The Candidates -- Where They Stand on Market 'Reform'

October 23, 2008 4:42 p.m. EDT

Since the first presidential debate, when we offered a breakdown of John McCain’s and Barack Obama’s positions on market reform, the respective candidates have tweaked and refined their stances in light of the continuing turmoil. As we wrote before, both candidates have stressed the need for "reform" but differ substantially on what actual changes they would make to the financial system.

Here is our attempt to pin down their ideas for specific changes.

John McCain Barack Obama

The Mortgage Industry

A mortgage is a loan that involves property. Normally, the lender (a bank or other financial group) takes the right to seize -- foreclose -- and sell the property if the borrower can’t repay the loan. Many mortgages -- so-called subprime loans and Alt-A loans -- were given to people with questionable credit, and recently this has resulted in increased foreclosures.

Oct. 7, 2008 -- During the second presidential debate, McCain unveiled a new plan, in scant detail, to rescue homeowners struggling to pay their mortgages by allowing them to refinance with government assistance.

 â€œI would order the secretary of the treasury to immediately buy up the bad home loan mortgages in America and renegotiate at the new value of those homes -- at the diminished value of those homes and let people be able to make those -- be able to make those payments and stay in their homes. “

Douglas Holtz-Eakin, McCain’s chief economic adviser, provided further details on the American Homeownership Resurgence Plan to the New York Times the following day. McCain’s strategy, Holtz-Eakin said, would be a fast and direct way for troubled homeowners to receive aid. The government would pay off the bad loan and provide a new loan in the form of 30-year mortgages at a fixed interest rate of slightly over 5 percent.

Holtz-Eakin conceded taxpayers will bear the cost of this program. According to the McCain-Palin campaign Web site, the direct cost of the plan will be roughly $300 billion.

But some economists critical of the McCain plan say it allows banks and investors to walk away, with money in hand, from these toxic mortgages with taxpayers footing the bill and likely losing money as well. "You run into the question of whether or not then you are bailing out bad lending decisions," David C. John of the conservative Heritage Foundation, told the Associated Press.

Sept. 19, 2008 -- McCain called for a government trust to work with the private sector and regulators to spot faltering financial institutions and shore them up before they become insolvent and had to be rescued. He said the new agency would be "an early intervention program to help financial institutions avoid bankruptcy, expensive bailouts and damage to their customers."

McCain also called for a system to "punish individuals who engage in fraud," including "the predatory lenders who know you can't afford an adjustable rate mortgage, but mislead you into signing one."

The McCain campaign has not said what new laws or "system" he is proposing. We’re still waiting for a response from his campaign.

Oct. 13, 2008 -- Two days before the third and final presidential debate, Obama announced four proposals to help quell the economic crisis. He called for a 90-day reprieve for families facing foreclosure if they are working with a finance company that is participating in the $700 billion Troubled Asset Relief Program and are making a “good-faith” effort to make timely payments on their mortgage. This is in addition to his proposal for a mortgage tax credit worth 10 percent of the interest on a homeowner’s mortgage to further assist those who are struggling.

March 13, 2008 -- Obama and Sen. Chris Dodd introduced legislation "creating a new FHA Housing Security Program, which will provide meaningful incentives for lenders to buy or refinance existing mortgages, and to convert them into stable 30-year fixed mortgages so that homeowners facing foreclosure can keep their homes." 3/13/2008

Feb. 14, 2006 -- Obama introduced legislation to create new criminal penalties for mortgage fraud. The STOP FRAUD Act included the following key provisions:

  • Defined "mortgage fraud" and proposed prison terms of up to 35 years and fines of up to $5 million for the new offense.
  • Extended regulations to cover a range of "mortgage professionals" who previously fell through legislative cracks.
  • Gave home buyers new rights to challenge the terms of their mortgages.
  • Set up a mortgage broker database so that banks and others could do a background check.

The Act failed. Obama and Sen. Durbin (D-Ill.) reintroduced it in April 2007 but it never made it out of committee.

Freddie Mac and Fannie Mae

Freddie and Fannie were institutions set up by Congress to buy mortgages from lenders and resell them as securities. They eventually became publicly traded companies. But they had a huge advantage in that investors assumed the mortgage-backed securities they sold could never default, because the government would step in -- as proved the case with the federal bailout in September. Fannie and Freddie, with large lobbying operations, were exempt from many regulatory laws.

John McCain

Oct. 7, 2008 -- As McCain mentioned in the second debate, he and nineteen other Republican Senators wrote a letter in 2006 about the need to rein in Fannie Mae and Freddie Mac.

May 25, 2006 -- McCain condemned what he saw as corruption at Freddie Mac and Fannie Mae and cosponsored a bill that would have set up an independent body to oversee the companies. The bill died in committee.

Barack Obama

Sept. 22, 2008 -- Obama advocated more direct government oversight of all financial institutions that rely on public funds. The statement did not contain specifics on what sort of rules and oversight he wanted. We're still waiting for a response from his campaign.

"If you're a financial institution that can borrow from the government, you should be subject to government oversight and supervision." 9/22/2008

March 27, 2008 -- Obama said the government should have "supervisory authority" over institutions like Freddie and Fannie and called for rules on how much cash and assets they had to keep on hand.

"The Federal Reserve should have basic supervisory authority over any institution to which it may make credit available as a lender of last resort. When the Fed steps in, it is providing lenders an insurance policy underwritten by the American taxpayer. In return, taxpayers have every right to expect that these institutions are not taking excessive risks. The nature of regulation should depend on the degree and extent of the Fed's exposure. But at the very least, these new regulations should include liquidity and capital requirements." 3/27/2008

Investment Banking

Investment banks bought and sold bundles of mortgage loans repackaged into securities. They were not subject to the same regulations as commercial banks, like Citibank or Bank of America. Now that all of Wall Street's big investment banks have either failed, are being sold or are converting to commercial banks, it's less clear what reforms might be needed.

John McCain

Sept. 19, 2008 -- In a speech last week, McCain didn't say exactly what he'd do to reform the many aspects of the financial market, but he did point to the lack of transparency at "financial firms."

"I will propose and sign into law reforms to prevent financial firms from concealing their bad practices. An inexcusable lack of financial transparency allowed Wall Street firms to engage in reckless behavior that padded their profits and fattened executive bonuses when times were good, but now imperil the financial security of millions of Americans when their bets turned sour." 9/19/2008

Barack Obama

March 27, 2008 -- Without giving details, Obama called for greater regulations of "complex financial instruments,"that investment banks frequently use.

"Capital requirements should be strengthened, particularly for complex financial instruments like some of the mortgage securities that led to our current crisis. We must develop and rigorously manage liquidity risk." 3/27/2008

The Federal Regulatory Agencies

The main financial regulatory agencies are the Federal Reserve, Securities and Exchange Commission, the Office of Thrift Supervision, the Office of the Comptroller of the Currency, the Commodity Futures Trading Commission and the Securities Investor Protection Corporation. Established at different points over the last 75 years, none has played a major role in overseeing the "shadow banking system" at the center of the current tumult.

John McCain

Oct. 14, 2008 -- At a rally in Blue Bell, Pa., a suburb of Philadelphia, McCain told the crowd he would “get government out of the business of bailouts and equity stakes, and back in the business of responsible regulation.”  He again called for more transparency and greater oversight, and an end to the Wild West environment of the financial markets. Since his Sept. 19 speech, he has added a few more details on how he plans to do this.

We will learn from this crisis to prevent the next one, with much stricter oversight. No more wild overleveraging, no more liabilities concealed from the public and from shareholders, no more bundling of assets to maximize profit by assuming insane risks. Those days are over on Wall Street. With new rules of public disclosure and accounting, my reforms will make certain these betrayals of shareholders and the public trust are never repeated.

Sept. 19, 2008 -- In his speech last week, McCain criticized the role of federal regulators and called for greater clarity. He did not offer details on how he would change the agencies.

"We've got the SEC, the FDIC, the CFTC, the SIPC, the OCC, the Fed. At best, this confusing assortment of regulators and institutions was egregiously lax in carrying out their responsibilities. At worst, they engaged in the old Washington game of guarding their bureaucratic turf, instead of safeguarding the public interest and protecting investors." 9/19/2008

On the same day, McCain called for the firing of SEC Chairman Chris Cox.

"The regulators were asleep, my friends," McCain said. "The chairman of the SEC serves at the appointment of the president, and in my view, has betrayed the public trust."

Barack Obama

Oct. 7, 2008 -- During the second debate, Obama appealed for tighter regulations for the financial system and Washington leadership to set this in motion.

The problem is we still have an archaic, 20th-century regulatory system for 21st-century financial markets. We’re going to have to coordinate with other countries to make sure that whatever actions we take work.

On the Obama-Biden campaign Web site, Obama proposes greater transparency for all federal regulatory agencies. He would require these agencies to conduct “significant business” in public, and allow people to watch policy debates either in person or via the Internet.

March 27, 2008 -- Obama calls for a commission to oversee the markets. He also said the regulatory agencies need to be streamlined. He has not given details on how this should be done, or what new agencies would emerge and what their roles would be. We're still waiting for a response from his campaign.

"We need to streamline a framework of overlapping and competing regulatory agencies. Reshuffling bureaucracies should not be an end in itself. But the large, complex institutions that dominate the financial landscape do not fit into categories created decades ago. Different institutions compete in multiple markets -- our regulatory system should not pretend otherwise. A streamlined system will provide better oversight, and be less costly for regulated institutions." 3/27/2008

Rating Agencies

Rating agencies issue guides to the riskiness of various financial instruments, like bonds. The main agencies are Moody’s, Standard and Poor’s and Fitch IBCA, which have an effective monopoly because they're the only ones with the SEC’s stamp of approval. Paid by the sellers of debts, the agencies often gave good ratings to bad mortgages and bonds.

John McCain

In our searches, we couldn't find any statement from McCain on rating agencies. We're still waiting for a response from McCain's campaign.

Barack Obama

Sept. 22, 2008 -- Obama called for investigations into rating agencies and more disclosure rules. He did not give more specifics on what they should disclose, when, or to whom.

"We need to reform requirements on all regulated financial institutions, investigate rating agencies and potential conflicts of interest with the people they are rating, and establish transparency requirements that demand full disclosure by financial institutions to shareholders." 9/22/2008

Hedge Funds

There are many types of hedge funds and they have different investment strategies, but one thing they have in common is that they are private partnerships, usually for the very rich, that trade in a variety of complicated financial instruments. They are largely unregulated.

John McCain

Sept. 18, 2008 -- We could not find any further details on McCain’s position regarding oversight and reform for hedge funds. But at the same time McCain called for the dismissal of SEC Chairman Christopher Cox, he criticized the SEC for keeping “in place trading rules that let speculators and hedge funds turn our markets into a casino.” McCain’s specific design for reining in the hedge funds remains unclear. We are waiting for a response from his campaign.

Barack Obama

Feb. 17, 2007 -- Obama co-sponsored a bill to stop overseas tax havens for American hedge funds. The bill appears to have died in committee. Here's a summary of the main provisions, and this is what Obama said in the press release at the time:

"This is a basic issue of fairness and integrity. We need to crack down on individuals and businesses that abuse our tax laws so that those who work hard and play by the rules aren’t disadvantaged." 2/17/2007

Short Selling

Short selling, or "shorting," is where you agree to sell shares that you don't own. You can often get the shares by borrowing them. It's one way of betting that a stock will go down. Legislators have blamed short sellers for some of the recent trouble, though many economists have derided that notion. Last week, the SEC began a temporary ban on the practice for many financial stocks.

John McCain

Sept. 18, 2008 -- McCain has not taken a position on whether short selling should be banned but listed allowing some versions of it as one of the failures of the SEC. We're still waiting for a response from his campaign.

"The primary regulator of Wall Street, the Securities and Exchange Commission (SEC) kept in place trading rules that let speculators and hedge funds turn our markets into a casino. They allowed naked short selling -- which simply means that you can sell stock without ever owning it. They eliminated last year the uptick rule that has protected investors for 70 years. Speculators pounded the shares of even good companies into the ground." 9/18/2008

Barack Obama

It's unclear whether Obama supports the moratorium on short selling or whether he would extend it. We're still waiting for a response from his campaign.

The Securities Market, Including Derivatives, Credit-Default Swaps and Collateralized Debt Obligations

The securities market, including derivatives, credit-default swaps and collateralized debt obligations; these exotic and unregulated securities have been at the center of the deepening the financial crisis.

John McCain

We couldn't find any McCain statements about these forms of investments. We are waiting for the McCain campaign's response to our questions about how he proposes to reform this sector of the market.

Barack Obama

Sept. 17, 2008 -- Obama called for greater power and funding for the Securities and Exchange Commission to regulate stock exchanges and "identify market manipulation, protect investors and avoid excessive speculation in financial markets." He has not commented on specific instruments. We're still waiting for a response from his campaign. He said this in a fact sheet given out on Sept. 17:

"Crack down on trading activity that crosses the line to market manipulation. Barack Obama believes that the Securities and Exchange Commission (SEC) should aggressively investigate reports of market manipulation. Under the Bush Administration, the SEC has been sapped of the funding, manpower and technology to provide effective oversight." 9/17/2008

The Bailout

The Bush administration has proposed a $700 billion package to shore up the financial system. As of Friday afternoon, no agreement had been reached.

John McCain

Oct. 2, 2008 -- McCain spoke out against the large number of earmarks tucked into the bailout legislation before its passage, but voted for it nonetheless. When pressed on a morning talk show on MSNBC why he approved the bill despite the pork, he responded that he had no choice with the country “on the brink of economic disaster.”

Sept. 26, 2008 -- McCain's stance on the administration's proposed $700 billion bailout is unclear. He initially offered cautious support. But with House Republicans wary, he has more recently declined to explicitly endorse the plan.

"In any solution, we must see accountability, we must see transparency, and we must make sure taxpayers' dollars don't line the pockets of executives." 9/23/2008

Sept. 16, 2008 -- McCain proposed a commission to examine the crisis.

"We have to have a 9/11 commission, and we have to fix this alphabet soup of regulatory agencies that's left over from the 1930s. We can come back from this." 9/16/2008

Barack Obama

Oct. 6, 2008 -- Obama shared his thoughts on the passage of the $700 billion Troubled Asset Relief Program, and the steps he believes are necessary to begin to fix the fractured financial markets.

“It is a reminder that the rescue package that was passed last week is not the end of our efforts to deal with the economy, it is just the beginning.” He continued by urging Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke to move quickly and to restore confidence, and added that the underlying structural problems within the financial system will need to be addressed. He also voiced his support for an economic stimulus package.

Sept. 23, 2008 -- Obama has supported the Bush administration's $700 billion bailout on four main conditions: that it contain help for those facing foreclosure, that there be limits on executive pay for participating companies, that it include independent oversight and that taxpayers see some return on the investment.