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

Category: Bailout Nation, Bailouts, Credit, Real Estate, Really, really bad calls

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

121 Responses to “Get Me ReWrite!”

  1. Dennis the menace says:

    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.

  2. heh he — there is that also —

    I will add a link to the book to his name

  3. Scott F says:

    That was the politest way to call a person a god damned liar I have ever seen

  4. constantnormal says:

    “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.

  5. jonathanb says:

    Amen, Barry!

  6. 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.

  7. Haigh says:

    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

  8. HEHEHE says:

    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.

  9. Drew says:

    BR, you really don’t care what Hornet’s nest you throw rocks at, do you?

  10. snapshot says:

    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.

  11. Evoo Kermartin says:

    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.

  12. rileyx67 says:

    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!

  13. Moss says:

    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.

  14. cognos says:

    BR at his best. Nice!

  15. Tarkus says:

    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:

    -March 2003: Advisors who were Dems who ignored the impact of the Bush tax cuts on markets after an 80% Nasdaq drop
    -March 2009: Advisors who were Repubs who ignored the impact of TARP, FASB rule changes, ZIRP, and QE on a massively oversold market

    When it comes to investing, Politics is a recipe for losing money . . .

  16. investorinpa says:

    I heard Hassett hangs out with Don Luskin..can anyone confirm this?

  17. mgkurilla says:


    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

  18. jjay says:

    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.

  19. I’ll suppose it moot to bring up

    “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

    good thing we can distract ourselves, amongst the branches, never looking at the Root..

  20. 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.

  21. VennData says:

    Jjay, didn’t Bush travel like that? What about Cheney’s “undisclosed location” you’re a tin-foiler, dude,

  22. VennData says:

    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

    …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”

    …further reading regarding the GOP Congressional actions ‘allow[ed] {the GSEs] to get too big and make stupid decision.”

  23. Evoo Kermartin says:


    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

  24. wally says:

    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.

  25. call me ahab says:


    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

  26. brophy says:

    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 . . .

  27. Robespierre says:


    Well said. One more thing isn’t the government trying like hell to do over all those bullets again?

  28. “…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?

  29. w says:

    BR you’re not alone.

  30. darekkkk says:


    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.

  31. tawm says:

    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 …

  32. jjay says:

    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.

  33. Robespierre says:

    @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)—new-prime-minister

  34. Josh says:

    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.)

  35. eightnine2718281828mu5 says:

    -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.

  36. Marcus Aurelius says:


    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.


  37. Marcus says:


    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:

    Many of the biggest flameouts in real estate have had nothing to do with subprime lending. WCI Communities, builder of highly amenitized condos in Florida (no subprime purchasers welcome there), filed for bankruptcy in August. Very few of the tens of thousands of now-surplus condominiums in Miami were conceived to be marketed to subprime borrowers, or minorities—unless you count rich Venezuelans and Colombians as minorities. The multiyear plague that has been documented in brilliant detail at IrvineHousingBlog is playing out in one of the least-subprime housing markets in the nation.

  38. dead hobo says:

    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.

  39. Dogfish says:


    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.

  40. 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

  41. Dogfish says:

    guys guys guys

    Not VERY conservative, not MILDLY conservative… they were NEO conservative. Totally different, kind of like bizarro conservative. See also neo liberal.

  42. Hugh says:

    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.



    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?

  43. Scott P says:

    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.

  44. kstills says:


    (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.

  45. The Curmudgeon says:

    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.

  46. Hugh says:

    “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.

  47. Evoo Kermartin says:


    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.

  48. darekkkk says:

    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

    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?)

  49. gordo365 says:

    Barry – THANK YOU.

    I love your philosophy and what you do.


  50. wally says:

    “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.

  51. WFTA says:

    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?”

  52. JimE says:

    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.

  53. Cdale_dog says:

    darekkkk is exactly correct – Barry (or anyone else for that matter), please point out where he is wrong.

  54. Cdale_dog says:

    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?

  55. Not VERY conservative, not MILDLY conservative… they were NEO conservative. Totally different, kind of like bizarro conservative. See also neo liberal.

    Or maybe limoconservative

  56. call me ahab says:

    darekkkk and WFTA-

    good points

  57. arogersb says:

    Sorry Barry, Fannie and Freddie were a major cause of this crisis. Here are the facts (do I deserve part of the 100K prize?)

  58. NotQuiteSo says:

    “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 ( 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:

    “U. S. securities markets have grown tremendously and become more complex and international. As a result, SEC’s workload has increased in volume and complexity over the past decade. As illustrated below, around 1996, SEC’s workload (e.g., filings, applications, and examinations) started to increase at a much higher rate than SEC staff years devoted to this workload. Although industry officials said that they respect SEC as a regulator, they said that SEC’s limited staff resources have resulted in substantial delays in SEC regulatory and oversight processes, which hampers competition and reduces market efficiencies. In addition, they said information technology issues need additional funding, and SEC needs more expertise to keep pace with rapidly changing financial markets. Finally, the officials said that SEC’s reliance on a small number of seasoned staff to do the majority of the routine work does not allow those staff to adequately deal with emerging issues.

    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 . . .

  59. Bomber Girl says:

    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”.

  60. DeDude says:

    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.

  61. Bomber Girl says:

    “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?

  62. kstills says:


    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.

  63. kstills says:


    People would have had to buy cheaper houses that apprecitated less with more money down.

    Next question.

  64. DeDude says:

    “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.

  65. darekkkk says:

    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

  66. riverrat says:

    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”.

  67. DeDude says:


    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).

  68. kstills says:


    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.


    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..

  69. One Step Beyond says:

    I like to keep my arguments simple.

    Commercial real estate- also imploded. What was the role of the CRA or F & F in that?

  70. Rex says:

    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.

  71. kstills says:

    One step beyond,

    Ummmm…let me think….people build a shitton load of houses……business ignores the potential market? or not….

  72. AHodge says:

    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.

  73. DeDude says:

    “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 ;-)

  74. willid3 says:

    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

  75. hue says:

    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.

  76. DeDude says:

    “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.

  77. DeDude says:


    “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.

  78. 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.

  79. DeDude says:


    “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.

  80. keatssycamore says:

    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.”

    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”?

  81. darekkkk says:

    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

  82. DeDude says:

    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.

  83. darekkkk says:

    For me there is a big difference between GSE and private companies
    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.

  84. Bomber Girl says:

    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.

  85. Andy T says:

    Here’s sort of balanced essay on the subject from a few years ago.

    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….

  86. Hey, that is the first decent data point on this debate in I have heard.

    Now the next step is demonstrating causation . . .

  87. RW says:

    “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

    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 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.

  88. Evoo Kermartin says:

    Andy T, that is a nice article – and with a nice quote from Tanta too. But Jim Hamilton updated here:

    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.

  89. Jim67545 says:

    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?

  90. Andy T says:


    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…..

  91. Bomber Girl says:

    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….

  92. Bomber Girl says:

    …but yes, I would agree with Andy T on the underlying problem.

  93. Evoo Kermartin says:

    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.

  94. R. Cain says:

    data = data

    data is NOT = ‘information’

    information = data + processing/analysis

  95. lefevre says:

    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.

  96. Jim67545 says:

    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.

  97. hdoggy says:

    It’s getting hot in here.

  98. lulsh says:

    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.