FACT SHEET | October 10, 2008

The Credit Crisis: The Bush Administration's Record of Denial and Regulatory Neglect

For more than a decade, President Bush and/or Congressional Republicans have controlled Washington. During these Bush-McCain Republican years, Americans have seen their dreams of homeownership and a secure retirement gambled away by reckless economic policies that put Wall Street and special interests ahead of middle class families. Not only did the Bush Administration ignore the warning signs about risky mortgages, they encouraged the very practices that are at the heart of the current economic crisis and stood in the way of efforts that would have prevented the crisis.

 

The epicenter of the current market turmoil has been caused by risky mortgages that the Bush Administration failed to regulate. Beginning in 2000, Federal Reserve Governor Edward Gramlich warned that predatory lending would "jeopardize the twin American dreams of owning a home and building wealth." (1/18/02) In 2006, Moody's Economy.com warned that "problems in the mortgage-backed market would spill over into the rest of the U.S. fixed income and stock markets... The turmoil in the U.S. financial markets would immediately reverberate around the world, engendering a global financial event." (Moody's Economy.com, October 2006) Moreover, the Federal Reserve staff observed a prolonged loosening of standards for mortgages starting in late 2003. (Federal Reserve staff briefing for Senate Banking, Housing, and Urban Affairs Committee staff, 3/20/07)

 

Republican-appointed regulators turned a blind-eye to the early warning signs of an unstable mortgage market. Instead of heeding the warnings and working with Congressional Democrats to protect American consumers, regulators ignored these warnings, failed to enforce existing protections, and actually encouraged Americans to take out risky mortgages. 

·No oversight from Bush Administration. "There was a lack of regulatory oversight during the Bush administration ... that's one of the reasons we are in the mess that we are in... Many bad mortgage loans and other loans were made in part because regulators were not empowered and were not playing their proper role." (Mark Zandi, NPR, 9/16/08) 

·Former Federal Reserve Chairman, under the Bush Administration,encouraged risky mortgages -- and just "didn't really get it."In 2004, former Federal Reserve Chairman Alan Greenspan continued to encourage higher-risk mortgages: "American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage... The traditional fixed-rate mortgage may be an expensive method of financing a home." (2/23/04) Later, when "[a]sked why he didn't speak out, if he knew these practices were going on or even suspected that there was something illegal or shady, Greenspan admits, 'While I was aware a lot of these practices were going on, I had no notion of how significant they had become until very late. I didn't really get it until very late in 2005 and 2006.'" (CBS News, 9/13/07) 

·Bush regulators encouraged risky mortgages despite warnings from Senate Democrats. Senators Dodd and Sarbanes warned Chairman Greenspan about the dangers of promoting the use of nontraditional mortgages: "Adjustable rate mortgages, for a low income constituency, [are] a nightmare." (Senator Dodd, Senate Banking Committee hearing, 2/24/04) "[The Federal Reserve] is pushing adjustable rate mortgages...and throwing this risk back on the consumer...in effect, downing the 30 year fixed rate mortgage and pushing up the adjustable rate mortgage." (Senator Sarbanes, Senate Banking Committee hearing, 2/24/04) 

·Bush regulators to blame for spike in risky mortgages. "When consumers hear[d] from a Fed chairman that it makes little sense to take on fixed rate debt...[n]ot by coincidence, the adjustable rate portion of newly originated mortgage debt shot up... And should asset-dependent, saving-short, overly indebted American consumers feel at risk if the Fed assures them that there is no housing bubble?" (Morgan Stanley Chief Economist Stephen Roach, 4/22/05)

Instead of protecting Americans' savings, President Bush and his Republican allies promoted Social Security privatization, placing not only homeownership at risk, but retirement security at risk. "You will be able to achieve the objective of getting a better rate of return on your money and have more money available for you on retirement than if it had sat in the Social Security trust." (President Bush, 2/4/05) "[I]t's not risky." (President Bush, 1/11/05)

 

·"Over time, the securities markets are the best, safest way to build substantial personal savings." (Vice President Cheney, 1/13/05) 

·"As part of Social Security reform, I believe that private savings accounts are a part of it - along the lines that President Bush proposed." (Senator McCain, Wall Street Journal, 3/3/2008) "Without privatization, I don't see how you can possibly, over time, make sure that young Americans are able to receive Social Security benefits." (Senator McCain, 12/04)

 

Bush-McCain Republicans "denied, denied, denied" the growing economic and housing crisis until it was too late. 

·In late 2007, President Bush told Americans that the economy was stable: "[I]t looks we're headed for a soft landing." (White House morning press briefing, 8/9/07) 

·Treasury Secretary Henry Paulson played down the subprime market turmoil, saying the economic fallout will "be painful to some lenders, but it is largely contained." (MarketWatch, 3/13/07) Later that year, still, Secretary Paulson "did not see anything that caused him to reconsider his view that the economic damage from the housing correction was 'largely contained.'" (Reuters, August 1, 2007) 

·Federal Reserve Chairman Ben Bernanke maintained that "troubles in the subprime sector on the broader housing market will likely be limited." (Forbes, 5/17/07) 

·As late as September 2008 and despite all evidence to the contrary, Senator John McCain argued that "[t]he fundamentals of our economy are strong." (9/15/08)

 

Arguing that they had it under control, the Bush Administration fought Congressional Democrats' efforts to address the housing crisis."Treasury Secretary Henry Paulson said U.S. financial markets are emerging from the credit crunch and that 'the worst is likely to be behind us'... Mr. Paulson's comments, made in an interview Tuesday, reflect Treasury's view that the administration and the Fed have already taken steps necessary to quell the situation. Bolstering that notion, the White House Tuesday threatened to veto [housing] legislation..." (Wall Street Journal, "Paulson Sees Credit Crisis Waning," 5/7/08) 

The Bush Administration repeatedly blocked Government Sponsored Enterprises (GSE) reform. In the 108th Congress, the House Financial Services Committee reached an agreement to markup legislation originally scheduled for October 8, 2003. However, on October 7, 2003, the Treasury Department announced its opposition to this agreement, killing progress on GSE reform. (Congressional Research Service, "Improving the Effectiveness of GSE Oversight: Legislative Proposals in the 108th Congress.") 

In the 109^th Congress, Democrats supported bipartisan legislation drafted by the Republican Chairman of the House Financial Services Committee, Representative Oxley, which would have given the new GSE regulator broad authority over setting capital requirements and limiting portfolio size. This bill passed the House 331-90. Senate Democrats supported and offered the bill in the Senate, but the Bush Administration opposed it and the bill did not receive Republican support in the Senate. According to Mr. Oxley, the White House gave Congress and the GSE reform legislation "a one-finger salute." 

·"'We missed a golden opportunity that would have avoided a lot of the problems we're facing now, if we hadn't had such a firm ideological position at the White House and the Treasury and the Fed,' Mr. Oxley says." (Financial Times, 9/11/08) 

·GSE reform "wasn't a priority of this Administration's. They quite frankly put it on the back burner. And now we see what we have." (Douglas Holtz-Eakin, NPR, 9/16/08)

 

Despite the assertions of Bush-McCain Republicans, GSEs did not ignite the subprime fire, they were swept up in a fire started by unregulated financial institutions.Even though they blocked GSE Reform, Bush-McCain Republicans are now attempting to deflect blame for the nation's mortgage mess by asserting erroneously that GSE's, alone, are at fault. In truth, the Bush Administration's failure to regulate financial institutions on Wall Street is a root cause of our current economic crisis. "Wall Street had recently jumped into the market for risky mortgages. Firms like Bear Stearns, Lehman Brothers and Goldman Sachs had started bundling home loans and selling them to investors -- bypassing Fannie... In the previous year, Fannie had already lost 56 percent of its loan-reselling business to Wall Street and other competitors." (New York Times, October 5, 2008) 

Republican-appointed regulators failed to prevent unsafe and unsound practices at the GSEs.If indeed GSEs are partly to blame for the mortgage crisis, President Bush appointed or retained every financial regulator in charge of overseeing the GSEs, banks, and the securities markets since 2001, long before subprime mortgage usage began to explode. Moreover, in addition to controlling the executive branch, Republicans have controlled both houses of Congress charged with oversight of financial regulators during nearly every year of this period. Further, the GSE regulators charged with ensuring safety and soundness at the Office of Federal Housing Enterprise Oversight (OFHEO) and the Department of Housing and Urban Development (HUD) were also appointed or retained by President Bush.

 

To save themselves, Bush-McCain Republicans have erroneously blamed efforts to expand homeownership to low- and moderate-income Americans for the credit crisis. In desperation to escape responsibility and accountability for years of regulatory neglect and fiscal incompetence, Bush-McCain Republicans have shamefully attempted to offer theCommunity Reinvestment Act (CRA) as a scapegoat for the nation's economic turmoil. The CRA is not to blame, however, because -- as it is acknowledged by the Bush Administration's own Federal Reserve -- the CRA only requires safe and sound lending practices and actually penalizes predatory and reckless lending. 

·"The Community Reinvestment Act is intended to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods, consistent with safe and sound operations.... The CRA does not require institutions to make high-risk loans that jeopardize their safety. To the contrary, the law makes it clear that an institution's CRA activities should be undertaken in a safe and sound manner." (Federal Reserve Board website, available here.) 

·The CRA did not require mortgage companies to offer loans for no money down, or relax underwriting standards, or encourage mortgage brokers to aggressively seek out new markets. CRA penalizes banks for reckless, irresponsible, and otherwise predatory lending. Subprime lending grew faster in institutions that did not have to meet the conditions of the CRA. (National Community Reinvestment Coalition) 

Moreover, the majority of subprime loans were made by institutions not covered by the CRA. The CRA has been in place since 1977 -- long before subprime mortgages at the heart of the current crisis were ever made. Most subprime loans were originated and securitized by non-CRA financial institutions such as non-bank mortgage companies and investment banks. Only about 25 percent of subprime loans were made by institutions covered by CRA.

 

Bush-McCain Republicans were openly hostile to sound regulation of financial markets by the Securities and Exchange Commission (SEC), opting instead to left Wall Street regulate itself. 

·Former Federal Reserve Chairman Greenspan argued against regulation of the risky securities market.The derivatives market has exploded from $106 trillion in 2002 to $531 trillion today -- 38 times the size of the U.S. annual economic output. Instead of increasing regulatory vigilance over this market, the Federal Reserve argued against regulation. "[D]erivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn't be taking it to those who are willing to and are capable of doing so...[S]hould these be regulated, well, indeed for the United States they are obviously regulated to the extent that banks, being the crucial creators of these derivatives, are regulated by the banking agencies, but not beyond that. The reason why we think it would be a mistake to go beyond that degree of regulation is that these derivative transactions are transactions amongst professionals... one major bank will know far more about its customer...than we could conceivably know as regulators." (Alan Greenspan, Senate Banking Committee Hearing, 7/16/03) 

·The Bush Administration and Congressional Republicans understaffed and underfunded key regulatory offices at the SEC.In 2004, the Office of Risk Assessment (ORA) was established to "anticipate, identify, and manage risks, focusing on early identification of new or resurgent forms of fraud and illegal or questionable activities." Unfortunately, SEC Chairman Cox left the Directorship of the ORA vacant from December 12, 2006 until February 28, 2008. Moreover, the SEC only had two employees working under Chairman Cox despite the Fiscal Year 2006 budget request to eventually hire fifteen full-time staff. (Securities and Exchange Commission, available here) 

Democrats are fighting for increased funding and manpower at the SEC to police the financial markets. Democrats asked appropriators for a 5% increase in FY 2009 SEC funding. In May, 2008, ten Democrats on the Senate Banking Committee wrote a letter to the Chair and Ranking Member of the Senate Appropriations Subcommittee on Financial Services and General Government asking for a $50 million increase (5.5%) above the President's SEC budget request. (Letter to Senators Durbin and Brownback from Senate Banking Democrats, 5/7/08) The letter notes that the President's proposal, when adjusted for inflation, is effectively a budget freeze at a time when the SEC is dealing with the explosion of complex financial securities and the fallout of the subprime mortgage crisis. The letter also references an Op-Ed by former SEC Chairmen Donaldson, Levitt, and Ruder, called "Muzzling the Watchdog," which says that the SEC "lacks the money, manpower, and tools it needs to do its job." (New York Times, 4/29/08) Because of the Senate Democrats' action, the Senate Appropriations Committee passed a Financial Services Appropriations bill with a $25 million increase over the President's budget request. (S.3260, Financial Services and General Government Appropriations Act, 2009)

 

In the face of Republican obstructionism, Democrats have worked to protect Americans from risky mortgages. 

·Democrats enacted a law to protect Americans from abusive mortgages. In 1994, under a Democratic Congress and Democratic White House, Congress enacted the Home Ownership and Equity Protection Act ("HOEPA"), which requires the Federal Reserve to prohibit unfair and deceptive lending practices by both federally- and state-regulated mortgage lenders. HOEPA requires the Federal Reserve to issue regulations to prohibit abusive and deceptive practices. It took the Fed 14 years to finally implement these regulations, after the Senate Banking Committee urged them to do so through numerous hearings and several letters. 

·Democrats fought to protect homeowners from risky mortgages. Since 2000, Senators Sarbanes, Schumer, and Dodd have repeatedly introduced legislation to protect against predatory lending. None has ever had a Republican cosponsor in the Senate. 

·Bush Republicans blocked housing legislation as the crisis deepened. Even after reaching a bipartisan agreement on the Foreclosure Prevention Act, and its successor, the Housing and Economic Recovery Act of 2008 (HERA) in June, some Republican Senators delayed the final passage of the legislation for weeks. Between the two bills, Republicans conducted six filibusters to prevent the passage of this legislation. In addition, the White House issued numerous veto threats against both bills. 

·Democrats enacted housing legislation to preserve homeownership and reform the GSEs. The HERA legislation enacted in July created a foreclosure rescue program (HOPE for Homeowners); expanded the FHA program to reach many more borrowers; provided funds for foreclosure prevention counseling and for local governments to buy and rehab foreclosed properties. It also created a much stronger regulator for Fannie Mae, Freddie Mac, and the Federal Home Loan Banks (GSEs).

DPC