What Caused the Failing Economy

Floor Speech

BREAK IN TRANSCRIPT

Ms. SPEIER. Thank you, Madam Speaker, and I appreciate the opportunity this evening to talk about something that we're not talking much about right now. We talk about the loss of jobs, the unemployment. But what really caused it?

You know, a few weeks ago the Financial Crisis Inquiry Commission actually submitted its report to Congress. The good news is that it's on the best seller list. The bad news is that I am fearful that it's going to be gathering dust in the Chamber here and throughout this building because in this document it speaks volumes about why we are sitting where we are today; why our economy has tanked; why there are 15 million people unemployed in this country; and why there are 4 million people who now have been foreclosed on, and another 4 million who are underwater relative to their mortgages.

So this evening I am joined by the distinguished member from the Financial Services Committee, my good friend from the State of North Carolina, who is a powerful voice on consumer protection and the financial crisis that we've endured. And we're going to spend the next half hour just talking about it.

Well, first and foremost, what was this commission? This commission was a bipartisan, independent 10-member committee composed of private citizens with experience in economics, finance, housing, market regulation. They held 19 public hearings in affected communities across this country including Washington, New York, Miami, Sacramento, Las Vegas, and Bakersfield; 115 witnesses appeared before the commission in sworn public hearings, including leading figures in the crisis.

In addition, the commission interviewed over 300 people, virtually all of the key players in the financial collapse, including Angelo Mozilo of Countrywide, Richard Fuld of Lehman, and Joe Cassano of AIG Financial Products Division, and examined thousands of documents--all of which are posted on the Web. A totally transparent process.

And the single most important statement they made was this crisis could have been avoided.

Now, they gave just a few examples. The Securities and Exchange Commission could have required more capital and halted risky practices at the big investment banks, but they did not. The Federal Reserve Bank of New York and other regulators could have clamped down on CitiGroup's excesses in the run-up to the crisis. They did not. Policymakers and regulators could have stopped the runaway mortgage securitization train. And they did not.

So this document has line and verse of what went wrong. But one of the most telling parts deals with the mortgage fraud, and I would like to just put this up.

How many executives have been held accountable for their actions in this financial crisis?

As you can see, two have been criminally charged. There have been zero convictions, zero sent to prison.

Well, what happened when the savings and loan crisis occurred in this country decades ago?

The results there were much different: 1,188 were criminally charged, 915 were convicted, and 582 went to prison. Convictions included more than 260 thrift CEOs and senior executives including, of course, the famous Mr. Keating.

So it is very important for us tonight and through the next year or two to not only study this document but to put it to paper. By ``put it to paper,'' I mean legislate around it.

Now the Dodd bill is an incredible effort in that regard. The Dodd-Frank effort was one that we were successful in moving through; but as this report points out, there were powers that many of these regulators already had but chose not to use.

Now, the second poster talks about mortgage fraud; and the compelling information in the report that I think is important to point out is that, again, there were people that were looking at the problem and saying, Wait a minute, we need to do something about this. One in particular was the Deputy Director of the FBI who began to look at this issue and thought something is wrong here.

According to the FBI, 80 percent of the cases of fraud involves insiders. So if there was fraud being exercised in the mortgage industry, it was coming from the inside. FBI Assistant Director Chris Swecker began noticing a rise in mortgage fraud back in 1999 and in 2002 led a successful criminal prosecution against the owner of Beneficial Mortgage in your State, my dear friend from North Carolina, for selling fraudulent loans to Fannie Mae.

First Beneficial repurchased the fraudulent loans from Fannie but then proceeded to resell them to Ginnie Mae without any interference from Fannie. Fannie later paid $7.5 million in restitution to the government for allowing the sale.

Assistant Director Swecker told a congressional committee in 2004 that if fraudulent mortgage practices became unrestrained and systematic, it would ultimately place financial institutions at risk and have adverse effects on the stock market. Boy, was he prescient or what?

So here is an interesting chart that shows how we've seen an increase in fraud reports at financial institutions.

Now, these are really undervalued. They're probably five times higher because many institutions do not actually report like they should. But what is even more disturbing is that while the number of mortgage frauds have increased, the number of actual prosecutions have slowed down. So as we are trying to kind of somehow come to some understanding of why this all happened and how do we make sure it doesn't happen again, if we don't have enforcement tools, if we don't have those who have the enforcement tools seeking to go after the mortgage fraud, then in all likelihood it will continue to happen.

So I know that my good friend from North Carolina is interested in weighing in on this issue. I think that as we discuss this issue, it's important to know, one, that there are enforcement tools, but they have to be used.

I yield to my good friend.

BREAK IN TRANSCRIPT

Ms. SPEIER. I thank the gentleman. Reclaiming my time, you know, you had said earlier that our friends on the other side of the aisle were bemoaning the big government; and yet if any of the records that have been established by this commission are really studied, without the kind of government to do the kind of investigation and enforcement, then we are setting ourselves up for another financial crisis.

BREAK IN TRANSCRIPT

Ms. SPEIER. You know, you are absolutely right, and so is Will Rogers. I think that it's important for us to communicate to the American people that while we don't want bloated government, we want to make sure that there is a government that has the cop on the street.

Look at the savings and loan crisis and those who were criminally charged and those who were convicted and those who went to prison. The FBI deputy director at the time, John Pistole, testified before Congress and said that there were a thousand people working on the S&L crisis at its height within the FBI, a thousand people.

That compares to about 240 agents working on the mortgage fraud cases last year. So, you see, no numbers in terms of convictions, and you can see that if you don't have cops on the beat, then you are going to have people that are going to take advantage, that are not going to follow the rules, and that, frankly, will not be charged nor convicted for their crimes.

I am reminded, too, that during much of this review by the commission they talked about the action that some regulators did take in 2005 where they weren't willing to actually take action against the banks, but they did issue what they called was a nonbinding guidance. The guidance was to recommend the banks consider a borrower's ability to make the loan payment when the rate adjusted.

What a lightbulb going off. I mean, why wouldn't that be naturally part of the process when you were going to assess whether someone could carry the loan, to see whether or not they could carry the loan after the rate adjusted? But as you pointed out, they were all interested in the yield spread. They were all interested in churning. They were all interested in securitizing these loans and making more and more money. So it wasn't about making sure people could actually pay for the loans moving forward.

I see we have been joined by another colleague. Welcome. I yield to the gentleman from New Jersey.

BREAK IN TRANSCRIPT

Source