EDITOR'S NOTE: Here are excerpts from two articles outlining the collapse of the "Auction Rate Securities" (ARS) Market which today leaves The State of Hawaii with $1 Billion of frozen, currently unsalable, but interest bearing, Student Loan Auction Rate Securities. The ARS auction markets failed in February 2008 as the Democrats' subprime mortgage scam made banks insolvent and therefore unable to lend. The last article indicates which Congressmen and Senators--with Obama near the top of the list--were purchased in order to make sub-prime lending possible. RELATED: Kawamura Hits "inaccuracies" on State's $1B ARS
LINK: Figuring Out ARS Freeze (11-1-08)
Over the past 25 years, the ARS market grew to a whopping $330 billion market because ARS offered higher rates of return than Treasuries or money market funds. ARS are municipal and corporate bonds, as well as preferred stocks, with interest rates or dividend yields that are periodically reset through auctions, usually every seven to 35 days. But, as Rep. Spencer Bachus (R-Alabama), ranking member of the House Financial Services Committee, noted during his opening speech at Congressman Franks’s ARS hearing, "many of the firms that sold ARS did not disclose that with increased yield came additional risk. Indeed, many investors who purchased auction rate securities have asserted that they were marketed as the equivalent of highly liquid money market accounts." (Rep Barney Frank received $42,350 in contributions from Fannie Mae and Freddy Mac.)...
The subprime mortgage and credit crisis that unfolded in the second half of 2007 was also a contributor because it limited firms’ ability to support auctions with their own capital, Thomsen explained. "Firms stopped supporting the auctions in mid-February 2008, and the entire market froze in a matter of days. The securities became illiquid, leaving tens of thousands of customers unable to sell their ARS holdings."
(And what caused the subprime mortgage crisis?)
LINK: How the Democrats Created the Financial Crisis (9-22-08)
The clear gravity of the situation pushed the legislation forward. Some might say the current mess couldn't be foreseen, yet in 2005 Alan Greenspan told Congress how urgent it was for it to act in the clearest possible terms: If Fannie and Freddie ``continue to grow, continue to have the low capital that they have, continue to engage in the dynamic hedging of their portfolios, which they need to do for interest rate risk aversion, they potentially create ever-growing potential systemic risk down the road,'' he said. ``We are placing the total financial system of the future at a substantial risk.''
What happened next was extraordinary. For the first time in history, a serious Fannie and Freddie reform bill was passed by the Senate Banking Committee. The bill gave a regulator power to crack down, and would have required the companies to eliminate their investments in risky assets.
If that bill had become law, then the world today would be different. In 2005, 2006 and 2007, a blizzard of terrible mortgage paper fluttered out of the Fannie and Freddie clouds, burying many of our oldest and most venerable institutions. Without their checkbooks keeping the market liquid and buying up excess supply, the market would likely have not existed.
But the bill didn't become law, for a simple reason: Democrats opposed it on a party-line vote in the committee, signaling that this would be a partisan issue. Republicans, tied in knots by the tight Democratic opposition, couldn't even get the Senate to vote on the matter.
That such a reckless political stand could have been taken by the Democrats was obscene even then. Wallison wrote at the time: ``It is a classic case of socializing the risk while privatizing the profit. The Democrats and the few Republicans who oppose portfolio limitations could not possibly do so if their constituents understood what they were doing.''
Mounds of Materials
Now that the collapse has occurred, the roadblock built by Senate Democrats in 2005 is unforgivable. Many who opposed the bill doubtlessly did so for honorable reasons. Fannie and Freddie provided mounds of materials defending their practices. Perhaps some found their propaganda convincing.
But we now know that many of the senators who protected Fannie and Freddie, including Barack Obama, Hillary Clinton and Christopher Dodd, have received mind-boggling levels of financial support from them over the years.
Throughout his political career, Obama has gotten more than $125,000 in campaign contributions from employees and political action committees of Fannie Mae and Freddie Mac, second only to Dodd, the Senate Banking Committee chairman, who received more than $165,000.
Clinton, the 12th-ranked recipient of Fannie and Freddie PAC and employee contributions, has received more than $75,000 from the two enterprises and their employees. The private profit found its way back to the senators who killed the fix.
There has been a lot of talk about who is to blame for this crisis. A look back at the story of 2005 makes the answer pretty clear.
RELATED: Fannie Mae and Freddie Mac Invest in Democrats
Top Recipients of Fannie Mae and Freddie Mac Campaign Contributions, 1989-2008
Name Office Party/State Total
1. Dodd, Christopher J S D-CT $133,900
2. Kerry, John S D-MA $111,000
3. Obama, Barack S D-IL $105,849
4. Clinton, Hillary S D-NY $75,550