Get Me ReWrite!
My approach to everything I have written, studied and analyzed in this space is pretty straight forward: Start with the data and evidence and go forward from there. Figure out what the “Truth” is; try to get as close to the objective reality beneath the noise in order to make intelligent investing decisions for myself and my clients.
There are others who do not share this objective. Their goals are either political (winning the next election) or ideological (having their belief system become dominant). Truth is irrelevant to these people.
Not surprisingly, these folks — many of whom contributed to the crisis in a mighty way — are desperately trying to duck responsibility for what happened. Those who helped cause the crisis are engaged in an ongoing effort to rewrite its history.
Their goal? Exonerate their own bad behavior, throw off any responsibility for the collapse, blame anything but their own ideology and horrific decision making. They want to keep pushing their tired political agendas, despite the damage they may have caused.
When writing Bailout Nation, I tried to steer clear of partisan finger pointing. I kept the focus on what actually occurred, what could be proven mathematically. I blamed Democrats and Republicans — not equally, but in proportion to their actions, and what they did. Unsupported theories, tenuous connection, loose affiliations were not part of the analysis.
To be blameworthy, every legislative change, each regulatory failure, any corporate action had to manifest themselves in actual mathematical proof. This led me to ascertain the following 30 year sequence:
-Free market absolutism becomes the dominant intellectual thought.
-Deregulation of markets, investment houses, and banks becomes a broad goal: This led to Glass Steagall repeal, unfettering of Derivatives, Investing house leverage exemptions, and a new breed of unregulated non bank lenders.
-Legislative actions reduce or eliminate much of the regulatory oversight; SEC funding is weakened.
-Rates come down to absurd levels.
-Bond managers madly scramble for yield.
-Derivatives, non-bank lending, leverage, bank size, compensation levels all run away from prior levels.
-Wall Street securitizes whatever it can to satisfy the demand for higher yields.
-”Lend to securitize” nonbank mortgage writers sell enormous amounts of subprime loans to Wall Street for this purpose.
-To meet this huge demand, non bank lenders collapse lending standards (banks eventually follow), leading to a credit bubble.
-The Fed approves of this “innovation,” ignores risks.
-Housing booms . . . then busts
-Credit freezes, the markets collapse, a new recession begins.
You will note that the CRA is not part of this sequence. I could find no evidence that they were a cause or even a minor factor. If they were, the housing bubbles would not have been in California or S. Florida or Las Vegas or Arizona — Harlem and South Philly and parts of Chicago and Washington DC would have been the focus of RE bubbles.
Nor do I blame Fannie and Freddie. Now understand, there is no love lost between myself and the GSEs. For years, I have called them “Phoney and Fraudy.” Since George Bush and Hank Paulson nationalized them, I have accused the government of using these two as a backdoor bailout for banks — a hidden PPIP/TARP used to buy all the garbage mortgages that banks are desperate to get off their balance sheets. Longtime readers will recall we very publicly shorted Fannie based upon their fraudulent practices and horrific balance sheet when FNM’s stock was in the $40s (it soon after collapsed).
But even I cannot reconcile reality with the movement to place all of the world’s troubles at the feet of the GSEs. Not, at least, according to the data.
That lack of evidence, however, doesn’t stop ideologues from trying. Consider this attempt at rewriting the causes of the credit crisis by Kevin Hassett:
“The worst financial crisis in generations was set off by a massive government effort, led by the two mortgage giants, to make loans to homebuyers no matter whether they could make the payments. Lenders were willing to lend money to just about all comers, no matter how low their income. Why? Because the lenders knew Fannie and Freddie would purchase the loans from them for a high price before bundling them into securities to sell to investors.”
Now, this makes for a fascinating narrative that plays into a number of different ideological beliefs. It exonerates the radical free market deregulators, it ignores what the private sector did, and it somehow ignores the fact that Congress was controlled by a very conservative GOP from 1994 to 2006 — the prime period of time covered leading up to and including the beginning of the crisis.
But worse than all of that, the data supporting Hassett’s position simply isn’t there.
Over the past 2 years, I have repeatedly asked the people who push this narrative to provide some evidence for their positions. I have offered a $100,000 if they could prove their case.
Specifically, I have requested some data or evidence that DISPROVED the following facts:
-The origination of subprime loans came primarily from non bank lenders not covered by the CRA;
-The majority of the underwriting, at least for the first few years of the boom, were by these same non-bank lenders
-When the big banks began chasing subprime, it was due to the profit motive, not any mandate from the President (a Republican) or the the Congress (Republican controlled) or the GSEs they oversaw.
-Prior to 2005, nearly all of these sub-prime loans were bought by Wall Street — NOT Fannie & Freddie
-In fact, prior to 2005, the GSEs were not permitted to purchase non-conforming mortgages.
-After 2005, Fannie & Freddie changed their own rules to start buying these non-conforming mortgages — in order to maintain market share and compete with Wall Street for profits.
-The change in FNM/FRE conforming mortgage purchases in 2005 was not due to any legislation or marching orders from the President (a Republican) or the the Congress (Republican controlled). It was the profit motive that led them to this action.
These are data supported facts I pounded on in BN.
Of course, folks like Hassett hate this factual history, as it conflicts with their goals and politics. Rather than produce evidence, they create story lines unsupported by facts. But Monkeys love a good narrative, and so they give that to them.
However, as an investor, I demand evidence, data and facts. The blame Fannie & Freddie crowd have managed to remain blissfully data free. They have steadfastly ignored all calls for proof.
Its way past the time to call out their intellectual dishonesty. If you cannot show any data, if you cannot prove what you are alleging with actual facts, you need to be called out for what it is you actually are: Proponents of a failed philosophy.
>
See also:
Freddie Finances Scarier Than Bad Slasher Flick
Kevin Hassett
Bloomberg, May 10 2010
http://www.bloomberg.com/apps/news?pid=20601039&sid=aJc8svVLQCVk
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May 13th, 2010 at 7:32 am
Dont forget Hassett is the clown who wrote: “Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market”
How on earth he actually still has a job after that disaster is a miracle.
May 13th, 2010 at 7:33 am
heh he — there is that also —
I will add a link to the book to his name
May 13th, 2010 at 7:38 am
That was the politest way to call a person a god damned liar I have ever seen
May 13th, 2010 at 7:51 am
“failed philosophy”?
Hardly. They only “fail” if their political faction declines in its influence in running the nation. If that means running the nation into the ground, so be it.
“Failure” is a relative concept.
May 13th, 2010 at 7:56 am
Amen, Barry!
May 13th, 2010 at 7:59 am
Failure as in contributing to what occurred — the specific legislation, the changes in rules, and the corporate behavior.
More importantly, the DATA that these changes produced in terms of mortgages, loans, lending standards, derivatives, leverage etc.
May 13th, 2010 at 8:01 am
BR,
What about the Credit Rating Agencies?
Didn’t they create the feedback loop that energized the high risk securitization?
From 2/10/09
“While it was the investment banks that sold the junk paper, it was the rating agencies that tarted up the bonds. It was the equivalent of putting lipstick on a pig: This paper could never have danced its way onto the laps of so many drooling buyers without the rating agencies’ imprimatur of triple-A respectability.
Yet considering the massive damage they are directly responsible for, the rating agencies have all escaped relatively unscathed. Given their key role in the crisis — were they corrupt or incompetent or both? — one might have thought an Arthur Anderson-like demise was a distinct possibility. Warren Buffett should consider himself lucky — he is Moody’s biggest shareholder, and is fortunate the scandal hasn’t tarnished his reputation.”
~~~
BR: In Bailout Nation, on my list of 30 factors, they are the #3 cause, after Greenspan and Gramm
May 13th, 2010 at 8:03 am
I’d go a step further and say the political ideology is just a smokescreen for theft from the middle class. If it’s globalization (we get cheap crap, you get our jobs) or the housing bubble/bailouts it’s the middle class that is being destroyed in this country by both parties (I’d argue there is only one party). Soon we’ll be like many countries in the world where a few rich people travel around in armored cars with their bodyguards while the rest of us sell bottled water at highway on ramps.
May 13th, 2010 at 8:03 am
BR, you really don’t care what Hornet’s nest you throw rocks at, do you?
May 13th, 2010 at 8:04 am
http://dailybail.com/home/secret-bank-bailout-fannie-freddie-losing-money-as-a-matter.html
I always like it when you add” Really, really bad calls” to the tag line.
After listening to you and Dean Baker discuss Phoney and Fraudy, I think it is important to make the distinction between what happened before and after 2008. I think you questioned whether it is now a conscious, willful decision to do this back-door bailout yet as Dean Baker says, no one wants to talk about it.
If, in fact losses will run north of $400B, and they do it all under the guise of – run up the losses and we will deal with it as it comes up – Congress is AGAIN avoiding their obligation as the holders of the purse strings. It is ridiculous. TARP is being misused and Elizabeth Warren should be screaming from the rooftops. I know, no one listens to her, but she should be screaming just the same.
May 13th, 2010 at 8:06 am
Stupid me, I thought the pull was to feed the $60-odd trillion notional monster churning out massively leveraged derivatives. Kevin Hassett is right up there with David Brooks.
May 13th, 2010 at 8:09 am
I have, beneath the clear plastic sheet on my desk, two lists of those to pay attention to for investing info, and those to ignore even reading…and the latter is filled with those politically biased!
May 13th, 2010 at 8:19 am
The real question to me is how can an organization like Bloomberg publish these types of opinions, masquerading as factual, without any type of backup to substantiate the claim.
May 13th, 2010 at 8:21 am
BR at his best. Nice!
May 13th, 2010 at 8:24 am
But ideologically-based investing can produce returns, like Halliburton did. Those like Hassett definitely prove that when they are in charge, government does not work (unless you are really well-connected). The 2000-20008 years will be known as the corporate Smash-And-Grab economy, where his kind of pig either gorged at the trough or helped place the dinner napkins. He is still pushing Bushynomics.
~~~
BR: When I speak to investing groups or brokers/advisors, I use two examples of the impact of political bias affecting returns:
When it comes to investing, Politics is a recipe for losing money . . .
May 13th, 2010 at 8:24 am
I heard Hassett hangs out with Don Luskin..can anyone confirm this?
May 13th, 2010 at 8:24 am
Barry,
I agree with you that CRA is not responsible for the downstream events, but is it possible that creativity around implementing CRA led to exploration of alternative financing vehicles that became the basic blueprint for others to devise all these exotic and poorly understood mortgage machinations?
~~~
BR: That is like the George Carlin joke about pot leading to heroin: we should outlaw mother’s milk, it leads to EVERYTHING
May 13th, 2010 at 8:28 am
I agree with HEHEHE. In fact, we are already there. I watched on TV here in Los Angeles as President Obama arrived in LA for some function. As I watched his endless armored column of black SUVs speed down the blocked off streets to his venue I said to myself, he is scared to death of his own citizens, otherwise why would he travel in such an shameful fashion. It goes right along with caged citizens in “free speech zones” and the Secret Service seizing protest signs and rousting the people carrying them.
Or the Secret Service prohibiting ceremonial swords when Obama spoke at an Naval Academy graduation, afraid of his own military!
What a disgrace in the “Land of the Free” I can remember even Richard Nixon walking out into the middle of a huge anti-war demonstration and talking to the young demonstrators with minimal Secret Service protection. Times have changed for sure.
May 13th, 2010 at 8:29 am
I’ll suppose it moot to bring up http://clusty.com/search?input-form=clusty-simple&v%3Asources=webplus&query=Federal+Reserve+Act
“The name of Central Bank is carefully avoided, but the ‘Federal Reserve Association’, the name given to the proposed central organization, is endowed with the usual powers and responsibilities of a European Central Bank.”
– Nation Magazine, January 19, 1911
http://hubpages.com/hub/Federal_Reserve_Act
good thing we can distract ourselves, amongst the branches, never looking at the Root..
May 13th, 2010 at 8:35 am
Barry,
As you said, they do not seek to be intellectually honest. Their purpose is to shout loudly and hope that more ignorant folks like the conclusions reached. It works. It works especially well on election day. Too many voters – lacking passion – stay home.
Your battle is not easily won, an I doubt it’s winnable.
My suggestion: Find a small number of courageous congresspeople to fight the battle.
May 13th, 2010 at 8:41 am
Jjay, didn’t Bush travel like that? What about Cheney’s “undisclosed location” you’re a tin-foiler, dude,
May 13th, 2010 at 8:42 am
Excellent synopsis.
On the GSE question, it would be great to move to a all-private lending model, yet the GOP’s current talking point: that it’s all the Democrats fault, belies the data. There’s no doubt both parties were complicit (there’s a Fannie/Freddie connection in every district) but the GOP is mudding the waters.. so to speak, with this new meme;
Here are facts showing how the GOP ‘allow[ed] {the GSEs] to get too big and make stupid decision. Daniel Mudd the GOP’s handpicked CEO to lead Fannie Mae increased their debts by more than anyone
http://graphics8.nytimes.com/images/2008/10/04/business/ATTY1WQA.jpg
…in fact the GSE”s were primary tools in Bush’s ownership Society, instead of shrinking them, when the GOP had full power they did nothing with regard to Fannie and Freddie but use them to get much bigger under their implementation of the their “Ownership Society”
http://www.newsweek.com/id/163653
…further reading regarding the GOP Congressional actions ‘allow[ed] {the GSEs] to get too big and make stupid decision.”
http://www.realestaterama.com/2010/04/28/house-republicans-ought-to-be-embarrassed-about-their-record-on-fannie-and-freddie-ID07061.html
http://www.house.gov/apps/list/press/financialsvcs_dem/pressREP_04282010.shtml
May 13th, 2010 at 8:46 am
@mgkurilla:
No, it’s not possible. Sorry. But thanks for playing. AIG Financial Products and JP Morgan teamed up to create the first BISTRO in 1998-99 — arising out of JPM’s exposure to European government bonds, not mortgages.
The dream machine: invention of credit derivatives, Gillian Tett, Financial Times, March 24, 2006
http://www.ft.com/cms/s/2/7886e2a8-b967-11da-9d02-0000779e2340.html
May 13th, 2010 at 8:51 am
The frenzy was worldwide, so it cannot be attributed to some minor internal US agency policy, not, in fact, to any exclusive US action or policy.
May 13th, 2010 at 8:58 am
jjay-
that’s nonsense- I’d wager it’s the folks protecting the POTUS who tell him how it’s going to be when he travels- not the other way around-
. . .and BR is correct- the GSE’s were late to the subprime party- which was in already in full swing- Wall Street at its finest- tripping over profits on their way to bankrupting the whole country-
Freddie/Fannie did loosen up their automated underwriting platforms- but it was nothing like the Bear Stearns products- 100% financing no doc loans-
what a show that was- when I had shoe shine boys from Country Clubs applying for $500,000 mortgage loans- that’s when I knew the game was up and it would it all implode soon enough
May 13th, 2010 at 9:04 am
So does that mean FAN and FREd do not need reform? Is that any reason to leave them of completely out of FIN REG which means… this is no fin reg at all. Barry, I love your work, and call me a Conservative please! but your liberal bias is ALWAYS showing.
~~~
BR: Of course they need reform — I think they never should have been a hybrid private public GSE int he first place.
But I am looking at the causes of the crisis — not the factors that have little or no causality. FNM and FRE were just two more fucked banks in a long list of many many others . . .
May 13th, 2010 at 9:10 am
BR,
Well said. One more thing isn’t the government trying like hell to do over all those bullets again?
May 13th, 2010 at 9:10 am
“…What a disgrace in the “Land of the Free” I can remember even Richard Nixon walking out into the middle of a huge anti-war demonstration and talking to the young demonstrators with minimal Secret Service protection. Times have changed for sure.”–jjay, above..
jjay is speaking about a ~40-year arc, no?
May 13th, 2010 at 9:13 am
BR you’re not alone.
May 13th, 2010 at 9:13 am
Barry,
In general it is hard to argue with your sequence but i do blame GSE and do not blame free market thinkers.
I do not agree with the statment “Free market absolutism becomes the dominant intellectual thought” – for me deregulation which was due to Wall Street lobbing has nothing to do with free market)
I agree that low ratest were the primery couse of the cirsis, but this point stands in contradiction to the first point- what a control of an interest rates has to do with free market?) I do think that GSEs (in general GSE’s are not free market phenomenon) contributed to the housing bubble. GSE’s created false demand for houses wich helped a creation of housing bubble.
Best regards,
~~~
BR: You are correct about the rates, but I would like someone to explain to me how the GSEs around since 1938 and 1968 respectively caused a housing bubble. Also, how the GSEs in the US caused a massive boom & bust in England, Australia, Germany, Korea, Ireland, Spain, etc.
Its not free market thinkers – its RADICAL free marketers like Greenspan and Gramm that did so much actual damage.
And I agree with you about the irony of Greenspan — he professed free markets, and was a radical deregulator — yet it was his massive intervention in markets via ultra low rates that started the entire credit bubble/CDO/leverage sequence.
May 13th, 2010 at 9:19 am
BR: Your first point is a straw man: “Free market absolutism becomes the dominant intellectual thought.” Targeting an extreme version of free market does not negate the value of pursuing free market system. If you turn your withering gaze with equal hostility on the implied alternative — government regulation — you’d find problems too. My point is don’t throw out the baby with the bathwater.
~~~
BR: But it was the extremists who defunded the SEC, passed Glass Steagell, passed the Commodity Futres Modernization Act deregulating derivatives, etc.
When I blame the radical free market absolutists, I am implicitely am giving those who believe in free markets a pass …
May 13th, 2010 at 9:28 am
To Ahab and VennData.
Of course Bush I and II and Clinton did the same thing, I said things have changed since Nixon who was aware of the constant political assasinations in the 60s and still walked out in the crowd of demonstrators. Obama is just the latest manifestation of the Imperial Presidency, I am not going to write a book in the comments section to explain myself if I can help it.
The President can overide the Secret Service agenda any time he feels like it, what are they going to do arrest him? He is running the show, not them. When was the last time any of those guys stopped to talk to a group of citizens that was not orchestrated and controlled?
My point is that we are now in the situation where the average citizen has no representation in Washington DC, and all politicians avoid their constituents as much as possible, to the point of fearing any open forum that might involve a dissenting opinion that they have no answers to.
May 13th, 2010 at 10:18 am
@jjay Says:
“Obama is just the latest manifestation of the Imperial Presidency,”
They alluded to that at Daily Show. No even England is that Imperial (7:10 into the video)
http://www.thedailyshow.com/watch/wed-may-12-2010/clustershag-to-10-downing—new-prime-minister
May 13th, 2010 at 10:28 am
Bloomberg disclaimer on Hassett…with my revision…
(Kevin Hassett, director of economic-policy studies at the American Enterprise Institute, is a Bloomberg News columnist. The opinions expressed are his own, as are the facts.)
May 13th, 2010 at 10:39 am
—
-When the big banks began chasing subprime, it was due to the profit motive, not any mandate from the President (a Republican) or the the Congress (Republican controlled) or the GSEs they oversaw.
_–
I would also add that back in 2006 there were no CEO’s on CNBC begging the feds to stop forcing them to write bad loans.
But they were more than happy to get on the tube to crow out their own managerial brilliance, justify their paychecks, and talk up their stock prices.
May 13th, 2010 at 10:41 am
jjay:
I’ll start by saying that I think Obama’s economic policies are corporatist, if anything (even the healthcare legislation the right continues to have a shit hemorrhage over benefits the corporations over J6P). Not what was expected.
OTOH, he’s smart, and was dealt a very bad hand by the fiasco and crime-fest that was “conservative” Republican government.
You are projecting your warped (political?) biases onto millions upon millions of people. Why the fuck would any President override the Secret Service, especially when that President has — by the very fact that he is President, and for reasons we all understand, but dare not speak — freaked-out a certain demographic to the point that death threats against the man are at all time high levels? The people making these threats are not “average” Americans, they are not in the majority. They are the lunatic fringe.
If you want to talk about “open forums,” the Obama Administration comes nowhere close the the cherry-picking of crowds and the crushing of dissent that took place under Bushco. I don’t think for a moment that Obama fears any question — he has demonstrated an ability to answer tough questions (and without having to make up new words to get his point across). What he’s afraid of is not dissent, it’s a bullet from some whacked out, unhinged ideologue, supported by intellectually dishonest non-facts, such as those you provided.
It was John Hinckley’s attempt on Reagan’s life that was the turning point for the President to be lightly guarded while in public.
You wrote:
“My point is that we are now in the situation where the average citizen has no representation in Washington DC, and all politicians avoid their constituents as much as possible, to the point of fearing any open forum that might involve a dissenting opinion that they have no answers to.”
I went back and reread your original comment. That does not seem to be what you were saying, at all.
All of this shit in a post about intellectual dishonesty.
Sheesh.
May 13th, 2010 at 10:41 am
BR,
The one point that I would have to question here is “-The change in FNM/FRE conforming mortgage purchases in 2005 was not due to any legislation or marching orders from the President (a Republican) or the the Congress (Republican controlled). It was the profit motive that led them to this action”.
That change was largely influenced or at least exacerbated by the GSE’s regulator, OFHEO, who required a certain (and relatively large) percentage of loans to be made to borrowers in “underserved areas”. In order to meet that requirement, underwriting systems were changed to often approve loans for purchase based on the location of the property irregardless of the borrower’s merit.
I ultimately left my job working at Freddie Mac supporting the underwriting department once I grew weary of trying to cover up this fiasco (as well as several other reasons). Mortgage brokers often called wondering why just changing the street number on an address would change the loan purchase approval, but we weren’t allowed to tell them. I told co-workers that I would leave, short the stock, and retire comfortably. If only I’d heeded my own advice since I left when the stock was still over $50/share.
That decision to leave Freddie has cost me tens of thousands of dollars in lost salary as I haven’t been able to find a position of equivalent pay since, but at least I’m morally intact. As I’ve just been “downsized” from my latest position the end of April, the employment search and slog through this downturn begins anew. Joy! :-)
~~~
BR: Let’s assume what you are saying about OFHEO is correct. If that was a significant part of the boom bust collapse sequence, we should see massive delinquency, default and foreclosures in these undeserved areas.
But we dont. As Dan Gross noted:
May 13th, 2010 at 10:49 am
Excellent post. It’s the type of entry I remember from days ago. Whether by design or not, the content has taken several big steps forward over the past few weeks. You’re making it look like boutique services are back.
Too bad the chronology stopped at the crash. Unfortunately, only unhindered Fed audits will allow the rest of the story be told with accuracy and without X-Files conspiracy assumptions. When history finally has the complete picture of the events of today, I strongly believe a lot of the conspiracies will become historical fact. The liquidity pump will be known as a managed asset bubble that was intentionally built to keep banks from failing and consumption intact.
Without trading profits, a lot of big banks would have no profits. Without spending there would be an economy in bigger trouble that it is in today. A pumped market provides both and at no cost since the money is printed.
May 13th, 2010 at 10:50 am
tawm,
With all the bailouts, subsidies, tax credits, corruption, etc, I would caution you against confusing the direction we were moving in with free market capitalism.
The proper label would be along the lines of crony capitalism or corporatism. The closest thing we have to true free market principles in this country continues to be small business, and most of them are surviving despite the economic climate of this country the past few years, not because of it.
Also, I always get confused why people associate a lack of regulations with capitalism at it’s best, when it’s fairly obvious that capitalism works because of the competition, and regulations are required to maximize competition, as any business seeks to minimize competition, thus you can’t leave it to self-regulation. Sure, you don’t want bad regulation, but, like you said, don’t throw out the baby with the bath water.
May 13th, 2010 at 10:50 am
it somehow ignores the fact that Congres was controlled by a very conservative GOP from 1994 to 2006
Very conservative? More like mildly conservative. They couldn’t even balance a budget. And this was at a time when Canada’s liberal government was racking up surplus on top of surplus
May 13th, 2010 at 10:55 am
guys guys guys
Not VERY conservative, not MILDLY conservative… they were NEO conservative. Totally different, kind of like bizarro conservative. See also neo liberal.
May 13th, 2010 at 10:55 am
As a Brit I have to say that F & F do look very, very anomalous. I am not aware of any other country that provides this kind of state help to home buyers.
Surely in building up their $5 trillion portfolio they must have been acting as steroids to the the housing market in general – it”s really hard to believe otherwise.
Does that make them “guilty”? I don’t know, and it’s probably the wrong question to be asking. The right question is whether you let them live or not. I say no.
Hugh
~~~
BR: Please then explain why other countries with F &F also had housing booms and busts contemporaneously with the US. Can you see the logical failings of Hasset’s position in light of that?
Ireland? Spain? Korea? UK? Germany? Australia?
May 13th, 2010 at 10:55 am
I agree with your missive this morning. Fan and Fred have been around for decades, you have to ask yourself what changed around 2001-2. What changed – Wall Street piled into the mortgage industry, combined with massive growth of levered hedge fund assets (inside banks as well). DC pushed for deregulation because academia said the financial industry could self-regulate (Chicago School efficient markets basically). Kaboom.
May 13th, 2010 at 10:56 am
Evoo,
(and BR),
I read your FT piece, and I dont think that answers the question. Unless I’m misunderstanding, your article is describing Credit Default Swaps, insurance on bonds.
What Mgurk (and myself) would like to know is what impact did non-defaulting loans made to subprime borrowers out of the CRA program have on the ratings of the CDO’s (or MBS, whatever the terminology would be).
Throughout the 1990′s and early 2000′s, all those high risk loans would ‘appear’ to be performing brilliantly, precisely because the bubble was being blown at the time. Of course they didn’t cause the collapse, but did they cause ratings to be perverted?
~~~
BR: You are working backwards from conclusion looking for proof to justify a belief. Not that is not how the empirical process works . . .
Give up the political talking points and find some data.
May 13th, 2010 at 10:58 am
BR: Agreed that it wasn’t the GSE’s. It, as MEH pointed out, was the Central Bank. None of this happens without the Fed. I was in the game for twelve years. “Conforming” Fannie and Freddie loans didn’t become shit paper until the very last stages. Before that it was outfits like New Century and Ameriquest (both gone) that issued the crap.
But the GSE’s are now being used to launder money to deadbeat homeowers, plain and simple. Every loan they buy at these “market” rates is a subsidy to the borrower, which is to say, a subsidy to some new or existing homeower. The subsidy is paid by all of us, mainly in the form of housing prices that are artificially held higher than otherwise, and in the concomittantly lower value of money. And the government is the only game in town, with the GSE’s (including Ginnie Mae) funding well over 90% of the new mortgages in the last eighteen months or so.
I’m torn, though. Will it be the GSE’s that finally bankrupt America, or will it be the health care system? I’m guessing it’ll be the GSE’s as the catalyst that starts the chain of events revealing the true insolvency of America, but one that is mostly the result of out of control health care spending.
May 13th, 2010 at 11:23 am
“BR: Please then explain why other countries with F &F also had housing booms and busts contemporaneously with the US. Can you see the logical failings of Hasset’s position in light of that?
Ireland? Spain? Korea? UK? Germany? Australia?”
The easy money in the US bond market certainly spilled over into the rest of the world, hence the synchronised boom (and bust when the US market went bad).
F & F were taking loans off lenders balance sheets and giving them fresh funds to lend again. In the 30s this steroid therapy may have been appropriate, but by the time the noughties had rolled around it was just way, way over the top.
~~~
BR: Fannie had been “taking loans off lenders balance sheets and giving them fresh funds to lend again” since 1938; Freddie since 1968. So why did it all suddenly go to hell around the world in 2005?
The F&F explanation simply does not hold water.
May 13th, 2010 at 11:24 am
@kstills:
Maybe read the FT article again. It’s about derivatives/CDOs.
By 1997, Demchak and Masters came up with their Big Idea: a product known as Bistro, short for Broad Index Secured Trust Offering. . . . What Bistro did was to use credit derivatives to “clean up” a bank’s balance sheet. The scheme started by taking a basket of bank loans and separating out – in accounting terms – the theoretical risk that these loans would turn sour from the loans themselves. This default risk was usually then sold to a “paper” company, known as a special purpose vehicle, which then issued bonds that investors could buy. If lots of loans went into default, the value of these bonds would fall, of course; but if the loans were honoured, the bonds would be a safe bet for the investors. Either way, the point was this: anyone buying such bonds was essentially betting on the risk of loan default. And as long as the deal was structured in a way that made the bonds look cheap, relative to the risk of default, then investors would think they had got a good deal. The pricing itself was based on what had happened to banks’ loan books in recent years (together with some complex number crunching).
————
Sure sounds like the FT reporter is describing the basic mechanics of a CDO/synthetic CDO to me.
And Mgurk’s comment earlier had absolutely nothing to do with the direction you’re trying to go in re: ratings agencies. Keep grasping at straws.
The sad thing is that the GSEs really might be at the heart of a new bubble scheme as mentioned by Curmudgeon above and Kid Dynamite last night. The intellectual dishonesty is trying to tag the GSEs with blame as the origin of the mess.
May 13th, 2010 at 11:37 am
BR: You are correct about the rates, but I would like someone to explain to me how the GSEs around since 1938 and 1968 respectively caused a housing bubble
Barry-I do not think that housing bubble was caused by GSE’s. But i do think that GSEs were one of the factor I have googled some charts
http://www.econbrowser.com/archives/2007/11/freddie_mac_and.html
GSE’s business in 1990 was about 750B USD. In 2007 4,7T USD.
In my opinion such amount of money would have not come to housing market if the agencies had not be guaranted by goverment.
Second thing- GSEs leverage- they created a demand in housing market in trilions dollars from capital reckond in billions USD. Due to GSE’s massive lending “sound mortgage” market has been saturated. That could also be reason why subprime loans were given. Banks and non bank lenders had capacities to give mortgages, they had also place in balance sheets after selling “sound mortgages” to GSE’s so they found niche in subprime loans.
Easy money and other factors mentioned by You accelarated the process….
Below link to interesting article from real free market thinkers. Goverment sponsored programs in High Education caused tuitition inflation (or is that just coincidence?)
http://mises.org/daily/4287
May 13th, 2010 at 11:46 am
Barry – THANK YOU.
I love your philosophy and what you do.
Gordo
May 13th, 2010 at 11:48 am
“The easy money in the US bond market certainly spilled over into the rest of the world, hence the synchronised boom (and bust when the US market went bad).”
That statement, by Hugh, bears thinking about. it probably bears some really serious study. I don’t know if it is true or not, though I doubt it. But if true, it implies that Greenspan, and now Bernanke, are the most powerful men in the world today. If not true, then you have to ascribe a global mania to something else.
May 13th, 2010 at 12:12 pm
I’m sure someone will be delighted to correct me if I am wrong.
While Fed monetary policy was almost certain to lead to a bubble in something, had the trade in financial derivatives (credit default swaps primarily) been out in the open, the investment banks would never have been able to package this crap up and get AAA ratings. The ratings agencies would have been laughed out of business. That would have been a free market method to correctly price risk and prevent the misallocation of capital.
Why am I afraid this will not come out of the regulatory reform currently being “debated?”
May 13th, 2010 at 12:32 pm
In the mortgage business around 2003-2004 the Alt-A and Option ARM loans became available from every mortgage banker, sold to Wall Street firms (not FNM or FRE) and repackaged into those toxic CDOs. The exposure became a multiple of the actual mortgage loans that were on the books. The short term profit motive was hard at work, aided and abetted by the rating agencies.
Fannie/Freddie had their own conflicting objectives, but I’d call them a secondary factor in this debacle.
May 13th, 2010 at 12:40 pm
darekkkk is exactly correct – Barry (or anyone else for that matter), please point out where he is wrong.
May 13th, 2010 at 12:43 pm
Freddie and Fannie were “enablers”, much like the drug addict needs, so was the GSE’s to pump morphine into the mortgage industries bloodstream. Without them, this thing still may have happened with ZIRP, but nowhere near the same extent.
BTW, I have a group of mortgage brokers in the office right next to mine. Sure seem like a slimy bunch of leaches. They have new guys coming/going every day over there. Anyone else see the majority of these guys only out to make a quick buck?
May 13th, 2010 at 12:47 pm
Not VERY conservative, not MILDLY conservative… they were NEO conservative. Totally different, kind of like bizarro conservative. See also neo liberal.
Or maybe limoconservative
May 13th, 2010 at 12:54 pm
darekkkk and WFTA-
good points
May 13th, 2010 at 12:56 pm
Sorry Barry, Fannie and Freddie were a major cause of this crisis. Here are the facts (do I deserve part of the 100K prize?)
http://mitsloanblog.typepad.com/alejandro/2008/12/index.html
May 13th, 2010 at 1:51 pm
“Start with the data and evidence and go forward from there” and then “SEC funding is weakened.”
BR: Once again, not true, and you know it. You are clearly not data driven and apolitical on the point of SEC funding. As I pointed out in March, and then again the other week, SEC funding tripled in the last 10 years (http://www.sec.gov/foia/docs/budgetact.htm). By any measure, SEC funding was vastly expanded. You reached your conclusion that SEC funding was “weakened” by looking at 10-20 year old data. That’s not “data and evidence.” Cop to the point or show yourself as biased and ideological as the same people you fault.
~~~
BR: I guess it is all relative. When the industry you are charged with regulating increases 20 fold in size, and yet your funding is flat to slightly positive, that to me looks like real (rather than nominal) defunding, and congressional neglect.
Consider this March 2002 GAO report to President Bush and Congress on the SEC. To summarize their conclusion:
See this for more: SEC: Defective by Design?
Again, I have done the research, crunched the numbers, and completed an analysis, and reached a conclusion opposite the talking points. If that makes me biased in your eyes, I completely understand your position . . .
May 13th, 2010 at 2:04 pm
Elizabeth Warren, in talking about regulatory issues that could have prevented the crisis focuses on three things, number 1) “consumer protection regs” that would have curtailed the high risk mortgage craze which ended up producing so many toxic assets, 2) the poor job done by the rating agencies and 3) too big to fail type of banking system issues. Regarding the high risk mortgages, it is hard to fathom – although you seem to – that Fannie/Freddie which were involved in the majority of mortgages overall in one way or another ($5 trillion is a lot of assets), so certainly were relevant to market pricing, market practices (and malpractices), AND the majority of the resulting toxic assets, did not play a major role in the crisis. While you may be correct in questioning the motives or logic of those who place the entire blame on the GSEs, which is nonsense given all the other players in the game, it stretches credibility to say that the biggest participants/enablers of what are now toxic mortgage assets were bit players, if that.
Reminds me of a sketch, replace “the front falling off” with the “mortgages that shouldn’t have been written”.
http://www.youtube.com/watch?v=8-QNAwUdHUQ
May 13th, 2010 at 2:04 pm
If the privately owned “government sponsored” entities Fannie and Freddie had not existed the business they did would have been taken over by other privately owned (not government sponsored) companies. So if you want to blame F&F you first have to tell me what it is that F&F did but private companies (did not or) would not have done. All the evidence suggest that the private (non-government sponsored) companies competing with F&F securitized even worse loans than F&F were willing to securitize. So turning sh!t loans into AAA rated investment paper would have happened with or without F%F. So what exactly is it that would not have happened if there had been no F&F? The only thing I can see is that there would have been no housing market outside of cash since the collapse (F&F has 96% of that market right now and none of the previous private companies in the business are doing anything). So without F&F (and government defense of the economy) the difference would have been a complete collapse of the housing market and (as a result) the economy. I guess those who wish there were no F&F are the vultures with lots of cash on hand.
May 13th, 2010 at 2:17 pm
“If the privately owned “government sponsored” entities Fannie and Freddie had not existed the business they did would have been taken over by other privately owned (not government sponsored) companies.”
Well fine, then we wouldn’t have Fannie and Freddie to blame, would we? End of story.
As to what happened post-crash, that isn’t really the subject of this post is it?
May 13th, 2010 at 2:27 pm
Evoo,
I’ll buy your explanation, but I’m not sure how that is relevent. CDO’s were created circa 1994-95, and didn’t blow up until 2007….and?
Mortgage requirements started to change around that time (earlier, I got a 5% down in the late 1980′s). The spread of low money down, interest only came about from the CRA, did it not?
*****Legislative changes 1992
Although minor amendments were made directly to the Community Reinvestment Act concerning the consideration of minority and female owned institutions & partnerships during evaluations first established in 1991, other portions of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 indirectly afftected the CRA practices at the time in requiring Fannie Mae and Freddie Mac, the two government sponsored enterprises that purchase and securitize mortgages, to devote a percentage of their lending to support affordable housing.[4]
In October 2000, to expand the secondary market for affordable community-based mortgages and to increase liquidity for CRA-eligible loans, Fannie Mae committed to purchase and securitize $2 billion of “MyCommunityMortgage” loans.[49][50] In November 2000 Fannie Mae announced that the Department of Housing and Urban Development (“HUD”) would soon require it to dedicate 50% of its business to low- and moderate-income families.” It stated that since 1997 Fannie Mae had done nearly $7 billion in CRA business with depository institutions, but its goal was $20 billion.[51] In 2001 Fannie Mae announced that it had acquired $10 billion in specially-targeted Community Reinvestment Act (CRA) loans more than one and a half years ahead of schedule, and announced its goal to finance over $500 billion in CRA business by 2010, about one third of loans anticipated to be financed by Fannie Mae during that period.[52]*****
From wiki.
Now, were those loans performing during that time period, and were they a factor in the way ratings agencies determined risk?
I’ve read that risk analysis only went back to 1993 or so during that time period, which is why I ask. Also, Mcgurk question is still valid: were the issuance of favorable loan terms to people with less means a factor in convincing lenders that exotic loan vehicles to people with better credit made sense?
~~~
BR: $7 billion in CRA loans since 1977 ? Dude, that is 11 seconds worth of mortgage underwriting in 2005.
I have no problems with either Securitization or CDOs. The real issue here was the underlying loan quality — garbage in garbage out.
PS: NEVER rely on wikipedia entries. They are frequently garbage. I have witnessed entries that have been gamed by people who then cite their own handiwork.
May 13th, 2010 at 2:30 pm
Dedude,
People would have had to buy cheaper houses that apprecitated less with more money down.
Next question.
May 13th, 2010 at 2:32 pm
“Elizabeth Warren should be screaming from the rooftops. I know, no one listens to her, but she should be screaming just the same”
If a person cream from the rooftop and the corporate media refuse to cover it – did it happen at all?
“is it possible that creativity around implementing CRA led to exploration of alternative financing vehicles”
No the non-standard financing has its origins in the private small business owner who makes a huge amount of money of the books and tax free. When you look at his papers he cannot qualify for a 6×8 shack, yet he has plenty of money to pay a mortgage on a nice house. The newer creative financing instruments were invented to sell above median priced houses to be below median income people – and those above median houses were not build in CRA areas so they had nothing to do with CRA.
“So does that mean FAN and FREd do not need reform?”
No, what F&F need, is to get the heck out of the for-profit business and become what they used to be; a government agency that provided regular people, who could save up a 20% down-payment, with access to an inexpensive loan that would give them a realistic shot at the American homeownership dream. The thing that really messed them up was that they thought they should fight for keeping market share when the private sector went nuts.
May 13th, 2010 at 2:32 pm
Russ Roberts at CafeHayek responds:
http://cafehayek.com/2010/05/two-mysteries.html
May 13th, 2010 at 2:37 pm
to DeDude
“you first have to tell me what it is that F&F did but private companies (did not or) would not have done”
if GSE’s were not guaranted by US goverment:
They would not have injected so much money to the Housing market. Private companies would have had much bigger capital requirements and they would have had more difficulties in placing debt.
F and F bonds were bought massively by central banks. I do not see any central bank buying bonds not backed by US goverment.
Mortgage rates would have been higher and loans less afordable.
1)Housing bubble would be much smaller
2)With less money for mortgage loans subprime mess would be less probable to happen. If you have to choose between good borrower and subprime borrower you choose good borrower.
3)The bust would have been earlier so would have been less painful
May 13th, 2010 at 2:41 pm
The argument that Fanny and Freddie “enabled” sleazy mortgage brokers to underwrite all those shitty mortgages that they often knew were going to people who would not be able to repay them is the same as arguing that banks “enable” bank robbers by having so much cash inside them.
RE those who’ve commented on Barry’s alleged “liberal” bias: what you are seeing is actually that the facts and a disciplined commitment to objectivity results in analysis that runs counter to your ideology. In other words, as has been said I think on this very blog, “[I]reality[I/] has a liberal bias”.
May 13th, 2010 at 2:41 pm
kstills;
Before the crash they would not have had to buy cheaper houses since the banksters already allowed them much more house than a conforming (F&F) loan would allow. After the crash they would only be able to buy a house for as much as they had left on the savings account because nobody would lend anybody any money (unless the loan could be passed on to F&F).
May 13th, 2010 at 2:50 pm
Dedude,
We’re talking no F and F at all. Ever.
You act as if the only time people owned homes in the US was after the government made it possible.
Wrong.
Without F and F (and the government) people who wanted a home (aka: the responsible ones) would have bought a home. It would have been cheaper, private lenders would have demanded more money down to protect themselves from risk, and as a consequence home prices would have gone up in line with incomes, generally speaking.
Instead, we had successive administrations humping home ownership up to and including the CRA, then WS cashed in on the frenzy after losing it’s ass during teh Tech bubble, and here we are.
To think, F and F were planning on holding 500billion of CRA loans by this year. Wonderful group of folks we have in Washington..
May 13th, 2010 at 2:55 pm
I like to keep my arguments simple.
Commercial real estate- also imploded. What was the role of the CRA or F & F in that?
May 13th, 2010 at 3:07 pm
Great as usual, Barry.
One factor you may have missed:
Fannie and Freddie was one of the few risks to the system that these guys noticed in advance. There were many warnings of the dangers that Fannie and Freddie poised.
It’s natural after such a disaster for people to look back at their own record and say: I got that one right!! It reassures them that they weren’t totally clueless. And if you can make Fannie and Freddie the main villain, then you can ignore what you missed (such as a mammoth housing bubble and toxic levels of leverage).
As you said, politics and ideology are probably the bigger factors in the rush to judgment against Fannie, but you shouldn’t underestimate the personal and psychological factors. In some ways, it’s similar to the ways people get emotionally invested in their investment decisions, and why they can’t easy change their minds.
~~~
BR: That is a fascinating observation that I had not previously considered.
May 13th, 2010 at 3:10 pm
One step beyond,
Ummmm…let me think….people build a shitton load of houses……business ignores the potential market? or not….
May 13th, 2010 at 3:33 pm
Its a great list got to add several more basics
• accounting in the toilet-still produces complex overvalued assets
• buy side joins in. turns and sells to us the final buy side.
• So aggressive marks. Call it profit. Take half as bonus IBG-YBG meaning sell side and buy side, works for them, we hold bag
• Bank panic Aug 8, 2007 unfixed by massive Fed etc liquidity aid says to me far worse than housing. Nat. house prices hardly down at all then.
• Fake insurance of all kinds including Fannie and Freddie that know nothings and foreigners will buy. FF charged virtually nothing for their insurance beyond the fees they paid mortgage insurers, pool insurers. They were by my count underwater by several hundred billion $ before prices really fell. They kept all mortgage rates several %pts PER YEAR below the market indicator jumbo rates for decades. Capitalize and PV that subsidy? Fear that whole daisy chain would collapse poisoned the markets further in 2008.
Even now unmarked accounting allows one side of a trade to carry THAT TRADE way different than the counterpart. Assets always much higher than the counterpart liability. Have some one say a regulator, check a couple trades? Gee why not? CDS the worst. Both sides carrying as an asset or asset enhancement.
So if 30% of the problem was CDS, other fake insurance and non housing accounting driven derivatives and structured products, I could still make a case that F/F and their associated insurers were at least 15% of the total prob, ought to make your list. Over half of total defaults were non subprime mostly FF funded even as early as July 2007. Got to agree hasselt and other “R” losers are annoying.
May 13th, 2010 at 3:38 pm
“Without them, this thing still may have happened with ZIRP, but nowhere near the same extent”
Why not? F&F were simply the middlemen between ZIRP and homeowners. Do you really think that without the F&F middlemen no other middlemen would have stepped up and done the same? It would be great if you could just take out the middlemen and then everything stopped – then we really could win that war on drugs ;-)
May 13th, 2010 at 3:48 pm
i am thinking the entire mess was based on politics. the way the parties (both of them) get elected is to sell the voters that they are on their side. to do that the party must be in favor of jobs (oddly enough that doesn’t seem to be the case any more). each party had their own ideology to get that done. The GOP’s version is based on tax cuts. well that was working out as well as advertised but they did notice that if the could (and did) build a housing bubble that low and behold jobs (to build houses) would appear. but to build such a bubble they had to be in favor of the free market and tax cuts (which creates jobs!! just check the stats for the years 2001-2008 on how well that worked out!), but to really do the deed that housing bubble needed help. so make sure the regulator is asleep at the wheel, keep interest rates low, and push the ownership society! presto the missing jobs start appearing in finance, and construction. barely replacing the ones disappearing else where though. and their friends on wall street were willing accomplices to this
May 13th, 2010 at 3:57 pm
High end houses had a bubble and bust without Fan or Fred. Back in 2004, the conforming limit was $373k, which made most of Calif. jumbos, especially Silicon Valley and So. Cal. I don’t recall F&F buying jumbos back then. I think I might have defied the smallest house in San Jose in 2004, 700 sq ft, and it was still a jumbo loan.
May 13th, 2010 at 3:58 pm
“requiring Fannie Mae and Freddie Mac, the two government sponsored enterprises that purchase and securitize mortgages, to devote a percentage of their lending to support affordable housing”
Note the difference between affordable housing and subprime loans. You can offer regular conforming loans for affordable housing or subprime (made to fail) loans that are beyond what the homeowner can handle. The presumption that affordable housing is equal to failing subprime loans is just dead wrong. The wast majority of sh!t loans were given on housing in the suburbs not on houses in CRA areas.
May 13th, 2010 at 4:11 pm
Darekkk;
“If GSE’s were not guaranted by US goverment: They would not have injected so much money to the Housing market. Private companies would have had much bigger capital requirements and they would have had more difficulties in placing debt. F and F bonds were bought massively by central banks. I do not see any central bank buying bonds not backed by US goverment.
Private companies didn’t need capital requirements, they unloaded the loans into CDO’s as quickly as they could get them. That is why they took market share away from F&F, eventually dragging those entities into the sh!t loan business. The central banks that bought F&F bonds had to buy something with that money. If F&F bonds had not been available then they would have had to buy the other bonds (that also wasn’t guaranteed by US government). Remember there were no guarantee of F&F bonds by the US government. US government had to step in when they got blackmailed by foreign governments, but that blackmail would have happened whether it was a big privately owned GS housing bond company or privately owned F&F that was about to fold.
May 13th, 2010 at 4:12 pm
I have no position on the CRA — and after extensive research, I have found zero evidence they were a prime or even secondary cause.
And I find the arguments that “it encouraged irresponsible lending, then the banks just fell into line” hardly persuasive. Show me some data please.
Now, I am not saying this is a good piece of legislation — I cared enough to do that analysis to see if there was any truth tot he accusations — but I am stating that after exhaustive research, I found ZERO factual evidence directly linking either the CRA or F&F to the crisis.
F&F were just two more crappy banks who, after 2005, started buying crappy loans.
If there is such evidence, please don’t keep it a secret. Show me some causative factors, Data, numbers, that F&F or the CRA led to the collapse somehow. I keep asking the people pushing this idea for proof — and all I get back are talking points blissfully data free.
Show me the money . . .
I am pretty pragmatic when it comes to this stuff — I have no political party or ideology, other than pragmatic fact based data anlysis.
But I do notice that all of the proponents of the “ITS THE Fannie/Freddie/CRAs FAULT” seem to share a very similar ideology. That are blissfully data free.
And they all seem to accuse anyone who challenges their data-free positions or disagrees with their fact free analyses of being partisans or idealogues or both.
It looks like a simple case of massive projection to me.
May 13th, 2010 at 4:15 pm
Kstills;
“private lenders would have demanded more money down to protect themselves from risk,”
It must be nice living in a world that doesn’t get interrupted by a reality check. Last time I looked at the worst of the sh!t loans from 2003 – 2008 (125% LTV with no income documentation, etc.) were given out by private lenders not by F&F.
May 13th, 2010 at 4:20 pm
Mr. Ritholz,
Russ Roberts has written a post at Cafe Hayek claiming he wants his $100,000 cause he can show that the GSEs are responsible for all evil in the world (all right, maybe he didn’t write all evil). I thought you’d like to check it out and maybe offer a response since Russ is all over twitter claiming a right to that bet money.
Here’s a quote from and link to what was, in my mind, an extremely unconvincing attempt to win your bet:
“But Ritholtz ignores why subprime was so profitable. And part of the answer is that Fannie and Freddie had been buying up a lot of mortgages made to low-income buyers pushing up the demand for low-income housing. That in turn pushed up the price of houses in low-income areas.”
http://cafehayek.com/2010/05/two-mysteries.html
Perhaps you could check it out and respond. I did by asking how $1.5 trillion in GSE mortgages got the rest of Wall Street to all lever up 35 to 1 and created $60 trillion in notional swaps. Not to mention, why did Great Britain or Spain have bubbles without all the supposed GSE “fuel”?
May 13th, 2010 at 5:08 pm
It seems taht we are talking aples and oranges
My points are
-I do not support Hassett’s view. CRA and GSE’s has not caused the financial crisis.
In my opinion main factors of the crisis were:
1)Easy money from FEd for so long
2)Easy money from Fed for so long
3)Easy money from FEd for solong
4)Some other factors mentioned by BR plus GSE’s activity
I do not agree that the mess was due to subrpime. In my opinion ther was a big credit bubble fueld by FED. Housing bubble was maybe the most important part of the big bubble. Subprime was just tip of the iceberg.
-GSEs activity was one of the most important factor that let housing bubble to grow so big.If you do not agree please explain me how it could be possible to inject a few trilion dolars by F and F into housing market without causing rise in the house prices .
I someone is missing facts, data etc. please read paper which Arogersb has added to the discusson
http://mitsloanblog.typepad.com/alejandro/2008/12/index.html
May 13th, 2010 at 5:41 pm
As I see it the GSE’s were simply middlemen that facilitated the flow of easy money from the Fed to the consumers (homeowners). Without the GSE’s there would have been other middlemen. It was absolutely essential for keeping Bush and GOP in power (and huge sums of money flowing to the rich), that the consumer did not collapse (until a democrat was in the white house). The economy is 70% consumption so “as the consumer goes, so goes the economy”. They had killed the unions, so wages could not be driven up by labor strife, and with all the exporting of jobs they could not engineer a labor shortage. So to keep the economy growing they HAD to blow a bubble in the main asset of the consumer class, so the consumers could expand consumption in the face of stagnating wages (and the rich could keep skimming all the fruits of a growing economy). To keep this scam going they did not need the GSE’s. They had a system of passing the risk to a greater fool (with a nice little “incentivizing” cut at each step). That system ensured them that the front end would always look attractive, if no F&F, then to some other privately owned company.
May 13th, 2010 at 6:08 pm
DeDude
For me there is a big difference between GSE and private companies
http://www.fas.org/sgp/crs/misc/RS21663.pdf
http://www.cbo.gov/doc.cfm?index=2841&type=0&sequence=3
GSEs debt was always treaten like a substitute to US Treasuries.
Private MBS would be treaten as mortgage like securities. GSEs were treaten as tresury like
GSEs were not just middlemen -they transferred mortgage risk into treasuries like risk.
Central banks would not have bought any private debt. Financial institution would have been have concentration limits for private companies which they do not have for GSEs.
The difference is like between FDIC guaranted bank and private company which promise to pay interest for money given to it.
Some quotes below.
Direct Benefits from Special Legal Status
The law treats the GSEs as instrumentalities of the federal government, rather than as fully private entities. They are chartered by federal statute, exempt from state and local income taxes, exempt from the Securities and Exchange Commission’s (SEC’s) registration requirements and fees, and may use the Federal Reserve as their fiscal agent. In addition, the U.S. Treasury is authorized to lend $2.25 billion to both Fannie Mae and Freddie Mac and $4 billion to the FHLBs. GSE debt is eligible for use as collateral for public deposits, for unlimited investment by federally chartered banks and thrifts, and for purchase by the Federal Reserve in open-market operations. GSE securities are explicitly government securities under the Securities Exchange Act of 1934 and are exempt from the provisions of many state investor protection laws. Those advantages have not been granted to any other shareholder-owned companies. Some of those provisions of law result in direct monetary savings to the GSEs, estimates of which are reported below.
Indirect Benefits That Lower Borrowing Costs
The special treatment of GSE securities in federal law signals to investors that those securities are relatively safe. Investors might reason, for instance, that if the securities were risky, the government would not have exempted them from the protective safeguards it put in place to prevent losses of public and private funds. This implied assurance appears to outweigh the explicit disavowal of responsibility in every prospectus for GSE securities.(2) The GSEs therefore enjoy lower financing costs than would private financial intermediaries, were they to hold similar levels of capital and take comparable risks.(3)
As a consequence of those provisions, GSE obligations are classified by financial markets as “agency securities” and priced below U.S. Treasuries and above AAA corporate obligations. The super-AAA rating reduces borrowing costs for the GSEs, in part by promoting institutional acceptance of the securities. Decisions by portfolio managers to invest in GSE securities do not have to be justified in terms of credit risk. General acceptance of the securities increases investors’ willingness to buy them and enhances their liquidity. Those characteristics of acceptability and liquidity contribute to the relatively high price investors are willing to pay for GSE securities. CBO assumes that those advantages are captured in its estimate of the spread between the rates on GSE debt and the rates on comparable debt from other financial institutions, so CBO makes no separate estimate of the value of liquidity.(4)
The Subsidy to Mortgage-Backed Securities
A similar combination of federal regulatory provisions and implied guarantees enhances the credit standing, market acceptance, and liquidity of MBSs guaranteed by Fannie Mae and Freddie Mac. For example, risk-based capital requirements for banks are lower for GSE-guaranteed MBSs than for privately guaranteed MBSs. Federal backing also enables Fannie Mae and Freddie Mac to offer a credit guarantee that the market perceives as more valuable than any similar guarantee by a private company. The enhanced quality of the guarantee reduces the rate of return that investors require on GSE-guaranteed MBSs below the rates required on similar privately guaranteed MBSs. That lower rate permits a mortgage pooler to pay higher prices for mortgages and pass along lower interest rates to borrowers. That competitive advantage on GSE-guaranteed MBSs also enables Fannie Mae and Freddie Mac to charge higher guarantee fees than private guarantors.
May 13th, 2010 at 6:44 pm
BR – your demand for “data” and “proof” is laudable except when it starts to sound like the geniuses with black boxes who brought us LTCM, bank VARs that wouldn’t know a black swan if it bit them in the tail, computer-driven trading algorithms that bring us our recent 2:45 fun, and the like – all of them lacked a bit of common sense.
May 13th, 2010 at 8:15 pm
Here’s sort of balanced essay on the subject from a few years ago.
http://seekingalpha.com/article/85146-did-fannie-and-freddie-cause-the-mortgage-crisis
The money quote:
“The fraction of outstanding home mortgage debt that was either held or guaranteed by the GSEs (known as their “total book of business”) rose from 6% in 1971 to 51% in 2003. Book of business relative to annual GDP went from 1.6% to 33%.”
If you cannot understand that the role they played in the overall housing boom was significant, then it’s going to be difficult to ever have any meaningful debate on this subject.
I mean c’mon…their book of business went from 1.6% of GDP to 33% between 1971 and 2003….that’s a lot of credit to force into the economy at below market rates…
Hell, that’s a lot of credit to pump into the GLOBAL economy….
So, Barry, that’s a DATA point. That’s a FACT.
Are you willing to say that that amount of money/credit had no bearing on creating a robust trend in the housing market? Taking it one step further, wouldn’t you admit that a long standing TREND often attracts the highly speculative crowd at the end of trends???
Would we have had the same amount of homeownership ABSENT the GSEs???
I think deep down inside you know the answer….
May 13th, 2010 at 8:48 pm
Hey, that is the first decent data point on this debate in I have heard.
Now the next step is demonstrating causation . . .
May 13th, 2010 at 8:52 pm
[...] Go read it. [...]
May 13th, 2010 at 9:26 pm
“Now the next step is demonstrating causation . . .”
I believe the Underpants Gnome model is the preferred causal framework in the conservative cri de coeur:
Phase 1: Collect underpants
Phase 2: ?
Phase 3: Profit!
ht South Park at http://tinyurl.com/5wgltp
Frankly there is is increasing reason to be suspicious of putative “facts” these days: Even prefatory comments can be bullshit. The article by James Hamilton referenced by AndyT above begins with a significant misrepresentation of Paul Krugman’s position (which is basically the opposite of that stated – Krugman debunks the notion of GSE culpability) so the effort of detecting what other elements of Hamilton’s article are misrepresented seems barely worth it.
Burying mis-cited or fallacious references upon which subsequent “reasonable” arguments depend has become so prevalent and resistant to detection that entire web sites are dedicated to simply trying to track them down: The web site at http://www.lomborg-errors.dk/ tracking the hundreds of errors, false citations and misrepresentations by the climate-change skeptic Bjørn Lomborg being a case in point.
We seem to be approaching a point where language is stripped of reliable symbolic meaning and, like the song of birds, only conveys social identity and internal psychological state.
May 13th, 2010 at 9:33 pm
Andy T, that is a nice article – and with a nice quote from Tanta too. But Jim Hamilton updated here:
http://economistsview.typepad.com/economistsview/2008/09/it-wasnt-fannie.html
Really interesting quote from Brad Setser:
Agency lending has been absolutely essential to avoiding an outright recession over the past few quarters. A surge in Agency issuance has offset a total collapse in “private” MBS issuance. Without the Agencies, US households probably wouldn’t have had any access to credit over the past year. The US government actually started to intervene heavily in the market last fall, when it reduced limits on the growth of the Agencies to keep credit flowing. It isn’t an accident that the Agencies provided $1.1 trillion in new credit to the US last year, while ABS issuance fell from $900b a year to less than zero.
The book of business includes Agency MBS, though, no? The GSEs were THE MBS packagers of choice because the Full Faith & Credit of agency backing boosted liquidity. So IMO the total pass-thru volume is a bit of a red herring. This update is really worth a (re-)read because it claims that the liquidity breakdown in the secondary mortgage market was apparent to the Fed by at least mid-2007 (tracked via Flow of Funds) and the GSE spigots were opened wide on orders from above as the private MBS dried up. Another point Hamilton makes: Agency MBS were a leading U.S. export! U.S.-based banks started taking on private MBS as foreign central banks ate up those with federal guarantee.
Hamilton’s update’s ultimate conclusion is pretty clear:
So, overall, perhaps the implicit asset guarantee did distort markets, but those distortions did not start with Fannie and Freddie, and they did not substantially worsen when Fannie and Freddie took over where the S&Ls left off. And even if there was some distortion, it’s hard to find any linkage between the onset of the financial crisis and changes in the net socialization of risk through Fannie and Freddie.
May 13th, 2010 at 9:45 pm
CRA gave at least moral justification for some of the predatory lending that went on. One’s conscience feels better when thieving for a good cause. Robin Hood stuff. Data? Nope. Certainly greed motivated what took place but I’d maintain CRA did too – to a lesser degree. Now, how to quantify?
May 13th, 2010 at 10:00 pm
Evoo
Good article. Though, the point I’m trying to make is that government interference in the housing market, whether direct or implicit, played a role in the debacle that became the U.S. Housing market. Whether Fannie/Freddie were just replacing one corrupt sector that was backed by the USG (S&L) or not….the fact remains that the U.S. Government (We the People) played a major role in our demise through the credit pushing behemoths that are the GSEs .
It was the government policy that promoted homeownership through A) advanataged tax policy (mortgage interest deductions) and B) FNM/FRE/FHA that created an extremely poor national economic policy. Essentially, this country plowed all kinds of resources into housing when we should have been investing those resources/credit in better ways….
We did this to ourselves…..
May 13th, 2010 at 10:05 pm
There are quite a few problems in comparing Fannie and Freddie to the S&Ls and assuming it was deja vu all over again, so no cause for the recent crisis. Capital requirements/permissable leverage ratios, ginormous growth and size of the mortgage market compared to previous levels, moral hazard of securitizations piling on top of these “government-sponsored” deals….
May 13th, 2010 at 10:06 pm
…but yes, I would agree with Andy T on the underlying problem.
May 13th, 2010 at 10:35 pm
But Andy, the GSEs didn’t originate sub-prime, they couldn’t. Were they instruments in a Ponzi monetary policy in agency issuance? Possibly. I think we differ on semantics. I see the GSEs more as a dumb mechanism, tools. Their function in all this was to put their golden rubber stamp on agency issued bonds. Originations were way down at the peak. I think you need to keep separate the agency issuance function from loan origination programs in analyzing the GSEs.
I’m with you that the RE bubble was a criminal misallocation of the nation’s capital as a policy matter.
Should the GSEs even be able to bind us to MBS at all in the name of liquidity? Fair question, IMO. Not all central banks allow that. But, like I said, semantics. The GSEs can’t regulate how wide their spigots run. They do what they do. But when you’re talking full faith and credit of the U.S., I think Treasury and the Fed. They’re the ones minding the store.
May 13th, 2010 at 10:43 pm
data = data
data is NOT = ‘information’
information = data + processing/analysis
May 13th, 2010 at 10:45 pm
Wow… Andy T took a bit my thunder and Barry’s response is very underwhelming… “now show causation.” hmm, pshaw I say.
Andy makes a tremendous point and you just want to sweep it aside. given your exhaustive research into this why weren’t you already aware of this?
Barry, btw, I love your site. I check it regularly and enjoy your commentary and insight.
However, I think on this issue it is your bias and political blinders that are showing. In particular the tone of your writing gets very emotional and not in a good way.
More importantly, as a data point. you don’t seem to understand Fannie’s business model. I mean you have never mentioned their mortgage guaranty business. That is, guaranteeing mortgages originated by others so they could be securitized. That is, Fannie was another, enormous credit rating agency that allowed massive securitization by others to take place with their imprimatur and implied guaranty.
As another Data Point. Fannie made more money on their guaranty business than capital markets business (mortgage buying) in 2006 and 2007… another data point that should have been discovered in your ‘exhaustive analysis’ in 2005 fannie made more in the capital markets ~$3.2B versus ~$2.6B in guaranty business. Obviously guaranty is a huge part of fannie. The fact you omit this or don’t know it makes your commentary seem flawed, dishonest or ignorant. Any of these represent a significant departure from the usual caliber of your analysis and commentary.
another data point, or really back of the envelope math. In Fannie’s 2008 10K it claims there was ~$2.5T in single family originations in 2007(total U.S.). The same 10K states FNM had $~5.1B in guaranty fee income with an average guaranty fee of 23.7 bps. This roughly equates $2.1T of mortgage guarantees or ~84% of single family mortgages guaranteed.
That seems preposterous on the face of it and I know there are a lot of gains and losses that go into calculating guaranty income and average fee income (fee income is recognized for years on a single guaranteed mortgage btw). The point is FNM is directly responsible for a friggin’ vast amount of mortgage debt through directly holding it or guaranteeing. Like, the largest player in the space. As Andy T’s post also made clear.
The point is that your not recognizing that is disappointing and makes you seem less credible on everything else, which is also disappointing.
anyway, love the site but I think you are missing some key points on this issue.
Also, I am not some nutbag saying Fannie and Freddie are the sole causes of the housing crisis or finacial debacle and the CRA is the root of all evil. But… you seem to be saying/implying their role was trivial or de minimis and that seems equally off base as a straw man you are putting forth.
btw, no evidence for now, another conversation for another time but you must not know any bankers (i.e. commercial/retail/mortgage) because anecdotally they all seem to curse HUD and CRA for harshing their mellow and fucking up their business.
May 13th, 2010 at 11:21 pm
All those of you who fume and rant about Fannie and Freddie and FHA, consider what would happen if we shut them down. You would have nothing but adjustable rate mortgages probably issued by banks, probably with PMI or 20% down. Come to think of it, that might not be so bad a result.
Few lenders “stress test” their consumer adjustable mortgage applications for potential rate increase. With that exposure they would have to. You could lop 10%+ off the percentage of home ownership. Home prices would fall (less demand.) Car rates and commercial rates would rise (tighter supply.) The source of consumer credit would become far more domestic. Not such a good thing to throw into the mix right now which is probably why the government is backing away from messing with the GSEs.
An addiction like this is very hard to break.
May 13th, 2010 at 11:39 pm
It’s getting hot in here.
May 13th, 2010 at 11:49 pm
Sorry Barry, but I disagree.
CRA in itself didnt cause meltdown, but it was a contributing factor. More so was the Acorn’s of the world demanding more lending to minorities. They got it in the form of subprime, in which borrowers willing slurped up.
I spoke with Freddie many years before the credit bubble burst, and they actively were seeking data share agreements and were buying bulk subprime!! This was in right before the hedge fund meltdown(Long Term Capital)
No question the Bush administration was after the GSE’s for charter creep and the Barney Franks of the world were providing the firewall…
~~~
BR: Again, even if your facts are correct, then you would need to demonstrate the impact. And the CRA zones are not where the housing bubble was. See the Dan Gross quote nearby.
May 13th, 2010 at 11:58 pm
hdoggy Says:
May 13th, 2010 at 11:39 pm
It’s getting hot in here.
Don’t worry everyone has taken a break to drink their own brand of icy kool aid.
May 14th, 2010 at 12:53 am
hah
May 14th, 2010 at 1:21 am
Barry: over the last 300-400 years the corporate form has evolved in such a way that the concept of personal responsibility has all but disappeared. By granting an unlimited lifetime and by eliminating responsibility, behavior degenerates to the lowest common denominator (aka reptile brain). You have delineated thirty years of deterioration since the last person with a whole brain, Paul Volker, was in charge of the Fed. Since we don’t have someone with a brain running the bank, we will be dependent on the BMV’s to do it for us (bond market vigilantes); or we will go into hyperinflation down the road.
May 14th, 2010 at 3:33 am
Barry Ritholtz Says:
May 13th, 2010 at 8:48 pm
Hey, that is the first decent data point on this debate in I have heard.
Now the next step is demonstrating causation . . .
Barry – let me not to prove that injection of 4 trilion dollars by GSEs contributet to the rise of home prices. I can offer 1 USD prize to the person that can prove that increasing demand in housing for such an amount have not contributed to the housing bubble. The same with GSE’s stake in housing market which was is ridiculous big.
Instead of that i woul like to get back to some important points of your sequence leading to the crisis
-Rates come down to absurd levels.
-Bond managers madly scramble for yield.
You are absolutly right in this- extremely low rates were a causation which created a demand for subprime . Bond managers had almost nothing to buy. But not only low rates led to that. GSEs have contributed to that as well.
More than half of the mortgages was bought or guaranted by Goverment sponsored and goverment implicit backed Enterprises. It led to extremly low risk premiums assigned to the MBS (please again let not to prove me here that the purchase of half of the market interferes the price).
Bond managers were not able to compete with GSEs in the prime mortgage market and were not satysfied with risk premiums/rates linked to prime mortgage debt. Thay were scrambled for yields in mortgage market. Subprime and Wall Street had an demand for subprime securatyzation
May 14th, 2010 at 3:59 am
Once again Engineerism belittles an otherwise interesting idea for not being easily demonstrated or proven.
According to Engineerism only the most important and obvious factors exist. Any factor that is not one of THE most important does not exist. Somewhat relatedly, any factors that are difficult to see, i.e aren’t measureable or occur in a complex noisy system, also do not exist.
Engineerists believe what they see. If they see it, then it must exist. If they cannot see something, it does not exist.
Engineerists LOVE to issue monetary challenges on economic thoughts that are difficult, if not impossible, to prove statistically. Their discipline gives them a false sense of superiority.
It is the pandering to Engineerist ideals that makes macro-economics such a ridiculous field of study.
Funny. In physics its the theoretical physicists who look down their noses at their experimental brethren.
May 14th, 2010 at 4:54 am
Plenty of data in the link below – worth reading
Please try to read it before asking for facts and data proving that poltytions and GSE’s contributed to the housing bubble and subprime
http://www.aei.org/outlook/29015
some quotes:
In regards to CRA:
In 1993, bank regulators initiated a major effort to reform the CRA regulations. Some of the context in which this was occurring can be gleaned from the following statement by Attorney General Janet Reno in January 1994: “[W]e will tackle lending discrimination wherever and in whatever form it appears. No loan is exempt, no bank is immune. For those who thumb their nose at us, I promise vigorous enforcement.”[4]
After 1995 and the adoption of the new CRA regulations, homeownership in the United States grew rapidly. Having remained at 64 percent for almost twenty-five years, it grew to 69 percent between 1995 and 2005.[11] The increased availability of credit under CRA requirements probably also spurred housing demand, which doubled home prices between 1995 and 2007.[
In regards to GSEs:
By 1997, Fannie was offering a 97 percent loan-to-value mortgage, and by 2001, it was offering mortgages with no down payment at all. By 2007, Fannie and Freddie were required to show that 55 percent of their mortgage purchases were LMI loans and, within this goal, that
38 percent of all purchases were from underserved areas (usually inner cities) and 25 percent were purchases of loans to low-income and very-low-income borrowers.[19] Meeting these goals almost certainly required Fannie and Freddie to purchase loans with low down payments and other deficiencies that would mark them as subprime or Alt-A.
The decline in underwriting standards is clear in the financial disclosures of Fannie and Freddie. From 2005 to 2007, Fannie and Freddie bought approximately $1 trillion in subprime and Alt-A loans, amounting to about 40 percent of their mortgage purchases during that period. Freddie’s data show that it acquired 6 percent of its Alt-A loans in 2004; this jumped to 17 percent in 2005, 29 percent in 2006, and 32 percent in 2007. Fannie purchased 73 percent of its Alt-A loans during these three years. Similarly, in 2004, Freddie purchased 10 percent of the loans in its portfolio that had FICO scores of less than 620; it increased these purchases to 14 percent in 2005, 17 percent in 2006, and 30 percent in 2007, while Fannie purchased 57.5 percent of the loans in this category during the same period.[20] For compliance with HUD’s affordable-housing regulations, these loans tended to be “goal-rich.” However, because they are now defaulting at unprecedented rates, the costs associated with these loans will be borne by U.S. taxpayers and are in large part the result of the failure of Congress to adopt an effective new regulatory structure for Fannie and Freddie. In this sense, the GSEs’ extraordinary and devastating commitment to affordable housing loans was a tactical success.
The GSEs’ purchases of subprime and Alt-A loans affected the rest of the market for these mortgages in two ways. First, it increased the competition for these loans with private-label issuers. This competition had already existed, but the GSEs were not major buyers until late 2004. Prior to that, private-label issuers–investment and commercial banks for the most part–specialized in subprime and Alt-A loans because the financial advantages of the GSEs, including their access to cheaper financing, enabled them to exclude private-label competition from the conventional market. When the GSEs decided to ramp up their purchases of subprime and Alt-A loans, they began to take market share from the private-label issuers but also created greater demand for subprime and Alt-A loans from the mortgage brokers, mortgage bankers, and other members of the originator community. Second, the increased demand from the GSEs and the competition with private-label issuers drove up the value of subprime and Alt-A mortgages, reducing the risk premium that had previously suppressed originations. As a result, many more marginally qualified or unqualified applicants for mortgages were accepted, and these loans joined the flood of junk loans that flowed to both the GSEs and the private-label issuers beginning in late 2004. During this period, conventional loans (including jumbo loans) declined from 78.8 percent of all mortgages in 2003 to 50.1 percent at the end of 2006. During this same period, subprime and Alt-A loans increased from a 10.1 percent to a 32.7 percent share.[21] Since GSE purchases are not included in these numbers, in the years just before the collapse of home prices began, about half of all home loans being made in the United States were non-prime loans.
May 14th, 2010 at 8:01 am
darekkkk@6:08;
yet all of that didn’t matter during the boom, when Countrywide and other cr@p-outfits made subprime mortgages and securitized them without need for F&F. Because in the end the number that counts is not the rate but that little “monthly payment” number that you stick your pen under when you want the signature. Not only could all the private competitors have taken over the F&F business (had F&F not existed) – the private competitors were in the process of taking over in the middle of the boom (that is why F&F got into it at the end). And if China got desperate enough to stick they money into the US stock market in 2007 then they certainly would have put their money into private CDO paper – same with other entities that have huge amounts of cash. They just don’t sell mattresses big enough for billions so if the money could not be placed in F&F paper they would put it somewhere else even if it would take a change in laws. Housing was the only place big enough to absorb the money.
May 14th, 2010 at 8:18 am
I don’t know how many readers have sat through a CRA exam. I have, in fact just did 2 weeks ago. CRA has a separate set of examiners who have nothing to do but expand their regulatory empire. My tiny bank lends diligently to its market area and we are not aggressive about branching so we breeze through. However, this is not true of everyone, especially the biggies and the GSEs that are under Congress’ mindless thumb. CRA is a big deal in banking and something that one ignores at one’s definite peril.
I think we all agree that the housing meltdown had numerous contributory factors/players. Insisting that one quantify the impact of any single one is not reasonable. Can BR QUANTIFY the impact of the rating agencies? Yet, do we not all agree that they played a part?
I think darekkk just quantified it about as well as it can be quantified.
May 14th, 2010 at 8:32 am
an American Enterprise Institute white paper about the evils of the GSEs, how unusual.
when the Fed kept interest rate at 1%, the giant pool of money goes looking for yield and return, http://bit.ly/baVu1B
May 14th, 2010 at 8:56 am
DaDude
You said:
“Not only could all the private competitors have taken over the F&F business (had F&F not existed) – the private competitors were in the process of taking over in the middle of the boom (that is why F&F got into it at the end”
Please let me know what private companies were able to take over GSEs business?
I can see just one but not strictly private- FED (what in fact in part happened in 2009)
http://www2.standardandpoors.com/spf/pdf/fixedincome/Housing_GSEs.pdf
chart 1
GSEs mortgage holdings plus its MBS reckons correspondes to half of the market. Commercial banks share is close to 20% and is less than increase of GSEs share during the housing boom.
In fact during the housing boom GSE markets share has increased rapidly
GSEs business totaled more than 4T US dollars. 4 times more than china US Debt holding
May 14th, 2010 at 9:48 am
Andy; Yes F&F grew – all that money had to go somewhere. That doesn’t mean that if they had now grown the money would have evaporated. Nobody is questioning that they had a big book, the question is whether other private companies would have had had that big book if F&F didn’t exist. And after the private mortgage industry model collapsed, they were the only game in town – so yes they got really big. That still doesn’t make them responsible for the melt down – as pointed out by others, that just means that they prevented an even worse meltdown.
Kimble; yes what an outrage people demanding facts and logic connections between an idea and reality before they are willing to swallow it :-) Where would Fox be if that kind of insanity took hold.
darekkkk; I looked at your link and at the top of page 3 it reads: “As the mortgage markets became more competitive the GSEs lost significant market share to the securitization markets (see table 1).” So yes I am right – thank you. Even if the absolute number increase you can still lose market share if the market is expanding.
May 14th, 2010 at 9:52 am
Excellent!
I like the phrase “intellectual dishonesty”.
Yes, they are indeed.
May 14th, 2010 at 10:43 am
DeDude Says:
“all that money had to go somewhere. That doesn’t mean that if they had now grown the money would have evaporated. Nobody is questioning that they had a big book, the question is whether other private companies would have had had that big book if F&F didn’t exist”
I have not received an answer for the question who wold have been able to take over GSEs business.
What are you talking about proves rather that nobody- please remember that securitization market collapsed after trying to do so. In 2007 banking system ended with ridiculous leverege.
“all that money had to go somewhere. That doesn’t mean that if they had now grown the money would have evaporated”
I do not agree because in my opinion GSEs do not just have attracted money- they rather created a money. They debt was accepted as collateral in FED. Multiplying effect was much bigger than in the case of banks duze to their capital requirements
Frankly speaking i do not see any chance that private sector will be able to take of GSEs business anytime soon. It grows much to big
May 14th, 2010 at 12:32 pm
My key point about the crisis origins is that I always want to see a causal relationship and actual impact in the data.
Numbers persuade me far more than loose esoteric theories.
The CRA stuff simply lacks ANY numbers to back up the claims — look at where the problems are, and thats game over.
And as to F&F, they were just another crappy bank doing dumb stuff — thats why we were short their stock.
But they are no more the cause fo the crisis than was LEH or BSC or GS or C.
In Bailout Nation, I wanted to look at the Legislative actions (and the impact it had) as well as Executive Branch decisions and appointments, and of course, monetary policy and THAT direct impact. Then we took part the corporate actions that took place as result of the WH, Fed and Congress.
*(There was also a feedback loop because these banks lobbied hard to WH, Congress and the Fed )
I very much tried to steer clear from the squishy ieological belief system that are soft arguments at best and even harder to prove.
May 14th, 2010 at 12:32 pm
My key point about the crisis origins is that I always want to see a causal relationship and actual impact in the data.
Numbers persuade me far more than loose esoteric theories.
The CRA stuff simply lacks ANY numbers to back up the claims — look at where the problems are, and thats game over.
And as to F&F, they were just another crappy bank doing dumb stuff — thats why we were short their stock.
But they are no more the cause fo the crisis than was LEH or BSC or GS or C.
In Bailout Nation, I wanted to look at the Legislative actions (and the impact it had) as well as Executive Branch decisions and appointments, and of course, monetary policy and THAT direct impact. Then we took part the corporate actions that took place as result of the WH, Fed and Congress.
*(There was also a feedback loop because these banks lobbied hard to WH, Congress and the Fed )
I very much tried to steer clear from the squishy ideological belief system that are soft arguments at best and even harder to prove.
May 14th, 2010 at 5:33 pm
Like many readers I think this a little pigheaded of you. At some risk since I am not a planet “R” loser with a belief system requiring govt blame for 100% of cycles, I do this reluctantly. You will note me earlier mention private cycle generators adding to yours
Causes of FF overlending
1.Issuing at only 150bp over 10 yr treasuries. Spreads in other countries are much higher often double. Spreads on US jumbos much higher, except now only 100bp possibly because of conforming jumbo this a huge subsidy. Yur buddy Kotok calculates at $12,500 per year, though I think that a little high. Over life of the mortgage would be PV of…?
2.Weak credit standards. Automated underwriting? forget know your customers, just take more of that alt A from Countrywide meeting mindless bogies. Agreement to accept small down payments in 1998 preceded most nonguaranteed bank mortgagors doing that.
3.Under priced prepayment and other risks you can go to their automated underwriting platform and see arrays of “option adjusted spreads” for prepayment risk. This was and is massively underpriced. Promoted world wide fiction this stuff was not second tier complex product– fixed income that aint fixed– and should only be bought by experts.
4.Promoted belief house prices would never fall. Remember David Berson? FF Chief Economist? Generally acknowledged high priest of view house prices could never fall. FF put that into their risk models, foreclosure estimates and spread pricing. Adopted by everyone
Evidence of FF overlending
1.the market share data cited earlier expanding to 1/3
2.total US ownership rates, also houses % of population, vacancy rates in 2006 far higher than other countries.
3.the price bubble seen in only a few other countries. Similar collapses. Common factor – low no down payments
4.FF losses good measure of overlending, yes? Do you believe its only the $183 billion admitted to already? Excluding insurance. Kotok cites expert Laurie Goodman eventual FF taxpayer loss at $448 billion. My estimate is $750 billion before mortgage and pool insurer guarantees, where FF have bankrupted those two, possibly ½ $ trillion after they pay til they are broke. I’ll send you Kotok’s separate email string privately. But then add the decades of extremely low cost preferential funding, and the losses the fed will be taking on the unmarked $1.2 trillion of mostly FF MBS they hold.
Evidence fears about FF assets promoted liquidity crisis.
1.spreads widened to near 3% on 2008. PV that on $5trillion.
2.bank and FF paper holder stocks traded strongly related to fears of FF insolvency and rescue in 2008.
3.BEARs demise was cited by officials as finally triggered by no one willing to repo BEARs FF paper
4.Proper marks on unmarked FF paper would have demonstrated at least temporary marked insolvency for a number of institutions. CITI etc
I have not documented all statistical statements, it would take hrs esp the foreign. Find one you can prove wrong and YOU have a bet. Please please moderate on this before Prague/Paris or I will have to perform rhetorical home surgery on you.
Love your column you are a treasure.
Andrew
May 14th, 2010 at 7:08 pm
“An economist is a man who states the obvious in terms of the incomprehensible. —Alfred A. Knopf ”
Your website quote of the day. I would re-arrange it in this circumstance to say that you are ignoring the obvious for reasons incomprehensible.
Otherwise, great blog.
May 15th, 2010 at 8:20 am
[...] Ritholtz wrote a nice column spanking people who are ignoring the empirical evidence without so much a rigorous philosophical [...]
May 15th, 2010 at 3:26 pm
I believe Peter Schweizer has written an entire book on how the “progressive agenda,” including the CRA, was significantly culpable for the housing meltdown. I just bought it and it looks to be very well footnoted.
Also, there’s a C-SPAN BookNotes interview where he discusses all this:
http://tinyurl.com/booknotes-ruin
May 16th, 2010 at 7:43 am
[...] Whatever the coalition does, I’ve a feeling this story will determine how it ends up – on China’s property bubble, banks, and the coming blowout of the government deficit as it inevitably bursts and lands on the government’s books. As Doug “always up to no gooood” Henwooood would say, he believed in the collapse of capitalism until he realised the power of a good bailout. When the Chinese banks blow up and get bailed out, will American right-wing nuts blame that on black people? [...]
May 16th, 2010 at 11:20 pm
“Kimble; yes what an outrage people demanding facts and logic connections between an idea and reality before they are willing to swallow it.”
Logical connections have been provided, it is the lack of observable data and the size of the impact tghat is the problem as identified by Engineerism.
Easy money is identified by many as by far the largest influencing factor. Outside of that, it is difficult to prove one way or another that other smaller influences existed. Their signal isnt strong enough and their impact isnt obvious enough. And yet, they could have still contributed, crucially, to the final outcome.
Again, the logical connections have been made, but this isnt enough for Engineerists. To them the logical connection is only valid if some data can be produced to show it. Macro economics has suffered as a field of study because of efforts to “engineerise” economic ideas.