happen if our chairman gave you a list of issues. asked all of you to take a look at which you would think is the best for your church and community and the country, and then one sunday, we all all over this country, picked something that everyone liked, black, jew or gentile would say, we never thought about that. because i take my seat saying i never gave chairman cleaver a hard time. what i told the chairman was that i didn't know much about the bible. all i knew is that i was an altar boy, they were talking latin, throwing incense in my face and i was listening to the same thing every sunday. but there was one thing that came out of it. and that is there was some rich people and they wanted to get into heaven as i remember. and they were waiting for jesus to explain why he was blocking the way.

for their admission into heaven. and he explained to them that he was naked. and he had no clothes. that he was sick. and didn't come to visit him. that he was in jail and they didn't know he was hungry, he was thirsty. basically, he was in bad shape and he went to them and they just turned him down. and as i remember the story, they looked at each other and said, no, you got the wrong people. you never came to any of us. and he said something like, if you don't understand how you should be treated, people not me, but the lesser of people

like me, then you should go straight to hell. that's all -- that's all i remember. and so, i keep bringing it back and forth and saying that's our mission. we saw on television what they think about us as a people. republicans have named us and thank god you're our partners. and i feel so proud as i walk out of here. i'd like to say that in three months, this is the first day i tried to do it without a cane. thank you. >> we want to thank the congressman. come on. [ applause ] as you remain standing, let me say that i want to thank all of you for sharing. we have another full day tomorrow. tomorrow night is our awards dinner.

we want to ask you please with honoring clyburn -- james clyburn tomorrow night, one of the honorees tomorrow and we are asking you please make sure you get your ticket for tomorrow's dinner. board members depart at 6:15 on k street. board members on k street. i want to close out by saying how grateful i am -- k street, board members. at the front door. i want to say how grateful we are to our congressmen. they have made us, they have honored us today. and the truth of the matter is that for most of us, this national display of unity between the caucus and the conference, the national black churches, is not a pretense.

because we live in our every day in the districts of this nation. most of us, our churches have had partnerships with our congressmen and they've been faithful to us, especially the members of the caucus. we want them to know we're proud of you. we've found great joy in the services you've made. you've made us proud and we've never once, never once, rejected the idea that we invested in you and you have always delivered on our part. this is my congressman. i live in westchester, but this is my congressman. he's in harlem and he's been great. i want you to know on behalf -- and let me tell you, this was not just a ceremonial partnership. mostly all of the caucuses been through every day. from early this morning, you saw nothing but congressmen. you almost thought this was where the legislature being passed because the congress, u

caucus was here. so on behalf of all of the pastors of our nine denominations -- church of god and christ, four baptist denominations, all nine of them and independent churches, because we have also opened up the caucuses within main line denominations and we're building a movement. we're not gathering for religious or theological purposes, even though our thinking flows out about the other. we're gathered around education, health, social justice and economic empowerment and when the church comes together around those issues and puts aside the denominational baggage that separates us from our people, there's no telling the impact we could have in this country and this election season is an important test of whether or not we're serious. mr. chairman, thank you for your leadership. [ applause ] >> let me thank you, too, mr. chairman and our staff and all the work they've put into it as

well as the staff of the cnbc and now, let us prepare to leave from this place and now to him who is able to keep you from stumbling and to present you faultless before the presence of his glory with exceeding joy to the god our savior who alone is wise be glory and majesty, dominion and power both now and forever more, the people of god said amen. hey, sue. coming up next on c-span3, the kcato institute hosts a tal on the causes of the 2008 financial crisis. then a hearing on federal regulation of the oil drilling technique known as fracking. and later national journal looks at the foreign policies of

presidential candidates mitt romney and barack obama. mr. gorbachev, tear down this wall. >> sunday night mark the 25th anniversary of president ronald reagan's 1987 speech from west germany. also this weekend on c-span3 our series the contenders. 14 key political figures who ran for president and lost but changed political history this sunday at 7:30 james blaine, american history it tv this weekend on c-span3. finally on a personal note, michelle and i are grateful to the entire bush family for their guidance and their example during our own transition. george, i will always remember the gathering you hosted for all of the living former presidents before i took office. your kind words of encouragement. plus you also left me a really

good tv sports package. i use it. >> last week portraits of former president george w. bush and first lady laura bush were unveiled at the white house. it was their first visit since leaving office. >> as fred mentioned in 1814 dolly madison famously saved this portrait of the first george w. now, michelle -- if anything happens, there's your man. >> watch the entire event online at the c-span video library. the cato institute last week hosted a discussion on the 2008 financial crisis and housing bubble. kevin villani, a former chief

economist for both the department of housing and urban development and for freddie mac outlined his belief that federal housing policy caused the financial crisis. this is just over an hour. good afternoon and welcome. i am mark cala about bria and i will be serving as a moderator to today's forum. the recent multibillion dollar losses at jpmorgan have renewed the unsettled debates surrounding the need for the dodd/frank act as well as its effectiveness. defenders argue that jpmorgan's losses prove the value of dodd/frank while its detractors argue that the act is either grossly insufficient or even misguided. last week one of the architects of dodd/frank, former treasury official michael aybar wrote in

politico that jpmorgan's losses clearly prove that, quote, opponents of financial reform are wrong, unquote. what professor aybar and other dodd/frank apologists ignore is that the substance that is the quality of reform is far more important than its quantity. today's speaker, kevin villani, will argue for reform of our financial and mortgage systems, contra-dodd/frank, however, the reforms covered this afternoon will be derived by an analysis of the weaknesses. any reform of our financial system will only be as good as the assumptions from which it begins. today we will examine the assumptions both behind dodd/frank and behind the financial crisis inquiry commission. after finding those assumptions wanting, our speaker will offer his own observations of what caused the failures in our financial system and what made these failures systemic.

kevin villani is uniquely qualified to give analysis. in the early 1980s he served as the first chief economist at freddie mac as well serving as the chief financial officer. prior to his work at freddie mac, kevin served as chief economist for the u.s. department of housing and urban development. in addition to government and public sector experience kevin has held a variety of teaching positions including positions at the university of southern california. he's also held adjunct positions at pennsylvania, north western university, george washington university, purdue, and george mason university. certainly gets around the academic circle quite a bit. dr. villani has been instrumental in the development and an introduction of many of the innovative financial instruments currently in use. in domestic international capital markets. he has written or co-authored approximately 100 books and articles and has edited several academic journals. kevin hases a bs in mathematics from the university of massachusetts at amherst and a ph.d. from purdue. perhaps more importantly than

any of those accomplishments, at least in my view, kevin is also the author of two recent cato policy papers. the most recent paper is "what made the financial crisis systemic" while his early paper is "the subprime lending debacle." competitive private markets are the solution not the problem. both of these papers can be found online at www.cato.org. i want to welcome kevin to the podium. [ applause ] >> thank you very much, mark. i want to thank you all for coming and i want to thank mark for setting this up. as a third generation milton friedman student i was taught to believe there's no such thing as a free lunch but i can see here in washington the rules don't apply. the topic today, what made the financial crisis systemic, is quite ambitious for a lunchtime seminar. there's been hundreds of books and thousands of academic

papers, and there's hundreds of stories out there, but we're going to try to keep it fairly simple, discuss two stories. one is the financial crisis inquiry commission report that was published in january of last year, and then the one single dissent by commissioner peter wallison. now, the financial crisis inquiry commission spent tens of millions of dollars. they had 100 staff. they took testimony from 700 people. they had millions of pages of testimony, and they produced a report on what caused it, and basically it was -- they were charged to study 22 specific causes. they found evidence of all sorts of causes, a confluence of failures, mostly related to private label securitization, and the one thing they exonerated was the political housing goals and, of course, they exonerated or they found

that fannie mae and freddie mac were led into this market by the private label market. the diagnosis is diametrically opposed to that of the financial crisis inquiry commission. that is nothing else counted. if you remember your days in latin, the days without nothing. it was the entire crisis related to the existence of housing policy and since fannie and freddie mac were the implementers of that policy, they led the way and hud as the mission regulator also extended those housing goals to others in the market, including the private label, and so everything else would be a symptom of what happened when that happened. so in some sense the financial crisis inquiry commission was set up to emulate the pecora commission.

the pecora commission was established during the great depression and purportedly the idea was it would investigate the causes of the financial crisis in the great depression, but, in fact, it was a report to implement a long-standing agenda which related the implementation of glass/steagall. y brought us deposit insurance and commercial banking from invest omt banking. even though the evidence suggested that that had nothing to do with the depression at that time. and i will argue that that sowed the seeds of the current crisis. so under the description, if you understand how the housing goals work, then nothing else matters. and i just re-read that report. my discussion today is basically going to agree with the dissent. i agree with one point in the financial crisis inquiry commission report, and that is that the prudential regulation failed pervasively.

i'd even at to that there's a new book out "the guardians of finance" it's failed chronically in doing that. so the one thing we have to understand if those two things alone could cause the financial crisis to be systemic, then that's all we need to explain it, and everything else will be a symptom of what happens when you get a crisis that bad. now, it all starts then with the housing goals. what are the housing goals? the housing goals were in the original '68 act. they were implemented first in the 1970s but fannie mae wanted no part of those housing goals and i can remember the arguments we had with them at that time to try to convince them they weren't binding anyway, that whatever they did, they already met the housing goals. but they were looking ahead, and in 1992 we passed the ironically named federal housing enterprise safety and soundness act which was more about implementing housing goals than it was about

making these organizations more safe and sound, and the whole idea was that these goals would eventually become more binding with lending quotas to lower income households that would eventually reach 50% to 70%. the second thing that we did in 1994 was we put a formal requirement that they target an increase in the home ownership rate from 65% to 70%. that seems very modest, but the u.s. at this time already had the most liberal lending requirements among any of the market economies. so the question was how are they going to be able to get there? this i stole from mark when he was in italy. but just a basic graph. even though fannie and freddie said their goal was to promote home ownership, they never really did. they were stuck at 65% when fannie and freddie were down to zero. they grew their market share to 50%. the homeownership rate stuck at

65%. it wasn't at all clear how the home ownership rate was going to get to 70%. so the question is how does fannie and freddie subsidize the homeownership rate to 70% and to make loans more affordable for low income borrowers. there's the irrelevance theorem that came out in the 1950s. it says for any firm, for any bank, for any finance company, for any pool of mortgages, your total funding cost is the same regardless of how you decide to fund it. debt, equity, anything else. makes perfect sense. and the more the risk, the higher the funding cost will be to fund that risk. the well-known exception to that which turns out to be fundamental for understanding the mortgage markets was tax. that is debt is deductible and equity returns aren't deductible. there's a big difference in

costs. the second biggest exception is that with agency status, no matter how little equity you have or how much loan risk you have, your debt costs aren't going to go up. so the key to their funding is they can fund an unlimited amount at basically the government's cost of funds no matter how risky they get or how little capital they have and this is what's supposed to generate the money to fund the subsidies. this gives rise to what "the wall street journal" called the public risk for private profit model. and essentially you're providing subsidies through finance. now, politicians love this because there's nothing on the budget they have to justify. and private firms are exempt from political contributions so it works both ways. one of the commission staffers, tom stanton, wrote papers on this 20 years ago that said this is not uncommon. this is basically what a monopoly charter of the king did for the previous 1,000 years. you give a monopoly charter and

they're going to favor certain entities. so what fannie mae and freddie mac did basically for the three decades is leverage a lot, about 100 to 1 we can go into the details. that generated about $10 billion a year in tax savings and $10 billion a year in financing cost savings, and that money was sort of split. the borrowers got a better deal, 25 to 50 basis points, they probably got half the subsidy and the other half went to shareholders and management and back to congress. now, the key thing about all of this is it worked well, but you can only leverage to infinity, you can only drive capital to zero, so the magnitude of subsidies you can derive by giving them a capital advantage is going to be limited. and the 70% home ownership rate implied a fairly big expansion of the market from where it had been at 65% and because they had loan limits and because they had

affordable housing requirements, it meant that they were going to have to expand the market going down market to subsidize lower income households. so basically by the year 2000, we had the financial institutions leveraged 100 to 1. we had the borrowers putting very little down so they were leveraged a lot. and it turns out the only ones with capital in the mortgage system were the private mortgage insurers and you can see none of this had had much impact on the home ownership rate. it still wasn't clear how we were going to get this home ownership rate up. so there's a lot of papers, and i see peter is here and thank you very much for coming. he's written most of these papers. there's a ton of data about the quality of the mortgages when we get to the year 2000. the previous decade this all worked pretty well. fannie mae's stock price quadrupled from 1990 to the year 2000. by the year 2000 we had already been in a housing boom for about three years and the pool of

potential borrowers was a lot weaker. i want to point out two elements of the characteristics. one, the down payment requirements had basically been replaced because these purchase money second mortgages could be -- could bypass the private mortgage insurers and they could be funded in the capital markets or fannie mae was buying purchase money seconds. we no longer had the borrower with any stake in the game. the second thing is a lot of these loans had teaser rates which means they didn't even have to pay the full monthly payment and they didn't have to have enough income to qualify and they could refinance after the teaser rate was supposed to go to the fully indexed rate. so the borrowers worked only so long as house prices continued to rise. and they didn't care what they paid for the house price because they were putting no equity into it. so what that essentially leads to is a go for broke model. that is, these were loans that people should have known to be risky on the front end just

looking at the characteristics of the borrowers with high leverage and we know at the back end that they lost money. this was a period, the first five years of the last decade, of relatively low profits and the losses they took subsequently offset all those profits. so it was a losing proposition right from day one, january 1, 2000, in my view, and for reasons i think were predictable. and that's because they were funding high-risk, low-return mortgages which is something that was very much different than their success story for the previous three decades. so what was on their mind is not -- we can't clearly know. they were either excessively optimistic, some say they were, or they were pushed by their housing goals, or they didn't care if they took a lot of losses later because that came later. but the private label securitization system did the same thing. they were making loans, and these loans didn't have enough yield to compensate for the

risk, and when we look back in retrospect, we know that the bbb securities they issued during this five-year period lost about 30% of their value due to default. so this was a bad bet as well. so you have to ask yourself why were so-called private label securitizers also willing and able to make a bad bet for five years? i actually found this graph on the internet and then realized it was in the dissent. they say a picture is worth a thousand words. this one could be worth 10,000 words, and this is just the plot of house prices against a scale of 100. and you can see that the biggest peaks had been at about 125 from 110. so, for example, in the 1990s, i had a real estate development business building ocean front homes in la jolla. didn't go very well but i had the same attorney as mitt romney.

and i closed it down. in 1999 my contractor came back to me and said, let's get started up again. and i said, look, i said it's 1999 it takes two years to get a permit. by the time we have a house built it will be three years. by the year 2002 we'll already be on the downside of this market, which we would have been if we had followed historical trends. there had never been a bubble bigger than that. of course, i was wrong, but the question is why did the bubble grow first to five times and then to ten times the size of the biggest bubble in history? if you can understand this, then you know everything you need to know about the subprime crisis. and so what happened was in 2005 they continued to go. now the losses that ensued were much deeper. that is by 2007 we know that that cohort of loans or the net loss on the entire pool is 60% and it's still growing.

you can't tell me that people thought they were good loans when they made them and almost everybody defaults and there's almost no equity when they do. and this is where i say they may have been going for broke, the moral hazard of taking a high-risk strategy in the early years, but they were going broke in these years. that is, you know the business is underwater. you just know that nobody has called you on it yet. they haven't made you declare bankruptcy and so you take all the cash out of it that you can until somebody finally closes you down. and for fannie mae and freddie mac, i have a brief anecdote. back in the '70s when i was at hud, i was supposed to be the prudential regulator, but, of course, that was only supposed to be 1% of my time. it was like with one eye shut. they really weren't going to be serious with prudential regulation. they had a lot of people involved with making fannie and freddie mac getting housing goals.

it amounted to me making one call a year to david. david, how are you doing today? it's great over here. it's fantastic. as i look at your books, you're $10 billion under water. yeah, who cares. we can have as much debt. our debt hasn't risen. what different does it make? how many financial analysts do you have in that shop? he says i think there's one guy down there writing newsletters. i said how about legislative affairs and people, you know, in charge of the care and feeding of hud? he said there must be 50, 75, they're growing like crazy. that tells you what you really needed to know about these entities. they didn't face a bankruptcy constraint. so why, and this is the end of my story, but why it happened, why did the financial crisis become systemic? well, even through all this period, never reached the home ownership goal. got close to it, never reached the 70%.

there was a new criteria that was imposed in addition to all of the other affordable housing goals. the mission regulator said, well, you have to maintain at least a 50% market share against the so-called private label securitization. okay. so fannie mae and freddie mac were cooperating with the pls. they funded almost half of it, and they did this to meet the housing goals because those securities counted for the housing goals. at the same time they were competing with them for market share because they were required by their regulators to do it. so when the private -- i call them plss, when the private label securitizers went for broke in the first half of the decade, fannie mae and freddie mac went for broke in competition with them. when they went broke in the next three years, fannie and freddie went broke, okay? i have one slide left on fannie

and freddie. had there been no private label securitization market, fannie mae and freddie mac could have still called a systemic crisis because they had no way of generating. it's possible that politicians would have relieved them of that goal and just ignored it. with private label securitization going over the cliff, the market share mandate was going to force them to do this. now, there's been a lot of defenses that have since been offered for fannie mae and freddie mac. one is they followed and were led. when i tried that excuse with my mother, she said what did you do, i said everybody else was doing it so we did it, that excuse didn't work very well. what if everybody else was jumping over a cliff to their death, would you jump over a cliff to your death? no. they weren't followers, they were leaders. except for one period when prudential regulation trumped mission regulation.