WASHINGTON D.C. — When Chris Dodd took control of the Senate Banking Committee in January 2007 the seeds of today’s financial disaster had long since been sown.
Years of deregulation, lax government oversight and a monetary policy that fed into the greed of Wall Street had inflated housing values and encouraged risky loans. The subprime mortgage crisis had already sprouted, yet no one foresaw how it would spread like a weed overtaking the entire economy.
"By early 2007, it was already too late," said Ed Deak, a professor of economics at Fairfield University. "I suspect that if Congress had taken a look at the quality of loans and asked about underwriting standards in 2005 it may have helped. That was the root cause of this."
Dodd, a Connecticut Democrat and then a soon-to-be presidential hopeful, sensed the coming storm when he laid out his plans for the Banking Committee to reporters at the U.S. Capitol on Dec. 7, 2006.
"In many respects, the American Dream is at risk in a way it has never been before," he said. "I do not intend to preside over its demise, but rather to do everything possible for its revival."
Dodd pledged to conduct oversight of the agencies that are supposed to ensure that financial institutions and markets operate in a safe, sound, transparent and efficient manner.
Although the committee has held more than 55 hearings, nudged the financial industry to clean up its subprime mess and passed laws aimed at containing the crisis, it has fallen short of curbing the problem.
Today, we sit perilously close to a fatal heart attack in our credit markets — the lifeblood of our economy without which businesses cannot borrow to meet payrolls or pay for the materials needed for production.
"It seems a bit of surprise to me that everybody is shocked by what is going on here. This has been going on for a long time and a lot of people on the Banking Committee were right in the middle of it," says Todd Martin, who teaches economics at Fairfield University.
Critics have blamed Dodd for aiding and abetting the crisis as chairman of the committee. In particular, they have raised concerns about his ties to the financial services industry as well as his failed bid for the presidency in 2008.
Since 1989, Dodd has raised $43 million for his federal campaigns, including $13.2 million from the financial services sector, according to the Center for Responsive Politics.
Among his top contributors are executives of Wall Street giants now in trouble: Bear Stearns $351,950; American International Group $281,438; Goldman Sachs $264,116; Morgan Stanley $209,725; JPMorgan Chase $180,173 and Lehman Brothers $160,400, according to the Center.
Dodd has also been sharply criticized for receiving special treatment from Countrywide Financial Corp. when he refinanced his mortgages in 2003. The company, one of the nation’s largest subprime lenders, included Dodd in a special VIP program it aimed at currying favor with Congressional leaders by providing cut-rate loans, waiving fees and erasing points.
Dodd has denied any wrongdoing and claimed he did not know the purpose of the VIP program until Conde Nast Portfolio reported on it in June.
Martin traces the nation’s current financial crisis back to the 1970s when Democrats pushed for banks to set aside mortgages for inner city families with less-than-stellar credit. Then, too, was the Republican deregulation efforts pushed through the 1990s that spawned the growth of the subprime market.
Subprime lending in the U.S. rose from $35 billion annually in 1994 to $625 billion in 2005.
Nick Perna, an economist with Webster Bank in Connecticut, said that Congress could have pressured the Federal Reserve to increase oversight of exotic securities, reined in Fannie Mae and Freddie Mac, and done more to protect consumers from predatory lending. But, nobody wants to rain on a parade.
"When housing prices are going up 15 percent we all look smart and nobody wants to do anything to upset that," he said.
Perna also noted that it is too much to expect that Dodd should have reacted differently than he did when the subprime mortgage crisis began to unfold. The consensus among economists in January 2007 was that the subprime issue was unique and an isolated phenomenon that pertained to some shady lenders and more broadly to mortgage brokers making subprime loans. Even through the summer, it seemed as if the problem was contained.
"Then this year it all started to hit the fan — first in clumps and then by storm," Perna said.
The Bush administration has demanded that Congress swiftly approve a $700 billion bailout that would give Treasury Secretary Henry Paulson unfettered power to absorb the bad mortgage securities clogging the nation’s credit arteries.
"It’s important to note that these events that we talked about are not natural disasters. They happened, in my view, because of mismanagement and deregulation that occurred on basically an eight-year-old coffee break by the administration," Dodd said during a recent press conference in the U.S. Capitol.
But it was not until the bubble began to burst that the administration and lawmakers have sharpened their focus on reforming federal regulations over the financial services industry. When the crisis first unfolded, Dodd was quick to call on President Bush, federal regulators and the private financial markets to take action but took a more cautious approach in drafting his own legislation.
Dodd began holding hearings on the subprime crisis in February 2007 and was soon inviting industry players to his office to get the industry to take care of the boom in foreclosures that engulfed many homeowners whose subprime loans were resetting to untenable interest rates.
Dodd eventually went to work on his own $300 million housing bailout bill, which did not pass until this year.
Dodd’s critics point to his short-lived presidential campaign as a major distraction that kept him from focusing on the looming financial crisis. Particularly galling to them was his announcement in October 2007 that his family was moving to Iowa for the duration of the caucus campaign.
He quit the presidential race on Jan. 4, almost a year to the day that he had launched his quixotic campaign.
While the House Financial Services Committee began in earnest in 2007 to produce a housing relief bill, the Senate took its time.
Dodd and Sen. Richard Shelby, R- Ala., spent much of May 2007 in private negotiations trying to reach consensus before unveiling their bill. The breakthrough came when they agreed to pay for mortgage guarantees by dedicated funds generated through reforms to Fannie Mae, Freddie Mac and other Government-Sponsored Enterprises.
Although Democrats held an 11-10 majority in the Banking Committee, it was essentially split as Sen. Tim Johnson, D-S.D., recovered from a stroke. A compromise with Republicans was needed to avoid an impasse.
"There are other ways of doing this. I remember marking up bills where no Republican showed up for the meeting. But, that is a much more difficult road politically," Dodd said at the time.
Rep. Chris Murphy, D-5, who sits on the House Financial Services Committee, praised Dodd at the time for reaching a "stunningly ambitious compromise" with Republicans who had little interest in helping homeowners.
But Rep. Christopher Shays, R-4, who sits on the House Financial Services Committee, said at that time that he disagreed with Democratic contentions that Republicans were to blame for the pace of action in Congress. He noted that Dodd, an early presidential hopeful, had spent much of 2007 on the campaign trail.
"I think his running for president kind of diverted him," Shays said at the time.
Dodd has also taken criticism for relying so heavily on Wall Street to fund his campaigns.
In a report issued last week, Common Cause claimed that campaign contributions and lobbying by the mortgage financial industry have played a major role in blocking measures that would have addressed today’s financial crisis.
"Even unscrupulous lenders responsible for steering people into predatory loans have escaped government intervention because the lending industry has so much influence in Washington, thanks to their incredible lobbying and campaign spending," said Common Cause President Bob Edgar.
Mike Surrusco, a Common Cause spokesman who wrote the report, said that alarms had been sounded, in testimony and letters, of the potential for widespread defaults on subprime loans.
"It wasn’t a secret that this was going on and had Congress done something to regulate this it is not unreasonable to think we wouldn’t have had the kind of collapse that we have had," Surrusco said.
The Center for Responsive Politics noted that the finance, insurance and real estate sector contributed more than $86 million to members of Congress between 1997 and a key vote on Gramm-Leach-Bliley in November 1999 that did away with the Depression-era protections that had established a wall between banks, insurers and investment firms. Dodd and Sen. Joe Lieberman voted in favor.
When they removed that wall, it gave way to mega-financial firms that are now considered "too big" for the government to allow to fail.
Sen. Phil Gramm, who chaired the banking committee at the time, touted their action as a deregulatory godsend.
"We are here today to repeal Glass-Steagall because we have learned that government is not the answer. We have learned that freedom and competition are the answers," he said.
Maryland Sen. Paul Sarbanes, who was ranking member of the committee at the time, saw it differently. The new law, he said, was an effort to keep pace with globalization, technology changes and new financial products. Glass-Steagall, he said, had already been eroded through regulatory actions and court decisions.
The merger of Citibank and Travelers Group into Citigroup occurred in 1998 through a temporary waiver that other companies had also secured, he noted.
Public Citizen and Consumer Watchdog have also called on Congress to increase regulation of financial institutions and establish strict accountability for firms that receive bailout money.
Dodd has been an advocate for most of their specific recommendations including that taxpayers get a stake in companies that are bailed out and strict oversight.
"This crisis is rooted in a lack of regulation and oversight," said David Arkush, director of Public Citizen’s Congress Watch division.
"This bailout bill must be covered by the Freedom of Information Act and have regular reporting to Congress of all expenditures." Surrusco said it would be unfair to blame Dodd for the inaction particularly since he introduced legislation to deal with the crisis. "You should give him credit for what he has done in that regard."
Dodd said he had hoped that earlier efforts — including housing reforms and the bailout of Bear Stearns and AIG — would have stanched the crisis. Paulson and Fed Chairman Ben Bernanke, he noted, had told the committee last August that the worst was behind them.
"We’ve had 55 hearings in my committee. It is almost unprecedented. I have constantly been talking about this and getting these bills done," Dodd said. "It has been a journey."