One of the reasons I chastise idealogues like Peter Wallison is that while they are busy chasing their white whales, they ignore real issues. Important things that don’t fit neatly into their dogmatic driven narratives.

While they are fantasizing about laying the blame for the credit crisis on the GSEs, they are missing all the really bad stuff that is actually happening with them: The banks have been selling their near junk loans and bad debt to Fannie/Freddie at full price, then having the GSEs take the write down.

In other words, the GSEs have become a backdoor bailout for failed bank policies.

I will have more on Monday, but in the meantime, have a gander at these prior posts:>

Fannie And Freddie And the Backdoor Bank Bailout (May 12, 2010)

GSEs: $1 Trillion Dumping Ground for Bad Bank Loans (Jun 14, 2010)

Backdoor Bailouts for Goldman Sachs? (Mar 6, 2009)

Which Banks Got Fed Loans During the Meltdown? (Dec 3, 2010)

Fannie / Freddie Acquitted (Sep 22, 2010)

Always remember when investigating these things: Follow the money!

Category: Bailouts

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.

29 Responses to “Why You Should Really Be Angry About Fannie/Freddie”

  1. Here is what I don’t get. Don’t NAR and NAHB(and their ilk) want Fannie and Freddie to exist? Otherwise not as many homes would get built and they’d make less profit. And yet NAR, and NAHB, are the type of places that contribute to propaganda outfits like AEI. So what gives?

  2. DrungoHazewood says:

    Sneaked it in the dark of night. I remember it well, around this time of year. A big lump of dog doo in the stocking that year.

  3. I use the sharethis function. It’s the green icon, you don’t have it up yet in your share options so I can’t share your specific articles on the main column of swarm the banks. Might you be getting it soon?
    here is the link to learn more about it. http://sharethis.com/

  4. Liminal Hack says:

    “While they are fantasizing about laying the blame for the credit crisis on the GSEs, they are missing all the really bad stuff that is actually happening with them: The banks have been selling their near junk loans and bad debt to Fannie/Freddie at full price, then having the GSEs take the write down.

    In other words, the GSEs have become a backdoor bailout for failed bank policies. ”

    For sure, but at the same time we the people are fantasizing about laying the blame for the credit crisis entirely on the banks.

    Its true the GSEs exacerbated the crisis, and its true that the banks are the next layer of exploitation and moral hazard below that.

    But then look a little deeper and one finds the moral hazard of deposit insurance, which has been festering fror 80 years.

    Deposit insurance is a de-facto bank bailout implemented many many decades ago and now we are surprised that they – the banks – have profited from that.

    This is not to excuse the criminal behaviour of financial institutions recently but what leaves a really bad taste in my mouth is that so much of criticism or banks totally ignores the benefits to individuals (and arguably, society) from 80 years of risk free returns for doing nothing more productive than simply putting one’s money in a bank.

    Its hypocrisy. We decided to award ourselves, mom and pop savers, the benefit of risk free savings earning a risk free real return, and now we are SHOCKED, SHOCKED, that it has blown up in our faces and we have been fleeced by banks.

    Its quite simple: either you have free banking and some kind of gold standard or a fiat emulation of it with all the periodic bank failures, sovereign defaults and loss of mom and pop savings that this entails, or you have a system of nominal risk free money and bonds backed by printing presses, in which case the yield on bank deposits has to be at or near zero.

    You cannot have your cake and eat it, and if you try, some bigger fish will eat you first.

  5. louis says:

    http://www.youtube.com/watch?v=xbqzp2-qsAU&feature=related

    Damn Little Cat’s Feet

    The whole problem was that everyone thought the American dream was to own a home.

    It really is to rent a home, which so many unemployed citizens now get to do.

    As BR and Deep Throat said- “Follow the Money” This was all pure greed and Main Street is littered with dead homeowers.

  6. carleric says:

    It seems to me that there is plenty of blame to share. The GSEs aren’t blameless, the US Congress and Administrations lapped up the lobbying $’s from the GSEs and let them run unfettered, financial institutions created and sold products, under false premises, to the willfully ignorant or the mentally challenged and borrowers driven simply by greed and stupidity bent over and spread them for the lenders in the hope that they too could get rich. There are no innocent players here.

  7. Liminal Hack says:

    “The whole problem was that everyone thought the American dream was to own a home.”

    Nope, everyone thought the American Dream was about making money. It has always been about that.

    Homes were a means to an end in that sense.

    Again, are we really shocked, shocked that having built a civilisation that is based upon the distribution of goods and services via the general price level (and still is to a 99% approximation, despite the various corruption pustules and notwithstanding the revisionist bleating about true-capitalism(TM) ), that our civilisation comes to be dominated by money, moneymen, and dreams of money?

    This blog is a blog about money (OK, occasionally about technology and media too, but normally from a value perspective). It is not a blog about gardening.

    Ironic then, isn’t it, that while we are all banging on about the money issues we face and how to deal with the robbery we have been subjected to, that money as we actually think of it is dying its final little death? Despite all the fear that this process generates, given all the above I feel it can only be a good thing once all the pros and cons are netted, as long as no-one does anything really stupid.

  8. Tarkus says:

    GSE’s as another backdoor bailout for banks?

    What exactly is a banker anyway? Gamble at Vegas, blow up, take a big bonus, go back for more gov’t money, gamble at Vegas. If you win, take a big cut on top of your bonus. If you lose, take a big bonus.
    So is a banker’s job to gamble and have fun? Sign me up!!!

  9. DL says:

    “the GSEs have become a backdoor bailout for failed bank policies”

    . . . . . . . . . . . . . . .

    No doubt that’s true. All the more reason not to have a Fannie/Freddie with any government guarantees. Or perhaps a middle ground would be to have the government explicitly guarantee Fannie/Freddie debt at 50 cents on the dollar; coupled with restraints on the amount of leverage that they can take on.

  10. liminal,

    you go with: “…This blog is a blog about money…. It is not a blog about gardening…”

    are you saying that ‘Gardening’ has nothing to with Economics?

    http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus&v%3Aproject=clusty&query=Return+of+the+Victory+Garden

    “…Burpee adapted European seed stock for growing conditions in the United States and grew W. Atlee Burpee & Co. into the largest mail-order seed company in the nation. These days, the business is enjoying a growth spurt—a 20 percent sales increase last year and at least another 20 percent projected this year—as more people turn to home vegetable gardening to save money at the supermarket.

    “Whenever the economy is down, we see a spike in seed sales,” says Ball, citing an upsurge of first-time gardeners. “For every dollar you invest in a garden, you get an average of $25 worth of store-bought produce, so it’s an excellent return. Plus, you can’t buy that kind of flavor at the grocery.”…”
    3/15/2009
    http://www.americanprofile.com/article/32600.html

    “…Hard economic times are acting like instant fertilizer on an industry that had been growing slowly: home vegetable gardening.
    Amid the Washington talk of “shovel-ready” recession projects, it appears few projects are more shovel-ready than backyard gardens. Veggie seed sales are up double-digits at the nation’s biggest seed sellers this year…”
    Updated 2/20/2009
    http://www.usatoday.com/money/industries/food/2009-02-19-recession-vegetable-seeds_N.htm

    maybe, w/this: “that money as we actually think of it is dying its final little death?”, you’re more accurate than you might expect(?)

  11. rktbrkr says:

    President “Bobby”: Mr. Gardner, do you agree with Ben, or do you think that we can stimulate growth through temporary incentives?
    [Long pause]
    Chance the Gardener: As long as the roots are not severed, all is well. And all will be well in the garden.
    President “Bobby”: In the garden.
    Chance the Gardener: Yes. In the garden, growth has it seasons. First comes spring and summer, but then we have fall and winter. And then we get spring and summer again.
    President “Bobby”: Spring and summer.
    Chance the Gardener: Yes.
    President “Bobby”: Then fall and winter.
    Chance the Gardener: Yes.
    Benjamin Rand: I think what our insightful young friend is saying is that we welcome the inevitable seasons of nature, but we’re upset by the seasons of our economy.
    Chance the Gardener: Yes! There will be growth in the spring!

  12. Liminal Hack says:

    Hoffer, you prove my point for me. Your gardening quotes are peppered with money and economy references.

    Gardening is about growing food or pretty flowers, and about worms, soil acidity, greenfly and so on.

    Economics is about trading said harvest.

  13. rootless says:

    @Liminal Hack:

    Saving money, which has other sources like salaries and wages from selling your own labor force to an employer, is not the same as investing money to make money. So, I’m quite fine with the existence of a deposit insurance provided by the government to protect savings, while letting bondholders, or investors generally, take the losses, if their risky investments fail. If you don’t like it, not my problem.

  14. Pobrito says:

    Mr. Ritholz

    It seems that your defense of the GSEs is weak in one critical area.

    If one grants that the exotic excesses started on Wall Street, then why is it that at the height of tha mania and also now the GSE’s are participating in it? Why did they then and why are they now taking on all this toxic paper?

    Did someone put a gun to the GSEs’ collective heads to take on this junk? If you say it was the politicians who made them do it, then all the more reason the GSEs should be disbanded. They are acting as a conduit to bail out Wall Street. It is a malfunctioning organization. To me, it seems, that without the GSEs taking on this toxic paper, there would have been less overall excess as Wall Street would have less outlets for their paper. Wall Street would have had serious second thoughts knowing that they may have to eat these loans.

    What am I missing?

    ~~~

    BR: Three things:

    1) I am not defending the GSEs — i have been a critic, and we were short them heading into the the collapse. What i HAVE said was the arguments blaming the crisis on them fail to prove that claim, while lots of other blame is well documents and supported by empirical data.

    2) It has been well established by evidence, testimony, etc. that the GSEs jumped into the subprime market late (2005-07) because they HAD LOST MARKET SHARE TO WALL STREET. This was a private sector decision by company management.

    3) Now, the GSEs have become the only mortgage game in town — for ordinary securitization and mortgage repurchases, as well as a dumping ground for mortgages gone bad.

  15. louis says:

    Come on Liminal- Gardening and economics are the same thing.

    http://www.youtube.com/watch?v=YgGvd1UPZ88

  16. Sechel says:

    And the banks didn’t cherry pick when deciding what to sell to Fanie/Freddie and what to retain? It’s the nature of the beast to game the system. Frankly, I don’t see how this can be stopped short of ending the current system.

  17. Liminal Hack says:

    haha, very good Louis!

    - but when I talk about gardening, I am talking about growing plants, not using it as a euphemism for civilisation-husbandry.

    One wonders how the ancient Egyptians that built the pyramids viewed the work they were undertaking as they hauled blocks of stone through the desert. Do you imagine they created for themselves an economic rationale for what they were doing, or do you think their reasoning was about matters not to do with economics, unless of course we are talking about the economics of eternal life?

  18. liminal,

    speaking of Egyptians, travel North, and see– Greek root: oikos-nomos (oiko + nemein) which means “management of the household”.

    “Gardening”, certainly, is withing the mein of Economics..whether to Trade one’s Crop is, rather, a matter of Finance.

    def. Finance 1. A branch of economics concerned with resource allocation as well as resource management, acquisition and investment. Simply, finance deals with matters related to money and the markets.
    http://www.investorwords.com/1940/finance.html

    to your Q: “Do you imagine they created for themselves an economic rationale for what they were doing, or do you think their reasoning was about matters not to do with economics(?)

    A: they, certainly, created an Economic rationalization, else nothing would have been done. the Financial case, obv., was more than suspect..

    for a current ex. see Alberta’s ‘Tar Sands’..
    http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus&v%3Aproject=clusty&query=Athabasca+Tar+Sands+ecological+disaster

  19. laBear says:

    Thanks Barry….let’s hope the media gets more focused/educated on this as we don’t need another Christmas eve funding like last year by Treasury to these GSEs…tired of fiscal policy being implemented through Treasury with no oversight/veto power.

  20. Pobrito says:

    Mr. Ritholtz

    On your point…

    2) It has been well established by evidence, testimony, etc. that the GSEs jumped into the subprime market late (2005-07) because they HAD LOST MARKET SHARE TO WALL STREET. This was a private sector decision by company management.

    Yes, that is known. But so what? It sounds like you are making an excuse for them. How often have we often heard the defense, especially by children, “well he did it first!” But these weren’t children. These are government sponsored entitites who were playing fast and lose with taxpayer money (as we now see from the bailouts). I have no sympathy for them.

    ~~~

    BR:The question is “What caused the credit crisis.”

    The narrative from the far right is that government mandates forced FNM/FRE to buy subprime, aka low income loans. The reality is he GSE’s management jumped in on their own

    Understand the difference?

  21. [...] Barry Ritholtz, “the GSEs have become a backdoor bailout for failed bank policies.”  (Big Picture) [...]

  22. Wingnut says:

    Hi, I’m really angry about this post, it makes my brain hurt. So I am going to repeat the same empty statements about the crisis being Fannie’s fault, and then refuse to provide any data. As a kicker, I am going to accuse you of making an argument without using any data, even though you have exhaustively covered the subject with oodles of data, while I have yet to use one piece.

    I feel better now. When’s Rush on the radio?

    -Wingnut

  23. Dow says:

    Wingnut, your letters need to be bigger, all caps, in pretty colors. Otherwise your argument just isn’t credible.

  24. rktbrkr says:

    Fannie offering virtual 100% financing on their foreclosure sales…kind of funny

    http://www.fanniemae.com/homepath/financing/index.jhtml

  25. Bill W says:

    I think this is more proof that the TARP/bailout solution in 2008 was not free, and a resolution authority would have been worth the cost.

  26. Pat Shuff says:

    Fannie and Freddie amplified the housing boom by buying mortgages from lenders, allowing them to originate even more loans. DECIDING what to do with Fannie Mae and Freddie Mac, the taxpayer-owned mortgage giants that helped set the financial crisis in motion, will be a huge job for Congress next year.

    *snip*

    ~~~

    BR: Amplified? What a weasel word.

    1) Fannie has been buying mortgages for 70 years (1938); Freddie since the late 1960s. — so GSEs have been “Amplfying” the housing boom for 70 years — Where is the sudden causation in 2008?
    2) Fannie and Freddie were precluded from buying non-conforming loans — 2/28 ARMs, I/O, Neg Ams, etc.
    3) They were even precluded from, buying subprime until 2006.

    Please explain how under these circumstances they were a prime cause

  27. AHodge says:

    Always a question Which Berry’s show up on this topic….
    in this case both.
    your May June completely contradict your “Fannie freddie Acquited”

    but I completely agree CRA by itself is a piddle
    ALL of govt, including Fannie freddie, low interest rates, and including their omissions (dereg)
    is only worth a third or less of the drivers by my count

    that aint a “prime cause”
    but thats a weasel word,
    they worth a good 10-15% for all their bubble building and guaranteeing discussed ad nauseum earlier

  28. DeDude says:

    First of all we should be really angry that F&F was privatized in a haze of ideologogism that (in spite of mountains of evidence to the contrary) state that the private sector will always do the job better no matter what the job is. Had they remained non-profit then they would never have gotten themselves away from the old model and their loses would have been minimal. Yet they would have been there as viable institutions that could take over the job of making affordable (i.e. you can get no more than what you can afford) housing credit available to everybody (after the private sector failed and collapsed).

  29. DeDude says:

    “They were even precluded from, buying subprime until 2006”

    Yes just as the big boyz needed someone to get in and be the bag-holder when that subprime sh!t went south, a miracle happened. The GOPsters who had wanted F&F to get small enough to drown in a bathtub, suddenly thought it was a great idea to let them get in and compete in the subprime market. Almost looks like a plan to rob the taxpayers?