By Mike Colpitts
The repeal of the law that produced the current housing depression was made by Congress in 1999, and it took just eight years before it would nearly destroy the U.S. economy. At the peak of the real estate bubble lobbyists gave more than $350-million to members of Congress. Lawmakers passed laws that weakened the nation’s financial structure and regulatory oversight, setting in motion the series of failures leading to the troubled economy.
As the White House and Congress work on a new package of legislation to re-regulate financial markets, including mortgages it is becoming clear that the road to a full economic recovery will take years. The new regulations are vital to restoring confidence in the financial system, increasing mortgage lending, providing more financing for business and aid Congress in restoring its’ own damaged reputation.
Massive campaign contributions were made by special interests to members of Congress during the peak of the real estate boom beginning with the 2004 elections when housing markets were flying high. The banking industry, backed by the most powerful lobbyists in Washington D.C. had been seeking the repeal of the law that controlled financial instruments used to trade mortgage securities since the 1980’s.
Wall Street firms donated $154.9-million to Congressional candidates alone for the 2008 election. That’s $57-million more than the $98-million they gave in 2004 elections, according to OpenSecrets.org, which tracks election campaign contributions.
Real estate interests donated another $136.7 million during the 2008 cycle. Commercial banks contributed $37.1-million and hedge funds, blamed for much of the economic crisis, gave almost another $17-million. The total donated amounts to $354.4-million. The sum is one of the largest amounts ever donated to political candidates amid cries of campaign contribution reform.
The donations seem to be paying-off. Despite causing the worst economic recession since at least the Great Depression, Wall Street and bankers are still getting what they want from Congress. Bankers are being bailed out, while millions of Americans are caught in financial traps on everything from credit cards, lines of credit and second mortgages taken out against property to the epidemic of foreclosures.
Only a year before the repeal of the Glass-Steagall act subprime mortgages made up between just 5 and 7 percent of the mortgage market. But with the abolishment of the act it opened the flood gate for sophisticated financial instruments, including mortgage-backed securities, collateralized debt obligations and established structured investment vehicles, SIVs. All would lead to the plague of toxic assets that are poisoning the nation’s economy today.
Congress repealed the Great Depression era act and it was signed by President Bill Clinton, who later admitted regretting the action. The abolishment in essence gave bankers a free ride to do what ever they wanted to increase the level of securities that were backed by mortgages on Wall Street.
The record number of securities traded in financial markets grew to include all sorts of mortgages, and drew investors from all over the world for their high paying returns, leading to the foreclosure epidemic and global economic crisis. Investors on Wall Street reaped returns as high as 60% on their investments in a matter of months until it all came crashing down.
Perhaps the most toxic asset class is Adjustable Rate Mortgages or Option Arm’s as they are called in the lending industry since borrowers are able to choose from 4 options to pay their loan. Mortgage underwriting guidelines were ignored or lenders looked the other way in order to push loans through as fast as they could to get paid. The mortgages were being packaged and sold so bankers had little to lose for the time being.
Years later hundreds of thousands of lawsuits would be filed seeking restitution for fraud and many are still lingering in courtrooms throughout the nation. Millions more became victims of foreclosure trapped by bankers who never should have made the mortgages to begin with. Forced by public outcries for change to improve the worsening economy, Congress would hold hearings.
Banking laws would be changed to stop the market manipulation from occurring again. But the question that remains unanswered is just how long it will take for legislation to become effective to re-regulate the markets and encourage lending. During the Great Depression it took more than six years to pass Glass-Steagall.