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WILLIAMS: Showdown at Gucci Gulch, Part 2
Question of the Day
In 1987, former Wall Street Journal reporters Jeffrey H. Birnbaum and Alan S. Murray wrote a wonderful book detailing the complex machinations of passage of the Tax Reform Act of 1986 — what many believe to be the most important piece of tax legislation since the code was created in 1913. If you think tax talk is boring, try describing the meticulous process of enacting new tax laws.
But Mr. Birnbaum and Mr. Murray artfully weave a terrific narrative of the drama and nuances behind closed doors of powerful figures such as Rep. Daniel Rostenkowski, Illinois Democrat, the larger-than-life chairman of the House Ways and Means Committee.
The book was aptly titled. As many insiders know, “Showdown at Gucci Gulch” references the marbled floors just outside the committee hearing rooms for the House and Senate tax writing panels. Nearly every day in 1986 (and even now), you could hear the “tap, tap” of those fine Italian loafers donned by slick lobbyists, sauntering up and down the halls, looking for lawmakers they could pigeonhole for an extra line of code that meant millions for their respective industries.
Despite those powerful interests, Mr. Birnbaum and Mr. Murray write of the triumph of policy in enacting a tax reform bill that defied the odds and closed massive loopholes. None of those reforms would have been possible without the direct, near-daily involvement of President Reagan. And while he didn’t get everything he wanted, Reagan was able to leave his indelible mark on the entire process, bending the wills of his adversaries and ensuring the lobbyists didn’t hijack the process.
I tell that story because there are loose similarities between what occurred in 1986 with tax reform to today’s developments surrounding financial regulatory reform. Perhaps the most obvious link is the rampant prevalence of Gucci Gulch figures — Armani-wearing Wall Street lobbyists hustling Democratic leaders for their slice of clemency.
Ahh, ol’ Rosty would be proud!
But let’s not forget what factors contributed to the financial meltdown of 2008. Here again, the comparisons are noticeable. With respect to the housing market, the federal government simply put its thumb on the scale, attempting to foist one sector of society, whether it had the means to pay or not, into the home buying market.
Just as the growth and expansion of the tax code swelled throughout the late 1960s and ‘70s, picking winners and losers along the way, the seeds of the housing bubble that would soon burst were planted when the federal government instructed banks and local financial institutions to loan money to purchase homes individuals couldn’t afford. And lo, so began the meteoric rise of no document loans. The very term defines what these loans were about, essentially screaming “Free money! No papers!” to most anyone interested in a home.
As one loan company marketed on its website: “We accept applications from all kinds of borrowers irrespective of their credit scores. … We will arrange you a loan despite your credit problems.” You read that correctly, …irrespective of their credit scores.
Isn’t that what a loan in its root purpose is predicated on — granting access to funds where your only legitimate claim to them is because of your future financial stability and ability to repay? So was a loophole secretly created? Hardly, this push by the feds was high-profile and encouraged at every turn earlier this century, and Freddie Mac and Fannie Mae were some of their most eager perpetrators. And with high-level Democrats such as Rep. Barney Frank protecting them, not much could stand in their way.
These institutions were giving money to prospective buyers whom they knew at the time lacked the financial wherewithal to pay. And yet they continued, successfully I might add, for two primary reasons. The first was political. Institutions such as Fannie and Freddie were being pressured by Congress and the Clinton/Bush administrations to encourage minorities and others less fortunate to enter the home-buying market, and yet turned a blind eye to their responsibility to pay. Irrespective of whether an individual held a job, liens on personal property, bad credit, no regular income, etc., the rules were relaxed so drastically that all these considerations were seemingly ignored or tossed to the side.
Mortgage institutions and loan agencies were prone to accept these political pressures because of the second reason stated above, economics. In the hey-day of the late ‘90s and early 2000, lenders didn’t care what the house would cost, because it was almost a virtual certainty that the value of the home — no matter the purchase price — was going to increase significantly in value. No one gave a thought to a home’s value declining. It was unfathomable at the time. So banks and lenders treated these as an appreciating asset, even if the current tenant couldn’t pay. In effect, they were making a mini investment in the name of “the American Dream” regardless of the outcome. This was a win/win situation for them.
Fast-forward to today, when once again Gucci Gulch is teeming with lobbyists, only this time, they’re stalking the halls outside the Senate chamber. And just as in 1986, we find our Democrat friends stuck with their hands out. As Silla Brush of the Hill reported last week, one group has already posted large gains for its industry. It appears hedge funds are big winners in this overhaul debate, getting a free pass through exemptions in the financial regulatory bill.
Mr. Brush reported that the world’s top-earning hedge fund managers have bankrolled almost exclusively Democratic campaigns. According to research by the National Republican Congressional Committee (NRCC), based on data maintained by the nonpartisan CQMoneyline, the 10 highest-paid hedge fund managers gave nearly $33 million in campaign contributions to Democrats over their lifetimes. That’s more than 98 percent to Democrats and their political action committees.
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