The New York Times scoop that Fannie and Freddie’s regulator, the Federal Housing Finance Agency, is suing the big banks over toxic mortgage assets adds a sort of government imprimatur to the wave of putback lawsuits by private investors.
The funny thing about this case is that it’s somewhat surprising that The Government, so to speak, almost surely doesn’t want to bring it, even though it’s clearly a slam-dunk. That the banks “misrepresent(ed) the quality of mortgage securities they assembled and sold at the height of the housing bubble” is empirical fact. Check out the reporting on Clayton Holdings, which told the Financial Crisis Inquiry Commission that half of the mortgages it checked out during the crisis didn’t meet standards banks promised investors. It told the banks this, and they used Clayton’s reports to demand cheaper prices on the loans they bought to securitize—without passing on the savings or bothering to tell the folks they sold them to.
But the Obama administration primary goal has been to protect the banks, not correct them—much less make them pay for part of their sins, which only took down the global economy and cost some forty or fifty percentage points of GDP. We need to see some reporting on how Treasury views the FHFA move. It’s surely giving Tim Geithner some major heartburn and as Felix Salmon (a contributing editor here) writes, it makes the global mortgage settlement the administration has pushed look even more unlikely.
It was just Wednesday, as David Dayen points out, that Brad Plumer and Ezra Klein reported that Geithner had looked for ways to fire FHFA acting director Edward DeMarco (something Treasury denies). He’s still in place because Republicans, then still in the minority, blocked Obama’s pick last November.
We get just a hint of tension this morning, though not from the NYT. The Financial Times, for instance:
But it is a deeply controversial move within the Obama administration, which is looking to ensure that the economy avoids a double-dip recession and that the banking system remains on an even keel. The US Treasury and the FHFA have not always seen eye to eye on financial policy since the crisis.
We need more on that angle in the coming days.
The reporting is all over the place on the critical question of how many private-label mortgage securities Fannie and Freddie have and how much they’ve lost on them. The Wall Street Journal says it’s $227 billion as of a month ago, but doesn’t tell us how much they’ve lost. The FT says Fan/Fred purchased $883 billion in private mortgage bonds, but doesn’t say how much they still own or how much they’ve lost . The NYT reports this:
As of June 30, Freddie Mac holds more than $80 billion in mortgage securities backed by more shaky home loans like subprime mortgages, Option ARM and Alt-A loans. Freddie estimates its total gross losses stand at roughly $19 billion. Fannie Mae holds $38 billion of securities backed by Alt-A and subprime loans, with losses standing at nearly $14 billion.
But the Times doesn’t give us an overall number on non-subprime private-label holdings. Let’s hope everyone gives us more clarity in their second-day coverage.
Beyond that, there’s some confusion on why the suits are being filed now—or if they need to be filed. Here’s how the WSJ credits the Times’s scoop:
News of the filing deadline for the lawsuits was first reported Thursday night on the website of the New York Times.
The FT directly contradicts the Times’s assertion that the U.S. needed to file the lawsuit now to get in under the statute of limitations:
Fannie Mae, Freddie Mac and FHFA had signed agreements with the biggest mortgage bond issuers preserving their right to sue the firms for alleged fraud even if the respective statutes of limitations ran out, two people familiar with the matter said.
"Of course, the broader downturn in the economy and housing market was caused by how the mortgages were originated and packaged into securities. Without that, there is no bubble and no crash."
But you're still focusing on a large symptom and ignoring the root cause. Follow the money and the power. Who provides the perverse incentives? The policymakers and regulators of the federal govt and the FED. Without the govt's and the FED's "pumping in liquidity" (printing money, lowering interest rates, etc.), institutionalizing poor lending practices, and guaranteeing bail-outs, those firms would not have engaged in — much less, gotten away with — their loose, and otherwise risky, activities. If there was separation of bank and state, and the feds had allowed for the liquidation of the bad assets (instead of "bailing out" the banks) and bankruptcy, then this litigation probably would not even be on the table.
#1 Posted by Dan A., CJR on Mon 5 Sep 2011 at 08:13 AM
It's never the government's fault in Chittumland...
It's always "Wall Street's" fault.
The commie/liberals are convinced that the government can do business better than the private sector can, and no amount of truth-telling will convince the otherwise.
If a private enterprise makes money on an investment, then, in the commie/liberal worldview, it has stolen the ill-gotten booty from the pockets of the proletariat. "Profit" is tantamount to "theft".
On the other hand, if a private enterprise loses money on an investment, then the loss is a criminal one - a clear case of fraud that must be punished.
When the government loses money (as it always does) the blame never lies with the government or its zillions of functionairies... Instead the blame always lies in the private sector.
These commie/liberals want the government to run everything through an absurd philosophy.
It's one thing to say "I know that government intervention in the markets costs money, but society needs to pay the price to achieve social ends". THIS at least makes sense, logically speaking. One could say "I know that protecting the snail darters will cost money, jobs, market share and productivity, but damn it - society needs snail darters". One could say "I know that government-administered health care will cost more, deliver fewer services, and that the quality of care will generally decrease, but damn it -- society needs to give away health care".
But that's not what these new commie/liberals believe. They honestly believe that government intervention somehow improves market efficiency. They honestly believe that Obamacare will save money and improve quality. They honestly believe that lending money to solar cell companies will spur the "green" economy. They honestly believe that the government can time the markets and pick the winners in the economy with "stimulus" spending better than the free market can.
These notions are so patently absurd, and so utterly refuted by every shred of historical evidence, that dispelling them is usually simply a matter of tolling the Reality Bell a couple of times until the nonsense gets a begrudging "update". Nonetheless, the stupidity persists - more silliness follows each correction.
#2 Posted by padikiller, CJR on Mon 5 Sep 2011 at 09:32 AM
I occurs to me that articles like these starkly reflect the commie/liberal hypocrisy.
When anyone alleges that Fannie or Freddie were the root of the financial meltdown, the commie/liberals trip over themselves in denial. Fannie, Freddie and the other GSM's were mere drops in the bucket, they claim. "Wall Street" did the meltdown in the private markets.
But when it's time to go after the lenders, the commie/liberal tune changes. Now the mortgage lenders "took down the global economy" by tricking the GSM's.
#3 Posted by padikiller, CJR on Mon 5 Sep 2011 at 11:34 AM
The re-manufacturing by the banks of separate mortgages into securitized products promoted by the banks is the legal responsibility of the banks. This is not an issue of agreeing or disagreeing with Chittum. This is not an issue of politicizing antiquated and unsubstantiated babbling by anyone, even me!
This is a basic financial issue that is legally defined. IF FHFA is the entity that has a legal team that actually filed claim before any "possible" legal date that could affect any legal claims by the client FHFA, then good for them and the rest of US citizens(that's only suggesting that there can be any kind of a positive outcome at this time for any US citizen earning under 100,000 gross annually. Why? Because the FHFA legal team understands the ramifications of the legal game today which is bluntly, CYA.
It may just be a good thing that DeMarco is standing up to the fiscal responsibility of his position. I have only just reviewed his credentials from the .gov site. If he assumes and maintains integrity of his position he may be a good dark horse candidate to come out of the whole OMG mess!
However, Chittum, check out the facts of your following graph. You really aren't mentioning all the facts, and it gives a bit of a slanted picture. It may be the best thing that DeMarco may not be playing ball with either team!
"It was just Wednesday, as David Dayen points out, that Brad Plumer and Ezra Klein reported that Geithner had looked for ways to fire FHFA acting director Edward DeMarco (something Treasury denies). He’s still in place because Republicans, then still in the minority, blocked Obama’s pick last November.'
Also note my word choice at the very beginning of my comments- "re-manufacturing". This kind of manufacturing on a number of different levels, on a number of different extremes on a number of different variable scales all over the world is just about the ONLY KIND of real manufacturing of the NEW and REALLY REAL POLITICAL ECONOMY. That political economy is significantly different than and separate from the real political economies of the majority of citizens world-wide.
#4 Posted by llisa2u2, CJR on Mon 5 Sep 2011 at 12:37 PM
Hey everybody, this is interesting math.
Did you know that padkiller's people allege that the:
"$80 billion in mortgage securities backed by more shaky home loans like subprime mortgages"
"were the root of the financial meltdown"?
Neat!
#5 Posted by Thimbles, CJR on Mon 5 Sep 2011 at 10:21 PM
A friend & former Wall Street energy analyst had this comment, which I'm including verbatim:
"My banking analyst friends think this is Res Judicata. A backdoor bailout of the banks. Banks win the federal lawsuit and in one fell swoop all of the thousands and thousands and thousands of state lawsuits GET SQUASHED. Obama is still raising tons of money from the banks and he is still their best friend.
Sadly we the taxpayer get stuck with the bill and the corrupt practices are never punished.
TOTAL JOKE
#6 Posted by Paul Sweeney, CJR on Wed 7 Sep 2011 at 07:40 PM