Monday, September 15, 2008

Dodd and the Dominoes

Firms that were undercapitalized during the housing mortgage failure are now going under. On Black Sunday, Lehmen Brothers tanked, Merrill Lynch quietly sold itself to the Bank of America, and AIG, a major insurer, was tottering.

When AIG put its hand out to the Federal Reserve for a 40-billion- dollar bridge loan to stay afloat while it raised needed capital, the Fed said no. It had already pledged to spend up to 200 billion dollars of taxpayer money to help rescue the government-chartered Fannie Mae and Freddie Mac mortgage underwriters and another troubled investment banking firm, Bear Stearns.

Briefly, the brokers at the failing firms were buying up bad mortgages, repackaging them as stock options and making money hand over fist on the mortgage bubble, which eventually ruptured. When the bubble broke, none of the firms had stored away enough capital to handle the whips and scorns of outrageous fortune.

Sen. Chris Dodd, the chairman of the senate banking committee whose elections have been heavily financed by Countrywide and other bubble blowers, has belatedly called for hearings – even though he had been warned by countless editorials in the Wall Street Journal and presidential directives that his sponsors were full of hooey.

The Hartford Courant belatedly took sharp notice of Dodd’s delinquencies by printing a column written by two Bushies, Al Hubbard and Noam Neusner, that responded to Dodd’s wide-eyed claim that the White House had not been attentive to the coming collapse of the housing mortgage industry.

Au contraire said Hubbard, director of the National Economic Council and assistant to the president from 2005 to 2007, and Neusner, a speechwriter and communications director in the Bush administration from 2002 to 2005.

Way back in the Clinton administration, Treasury Secretary Larry Summers and other were warning that Fannie and Freddie investment portfolios were full of risky holdings. Alan Greenspan, carefully covering both his buddocks, also pointed to the risks presented by undercapitalization. The Wall Street Journal magnificently covered the coming collapse of the mortgage bubble. Someone should send Dodd’s office a subscription.

The Bush administration was nervous about the GSE’s (Government Sponsored Enterprises), pointing out in a 2004 Budget Analytical Perspective that Fannie and Freddie, as well as other Government Sponsored Ponzi Schemes (GSPS’s) “are highly leveraged, holding much less capital in relation to their assets than similarly sized financial institutions. ... A misjudgment or unexpected economic event could quickly deplete this capital, potentially making it difficult for a GSE to meet its debt obligations. Given the very large size of each enterprise, even a small mistake by a GSE could have consequences throughout the economy.”

But the GSE’s are not only under-capitalized; they are, in the precise sense of the term, irresponsible, heedless of consequences. They have been made so by a government that has removed failure from those GSE’s that cannot be permitted to fall because they are large and important to the economy. The chief financial officers of such state supported quasi-public companies made reckless decisions because their stock driven companies were attached to the apron strings of a mothering state that would not permit them to fail. And they knew it.

Connecticut papers already have tied Dodd to the failure of Countrywide, another kaput mortgage lender that had given Dodd a “deal he couldn’t refuse” on his own mortgages in Connecticut and Washington. Months ago, Dodd had promised to release the terms of these sweetheart mortgages. Around the time controversy was swirling around his head like a black halo, Dodd high-tailed it out of town to Ireland, where he has a vacation cottage, perhaps hoping that happier times were ahead.

No such luck. The second shoe fell on Black Sunday.

The bill, as is usual in the case of GSPS’s, will be paid by Dodd’s constituents. And Republicans, Connecticut’s press and Dodd’s opponents – whoever the happy band may be when he comes up for re-election – should remind the senator’s constituents that he is directly responsible for the debt they will assume because the buck did not stop – years ago -- at Dodd’s desk.
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