Who's to Blame? Congress


Each day for five days, a different writer from TheStreet.com will make the case for why one of five prime culprits—the banks, Congress, irresponsible home buyers, the Federal Reserve or the rating agencies—is most to blame for the credit crisis and ensuing economic meltdown.

The financial crisis has been caused by failures at every level of the economic spectrum, from foolhardy consumers to greedy Wall Street bankers to suspiciously blind ratings agencies and a Federal Reserve that only noticed a bubble after it had burst.

However, the legislators in charge of overseeing the housing and financial markets—and whose predecessors created the Fed and its mandate in 1913—were most responsible.

Instead of dousing the fire, lawmakers and their regulatory agencies kept adding fuel by championing policies they now bash as economically flawed. They also reaped donations from the financial firms who profited mightily from those policies, the same firms that are now receiving hundreds of billions of taxpayer dollars to prevent their collapse.

All of this comes at the cost of jobs, household wealth and higher taxes for voters who handed these legislative hypocrites the reins.

Today, members of Congress pillory regulators and the CEOs of big fallen financial firms. But their protestations of anger, shock and ignorance sound hollow when compared with statements from just a few years ago during the housing boom.

For instance, Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee since 2007, characterized Fannie Mae (Stock Quote: FNM) and Freddie Mac (Stock Quote: FRE) as "fundamentally sound financially" at a hearing in September 2003, as the two entities went through major accounting scandals. Frank also said he didn't want "the same kind of focus on safety and soundness" on Fannie and Freddie as other financial firms and preferred to "roll the dice a little bit more" to support subsidized housing.

Sen. Chris Dodd (D-Conn.), chairman of the Senate Committee of Banking, Housing and Urban Affairs since 2007, called Fannie and Freddie "one of the great success stories of all time" at another hearing in 2004, noting that they brought homeownership levels up to 70% of the American populace. As recently as last July, Dodd called the two entities "viable" institutions that were "fundamentally, fundamentally strong."

Those statements came about two months before the government launched massive bailouts for the firms to avoid their collapse from souring mortgage debt. Apparently, while Congress was pushing subsidizing housing and expanded homeownership, it didn't bother to ensure that those homeowners could afford their homes, that lenders were engaging in safe practices, or that the Federal Reserve's ambitions were in line with sound economic policy.

Yet, ever since mass chaos struck last year, Congressional hearings have been filled with hostile, and sometimes bizarre, questioning from members who are far from novices at the financial oversight game. Frank has been a member of the committee since his entry into the halls of Congress in 1981, and Dodd has been on the Senate counterpart for more than a quarter century.

During one House Financial Services Committee hearing last month, Rep. Maxine Waters (D-Calif.) launched into an antagonistically absurd string of questions at eight top bank CEOs. Those queries included one about ominous-sounding offshore "loss-mitigation departments" at Bank of America, commonplace interest rate hikes on credit-cards and a characterization of the CEOs as "captains of the universe."

BofA CEO Ken Lewis answered one query concerning mysterious fees that bankers were supposedly paid to accept TARP funds with a perplexed look and bemused response: "I don't know what you're talking about."

He's not the only one.

Rep. Waters: Get a grip, and a clue. For someone who has been on the committee for 18 years to launch into a juvenile, nonsensical diatribe adds insult to injury for the taxpayers whose economy you've helped destroy.

There are other fees that Waters and her counterparts might want to take a closer look at, though.

Over the past two election cycles—which included the height and the downfall of the housing market, financial market and the economy—members of the House Financial Services Committee and Senate Banking Committee received over $408 million in campaign donations from financial, insurance and real-estate firms, according to OpenSecrets.org. That figure represents nearly 30% of contributions from any one sector, with legal contributions a distant second at $40.7 million, or 10%.

One can blame the portion of homeowners who tried to turn shelter into profit -- or the carrots they were offered by lenders who recklessly doled out home loans; Wall Street firms that booked profits on securitizing and trading that mortgage paper; ratings agencies who profited from rubber-stamping that paper, ignoring telltale signs that something was amiss while raking in money from financial firms; and the Fed, which greased the wheels of an overleveraged economic time-bomb with low interest rates.

But, the bottom line is, who was supposed to be batting down those carrots with a giant stick? Lawmakers and their enforcement agencies. And who was funding the lawmakers? The very firms they should have been batting down.

Perhaps they were too busy investigating Ponzi schemes in the Caribbean. Don't worry, the margaritas are on the House.

Robert Holmes blames irresponsible home buyers tomorrow.

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