In an article "How the Scapegoats Escaped," the New York Times described mistakes prosecutors made in trying to convict two Bear Stearns hedge fund managers of fraud:
In short, the prosecution blew it - on two counts. First, in devising the original indictment for conspiracy and securities fraud against the two defendants, Ralph Cioffi and Matthew Tannin, it relied on damning snippets of lengthy e-mail messages that when viewed in their entirety proved to be highly ambiguous. Second, the prosecution made a reductionist opening argument claiming the men were nothing more than out-and-out liars, needlessly raising the bar in terms of what it had to prove to jurors.
Following Eliot Spitzer's misbegotten example, publicity-hungry prosecutors had released snippets of an email which said "The entire subprime market is toast" when announcing charges. The prosecutors tried to show that these two men had told investors not to withdraw money from their funds even though they knew the funds were worthless. When read in its entirety, however, the email showed a fund manager wrestling with trying to figure out what to do in an uncertain market.
The government has worked very hard to claim that the financial crisis was the fault of greedy bankers. These prosecutors seemed to be trying to make these two men targets of all the public resentment over the $12 trillion of taxpayer money that's gone to bail out financial institutions and politically-connected fat cats, but the jury didn't buy it:
Not so fast, this Brooklyn jury declared. "The entire market crashed," one juror explained. "You can't blame that on two people."
We at Scragged respect the jury for acquitting these men of criminal charges. It's hard to argue that being wrong about the market is a crime, but the government is desperate to keep the taxpayers from realizing where the real fault lies.
With all due respect to the jury, we can indeed blame most of the crash on two people - Representative Barney Frank and Senator Chris Dodd.
Rep. Frank chairs the House committee that oversees banks and Sen. Dodd chairs the corresponding Senate committee. These men have a great deal of power over the financial system and have used their power to the fullest.
Sen. Dodd, for example, received a sweetheart mortgage loan from Countrywide, one of the banks which collapsed during the financial melt down. The bank which took over Countrywide has assured the public that they're holding all the records about Sen Dodd's loan so that they can respond to a subpoena whenever anyone gets around to investigating the matter, but so far, Sen. Dodd has managed to quash any and all investigations.
What did Sen. Dodd do for the banks in return? He relaxed federal regulations and made it easier for banks like Countrywide to write and sell riskier mortgages. Instead of having to keep the loans they wrote and accept the risk that they might not be paid off, banks were allowed to sell the loans to government agencies. Selling the loan and ditching the accompanying risk gave them more money to lend again, and the housing bubble grew.
Rep. Frank had the same cavalier attitude towards risk:
I do think I do not want the same kind of focus on safety and soundness that we have in OCC [Office of the Comptroller of the Currency] and OTS [Office of Thrift Supervision], I want to roll the dice a little bit more in this situation towards subsidized housing.
- Rep. Barney Frank, September 23, 2003
When Rep. Frank referred to "subsidized housing," he was talking about Fannie Mae and Freddie Mac, the two government agencies which offer low-cost home loans. Investors believed that the government would never let those two agencies default, so they offered them money at lower rates than they'd offer to commercial banks which were riskier. Given that these housing agencies paid less for money than their competitors, it's no surprise that the government has taken over a major portion of the home mortgage market.
Exactly where did our current financial crisis start? In the home mortgage market, of course. Ten years ago, the New York Times warned of the coming crash when lending standards were relaxed during the Clinton administration, but Rep. Frank and Sen. Dodd would hear none of it.
Given the ever-increasing risks which Rep. Frank urged the government loan agencies to take, it's no surprise that Fannie and Freddie crashed. Our total cost for bailing them out has been $111 billion, with more to come. Our money is being used to subsidize borrowers who took on loans they couldn't afford.
That's not all. On Nov. 13, the New York Times reported that the Federal Housing Administration, which insures bum loans made by its sister agencies, is running out of cash.
Instead of the traditional 10% or 20% down payments, the FHA insures loans which are made with as little as 3.5% down. With so little money tied up in the house, buyers have every incentive to walk away when things get tough. The FHA now admits that it insured many loans made to unqualified borrowers back in 2007 and 2008, which is what its critics have been saying all along.
Lending money to unqualified borrowers is exactly what Rep. Frank meant when he said he wanted the government's housing agencies to "roll the dice a little bit more" back in 2003. His roll of our dice came up snake eyes, but unfortunately for the taxpayers, the mainstream media are reluctant to pin the blame where it belongs.
Instead of telling us what actually happened, they're helping Rep. Frank and Sen. Dodd deflect blame by making heavily-publicized, but bogus, charges against small-time players. They're trying to make this look like a market failure which requires government to limit the market instead of admitting that the source of the problem was government interference in the market.
Mr. Obama's Justice Department would rather hassle low-end traders than go after the real villains who happen to be powerful Democrats, of course. Just more of the usual graft and corruption, Chicago style.