I never wanted to write Bailout Nation.

That only came about after Bear Stearns collapsed. McGraw Hill approached Bill Fleckenstein to do a follow up to his successful Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve, about the end of Bear.

Fleck turned them down. When the publisher asked him who else was covering this subject, he said “That’s easy, Ritholtz has been all over this story.” (so I was told).

I turned McGraw Hill down — repeatedly — but they cajoled and flattered and wheedled and promised, and eventually I relented.

I approached the subject with a blank slate, pragmatically, with no agenda. It was a problem solving exercise, and I began by looking for and at the data that led me where ever it would. Following the money is always a good tactical approach for anyone researching these sorts of events.

The data led me to numerous conclusions: I blamed Republicans, I blamed Democrats, I blamed the Federal Reserve, Congress, the ratings agencies, mortgage originators and lending banks, the biggest Wall Street firms, the SEC. I blamed US borrowers and home buyers, the RE agents, the mortgage brokers, and appraiser. I blamed the other end of the sausage factory, the collateralized debt obligation (CDO) underwriters, managers and the funds that bought them. I blamed Greenspan & Gramm, Bush & Clinton, Paulson & Bernanke & Rubin & Summers. Even mutual funds, compensation consultants and crony corporate board members come in for criticism. (This is only a partial list).

Which leads to today’s exercise in willful ignorance.

The 4 GOP members of the FCIC have a document which purports to have questions and answers on the causes of the financial crisis have abandoned their charge. They released a silly analysis that could have been written by wingnut think tanks like the AEI or Cato or others BEFORE the crisis even occurred (and indeed, there are many examples of this findable via the wayback machines of the intertubes).

The Gang-o-four absolves Wall Street and the banks, blames the government — for everything — and ignores the data that conclusively demonstrate otherwise.

To these Reality Challenged people, I pose the following questions:

1. From 2001 to 2003, Alan Greenspan took rates down to levels not seen in almost half a century, then kept them there for an unprecedentedly long period. What was the impact of ultra low interest rates on Housing, credit, the bond markets, and derivatives?

2. How significant were the Ratings Agencies (S&P, Moodys and Fitch) to the collapse? What did their AAA ratings on junk derivatives affect? What about their being paid directly by underwriters for these ratings?

3. The Commodities Futures Modernization Act of 2000 removed all Derivatives from all oversight, including reserve requirements, exchange listings, and disclosures. What effect did the CFMA have on firms such as AIG, Bear, Lehman, Citi, Bank of America?

4. Prior to 2004, Investment Houses were limited to 12-to-1 leverage by the SEC’s net capitalization rule. In 2004, the 5 largest investment banks asked for, and received, a full exemption from leverage restrictions (known as the Bear Stearns exemption) These five firms all jacked up their leverage. What impact did this increased leverage have on the crisis?

5. For seven decades, Glass Steagall separated FDIC insured depository banks from riskier investment houses. Prior to the repeal of Glass Steagall in 1998, the market had regular crashes that did not spill over into the real economy: 1966, 1970, 1974, and most telling of all, 1987. What impact did the repeal of Glass Steagall have on the banking system during the 2008-09 crash?

6. NonBank Lenders: Most of the sub-prime mortgages were made by unregulated non-bank lenders. They had a ”Lend to securitize” business model, and they sold enormous amounts of subprime loans to Wall Street for this purpose. Primarily located in California, they were also unregulated by both the Federal Reserve and the California State legislator. What was the impact of these firms?

7. These firms abdicated traditional  lending standards. They pushed option arms, interest only loans, and negative amortization mortgages, all of which defaulted in huge numbers. Was non-bank sub prime lending a major factor in the crisis?

8. The entire world had a simultaneous global housing boom and bust. US legislation such as the CRA or Fannie & Freddie only covered US housing and lenders.  How did this cause a worldwide boom and bust — even bigger than that in the US ?

9. Prior to the 2004, many States had Anti-Predatory Lending (APL) laws on their books (and lower defaults and foreclosure rates). In 2004, the Office of the Comptroller of the Currency (OCC) Federally Preempted state laws regulating mortgage credit and national banks. What was the impact of this OCC Federal Preemption ?

10. Corporate Structure: None of the Wall Street partnerships got into trouble, only the publicly traded iBanks. Partnerships have full personal liability for their losses. What was the impact of this lack of personal liability of senior management on Wall Street risk management?

I can go on and on — but the concept is rather simple: If you cannot answer these questions, or adequately explain these facts, then how on earth can you explain the credit crisis?

Category: Bailout Nation, Bailouts, 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.

59 Responses to “10 Questions for GOP Members of Financial Crisis Inquiry”

  1. [...] Barry flagellates the Financial Crisis Inquiry Commission.  (TBP) [...]

  2. Petey Wheatstraw says:

    Who needs personal responsibility, when the government can be blamed for everything?

    If you want to find the culprit in this mess, follow the money (same as it ever was). As the government, via right-wing policies (R or D is immaterial — right wing policy is the law of the land), is running the deficits to pay for the top 1% of money hoarders, and as the income and holdings of that elite group has risen beyond precedent (while reasonable oversight and fair taxation have been abandoned), I think it becomes clear exactly who is culpable for the looting of our Treasury and the running-up of our national debt, and whose ideology enabled it.

    The tea baggers elected in the last cycle will end up being the worst of the worst when it comes to giving away the store. They will blame “the government”.

  3. dead hobo says:

    Not to diminish what you wrote, but this is old news. Everyone knows this stuff already if they have paid even the slightest attention.

    Here’s what I would like to know. Nobody has written about it specifically. They have only hinted at it and glossed over all details.

    Starting from the first idea by someone in their office, how did these bad ideas go from genesis to credit explosion? For example, Mr X was shaving one morning and decided that derivatives were a big growth area and would be most profitable if there was no regulation. How did Mr X go about taking that idea fragment and turn it into Commodities Futures Modernization Act of 2000? It’s not enough to say Phil Graham spearheaded the effort. I doubt it was his original idea. Somebody put him up to it and someone likely put that person up to going after Phil Graham. Similar situations probably occurred for every bad piece of legislation or bad act that occurred.

    Some individuals, probably acting independently, saw opportunity in a visionary way and changed the world in order to profit. They were ignorant enough or sociopathic enough not to see and/or care about the problems that would result. Once that flow is properly understood, one or two strategic roadblocks might be legislated that would make another convergence of exploitation less likely to occur.

    To put it another way, every originator of each point above was a visionary, no less creative than young Bill Gates, Steve Jobs, or any of the myriad of persons who founded Amazon, eBay, Facebook, or the like. Only their creativity resulted in an explosion of financial failure instead of financial success. These people were mega failures or master criminals at the level of Lex Luthor. Who are they and what’s their story?

  4. BR,

    surely, you’re a bright boy, and, as ‘Fleck’, alledgedly, said: ““That’s easy, Ritholtz has been all over this story.””, but, really, there are, other, ~100s of People that could delineate such a list, for the FCIC’s, purported, ‘purpose’..

    as dh, above, begins to delineate, We should wonder ~”Why is the FCIC “unable” to get ‘to the bottom of this’?”

    That answer is, obviously, one We’d rather not hear, yes?

    The singular feature of the great crash of 1929 was that the worst continued to worsen. What looked one day like the end proved on the next day to have been only the beginning. Nothing could have been more ingeniously designed to maximize the suffering, and also to ensure that as few as possible escaped the common misfortune. The fortunate speculator who had funds to answer the first margin call presently got another and equally urgent one, and if he met that there would still be another. In the end all the money he had was extracted from him and lost. —John Kenneth Galbraith, “The Great Crash”

    Two different Rackets, both: “Set-ups, set-up, to be Taken Down.”

  5. KentWillard says:

    I’ve worked for Freddie, Fannie, Washington Mutual, an mortgage insurance company, and even Paulson & Co. – always in mortgage credit analysis. I’ve probably seen as much mortgage data and created as many mortgage models as anyone. Fannie & Freddie weren’t the cause of the housing boom and bust, but the dumb guys who joined the party late, just as the smart guys were getting out.

    I could give lots of empirical support to this, but it won’t matter. People have a belief that is often stronger than their religious beliefs that the government is wrong, and the private sector is right. This theory was good for fighting communism and justifying lower taxes and smaller government. But the level of belief now precludes people from rational thought. Although I prefer the private sector over the government, they are both inhabited by people – and people are fallible. In this case, both public and private sector people fell under the same spell of mass stupidity.

    Concurrently there was a bubble in both commercial and residential real estate in the US. And there were bubbles in much of Europe. There must be a common cause bigger than US domestic policies. There is some evidence, though it isn’t overwhelming, that trade surplus countries (China, Germany) bought the debt of trade deficit countries (US, Britain, Spain, etc.) to balance payments. This influx of plentiful and cheap debt was going to fuel some debt driven speculative bubble. Since real estate can’t be imported, and is a big enough market to absorb all that debt, it ended up there. For more, check out:

  6. FrancoisT says:

    “as dh, above, begins to delineate, We should wonder ~”Why is the FCIC “unable” to get ‘to the bottom of this’?”

    In the movie “Inside Job”, Nouriel Roubini was asked “Why don’t we have a serious investigation about this whole crisis?”

    His answer? “Because then, we would catch the crooks.”

    The “inability” to catch the crooks is strictly and only political…period!

    It shall remain so until the rate of replacement of Congress REMFs in one election approaches 70%. Then and only then, those-who-are-always-ready-to-be-sodomized shall listen to their constituents.

  7. Petey Wheatstraw says:

    dead hobo:

    Those who lust for wealth can buy those who lust for power (tipping the scales to their benefit one regulation at a time, until regulatory capture has been achieved). The Medici bought political control of Europe, via the Papacy.

    Who are these folks? Lots of lists and theories, but, as I said earlier, follow the money, and you’ll find the culprits.

    What’s really difficult for me to understand is the foolishness of the American electorate. Only an ADD suffering moron (distracted by issues such as abortion, gay marriage, war on Yacksmas, constant hyping of xenophobic tendencies, etc.), would fall for the idea that if the wealthy were allowed unbridled control of the entire economic system, they would, out of a sense of justice and/or patriotism and/or responsibility and/or love of their fellow man, raise the lower classes to a level of financial security above and beyond that achieved in the highly-taxed, highly-regulated late 20th century.

    Shorter: If you satisfy the greedy, they will share.

    The middle class bought that shit hook, line, and sinker.

  8. Bill W says:

    I’d like to see the government go 1800′s on these banks, and bring back legislation that would limit the the size of any one institution. Too big too fail will cause the next crisis if it didn’t cause this one.

    Also, the government didn’t cause this crisis, but it needs to get out of the “affordability” business, or at least change its thinking. If you want houses or education to be more affordable, you need to build more houses, build more universities. Now it’s all about government guaranteed loans that only juice the demand side of the equation, and drive prices up, making it less affordable.
    Take all the government money that is going into student loans, and start a federal online university. And I don’t think Freddie and Fannie caused the crisis, but they are certainly a stupid idea. You can either afford a house or you can’t.

  9. Moss says:

    It all starts with understanding what the Maestro, Greenspan, told the Senate. Everything emanated from the belief system he held as gospel and therefore gave legitimacy to all that followed. The others like Summers, Rubin, Gramm et al., all shaped the overall framework which catapulted the Financialization frenzy. What ensued was a credit bubble where the greed, corruption and fraud eventually ran its course.

  10. Taliesyn says:

    Well I just read the *Ideologically Correct* sacred word given the newly minted Republican majority and OMG! Where were these idiots when they controlled *both* house of Congress and *then* the White House. You’d think these artful dodgers were never in the seat of power to , heaven forfend , *prevent* this latest economic collapse a scant Senate Term after that other Wall st. collapse brought about by the Dot.Bomb boom.
    Long beating its chest over being the party of Law & Order why have they *never* included white collar crime as part of this bankrupt boast. For that matter they tout themselves as the hand-maidens to the so-called called Moral Majority Christian Right wingnuts. I well-remember telling Frank Luntz on a call-in show after Clinton had won , in no small part to the candidacy of Ross Perot , that you’re never going to be taken seriously with this *moral* Bush-wah until the Republicans actual take a stand on *Morality in the Marketplace*. I still have on cassette tape his hemming & hawing , but ultimately agreeing with this concept and he’s supposed to be *the* concept guy.
    Yeah the Democrats totally blew it when they proved to be as clueless when it came their turn & start some actual *oversight* , something Republicans *never* do on the marketplace based upon their very public record ,
    as the old bull white collar liberals of Dodd & Frank totally caved to the financial interests that lobbied them with all they had at their disposal , but now the original pathogens that literally took the financial cops *off the beat* is in power again and, after actually reading their ideologically correct read of what happened I , as Ritholtz has commented upon as well, *fear* that we’re in for yet another *lessons unlearned* financial fiasco.
    Glad I own Appl & gold.

  11. curbyourrisk says:

    Do you really think any investigative group would want to find fault with the very organizations that have employed them for year, currently employ them or might employ them in the future.

    Also BR – you said: “That data led me to numerous conclusions: I blamed Republicans, I blamed Democrats, I blamed the Federal Reserve, Congress, the ratings agencies, mortgage originators and lending banks, the biggest Wall Street firms, the SEC, borrowers and home buyers, the RE agents, the mortgage brokers, appraisers, and Collateralized debt obligation (CDO) managers. I blamed Greenspan & Gramm, Bush & Clinton, Paulson & Bernanke & Rubin & Summers, Even mutual funds, compensation consultants and crony corporate board members come in for criticism.”

    I do not see the American people on that list. We are just as much at fault for everything. WE elected all the jack-offs that did this to us, not once, not twice but over and over again. WE lived a life of lies…living above our means, yes perpertrated and forced on us, but we swallowed it hook, line and sinker. WE (everyone on the board) lived life like they wanted based on assumed wealth, and not actual income. It is everyone’s fault. But the real sick thing is….30 years from now, it will happen all over again.

  12. Underbelly says:

    [...] They say the Devil has nine questions. Barry Ritholtz has ten; he poses them to the four guys who didn’t finish their term paper (Big Picture) [...]

  13. Curbyourrisk:

    Why don’t “borrowers & homebuyers” count ?

  14. inessence says:

    Right wingnuts, left wingnuts, government, regulators, republicans, democrats etc., etc., convenient and easy to place the blame elsewhere. Every poster here and elsewhere needs to stare hard and dutifully into the mirror and ask themselves where the ultimate culpability lies.

  15. grumpyoldvet says:

    Sometime ago you had a “Quot of the day” which seems appropriate:

    Upton Sinclair

    It is difficult to get a man to understand something if his salary depends on him not understanding

  16. EAPoe says:

    You lump Cato in AEI? Seriously? You do them a disservice. What happened to the blog I used to read that focused on the economy and markets, picked apart the mainstream media and highlighted important trends that really mattered?


    BR: Maybe Cato is different than AEI — I’ll change above — but when I check out Cato’s derivative defense, 10 Myths About Financial Derivatives, I am disappointed . . .

  17. red_pill says:

    The problem is not that they can’t understand a list of reasons. They are just a bunch of corrupt elites, plain and simple. Barry, you strike me as an honest and ethical man who believes that if you apply your scientific thinking to a problem, you will be able to solve it and thereby improve society, prevent the next crash, etc. They don’t care about that, they just want to enrich themselves at the expense of the greater good. We are no better than a Banana Republic at this point.

  18. [...] A roundup of economic news from around the Web. (Big Picture) [...]

  19. Taliesyn says:

    Well excuse me , but I *never* bought into this Bush-Wah financial bubble. This is to say I never bought a house , but rather rented. Let the owner worry about the price of their *investment* as well as each year of Virginia property tax ( which is better than Long Island based upon my friends who still live there ) as well as home-owners insurance , HomeOwner’s Associations or Condo-fee pushers adds on to the cost of the investment. If I want out because of a better deal elsewhere I just wait for the lease , or verbal agreement , to run its course and move. No realtors need apply.
    So I sat Bush-Wah to all of these self-flagellating *It’s all our fault* bleeding-hearts. In my world I blame those that make the rules , rig the game , bribe/lobby the so-called *oversight* when not writing out of laws or the regulations entirely due to being *not good for business*.
    Well then , in your elf-righteous swoon, you may as well blame all of the investors who went along for the ride owning stock in all of these Wall St.miscreants.
    Yeah there are consumer abusers of what’s being *sold* to them as *too good to be true* by those whom profit from it with no one wanting to kill the golden goose because we have investors to answer to. The demands of the investors made me do it”? I’m sorry , but I find the *pushers* far more culpable than the *users* in street drug culture or otherwise ( …and what was that recurring line about “the pusherman” from Steepenwolf’s song “The Pusher”. I say Amen )
    To follow this *plenty of blame to go around* smoke screen line of obfuscating argument one should then effortlessly blame all of the idiots who still smoke , drink , & drive like a-holes , eat absolute crap & don’t exercise, oh and whom then run to their doctors to try whatever pharma-crap with all the speed-read side-effects , who thusly jack up the cost of *everyone’s* Health & Auto insurance. Then watch all of the *junk food , beverage , & tobacco industry public relations storm troopers swarm advocating our right to *choose* to continue to be that absolute idiot consumer so long as we keep right on buying their products.
    Yeah , no plenty of blame to go around Bush-Wah in my book if you really want to talk *lessons learned*.
    I blame the Pusherman..and them that’s on his payroll to make things go on all smooth-like.
    Case closed.

  20. craig k says:

    I’ve said it for a long time: the answer to what went wrong it “it’s as simple as yield” – after the dot com crash and 9/11 yields fell to nothing . . . good for borrowers but not good for conservative portfolio managers, seniors, etc. – solution: quants and MBA financial engineers. etc create instruments to goose yields and get ratings agencies to pronounce they were safe. at the same time, the concept of “owning your home” became the political dream . . . everything else follows.

  21. Taliesyn says:

    EAPoe Says:
    December 16th, 2010 at 9:45 am
    You lump Cato in AEI? Seriously? You do them a disservice. What happened to the blog I used to read that focused on the economy and markets, picked apart the mainstream media and highlighted important trends that really mattered?


    BR: Check out Cato’s derivative defense, 10 Myths About Financial Derivatives, then get back to me

    Just an affectionate hurrah for Ritholtz’ still well-maintained N.Y.-style *bullshit meter* with that response to another ideologically correct Koolaid-abuser.

  22. gordo365 says:

    Craig k: I guess we are back to where we started.

    Fed holding rates too low too long – pushing risk averse investors into risky investments.

    It’s beyond irresponsible.

  23. wngoju says:

    BR – The 10 commandments questions are about as good an elevator pitch on the crisis as it is possible to find/imagine/get. Thanks!

  24. louis says:

    Ritholtz your on the story, don’t F^C$ it up.


  25. Arequipa01 says:

    Number 9:

    This particular point is, imho, the one which reveals the engineering of this crisis:

    “9. Prior to the 2004, many States had Anti-Predatory Lending (APL) laws on their books (and lower defaults and foreclosure rates). In 2004, the Office of the Comptroller of the Currency (OCC) Federally Preempted state laws regulating mortgage credit and national banks. What was the impact of this OCC Federal Preemption?”

    When you elect criminals, they commit crimes. I encourage people to reflect on the fact the Bush Administration manipulated the system through the imposition of a regulation from 1867. They broke Spitzer in half for his temerity in bringing this up in an editorial in the Washington Post.

  26. Mannwich says:

    It’s all about “winning” and nothing else to the folks who run the show. That allows them to accumulate the lion’s share of the power and money to then control the message and ultimately the Sheeple to allow them to “win”, which, again, is the only justification that matters to them. When we all finally understand and accept that, we’ll all be better off. Sometimes the simplest explanation (Occam’s Razor) is indeed the right one.

  27. wunsacon says:

    Since Obama changed party affiliations and the GOP won the election, this really is W’s third term. It’s exciting…

  28. AHodge says:

    you would have thought several $ trillion of losses would have induced more learning behavior., even in planet R primates
    Instead they just start with the premise, anything that goes wrong must be the governments fault. therefore if we get rid of all govt
    nothing will go wrong.
    vote for us to protect you from “that government over there”

  29. Darkness says:

    Forget all these numbers and facts. The GOP is doing its job splendidly.

    Let’s let George W sum it up.


  30. [...] If you can’t answer these questions, you can’t understand the financial crisis.  (Big Picture) [...]

  31. I keep coming back to the same point. Unless you want to say names and hold specific people accountable then its all just theater. For example, disgorge Rubin of all his Citi profits thats my f#%*ing money. And Orszag going there to make million$ last week, not illegal but it should be.

  32. Arequipa01 says:


    “For the first time in the nation’s history, there is no longer an authoritative, public record of who owns land in each county.” — University of Utah law professor Christopher Peterson [he's the author of that scholarly piece on the legality of MERS that was linked to in many fora]

    The C-SPAN video of the recent hearing is out there. I will try to find it. Rep. Conyers seemed to be accusing the banking industry of control fraud (his language was veiled but really stunning).

  33. Arequipa01 says:

    From the art:

    “Bankers needed a quick, clean way of reassigning mortgages without having to go through the “cumbersome” process of recording them with county courts and recorder offices. But instead of working with municipalities to modernize title registration by a creating a national database that was aboveboard and that everyone could use, the banking industry did what it does best: hid the information with sly accounting tricks.”

    US corporations (and others) have been usurping the sovereign authority of government at all levels. These processes and maneuvers are mechanisms being employed by an identifiable group of people.

  34. WFTA says:

    C’mon Berry, you are ignoring the will of the American People as expressed on November 2nd: we want to blame poor people, preferably poor people with dark skin, and the over-reaching federal collectivist bureaucracy. We even elected a senator named after Ayn Rand and we’ll soon get that Kenyan, who is in fact dark skinned, out of the White House.
    Happy Holidays.

  35. ancientone says:

    I grew up in the fifties when it was still commonly known what the abuses of the rich had been before 1929, and how the policies of the New Deal made America a much wealthier country for the working middle class. When Reagan came along in 1980 with his crap about government being the problem, I thought the American people would regard him as a joke. Unfortunately, they had become so economically ignorant by then that they believed him, and the last thirty years have been a gradual, but now complete victory for the rich over the middle class. It has been a sad spectacle to watch. No amount of warning could convince anyone around me that the Republicans were a bunch of predatory liars, intent on giving back to their super wealthy overlords their “rightful” share of America’s wealth. They have succeeded.

  36. ruetheday says:

    The GOP document reminds me of something written by a high school senior who has just finished reading Atlas Shrugged, Free To Choose, and The Road To Serfdom over the past year or two, and is now CONVINCED that they have all of the answers to the questions regarding morality, political philosophy, and economics that have troubled mankind for eternity. Just have the government become a night watchman, eliminate all other aspects of the state, let the free market work, cherish freedom above all else, respect natural rights, blah blah blah and everything will be perfect. It will be utopia!!! Damn those statists and their meddling, the answewrs are simple and it would be so easy to make it happen if they’d just realize that A is A.

  37. DG_Allen says:

    I read that trash and I’m just flabbergasted. They are factually wrong in some of their first points. It’s very telling that where causality is mentioned in this meme, there are no numbers or dates. They conveniently leave those out, because they are facts that prove them wrong.

    Next of course, Fox and most media will report this document as “news” and not challenge any of its incorrect statements. Only BR and probably Jon Stewart will take it on. The rest of the lemmings will never know (or care?) that people are using and lying to them.

    It’s such a disgrace.

  38. WFTA says:

    Obviously I was being flippant with my earlier remark. Some of the comments here (and the fact that these guys published a dissenting explanation of facts) reinforces my fear of what I think is a serious threat, not just for the U.S., but for civil society generally:

    Until recently, if you read the paper and watched television news, the FACTS, even in the short term were generally in agreement. Mistakes might be made; the story might enlarge as more FACTS came to light. But we still had a consensus on what the FACTS were.

    Today with vast expansion of cable TV channels and internet news sites and blogs, we have a smorgasbord of facts from which consumers can choose. People make the choice of outlets like a drunk leans on a lamp post—more for support than illumination.

    How can any society take the right direction if there is no consensus on what constitutes reality?

    I think it is scary.

  39. Majorajam says:

    Barry, I appreciate that your focus here is on slaying one politically-motivated zombie meme rather than delving more deeply into the credit crisis and on that score would give you full marks. Saying that, I think you’re wrong to say that Fannie and Freddie didn’t play critical roles in the development and fostering of the largest Minskian credit bubble in human history; notwithstanding that that bubble was global in nature, and grew up alongside a massive global asset bubble and its special case of US residential real estate.

    This is not to suggest that the GSE’s were instrumental as the badly-run/minority-lending banks of the woefully-devoid-of-evidentiary-basis conservative meme would have it, but rather, that they were instrumental as underwriters of market liquidity, i.e. as instruments of monetary policy. more than a decade the way in which GSE balance sheets have ballooned in times of market stress by issuing quasi-government liabilities.

    The numbers speak for themselves, as Doug Noland has busily documented for over a decade. This was written in July of 08:

    GSE assets expanded 15% ($115bn) during the 1994 [bond market/tequila/hedge fund] crisis, 28% ($305bn) during tumultuous 1998 [emerging market crisis], 23% ($317bn) during 1999 [LTCM], and another 18% ($344bn) during the corporate Credit crisis of 2001 [post TMT bubble]. And keep in mind that Fannie’s and Freddie’s combined Books of Business have ballooned more than $3.1 TN so far this decade.

    Most of that $3.1 trillion with a t came of course before the economic recovery while rates were being held down at 1%, (huge by today’s standards), as the accounting scandals that rocked the GSE’s during the Bush administration basically halted their balance sheet growth for a few years in its tracks. By then of course the private label folks were off to the races. Of course, since 2008 Freddie, Gennie, Fannie and the FHLB have underwritten nothing short of the entirety of the US residential real estate market.

    That is what Bernanke has called credit easing. Whatever name it goes by, whatever the mechanism by which it was coordinated, (telepathy come what may), it is utterly undifferentiated from the unconventional monetary policy of the here and now. And it is exceedingly difficult to believe that the Fed was not cognizant of this TARP-before-TARP vehicle for underpinning market liquidity in times of crisis, and less the case that Wall Street speculators weren’t. Certainly the Fed’s own Z1 report was.

    Of course, this all goes to the co-dependency that grew up between speculator and monetary policy makers during the most bubblicious of the bubble years (which, unfortunately due to the fact that I work in finance, do not include the here and now), which is the yet-to-be-discussed elephant in the living room in all of this. There will come a time though when it is discussed. And how.

    When that day comes, people will be sure to note the Fed’s elaborate and very speculator friendly ‘communication policy’, in addition to the simple decision to target short rates at all, in addition to Fannie and Freddie’s ‘backstop bid’ as Doug Noland aptly refers to it, in addition to the Fed’s joint ‘hear no evil see no evil’ approach to asset bubbles and explicit commitment to reliquify/clean up/prop up the mess that results, (something Jeremy Grantham has correctly recognized as a working definition of moral hazard), in addition to the Fed’s refusal to acknowledge the systemic importance of institutions and markets until nanoseconds after they fail after which bailouts become obvious and urgent imperatives for the Serious, etc. etc. etc.

    All of which is to say that Fannie and Freddie were integral parts of this whole God forsaken fiasco, just not in the way that the politically motivated would prefer (hey, facts are stubborn things). Would be interested to hear your thoughts.

  40. VennData says:

    The punishment for the partisans who follow these outlets – who tell them NOT to listen to others – is financial failure.

    Using these silly political beliefs of what the right wing media machine (financed by those who want low taxes for the ultra rich) tells them, guarantees those amateurs to a life of sub-par returns, since they have all these illogical “feelings” and ideological nonsense in their thinking.

  41. farmera1 says:

    So why will 50% of the people vote in a manner that is against their own self interests at least on the surface???

    -Fear is a great motivator. People fear as in prejudiced against the guys over there(you know those other guys, it can be Muslims, the poor, unions, blacks, Hispanics, gays what ever) much more than they fear the real people that are taking money from their pocket and driving the masses into poverty. Fear also works great when the government takes your rights. Terrorism is a fear tool that works to take peoples civil rights.

    -Fear is especially a huge efficient tool when you have a vast echo camber that constantly beats the anti-government drum (listen objectively to fox, late night radio etc)and does everything possible to keep the fear and prejudice going.

    We saw fear work like a champ in the build up to the invasion of IRAQ. Liberal use of the terms WMDs, 9-11 looming mushroom cloulds etc caused fear in the populace and eventually to the support for the invasion of Iraq. It was no accident that 78% of the people believed Iraq was behind 9-11 just before the the US invaded Iraq. We saw the fear tact work like a champ when there was no intelligent discussion on what could be done to control spiraling health care costs that by themselves will bankrupt this country. People on Medicare were convinced that “they” were going to take their Medicare and give it to those guys over there, you know the poor, the blacks etc.

    Again fear worked like a champ, but you aren’t going to successfully govern a country by using fear as your only or at least main tool.

    Goering was exactly right in his quote about using fear to lead people to war:

    “Why of course the people don’t want war. Why should some poor slob on
    a farm want to risk his life in a war when the best he can get out of
    it is to come back to his farm in one piece? Naturally the common people
    don’t want war neither in Russia, nor in England, nor for that matter in
    Germany. That is understood. But, after all, it is the leaders of the
    country who determine the policy and it is always a simple matter to
    drag the people along, whether it is a democracy, or a fascist
    dictatorship, or a parliament, or a communist dictatorship. Voice or no
    voice, the people can always be brought to the bidding of the leaders.
    That is easy. All you have to do is tell them they are being attacked,
    and denounce the peacemakers for lack of patriotism and exposing the
    country to danger. It works the same in any country.”

    So if fear works (and it does, just look at the invasion of IRAQ) to lead people into a war, it certainly will work in other circumstances, like not having an intelligent discussion on health care costs, or how to be fearful of the “other” guys. Works every time if you have the right people in the positions of power.

  42. DeDude says:

    Dead hobo@8:23 and KentWillard@8:40

    Great posts. What I want to know in details is how Fannie and Freddie moved from conservative players just giving boring safe conforming loans to people that could afford it, to being bag-holders at the end of the bubble. At the end of any bubble you have to have idiot bag-holders purchasing the cr@p from those driving the bubble up – otherwise they will not be able to harvest the profit and get out in time. It was not an accident that F&F got most heavily into the sub-standard stuff just at the top of the bubble. We need a step-by-step accounting of how the restrictions on what F&F could do were weakened (by whom?), and who prodded them to get into this cr@p just a the time when the big boyz needed a bag-holder to unload onto. These things were way to nicely timed to be accidental stupidity, they were clearly planned stupidities (set in motion by someone smarter than the leadership at F&F).

  43. willid3 says:

    i am wondering who they think was in charge back in 2001-2007. all of the budgets from for years 2001-2007 were written by the GOP, they controlled the executive branch. so if they are saying the collapse was because of government, what they are saying is that it was their fault. and I am wondering if the real reason for the collapse was the deregulation theme. after all its like having the police treat the criminals as customers and then wondering why the crime rate is up. it must be because of the cops!

  44. obsvr-1 says:

    @BR — right on, the 10 questions that the American people should continue to demand answers to, even if the FCIC drives off course. Could add #11 the revolving door between private and public sectors, lobbyist and political campaign donations. I am sure #3, #4, #5 and #6 were a result of the cozy crony relationships.

    @FrancoisT Says:

    In the movie “Inside Job”, Nouriel Roubini was asked “Why don’t we have a serious investigation about this whole crisis?”

    His answer? “Because then, we would catch the crooks.”

    – Unfortunately we are living in a time of institutionalize crime — we need the executive branch, DOJ to grow some big balls and go after this with a vengence, an renewed RICO effort.

  45. obsvr-1 says:

    @Mark E Hoffer Says:

    as dh, above, begins to delineate, We should wonder ~”Why is the FCIC “unable” to get ‘to the bottom of this’?”

    — reply

    Why indeed, since their efforts covered most of the 10 questions that BR posed — FCIC.org website is full of information that tells a story much different then the 4 dissenting Republicans position. Only if everyone had the time to review all the documents and testimony, they would see a story more aligned to BRs position.

    I would love to see ALL the other staff testimony, offline/non-public documents and answers to Q&A that were done outside of the public testimony. All pieces are there to support BRs position.

    It is a shame to see partisanship and politics enter into what should have been an independent objective review of the most important issue that has hit this country since the Great Depression.

  46. KentWillard says:


    For how F&F lowered their lending standards, please read:

  47. bigbases says:

    Item 1 — In light of today’s low rate’s, how might your column read in , let’s say, 2014? What parts of our financial system and economy might experience the most excess, destruction and decay? Currency and bonds are consensus bets. Are there hints of problems most folks are ignoring? Could the ultimate irony be that deficiency rather than excess is the birth child of today’s rates (lack of credit expansion; minimal interest/dividend income)?

    Item 5 — Notwithstanding the brief, heroic rise of the “nifty fifties”, the market crashed from Jan. 1969 through Oct. 1974. I might be stretching my luck here, but to the best of my recollection, your honor, the economy was pretty pathetic during that time — this despite Glass Steagall.

    All said, B.R. — yours was a terrific article today, absolutely insightful, and if your a Republican like me, “inciteful”. Great work!

  48. ancientone says:

    bigbases, the market downturns from 1969 through 1974 happened after Nixon unhooked the US Dollar from gold. The Republicans were already at work destroying what had been a very successful economy since the end of WW ll by trying to boost exports with a weaker currency, and unleashed the inflation of the seventies because OPEC was not about to let oil (which was priced in dollars) sink in value like the dollar. Extreme greed is always self-destructive.

  49. Take a Load Off Fannie
    Why won’t the GOP’s financial-crisis report follow the money?

    it is shockingly incomplete, which makes it, in the end, a ludicrous distortion of what happened. Yes, the government did lower the regulatory capital requirements for mortgages. But that didn’t happen in a vacuum. Regulators did so in the face of fierce lobbying from the private sector. And while the government certainly did encourage the private market to extend credit, companies like Countrywide and Ameriquest didn’t make mortgages—and Wall Street firms didn’t package those mortgages and sell them off to investors—because the government was holding a gun to their heads. The mortgage companies and securities firms did what they did for one overwhelming reason: There was a huge amount of money to be made. As employees of Washington Mutual, which was one of the most prolific subprime lenders, rapped at a retreat in Hawaii in 2006: “I like big bucks and I cannot lie.”

    As for the implication that subprime lending began with Fannie and Freddie and resulted from the government’s affordable housing goals, that’s simply false. Subprime lending began in the 1990s with a group of other, nongovernment-affiliated companies more aggressive than Fannie and Freddie that sold the mortgages they made to Wall Street. These mortgages, for the most part, had nothing to do with putting people in homes. They were refinancings, not purchase loans, and they allowed people to use their homes as ATMs. Homeownership was just a convenient fig leaf—albeit one embraced by lenders and politicians alike.

    For most of the 1990s, Fannie’s and Freddie’s affordable-housing goals required them to buy a certain percentage of mortgages made to families with a median income level. That was hardly onerous or risky, and anyway Fannie executives, who were far more preoccupied with return to shareholders, used to joke about the ways they neutered the affordable-housing rules. Indeed, there was an odd alliance between housing advocates and right-wing Republicans, both of whom complained—legitimately—that Fannie and Freddie weren’t really doing anything to help homeownership. For Republicans to ignore now those earlier contentions in order to claim that it was the housing goals that gave birth to subprime lending is utterly dishonest.

    The GOP report—oops, primer—provides a calculatedly incomplete account of how bad mortgages found their way onto the balance sheets of financial firms. There’s an interesting dissection of the kinds of risk that banks took—but no mention of the reason they took those risks: They were making piles of money! As for the ways the risky mortgages were packaged into supposedly safe securities, all readers get is a whitewash. Collateralized debt obligations, or CDOs, which provided Wall Street with another way to launder bad mortgages into supposedly safe securities (and thereby keep the fee machine humming), are described as having “diversification benefits” that were simply “overwhelmed by the rising tide of foreclosures.” No mention—zero—of “synthetic CDOs,” which essentially allowed Wall Street to replicate the same bad mortgages over and over again, causing billions in losses. Nor is there any mention of the Street’s failure to investigate the underlying mortgages, despite its promises to investors that it was doing so.

  50. partimer1 says:

    I can not refrain from responding to the BS you put out there. If the blame goes to everyone as you have listed repeatedly, there is no blame. So let me ask you, have we had a crisis? If we have, there will be a culprit. in this case, its crystal clear the culprit is the BANK. If we started by hanging a few bankers on the cross, many, if not all the other problems will go away.


    BR: Sorry if nuanced fact driven analysis bores you.

  51. muckdog says:

    #1: Well, rather than cherry pick the things that went wrong, we should remember that the low interest rates and George W. Bush tax cuts did lead to 20 consecutive quarters of GDP over 3% from 2003 to 2007.


    For the prudent investor, there were new highs in housing and the stock market to take advantage of.

    And yes, the walls did come tumblin’ down when banks made home loans to people who never had any chance of making even a single monthly payment, then then those loans were packaged up as investment vehicles.

  52. muckdog says:

    (I stopped after question one, because I have to get my rear-end out to the malls for Christmas shopping…)

  53. DeDude says:

    Actually the GDP over 3% was not the result of tax-cuts and only indirectly the result of low rates (as in low rates caused the housing bubble). Barry had a nice chart some months ago showing the GDP with and without mortgage equity withdrawal. Taking away MEW you have negative GDP for 2001-02, less than 1% for 2003-05 and slightly above 1% in 2006. All the economic growth during Bush II was fake and based on the RE bubble and increasing the national debt. You cannot get real GDP growth unless you give the consumer class real income growth. Until the masters of this country realize that, we will continue to have much less growth than China and eventually be the worlds second, then third, largest economy.

  54. hlowe says:

    I met a birther today. These people are emotional and will not allow facts to influence their beliefs. Of course they watch Fox News and listen to Rush and his protégés. They do not understand economics or how the world works.

    Barry, I must assume you know the Crazy fucks on fox are consistently misinforming the naive and gullible. My question is why don’t you and others call them out for helping to advance the misinformation?

    STUDY: Watching FOX News Makes You Stupid

  55. andrewp111 says:

    This one is not true:
    “8. The entire world had a simultaneous global housing boom and bust. US legislation such as the CRA or Fannie & Freddie only covered US housing and lenders. How did this cause a worldwide boom and bust — even bigger than that in the US ?”

    The boom was not truly worldwide. It was concentrated in particular countries. For example, Germany did not have a boom or a bust. The UK property boom started years before the US one, and had 2 big legs up. Ireland also had a boom years before the US did. Among US States, Texas did not have much of a boom, because of its restrictive property lending laws. I think the explanation is more of a mixed bag. The ultimate cause of the bubble is the long term decline in LT interest rates from 1981 through 2000 and to the present of about 0.23% per year. This decline in LT rates caused an unending search for yield among money managers. Bubbles happened in those places where local laws, market conditions, or both were favorable to bubble formation, just as the tech and telecom makkets in the late 1990s were ripe for bubble action. So yes, the CRA, the relaxation of leverage requirements, existance of Fannie and Freddie, etc.. all played a role in making the USA more prone to a bubbilicious housing market. So did local conditions in FL, CA, NV, and other places within the US. Many of the gub’mint actions that goosed the bubble happened late (2004), and were a clear and transparent attempt to keep the existing bubble going so politicians can kick the can of reckoning beyond the next election or two. The Bush administration failed to keep the music playing beyond the 2008 election, but no one can doubt that they tried.

  56. [...] Barry has 10 Questions for GOP Members of Financial Crisis Inquiry, including this important question I would have investigated further had I subpoena power and [...]

  57. [...] •3 of the 4 GOP appointees of the FCIC dissented, writing: “Our views have been shaped, in part, by our knowledge of economics and financial markets generally.” And that’s the problem — your views of Efficient markets, rational actors,  and self-regulation have been proven to be  nonsense, bad theories that you slavish stick with for matters unbeknownst to thinking people.  (See 10 Questions for GOP Members of Financial Crisis Inquiry) [...]

  58. [...] 10 Questions for GOP Members of Financial Crisis Inquiry (December 16th, [...]