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Crony Capitalism

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Date:
Location: Washington, DC


CRONY CAPITALISM -- (House of Representatives - September 24, 2008)

Ms. FOXX. Mr. Speaker, the American people won an important victory today, and we all should celebrate it. The Democrats finally allowed the moratorium on offshore drilling to expire. They did that because of the pressure brought on them by their constituents and by the 135 Republicans who stayed on this floor every day in August while the Democrats were on vacation, and we spoke on the floor every day before that and since then.

We called to the attention of the American people every day that the Democrats are in charge of the Congress and it was under their charge that gas prices doubled.

So, when someone says to you there's no difference between Democrats and Republicans, you can point to this example of leadership by Republicans and how we brought this to the American people and with this support, changed the position of the Speaker.

Now we have another task before us. It is our task to inform the American public about who is responsible for the U.S. mortgage and credit problem that we are grappling with.

This is not a failure of the markets. But it is a failure of government.

Mr. Speaker, I would like to put in the Record an editorial from investors.com entitled ``Crony Capitalism Is Root Cause of Fannie And Freddie Troubles.''

``In the past couple of weeks, as the financial crisis has intensified, a new talking point has emerged from the Democrats in Congress: This is all a 'crisis of capitalism,' in socialist financier George Soros' phrase, and a failure to regulate our market sufficiently.

``This is a crisis of politically driven crony capitalism, to be precise.

``Indeed, Democrats have so effectively mastered crony capitalism as a governing strategy that they've convinced many in the media and the public that they had nothing whatsoever to do with our current financial woes.

``Funny, because over the past 8 years, those who tried to fix Fannie Mae and Freddie Mac--the trigger for today's widespread global financial meltdown--were stymied repeatedly by congressional Democrats.''

And as my colleagues on both sides of the aisle tonight have pointed out, these problems have been brought on under the leaders who were Democrats when Congress was controlled by the Democrats on several occasions.

``Although some key Republicans deserve blame as well, it was a concentrated Democratic effort that made reform of Fannie and Freddie impossible.''

In fact, earlier tonight on FOX News, to their credit, they showed comments being made by Chairman Frank and Chairman Schumer about why Fannie and Freddie were great and didn't need any reform, and going back to 2001 pointed out how President Bush and members of his Cabinet pointed out we were going to have a crisis because of Fannie and Freddie. As my colleague just previously said, we don't have enough regulations of these markets, but I would say we have the wrong kind of regulations, and more and more is going to come out about that and put it where it deserves.

Again, I'm going to quote some more from this article:

``Fannie and Freddie gobbled up the market. Using extraordinary leverage, they eventually controlled 90 percent of the secondary market mortgages. Their total portfolio of loans topped $5.4 trillion--half of all U.S. mortgage lending. This created the problem that we're having today.''

But they also ``became a kind of jobs program for out-of-work Democrats.

``Franklin Raines and Jim Johnson, the CEOs under whom the worst excesses took place in the late 1990s to mid-2000s, were both high-placed Democratic operatives and advisors to Presidential candidate Barack Obama.

``On the surface, this sounds innocent. Someone has to head the highly political Fannie and Freddie, right? But this is why crony capitalism is so dangerous. Those in power at Fannie and Freddie, as the sirens began to wail about some of their more egregious practices, began to bully those who opposed them.

``We now know that many of the Senators who protected Fannie and Freddie, including Barack Obama, Hillary Clinton and CHRISTOPHER DODD, have received mind-boggling levels of financial support from them over the years.''

The SPEAKER pro tempore. The time of the gentlewoman has expired.

Ms. FOXX. Thank you, Mr. Speaker.

``Crony'' Capitalism Is Root Cause Of Fannie And Freddie Troubles
(By Terry Jones)

In the past couple of weeks, as the financial crisis has intensified, a new talking point has emerged from the Democrats in Congress: This is all a ``crisis of capitalism,'' in socialist financier George Soros' phrase, and a failure to regulate our markets sufficiently.

Well, those critics may be right--it is a crisis of capitalism. A crisis of politically driven crony capitalism, to be precise.

Indeed, Democrats have so effectively mastered crony capitalism as a governing strategy that they've convinced many in the media and the public that they had nothing whatsoever to do with our current financial woes.

Barack Obama has repeatedly blasted ``Bush-McCain'' economic policies as the cause, as if the two were joined at the hip.

Funny, because over the past 8 years, those who tried to fix Fannie Mae (FNM) and Freddie Mac (FRE)--the trigger for today's widespread global financial meltdown--were stymied repeatedly by congressional Democrats.

This wasn't an accident. Though some key Republicans deserve blame as well, it was a concerted Democratic effort that made reform of Fannie and Freddie impossible.

The reason for this is simple: Fannie and Freddie became massive providers both of reliable votes among grateful low-income homeowners, and of massive giving to the Democratic Party by grateful investment bankers, both at the two government-sponsored enterprises and on Wall Street.

The result: A huge taxpayer rescue that at last estimate is approaching $700 billion but may go even higher.

It all started, innocently enough, in 1994 with President Clinton's rewrite of the Carter-era Community Reinvestment Act.

Ostensibly intended to help deserving minority families afford homes--a noble idea--it instead led to a reckless surge in mortgage lending that has pushed our financial system to the brink of chaos.

SUBPRIME'S MENTORS

Fannie and Freddie, the main vehicle for Clinton's multicultural housing policy, drove the explosion of the subprime housing market by buying up literally hundreds of billions of dollars in substandard loans--funding loans that ordinarily wouldn't have been made based on such time-honored notions as putting money down, having sufficient income, and maintaining a payment record indicating creditworthiness.

With all the old rules out the window, Fannie and Freddie gobbled up the market. Using extraordinary leverage, they eventually controlled 90% of the secondary market mortgages. Their total portfolio of loans topped $5.4 trillion--half of all U.S. mortgage lending. They borrowed $1.5 trillion from U.S. capital markets with--wink, wink--an ``implicit'' government guarantee of the debts.

This created the problem we are having today.

As we noted a week ago, subprime lending surged from around $35 billion in 1994 to nearly $1 trillion last year--for total growth of 2,757% as of last year.

No real market grows that fast for that long without being fixed.

And that's just what Fannie and Freddie were--fixed. They became a government-run, privately owned home finance monopoly.

Fannie and Freddie became huge contributors to Congress, spending millions to influence votes. As we've noted here before, the bulk of the money went to Democrats.

DOLLARS TO DEMS

Meanwhile, Fannie and Freddie also became a kind of jobs program for out-of-work Democrats.

Franklin Raines and Jim Johnson, the CEOs under whom the worst excesses took place in the late 1990s to mid-2000s, were both high-placed Democratic operatives and advisers to presidential candidate Barack Obama.

Clinton administration official Jamie Gorelick also got taken care of by the Fannie-Freddie circle. So did top Clinton aide Rahm Emanuel, among others.

On the surface, this sounds innocent. Someone has to head the highly political Fannie and Freddie, right?

But this is why crony capitalism is so dangerous. Those in power at Fannie and Freddie, as the sirens began to wail about some of their more egregious practices, began to bully those who opposed them.

That included journalists, like the Wall Street Journal's Paul Gigot, and GOP congressmen, like Wisconsin Rep. Paul Ryan, whom Fannie and Freddie actively lobbied against in his own district. Rep. Cliff Stearns, R-Fla., who tried to hold hearings on Fannie's and Freddie's questionable accounting practices in 2004, found himself stripped of responsibility for their oversight by House Speaker Dennis Hastert--a Republican.

Where, you ask, were the regulators?

Congress created a weak regulator to oversee Freddie and Fannie--the Office of Federal Housing Enterprise Oversight--which had to go hat in hand each year to Capitol Hill for its budget, unlike other major regulators.

With lax oversight, Fannie and Freddie had a green light to expand their operations at breakneck speed.

Fannie and Freddie had a reliable coterie of supporters in the Senate, especially among Democrats.

``We now know that many of the senators who protected Fannie and Freddie, including Barack Obama, Hillary Clinton and Christopher Dodd, have received mind-boggling levels of financial support from them over the years,'' wrote economist Kevin Hassett on Bloomberg.com this week.

BUYING FRIENDS IN HIGH PLACES

Over the span of his career, Obama ranks No. 2 in campaign donations from Fannie and Freddie, taking over $125,000. Dodd, head of the Senate Banking panel, is tops at $165,000. Clinton, ranked 12th, has collected $75,000.

Meanwhile, Freddie and Fannie opened what were euphemistically called ``Partnership Offices'' in the districts of key members of Congress to channel millions of dollars in funding and patronage to their supporters.

In the space of a little more than a decade, Fannie and Freddie spent close to $150 million on lobbying efforts. So pervasive were their efforts, they seemed unassailable, even during a Republican administration.

Yet, by 2004, the crony capitalism had gone too far. Even OFHEO issued a report essentially criticizing Fannie and Freddie for Enron-style accounting that let them boost profits in order to pay their politically well-connected executives hefty bonuses.

It emerged that Clinton aide Raines, who took Fannie Mae's helm as CEO in 1999, took in nearly $100 million by the time he left in 2005. Others, including former Clinton Justice Department official Gorelick, took $75 million from the Fannie-Freddie piggy bank.

Even so, Fannie and Freddie were forced to restate their earnings by some $3.5 billion, due to the accounting shenanigans.

As we noted, those who tried to halt this frenzy of activity found themselves hit by a political buzz saw.

President Bush, reviled and criticized by Democrats, tried no fewer than 17 times, by White House count, to raise the issue of Fannie-Freddie reform. A bill cleared the Senate Banking panel in 2005, but stalled due to implacable opposition from Democrats and a critical core of GOP abettors. Rep. Barney Frank, who now runs the powerful House Financial Services Committee, helped spearhead that fight.

Now, with the taxpayer tab approaching $1 trillion or more, we're learning the costs of crony capitalism.

In the coming days, an IBD series will look into this phenomenon in greater detail--how we got here, who's responsible, and why nothing was done.


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