Is Bill Clinton's Legacy Doomed? He Denies He Set The Credit & Housing Crisis in Motion

Asked what he could have done differently to avert the severe U.S. economic recession and collapse of the housing market, former President Bill Clinton told CNN last weekend, “The only thing that our administration did or didn’t do that we should have done is to try to set in motion some more formal regulation of the derivatives market.”

Clinton was named in a recent Time magazine article entitled, “25 People to Blame for the Financial Crisis.” The article singled out Clinton’s signing of the Gramm-Leach-Bliley Act, which repealed the Glass-Steagall Act and allowed commercial and investment banks to consolidate; as well as his support of the Commodity Futures Modernization Act, which freed most credit- default swaps from oversight.

“They’re wrong in saying that the elimination of the Glass- Steagall division between banks and investment banks contributed to this,” the former president said on CNN. “Banks were already doing investment business and investment companies were already in the banking business. The bill I signed actually at least put some standards there.”

However, other analysts point to the Clinton Administration, for forcing Fanne Mae and Freddie Mac to expand mortgage loans to U.S. residents who don't qualify for traditional home loans. The trigger that caused the real estate market's bubble to burst was the raising of interest rates by the Federal Reserve in 2006 and 2007, to ward off a perceived risk of inflation. This sent mortgage payments through the roof and hundreds of thousands of homeowners defaulted on their payments.

To make matters much worse, the banks had been buying and selling loans from each other before selling them to Fannie Mae. With the collapse in the housing market came the collapse of Fannie Mae and the loans it had purchased from the banks. Before long, the banks were collapsing too, not all of them but those that had bought and sold sub-prime loans. Defaults are now running at almost 3% of all mortgages in the US, representing hundreds of thousands of loans. (Sub-prime loan defaults are running at 20% nationwide.)

For the first time in U.S. history, real estate foreclosures have led to an economic downturn. This in turn has led to joblessness, which is leading to yet more foreclosures. It’s become a viscous cycle, now affecting the middle class and the wealthy. If homeowners lose their job, they can’t afford to pay their mortgage and thus the spiral continues.

A New York Times article from 10 years ago, warned of the consquences of the Clinton Administration's plan to extend homeownership to those with lower incomes.

"Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth," the New York Times reported Sept. 30, 1999.

"In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates--anywhere from three to four percentage points higher than conventional loans."

"Demographic information on these borrowers is sketchy. But at least one study indicates that the 18 percent of the loans in the subprime market went to black borrowers, compared to 5 percent of loans in the conventional market.

"In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not post any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loans industry in the 1980s.

"'If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry,'" said Peter Wallison, a resident fellow at the American Enterprise Institute."

Meanwhile, an analysis of the financing crisis from an Australian newspaper proves we're repeating history. In an article headlined, Social Engineers Are Bad Bankers, the article lays the blame of the financial crisis squarely on the Clinton Administration, Fannie Mae and the Democratic-controlled Congress.

"In 1999, then president Bill Clinton instructed the Fannie Mae Corporation to ease credit requirements on loans to ethnic minorities and low-income earners. In this nationwide scheme, the pilot program alone involved 24 banks. This was to include what became known as the sub-prime sector. Fannie Mae's chairman and chief executive in 1999 said that in addition to "reducing down payment requirements" the corporation would underwrite loans in the sub-prime market. Fannie Mae's board is largely made up of prominent Democrats.

"Fannie Mae and its sister corporation Freddie Mac are government-sponsored enterprises, exempted from taxation and with any losses guaranteed by public monies, although shares of profits go overwhelmingly to investors, executives and board members with shares. This is a hangover from its foundation in 1938 as a means to provide liquidity in the mortgage market that had collapsed following the Wall Street crash of 1929. The idea was to provide federal money to local banks, which would then finance home loans at below market interest rates. Fannie Mae held a virtual monopoly of what became known as the US secondary mortgage market until 1968, when Lyndon B. Johnson converted it into a private corporation or, rather, a government-supported enterprise. A second GSE, Freddie Mac (the Federal Home Mortgage Corporation) was established in 1970.

"It is important to note that Fannie Mae does not lend money directly to consumers, it purchases loans that banks make on the secondary market. This was made possible by Fannie Mae being allowed, uniquely, to borrow money from overseas at low interest rates backed by the US government. It passed this on to borrowers in low down payments and fixed rate mortgages. The parallels with the Ayr Bank are startling.

"However, the strategy announced in 1999 was to spur the banks to make more loans to people with poor credit rating, and especially to blacks and Hispanics. This was done by offering mortgages at 1 per cent above the standard variable rate. Home ownership rates among these groups had in fact been growing rapidly during the period 1993-98, 87 per cent for Hispanics and 72 per cent for blacks, but this was considered insufficient to close the gap between these and other groups. As early as 1998, Fannie Mae was already making 44 per cent of its purchases from loans to these groups.

"Not everyone was convinced this was a good idea. Peter Wallison of the American Enterprise Institute warned: "If they fail, the government will have to step up and bail them out." The US Senate finance committee in 2005 considered a bill to increase scrutiny of Fannie Mae and its accountancy mechanisms. In 2003 it had been revealed that Freddie Mac's accounting practices contained $4.5 billion worth of errors brought about by the removal of three of the company's top executives. By this time, combined debt at Freddie Mac and Fannie Mae was equal to 46 per cent of then national debt. The then US Federal Reserve chairman, Alan Greenspan, warned of forthcoming financial collapse if Fannie Mae's activities were not reined in.

"The bill was opposed by the Democrats, and lost.

"The culprits in all of this are the executives and board members of Fannie Mae for buying unsecured and risky loans, the Federal Reserve for putting up interest rates too far and too quickly, and the banks for what almost amounts to pyramid selling of bad debt based on fools' mortgages. Fannie Mae's structural flaws were an accident waiting to happen.

"But there is another culprit. The Clinton administration, in pressuring Fannie Mae, created the policy of lending initially good and then bad money to people who were themselves bad credit risks. This was done for good political - not to say politically correct - reasons: the targeted extension of home ownership to minority groups. But this social engineering has been achieved at a heavy cost, not least to those who have lost their houses and taxpayers who may now have to pick up the cost of an emergency package. People awarded such loans may well be forgiven for thinking they are now worse off than they were in 1999."