Friday, October 10, 2008

Congressional Corruption & Financial Crisis

THE WSJ LOOKS at Senator Dodd:
"The Connecticut Senator has been out front denouncing the 'companies that form the foundation of our financial markets,' for 'their insatiable appetite for risk.' He has also decried 'reckless, careless and sometimes unscrupulous actors in the mortgage lending industry' and he has proclaimed that 'American taxpayers deserve to know how we arrived at this moment.' To that end, we propose he take the stand -- under oath.

Former Countrywide Financial loan officer Robert Feinberg says Mr. Dodd knowingly saved thousands of dollars on his refinancing of two properties in 2003 as part of a special program the California mortgage company had for the influential. He also says he has internal company documents that prove Mr. Dodd knew he was getting preferential treatment as a friend of Angelo Mozilo, Countrywide's then-CEO.

That a 'Friends of Angelo' program existed is not in dispute. It was crucial to the boom that Countrywide enjoyed before its fortunes turned. While most of the company was aggressively lending to risky borrowers and off-loading those mortgages in bulk to Fannie Mae and Freddie Mac, Mr. Feinberg's department was charged with making sure those who could influence Fannie and Freddie's appetite for risk were sufficiently buttered up. As a Banking Committee bigshot, Mr. Dodd was perfectly placed to be buttered."
Members of Congress have been personally and secretly allocating taxpayer dollars to specific projects back home. That's the corrupt practice of earmarking. Perhaps the corrupt nature of Congress is deeper and wider that just earmarking.
In response to the charge that he knew he was getting favors, Mr. Dodd at first issued a strong denial: "This suggestion is outrageous and contrary to my entire career in public service. When my wife and I refinanced our loans in 2003, we did not seek or expect any favorable treatment. Just like millions of other Americans, we shopped around and received competitive rates." Less than a week later he acknowledged he was part of Countrywide's VIP program but claimed he thought it was "more of a courtesy."

Mr. Feinberg, who oversaw "Friends of Angelo" from 2000 to 2004, begs to differ. He told us that as the loan officer in charge he was supposed to make sure that the "VIP" clients knew at every step of the process that they were getting a special deal because they were "Friends of Angelo.

[ . . . ]

One indicator of his influence is the $165,400 in campaign contributions -- more than to any other politician -- that Fan and Fred have given him since 1989, according to the Center for Responsive Politics. These contributions are legal. But favors like those Mr. Dodd is alleged to have received may not be. Mr. Feinberg says he went public with his story because when he heard Senator Dodd on TV talking about predatory lending, he felt it was "hypocritical" and he says, "I just thought, 'This is wrong.'"

Mr. Dodd hasn't yet released his copies of the mortgage documents, though he promised to do so more than two months ago. His office told us this week they'd get back to us on that. Meanwhile, presumably the Justice Department can have Mr. Feinberg's Countrywide documents, if it's interested."
The seeds of this financial crisis are to be found in Congressional legislation created over many years and they are to be found at least as far back as the early 1990s. Without Congress participating in rent seeking, or if Congress was constrained and limited in the degree to which it could supply the demands for rent seeking, perhaps the statutes and the other actions of members of Congress that nurtured the perverse incentives to excess risk taking would not happened.

I've wondered why it seems so difficult for our political leaders in Washington to understand that their bad policies toward mortgages and affordable housing are the foundation of this financial crisis. Perhaps one reason is that many do understand, but they like their jobs having power over the incomes and the lives of others and they have decided they have to cover up the Congressional role in all of this or else they will likely loose their jobs. Perhaps another reason is that the members of Congress are among the economically illiterate. Here is what REP. HARMON RECENTLY said in this regard:
'This has been a crash course in Econ 201, and everybody's in school,' she said.
Senator Dodd's story suggests that Congressional corruption is another possible reason. How many other Friends of Angelo are in Congress? And, how many other Friends or Mort or Friends of Andy clubs are there out there with respect to other areas in which Congress has legislated?


Austin Frindt said...

Senator Dodd ran for President knowing he had this dirty laundry. So did John Edwards. So did Gary Hart. So have countless others. A lot of the times the only reason we find out about their questionable behavior is because they become prominent public figures. It makes me wonder how much corruption there is that is either never found out or that we never hear about. Just how corruption IS there in Washington?

Larry Eubanks said...

How much? Pretty hard to estimate given the kind of information we have available to us from the news industry. It seems politicians as well as much of the news industry have learned that rational ignorance as well as rational irrationality characterize the majority of voters. Perhaps, as I think you suggest, many members of Congress these days are explicitly assuming that their time in Washington is supposed to be about getting as much for themselves as they can.