KELLY: ‘Crony capitalism’ crackup

Lending money to people who probably won’t pay it back isn’t good business. If you wrap crummy loans in a clever package, they’re still crummy loans.

Your typical Wal-Mart shopper understands this. But the Masters of the Universe on Wall Street and in Washington evidently didn’t.

There are a lot of people to blame for the subprime mortgage crisis. The Federal Reserve Board under Chairman Alan Greenspan (1987-2006) pursued what seems in hindsight clearly to have been way too loose a monetary policy. Banks were awash with money to lend, and got careless in how they lent it.

Ostensibly to aid the poor, the Clinton administration and Congress encouraged lenders to give mortgages to bad credit risks. The combination of easy money and expansion of the number of borrowers by extending loans to bad credit risks sent housing prices through the roof, creating the bubble whose bursting has led to this crisis.

Congress in 1999 repealed the law that established a bright line between commercial and investment banks. This meant bad investments by banks could jeopardize depositors.

Wall Street created “derivatives” which multiplied profits in good times, but which also multiplied risk if there were defaults.

Most important was corruption and mismanagement at the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac), which together controlled 90 percent of the secondary mortgage market.

Once your bank has lent you money to buy a house, it can’t lend the money again until you pay it back. But if your bank sells your mortgage, it can make another loan right away. Without the secondary market, most of the funds for home mortgages would dry up.

Fannie and Freddie went broke because they had bought billions of dollars worth of subprime mortgages, on which borrowers defaulted when the housing bubble popped. Fannie bought most of its bad mortgages from Countrywide Financial, whose CEO, Angelo Mozilo, gave sweetheart loans to senior executives of Fannie Mae.

Fannie and Freddie cooked their books so senior executives would be paid millions of dollars in bonuses to which they were not entitled. Inadequate regulation kept the book-cooking from being discovered until the crisis had become a catastrophe.

President Bush proposed regulatory reforms in 2003, but Congress took no action. In 2005, John McCain and three other Republican senators proposed a strong reform bill. It died when Democrats threatened a filibuster.

Democrats opposed reform in part because they feared it would mean fewer loans to poor people. “Fannie Mae and Freddie Mac are not facing any kind of financial crisis,” Rep. Barney Frank, Massachusetts Democrat, told the New York Times when the Bush bill was introduced. “The more pressure there is on these companies, the less we will see in terms of affordable housing.”

Democrats and some Republicans opposed reform because Fannie and Freddie were very good at greasing palms. Fannie spent $170 million on lobbying since 1998, and $19.3 million on political contributions since 1990.

The principal recipient of Fannie Mae’s largess was Sen. Chris Dodd, Connecticut Democrat and chairman of the Senate Banking Committee. No. 2 was Sen. Barack Obama. Sen. Dodd was also the second-largest recipient in the Senate of contributions from Countrywide’s PAC and its employees. The No. 1 senator on Countrywide’s list? Barack Obama.

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