WASHINGTON, D.C. – U.S. Senate Republican Whip Jon Kyl delivered remarks on the Senate floor Thursday regarding the economy and the financial and housing markets. The following are his prepared remarks:
“I am astonished at the diatribe by Democrats charging that our economic woes are ‘the Republicans’ fault.’ As if somehow our system of housing finance and the complex mortgage-backed investments were created by President Bush. The American people know better.
“Similarly off-base are the efforts by Democrats to rewrite history by trying to cast Senator McCain and President Bush in the mold of President Hoover. This is, of course, false and a complete misunderstanding of history. It is nothing more than political mud-slinging.
“In the excellent history of the Great Depression by Amity Shlaes, ‘The Forgotten Man,’ we are reminded that Herbert Hoover was an interventionist, a protectionist, and a strong critic of markets. If anything, Hoover – and then Franklin Roosevelt – prolonged the Great Depression by their manic intervention in the free market, which caused a spiral of deflation. No, Senator McCain isn’t an interventionist or a protectionist like Hoover. But he is a strong critic of the greed and cronyism that have led to our current financial problems.
“What are the facts of our present situation?
“Almost everyone agrees this financial crisis was precipitated by the housing crisis; the bursting of the bubble of overinvestment and speculation in home mortgages. Housing prices skyrocketed to unsustainable levels as mortgages were given to people who simply couldn’t afford them and speculators ran up prices even more. Until housing prices level out naturally – not artificially through government interference – our financial crisis will not reach a conclusion.
“While it is true that both political parties took pride in supporting more homeownership, Democrats cannot deny that they promoted expanding loans to more and more people; people who found it hard to get a mortgage because they could not make a sufficient down-payment, or failed to meet other normal loan criteria; people who are higher credit risks. People were enticed and encouraged to buy homes they could not afford.
“It is also true that members of both political parties were strong defenders of Fannie Mae and Freddie Mac. But I cannot think of a single Democrat who fought for comprehensive, meaning reforms over the last decade. Fannie and Freddie made huge campaign contributions to both parties and those contributions secured for them many friends who were willing to stymie even modest proposals for regulation.
“Our friends on the other side of the aisle claim the current financial crisis stems for a lack of regulatory oversight, but they don’t mean a lack of regulatory oversight of Fannie and Freddie. They don’t mean regulations that would have actually headed off this crisis.
“I am perhaps one of the most free-market members of the Senate. I am not usually one to call for more regulations, but in the case of Fannie and Freddie I was. As Chairman of the Republican Policy Committee in 2003 and 2004, I provided two detailed analyses of the potential for catastrophic failure of the GSEs unless they were precluded from taking on more and more questionable debt. I noted that while their executives and shareholders were making a lot of money in the short run, the taxpayers would be on the hook in the long run. That is exactly what occurred.
“The first paper the RPC released under my watch suggested that the implicit government guarantee of both Fannie and Freddie allowed the companies to borrow significantly more than they would have without the guarantee, and that they used those resources to invest and trade in risky mortgage securities. In September 2003 – five years ago – I recommended that Congress ‘improve disclosure requirements and transparency; increase risk-based regulatory oversight; and begin to consider how to create a greater separation between the taxpayers and the business operations of these firms without causing financial dislocation or upsetting the mortgage markets.’ I also warned that without reforms, either or both companies could fail, and the ‘potential cost to U.S. taxpayers could range into the hundreds of billions of dollars.’ I am sorry to report that I was correct; the bailout will cost $200 billion.
“The second RPC paper I release, in April 2004, reported that then-chairman of the Federal Reserve, Alan Greenspan, had endorsed fundament reforms for Fannie and Freddie. Greenspan threw cold water on the most often-repeated rationale for allowing Fannie and Freddie to continue growing, indeed, for their very existence: that they increase homeownership and reduce mortgage rates. My report ‘challenge[d] the Senate to act quickly to reduce the risks to the taxpayer, either by fundamentally altering their relationship with the government, or by establishing a new regulatory regime.’ But the Senate failed to act in 2004, when it could have headed off this crisis.
“I also want to highlight the efforts made by Senator Shelby, the Ranking Republican on the Senate Banking Committee, to reform Fannie and Freddie. In 2004 and 2005, Senator Shelby tried to enact comprehensive GSE reforms, only to be stonewalled by then-Senator Sarbanes. First, in 2004, Senator Sarbanes refused to consider Senator Shelby’s legislation; he said the problem was the receivership provisions. At that time, Fannie and Freddie could only be taken into conservatorship if they failed, but not receivership. Fannie and Freddie and their supporters used their objections to this provision to label Shelby as ‘anti-homeownership.’
“When Shelby tried again, Senator Sarbanes told him the reforms couldn’t move forward because he objected to the portfolio limits that Shelby’s legislation would have imposed on Fannie and Freddie. Remember, their portfolios are highly leveraged. Again, Shelby and those who supported him were castigated as anti-homeownership. Each time Shelby pressed for reforms, Senator Sarbanes and Fannie and Freddie’s other supporters came up with some reason to oppose them.
“When Congress passed the Fannie and Freddie bail-out legislation this summer we were finally able to secure fundamental reforms, even though the damage had already been done to our financial markets. The legislation came too late to avoid the collapse; instead, it had to manage the collapse.
“And even at this late date, the Chairman of the Senate Banking Committee and the Chairman of the House Financial Services Committee would only agree to the GSE reforms after Republicans gave in to their demands for billions of dollars for ACORN – a far-left advocacy group that has engaged in vote fraud.
“Finally, in a last-ditch attempt to save Fannie and Freddie from greater scrutiny, the Chairman of the House Financial Services Committee even tried to delay appointment of the new, more powerful regulator set up in the legislation until next year. Fortunately Senator Shelby prevailed. When the two entities were taken into conservatorship this month, the new regulator shut down all political activities of Fannie and Freddie and fired their executives and barred them from getting lavish compensation packages.
“One final point about the political entanglement of Fannie and Freddie in Washington. When Senator Obama began searching for his vice presidential running mate, he tapped former Fannie Mae CEO Jim Johnson to help conduct the search. That wasn’t surprising; Johnson had the same role in Senator Kerry’s 2004 campaign. Senator Obama had to end his relationship with Jim Johnson after it came to light that Johnson had received at least three sweetheart loans from Countrywide. Remember, Countrywide was accused of pushing many people into home mortgages they could not afford. It ultimately failed and had to be acquired by a bank. I should also note that Johnson is credited by many as having built Fannie Mae into the financial giant it became; he built the failed business model that will cost taxpayers hundreds of billions of dollars. When he was CEO he aggressively hired an army of lobbyists to protect Fannie Mae from any meaningful oversight.
“Fannie and Freddie guarantee about $5 trillion of the $12 trillion in total outstanding home loans in the U.S. That amounts to $5 trillion in mortgage-backed securities guaranteed by the pair. Fannie and Freddie sold these to so many different companies and investors here and abroad as great and sound investments. But with real estate prices dropping, no one knows how to value these investments. Countless major investors here and abroad are now at risk; witness the problems with Bear Stearns, Lehman, Merrill Lynch, and AIG to name only the most prominent.
“So the problems that several Republicans predicted and tried to prevent have now come to pass. The Treasury has placed Fannie and Freddie in conservatorship, risking up to $100 billion of taxpayer dollars for each. Add to that the $30 billion the U.S. had to guarantee in Bear Stearns debt to get JP Morgan to acquire the bank, plus $85 billion for the Fed to nationalize AIG. All this because several prominent Democrats – and unfortunately, some prominent Republicans – refused to appropriately and seriously address the problems and dangers posed by Fannie Mae and Freddie Mac.”
