It’s the fifth anniversary of the financial crisis that sent panic through the markets and inspired historic federal interventions into the economy. Frequent readers of these pages understand government’s role in planting the seeds of the crisis. In 2008, about two-thirds of the risky home loans in the system were held by government entities or entities operating under government control. Through its affordable housing directives, the federal government had created a massive artificial demand for housing through risky loans, and the market delivered.
In the eyes of many taxpaying Americans, however, the bailouts that followed smacked of cronyism between big government and big business. But the most notorious cronyism took place behind the scenes. It included actors in the nonprofit and philanthropic world, both of which had excessive influence in the crisis and its legislative aftermath. Call it full spectrum cronyism.
Consider one prominent thread.
In August 2010, housing activist Martin Eakes boasted to a gathering of MBA students at Duke University that the ideas hatched in the nonprofit that he founded, called Self Help, were now the law of the land. He was referring to provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act, which had passed the month before.
Regulatory ideas have to hatch somewhere, of course; but Eakes’s statement was unsettling. First, he and Self-Help were key players in subprime lending and cheerleaders for the government’s “affordable housing” goals. Indeed, Eakes played a seminal role in mediating risky loans from unwilling private banks to an initially squeamish Fannie Mae. Second, he claimed in the same speech that Self Help’s national lobbying arm, the Center for Responsible Lending (CRL), had “hired fifty lawyers, PhDs, and MBAs to basically terrorize the financial services industry for any of their abusive practices nationwide.”
CRL was inspired and funded primarily by progressive California S & L owner Herbert Sandler, who wanted Eakes’s work to have a national impact. (Self-Help now owns a ten-story building in Washington, DC, a few blocks north of the White House.) Sandler and his wife, Marion Sandler, made news in 2008 at the height of the financial crisis, because their bank had pioneered the “option ARM loan,” which the New York Times called the “Typhoid Mary” of the housing crisis. Time magazine listed the couple among the twenty-five people to blame for the financial crisis, and even Saturday Night Live initially parodied them for their role in the meltdown.
The Sandlers, however, did not suffer irreparable harm from this temporary bad press or from the housing crisis itself. They had cashed out in 2006—at the height of the housing bubble—by selling their company for $24.3 billion to Wachovia in North Carolina—the same bank that went belly-up a couple of years later. This allowed the Sandlers to engorge their charitable foundation, making it one of the thirty largest foundations in the country. They immediately began to fund media operations that provided the metanarrative of Wall Street greed and Republican deregulation that supposedly led to the financial crisis. They also continued to heavily fund the left-leaning Center for Responsible Lending.
Herb Sandler appeared before the official Financial Crisis Inquiry Commission, but its final report carefully preserved his self-defense and rationalizations. The liberal California politician who chaired that commission with an iron fist—Phil Angelides—had enjoyed Sandler support as California state treasurer. In that capacity, Angelides had funneled pension money from state employee and teacher’s unions to “private equity businesses in underserved areas” and “affordable housing.” (Both pensions are now in serious trouble.)
With so much cross-fertilization, it was inevitable that many from this web would find their way into federal bureaucracies. One example is Mark Pearce, the Director of the FDIC’s Division of Depositor and Consumer Protection. We were told in 2010 that the U.S. needed a new bureau—the Consumer Financial Protection Bureau—to protect consumers, since the other agencies (such as the FDIC) could not. Yet the FDIC created its own consumer protection division the same year, which now has over 800 employees.
In this capacity, he has been busy defending various ill-conceived ideas, such as a pilot program to “encourage” ordinary banks to enter the small-loan markets. The purpose of the program seemed to be to put small-dollar installment loan and payday companies out of business; but it didn’t work. The basic reality of loan underwriting makes it very hard—without taxpayer’s money or a willingness to absorb losses—for commercial banks to make small loans profitably without using the business model of small-dollar lenders. Apparently the banks understood that. There was a lot of talk initially among regulators about “expected profitability” of the products, but the pilot program was a failure. In the pilot’s concluding report, the term profitability was nowhere to be found.
It’s likely that this program, which merely encouraged banks to offer these loans, will quietly be replaced by more insistent regulatory shoving.
Why do I mention Mark Pearce and his FDIC division here? Pearce was a long time employee at Self-Help and was the first president of its Center for Responsible Lending, with its horde of “financial terrorists.” The foxes are not only running the hen house. They laid its foundation.
Jay W. Richards, PhD, is the author of the New York Times bestselling book Infiltrated (McGraw-Hill, August 2013), Distinguished Fellow at the Institute for Faith, Work, and Economics, and a Senior Fellow at Discovery Institute.