The New York Times added another entry to its “The Reckoning” series yesterday, this one focusing on the Bush Administration’s role in the housing mess. Today, Bush fired back with a blistering press release accusing the Times of gross negligence.
So let’s see how the story stacks up.
First of all, it’s a necessary story and a good one with lots of quotes and new information from Bush officials—many on the record—about how the administration missed the problem, downplayed it, and helped to make it worse. While he didn’t cause the crisis (and is not alone in sharing presidential responsbility for it—I’m looking at you, Bill Clinton) and some of the key factors were out of his control (like Greenspan’s easy money policy), there can be no doubt that Bush has culpability here: It happened on his watch over several years—and the problems that led to it not coincidentally dovetail neatly with his laissez-faire philosophy of regulation.
“There is no question we did not recognize the severity of the problems,” said Al Hubbard, Mr. Bush’s former chief economics adviser, who left the White House in December 2007. “Had we, we would have attacked them.”
No kidding.
Bush flack Dana Perino has both barrels blazing in her press release saying “the reporters’ myopic point of view that only Bush administration policies could possibly be responsible for the housing and finance crises.” But that’s a straw man; it’s not what the Times says. For instance, this is up high, in the eighth paragraph:
There are plenty of culprits, like lenders who peddled easy credit, consumers who took on mortgages they could not afford and Wall Street chieftains who loaded up on mortgage-backed securities without regard to the risk.
Here is how the Times in the next graph sums up Bush’s responsibility:
But the story of how we got here is partly one of Mr. Bush’s own making, according to a review of his tenure that included interviews with dozens of current and former administration officials.
From his earliest days in office, Mr. Bush paired his belief that Americans do best when they own their own home with his conviction that markets do best when let alone.
He pushed hard to expand homeownership, especially among minorities, an initiative that dovetailed with his ambition to expand the Republican tent — and with the business interests of some of his biggest donors. But his housing policies and hands-off approach to regulation encouraged lax lending standards.
This is uncontroversial, but I agree with Barry Ritholtz who says that the Times doesn’t quite nail the heart of Bush’s responsibility here, though it’s certainly not incorrect in what it does report. Here’s Ritholtz:
That philosophy, and the executive, administrative and legislative acts, including political appointments, is where we should focus our ire at the soon the be former-President Bush. The belief system that leads to the conclusion that really bad behavior in the corporate world needs no proscribing is where you should look to place blame.
That Bush had as a goal increased home ownership is, quite bluntly, irrelevant. It is a worthy goal, and certainly one that could be achieved without forcing the collapse of the financial system.
I agree that the story overemphasizes Bush’s focus on increasing home ownership as a root cause of the crisis. That didn’t cause Wall Street underwriters to push for “loans, loans, any loans” so it could bundle them, make millions in fees, and pass them off to others. It didn’t cause subprime lenders and brokers to forget the basic rules of lending.
There’s no question that putting somebody in a house without a down payment isn’t a good idea, as Bush’s program did for some. But that was, as the Times reports, $200 million a year. That doesn’t even qualify as a drop in the bucket in the trillion-dollar mortgage industry, and the paper was wrong to give that so much emphasis.
It gets to the real issue down about halfway through the story:
But Mr. Bush populated the financial system’s alphabet soup of oversight agencies with people who, like him, wanted fewer rules, not more.
The administration’s response is bizarrely weak and almost not worth mentioning. Their essential beef is that the Times didn’t know about or mention Bush’s primetime address to the nation on the crisis. That address was on September 24—of this year. It was years after anything the Times was reporting about and was just utterly inconsequential, not only for this story, but of any impact, period. The cat had been out of the bag for two years—meaning the bubble had already popped—by the time of this speech.
And the Times shows how out of it the administration was:
Among the Republican Party’s top 10 donors in 2004 was Roland Arnall. He founded Ameriquest, then the nation’s largest lender in the subprime market, which focuses on less creditworthy borrowers. In July 2005, the company agreed to set aside $325 million to settle allegations in 30 states that it had preyed on borrowers with hidden fees and ballooning payments. It was an early signal that deceptive lending practices, which would later set off a wave of foreclosures, were widespread.
Andrew H. Card Jr., Mr. Bush’s former chief of staff, said White House aides discussed Ameriquest’s troubles, though not what they might portend for the economy. Mr. Bush had just nominated (CEO) Roland Arnall as his ambassador to the Netherlands, and the White House was primarily concerned with making sure he would be confirmed.
“Maybe I was asleep at the switch,” Mr. Card said in an interview.
Yes, that Ameriquest after they’d been nailed for screwing borrowers.
And Karl Rove bigfoots one of the administration’s Cassandras:
Brian Montgomery, the Federal Housing Administration commissioner, understood the significance… When he arrived in June 2005, he was shocked to find those customers had been lured away by the “fool’s gold” of subprime loans. The Ameriquest settlement, he said, reinforced his concern that the industry was exploiting borrowers.
In December 2005, Mr. Montgomery drafted a memo and brought it to the White House. “I don’t think this is what the president had in mind here,” he recalled telling Ryan Streeter, then the president’s chief housing policy analyst.
It was an opportunity to address the risky subprime lending practices head on. But that was never seriously discussed. More senior aides, like Karl Rove, Mr. Bush’s chief political strategist, were wary of overly regulating an industry that, Mr. Rove said in an interview, provided “a valuable service to people who could not otherwise get credit.” While he had some concerns about the industry’s practices, he said, “it did provide an opportunity for people, a lot of whom are still in their houses today.”
The White House pursued a narrower plan offered by Mr. Montgomery that would have allowed the F.H.A. to loosen standards so it could lure back subprime borrowers by insuring similar, but safer, loans. It passed the House but died in the Senate, where Republican senators feared that the agency would merely be mimicking the private sector’s risky practices — a view Mr. Rove said he shared.
Looking back at the episode, Mr. Montgomery broke down in tears. While he acknowledged that the bill did not get to the root of the problem, he said he would “go to my grave believing” that at least some homeowners might have been spared foreclosure.
It finds that Bush killed a compromise that would have resulted in greater oversight of Fannie and Freddie:
Mr. Falcon lacked explicit authority to limit the size of the companies’ mammoth investment portfolios, or tell them how much capital they needed to guard against losses. White House officials wanted that to change. They also wanted the power to put the companies into receivership, hoping that would end what Mr. Card, the former chief of staff, called “the myth of government backing,” which gave the companies a competitive edge because investors assumed the government would not let them fail.
By the spring of 2005 a deal with Congress seemed within reach, Mr. Snow, the former Treasury secretary, said in an interview.
Michael G. Oxley, an Ohio Republican and then-chairman of the House Financial Services Committee, had produced what Mr. Snow viewed as “a pretty darned good bill,” a watered-down version of what the president sought. But at the urging of Mr. Card and the White House economics team, the president decided to hold out for a tougher bill in the Senate.
Mr. Card said he feared that Mr. Snow was “more interested in the deal than the result.” When the bill passed the House, the president issued a statement opposing it, effectively killing any chance of compromise. Mr. Oxley was furious.
“The problem with those guys at the White House, they had all the answers and they didn’t think they had to listen to anyone, including the Treasury secretary,” Mr. Oxley said in a recent interview. “They were driving the ideological train. He was in the caboose, and they were in the engine room.”
And the Times calls out another Bush administration “Brownie”, James Lockhart, a prep-school pal who he put in charge Fannie and Freddie’s regulator, OFHEO:
Throughout that spring and summer, he warned the White House and Treasury that, in the stark words of one e-mail message, “Freddie Mac is in trouble.” And Mr. Lockhart, he charged, was allowing the company to cover up its insolvency with dubious accounting maneuvers.
But Mr. Lockhart continued to offer reassurances. In a July appearance on CNBC, he declared that the companies were well managed and “worsts were not coming to worst.” An infuriated Mr. Thomas sent a fresh round of e-mail messages accusing Mr. Lockhart of “pimping for the stock prices of the undercapitalized firms he regulates.”
Mr. Lockhart defended himself, insisting in an interview that he was aware of the companies’ vulnerabilities, but did not want to rattle markets.
“A regulator,” he said, “does not air dirty laundry in public.”
When the history books are written, it will be Wall Street, not George W. Bush, that is the key culprit in creating this mess. Bush’s role, along with those of his predecessors, was as enabler, allowing the beast to run amok with little or no attempt to rein it in.
Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.