In 1995 the foundation was set for our current fiscal situation, all the rules governing home loans went out the window.  Bankers felt there was no longer a need for substantial cash down payments, they no longer verified the borrowers income and didn’t worry about their ability to service their debt. Fannie Mae, under the guidance of James Johnson, became the poster child for risk taking by allowing their executives to amass great wealth and when things went south the taxpayers were there to pick up the bill.

Fannie Mae was created by Congress in 1938 in order to buy mortgages from lenders thereby freeing up capitol to lend to     others. Fannie Mae grew so large with so much debt that in 1968 it was taken public and moved off budget to allow financing the Vietnam War. In 1970 Freddie Mac was created to insure Fannie Mae would not operate as a monopoly and it went public in 1989.

Fannie Mae took the lead in relaxing loan underwriting standards, something private lenders soon followed. Then under      Johnson’s leadership Fannie Mae automated the lending process so loan decisions could be made in minutes rather than weeks and the basis was the borrower’s credit history, not a comprehensive financial profile. This was coupled with an aggressive   lobbying effort to insure those pesky regulators didn’t interfere with the program which allowed them to collect millions of   dollars in bonuses and stock options. Even the credit rating agencies who were suppose to be neutral arbitrators were making so much money they forgot their role and looked the other way as the predatory lending practices became the norm.

Johnson had a remarkable plan that included risk taking, lobbying, satellite offices that employed children and relatives of elected officials, special loan packages for influential friends, a bonus system based on volume not quality of loans, all while talking about homeownership for low income Americans. For the period 1991 through 1998 while Mr. Johnson was in charge of Fannie Mae he pocketed over $100 million while he set the framework that would cost taxpayers hundreds of millions if not trillions of dollars.

The other big breakthrough in this train wreck was when in 1993 United Companies put together its first mortgage pool (Mortgaged Backed Securities) worth an estimated $165 million and sold it to investors. Investors had no problem investing as Moody’s, Standard & Poor’s and Fitch Ratings all gave it an AAA rating. In a little over 60 days United Companies shifted $300 million of mortgages to these instruments and the following year increased it to $3 billion. Bottom line it was off to the races.

These securities had risks, such as the possibility of default, they were fixed rate loans, the possibility of interest rates going up would result in an under performing asset and then there was also the risk of an early prepayment of the loan. This gave birth to subprime securities; they could charge a higher interest rate due to the risk and lock them in with prepayment penalties. In 1994 there were some $40 million in subprime loans brokered, within ten years subprime mortgage securities worth $467 billion were being sold to investors.

Quantity not quality was rewarded because the institutions buying the loans had to absorb the losses if they went bad. For this reason the bankers that originated the loans were not concerned with underwriting standards, the more loans they made the more money they made, with no downside. The same situation came into play for those that bundled the securities, the more they sold the better the bottom line. The rating agencies could not stand by without taking advantage of the volume of business, after all the more that received their stamp of approval the fatter their paycheck. Our politicians were also paid off with family members on the payroll, donations to their favorite charity and of course healthy campaign contributions for those that could stand to   ignore what would soon become too obvious to ignore.

Unfortunately when the bubble burst taxpayers were the ones looked to for the bailout. Since late 2007 well over three and one half million homes have faced foreclosure. While these foreclosures were taking place the infamous Troubled Asset Relief    Program or TARP was busy providing these poor banks with $700 billion in bailouts because they were simply too big to fail. That $700 billion was only a small part of the cost of the bailout, if you add up guarantees and lending limits the Fed had     committed to, the total just from the Fed comes to well over $7 trillion additional to keep this ponzi scheme afloat.

The question we should all be concerned with is, can a credit crisis such as this happen again? The unfortunate truth is yes it can  because Congress did nothing about the too big to fail situation. It is interesting that the two biggest defenders of Fannie Mae, Barney Frank and Chris Dodd, authored the law that Congress passed in response to the crisis and it does absolutely nothing about too big to fail. Nor does the bill deal with any significant reform of Fannie Mae or Freddie Mac. With virtually no prosecutions, why wouldn’t these same bankers continue to make riskier and riskier bets while enjoying the profits and shifting the losses to   taxpayers.

An obvious question we should all be asking is, has the legal system done its part in prosecuting those responsible for the reckless lending and excessive risk taking by major financial institutions?  To date no senior executive has been imprisoned or even charged in connection with the events that led up to the financial crisis. This stands in stark contrast with the 1980 failures of numerous    savings and loan institutions. In 1980 over 1,000 cases were sent to prosecutors with over 800 bank officials going to jail. James Johnson and his counterpart Angelo Mozilo from Countrywide Financial are great examples, they made hundreds of millions of  dollars manipulating the system and arguably played a bigger role in the financial crisis than Charles Keating did in the savings and loan debacle but they aren’t the least bit concerned about potential prosecution.

Regardless of political persuasion most people should agree safeguards need to be put in place to insure this financial crisis doesn’t repeat itself. It shouldn’t matter how well connected you are or how much you donate to politicians, if you played an illegal part in this crisis that cost families their homes, their savings and their jobs you should face prosecution, restitution and time in prison. It is an insult to hard working Americans who comply with an overwhelming regulatory framework, that these too big to fail banks and their executives pulled this off and walked away laughing at the peasants that play by the rules. Hopefully 2012 will bring us       legislators, an Attorney General and an administration that will demand justice, sound fiscal policies and put the needs of the    Country over those of the party and reelection.