By Fr. George Welzbacher
October 12, 2008
Today I would like to talk about something future, something present and something past.
Something future. In the televised debate between the two leading candidates for the Vice- Presidency of the United States, a debate that broke all records for the number of viewers that it drew, it seemed to me that two of the most interesting comments were made by Senator Joseph Biden, in response to questions posed by Moderator Gwen Ifill and as recorded in the official transcript: IFILL.....the next round of questions starts with you, Senator Biden. Do you support .. granting same-sex benefits to couples?
BIDEN: Absolutely. Do I support granting same-sex benefits? Absolutely positively. Look, in an Obama-Biden administration, there will be absolutely no distinction from a constitutional standpoint or a legal standpoint between a same-sex and a heterosexual couple....It's what the Constitution stands for. And so we support it. We do support making sure that committed couples in a same-sex marriage are guaranteed the same constitutional benefits as it relates to their property rights, their rights to visitation, their rights to insurance, their rights of ownership as heterosexual couples do.
The second of Senator Biden's comments that I thought merited particular attention came towards the very end of the 90 minute debate:
IFILL: Final question tonight, before your closing statements, starting with you, Senator Biden. Can you think of a single issue-and this is to cast light for people who are just trying to get to know you in your final debate, your only debate of this year--can you think of a single issue, policy issue, in which you were forced to change a long-held view in order to accommodate changed circumstances?
BIDEN: Yes I can. When I got to the United States Senate and went on the Judiciary Committee as a young lawyer, I was of the view and had been trained in the view that the only thing that mattered was whether or not a nominee appointed, suggested by the president had a judicial temperament, had not committed a crime or moral turpitude, and was-had been a good student.
And it didn't take me long-it was hard to change, but it took about five years for me to realize that the ideology of the judge makes a big difference.
That's why I led the fight against Judge Bork. Had he been on the court, I suspect there would be a lot of changes that I don't like and the American people wouldn't like, including everything from Roe v. Wade to issues relating to civil rights and civil liberties.
And so that-that-that was one of the intellectual changes that took place in my career as I got a close look at it. And that's why I was the first chairman of the Judiciary Committee to forthrightly state that it matters what your judicial philosophy is. The American people have a right to understand it and to know it. But I did change on that, and-I'm glad I did [Emphasis added]
* * * * *
Those comments point of course to the future. And before we turn from Senator Biden's comments, may I run his words by you one more time? "That's why I led the fight against Judge Bork Had he been on the court, I suspect there would he a lot of changes .. including ... Roe v. Wade....:
* * * * *And may I offer some food for thought on something present, the present financial crisis, and on something past, the factors that coalesced to bring this crisis about. A thoughtful essay that in my opinion makes a great deal of sense appeared in The New York Times last Sunday October 5th. It was written by Charles Y, Duhigg. Because of its considerable length I reprint it here with some abridgment.
* * * * *Pressured to Take More Risk, Fannie Reached Tipping Point
Wall Street and Congress Fueled Fateful Choice
By: Charles DuhiggMr. Mudd said in an interview that he responded as best he could, given the company's challenges, and he worked to balance the risks prudently.
The New York Times
Sunday, October 5th, 2008
"Almost no one expected what was coming. It's not fair to blame us for not predicting the unthinkable." -- Daniel H. Mudd, former chief executive, Fannie Mae.
When the mortage giant Fannie Mae recruited Daniel H. Mudd, he told a friend he wanted to work for an altruistic business. .A1ready a decorated Marine and a successful executive, he wanted to be a role model to his four children-just as his father, the television journalist Roger Mudd, had been to him.
Fannie, a government-sponsored company, had long helped Americans get cheaper home loans by serving as a powerful middleman, buying mortgages from lenders and banks and then holding or reselling them to Wall Street investors. This allowed banks to make even more loans--expanding the pool of home-owners and permitting Fannie to ring up handsome profits along the way.
By the time Mr. Mudd became Fannie's chief executive in 2004, his company was under siege.... Congress was demanding that Mr. Mudd help steer MORE loans to low-income borrowers. Lenders were threatening to sell directly to Wall Street unless Fannie bought a bigger chunk of their riskiest loans.
So Mr. Mudd made a fateful choice. Disregarding warnings from his managers that lenders were making too many loans that would never be repaid, he steered Fannie into more treacherous corners of the mortgage market, according to executives.
For a time, that decision proved profitable. In the end, it nearly destroyed the company and threatened to drag down the housing market and the economy.
Dozens of interviews, most from people who requested anonymity to avoid legal repercussions, offer an inside account of the critical juncture when Fannie Mae's new chief executive, under pressure from Wall Street firms, Congress and company shareholders, took additional risks that pushed his company, and, in turn, a large part of the nation's financial health, to the brink.
Between 2005 and 2008, Fannie purchased or guaranteed at least $270 billion in loans to risky borrowers-more than three times as much as in all its earlier years combined, according to company filings and industry data....
Last month, the White House was forced to orchestrate a $200 billion rescue of Fannie and its corporate cousin, Freddie Mac. On September 26, the companies disclosed that federal prosecutors and the Securities and Exchange Commission were investigating potential accounting and governance problems.
"Fannie Mae faced the danger that the market would pass us by," he said. "We were afraid that ... Congress would feel like we weren't fulfilling our mission. The market was changing, and it's our job to buy loans, so we had to change as well."
When Mr. Mudd arrived at Fannie eight years ago, it was beginning a dramatic expansion, that, at its peak, had it buying 40 percent of all domestic mortgages.
Just two decades earlier, Fannie had been on the brink of bankruptcy. But chief executives like Franklin D. Raines [an advisor on economics to Barak Obama] and the chief financial officer J. Timothy Howard built it into a financial juggernaut by aiming at new markets.
Fannie never actually made loans. It was essentially a mortgage insurance company, buying mortgages, keeping some but reselling most to investors and, for a fee, promising to pay off a loan if the borrower defaulted. The only real danger was that the company might guarantee questionable mortgages and lose out when large numbers of borrowers walked away from their obligations.
So Fannie constructed a vast network of computer programs and mathematical formulas that analyzed its millions of daily transactions and ranked borrowers according to their risk.
Those computer programs seemingly turned Fannie into a divining rod, capable of separating pools of similar seeming borrowers into safe and risky bets. The riskier the loan, the more Fannie charged to handle it. In theory, those high fees would offset any losses.
With that self-assurance, the company announced in 2000 that it would buy TWO TRILLION DOLLARS in loans from L0W-income, minority and RISKY borrowers by 2010.
All this helped supercharge Fannie's stock price and rewarded top executives with tens of millions of dollars. Mr. Raines received about $90 million between 1998 and 2004, while Mr. Howard was paid about S30.8 million, according to regulators. Mr. Mudd collected more than $10 million in his first four years at Fannie.
Whenever competitors asked Congress to rein in the company, lawmakers were besieged with letters and phone calls from angry constituents, some orchestrated by Fannie itself. One automated phone call warned voters: "Your congressman is trying to make mortgages more expensive. Ask him why he opposes the American dream of home ownership."
Tie ripple effect of Fannie's PLUNGE INTO RISKIER LENDING was profound. Fannie's stamp of approval made shunned borrowers and complex loans more acceptable to other lenders, particularly small and less sophisticated banks.
Between 2001 and 2004, the overall SUB-prime mortgage market-loans to the riskiest borrowers-grew from $160 billion to $540 billion, according to inside Mortgage Finance, a trade publication. Communities were inundated with billboards and fliers from sub-prime companies offering to help ALMOST ANYONE buy a home.
Within a few years of Mr. Mudd's arrival, Fannie was the most powerful mortgage company on earth.
Then it began to crumble.
Regulators spurred by the revelation of a wide-ranging accounting fraud at Freddie, began scrutinizing Fannie's books. In 2004 they accused Fannie of fraudently concealing expenses to make its profits took bigger.
Mr. Howard and Mr. Raines resigned. Mr. Mudd was quickly promoted to the top spot.
But the company he inherited was becoming a shadow of its former self.
Shortly after he became chief executive, Mr. Mudd traveled to the California offices of Angelo R. Mozilo, the head of Countrywide Financial, then the nation's largest mortgage lender. Fannie had a longstanding and lucrative relationship with Countrywide, which sold more loans to Fannie than anyone else.
But at that meeting, Mr. Mozilo, a butcher's son who had almost single-handedly built Countrywide into a financial powerhouse, threatened to up-end their partnership unless Fannie starting buying Countrywide's riskier loans.
Mr. Mozilo ... told Mr. Mudd that Countrywide had other options. For example, Wall Street had recently jumped into the market for risky mortgages. Firms like Bear Stearns, Lehman Brothers and Goldman Sachs had started BUNDLING home loans and selling them to investors-bypassing Fannie and dealing with Countrywide directly.
"You're becoming irrelevant," Mr. Mozilo told Mr. Mudd, according to two people with knowledge of the meeting who requested anonymity because the talks were confidential. In the previous year, Fannie had already lost 56 percent of its loan-reselling business to Wall Street and other competitors....
"You need us more than we need you," Mr. Mozilo said, "And if you don't take these loans, you'll ftnd you can lose much more.... "
Investors were also pressuring Mr. Mudd to take greater risks....
Capitol Hill [Congressl bore down on Mr. Mudd as well. The same year he took the top position, regulators sharply increased Fannie's affordable-housing goals. Democratic lawmakers demanded that the company buy MORE loans that had been made to LOW-income and minority homebuyers.
:When homes are doubling in price every six years and incomes are increasing by a mere one percent per year, Fannie's mission is of paramount importance," Senator Jack Reed, a Rhode Island Democrat, lectured Mr. Mudd at a Congressional hearing in 2006. "In fact, Fannie and Freddie can do.MORE, A LOT MORE."
But Fannie's computer systems COULD NOT FULLY ANALYZE many of its risky loans that customers, investors and lawmakers wanted Mr. Mudd to buy. Many of them-like balloon-rate mortgages that did not require paperwork-were so new that dangerous bets could not be identified, according to company executives.
Even so, Fannie began buying HUGE numbers of RISKIER loans....
Everybody understood that we were now buying loans THAT WE WOULD HAVE PREVIOUSLY REJECTED, and that the models were telling us that we were charging way too little," said a former senior Fannie executive. "BUT OUR MANDATE WAS to stay relevant and TO SERVE LOW-INCOME BORROWERS, so that's what we did."
Between 2005 and 2007, the company's acquisitions of mortgages with down payments of less than 10 percent almost tripled. As the market for risky loans soared to $1 trillion, Fannie expanded in white-hot real estate areas like California and Florida.
For two years, Mr. Mudd operated without a permanent chief risk officer to guard against unhealthy hazards. When Enrico Dallavecehia was hired for that position in 2006, he told Mr. Mudd that the company should be charging more to handle risky loans....
Mr. Mudd told Mr. Dallavecchia that the market, shareholders AND CONGRESS all thought the companies should be taking MORE risks, NOT fewer....
Mr. Mudd added that it was almost impossible during most of his tenure to see trouble on the horizon, because Fannie interacts with lenders rather than borrowers, which creates a delay in recognizing market conditions.
He said Fannie sought to balance market demands prudently against internal standards, that executives always sought to avoid unwise risks, and that Fannie bought far fewer troublesome loans than many other financial institutions. Mr. Mudd said he heeded many warnings from his executives and that Fannie refused to buy many risky loans, regardless of outside pressures.
"You're dealing with massive amounts of information that flow in over months," he said. "You almost never have an 'Oh, my God' moment. Even now, most of the loans we bought are doing fine"
But, of course, that moment of truth did arrive. In the middle of last year it became clear that millions of borrowers would STOP paying their mortgages. For Fannie, this raised the terrifying prospect of paying billions of dollars to honor its guarantees.
Had Fannie been a private entity, its comeuppance might have happened a year ago. But the White House, Wall Street and Capitol Hill were more concerned about the trillions of dollars in other loans that were poisoning financial institutions and banks.
Lawmakers, particularly Democrats, leaned on Fannie and Freddie to buy and HOLD those troubled debts, hoping that REMOVING them from the system would help the economy recover. The companies, eager to regain market share and buy what they thought were undervalued loans, rushed to comply.
The White House also pitched in. James B. Lockhart, the chief regulator of Fannie and Freddie, adjusted the companies' lending standards so they could purchase as much as $40 billion in NEW subprime loans. SOME IN CONGRESS PRAISED THE MOVE.
"I'M NOT WORRIED ABOUT FANNIE AND FREDDIE'S HEALTH, I'M WORRIED THAT THEY WON'T DO ENOUGH to help out the economy," the chairman of the House Financial Services Committee, BARNEY FRANK , Democrat of Massachusetts, said at the time. "That's why I've supported them all these years- so that they can help at a time like this."
But earlier this year, Treasury Secretary Henry M. Paulson Jr. grew concerned about Fannie's and Freddie's stability. He sent a deputy, Robert K. Steel, a former colleague from his time at Goldman Sachs, to speak with Mr. Mudd and his counterpart at Freddie.
Mr. Steel's orders, according to several people, were to get commitments from the companies to raise more money as a CUSHION against all the new loans....
Rather than getting firm commitments, Mr. Steel struck handshake deals without deadlines.
That misstep would become obvious over the coming months. Although Fannie raised $7.4 billion, FREDDIE NEVER RAISED ANY ADDITIONAL money.
Mr. Steel, who left the Treasury Department over the summer to head Wachovia bank, disputed that he had failed in his handling of the companies, and said he was proud of his work.
As the housing crisis worsened, Fannie and Freddie announced larger losses, and shares continued failing.
In July, Mr. Paulson asked Congress for authority to take over Fannie and Freddie, though he said he hoped never to use it. "If you've got a bazooka and people know you've got it, you may not have to take it out," he told Congress.
Mr. Mudd called Treasury weekly. He offered to resign, to replace his board, to sell stock and to raise debt. "We'll sign in blood anything you want, " he told a Treasury official, according to someone with knowledge of the conversations.
But, according to that person, Mr. Mudd told Treasury that those options would work only if government officials publicly clarified whether they intended to take over Fannie. Otherwise, potential investors would refuse to buy the stock for fear of being wiped out.
"There were other options on the table short of a takeover," Mr. Mudd said. But as long as Treasury refused to disclose its goals, it was impossible for the company to act, according to people close to Fannie.
Then, last month, Mr. Mudd was instructed to report to Mr. Lockhart's office. Mr. Paulson told Mr. Mudd that he could either agree to a takeover or have one forced upon him.
"This is the right thing to do for the economy," Mr. Paulson said, according to two people with knowledge of the talks. "WE CAN'T TAKE ANY MORE RISKS."
Freddie was given the same message. Less than 48 hours later, Mr. Lockhart and Mr. Paulson ended Fannie and Freddie's independence with up to $200 billion in taxpayer money to replenish the companies'coffers.
The move failed to stanch a spreading panic in the financial wold. In fact, some analysts say, the takeover accelerated the hysteria by signaling that no company, no matter how large, was strong enough to withstand the losses stemming from troubled loans....
Today, Mr. Paulson is scrambling to carry out a $700 billion plan to bail out the financial sector, while Mr. Lockhart effectively runs Fannie and Freddie.
Mr. Raines and Mr. Howard, who kept most of their millions, are living well. Mr. Raines has improved his golf game. Mr. Howard divides his time between large homes outside Washington and Cancun, Mexico, where his staff is learning how to cook American meals.
But Mr. Mudd, who lost millions of dollars as the company's stock declined and he had his severance revoked after the company was seized, often travels to New York for job interviews. He recalled that one of his sons recently asked him why he had been fired.
"Sometimes things don't work out, no matter how hard you try, " he replied.