Michael Hudson writes one of the most convincing Fannie and Freddie Didn’t Do It pieces yet.
Actually, my soundbite isn’t quite right: Frannie contributed to the crash, as Hudson says. But they were minor players compared to Wall Street, not in any way the main bad guys—despite what the American Enterprise Institute and the like would have you believe. Hudson, who has a new book out called The Monster: How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America—and Spawned a Global Crisis, shows why.
First there’s this: Fannie and Freddie’s market share plunged through 2006 (when the housing market turned) as Wall Street’s bubble machine went into high gear. It was a bit player in the riskiest loans. Just 5 percent of its loans were subprime. Wall Street’s percentage was 500 percent higher.
Ahh, Wall Street apologists say, but bankers wouldn’t have put together these MBS and CDO deals if Fannie and Freddie weren’t funding them indirectly via the securitization markets. Wrong:
In addition to buying loans directly, Fannie and Freddie also purchased mortgage-backed securities produced by Wall Street. From 2002 to 2007, Wall Street produced more than $3 trillion in securities backed by subprime mortgages and so-called Alt-A mortgages, another class of risky home loans. During that time, Fannie and Freddie purchased 23 percent of Wall Street securities underpinned by subprime and Alt-A loans, according to Inside Mortgage Finance.
That’s a big chunk, but still not enough to make the case that Fannie and Freddie were the main drivers of the growth in risky lending.
Need even more evidence? There’s this:
As of September, Federal Reserve data show, 2.2 percent of Fannie- and Freddie-backed mortgages were in foreclosure, compared to 13 percent of all subprime mortgages, 11.3 percent of all Alt-A mortgages, and 2.9 percent of all prime mortgages.
Or to put that another way:
Mortgages financed by Wall Street from 2001 to 2008 were 4½ times more likely to be seriously delinquent than mortgages backed by Fannie and Freddie.
Case closed, or it ought to be, but you can bet we’ll still be debunking the CRA/Frannie canard ten years from now. Why? I like how Hudson, who’s a staff writer with the Center for Public Integrity, gets at that:
Tagging Fannie and Freddie as the primary suspects in the mortgage debacle diverts attention from bigger offenders and from policy decisions—such as deregulation in the mortgage market and on Wall Street—that helped create the climate for out-of-control lending.
There you go. And it comes from an awfully well funded propaganda machine.
Further Reading:
Audit Interview: Michael Hudson. “We’re in a battle now to define what happened.”
Covering the Republicans’ Crisis Commission Document. Bethany McLean shows why he said-she said reporting doesn’t cut it
The funny thing is that by focusing Freddy and Fannie as government failings, one ignores the real government failings which happened at the Securities Exchange Commission (CSE failures), the Federal Reserve (subprime watchdog failure), the Office of the Comptroller of Currency (overriding state laws against predatory lending failure), the Office of Thrift Supervision (AIG failure), and the Federal Bureau of Investigation (cops pulled off the white collar crime during a fraud epidemic failure).
That's only natural since the government failed in the wrong way in those institutions. It failed to regulate, it failed to enforce the law, it failed to protect the public. Those were failures of small government, laissez faire in nature, so we can ignore them. But if you really cared about government failures, the above would be your focus.
Freddy and Fannie on the other hand... they were private, weren't they? They used to be public institutions, but then they were spun off to private investors with government guarantees (because they were to big to fail) and strict charters (because TBTF requires responsible acting institutions). It wasn't until 2008 that they became wards of the state, like AIG and the rest of the banking system soon after.
So if you really hate Freddy and Fannie, then you have to hate all the other TBTF scumbags because the government guarantees their risks (and puts the money for them up front through the Federal Reserve) while not restricting their charters nor requiring that they behave as responsible actors. Whatever brings in the bonuses in a mark to market system is fine with these new TBTF players.
If you really want to protect citizens, the economy, and the treasury then your focus would be on the rogue banks and the government institutions that see no evil / hear no evil while power lunching with these people they are supposed to regulate.
And that's just not a story a Koch sponsored institution wants to tell.
http://www.cato.org/pub_display.php?pub_id=12050
#1 Posted by Thimbles, CJR on Wed 19 Jan 2011 at 07:04 PM
PS. Is the title supposed to be "Frannie and Fannie" or did you mean "Freddie and Fannie"?
I've done that too, especially on early mornings during which someone slipped decaf in the coffee maker.
I hate those mornings.
#2 Posted by Thimbles, CJR on Wed 19 Jan 2011 at 07:42 PM
Thanks, Thimbles. I think it's more like my twin girls don't like to sleep at night.
#3 Posted by Ryan Chittum, CJR on Wed 19 Jan 2011 at 09:46 PM
Why else would you think I need caffeinated coffee in the morning?
(3 year old. After midnight. Duct tape. Temptation. ...Must resist temptation...)
#4 Posted by Thimbles, CJR on Wed 19 Jan 2011 at 09:59 PM
Thank you, thank you, a bajillion times thank you.
The "Fannie, Freddie, and the CRA did it!" crowd are doing the typical conservative analysis: start from a pre-determined conclusion (government is bad), then work backward, ignoring any and all evidence that might prove the conclusion wrong.
Of course, there's also the underlying -- and abhorrent -- theme of "It was all the fault of the poor and minorities." Because there's no way the Master of Wall Street were the cause. Nope. Not at all. It was the fault of The Others.
**bangs head on keyboard**
Again, thanks! I'll be bookmarking this for future reference.
#5 Posted by Mark D, CJR on Mon 14 Feb 2011 at 10:52 AM