September 24, 2008
Andrew Cuomo and John McCainBy Patrick J. Casey
Why in heaven's name did Senator McCain tell 60 Minutes that he thinks that Cuomo would make a good SEC Chairman in a McCain Administration? Especially when one looks at what Cuomo managed to 'accomplish' in his last high-ranking federal position:/* no less than the birth of the current economic crisis.
There would be no housing crisis, no mortgage crisis, no credit crisis, and no Wall Street crisis today if the underlying mortgages that these securities rely on had not gone bad. If any reasonable underwriting criteria has been used when originating these now non-performing or foreclosed mortgages -- say, something like the lending criteria used before 1997 -- there would be no bank failures and no need for a $700 billion dollar bailout.
The economic crisis that we find ourselves in today was entirely foreseeable and unnecessary. It was born of Congress and the Clinton Administration in 1997, under the auspices of providing "home ownership for all" -- a new human right. But at the time, the only people who couldn't buy a home were the people who lacked credit, jobs, down-payments, and money in the bank. So it was cudgeled into our collective psyches that to oppose "home ownership for all" was to be a racist or worse, since minorities make up a significant percentage of the population with no credit, jobs, or money for down payment or in the bank.
The media bought into this ploy wholeheartedly. To support "home ownership for all" was the key to popularity, political donations, and power. To oppose it, or to propose even a smidgen of common sense regulation and risk management to the mortgage process, was certain political suicide.
Who was the person leading this "home ownership for all" program at the behest of the Democrats? No other than the head of Bill Clinton's Department of Housing and Urban Development, Andrew Cuomo. A non-banker, by the way. And apparently a favorite of John McCain.
This isn't new or hidden information. In fact it was published on August 5th, 2008 in the very liberal Village Voice newspaper, of all places: "Andrew Cuomo and Fannie and Freddie -- How the youngest Housing and Urban Development secretary in history gave birth to the mortgage crisis".
Here's the lede of the article, by Wayne Barrett:
Remember, this article is from the Village Voice, not some right-wing outfit -- and they are exactly right.
After the Clinton Administration and the Democrats in Congress were done, literally anyone could buy a home. Any reasonable underwriting criteria were tossed aside. After 1997, in order to qualify for a mortgage a borrower no longer needed a job, income, or their own money in the bank or for a deposit (if needed, it could be a gift). As a result, many people who previously were ineligible to buy a home were able to do so. They no longer needed to prove to a bank that they had the ability to pay back those mortgages.
The sudden injection of millions of newly-eligible potential homeowners caused a sea change in the housing market. More people bought homes, meaning that there were fewer homes on the market available for purchase. That meant more homes were being built, and the value of existing homes skyrocketed. Simple supply and demand.
Because those values went up so much, the inevitable correction that housing markets go through was bound to be painful. With more homes being able to be purchased with little or no money down, as soon as values decreased in the correction, the homeowners' equity either disappeared or went negative -- meaning that the outstanding mortgages were often more than what the homes were worth. With no money of their own at stake, it was easier for many homeowners in financial difficulty to just walk away from their loans and houses, rather than trying everything in their power to keep paying and save them. And that's what is now happening.
Fannie Mae and Freddie Mac were at the heart of this new housing market. Many commercial banks immediately joined in, originating and underwriting FHA loans under the lesser lending criteria. Mortgage banking companies were founded in order to service the emerging sub-prime market. Everyone was making money, and the worry about how many of these new borrowers would eventually default was forgotten because the loans could be bundled and sold.
Mortgages used to be relatively simple financial products. Banks made them to qualified individuals using the money on deposit at their institution (remember this from George Bailey in It's a Wonderful Life?: "The money's not here. Your money's in Joe's house, right next to yours. And in the Kennedy house, and Mrs. Macklin's house, and a hundred others...").
To vastly oversimplify, in order for today's banks to lend more money -- to make mortgages available to more people -- a bank has to sell that mortgage and replenish their supply of cash. The bank then lends out that new money, and again replaces it by selling the mortgage -- and so it goes, over and over again. That's the secondary market, and that's where securities -- bundles of mortgages -- come in. As Fannie and Freddie expanded, so did other lenders. They saw the same opportunity.
But if the first mortgage isn't stable -- if the borrower can't pay back that loan because the government has loosened criteria too much and are actively promoting the purchase of homes by poorer people who by definition can't afford mortgages, then the subsequent Wall Street security that holds that mortgage will also be bad. Multiply that by 6,000,000 times and that's why we are in the trouble we are in.
The purpose of the aforementioned Village Voice article was to point out the hypocrisy of Andrew Cuomo. As Attorney General in New York, he's now targeting and actively investigating a situation that he caused, and is attempting to politically gain by it. That's also precisely what Barack Obama and the Democratic Party are doing with their rhetoric: blaming Wall Street and deregulation for all of the trouble.
The supposed deregulation that caused this mess was the loosening of mortgage underwriting standards directed by Andrew Cuomo, the Clinton Administration, and the Democratic Party. Every time that anyone from the Bush Administration to John McCain himself pointed out the fact that a disaster was coming, they were ridiculed, and whatever reform they tried to introduce was defeated. John McCain knows this.
Over the past few years, McCain's first instincts in dealing with a crisis (other than on the war) has been populist in nature, rather than conservative. It's what made him a media darling up until a short while ago, since that instinct often put him at odds with President Bush and many segments of the GOP. But if he wants to continue to be a serious Presidential candidate, and a good President, he has to stop doing that immediately.
Senator McCain should be distancing himself from people like Andrew Cuomo as far as possible, not inviting them into his Administration. And he should be bludgeoning Barack Obama every second he can for the cause of the current economic debacle, the Democratic Party itself and its self-serving policies designed to purchase votes.