By Sean Hayes
Most ``mainstream'' pundits and the vast majority of editorial writers have blamed the current financial mayhem on the Bush administration's ``deregulation bias.''
Democratic presidential hopeful Sen. Barack Obama has noted, in a campaign speech, that John McCain and the Bush administration ``fought against the very rules of the road that could have stopped this mess.''
Let's put blame where blame is due; Republicans and Democrats played a significant role in this mess. Without this realization we will never learn from our mistakes.
Those espousing Sen. Obama's viewpoint have not cited one Bush-term regulatory change that is the culprit for our present difficulties nor have they explained away the fact that the U.S. financial market is one of the most regulated markets in the world.
The reason we hear no explanation is the obvious disingenuousness of these statements. The reality is that a Bush regulation that would have assisted in alleviating these problems was strongly opposed by the same regulation bellwethers and regulation is a major culprit behind our current situation.
First, we can't put all the blame on a deregulation-biased Bush administration. The administration proposed a regulatory framework that would have helped prevent the coming crisis, however, Democrats strongly opposed the plan and Republicans, because of more pressing Iraq issues were unwilling to strongly push for the regulations.
In 2003, the Bush administration attempted to create an agency ``to regulate and supervise the financial activities" of Fannie Mae and Freddie Mac. It perceived that a problem with one of these agencies could ``cause strong repercussions in financial markets, affecting federally insured entities and economic activity."
However, our usually regulation-friendly Democrat Barney Frank, chairman of the House Financial Services Committee, strongly opposed the plan, noting that the agencies ``are not facing any kind of financial crisis … The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''
He added, in a House hearing, that ``there has been more alarm raised about potential unsafety and unsoundness than, in fact exists … I want to roll the dice a little bit more in this situation toward subsidized housing.''
The Bush administration renewed its efforts in 2004 and 2005, but again Barney Frank and his liberal cohorts vigorously opposed the plan. Frank's ``dice roll'' failed, but he is unwilling to take an iota of blame for this crisis and still has a major role in the inevitable regulatory backlash.
Secondly, over-regulation was a major catalyst. The Clinton administration, motivated by a debunked Boston Federal Reserve Bank study, extended the scope and impact of the Carter-era Community Reinvestment Act and the Home Mortgage Disclosure Act.
The acts, and particularly the Clinton amendments, made it more difficult for lenders to receive acceptable bank ratings. Acceptable ratings, after the amendments, were heavily influenced by how well a lender ``served'' low, moderate income and minority borrowers.
The bank examiners looked at federal home loan data and broke the data down by income group, neighborhoods, race, and tax brackets and determined how well the banks were servicing these groups.
Without an acceptable rating banks would not be given permission to merge or to establish new branches and may even be subjected to costly class action lawsuits.
The impetus for the bills was a study that incorrectly claimed that banks were not giving loans to minorities because of their race. Holes and possible fabrication of data were found by a noted economist who, adjusting for the irregularities, found no mortgage discrimination based on race.
Lastly, the Clinton administration encouraged Fannie Mae to underwrite loans to subprime borrowers.
Franklin Raines, the former chairman and CEO of Fannie Mae, noted that ``Fannie Mae has expanded home ownership for millions of families in the 1990s by reducing down payment requirements … Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''
Clinton fixed this with a program in 1999 to underwrite loans to subprime borrowers.
Republicans, Democrats, and of course some unscrupulous lenders are to blame for these difficulties. However, if we can't force them to take a good look in the mirror we will never learn from the present melee.
Sean Hayes is a New York attorney working for LOGOS Attorneys at Law, one of Korea's largest and most respected law firms. He formerly worked as a law faculty member and for the Constitutional Court of Korea. He can be reached at SeanHayes@LawLogos.com.