess triggered the collapse of trust, financial markets were in danger of such a free fall even before mortgage-backed loans were shown to be worth far less than anyone assumed. That's because when the market was roaring a few years back, so many financial players were clueless as to what they were buying or selling. Even worse, they didn't care a hoot, as long as they were reeling in the cash.

A suite of financial instruments, such as complex derivatives and collateralised debt obligations erected a mirage of solid value. But it was just a mirage. These securities had sweet little behind them.

The leverage some financial institutions took on board seemed to have no limits. Lehman Brothers, for example, started this year with a gearing ratio of 30:1. Imagine that. Imagine rolling up to your home mortgage provider and stumping up a $100,000 deposit, to be offered a $3m loan. Now that’s my kind of home loan.

Why the former Labor Secretary should even enter the debate on the housing originated sub prime fiasco - given his party’s fingerprints all over the mess in the first place - is incomprehensible.

Since the mid 1990s, Democrats, both in the Clinton White House as well as in Congress, fought tooth and nail against major reforms to bring Fannie Mae and Freddie Mac under closer financial supervision.

A bit of history is in order.

The Democrats lit the sub prime fuse by railroading lenders to spoon out cash to people who could not possibly qualify for a home loan. This came into being via the irresponsible modifications to the Community Reinvestment Act. While President Bill Clinton was not unzipping his trousers for Ms Monica Lewinsky, he applied pressure to US financial institutions to lend to minorities and those in poor neighbourhoods, in a misguided effort to increase home ownership in United States.

One of Clinton’s more appalling changes to the Act was giving Fannie Mae and Freddie Mac extraordinary leverage, allowing them to hold just 2.5 per cent of capital to back their investments, versus 10 per cent for banks.

The Democrats, under Bill Clinton’s Secretary for Housing and Urban Development, Mr Andrew Cuomo (the youngest such secretary in history), made several ignorant and partisan decisions between 1997 and 2001 that gave birth to the current financial crisis.

Cuomo took actions that helped plunge Fannie Mae and Freddie Mac into the subprime markets while disallowing the means to monitor their increasingly risky investments. He turned the Federal Housing Administration mortgage program into a sweetheart lender with shoot-the-moon loan ceilings that required no money down, in time making it a major lender to minorities (code for blacks and Hispanics who earn little, have poor credit histories, but vote Democrat).

The Democrat-manufactured current mortgage crisis involved strong-arming home loan providers to lend with no-doc provisions. Low-doc would have been a godsend in comparison. There was no verification of income. No verification of assets. Little assurance of the ability to pay the mortgage and little or no down payment.

So, with rules like these, who wouldn’t expect that in time, something unpleasant would hit the fan?