Joe Nocera weighed in Saturday on the ridiculous document released by the Republicans on the Financial Crisis Inquiry Commission.
Here he lowers the boom on Peter Wallison of the American Enterprise Institute (here):
The F.C.I.C. commissioner who has complained loudest about Fannie and Freddie is Peter Wallison, a former Reagan-era Treasury official who for the last two decades or so has been a fellow at the conservative American Enterprise Institute. Long before it was popular to criticize Fannie and Freddie, they were Mr. Wallison’s bugaboo. Back then, he was a lonely — indeed a brave — voice arguing that the enormous portfolios of mortgages of the G.S.E.’s — combined with their quasi-governmental status — created systemic risk.
He was right about this, though it’s worth nothing that his precrisis prognosis of Fannie and Freddie’s ills was wrong in a number of key ways. Like most Fannie and Freddie critics at the time, he believed the risk they posed was interest-rate risk, rather than credit risk, which is what actually brought the two companies low. He also argued that Fannie and Freddie were consistently ignoring their mission to help make affordable housing available to Americans.
As he wrote in 2004, “Study after study have shown that Fannie Mae and Freddie Mac, despite full-throated claims about trillion-dollar commitments and the like, have failed to lead the private market in assisting the development and financing of affordable housing.”
After the crisis, his tune changed considerably — as did that of many other Republicans, who tended to follow his intellectual lead on this issue. Now, he said, it was government policy aimed at increasing homeownership that essentially forced the private sector to make bad subprime loans.
And, one more time, Fannie and Freddie didn’t cause the crisis:
The only problem with Mr. Wallison’s theory is that it’s not, as they say, reality-based. Anyone who has looked at the role of Fannie and Freddie will discover they spent most of the housing bubble avoiding subprime loans, because those loans didn’t meet their underwriting standards. (Indeed, for most of their existence, Fannie and Freddie didn’t so much meet their affordable housing goals as gamed them.)
When Fannie and Freddie finally did get into the business, it was very late in the game. But the motivation wasn’t pressure from the government; it was pressure from the marketplace. You see, the subprime companies and Wall Street had long used subprime loans as a way to do an end-run around Fannie and Freddie. By the mid-2000s, subprime underwriting and securitization had become so profitable — and such a large part of the overall mortgage business — that Fannie and Freddie felt they had no choice but to dive in. In other words, the G.S.E.’s were reacting to the realities of the market, not to the government. They were worried about losing market share.
— Adam Liptak of the Times had an important story in Sunday’s paper on a study of the Supreme Court’s pro-business rulings over the last several decades.
No surprise: The current Roberts court is by far the most corporate-friendly of the last sixty years. The Chamber of Commerce was on the winning side of thirteen out of sixteen cases this year. Here’s the type of thing it’s pulling for:
In AT&T Mobility v. Concepcion, for instance, the chamber urged the court to allow companies to use standard-form contracts that in essence forbid consumers who sign them from pursuing class-action suits. In Thompson v. North American Stainless, the chamber asked the court to forbid some employment discrimination claims, saying that “it costs, on average, over $120,000 just to defend a wrongful-discharge claim.”
The NYT has the data to put the corporate ascendancy in context:
The Roberts court, which has completed five terms, ruled for business interests 61 percent of the time, compared with 46 percent in the last five years of the court led by Chief Justice William H. Rehnquist, who died in 2005, and 42 percent by all courts since 1953.
Nocera is correct that Fredddy and Fannie dove into mortgage securities late in the game and that it was a lot to do with shareholder pressure and pressure from dealers like Countrywide to lower their standards but there was some government pressure as well, as this article details:
http://www.nytimes.com/2008/10/05/business/05fannie.html
"Firms like Bear Stearns, Lehman Brothers and Goldman Sachs had started bundling home loans and selling them to investors — bypassing Fannie and dealing with Countrywide directly.
“You’re becoming irrelevant,” Mr. Mozilo told Mr. Mudd, according to two people with knowledge of the meeting who requested anonymity because the talks were confidential. In the previous year, Fannie had already lost 56 percent of its loan-reselling business to Wall Street and other competitors.
“You need us more than we need you,” Mr. Mozilo said, “and if you don’t take these loans, you’ll find you can lose much more.”
Then Mr. Mozilo offered everyone a breath mint.
Investors were also pressuring Mr. Mudd to take greater risks.
On one occasion, a hedge fund manager telephoned a senior Fannie executive to complain that the company was not taking enough gambles in chasing profits.
“Are you stupid or blind?” the investor roared, according to someone who heard the call, but requested anonymity. “Your job is to make me money!”
Capitol Hill bore down on Mr. Mudd as well. The same year he took the top position, regulators sharply increased Fannie’s affordable-housing goals. Democratic lawmakers demanded that the company buy more loans that had been made to low-income and minority homebuyers."
(Check out the graphic because it shows clearly how the risky portfolio expands from 77 billion to over 300 billion between 2005 - 2008 and what their share of the market was at the time, between 20 to 30%)
Also see this article which shows that the Bush Administration pushed the GSE's into the riskier parts of the market as part of their ownership society BS.
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ay0Kkt47a3s4
"The companies said they were urged to increase purchases of subprime debt by the Bush administration. The Department of Housing and Urban Development said in 2005 that Fannie and Freddie should increase financing for low-income areas or moderate-income regions with high minority populations to 37 percent of new business from 34 percent in 2001 through 2004. That rose to 39 percent last year.
The updated goals ``were significant enough to force them to go down the credit curve to meet them, which meant participating in some way or form in the higher-risk areas of the mortgage market,'' said David Stevens, a former head of Freddie's single- family mortgage business who now runs lenders affiliated with Long & Foster Real Estate Inc. in Fairfax, Virginia. That included ``the subprime business.''"
So it's not true to say that there wasn't pressure from the government, but that pressure started in 2005 and that was years after Greenspan's prolonged low interest period and the shadow banking industry (am I allowed to say 'shadow banking' around republicans? I forget.) inflated the market beyond recognition.
So no, Freddie and Fannie and the government did not do this. They sure didn't help, but they weren't the ones writing loans they didn't care about because they were securitizing them and selling them to suckers while writing the bets with AIG that they would blow up. That was all Wall Street (Whoops, another banned word, heavens to betsy).
#1 Posted by Thimbles, CJR on Tue 21 Dec 2010 at 07:54 PM
In passing, caught this:
"an aggressive Bloomberg column on "Wall Stret" pay last week."
Kind of makes you wish you had iPhone Auto correct...then again
http://damnyouautocorrect.com/
maybe not.
#2 Posted by Thimbles, CJR on Tue 21 Dec 2010 at 08:48 PM
The asymmetry in trading is often summed up by senior managers of trading firms with this phrase: every trader's first option is on the firm.
Best,
Bill Black
UMKC Economics & Law
#3 Posted by Bill Black, CJR on Wed 22 Dec 2010 at 12:17 PM