“All political activities — including all lobbying — will be halted immediately.”

-Federal Housing Finance Agency Director James Lockhart (Bloomberg)

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Here is a factoid you may not have been aware of. It explains a lot of things about the political philosophy, crisis resolution, and approach to regulation in Washington D.C. It also explains to a large degree why the final version of the Dodd-Frank bill looks the way it does, and goes so relatively easy on the institutions at the core of the crisis.

The conclusions are not pretty. Indeed, its downright fugly.

Let’s start with the FACTS, something Washington D.C. seems to be allergic to:

When the GSEs were put into conservatorship by Hank Paulson, several steps were immediately effected: The CEOs and much of the senior management were fired. One of the very next steps put into place was a total ban on all political activities, including — most especially — lobbying. Common stockholders were placed last in line for any claims, with preferred shareholders right behind them.

Compare that to the rescues of Citigroup, Bank of America, Merrill Lynch, and the rest of the bankers wrecking crew. The vast majority of senior management and board members who created and oversaw their own implosions are still in place. A report on Corporate Governance by Professor Emma Coleman Jordan of the Georgetown University Law found that 92% of senior bank execs were still working in their same jobs.

But worse of all, at any insolvent banking institution not named Fannie or Freddie,  none of the POLITICAL ACTIVITIES, CAMPAIGN DONATIONS OR LOBBYING ACTIVITIES were halted. It was business as usual on capital hill, for the bankrupt banks and their highly paid shills.

When we look at the shortcomings of Dodd-Frank, or the weaknesses of the FCIC (Underfunded, short on time, lacking prosecutorial zeal), it traces back to this decision.

I suspect there are two reasons for this:

First, Treasury Secretary Hank Paulson was the former CEO of Goldman Sachs. He was very much aware of how profitable the banks’ lobbying efforts were — keeping capital requirements low, allowing excess leverage, capturing regulators. He sure as hell wasn’t going to allow the bank to lose that strategic advantage. Second, it reflected the longstanding conservative ideology against Fannie and Freddie while simultaneously favoring all other things financial. Remember, before he became a Socialist redistributing taxpayer wealth to the banking sector, George W. Bush was ostensibly a conservative.

Hence, we see a dichotomy: There were well deserved lobbying restrictions placed on the mess that was Fannie and Freddie. At the same time, there was an undeserved freedom to lobby, to continue exploiting their wealth and power, despite their essential insolvency,

The bottom line: If you think Dodd-Frank was too soft in its treatment on banks, if you belief the FCIC was hamstrung from the outset, consider this ugly fact of American politics: It was all by design.

And the folks who allowed that lobbying juggernaut to continue uninterrupted were Hank Paulson and George W. Bush . . .

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UPDATE: January 31, 2011 10:11am

I guess I need to spell this out evenmore

-When the Bush administration rescued F&F, they stopped their lobbying.
-When the Bush administration rescued  C/BAC/JPM/MER/GS/MS they did not stop their lobbying.

That was the decision that administration made — they could have imposed the Lobbying restrictions as a condition of the bailouts. There was window then, and that window is now closed.

The result? The full force and fury of the bank lobby was brought to bear on the reform efforts, effectively neutering them.

As was noted in comments, the Bush administration is the gift that keeps on giving . . .

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Previously:
The Moral Hazard of the “Bad Bank” (January 2009)
FDIC Bair: Bank Chiefs Need to Go (May 2009)
Report: Paulson Lied to Congress, Public (October 2009)
Banking Sector Remains (literally) Unchanged (January 2010)
Elections: Money Talks Louder Than Ever (October 2010)
Too Bad Banks Missed Out On the GM Treatment (November 2010)
BofA Freddie Mac Putbacks Resolved for 1¢ on $ (January 2011)

Category: Bailouts, Politics, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

41 Responses to “Why Were FNM/FRE Banned From Lobbying But Not C/BAC/JPM/MER/GS/MS ?”

  1. Wendy says:

    George W. Bush: The gift that keeps on giving . . .

  2. [...] By Barry Ritholtz – January 31st, 2011 “All political activities — including all lobbying — will be halted immediately.” [...]

  3. mark says:

    The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.emphasis added

    This is the summary from Simon Johnson’s article in the Atlantic “The Quiet Coup” published in May 2009. It’s worth reading or re-reading.

    http://www.theatlantic.com/magazine/archive/2009/05/the-quiet-coup/7364/

  4. Petey Wheatstraw says:

    The corporatists are corrupt and won’t investigate or prosecute themselves? Why, the nerve of them.

  5. [...] Big banks were allowed to aggressively lobby even while the GSEs were reined in.  (TBP) [...]

  6. rktbrkr says:

    The F&F 1% settlement with BAC is a pretty good ROI in BAC’s lobbying investment. Geithner (Paulson Lite) is a Republican secret agent. The way this is playing out the Democrats are getting all the blame and taxpayers getting all the pain via F&F and the Republicans are banksters are getting all the benefit from funneling losses from the big banks into F&F, O’Bama must be brain dead to allow geithner to implemnt this policy.

    Geithner is making O’B a 1 term prez and guaranteeing himself a dream job at one of the TBTF.

    ~~~

    BR: Oooh, I forgot about the F&F BAC/C settlement — I’ll add that prior post above

    BofA Freddie Mac Putbacks Resolved for 1¢ on $ (January 2011)

  7. call me ahab says:

    “Remember, before he became a Socialist redistributing taxpayer wealth to the banking sector, George W. Bush was ostensibly a conservative.”

    it’s not socialism when you are pitching money to your friends (in high places)

    cronyism: doing favors for friends: special treatment and preference given to friends or colleagues, especially in politics

    ~~~

    BR: The line in Bailout Nation was “The Bush administration, which took office as social conservatives, is now leaving as conservative socialists.”

  8. then, again, sometimes, when this hoary story comes back (up for Air), other things, like

    http://booktv.org/Program/11839/Bob+Dylan+In+America.aspx

    seem much more interesting…
    ~~~

    forget, the appropriate, RICO … QE (FedRes estilio) seems to have Soma (ref. Huxley) beat — Cold.

  9. curbyourrisk says:

    “And the folks who allowed that lobbying juggernaut to continue uninterrupted were Hank Paulson and George W. Bush . . .”

    So….you are saying that the Obama administration and Tim Geithner stopped these practices when they took over?????

    ~~~

    BR: No, I am saying this:

    -When the Bush administration rescued F&F, they stopped their lobbying.
    -When the Bush administration rescued C/BAC/JPM/MER/GS/MS they did not stop their lobbying.

    That was the decision that administration made — they could have put the NON Lobbying terms on the banks a s a condition of the bailouts. That was the window, and it is now closed.

    So yes, I blame Paulson/Bush for the unrestricted power banks retained despite being bankrupt.

  10. montyhigh says:

    I thought Obama ran on “Change We Can Believe In”? I thought all you guys knew bush was a corporate today? Its time to figure out what to do now that your beloved Obama is found out to be the same as Bush only more hypocritical.

  11. Hugh says:

    And the folks who allowed that lobbying juggernaut to continue uninterrupted were Hank Paulson and George W. Bush . . .

    Unitl 1/20/2009.

    After that your crew could have asked the banks to stop lobbying, but didn’t.

    Busy diaries?

  12. AHodge says:

    yes
    and dont we the paople have extra rights to their records emails etc?

  13. wally says:

    As other posters point out, everybody knew Paulson and Bush were owned by big money… and Obama’s continuation of identical policy further proves that the issued is bigger than party politics. Simon Johnson was, of course, completely correct.
    When you are in politics, you don’t bite the hand that feeds you.

  14. Petey Wheatstraw says:

    Obama is as much a corporatist as Bush, if not more so. We’ve gone about as far right as we can, and lost the reins of government in the process. Corporatism is a juggernaut that will continue until there’s nothing left to steal.

    ~~~

    BR: You and I don’t know what Obama might have done (though we have our suspicions)

    BUT — We know PRECISELY what Bush/Paulson did do — hence, why they get the blame for their decisions

  15. PrahaPartizan says:

    I see the Bush and Paulson apologists are hard at work today. Too bad the idea that the only time a political entity has power to effect change of the type imposed on F&F is when it hands over the money to the party needing it. The window for demanding the banksters to take a hiatus in lobbying and influencing political action existed in the fall and winter 2008. To the best of my knowledge, Obama didn’t assume office until January 2009. Did I miss a few months earlier when his team was in charge? Of course, Bush and the plutocrats (his base) are never responsible for anything according to some people.

  16. Greg0658 says:

    Petey yeah but – John McCain & Sarah Palin ? I not going to Wiki to find factoids of their industrial complex allegiances (and 1st Lady 2nd Man) … now maybe we messed up in the Primaries …. this democracy thingie I’m I’m I’m

    Frank Zappa – Titties and Beer
    http://www.youtube.com/watch?v=441-Vnv7cRY

  17. Realist says:

    Does corruption need to be punished? Yes. Will the gov’t ever punish itself? No.

    That being said, I don’t mean to rain on anyone’s parade, but TBP’s ending to this article is illogical:

    “The bottom line: If you think Dodd-Frank was too soft in its treatment on banks, if you belief the FCIC was hamstrung from the outset, consider this ugly fact of American politics: It was all by design. And the folks who allowed that lobbying juggernaut to continue uninterrupted were Hank Paulson and George W. Bush . . .”

    The Dodd-Frank Act was passed by Barack Obama on July 21, 2010. Do your own due diligence…
    http://en.wikipedia.org/wiki/Dodd%E2%80%93Frank_Wall_Street_Reform_and_Consumer_Protection_Act

    ~~~

    BR: I don’t exonerate Obama/Geithner/Summers (I have been very critical of Obama and the status quo duo).

    But the simple reality is that they came into office with the banking lobbying apparatus at full strength — the impact of that was to water down any reform, and to keep Congress under the thumb of Wall Street.

  18. Carl H says:

    one of the characteristics of being an ideologue is denial. Ideologues will never admit they are wrong. They will rewrite history to support their view of how the world works and should work. Denial is a pretty nasty psychological process. It prevents us from facing reality and recognizing actions, beliefs, and behaviors that are not working or supporting us in improving our quality of life, the quality of life of others and the health of the planet. Many people need a belief system, political, economic or religious to help them create structure. I believe denial helps them justify beliefs that they are so indoctrinated with that when hard cold evidence is presented that their belief is inaccurate, is not working, or there is convincing evidence that it has failed they continue to justify the belief refusing to let go when the evidence proves that the system does not work. Here is a great example of denial at work in politics and economic theory.

  19. Jim Greeen says:

    The gambling industry has quite successfully change their name from gambling to gaming. Gaming is a much softer word, a word that doesn’t carry any of the many negative connotations of the word gambling.

    The word lobbying is a much softer version of what they really engage in and that is bribery. We would hopefully never put up with people that ‘bribed’ our elected officials, but lobbying them is more than OK.

    Read Chris Hedges The Death of the Liberal Class

  20. Rescission says:

    Is it relevant that one case involved conservatorship and the other was loans to be paid back? Weren’t some of the financial institutions pressured to take TARP funds even though they didn’t want to? Not sure on this one. Hindsight is certainly 20-20.

    ~~~

    BR: Um, no:

    1. There was no effective difference between bailouts & conservatorship. Both entities were bankrupt, bith rescued by taxpayer dollars.

    2. Pressured to take TARP funds? Grow a pair, and say no publicly. And stop whining about free taxpayer money

    3. This was said at the time, not in hindsight.

  21. Hugh says:

    3 October 2008 – TARP becomes law. Plan is to buy troubled assets. Plan morphes into capital injections usually in the form of preferred stock.

    From this point on Govt can insist on shareholders’ rights to change company policy. Anyone who has lived through a company takeover knows that this could easily have included a change to lobbying procedures, and that this wouldn’t necessarily have to be done in the first day(s) of the takeover.

    The “window of opportunity” to change company policy only closed when the banks repaid the capital injection in full.

    That was waaaaaay after 01.20.2009.

    Am I missing something?

  22. Yes

    Any company has the right to petition the government for redress — its int he consitution.

    When thee firms were on the verge of failure and begging for money, that was when the abrogation of speech rights could have been part of the deal. Take the money with these terms or not at all. Even the US Supreme Court, as corrupt as it is, could not have saved the banks bacon.

    Once the deals were cut, the terms were set, it was too late.

  23. roxy says:

    Yes, it was all by design as BR said. The Federal Government is prohibited from lobbying and political activities. The Bush Administration had to be well aware of the fact that the Federal Gov is prohibited from lobbying Congress, so the conservatorship of Fred/Fan was the perfect way to get them out of the way. I’m not sure they went out of their way to restrict Fred/Fan it was probably just a handy side-effect of the conservatorship that had to be done for the “good of the country.”

    Of course Paulson was aware of what lobbying can do, to suggest otherwise is laughable. That is why Obama’s continuation of the Bush personnel and policies is so troubling. It does not seem that there has been a real examination of what is at its heart. The selection of Daley as CoS is more evidence that we should not hold out hope for change for the better. At least not for the bottom 99% of us.

  24. budhak0n says:

    Well it seems I spoke too soon. Perhaps there is something of future value here.

  25. budhak0n says:

    Here’s my central problem with the entire conundrum. What are your options moving forward?

    A witch hunt designed to punish the sinners for their past sins would simply lead to a myriad of unintended consequences.

    How does one judge who stepped out of line, and who is worthy of being punished? Who can actually say who the beneficiaries were and who were not?

    I sounded this drum at the beginning of this fiasco but once you extend certain protections, it’s darn near impossible to pull them back and then later indict someone for having availed themselves. And frankly it’s not very helpful in dealing with the issues that stand front and center in 2011.

  26. curbyourrisk says:

    BR: No, I am saying this:

    -When the Bush administration rescued F&F, they stopped their lobbying.
    -When the Bush administration rescued C/BAC/JPM/MER/GS/MS they did not stop their lobbying.

    That was the decision that administration made — they could have put the NON Lobbying terms on the banks a s a condition of the bailouts. That was the window, and it is now closed.

    So yes, I blame Paulson/Bush for the unrestricted power banks retained despite being bankrupt.

    @BR. Believe it or not…I blame them too…..and I blame who ever it was (Ithink I know) who allowed Glass Steagal to be repealed. MY point is Obama has had 2 years to correct many mistakes of the Bush Presidency (who I voted for twice and would have voted for over Obama), but he has not. There comes a point, when you OWN what you inherited and his time has come. Start FIXING things (the right way) or stop throwing the blame around.

  27. Rescission says:

    @BR:

    1. Good points. Agreed.
    2. Correct. I recall being pissed when softy bank leaders went along and took the money rather than saying no. Ford said no, and gained a lot of respect. Agreed.
    3. Didn’t the banks have to negotiate with Obama when they wanted to pay the money back? I recall it wasn’t a clear cut available to simply pay it back whenever they wanted to. My question is, could not the current administration have negotiated some of this when they were negotiating the payback? Maybe not.
    4. Let’s agree that Paulson missed the opportunity. Let’s say he screwed it up. So now when does Obama and his team have to stand on their own and become responsible. Has he no power? Is he that weak?

  28. Mark Down says:

    We have to face it …On the list of the Crooked Country’s in the world. USA # 28 !

  29. PrahaPartizan says:

    “…So yes, I blame Paulson/Bush for the unrestricted power banks retained despite being bankrupt.

    @BR. Believe it or not…I blame them too…..and I blame who ever it was (Ithink I know) who allowed Glass Steagal to be repealed. MY point is Obama has had 2 years to correct many mistakes of the Bush Presidency (who I voted for twice and would have voted for over Obama), but he has not. There comes a point, when you OWN what you inherited and his time has come. Start FIXING things (the right way) or stop throwing the blame around…”

    Wow, Obama has pulled us totally out of a black hole created by your favoritest pResident of all time and his delaying cronies in Congress and sombody’s POd. I like that logic. Damn, I think I’d like to make almost any trade going with a person with that intellectual capacity. It would be a form of child abuse, though.

  30. Init4good says:

    curbyourrisk @ 12:17 – I think the Obama admin came in with sincere intentions to correct mistakes of Bush presidency, (evidence Dodd-Frank) but the opposition created enough noise to frighten those on the lib/conserv fence, and it worked. The midterms have shown that it worked, and one house is now Republican. It’s back to business/ govt as usual – bought and sold to those w money, ignoring constituency and the average american loses.

  31. Raleighwood says:

    After taking office could Obama have restricted the lobbying privileges of the banks, based on the agreements framed under Bush, or was that window nailed shut?

  32. obsvr-1 says:

    @PrahaPartizan 9:51 am

    …. The window for demanding the banksters to take a hiatus in lobbying and influencing political action existed in the fall and winter 2008. To the best of my knowledge, Obama didn’t assume office until January 2009. Did I miss a few months earlier when his team was in charge? Of course, Bush and the plutocrats (his base) are never responsible for anything according to some people.

    – Reply

    Don’t be naive, both Obama and McCain were deeply involved with team Bush/Paulson leading into the election, and it goes without saying post election Obama and his transition team were immersed.

    It is Obama that campaigned on Change, change the “politics as usual” by closing the revolving doors between gov’t & big business/FIRE sector and restrain the lobbyist. Instead he has installed a revolving door at the WH and hired lobbyist into the Exec Branch, seems the only restraint on lobbyist is the fact that DC has a height restriction on buildings, otherwise K-st would look like lower Manhattan.

    Apparently Washington D.C. and Manhattan (Wall ST) have become the modern day Sodom and Gomorrah.

  33. Brit says:

    I assume GM should have also be precluded from lobbying as well, correct? (If that was considered the model as opposed to what we did for the banks).

  34. jjay says:

    Barry, that five word sentence explains the MBS fraud, the offshoring of our industry, the rise of China, the destruction of the dollar, and the rise of the US Security State.
    ‘It was all by design.”
    A 500 page “report” just confuses the issue with minutiae.
    “It was all by design.”
    Don’t look for any change or truth out of the current regime.
    “It was all by design.”
    To the current regime, the destruction of the US economy is not a mystery, it is Policy”
    “It was all by design.”

  35. VennData says:

    The lobby that needs to take a break and do something useful is the US Chamber of Commerce.

    What a bunch of wackos. You can be sure those guys missed the two year rally.

  36. IS_LM says:

    curbyourrisk @ 12:17

    Here is a useful weighting scheme I apply to opinions:

    1 – 0.25*(Indicator for 2000 Bush voter) – 0.75*(Indicator for 2004 Bush voter)

    You know full well how Glass-Steagall died: Phil Gramm (R-FIRE) killed it in the night. You want Obama to have fixed all of the things your guy fucked up over eight years? Amazing.

  37. [...] Why No Lobbying Ban for All? Barry Ritholtz points out that a condition of the takeover of Fannie Mae and Freddie Mac was a ban on lobbying and political activities, while the banks that were rescued had no such curb. “It was business as usual on Capitol Hill, for the bankrupt banks and their highly paid shills.” The Big Picture [...]

  38. curbyourrisk says:

    Phil Gramm had the ability to do this all by himself??? I thought a Sitting President had to sing such bill.
    OK OK…I get it. Everyone here is a Bush Hater. A Republican hater. I get it.

    Nothing is the fault of the ruling party…..It all the other guy’s fault.

    I will VOTE for what ever side has the balls to do what is necessary. Right now…that is no one. What needs to be done is painful, very painful. I tmeans, you will most likely NOT get re-elected. Bush, wa by no means as bad as you all make him out to be. Yes, he fucked up…..Yes some of his policies were wrong. i do however, find it quite comical that the policies that were the most fucked up, are the same one’s being continued by the Obama presidency. The banks should have been nationalized. Bush fucked that up and so did Obama…. From there, everyting else is just a continuation of the Ponzi, from the appointing of Geithner to the re-appointing of Bernanke.

  39. [...] Why Were FNM/FRE Banned From Lobbying But Not C/BAC/JPM/MER/GS/MS ? Barry Ritholtz [...]

  40. subscriptionblocker says:

    Hmmmm…

    Seems to me that we could run a modern economy without credit. Excepting possibly transaction credit…and even that might be expendable.

    So why do we keep handing a rope to our executioners? And will attitudes ever change?

    How long could a bank last with zero borrowers, even with the best DC thieves?

  41. subscriptionblocker says:

    Might be interesting to poll your readership. Get an idea how many are still feeding the banking cockroaches.

    A lot of these bankers may own their own landscape business some day….