The crisis has two entirely separate issues. The first has plenty of political capital. Currently, there are million of borrowers that are struggling to pay their mortgages. There were politicians every were jumping over each to look to try and help struggling borrowers. Banks were also struggling but it would have been political suicide for any politician to look as though they were trying to help banks (for obvious reasons). By holding onto a bunch of bad loans, banks faced a liquidity crisis. They needed to sell these loans and the secondary market was no longer buying them. This offered a complicated dynamic. Both entities needed help. Neither, in my opinion, deserved or should have received it. While borrowers were sympathetic banks were powerful. Furthermore, while saving borrowers made sense politically, resolving the bank's liquidity crisis was the only way to resolve the actual crisis.
The first major piece of legislation was H.R. 3915. This was, in my opinion, an atrocious piece of legislation and it caused quite a stir within the mortgage industry. That's because it attempted to outlaw Yield Spread Premium, a tool for mortgage brokers to make money. This bill was introduced in the banking committee in the House of Representatives by Barney Frank. While this bill caused great outrage within the mortgage community, it was all overblown because the bill was dead on arrival once it arrived in the Banking Committee in the Senate headed by Chris Dodd.
Meanwhile as the mortgage crisis deepened, the liquidity crisis that it caused began to purge banks and mortgage companies without discrimination. It started with small and mid size mortgage companies like First Magnus and moved onto more powerful mortgage companies backed by banks like New Century and Greenpoint. The situation took on a new dimension when rumors spread that Countrywide was in trouble and also on the brink of shutting its doors. Countrywide even began selling CD's at above market rates in an apparent desperate attempt to raise cash.
The situation took on an even grimmer turn when giant Bear Stearns nearly shut its doors in March of this year. The situation was quite complicated and thus the average person didn't understand the details. In effect, Bear Stearns would have closed down had the Fed not stepped in and procured its sale to J.P, Morgan. Many politicians, especially among the Democratic party, characterized the Fed's action as a bailout. The details are complicated and ultimately in many ways politically irrelevant, because the Fed's action in saving Bear Stearns re invigorated calls for borrower's bailout. Thus, the Fed action in saving Bear Stears in effect gave new political capital to the upcoming bill at the center of this scandal.
In January, Countrywide was saved from closing when it was announced that Bank of America was stepping in to buy it out. The deal represented a boon for Bank of America as not only was Countrywide depressed already but the price was less even then its current price.
The transaction represents a 7.5 percent discount to where Countrywide shares ended Thursday after they soared on news that a rescue plan was in the works. It also effectively leaves Bank of America with a big loss on its $2 billion August investment in Countrywide Financial Corp. during the height of the summer’s global credit crisis.
Now, while the deal was a boon there was one significant hitch. Bank of America was also taking on all of Countrywide's bad loans. If Bank of America could successfully rid itself of these loans this transaction would be a financial success of dramatic proportions. As you will all see later the manner in which it will rid itself of these loans is at the center of this scandal.
This set the stage for the next piece of mortgage legislation, H.R. 5831 or Dodd/Frank. This bill was unprecedented in size and scope. While prior bailout proposals ranged between one billion and ten billion dollars, this one was in the neighborhood of $300 billion. Furthermore, it allowed borrowers to not only receive rates the market wouldn't approve them for, but it would even artificially reduce their loan amounts. The other thing the bill did, the thing politicians conveniently didn't publicize much, was it bought up billions of bad loans that banks couldn't find buyers for. The bill would do what the market for loans wouldn't, take bad loans off the hands of banks desperate for cash.
On June 4th, Barack Obama clinched the Democratic nomination for President and became the first African American to lead the ticket of a major party. Within days, he made his first decision as the newly minted candidate. He created his Vice President vetting committee, consisting of Jim Johnson, Eric Holder and Caroline Kennedy. Within days, Johnson's appointment turned into a scandal for Obama. Johnson, a former CEO for mortgage giant Fannie Mae, had received millions in "VIP" loans from Countrywide. Countrywide was not only at the center of the mortgage crisis, but it was a frequent target of Obama himself. Within days, Johnson resigned, but the scandal surrounding Countrywide was just starting.
It turned out several prominent politicians received favorable treatment from Countrywide. The most significant was Chris Dodd. That's because as head of the Banking committee not only was he working on an important piece of legislation regarding Countrywide but in a position to investigate wrongdoing on their part. Dodd, for his part, gave a dubious explanation. He claimed that while he knew that the loans he was receiving were VIP, he didn't ask what that meant. Then, the Washington Examiner reported on two very important and troubling developments. First, it turns out that the VIP loan was not the extent of financial support from mortgage giants affected by his legislation.
Countrywide's VIP loan to Dodd, which saves the Banking Committee chairman $75,000 over 30 years, smells like a potential quid-pro-quo now that Dodd has pushed a bill that will save the company from itself, but what about Bank of America's behavior?
Bank of America's political action committee (PAC) has donated $20,000 to Dodd since he became chairman of the banking panel 17 months ago. From January 2007 to March 2008, Bank of America employees have donated at least $50,400 to Dodd's campaigns, according to the Center for Responsive Politics. So, while Dodd's sweetheart loan from Countrywide saves him personally $200 per month, his chairmanship earns him politically more than $1,000 per week.
These aren't bank tellers funding Dodd, either, as contributors include Bank of America's director of government affairs John Collingwood and Barbara Desoer, who oversees the merger with Countrywide and will "run the combined companies' mortgage operations," according to The Los Angeles Times.
In other words, not only was Dodd receiving favorable loan terms from troubled lender Countrywide, but for the last year and a half he was receiving about $1000 a week from their suitor, Bank of America. At this point there was the strong appearance of a quid pro quo but it was still only an appearance.
Then, the next important development changed all that. A proprietary, internal Congressional document was discovered by Jay Carney of the Washington Examiner. It indicates that in fact Bank of America wasn't merely going to be helped by this by having a bunch of bad Countrywide loans get bought by the federal government. In fact, according to this document, Bank of America was leading the way in drafting this bill. In other words, we have two banks that are going to be critically affected by this legislation. One bank offered the central player, Dodd, a very favorable mortgage. The other contributed to multiple campaigns to the tune of roughly a $1000 a week for about a year and a half, and then the bank literally wrote major parts of the bill. You do the math on what all of that means.
Keep in mind that this bill wouldn't merely save borrowers but the banks currently holding onto their mortgages. Banks are desperate to rid themselves of these bad mortgages. The secondary market refuses to buy them. Of course they won't, who would buy bundles of mortgages full of borrowers that are unwilling or unable to pay on time. What this bill will do is rid their portfolios of all these bad loans. Keep in mind, again, that the only thing keeping Bank of America from making out like a bandit in buying out Countrywide were all of the bad loans they were taking on. This bill solves that problem rather nicely and neatly.
Then, this past week Jeb Hensarling demanded an immediate investigation of Countrywide, Bank of America and Dodd himself. The Senate leadership lead by Harry Reid, rather than immediately ordering an investigation, is now trying to ram this legislation through before the media attention gets too problematic. This is among the most brazen and despicable flaunts of power I have ever witnessed. Instead of investigating serious allegations of corruption, the Senate is attempting to ram through the very bill at the center of the corruption. So far, they are planning on continuing to have a vote next week. Any politician that votes for this legislation has a hand in the very corruption surrounding it.
The scandal doesn't end there unfortunately. This scandal extends to the media. Outside of Fox News, Conservative blogs, and financial media like the Wall Street Journal, you will find scant attention to this scandal. The Conservative Revolution has compiled a list of major media that is following this scandal. Outside of the ones I mentioned there are a handful of newspapers that are reporting on it. Why is that? Can a scandal get any bigger or more important? What we have is a powerful politician getting very special favors and then allowing a bank to craft legislation that benefits the bank and at the same time presents this legislation as a compassionate bailout for struggling borrowers. It frankly doesn't get anymore corrupt than that and every media should be jumping all over themselves to report new details. Yet, what we have is a major media blackout of the story. You won't find much coverage on the networks, CNN, MSNBC, or any papers like the New York Times and Washington Post. The reasons for this are not clear though of course I can give some logical hypothesis.
I do however know that Jack Abramoff was a major scandal. I know that the coverage of the likes of Duke Cunningham, Bob Ney and Mark Foley became front page and intense. Now that a Democrat is in the middle of a major scandal much of the media is strangely silent. Of course, corruption has no ideology and furthermore it is like a cancer. It spreads and affects everything around it. Corruption is allowed to flourish only when the media looks the other way as its happening and that's exactly what is happening here.