“It is telling that Congress adopted the (Dodd-Frank) act in July 2010, six months BEFORE the FCIC’s report was issued, a clear demonstration that the Democratic Congress knew well in advance exactly what this well-controlled commission would say.”, Peter J. Wallison, “Hidden in Plain Sight, Chapter 3: The Financial Crisis Inquiry Commission and Other Explanations for the Crisis”

“When the (FCIC) report was finally issued, in January 2011, all four Republican-appointed members of the commission dissented….I dissented from the report because I believed that the government’s housing policies were the predominant cause of the financial crisis and that, without those policies, there would not have been a financial crisis. The private sector was involved, of course, but, as I argued in my dissent and as I show in this book, it was a minor factor compared to the role of the government’s housing policies, and but for those policies, the actions of the private sector alone would never by itself have caused the crisis.”, Peter J. Wallison, Republican Minority Member of the Financial Crisis Inquiry Commission

On the First Page of Chapter 3:

“It is not difficult to deprive the great majority of independent thought. But the minority who will retain an inclination to criticize must also be silenced…..Public criticism or even expressions of doubt must be suppressed because they tend to weaken public support.”, Friedrich A. Von Hayek, The Road to Serfdom

Other Key Excerpts from Chapter 3:

“The ferocity of the left in defending Fannie Mae, Freddie Mac, and the government’s housing policies before 2008 is sometimes shocking, especially when even Barney Frank has given up. It makes you wonder why this is so important to them. They have no data, no policy arguments, just a virulent denial that anything other than the private financial sector could possibly be responsible for the financial crisis.”

“It was not the banks that created the mortgage crisis. It was, plain and simple, Congress who forced everybody to go and give mortgages to people who were on the cusp.” (New York Mayor Michael Bloomberg, responding to a question about Occupy Wall Street.)

“The difficult task in history is to discern which, among a welter of possible causes, are the significant factors…..the ones without which history would have been different. Using this standard, it is the thesis of this book that the 2008 financial crisis would not have occurred but for the housing policies of the U.S. government between 1992 and 2008…There is some truth in all of them (other theories about the causes of the crisis), but, as outlined below, none of them alone or in combination with others can fully explain why the crisis occurred.”

“If the Democratic Congress really wanted a thorough or unbiased investigation of the financial crisis, it was a mistake to give one party a majority on the commission, at least without providing the allocation of staff to the Republicans….as far as I could tell, only one staff member out of almost eighty was assigned specifically to assist Republicans on the commission, and none was assigned to represent the view of Republican members in such vital activities as interviewing witnesses, conducting research, and drafting the report.”

“Many of the staff members I got to know where working hard to do a thorough and objective study, but they were led from the beginning to consider only one theory….that the crisis was caused by risk-taking and greed of the private sector and could have been prevented by more energetic regulators with more regulatory control of the financial system.”

“For much of the commission’s life, the executive director had been on loan from the Federal Reserve, which….along with other bank regulators….should have been a major target of the FCIC’s investigation. The Federal Reserve was the closest thing we had at the time to a systemic regulator…..if any regulator missed excessive risk-taking by private-sector firms it was the Federal Reserve. It also had a huge and high-quality economics staff that should have been able to the see the dangers in the housing system before anyone else….especially the development of the housing bubble. Although the Federal Reserve was mildly criticized in the FCIC’s report, the reasons for its lapses were never explained. This absence of serious blame enabled Congress to reward the Federal Reserve…despite its obvious failures….with significant new powers in the Dodd-Frank Act.”

“Angelides (former head of the California Democratic Party and former California State Treasurer) controlled the writing and conclusions of the report; the Republican-appointed commissioners never had a voice in the direction of the investigation and were seldom informed about the work of the staff.”

“If the only information I had about the causes of the financial crisis came from the media at the time and what the FCIC staff supplied the commissioners, I probably would also have concluded, as the other commissioners did, that the government’s housing policies and Fannie and Freddie had little or no role in the financial crisis.”

“If a Republican staff group had been appointed to participate in the interviews, research, and drafting process, the normal adversarial process would have ensure a more objective outcome of the commission’s work; alternative explanations for the crisis might have been explored, and different conclusions…including the possibility that the financial crisis would not have occurred but for the government’s housing policies…might have been drawn.”

“….with the limited information made available to them by the staff, the Republican commissioners never even had the chance.”

“The (Democratic) majority (of the FCIC) concluded….very much in tune with the views of President Obama and the Democratic members of Congress….that the financial crisis could have been avoided through better regulation.”

“These (failures of human action) were fulsomely detailed in the majority’s report, usually supported by the after-the-fact interviews of witnesses that were not put under oath, rather than documents or data. Indeed, most of the report is based on statements made to the staff in more than seven hundred interviews. There was no adversarial process in the interviews that permitted verification of the accuracy of witness statements or their qualifications to make these statements. As far as I could tell from the witness interviews I was able to get, no one conducted any cross-examinations, and no one used any documents to question the witnesses’ statements or otherwise test their veracity. The process simply validated the conventional view of the financial crisis that the media had already accepted and repeated. Witnesses testifying in these circumstances were unlikely to disagree with the consensus, and if they did their disagreement was never recorded in the majority report. Other than the few public hearings, the commissioners were never notified of who was being interviewed or given the opportunity to attend.”

“The errors that brought about the crisis, the report argued, could have been prevented by a more vigilant set of government regulators….with additional powers where their authority was deficient. This dovetailed precisely with the conclusions the Democratic Congress and the Obama administration wanted…fully supporting the enactment of the Dodd-Frank Act, which imposed heavy new regulation on virtually every part of the financial system.”

“It is telling that Congress adopted the act in July 2010, six months before the FCIC’s report was issued, a clear demonstration that the Democratic Congress knew well in advance exactly what this well-controlled commission would say.”

“As a diagnosis of the causes of the crisis, the majority report was seriously deficient. There is no question that, if the regulators could have foreseen the crisis, they could have prevented it. But regulators are not omniscient; while they sometimes have better information than the general public, they have no special powers of foresight.”

“The Federal Reserve had the authority to stop the activities of mortgage originators as well as banking organizations, and the Securities and Exchange Commission (SEC) could have intervened in the activities of the large Wall Street investment banks that also suffered major losses. But neither of them, as we shall see, could have foretold…..that a massive financial collapse was looming in the immediate future….There were warnings…there always are, just as there are experts who contend that the warnings are wrong. To criticize regulator for failing to act….is nothing more than 20/20 hindsight.”

“Nevertheless, quite apart from whether regulators were really at fault, the FCIC (Democratic) majority concluded that the activities of the private sector were the only significan cause of the crisis….But when it came to Fannie Mae and Freddie Mac, “these two entities contributed to the crisis, but were not the primary cause.” Yet Fannie and Freddie were the dominant players in the housing finance system and were subject to HUD regulations that required them to reduce their underwriting standards. They were literally elephants stomping around in the room. To fail to explore their role in detail reflects a willful blindness that was inconsistent with the commission’s responsibility to the public.”

“By keeping necessary information from the few commissioners who might have been willing to listen, and by failing to explore any alternative explanation for the crisis, the FCIC (Democratic) majority produced a narrative about the causes of the crisis that was useful only to those who saw the crisis as a chance to impose a “New New Deal” (in Barney Frank’s evocative phrase)…..that is a more stringent regulatory regime….on the U.S. financial system.”

“The astonishing statement in the Triggers memo that just before the 2008 financial crisis almost half of all the mortgages in the United States were NTMs (higher-risk, nontraditional mortgages) and that 70 percent of those were held or guaranteed by government agencies like Fannie and Freddie should have alerted the FCIC to the existence of a valid alternative explanation for the crisis. Any objective investigation charged with telling Congress and the American people what caused the financial crisis would have taken a serious look at (the American Enterprise Institute’s) Pinto’s data, combed carefully through his research, exposed his ideas to the members of the commission, taken Pinto’s testimony, and tested the accuracy of his claim that the U.S. government’s housing policies were responsible for the mortgage meltdown and subsequent financial crisis. But this is not what happened.”

“The answer to that question (about their pre-crisis mortgage risk-taking) should have been obvious, simply because Fannie and Freddie….two companies with gold-plated franchises and funding costs just shy of the U.S. Treasury…became insolvent under the weight of NTMs they acquired.”

“In fact, the FCIC (Democratic) majority report failed to look seriously at any idea that was inconsistent with the narrative that the financial crisis was caused by insufficiently regulated activities of the private sector.”

“The FCIC (Democratic) majority’s report further stated that “we also studied at length how the Department of Housing and Urban Development (HUD’s) affordable-housing goals for the GSEs affected their investment in risky mortgages. Based on the evidence and interviews with dozens of individuals involved in this subject area, we determined these goals ‘only contributed marginally’ to Fannie’s and Freddie’s participation in those mortgages.” To the contrary, as chapters 5 through 8 detail below, HUD relentlessly pressed the GSEs to meet the goals, and the GSE’s compliance eventually caused their insolvency and spread degraded mortgage underwriting standards to the wider market.”

“In a hearing before the FCIC in April 2010, Daniel Mudd, the last CEO of Fannie Mae before the firm was taken over by the government, left no doubt…..”Fannie Mae’s mission regulator, HUD, imposed ever-higher housing goals that were very difficult to meet during my tenure as CEO. The HUD goals greatly impacted Fannie Mae’s business…This became particularly problematic when goal requirements grew to far exceed the proportion of eligible (mortgages) originated in the primary market.”

“And somehow the FCIC’s (Democratic) majority also managed to ignore this statement about affordable-housing goals in Fannie Mae’s 2006 10-K report: “(We) have made, and continue to make, significant adjustments to our mortgage loan sourcing and purchases strategies in an effort to meet HUD’s increased housing goals and new subgoals. These strategies include entering into some purchase and securitization transactions with lower expected economic returns….We have also relaxed some of our underwriting criteria to obtain goals-qualifying mortgage loans and increase our investments in higher-risk mortgage loan products that are more likely to serve borrowers targeted by HUD’s goals and subgoals, which could increase our credit losses.”

“It is clear from these statements alone that the (Democratic) commission majority ignored theories about the causes of the financial crisis that any objective investigation would have considered, while focusing solely on a narrative that advanced the political purposes of those in Congress and the administration who wanted to impose tighter regulation on the financial system. This was not the way an objective inquiry should have been carried out; unfortunately, the FCIC (Democratic) majority misused it mandate for political purposes.”

“Nor would it be accurate to say that the FCIC’s (Democratic) majority report was the considered work of the members who voted for it. The commission’s authorizing statute required that the commission report its findings on or before December 15, 2010. The original plan was for the commissioners to start seeing drafts of the report in April. No drafts were circulated until November, when chapters started to arrive in no particular order. The commissioners were then given an opportunity to submit comments in writing, but never had the opportunity to go over the wording as a group, to question the staff about the substance of what was written in the report, or to know whether their written comments were accepted.”

“On December 15, commission members received a complete copy of the (Democratic) majority’s report…..almost nine hundred double-spaced pages….with a notice that the approval date was eight days later. During that period, we never met in person or in a telephone conference to go over the wording of the report. It is difficult to believe, in light of this process, that any member of the commission other than Angelides himself had read the report in full and approved it before its release.”

“When the report was finally issued, in January 2011, all four Republican-appointed members of the commission dissented….”

“Angelides had contracted for a commercial edition of the report that would be widely distributed in bookstores. That edition contained the majority report in full, but limited the dissent to 9,000 words for each dissenter. My 43,000-word dissent was seriously truncated in the commercial edition…..most people who bought the commercial edition were not aware that the 9,000 words included at the back of the commercial edition were only a small portion of my complete dissent.”

“I dissented from the report because I believed that the government’s housing policies were the predominant cause of the financial crisis and that, without those policies, there would not have been a financial crisis.”

“The private sector was involved, of course, but, as I argued in my dissent and as I show in this book, it was a minor factor compared to the role of the government’s housing policies, and but for those policies the actions of the private sector alone would never by itself have caused the crisis.”

Posted on April 8, 2015, in Postings. Bookmark the permalink. Leave a comment.

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