I continue to hear a number of commentators blame the entire collapse on Fannie Mae. Like the prior group of cads who tried to blame the collapse on the CRA, this one tends to come from political hacks seeking to avoid responsibility for their past errors.

There certainly are legitimate criticisms of the GSEs — they were cesspool of fraud and bad judgment — which is why we told clients in 2007 to short Fannie Mae. And several academics and independent analysts have excoriated Fannie for its failings, separately from and long before the economic collapse.

But I digress. Here is my Fannie Mae thought experiment:

The Facts: Its 1995, and the private securitization market has developed on its own. Fannie Mae looks around, and notices that they are not really all that necessary anymore. Wall Street had become a securitizer of not just mortgages, but student loans, credit card receivables, auto loans.

The Hypothetical Counter-Factual: So the CEO of Fannie announces they were going to sell off their mortgage portfolio, dissolve,, returning their capital to shareholders.

Question: Would the Housing boom and bust have occurred? What about the credit bubble? Derivative crisis? Abdication of lending standards? Leverage increases to Wall Street? Misaligned Compensation packages?

Unless your answer is NO to all of these, than its impossible to blame Fannie Mae for the collapse . . .


Fannie Mae Looks Like Hell  (November 16th, 2007)   

Fannie Mae: Ouch!    (November 20th, 2007)

Fannie Mae and the Financial Crisis  October 5th, 2008   

CRA Thought Experiment (June 26th, 2009)   

Who is to Blame, 1-25  (June 29th, 2009)  

Category: Bailouts, Credit, Real Estate

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

40 Responses to “Fannie Mae/Freddie Mac Thought Experiment II”

  1. I want those of you who want to comment to actually think hard about this scenario . . .

  2. ToNYC says:

    There is no blame but the Federal Reserve System which failed to tie credit creation to ~2% increases in real domestic GNP. The Clinton euphoria of dot com equity to the moon and fake millennium worries demand push crash’s fix leading to the whooppie!! we’re all gonna’ get rich on our houses while our kids sit on the curb. Weordinary kids got schooled for nothing while our kids came out with 6 figure humps on their back specifically exempted from declaring bankruptcy in this grand scheme. Where was the adult Fed? Its member banks were too stoned on free cash and bonuses to notice. No Barry, Fannie was not the blame: FNM and FRE just brought two big bags of “beak” to the party.

  3. JSchmid says:

    I think it is unfair to say that it has to be all or nothing. I believe that if you answer yes to half of your questions, you could logically say that the GSEs were large contributers to the problem and it would be reasonable to say we would not have crashed as far or at all because we would have had a smaller problem and more time for the market to work it out.


    BR: I am not saying its all or nothing. I am saying the people who blame the GSEs for the collapse are full of bullshit.

    See the difference?

  4. Mannwich says:

    That’s right, ToNYC. None of this happens without the Fed. And the kicker? They’re doing it AGAIN.

  5. crjdriver says:

    Im not going to argue with your points BR, because I would answer yes to most, if not all of them. FNM and FRE sure poured gasoline on the fire and greatly magnified the bubble because of their implied Federal Goverment Backing and the fact that they are exempt from tier 1 capital restrictions. Allowing them to become leveraged at greater than 80:1 Setting the stage for them to provide a wave of cheap available credit with very low Spreads over Treasuries If the price of something (credit) becomes much cheaper, the demand will go up. Without all the other factors you mentioned, credit bubble? No, but with all those factors you get a massive accelerant to a raging fire and then an explosion.

  6. Mannwich says:

    I feel like this topic has been hashed and rehashed so many times, it’s pureed at this point. Do we have nothing else relevant going on today?

  7. Basilisc says:

    An even better thought experiment, because it’s true: It’s 2005. Because of a string of accounting scandals, Fannie and Freddie sharply curtail their activities. A crowd of private-label issuers takes their place – with much lower standards (for LTV ratios, documentation …) than the GSEs. Did the crisis happen?


  8. diogeron says:

    I thought Barry’s analysis of this issue in “Bailout Nation” put an end to this nonsense of blaming just the GSEs and the CRA for the meltdown, but apparently not everybody has bothered to read the book. When my sister was ranting and raving about this issue talking about all the “bad loans that Freddie and Fannie made”, I first had to inform her that the GSEs didn’t originate one loan. Upon reflection, I thought that’s how misinformed many people are about just what FRE and FNM do. Moreover, I asked her since Fannie has been around since the 30s and Freddie since 1970, what took so long for the GSEs to take down the American housing market if they and their original mission were to blame? While they certainly were part of the problem, I guess it’s just easier for some people to believe some talk show guy screaming about Freddie and Fannie causing the problem than to deal with the actual complexities of the issue. One again, thanks to Barry for trying to set the record straight and have his voice heard over the cacophony of talking heads who push this meme via talk radio and cable “news.”

  9. The Curmudgeon says:

    Short answer: Mannwich says all that needs saying.

    Longer answer, @Bsilisc: You think Fannie and Freddie had high standards? By what metric? They had this God-powerful thing called a “conventional conforming” loan that started out as truly “A” paper in the nineties, but by 2005, through desk-top underwriting and other nefarious go-arounds (i.e., plain old fraud) was labeling “A” on every pile of shit that came in the door. It’s why they’re insolvent now.

  10. Bomber Girl says:

    I am not sure that commentators (and my earlier post in open thread) blame the entire collapse on Freddie/Fannie since there were clearly other forces such as excess leverage on Wall Street at work. However, I think the difference is that the extent of the collapse – which nearly brought down the financial system – resulted in large part from the quantity of what became toxic assets directly attributable to the GSEs and, importantly, the market distortions they engendered. We may have had a crisis, but let’s just say a “normal” crisis not a nuclear meltdown.

  11. ToNYC says:

    Yes, mannwich andthey are doing it again…until we replace these academic Wall Street myrmidons with a simple algorithm that ties credit to real economic work-product metrics. The Fed Reserve is a private bank monopoly protection racket..read the history of usury and fractional credit monopoly schemes at http://www.zerohedge.com/forum/wilsons-folly-our-private-central-bank-allows-member-bankers-collect-rent-exponentially-invent
    ..it’s a club and we’re not in it. Many great presidents stemmed the tide, but Wilson fell down..another Princeton man. The big FAIL that we must immediately puke up to start the cure.

  12. call me ahab says:


    your point is noted-

    the problem w/ the GSE’s is their debt was viewed as risk free (implicit- now explicit guarantee) w/ a very low risk premium over treasuries-

    could the USG ever let them default?


    did everyone know this-


    so it was all a big show- because the GSE’s are de facto government agencies- separated in 1968 from the USG by Johnson- to “supposedly” free the government from their liabilities- and make it easier to finance the Vietnam War

  13. lalaland says:

    what’s the line between intellectual dishonesty and delusion?

    I think the banksters have a gun to the head of America and they’re saying they’ll shoot the hostage if they don’t get a flight to a no-extradition-treaty country.

    We have to realize that even if we pay the ransom and give them a flight, they won’t release the hostage.

    We need the gov’t to take out the banksters, pure and simple. Take your shot gov’t – it’s our only chance to walk away from this thing.

  14. bsneath says:

    If the GSEs had not existed surely some other player would have stepped into their shoes and issued the same questionable mortgages.

    The “facts” as I understand them are (and those with a different perspective, please let me know):

    1) Government policy makers, unable to increase direct funding for low income housing, wanted banks to make additional mortgage loans to low income individuals.

    2) Banks did not want to make these loans. They were not a good use of investment capital. Low income individuals have on average a higher risk of default. Banks would make less profit or incur losses on their available investment capital.

    3) Banks at the time were and still are influential in Washington politics and have demonstrated a keen ability for behind the scenes negotiations of provisions to further their financial interests.

    4) Politicians are concerned with helping their constituencies. Few understand the intricacies of finance.

    My question all along has been, what did the banks offer and what did government policy makers agree to as the quid pro quo that led to banks agreeing to issue high risk mortgages even though to do so was not in their best interests? Who proposed them and who agreed to them?

  15. VennData says:

    The only issue with this idea is: if embedded additional risk was somehow created by the FNM construct – a tipping point – which may have created the marginal additional bad mortgage loan(s.) That seems like a stretch to me.

    Simply put: Raines, O’Neal what’s the difference?

  16. DoctoRx says:

    BR asks the wrong question. If you are a foreigner, the fact the Federal National Mortgage Assn has its seal of approval on the mortgages beats Countrywide Credit’s seal. Or Merrill Lynch’s.

    So the answer to BR’s questions is the same. Fannie/Freddie’s seats at the party made the bacchanalia much larger and the hangover much worse.

    One can blame Bush and his SEC etc and also blame Barney Frank and his GSEs.


    BR: You can blame all manner of people and institutions. My goal is to blame the ones that caused the crisis. (Others dont care about that much).

    Again, I must add — we were short FNM, I don’t like the GSEs — but they were not a BUT FOR cause of the crisis.

    If they never existed, the same thing would have occurred anyway.

  17. BR,

    how does any understanding of ‘what happened’ manage to get the point that ToNYC, above, is making?

    IOW, it begins, and ends, with The Federal Reserve, and the Fact: “The Fed Reserve is a private bank monopoly protection racket”. And, I’ll second: ..read the history of usury and fractional credit monopoly schemes at http://www.zerohedge.com/forum/wilsons-folly-our-private-central-bank-allows-member-bankers-collect-rent-exponentially-invent

  18. …manage to get the point that ToNYC…

    manage to get… past …the point that

  19. Brett Tibbitts says:

    You are certainly correct Barry that it is “political hackery” at its utmost to blame the financial implosion entirely on Fannie Mae and Freddie Mac.

    But it is also “political hackery” at its utmost that the current Democratic financial reform legislation doesn’t touch the problems of Fannie Mae and Freddie Mac.

    And what confidence can we have that new government regulations and agencies will do anything at all? After all, Freddie Mac and Fannie Mae are among the most federally regulated companies of any in the country. They have an entire federal agency dedicated to their ‘regulation’. And this agency did SQUAT to prevent their implosion. And it wasn’t just during the Bush years that this agency did SQUAT. It has always done SQUAT.

    Call me wary about more politically motivated government regulation. Obama ought to try to lead on this one and wait until he gets true bipartisanship. Make both parties accountable.

  20. Yossarian says:

    You see, Barry is biased by his politics which he claims not to have. His cloak of objectivity has about as much substance as The Emperors New Clothes. He reacted to the exaggerated claims about the influence of CRA on the financial crisis by exaggerating their innocence. But he won’t the strong indictments of their role, rather his posts on the subject will typically involve his defense. Discuss the flaws in this BR: http://www.c-spanvideo.org/program/id/198950


    BR: The CRA had zero to do with the collapse. Not a little, not a teeny amount, but zero.

    This has been proven over and over confirmed by numerous analysts, academics, FDIC chairs, Fed bankers — even bailed out Bank CEOs.

    Again, you either care about facts and the truth and reality or you don’t. You, Yossarian obviously don’t.

  21. DeDude says:

    Perhaps more important question: without F&F how could you have stopped the free fall in housing and associated destruction of our credit based economy? Since the collapse F&F has been just about the only place for banks to unload good sound housing loans. Without them housing would quickly have become a cash only business. We would still be in a deep credit freeze, and a severe deflationary depression, if that had happened.

    Now if we had not done this idiotic privatization of F&F forcing them to worry about market share, profit and fat CEO bonuses, then they would not even have needed the bailout. They would simply have stayed with regular 20% down conforming loans and let the private sector go insane and bankrupt themselves, without ever having an incentive to be dragged into that kind of stupidity.

    As previously said, I may have been pissing in the Mississippi river that spring, but I didn’t cause the great flood of 1994. F&F may have made a few bad loans when they very belatedly came into that game, but they didn’t cause the crisis. It wasn’t F&F loans that dropped to below 10 cent on the dollar.

  22. Stephen says:

    This reminds me of ‘Murder on the Orient Express’ … if one of the suspects had changed his/her mind and not gotten on the train, would the murder still have taken place? Unless you can answer no then you cannot blame that person because they did get on the train and help to murder Ratchett.

    The bubble occured because of easy money. Fanny and Freddy pumped how many trillions into that bubble? The Fed pumped how many trillions? Instead of doing real analysis you’re just arguing for arguments sake.

    Barry, you watch the murder scene of Murder on the Orient Express and you have the hots for one of the participants (metaphorically – government) and you excuse that person ad nauseum.

  23. Moss says:

    The GSE’s implied guarantee, which ended up being explicit, provided the moral hazard shield which was exploited beyond reason. The gamers knew somebody would buy so as long as it could be sold no problem.


    BR: The GSE’s implied guarantee existed for 70 years.
    So why did it suddenly have an impact in 2006?

  24. willid3 says:

    i am thinking the collapse came about because the shadow banking system had created a new method of financing housing called originate to sell. this method of operation depends on several things happening. one the originator isn’t covered by Federal laws (and those that are ignored by the management at the Federal agencies. and then the Feds block the states from regulating the originators. if the state has any interest in doing so). that the wall street banks (who aren’t covered by CRA or banking laws) implement the 40-1 leverage. they tune this mess by keeping incomes collapsing there by ensuring more and more marks for their ‘loans’, they then tear up any restraint in writing contracts (if the mark can breath, they can get a loan). the originators using the originate to sell model, know going in that a large percentage of their contracts are bad, but don’t care as they sell them to Wall Street as soon as they fund the note. Wall Street has help from their rating agencies collaborators, who will rate the assets in the ‘security’ as AAA and go so far as to use the same models that their customers used (little wonder they came up with such junk opinions. i thought the reason for the rating agencies was to have an unbiased third party evaluate the assets. but who knew right?). wall street figured out about a decade ago how to make this entire mess work using a very special model. our friends at Fannie and Freddie some years ago become frantic because for a long time their ‘business’ was shrinking by leaps and bounds (so many were going that private route of course) that they tried to get more competitive, said competition being seeing how low their standards could go of course! and since they don’t write the contracts all they do is buy them (and now wall street was competing for this) . and when the doomed loan carousel inevitably when off the tracks, the whole mess came crashing down, impacting millions, costing trillions to keep the economy from collapse.
    and now we have so many (who knowing or unknowingly) are supporting those who created this mess !

  25. Bomber Girl says:

    Last I heard, 2/3 of the bad mortgage assets in the financial system were either bought by government agencies (Fannie, Freddie) or or required by government regulations.

  26. wngoju says:

    BR – thanks thanks thanks, this is a great reprise of this stuff!

  27. DeDude says:

    A lot of people seem to think that if F&F had not existed then the business they did would have evaporated. No if F&F had not existed then the reckless competitors who were taking market share away from F&F would have had that business too. And since subprime carried a lot better compensation than prime, they would have pushed those products rather than regular type mortgages. So not only would any shite loans done by F&F simply have been done by someone else, a lot of regular loans going through F&F would instead have been shite loans with the higher profits that everybody had gotten addicted to.

  28. wngoju says:

    Bomber Girl: “Last I heard, 2/3 of the bad mortgage assets in the financial system were either bought by government agencies (Fannie, Freddie) or or required by government regulations.”

    Ms. Girl, do you mind sharing with the group your source(s) for this surprising information? Fox, maybe? A quick google search yields a lot of fannie/freddie debunkery, for example, this (http://goo.gl/YRc8):

    “Between 2004 and 2006, when subprime lending was exploding, Fannie and Freddie went from holding a high of 48 percent of the subprime loans that were sold into the secondary market to holding about 24 percent, according to data from Inside Mortgage Finance…During those same explosive three years, private investment banks — not Fannie and Freddie — dominated [Securitization] In 2005 and 2006, the private sector securitized almost two thirds of all U.S. mortgages…”

  29. Osman.Aziz says:

    With all due respect Mr. Ritholtz, I believe that the section entitled “the facts” are, in fact, not factual.

    Having conducted research for David Wessel at the WSJ while he was at the Woodrow Wilson Center for his book “In Fed we Trust” and for my professor who taught a course here at The George Washington University about the financial crisis, I came across some data with regards to agency vs. non-agency debt.

    In 1996, Mortgage Related Issuances in the secondary market (essentially the total stock of securities issued and owned), according to SIFMA (Securities Industry and Financial Market Association) totaled 492.6 Billion USD. Fannie, Freddie, and Ginnie owned about 440.7 Billion USD of those securities, or 89.5 %. Even by 2006, GSE ownership of these securities was still 55% (essentially a duopoly). So to suggest that Fannie was looking around at a burgeoning private securitization market is flat out wrong.

    Source: http://www.sifma.org/uploadedFiles/Research/Statistics/SIFMA_USMortgageRelatedIssuance.pdf

    The notion that the GSE’s are entirely to blame for the crisis is a bit far fetched, however, I would say that their presence in the secondary market represented a huge rent transfer from the government to private financial institutions through an “implicit guarantee”. As long as the GSE’s remained intact, private firms like Goldman, JP Morgan, and the defunct Lehman could enjoy “riding the wave” of appreciating home prices that defied diminishing returns.

  30. Bomber Girl says:

    I was speaking about bad assets, not total assets. My source was Burton Malkiel. I don’t watch Fox, except when they post Yankee games.


  31. call me ahab says:


    you kill me BR-

    there was no implicit guarantee for 70 years-

    The GSE’s implied guarantee existed for 70 years.
    So why did it suddenly have an impact in 2006?- Ritholtz

    Fannie was what Ginnie Mae is now- a government agency-

    until 1968- and since Fannie was created in 1938- it was an explicit guarantee for 30 years-

    but hey- make it simple if you need to- sometimes that’s necessary to feel confident about your arguments

  32. Andy T says:

    Amazing to me that a man of your intelligence cannot see the “bigger picture” when it comes to FNM/FRE/FHA…

    Let me ask you a question….

    If Freddie and Fannie never existed and never issued Trillions of dollars of loans at below market (subsidized) mortgage rates, would there have ever been sustained housing boom in the 1980s, 1990s and 2000s?


    BR: The boom and soft contraction in the 1980s had everything to do with rates plummeting from the 1970s inflation busting 20% Volcker medicine to the Greenspan free money era. Mortgages falling from 14% to 7% was the major factor. If you have evidence its something else, please do inform me, but with RE, its hard to escape the impact of rates.

    In the 1990s, you were in years 8-18 of a huge bull market, with even lower rates. Equity gains were rolled out of stocks and into RE. And after the 1996 tax deduction changes, RE really popped. Again, major factors other than the GSEs were the drivers.

    That’s the problems with being data/fact driven — the political theories lack compelling data that reality (Interestrates, taxes) have.

    Again, Fannie

  33. Andy T says:

    The boom really began in the early 1980s with Foreign investment tax exemption. That’s when foreign money knew they could invest in US mortgages, with an implicit guarantee by the USG, and earn extra juice on Treasuries with no tax consequences. The DEBT explosion and mortgage boom in the US began at that point.

    So, yeah….the USG and Fannie Mae were the original problem…and, the seeds were planted in the early 1980s. Leave it to Congress to create the law that acted like the steroid.

  34. Andy T says:

    And, Barry please stop baiting us with these layups.

    It seems like when you need “go to” comment-bait material, you always draw on Libertarian-bashing, Fannie/Freddie, Ayn Rand, or Unions.

    Let’s broaden the horizon a bit, or else you might end up talking about abortion and religion here….

    Heh, heh, heh….

  35. dsawy says:

    OK, so the assumption we’re supposed to start from is that Fannie/Freddie roll up operations in 1995 and leave the secondary market completely to the private sector, yea?

    Here’s two thoughts off the top of my head:

    1. Mortgage interest rates would have gone up a bit. I don’t know how much, but a bit. Why? Fannie/Freddie sold their paper with an implicit assumption that they were backed by the US Treasury – when they were explicitly NOT backed by the US government. Greenspan alluded to this issue many times in Congressional testimony that he gave.

    Raising interest rates on conforming mortgages would have dampened the market a little bit – not much, but a bit.

    2. If Fannie/Freddie were then gone, would the private sector maintained the notion of a “conforming loan?”

    I don’t know the answer to this question. It is too easy to say “no” while pointing at all the freaky mortgage products out there. Well, the flip side of this is that Fannie/Freddie didn’t disappear in 1995, they were very much still around, offering rates so low that many bankers could not compete with them on conforming notes, so they got into the fringe freaky notes. It turned out that the fees and yields were much nicer on those freaky notes anyway, so the bankers who were edged out on conforming paper were not complaining that much in the heyday of the RE market.

    The question I’m trying to get my head around is “without Fannie/Freddie, what would have happened to the ‘conforming loan’ secondary market?” The answer is “I don’t know” – mostly because if anything, the conforming note parameters were a hindrance to the real estate bubble-blowers out in the hot-hot-hot markets. They wanted loans that could get people into a house for Earl Scheib sized down payments on a $750K house. Well, with conforming limits formerly at $417K… that wasn’t going to happen.

    At the same time, peddling conforming paper is much easier than peddling freaknote paper. So you’d have demand from the hot markets for non-conforming paper (or changing the parameters of “conforming”) and the banks would want to keep the concept of ‘conforming’ parameters because it made RMBS easy to sell because they were a commodity.

    To answer Barry’s question directly: I fully believe this charlie-foxtrot would have happened with or without Freddie/Fannie. The two major contributions to the mess that Fannie/Freddie made were:

    1. Mis-pricing the risk on RMBS due to their ‘implicit’ government guarantee.

    2. Allowing the LTV’s to go way too high as a result of legislative political pressure, which set the benchmark for the rest of the industry – and allowed such nonsense as 108% LTV’s to be written.

  36. This isn’t baiting, its simply fact driven. The ideological partisans who hate Fanny for reasons of free market purity cannot accept that.

    Than goodness these eejits invest based on their philosophy — they are the low hanging fruit to be harvested by savvy traders…

  37. Bomber Girl says:

    Those two statements conflict, an ideological partisan would have been shorting Fannie, like you.

  38. Yossarian says:

    Earlier I referred to CRA when I meant FNM/FRE/FHA/CRA/etc. All f these institutions distorted the market and ended up backing a vast amount of supposedly conforming mortgages that were, in reality, equivalent to subprime. Fannie didn’t cause the crisis- in fact there is no single cause- but they brought beer and a bong to the party. These useless bank CEO’s testified to Congress that they ALL failed to account for housing declines in their models (how stupid is that?). The constant wall of money flowing into housing due to Fannie’s sweet deal with both The Fed (borrow cheap) and foreign buyers (US guarantee) served to assuage fears of any meaningful declines. I mean, look at FNM’s balance sheet even after the $2T in Fed subsidies (buying MBS, providing leverage, etc.)- do you think this was solid institution?

    Interesting about the Foreign Investment Tax Exemption- will look more into that. Also, the change in the tax laws in the late 1990′s was also a significant catalyst for the RE debt bubble.

  39. Osman.Aziz says:

    Mr Ritholtz, you still haven’t acknowledged that the first premise to your thought experiment is not accurate, thereby nullifying the remainder of your argument.

    The duopoly of Fannie and Freddie (and if you want to include Ginnie, an oligopoly) had and still have no motive to exit the secondary market for mortgages due to their commanding clout in the market itself.

    Concerns over fluctuating interest rates is a short run consideration, however, the market structure itself is the more important long run consideration. So in short, what do you have to say to the factual deficiency of your first point?

    I would appreciate a response. Thank you very much.

  40. engineerd1 says:

    In a real marketplace some people WILL hand out money to losers because they want more yield. But it cannot blow up into a bubble that hurts everybody unless there is a reality or perception that the taxpayer is acting as backstop. This is the ultimate reality that your red herring argument side steps. Its not Fannie Mae per se… Its big government liberalism…..your team, that caused this problem. You guys are the smartest and most glib players at the table, so I have no doubt you will deflect the blame elsewhere….but remember, you can’t fool all the people…..me for example.