Respect Authority?

He never worked at a bank but he is responsible for the the signature piece of legislation that governs the banking industry. And since he wrote a law, it should be reasonable to expect that he would follow the others.

AuthorityBut it appears that would be presumptuous because former Massachusetts Senator Barney Frank used to solicit male prostitutes (it’s against the law to pay for sex) then had the prostitutes come live with him… where he ran a brothel out of his house (again, against the law).

Yet Frank is a welcome guest on CNBC where he gets to lecture the viewing public about corruption in the banking sector. Further, he asserts that since his law (Dodd-Frank) has been implemented, the banks will no longer be able to wreak havoc on the financial sector.

What most people don’t know, nor will CNBC report, is that Barney Frank was one of the main culprits of the financial scandal that rocked Wall Street in 2008. Here is a short version of the facts:

  • Barney Frank was the principal advocate in Congress for using the government’s authority to force lower underwriting standards in the business of housing finance.
  • They made banks, at risk of penalty, lower their lending standards so that more minorities could get home loans. Banks were penalized if they did not make these loans!
  • Once the loans were made, the banks then sold their sub-prime loans to government run Fannie Mae and Freddie Mac.
  • Frank (along with the Clinton’s) imposed “affordable housing” requirements on Fannie Mae and Freddie Mac in 1992. Before that time, these two government sponsored enterprises (GSEs) had been required to buy only mortgages that institutional investors would buy…in other words…prime mortgages.
  • Congress thought these standards made it too difficult for low income borrowers to buy homes and thereby discriminated against minorities.
  • The affordable housing law required Fannie and Freddie to meet government quotas when they bought loans from banks and other mortgage originators.
  • The GSEs then pooled these loans together and sold them out.
  • Since the GSEs had the implied backing of the US Government, investors thought they were buying quality loans backed by the U. S government.
  • Investors all over the world came in to buy all this paper which was supposedly of high quality and with good ratings.
  • The investors  never realized, until it was too late, that the U.S housing market was was  built on a house (no pun intended!) of cards courtesy of the programs pushed by Barney Frank.
  • In the end, the poor were encouraged to take out loans they could never afford and which were later foreclosed upon, destroying the borrower’s credit.

But only in Alice’s Wonderland, or the U.S. Congress, would the people most responsible for the banking crisis get to come back and blame the banks for the polices they enacted…and then get to rewrite the laws!

The motivating idea behind the Dodd-Frank was to reign in the size of the banks or as they said they said at the time, banks that were “to big to fail.” Never again would we allow banks to get so large they could destroy the economy.

But here we are just a few years years and the banks are bigger than they were in 2008.

So as each passing days we get closer to living in the world George Orwell’s futuristic book “1984.”. Up is down, and down is up. Too big to fail now means let’s have even bigger banks.

The sad fact is that we deserve the politicians we get. The press no longer challenges Barney Frank (or others like him) and when he comes on T.V the general public has no idea who he is or what he’s done.

I was recently on a trading desk when Barney Frank appeared on T.V. I informally polled the junior people on the desk to see if they knew who he was.  To a person no one could name him. After I told them who he was, and what he had done, one of the junior traders was generally impressed that I knew so much on this subject. I responded ‘You should not be impressed by how much I know about him. You should be embarrassed by how little you know about him.

This is the world we now live in where professionals who work in the finance industry have no idea about the politicians enacting and creating the laws under which they perform their jobs.

One of the main reasons that sycophants like Barney Frank are able to do what they do and get away with it is that we are trained from an early age that politicians are people worthy of respect. That by the sheer nature of the titles they hold, we should revere them as something more than mere mortals. In reality, Congress and politicians generally have come to excel at only one skill: getting elected and reelected.

Barney Frank’s career is prototypical.  He has never held a job in the private sector and knows nothing about banking or finance. What he does know is how to get elected… and the main way he got elected was by keeping people ignorant about who he really is.

He’s not alone. He’s in good company with Barack Obama.