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Archive for the ‘Public Private Partnerships’ Category

Book Review:  “Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Let to Economic Armageddon,” by Gretchen Morgenson and Joshua Rosner.

Reckless Endangerment tells the story of how crony capitalism led to the financial crisis of 2008.  Morgenson is a business reporter for the New York Times and Rosner a research consultant on the mortgage industry.  Both conducted interviews concerning the mortgage industry and Wall Street over the last decade.

Reckless Endangerment identifies the powerful people whose actions led to the financial crisis.  In the wake of the Wall Street bailouts, “the American people realize they’ve been robbed.  They’re just not sure by whom.”  The authors explain in detail the key players who profited from the decades-long relationship between Wall Street and Washington.

The financial collapse of 2008 resulted in part from the concept of public-private partnerships.  Rather than serve as a neutral enforcer of the rules, the federal government became a “partner” of Freddie Mac and Fannie Mae.  Freddie and Fannie are GSEs (government sponsored enterprises) benefitted from the guarantee of government credit long before the bank bailouts of 2008-09.

The book details the career of James A. Johnson, who served as CEO of Fannie Mae from 1991 to 1998.  Johnson came to Fannie Mae from politics and Wall Street.  Johnson served as the campaign manager of Walter Mondale’s 1984 presidential campaign and also worked on George McGovern’s 1972 presidential campaign.  From 1985 to 1990, Johnson became a managing director at Lehman Brothers.

Johnson recognized that defending and expanding Fannie Mae’s relationship with the federal government would prove lucrative.  Many of Fannie’s political champions were Democrats, including Barney Frank and Maxine Waters.  One of Johnson’s initiatives established regional Fannie Mae Partnership offices intended to promote ever-expanding homeownership by working with elected officials.  These regional offices became a political network designed to thwart any efforts to reign in Fannie Mae.  In 1995, the new House Speaker, Rep. Newt Gingrich, attended the opening of the Atlanta office.  Gingrich hailed “Fannie Mae as an excellent example of a former government institution fulfilling its mandate while functioning in the market economy.”  The GSEs, however, existed to rely on government support, not compete on an equal playing field.

Fannie Mae also used its regional offices to hire former congressional staffers from the offices of men like Sen. Robert Bennet (R-Utah)(defeated by the liberty movement in a 2010 GOP primary) and Sen. Tom Daschle (D-N.Dak.) who became Senate Majority leader and nearly became a member of President Obama’s cabinet. Fannie Mae also hired Herb Moses, Rep. Barney Frank’s partner.  Rep. Frank became a key defender of both Fannie and Freddie Mac.

Other financial firms also benefited from lobbying Congress and the White House. Sandy Weill the then-CEO of Travelers Group led the push to repeal the Glass-Steagall Act.  Clinton Secretary of the Treasury Robert Rubin was instrumental in the push to allow commercial banks to combine with insurance companies and investment banks into firms “too big to fail.”  Rubin became the Vice-Chair of Citigroup shortly before the full repeal of Glass-Steagall.  Glass-Steagall’s repeal did not create a “free market” banking system.  Banks took greater risks, with ever less financial transparency.   As events proved, these mega-firms could count on government support to privatize their profits while piling their losses on the U.S. taxpayer.  Long-Term Capital Management failed in 1999.  The Federal Reserve responded with a bail-out, creating the conditions for future bail-outs.  At the same time, the Fed expected the banking industry to do the right thing with little or no oversight.  Capital reserve requirements were watered down, allowing ever greater leverage, especially when combined with accounting gimmicks to manipulate profits & losses and potential liabilities.  Such policies were inconsistent with the sort of ad hoc government bailouts that followed.

Reckless Endangerment also chronicles the story of some of the subprime lenders, such as Countrywide Financial, NovaStar, and Fremont, all companies that pursued loose lending standards in search of short-term profits.

Many firms engaged in accounting fraud, including Fannie Mae.  In his last year as CEO, James Johnson received millions more in bonuses due to manipulations of the timing of earnings.  Johnson’s successor, Franklin Raines, suffered the consequences of such shenanigans.  Fannie Mae was later forced to restate earnings by $6.3 billion.  Still, Raines was allowed to resign and received substantial bonuses at his departure.  Years later, Raines paid millions of dollars in civil penalties.  The penalties were a small fraction of his total compensation from Fannie.  In 2008, Johnson was appointed Senator Barack Obama’s three-member Vice-Presidential candidate search committee, but resigned after the McCain campaign made his involvement an issue.

The authors contend that “the failure to hold central figures accountable for their actions sets a dangerous precedent.”  Many of those responsible for the financial debacle still remain in positions of influence.  Reckless Endangerment provides a glimpse of the crony capitalism that is motivating average citizens to take action. It is not the complete story of the financial crisis, but is one element of the problem that should be addressed.  Instead of recognizing the shortcomings of such purported “partnerships,” Congress and the Obama Administration are creating more regulatory agencies with even more layers of bureaucracy.  Read Reckless Endangerment, then you can decide whether you believe the political system is capable of refining crony capitalism and public-private partnerships into a workable economic system.

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Representative Barney Frank of Massachusetts announced today that he is retiring from Congress .  Unfortunately, his retirement comes a decade too late for taxpayers.  Rep. Frank was one of the most ardent supporters of Fannie Mae and Freddie Mac, thwarting efforts to increase their capital reserves and improve regulatory oversight.  Alarm bells sounded years before the real estate collapse.  Rep. Frank made certain that Fannie Mae & Freddie Mac could continue inflating the housing boom into a bubble.

Democrats are hailing his role in the passage of the Dodd-Frank financial reform bill.   Dodd-Frank is a 2,300 page bill that rivals ObamaCare in creating new bureaucracies.  Like ObamaCare, the full costs of the legislation will only become known over time.  Rep. Frank used his power to protect the two government-sponsored enterprises that played a major role in the real estate bubble and subsequent economic collapse.   What did Rep. Frank learn from his failures?  Instead of ending taxpayer bailouts, Dodd-Frank makes them a permanent part of government oversight. Now every bank has an explicit mechanism to seek government bailouts.  That enshrines the problem of private profits and taxpayer losses.

Estimates are that the new law will require 2.2 million hours of compliance work per year.  Accountants and lawyers aren’t cheap.  The burden will fall most heavily on small banks, not the national giants who teamed with Washington and Wall Street to give us TARP bailouts.  Crony capitalism will become more important–not less– under these purported reforms.

Rep. Frank proves that it is possible in Washington to get things wrong more than once.  He now wants to do other things.  Let’s watch and see where the revolving door puts the former congressman in 2013.  His power and influence will allow him to continue pushing for more crony capitalism.

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9 News investigators teamed with the Denver Post to review spending by E-470, the Denver metro toll road.  E-470 recently raised its tolls.   A 9Wants to Know reporter had the temerity to ask the Board of Directors questions in a public meeting.  Go here for the video & story.  The mnost controversial spending item was $13,000 per year for monthly massage therapist visits.

E-470 defends its spending as just a cost of doing business.   For example, E-470 paid a $100 baggage fee that allowed a Board member to take his golf clubs to a San Diego conference.

E-470 contends it is “competing” with the private sector and therefore must offer certain benefits and perks.  That’s probably true to some extent.  Yet the strange thing is E-470 is a public authority.  Their Board of Directors consists entirely of elected officials . Where is the “competition” to serve on their board?

Readers may recall that Pinnacol Insurance faced severe criticism for a golf trip to California.  Pinnacol does in fact compete with the private sector, yet the perks extended to its directors and officers became grounds for a failed legislator raid on Pinnacol’s reserves.

It will be interesting to see whether any legislators pick up the E-470 issue.  E-470 is one of the most expensive interstate toll roads per mile  in the country and just voted on a rate increase.  In fact E-470 is already planning its toll increases for the next ten years.  Since there’s no reserve fund to raid for the state budget, I suspect legislators will ignore E-470’s modest misspent funds.  Check out reporter Jeremy Jojola’s home page for more E-470 stories, including its outrageous policy on late fees.  That policy was only changed due to repeated public outrage.  No private business would ever be specifically empowered by the legislature to pursue such abusive late fee policies.

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For years lovelandpolitics.com has been documenting the interplay of local politicians and private interests through the monstrosities known as “public-private partnerships.”  Like an umpire in a New York Yankees uniform, local politicians prefer to be players and not neutral arbitors among local businesses.  This week Lovelandpolitics wrote an excellent overview of the Good Old Boy Era of Loveland government.

If you want to understand the major problem with local American governments, start with lovelandpolitics.com.  The favoritism displyed by the Loveland City Council was bipartisan and always described as promoting business or jobs.  The result has been a city and local taxing districts saddled with lost tax revenue for decades to come.  The Palisades commercial development by McWhinney Enterprises was foreclosed.  Now, the Centerra Metropolitan District can’t repay its urban renewal bonds on time.  That’s just one of many failed schemes.  Check out the home page for links to archives documenting years of taxpayer abuse.

The present economic crisis resulted from such real estate schemes spread across an entire nation.  Mortgage brokers acted on behalf of borrowers who could not afford their loans.  Banks re-sold the mortgages to investors.   Wall Street made fees from repackaging and selling the loans as mortgage-backed securities.  Fannie Mae & Freddie Mac facilitated the market for mortgages by issuing such securities.    The Federal government encouraged such loans through implied & actual government guarantees made to Fannie Mae & Freddie Mac.   Ratings agencies enjoyed a government-mandated oligopoly in which three companies provided “independent” ratings required by federal and state laws.  Those agencies were paid by the companies issuing the securities.

Overseeing all of it were quiescent state and federal regulators who answered to elected officials.  Elected officials relied upon contributions from the very same companies that transferred the risk of the shaky investments to the U.S. taxpayers.

In July 2010, the Loveland City Council allowed the McWhinney-controlled Centerra Metro District to extend the maturity of its public bonds to the year 2040 (eleven years beyond the life of the urban renewal authority).  At the same time, the federal government is saddling future generations with $15 trillion in debt–which is still growing.

Lovelandpolitics.com also revealed the details of the City of Loveland’s scheme to subsidize vNet LLC.   vNet promised to create “new jobs.”  Just like Solyndra at the national level, the promised jobs have disappeared and taxpayers are left holding the bill.

It takes vigilance and a willingness to challenge the conventional wisdom to effect positive change.   The only way to put an end to crony capitalism is to begin chipping away at such business favoritism at the local level.  Every community in Colorado could use a watchdog like lovelandpolitics.com.

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