Huff Post’s Zach Carter on Radio Free Dylan

New Players in the GSE Game: 

Episode #26 – Zach Carter, staff reporter with The Huffington Post

What goes on behind closed doors never ceases to amaze us.

Quietly, discussions between Obama administration insiders, advisers and NY’s financial elite have focused on next step for the federal government’s role in the mortgage market.  Zach Carter from the Huffington Post wrote an excellent piece exposing the behind-closed-doors discussions going on between the White House, its allies at the Center for American Progress, and their for their desire to accommodate the banks. It’s brilliant, really; perpetuating the scam… while appearing to be doing something about it.

As big banks have taken advantage of Fannie and Freddie to the detriment of taxpayers, a system designed decades ago to create a reliable source of lending for home owners has essentially become nothing more than a non-stop profit engine for private banks.  They do it by collecting money for the origination of mortgages from consumers, then transferring the risk of any defaults to government agencies.

“The question is how to reform this system while maintaining the continuity of the availability of affordable 30-year mortgages is the question facing policy makers. How to make billions of dollars while doing it is the question facing the banks,” Zach points out.

“Now, the subject of reforming the government subsidized home lending business which is being used as a political slush fund for years and a massive profit center for bankers who pay themselves to jam risk in America’s guts and the lead of Democratic think tanks, Center for American Progress, who theoretically represents the interests of the American people,” says Dylan.

“We have a system in which the profits from lending are given to private individuals who provide 40 percent of the political donations in this country — but all of the losses are paid by the American taxpayer,” he says.

Even more troubling, Zach points out, the big banks are now looking to get in deeper on the most potentially lucrative mortgage game that, for the most part, they’ve only been able to watch from the sidelines — the GSE slush fund.

“They basically want to replace Fannie and Freddie with banks and then have the mortgage securities of these banks so be guaranteed by the government,” says Zach.  “It just turns over the GSE slush fund to the banks… It’s a lot of money. The banks have always wanted this sort of get in on the GSE game, and now they think they’ve got their chance,” he explains.

The bigger questions to us here at The Dylan Ratigan Show: How in a capitalist country can you have the taxpayer lending taxpayer’s money with the banks harvesting profits through in the process?  How can the banks continue to create the illusion that they have to be propped up through a multi-trillion dollar extraction fees, paid every year?  And how can Democrats or liberals who claim to be in favor of fairness and equal opportunity would be willing to lay future generations of Americans with trillions in dollars in debt in order to pay profits to their bank friends?

Listen in to the podcast for an extended discussion on the role of banks, the future of GSE’s, and the nature of the relationship between the finance industry, the housing market, and our government.

Additionally, here’s some extra credit reading for your Thursday:

• Zach Carter: White House Allies Push Bank Lobby Line on Government Mortgage Reform (2/2/11)
• Michael Lewis: The Big Short: Inside the Doomsday Machine
• Full Transcript of the Zach Carter podcast below

Radio Free Dylan – Zach Carter, The Huffington Post, Full Transcript

DYLAN: Welcome to episode 26 of Radio Free Dylan. I am proud to welcome today Zach Carter, Staff Reporter to The Huffington Post and their Washington D.C. office. Previously of AlterNet where he was their Economics Editor and before any of that, a banking reporter for SNL Financial. He is one of the journalists in this country — and I should clearly define him as a financial journalist — in this country who has a thorough understanding of the relationship between the US government and more specifically, the US government agencies that create money that then banks use to lend for mortgage loans.

Unfortunately, a system designed decades ago that was intended to create effectively a subsidy and a reliable source of lending for home owners has become an incredible profit engine and scam by which private banks collect money for the origination of  mortgages to people like you and then transfer the risk of your default to these government agencies.

Once that structure has been established, the only incentive that the bank has is to make as many loans as humanly possible to jack the banker’s bonus and then jam all of the loans regardless of whether they’re payable or not in the guts of the American government.

Think of it as having the best of both worlds inside of a banking system that was a private banking system. The risk would have to reside with the lender which would then temper the amount of lending that they did relative to the actual risk and payability of the loans that’s a private banking system or think about a state banking system where the credit is issued out of the government to the people. Think of a communist or a central banking system of some kind out of China or Russia.

But the profits from that come back to the government. We have a system in which the profits from the lending are given to private individuals who provide 40 percent of the political donations in this country but all of the losses are paid by the American taxpayer. This obviously at the root of what was going on in American finance and the financial crisis and now the cover-up of that crisis through Federal Reserve money printing and all the rest of it.

One of the issues on the agenda now is a reform of these agencies so that they can no longer be a warehouse for the losses of banks while the profits are skimmed off like cream for people like Lloyd Blankfein and Jamie Dimon.

Zach Carter wrote an exceptional article really outing the White House, its allies for their desire to accommodate the banks and perpetuating the scam while appearing to be doing something about it. My favorite paragraph in his article is this. He says, “The question is how to reform this system while maintaining the continuity of the availability of affordable 30-year mortgages is the question facing policy makers.” He writes, “How to make billions of dollars while doing it is the question facing the banks.”

Zach, why is it that – again, this paper I understand comes from a core democratic ally, the Center for American Progress.

ZACH: That’s right.

DYLAN: A big Obama supporter appears to be issuing research and framing that seeks to perpetuate the massive risk transfer and profit extraction of the banks in the mortgage industry.

ZACH: Well, what’s so amazing about this particular report is that it comes about a year and a half after anybody made any significant contribution to the debate over what to do with Fannie and Freddie. That contribution was from the Mortgage Bankers Association, a major bank lobbying group that all of the big banks are part of and after a year and a half of silence, the only thing to come out is this Center for American Progress report which is essentially the exact same proposal coming straight from the bank lobby.

DYLAN: So, how is it when it is so widely known and understood, how corrupt and corrupting and corrosive this is – we heard every politician, Democrat, Republican – carrying out about Fannie and Freddie carrying out about the mortgage market, carrying about corruption in the housing market and yet, Dodd-Frank made the banks bigger, not smaller and didn’t fundamentally address the core issues.

And now, the subject of reforming the government subsidized home lending business which is being used as a political slush fund for years and a massive profit center for bankers who pay themselves to jam risk in America’s guts and the lead of Democratic think tanks, Center for American Progress, who theoretically represents the interests of the American people.

I just can’t explain it, Zach. Can you?

ZACH: It’s very – it’s a very strange situation. I think a lot of people in high finance and of think tanks like this, there are people behind this report who are very good people who do a lot of good work advocating against foreclosures and other bank abuses. But the report they’ve come up with is really troubling.

They basically want to replace Fannie and Freddie with banks and then have these banks, the mortgage — the mortgage securities of these banks so be guaranteed by the government. It just turns over the GSE slush fund to the banks. That seems like a very bad model to me. And a lot of other people assume that it gets problematic as well but it’s obvious why the banks like it. It’s a lot of money. The GSE – the banks have always wanted this sort of get in on the GSE game and now they think they’ve got their chance.

DYLAN: You write on your piece, “with the government standing behind any of the losses on these home loans, banks that extend mortgages to borrowers would not have to worry about losing money if the borrower fails to repay the loan. That means plenty of risk-free fees for banks as taxpayers explicitly lend the risk.” How in a capitalist country can you have the taxpayer lending taxpayer’s money with the banks harvesting profits through in the process?

ZACH: It’s really wild that the – if you talk to some of the authors of the report, they’ll say, well, we have to get private capital to come in. We have a huge mortgage market. It just won’t work if we don’t get private capital to come in. But, that’s just not true. Right now, the government is backstopping 90 percent of all mortgages. It can work without private capital. It’s a question of whether we want it to or not.

And certainly, you know, if you get the government out of the game altogether, I mean, we have parts of the mortgage market that look like that. It’s called the jumbo market, large big loans Fannie Mae and Freddie Mac are not involved in. There is a purely private sector market for that. They could have been abusive outside of the Fannie and Freddie markets certainly but it’s just absurd to say that the mortgage market as we know it will disappear if somehow we don’t do exactly what the banks want.

DYLAN: But as it becomes more and more apparent that the banks are irrelevant predators sucking the blood of the world, how then do they continue to create this illusion that they have to be propped up through a multi-trillion dollar extraction fee paid every year?

ZACH: This proposal has some safeguards. I mean they do want to have an FDIC-like insurance fund so that the banks would end up – you know, pre-funding any losses that would go eventually and the government would only step in in the event of catastrophic losses. But the only reason that system works is because taxpayers are backstopping the risk and all of that risk, taxpayers get no benefit and return or the profit ends up going to the banks. That is not capitalism. That – capitalism involves winners and losers. People who take risks get rewards. In this case, the government is taking risks and the people who are not taking any risks are getting the rewards.

DYLAN: So explain to me how conservatives who claim to be “free marketeers” could possibly think a system in which all of the risk is given to the taxpayer and all the profit is given to the bank would like that, and tell me how Democrats or liberals who claim to be in favor of some version of fairness or equal opportunity would be willing to lay future generations of Americans with trillions in dollars in debt in order to pay profits to their bank friends?

ZACH: Well, the problem on the liberal side is that for a long time, there have been some actually quite successful, affordable housing efforts through Fannie and Freddie that were then used by Fannie and Freddie as a segue for other problems that were mostly committed in conjunction with banks. A lot of liberal groups don’t want to see those affordable housing programs go away. The problem is you can do affordable housing a bunch of different ways if we, as a society, decide we want to make sure that people with modest means have access to buying homes. You don’t have to have a complex, you know, housing finance system involving multi-trillion dollar banks to do that. You can just have a tax policy do that.

On the conservative side, I think it’s really – you have a long history of Republicans working closely with banks and on a variety of issues and they’ve just come to see the world the way banks see the world. It’s – there’s a lot of campaign money going to both parties and that shapes our political system.

DYLAN: Well, the beautiful thing is that we have a free press and men like yourself that are willing to dig up and identify and highlight these things knowing that we have a corrupt relationship between our banking system and our government who are actively working to extract the very future capital of the generations and humans of this country for their own self-preservation and wealth accumulation.

It is clear that the last line of defense is information and the free press such that we are able to educate as many human beings in this country as possible as to why it is their salary is dropping, why they’re being thrown out of their house, why they have been fired and why their dollar simply doesn’t purchase as much as it once did as all of those levers are being manipulated by the political financial corrupt complex that runs the Democratic, Republican and presidency in this country. And I can’t compliment you enough for your efforts in journalism and keep it up.

ZACH: Well, same to you, Dylan.

ZACH: Alright. Zach Carter at The Huffington Post. We’ll take a momentary break. We’re back right after this.

*BREAK*

DYLAN: Welcome back. Before I let you go today, I want to advice you through a couple of different worthy, I think, points of attention. One, if you haven’t read Michael Lewis’ book, The Big Short, and you’re interested in this type of conversation and understanding what’s going on in this country, I need to emphatically recommend that you pick that book. It’s not only a good book, a good read but it is an incredibly insightful document as to just how corrupt the nature of the relationship between the finance industry and the housing market is and then the housing market and our government. Then we all continue to come to the realization as to how corrupt all these relationships are.

It is important to remember that we have a history of corrupt relationships in this country that we have overcome from women suffrage and slavery to the monopolies that were ultimately broken up by the trust busters led by Teddy Roosevelt and subsequently, Presidents Taft and Wilson. So, as discouraging as some of this may be, do remember the future is ours and they are the ones protecting a crumbling lie before our eyes, frustrating though it may be for some of us.