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

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. Hey You says:

    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.

  2. bc42 says:

    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.

  3. darekkkk says:

    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

  4. Kimble says:

    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.

  5. darekkkk says:

    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.

  6. DeDude says:

    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.

  7. Jim67545 says:

    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.

  8. hue says:

    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

  9. darekkkk says:

    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

  10. DeDude says:

    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.

  11. JazzMe says:

    Excellent!
    I like the phrase “intellectual dishonesty”.
    Yes, they are indeed.

  12. darekkkk says:

    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

  13. 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.

  14. 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.

  15. AHodge says:

    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

  16. Bomber Girl says:

    “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.

  17. [...] Ritholtz wrote a nice column spanking people who are ignoring the empirical evidence without so much a rigorous philosophical [...]

  18. LifeOnMars says:

    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

  19. [...] 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? [...]

  20. Kimble says:

    “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.