Audit Notes: Nocera on Wallison, The Corporate Court, Wall Street Pay

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.

And it points to a revolving-door problem:

Among these lawyers were some of the most prominent members of the specialized Supreme Court bar. Though the odds of obtaining Supreme Court review are about one in 100, these lawyers persuaded the court to hear four cases that “would not have seemed to have a remote chance of review,” Professor Lazarus wrote. They won every time.

In one of the cases, Theodore B. Olson, who had served as solicitor general in the administration of President George W. Bush, persuaded the court not only to hear the case but also to rule for his client, making it easier to dump mining waste into an Alaskan lake.

— Who said this?

“You can put on a large trade, and if it works, you make out like a bandit, and if it doesn’t, you might get fired, but you’re not paying back. So you have asymmetric risk: You either come out zero or you come out positive. That’s imbalance.”

That’s Morgan Stanley CEO James Gorman, of all people, as reported by Bloomberg last month. I can’t find any other major outlet that reported that quote. At the least, it’s a welcome change of tone at the top on Wall Street.

Matthew Lynn picked up on it in an aggressive Bloomberg column on Wall Street pay last week.

But Lynn left out was a bit of media criticism Gorman had in the original news story:

“The more you have this hero individual status, and lots of things written about them by journalist friends in the paper, the more likely that they are going to act out, because they start to believe it,” Gorman said.

“You can put on a large trade, and if it works, you make out like a bandit, and if it doesn’t, you might get fired, but you’re not paying back,” he said. “So you have asymmetric risk, you either come out zero or you come out positive. That’s imbalance.”

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum. Tags: , , , ,