Mike Konczal is a fellow with the Roosevelt Institute, and is a blogger at the Rortybomb Blog and New Deal 2.0.

~~~

Sigh.

Mayor Bloomberg:

“It was not the banks that created the mortgage crisis. It was, plain and simple, Congress, who forced everybody to go and give mortgages to people who were on the cusp… But they were the ones who pushed Fannie and Freddie to make a bunch of loans that were imprudent, if you will. They were the ones that pushed the banks to loan to everybody.”

It seems there are people who can’t accept that some markets, particularly financial ones, are disastrous when completely unregulated — and thus find any far-fetched excuse to blame the government instead. Since this line of argument continues to pop up, how should one respond to the idea that Congress and Fannie Mae/Freddie Mac caused the housing crisis? Here are six facts to back you up:

1. Private markets caused the shady mortgage boom: The first thing to point out is that the both the subprime mortgage boom and the subsequent crash are very much concentrated in the private market, especially the private label securitization channel (PLS) market. The Government-Sponsored Entities (GSEs, or Fannie and Freddie) were not behind them. The fly-by-night lending boom, slicing and dicing mortgage bonds, derivatives and CDOs, and all the other shadiness of the mortgage market in the 2000s were Wall Street creations, and they drove all those risky mortgages.

Here’s some data to back that up: “More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions… Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.”

As Center For American Progress’s David Min pointed out to me, the timing doesn’t work at all: “But from 2002-2005, [GSEs] saw a fairly precipitous drop in market share, going from about 50% to just under 30% of all mortgage originations. Conversely, private label securitization [PLS] shot up from about 10% to about 40% over the same period. This is, to state the obvious, a very radical shift in mortgage originations that overlapped neatly with the origination of the most toxic home loans.”

2. The government’s affordability mission didn’t cause the crisis: The next thing to mention is that the “affordability goals” of the GSEs, as well as the Community Reinvestment Act (CRA), didn’t cause the problems. Randy Krozner summarized one of the better studies on this so far, finding that “the very small share of all higher-priced loan originations that can reasonably be attributed to the CRA makes it hard to imagine how this law could have contributed in any meaningful way to the current subprime crisis.” The CRA wasn’t nearly big enough to cause these problems.

I’d recommend checking out “A Closer Look at Fannie Mae and Freddie Mac: What We Know, What We Think We Know and What We Don’t Know by Jason Thomas and Robert Van Order for more on the GSEs’ goals, which, in addition to explaining how their affordability mission is a distraction, argues that subprime loans were only 5 percent of the GSEs’ losses. The GSEs also bought the highly rated tranches of mortgage bonds, for which there was already a ton of demand.

3. There is a lot of research to back this up and little against it: This is not exactly an obscure corner of the wonk world — it is one of the most studied capital markets in the world. What has other research found on this matter? From Min:

Did Fannie and Freddie buy high-risk mortgage-backed securities? Yes. But they did not buy enough of them to be blamed for the mortgage crisis. Highly respected analysts who have looked at these data in much greater detail than Wallison, Pinto, or myself, including the nonpartisan Government Accountability Office, the Harvard Joint Center for Housing Studies, the Financial Crisis Inquiry Commission majority, the Federal Housing Finance Agency, and virtually all academics, including the University of North Carolina, Glaeser et al at Harvard, and the St. Louis Federal Reserve, have all rejected the Wallison/Pinto argument that federal affordable housing policies were responsible for the proliferation of actual high-risk mortgages over the past decade.

The other side has virtually no research conducted that explains their argument, with one exception that I’ll cover below.

4. Conservatives sang a different tune before the crash: Conservative think tanks spent the 2000s saying the exact opposite of what they are saying now and the opposite of what Bloomberg said above. They argued that the CRA and the GSEs were getting in the way of getting risky subprime mortgages to risky subprime borrowers.

My personal favorite is Cato’s “Should CRA Stand for ‘Community Redundancy Act?’” from 2000 (here’s a write-up by James Kwak), which argues a position amplified in its 2003 Handbook for Congress financial deregulation chapter: “by increasing the costs to banks of doing business in distressed communities, the CRA makes banks likely to deny credit to marginal borrowers that would qualify for credit if costs were not so high.” Replace “marginal” with Bloomberg’s “on the cusp” and you get the same idea.

Bill Black went through what AEI said about the GSEs during the 2000s and it is the same thing — that they were blocking subprime loans from being made. In the words of Peter Wallison in 2004: “In recent years, study after study has shown that Fannie Mae and Freddie Mac are failing to do even as much as banks and S&Ls in providing financing for affordable housing, including minority and low income housing.”

5. Expanding the subprime loan category to say GSEs had more exposure makes no sense: Some argue that the GSEs had huge subprime exposure if you create a new category that supposedly represents the risks of subprime more accurately. This new “high-risk” category is associated with a consultant to AEI named Ed Pinto, and his analysis deliberately blurs the wording on “high-risk” and subprime in much of his writings. David Min broke down the numbers, and I wrote about it here. Here’s a graphic from Min’s follow-up work, addressing criticism:

min_updated

Even this “high risk” category isn’t risky compared to subprime and it looks like the national average. When you divide it by private label, the numbers are even worse. Private label loans “have defaulted at over 6x the rate of GSE loans, as well as the fact that private label securitization is responsible for 42% of all delinquencies despite accounting for only 13% of all outstanding loans (as compared to the GSEs being responsible for 22% of all delinquencies despite accounting for 57% of all outstanding loans).” The issue isn’t this fake “high risk” category, it is subprime and private label origination.

The Financial Crisis Inquiry Commission (FCIC) panel looked carefully at this argument and also ended up shredding it. So even those who blame the GSEs can’t get the numbers to work when they make up categories.

6. Even some Republicans don’t agree with this argument: The three Republicans on the FCIC panel rejected the “blame the GSEs/Congress” approach to explaining the crisis in their minority report. Indeed, they, and most conservatives who know this is a dead end, tend to take a “it’s a whole lot of things, hoocoodanode?” approach.

Peter Wallison blamed the GSEs when he served as the fourth Republican on the FCIC panel. What did the other three Republicans make of his argument? Check out these released FCIC emails from the GOP members. They are really fun, because you can see the other Republicans doing damage control and debating whether Wallison and Pinto were on the take for making this argument — because the argument makes no sense when looking at the data.

There are lots of great quotes: “Re: peter, it seems that if you get pinto on your side, peter can’t complain. But is peter thinking idependently [sic] or is he just a parrot for pinto?”, “I can’t tell re: who is the leader and who is the follower,” “Maybe this email is reaching you too late but I think wmt [William M. Thomas] is going to push to find out if pinto is being paid by anyone.” And then there’s the infamous event where Wallison emailed his fellow GOP member: “It’s very important, I think, that what we say in our separate statements not undermine the ability of the new House GOP to modify or repeal Dodd-Frank.”

The GSEs had a serious corruption problem and were flawed in design — Jeff Madrick and Frank Partnoy had a good column about the GSEs in the NYRB recently that you should check out about all this — but they were not the culprits of the bubble.

~~~

mike-konczal-new

Mike Konczal is a Fellow at the Roosevelt Institute.

Category: Bailouts, Credit, Real Estate, Really, really bad calls, Regulation

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.

54 Responses to “Hey Mayor Bloomberg! No, the GSEs Did Not Cause the Financial Meltdown (but thats just according to the data)”

  1. ilsm says:

    This propaganda from the top is that congress should be target of occupy wall st not congress’ owners.

    In 2004 the GSE lost market share in the mortgage securitization business which evolved post Savings and Loan crisis of the late 80′s.

    Read Jeff Madrick’s recent book………………………..Age of Greed: The Triumph and Decline……

  2. flocktard says:

    By the way, people should know that the foreclosure stats, as informative as they are, leave out an important factor. This is not just an issue of credit quality in underwriting. As an example, lets say I’m one of the poor tools who got a mortgage from New Century Financial, and it turns out I can’t handle the home. If I bought in 2002, and sold in 2004, I don’t amount to a footnote in all this. If I bought in 2006, and try to sell in 2008, the underwriting isn’t the problem- the 40% drop in home value is. I can’t get out without shelling out tens of thousands to the bank to make them whole. And I never had squat for the house in the first place.

    But wait, there’s more! This dynamic works even on highly qualifed buyers. I have Bloomberg screen grabs of CMOs which were originated with a Weighted Average LTV of 65%, and an average FICO score north of 750. Yet, the default rate is over 6%, and the REO numbers climb each successive month.

    How can that be? It shouldn’t happen if we are to believe Pinto and the other nattering nabobs of negative amortization. The answer lies at the bottom of the screen shot- 50% of the loans on this particular piece were located in California- a non-recourse state.

    And the fact that people’s lives are deteriorating which affects their ability to carry a home.

  3. RW says:

    Bloomberg’s faux pas is just another example of hard it is to kill a zombie lie; it reproduces every time it eats a brain.

  4. Moss says:

    The apologetic free market puppets simply can’t accept the facts that the private sector screwed up. It does not follow their belief system. The government is an easy target and surely had a hand in the significant malinvestment and fraud. The law suits, fines and other trails clearly demonstrate the illegal activity which was a hallmark of the bubble.

    Bravo to you BR and others who refuse to relent to the ongoing propaganda meant to shift the cause in order to propagate their ingrained biases.

  5. ToNYC says:

    When all else fails, it’s time for Critical Analysis. Thanks for demonstrating a lost skill what they are not to offer in school. No child left behind that can’t be forced into multiple choice land where brain cells go to die on the wire.

  6. Sechel says:

    The GSE’s were huge buyers of subprime bonds being the “deal drivers” in many of the offerings, not only providng liquidity, but driving spreads down and further legitimizing the market. Most subprime offerings had one or two AAA conforming tranches reserved for Fannie and/or Freddie. The GSE’s bought these bonds partially out of their mandate and partially in the search for yield.

    Fannie and Freddie were also sourced the worst of the conforming 1st lien mortgages underwritten by the big banks, who often kept the 2nd lien and giving the tax payer the 1st lien which was often done without a significant down payment(80/20 financing).

    This is not to say the banks are blameless only that the there is merit to the gov’t/Fannie argument.

    ~~~

    BR: You are incorrect, partially due to your confusing the timeline, partially due to ignoring fundamental metrics, partially due to some squishy thinking.

    1. Prior to 2005, GSE were not permitted to purchase nonconforming loans (aka Alt-A and Subprime). F&F was losing significant market share to big banks, and petitioned for permission to buy the junk. OFHEO granted it to them in late 2005. By the time F&F began buying subprime in large quantities, the boom was already busting.

    2. GSEs as private companies bought junk because like the rest of Wall Street they were chasing profits — not as Mayor Bloomberg claims, they were ordered to.

    3. Joe Nocera called out perennial FCIC member (and long time AEI GSE analyst) Peter Wallison, about inconsistent narrative about Fannie and Freddie:
    Wallison had previously complained that GSE s were being bypassed by private lenders in the subprime area. As he wrote in 2004:

    “Study after study have shown that Fannie Mae and Freddie Mac, despite full-throated claims about trillion-dollar commitments and the like, have failed to lead the private market in assisting the development and financing of affordable housing.”

    4. GSEs had provided liquidity and standards to the mortgage market for 65 years. Why in 2005 did it suddenly blow up? What had changed?

    5. Most subprime lenders weren’t subject to federal lending law. They could not sell their mortgages to GSEs. Indeed, nearly $3 of every $4 in subprime loans made from 2004 through 2007 came from lenders who were exempt from traditional lending laws, and issued non conforming, non GSE buyable loans

    I can do this all day, but I have more important things waiting. The Mayors argument was false, factually incorrect, and an ignorant talking point. Why you choose to join his failure is beyond me.

  7. doug says:

    My question is WHY did the mayor LIE? He surely knows the truth. Getting ready to run for pres and needing rt wing cred? I have only that one guess. Must be other explanations…

  8. doug:

    I am going to suggest it is the God Complex:

    see: Tim Harford: Trial, error and the God complex

  9. Bill Wilson says:

    I agree with this article, but I do think the “governments affordability mission” is being executed in a way that contributed to the crisis.

    The ability to borrow does not constitute affordability. The price is what makes an item affordable. If the government had regulated properly, banks would not have been able to make many of the bad loans that were made last decade. Even now, housing industry groups are conducting a war on reasonable lending standards.

    If we want to make housing more affordable in this country, we need to build more condominiums and small houses on lots that are 1/4 acre or smaller. We also need to honest about the fact that many people are better off renting.

    ~~~

    BR: We have seen a growing increase in home size over the past 30 years. Its hard to see how that suddenly became a factor.

    Are you suggesting the greater credit required to buy into bigger houses is a factor? Some have suggested that it was the McMansion, not the small urban townhouses, that were especially problematic. And I note you use the “contributed” — note the word than the Mayor used was the harsher “caused” — about the crisis.

    Regardless, it is going to be a challenge to show a causal chain from government policy to house size to crisis !

  10. VennData says:

    I stand by my prior statement: The GOP believe this stuff, they will continue to repeat, and no amount of data to the contrary will change their rhetoric or their emotional positions.

    Bush was able to keep the GOP coalition together after 9/11:

    1) ending family planning support where abortion was mentioned in foreign countries for the religious-minded…

    2) tax cuts for the uber wealthy (damn the fiscal consequences)

    3) re-created the Defense coalition with the “War on Terror”

    Obama has…

    1) restarted the funding for non-US family planning

    http://articles.cnn.com/2009-01-23/politics/obama.abortion_1_abortion-counseling-family-planning-family-planning?_s=PM:POLITICS

    2) demanded tax hikes for the super rich (back to those horrid “Clinton rates” )

    3) sidelined the “War on Terror” with his effective killing of Qadaffi, bin Laden, and misc. drone victims

    …while growing the economy for nine straight quarters, doubling the stock market and supporting employment.

    That’s why he’s ahead in the polls and will most likely be re-elected. The GOP doesn’t have what it takes to build a coalition for the next century. All they can do is make stuff up about Socialist Muslims and CRE’s caused the Bush Bust.

    The GOP is in trouble, they can stir up anger at the followers of the Real-Estate con of the last decade (who also fell for the Tech-stock con in the prior decade) as a sit-on-your-ass way to get rich, but it’s not a coalition.

  11. louis says:

    And let’s not forget New Century executives were able to settle with the SEC without admitting guilt that they failed to disclose important negative info.

    1.Fannie becomes a buyer of the street’s product when Raines pushes it’s earning per share mantra to $6.46.
    2.How can Fannie fuel it’s rapid growth? -Take on the crap from the street.
    3. How does Fannie hedge their risk? -Derivatives.

    http://www.youtube.com/watch?v=9uU6rJoTqYo

    http://www.youtube.com/watch?v=CTbIb75JdwY&feature=related

    Who was Fannie’s biggest customer? – Countrywide.

    Treasury had the ability to shut down the GSE’s, they did not. Follow the Money, it leads you back to the Street.

    http://www.youtube.com/watch?v=VwJy2HN6i18&feature=related

  12. Bill Wilson says:

    I didn’t mean to suggest that bigger houses caused the crisis. I meant to suggest that a more reasonable government housing policy is to encourage the building of smaller housing units and rental units.

    In other words, don’t allow people borrow more money than they can afford. Figure out what people can afford, then build the housing stock that will be affordable. For many people, that means renting.

    I live in Massachusetts where I see this first hand. You can’t build apartment buildings or dense housing developments, because local governments won’t let you.

    I also didn’t mean to suggest that Fannie and Freddie “contributed” to the crisis. What contributed to the crisis is the fact that no elected official had the stones to say that 80/20 loans and 110% LTV loans were a terrible idea. It was heresy to suggest that any borrower could not “afford” the house that they wanted to buy.

    What I’m saying is that the governments idea of “affordability” in housing, and in education, is backwards. We should not allow it to be easy to borrow money to buy a house, or to get an education. Put the money into building more affordable schools and houses.

  13. Frilton Miedman says:

    THAT is what I call good journalism.

    Rather than convey standardized cookie cutter understandings, Barry takes the time to research and lay out that research for the scrutiny of readers.

    If this were ZH, you’d have members exchanging profane laced insults like a group of 16 yr olds, or inferring that this was caused by “that socialist Obama”.

    Here, people may not agree, but thank God, the debates remain on topic.

  14. mathman says:

    http://www.truth-out.org/too-big-jail/1320414516

    “Can we all agree that a $1 billion swindle represents a lot of money, and the fact that Citigroup agreed last week to pay a $285 million fine to settle SEC charges for “misleading investors” demonstrates a damning admission of culpability?

    So why has Robert Rubin, the onetime treasury secretary who went on to become Citigroup chairman during the time of the corporation’s financial shenanigans, never been held accountable for this and other deep damage done to the U.S. economy on his watch?”

    It just keeps gettin’ better and better for these guys. i don’t get it.

  15. Wiggs says:

    I don’t like Bloomberg at all, especially after he somehow finagled a third term as mayor and screwed up traffic flow on the west side of Manhattan with his Times Square lane closures.

    However, how can you not lay AT LEAST the same amount of blame on the government for what happened as you do on the banks? The banks absolutely are at fault and should be crucified for what they did (by the way, why Angelo Mozilo and others who will not be named aren’t in jail is beyond me), but they are drug addicts and the government is the drug dealer.

    I am not a proponent of over-regulation but it seems to me the greed and abuses of the system could have been limited or even avoided altogether if effective regulatory oversight were in place. The government oversees the regulatory environment (and does a poor job of it) and should share the blame.

    Look at recent events. Three years removed from Lehman and another financial firm is blowing up. How does MF Global blow up now when regulators supposedly knew about the troubles four months ago, especially given what happened in 2008? Answer: A breakdown in the regulatory system which probably had something to do with some phone calls from a few of Corzine’s buddies on Capitol Hill.

    Why did regulators and politicians ignore the subprime crisis signs that were popping up all over the place in 2004, 2005 and 2006? I’m sure part of it was the naive assumption that we all lived under at the time that housing prices always go up, but I also think it was because the politicians were more worried about getting re-elected than doing the right thing and protecting the citizens of our country.

    I don’t agree with Bloomberg just out of principle, but I blame Congress at least as much as I do the banks.

    Occupy Wall Street is fine but I think we need to see Occupy Capitol Hill soon. Enough is enough.

  16. Some pesky details worth considering:

    -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 (2001-05), 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 late 2005, nearly all of these sub-prime loans were bought by Wall Street — NOT Fannie & Freddie. Why? Because 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.

  17. Grego says:

    Regarding trial, error and the God complex:
    It is common sense to take a method and try it. If it fails, admit it frankly and try another. But above all, try something– FDR.
    Clearly not too many politicians of his capabilities or courage any more. But I think you give Bloomberg too much credit to explain this as the overconfidence of a powerful person. After enough evidence builds against an extremely simplistic explanation for a complex system, it seems more like a stubborn jackass complex. The question of whether he’s a fool or liar still seems unresolved to me.

  18. Joe Friday says:

    Konczal: “The CRA wasn’t nearly big enough to cause these problems.

    It wasn’t just about size (although most everything else seems to be):

    Former FDIC Chairman Sheila Bair on CRA

    I want to give you my verdict on CRA: NOT guilty,” said FDIC Chairman Sheila Bair, according to a press release by the Federal Deposit Insurance Corporation. Before the Consumer Federation of America, Bair said … she wanted to clear up the “myth” that the Community Reinvestment Act caused the financial crisis – and she set out to do so with vigor.

    The Community Reinvestment Act – or CRA – is a federal law designed to encourage commercial banks and savings associations to meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods. It has largely been criticized by conservative members of the GOP as promoting predatory lending practices.

    And “Let me ask you,” she proceeded. “Where in the CRA does it say to make loans to people who can’t afford to repay? Nowhere.” The facts are simple, Bair said. The lending practices that are causing problems today were driven by a desire for more market share and revenue growth, not because the government encouraged certain lending practices.

  19. Edoc says:

    Right off the bat you linked to ThinkProgress. Conservatives and libertarians are going to discredit your argument just for that.

    “More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions… Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.”

    For this info, which is cited at TP and McClatchy, you can find the direct source at the FBI.gov site, in the 2007 Fraud summary.

  20. Joe Friday says:

    BR: “The change in FNM/FRE conforming mortgage purchases in 2005 was not due to any legislation or marching orders from the President (a Republican)

    Perhaps not from clueless Chimpy Bush himself, but from his administration:

    A) (From 1992 forward, HUD became the regulator of both Fannie and Freddie)

    * In 2000 [during Clinton], as HUD revisited its affordable-housing goals, HUD restricted Freddie and Fannie, saying it would not credit them for loans they purchased that had abusively high costs or that were granted without regard to the borrower’s ability to repay.

    * But by 2004, when HUD next revised the goals, Freddie and Fannie’s purchases of subprime-backed securities had risen tenfold. Foreclosure rates also were rising.

    That year, President Bush’s HUD ratcheted up the main affordable-housing goal over the next four years, from 50 percent to 56 percent. John C. Weicher, then an assistant HUD secretary, said the institutions lagged behind even the private market and “must do more.”

    “That was a huge, huge mistake,” said Patricia McCoy, who teaches securities law at the University of Connecticut. “That just pumped more capital into a very unregulated market that has turned out to be a disaster.”

    http://www.washingtonpost.com/wp-dyn/content/article/2008/06/09/AR2008060902626_2.html

    ~

    B) UNDER PRESSURE FROM BANKS, BUSH EASED LENDING RULES

    (AP) – The Bush administration backed off proposed crackdowns on no-money-down and interest-only mortgages years before the economy collapsed, buckling to pressure from some of the same banks that have now failed. It ignored remarkably prescient warnings that foretold the financial meltdown, according to an Associated Press review of regulatory documents.

    Bowing to aggressive lobbying – along with assurances from banks that the troubled mortgages were OK – REGULATORS DELAYED ACTION FOR NEARLY ONE YEAR. By the time new rules were released late in 2006, the toughest of the proposed provisions were gone and the meltdown was under way.

    The administration’s blind eye to the impending crisis is emblematic of a philosophy that trusted market forces and discounted the need for government intervention in the economy. Its belief ironically has ushered in the most massive government intervention since the 1930s.

    Many of the banks that fought to undermine the proposals by some regulators are now either out of business or accepting billions in federal aid to recover from a mortgage crisis they insisted would never come. Many executives remain in high-paying jobs, even after their assurances were proved false.

  21. Irwin Fletcher says:

    Let’s challenge your facts.

    According to the National Housing Institute, in 2002 the GSE’s were purchasing as much as 70% of all the mortgage paper being written in the U.S.
    While the GSE’s did not participate in the initial growth of subprime in the early to mid 90′s, they started showing interest in it in the last 90′s. By 2000-2001, the GSE’s were already purchasing A-minus loans as a regular part of their business. In 2001 the GSE’s market share for subprime loans grew by 74% alone, giving them over 11% of all the subprime market that year. By 2002, they were on such a tear, that people estimated they would soon take over as much as 50% of the entire market.
    The GSE’s came out with Automated Underwriting systems (Desktop Underwriter and Loan Prospector) in the mid 1990′s. To enter the subprime space all they had to do was tweak the black box, which they started doing somewhere around the year 2000. After that, the GSE’s grew their Alt-A market share every year. They became the primary liquidity source for Alt-A paper. Each year they continued to make their AU systems more and more aggressive, taking more and more market share (while still calling it Alt-A). (A sham by the way). As Fannie and Freddie got more aggressive, the private guys had to get even more aggressive to compete, which they did. So the loans got crazier and crazier.

    The facts seem to say that the GSE’s were in fact, deeply involved in the Alt-A and the subprime space, and WELL before 2005 as is commonly claimed in this blog. I challenge that, and believe it to be false. Just because something is repeated often, doesn’t make it true. If I can prove this, would you be willing to accept it?

    Now, am I saying the banks are not responsible for the financial crisis? NO. But I tire of two camps of people, with one side blaming the banks and Wall Street and the other blaming the government. Fannie and Freddie were just as culpable as the other securitizers, all swimming in the same toilet bowl. All willing participants.
    It is NOT an either or situation. It is BOTH the GSE’s and the private securitizers. (Oh yea, and the Rating Agencies).

  22. Irwin Fletcher says:

    One more thing.

    The CRA had nothing to do with any of this.

    The GSE’s and Wall Street both were simply chasing profits and market share.

  23. Edoc says:

    My bad on the FBI.gov cite. I confused your statement with the FBI’s position on mortgage origination fraud. From the 2005 Mortgage Fraud report:

    “Based on existing investigations and mortgage fraud reporting, 80 percent of all reported fraud losses involve collaboration or collusion by industry insiders.”

    http://www.fbi.gov/stats-services/publications/fcs_report2005

    My apologies for the confusion.

  24. Petey Wheatstraw says:

    Edoc Says:

    “Based on existing investigations and mortgage fraud reporting, 80 percent of all reported fraud losses involve collaboration or collusion by industry insiders.”
    _________

    Jeez. This is a clarion call for RICO Act prosecutions, and all we get is crickets chirping. Failure to prosecute known criminality is the failure of legitimate government.

  25. slowkarma says:

    OK, Bloomberg’s a tool, but it seems to me the tendency to blame EITHER government OR Wall Street is basically political, not a product of economic analysis. The two were essentially an unspoken (and spoken, for that matter) conspiracy with benefits for both sides, i.e. the politicians and Wall Street dealers. I also have to say that I don’t like the use of the word “banks” to describe the problem, because it sounds to me like the old thirties anti-Semite thing, the “bankers” did it. The people who really rigged this deal aren’t the “banks” as we usually think of them, but a combine of politicians, mortgage originators (who were not banks) rating agencies (not banks) and Wall Street bond dealers and companies like AIG who promoted the credit default swaps that made all leverage available. The “banks” per se seem more like big blundering elephants who got in the way of the hustlers…

  26. DeDude says:

    The right wingers like Bloomberg who is trying to blame gobinment for the housing crisis are not in any way shape or form suggesting that this blame is due to the lack of action against irresponsible lenders – although that is the one place where gobinment actually can be blamed. Their ideology say that gobinment is bad so when something bad happens it must be because of gobinment. However disconnected from logic and fact the argument is it must be try because it comes to the right conclusion.

  27. BusSchDean says:

    Same old problem. Da Mayor chooses what caused the crises according to what he is willing to support moving forward, data be damned.

    I sent a Stiglitz’s March essay to all business faculty as a resource for students who continue to wonder about the crisis and explicitly invited faculty to use whatever source they prefer. The first comment from one of my economists? “Stiglitz is a liberal.” So apparently anything Stiglitz says or writes regardless of the quality of the analysis must be suspect. Gimme a brake!

  28. [...] Hey Mayor Bloomberg! No, the GSEs Did Not Cause the Financial Meltdown (TBP) [...]

  29. Frilton Miedman says:

    Edoc Says:
    November 5th, 2011 at 2:01 pm
    ” Right off the bat you linked to ThinkProgress. Conservatives and libertarians are going to discredit your argument just for that. ”

    As a Libertarian, I think it’s important to mention that after the last few years, coupled with “data” from corporate influenced sources, like Heritage Foundation, Freedomworks, Americans for prosperity and ALEC,, as well as doing my own research during the healthcare debacle and observing Fox Networks glaring lies and distortions (Lnntz coaching news staff on saying “government takeover” in place of “government option”), I absolutely do not trust any source that has proven to be influenced, funded or controlled by corporate or wealthy interests.

    This is the fundamental difference between Libertarians and Republicans

    To quote Milton Friedman -

    “We have been forgetting the basic truth that the greatest threat to human freedom is the concentration of power, whether in the hands of government or anyone else. We have persuaded ourselves that it is safe to grant power, provided it is for good reasons.”

    The highly sought after Libertarian/independent voter has been browbeaten with fear of “big government”, yet in reality, corporations exercise almost complete control over government, thereby putting corporations in place of government, this form of government is also known as Fascism.

    Milton would not have endorsed the idea of putting Dave & Charles Koch or Rupert Murdoch in place of our Constitutional Democracy.

  30. ToNYC says:

    @Petey Wheatstraw
    “Jeez. This is a clarion call for RICO Act prosecutions, and all we get is crickets chirping. Failure to prosecute known criminality is the failure of legitimate government.”

    Or the hallmark of a non-representative government of the people, not of the corporations.

    http://www.freespeechforpeople.org

    The 28th Amendment proposed.
    Take a look at the three Sections. I t looks like it was always there.

  31. flocktard says:

    In their quest to find villains, two factors have not been touched on:

    the same “bubble mentality” applied to commercial property as well as residential. Simply overlay the Moody’s Commercial Property Price Index on top of Case-Schiller. You will be hard pressed to find better correlation between two indexes of ANY kind.

    http://web.mit.edu/cre/research/credl/rca.html

    Secondly, while housing prices rose, and credit was being doled out, and wages remained stagnant, not ONE of the geniuses in the lending industry ever gave a single thought to the corrosive effect of increasing health insurance costs, which hit the middle class hard. From 2000 to 2008, insurance costs had essentially doubled.

    http://www.usatoday.com/money/industries/health/2009-09-15-insurance-costs_N.htm

    So while credit reports counted every dink Capital One credit card, and the lease on the Honda Civic, no one counted the greatest increase in fixed cost to the potential homeowner. And they still don’t.

    Shrewd, huh?

  32. Richard says:

    An interesting paper on the failure of Fannie and Freddie:
    http://moritzlaw.osu.edu/eblj/issues/volume5/number2/oesterle.pdf
    Mike Konczal’s article doesn’t mention Alt-A.
    BTW Didn’t Franklin Raines earn $90M at FNMA?

    ~~~

    BR: Raines was a jackass, Fannie and Freddie were dysfunctional, and never should have had Federal backing once they went public.

    But none of these are causal factors of the crash

  33. ElSid says:

    My simple retort to this GSEs-and-Congrees-did-it claim, which unbelievably I hardly ever see used is:

    “Then what caused the housing bubble in Ireland? Fannie Mae caused that? Liberal U.S. Congressional reps? What about the housing bubble in Spain? Or the current one in China? Or England?”

    Conversation ends right there. There is no other explanation needed and they *never* have an answer for it.

    I don’t see that above either.

    Also, Mr. Ritholtz hits on the real problem with Fannie above: they went public, and therefore had a profit motive competing with their original charter.

    Ask people how long Fannie existed before this, without creating any housing bubble, but all the time doing what it should to help millions of Americans, and they won’t know.

  34. Joe Friday says:

    Irwin,

    According to the National Housing Institute, in 2002 the GSE’s were purchasing as much as 70% of all the mortgage paper being written in the U.S.

    Eh, that was their JOB. What is it with people that are ignorant of the secondary market ?

    While the GSE’s did not participate in the initial growth of subprime in the early to mid 90′s, they started showing interest in it in the last 90′s. By 2000-2001, the GSE’s were already purchasing A-minus loans as a regular part of their business.

    As I previously posted, up and through 2000, HUD (Fannie & Freddie’s regulator) stated it would not credit them for loans they purchased that had abusively high costs or that were granted without regard to the borrower’s ability to repay.

    In 2001 the GSE’s market share for subprime loans grew by 74% alone, giving them over 11% of all the subprime market that year.

    Different administration. They didn’t believe in regulation.

    By 2002, they were on such a tear, that people estimated they would soon take over as much as 50% of the entire market.

    According to the Federal Reserve, almost 83% of the subprime loans to low-income and moderate-income borrowers were made by UNREGULATED PRIVATE LENDERS.

    As Fannie and Freddie got more aggressive, the private guys had to get even more aggressive to compete, which they did.

    Ass backwards.

    As I already posted, Chimpy Bush’s assistant HUD secretary, John C. Weicher, said that Fannie & Freddie lagged behind even the private market and “must do more.”

    Fannie and Freddie were just as culpable as the other securitizers

    The Federal Reserve data indicates otherwise.

  35. philipat says:

    The Government was to blame to the extent that their nonfeasance, purchased by the Corporatocracy and Wall Street, allowed it all to happen.

  36. philipat says:

    PS. Taibi nailed it in his RS Blog piece, using language we only wish we could use here. I hope someone knows Bloomberg;’s email address and sends a copy of both pieces to him. But, of course, he already knows the truth.

  37. budhak0n says:

    What casued the “financial” meltdown is the same thing that has been the living, breathing, heart and engine of America for over 2 centuries.

    Personal Greed. Only problem now is it got so large and so out of hand that people who had absolutely no idea how to play the game so to speak started getting in on the action.

    And then, suddenly, there was no class division. Just a large bunch of deadbeat clients

  38. Finster says:

    The truth is: Unfettered credit creation created this crisis. The ability of the banks to lend and their willingness to channel liquidity is destroying price discovery in sector after sector: First housing, now higher education.

    The FED funds rate is the moderation tool in this reactor, which has gone critical since Mr. Greenspan decided to remove all the control rods, becoming the academic parallel of the hapless engineer in Chernobyl.

    Now the inflation has happened in all areas of the economy targetted by inflationary credit creating (current target is funding of the Federal Government). The deflationary meltdown is to be staved off by putting on even more leverage, while money has lost its function as intermediator of scarce goods, while relative price levels break down.

  39. DeDude says:

    BusSchDean@3:40;

    I can understand if people who have little subject knowledge and no training in critical evaluation of sources and methods resort to judging a package by the color of the box. But it really is sad when academic faculty who has been trained for years and years in analysis and sorting out facts and methods within their specialty, resort to blanket labels and rejection of another specialist in their field. As an expert in a faculty position you are not only supposed to be able to make a logic argument for your opinion, you are supposed to change your opinion when you fail to have sufficient facts in support of it – not throw juvenile insults at the person presenting analysis and opinions you cannot refute. If there were something wrong with Stiglitz’s March essay that would have made it an even better teaching opportunity, letting students develop their ability to thing critically.

  40. UncleMilty says:

    Bloomberg, like most politicians, are in a box. They can’t blame the real culprits, the countless number of voters/borrowers who borrowed too much, built too big, and then couldn’t make their payments. Behind every bad loan is a bad borrower. This is no different than most other bubbles. Any analysis that doesn’t start with the borrowers and the cultural pressures to make bad financial choices is missing the big picture (pun intended).

    While the GSEs were not clearly the only cause of the crisis, they certainly made it worse. And the arguement in favor of them being the big cause is supported by the fact that many of the banks are paying TARP back while the GSEs are still taking money. That fact cannot be ignored, but it also confuses the issue as BR has pointed out time and time again.

  41. Joe Friday says:

    philipat,

    The Government was to blame to the extent that their nonfeasance, purchased by the Corporatocracy and Wall Street, allowed it all to happen.

    That would be a neat trick given that almost 83% of the subprime loans to low-income and moderate-income borrowers were made by UNREGULATED private lenders.

  42. Irwin Fletcher says:

    Joe Friday,

    In all due respect, I am afraid it is you that is ignorant of the secondary market. Your coomnts are too filled with ignorance to argue.
    The GSE’s were heavily involved in buying subprime paper all the way back to the year 2000. They are not just two other crappy banks. They have cheaper funds and can drive markets.

    By 2001 the GSE’s were the primary liquidity for ALT-A paper. That is a fact. ALT-A is a subprime product.
    How much more money did they just ask the taxpayers for just this past week?
    Billions.

  43. Frilton Miedman says:

    UncleMilty Says:
    November 6th, 2011 at 8:35 am
    ” Bloomberg, like most politicians, are in a box. They can’t blame the real culprits, the countless number of voters/borrowers who borrowed too much, built too big, and then couldn’t make their payments. Behind every bad loan is a bad borrower. This is no different than most other bubbles. ”

    You’ve entirely missed the point.

    The bad loans defaulting on their own would have been bad, yes, but the fraudulent ratings for MBS derivatives are what truly created the bubble. ( Goldman’s – “shitty deal”)

    One part of your argument is that even though a car dealer has knowingly sold a boatload of lemons en masse by lying about bad transmissions and engines with leaking rear main seals, it was the fault of buyers for not knowing how to look for those things or for trusting the sellers third party professional appraisal, therefore it’s justified for him to keep his commissions with no repercussions or legal/criminal penalty or fines.

    The big banks knew exactly what they were doing when they pushed sub-primes onto the public and encouraged liar loans for the sole purpose of packaging CDO’s, then lied about the value of the CDO’s and then sold them to the public. (not getting into AIG’s role on CDS’s, a whole new ballgame that now indirectly subsidizes all time record banking bonuses)

    If you disagree with this point and want to make the argument that the public had access to the fact that CDO’s were comprised of 90% liar loans, you lose.

    Kyle Bass has repeatedly discussed that the only reason he found out what CDO’s were comprised of, high risk no income liar loans, is because he accidentally met a man who packed them into CDO’s.

    Before he met that man, he couldn’t get the answer from anyone, not the banks, not the brokers, not the buyers or sellers of CDO’s…..EVERYONE took it on good faith that the ratings companies were honest & reputable.

    It was hidden from the public, banks were complicit and it made no difference to them, they were short CDO’s with NO disclosure while simultaneously pawning them as “triple A” to the public.

  44. [...] The financial background version: Hey Mayor Bloomberg! No, the GSEs Did Not Cause the Financial Meltdown (but thats just according to … [...]

  45. Futuredome says:

    Sorry Fletcher, but your dead wrong. Billions? That is chump change. They were not heavily involved with the Alt-A at all. Private markets gave trillions of dollars of Alt-A out since 2000. The GSE’s were the facade. The private capital owners want to do it again.

  46. Futuredome says:

    “The big banks knew exactly what they were doing when they pushed sub-primes onto the public and encouraged liar loans for the sole purpose of packaging CDO’s, then lied about the value of the CDO’s and then sold them to the public. (not getting into AIG’s role on CDS’s, a whole new ballgame that now indirectly subsidizes all time record banking bonuses)”

    Absolutely. The problem was the “bank” so much as the capital owners and bosses behind the “bank”. They wanted quick cash to make billions while knowing down the road, it would crash. Then either:
    1.Desperate politics bails out the corporation
    2.They liquidate their earnings and watch while it skyrocket in value during severe deflation and war

    People don’t get, especially market liberals: The US economy since 1980′s was mostly a credit driven mania(and the origin goes back to 1973). You “deflate” all that credit away, we have a vastly smaller economy. Worse than the great contraction of 29-33 and that was really one decade worth driven madness. That just doesn’t rebound. You aren’t in 3 years going to have some magical boom. Some areas may recover, but on the whole, alot of areas would never and would be way underdeveloped. Resources would become scarce and you would be living off the land and starving. The pols won’t like it and the capital owners knew it. So we had the bailouts. But even the capital owners know at some point, the full tide will pull out and the implosion will happen, setting the stage for a global war for scarce resources.

  47. Frilton Miedman says:

    Futuredome Says:
    November 6th, 2011 at 5:33 pm

    ” People don’t get, especially market liberals: ”

    I vehemently agree with all your points, but for the above statement I copied.

    For the record, Libertarian here, but not a corporatist zombie who buys the alignment of “corporate liberty” with “personal liberty” ….there is a difference, Koch industries is NOT a person, it is NOT their “first amendment right” to buy my government…..that falls under “bribery” as listed in the Constitution.

    Sources like Fox Network have turned attention away from mathematical reality and turned the entire debate into “Liberals did it”, this is where I disagree.

    Bernie Sanders is as far to the left as it gets, he has done more to exact the right change than any other politician in office, left, or right.

    I’m absolutely disgusted with the cherry-picked economic theory I continue to hear from the right, especially those who quote Milton F in convenient snippets to suit their agenda, yet obscure the rest of the given theory, same with the way they continually use Reagan as the reason for not increasing taxes, despite Reagan having increased taxes 11 times.

    Hearing Paul Ryan last year on CNBC cite Milton F’s “Permanent Income Hypothesis” as rationale to cut taxes on the wealthy was a perfect example of this ignorance combined with cherry picked theory, that specific theory discusses the effects of wealth disparity on per capita consumption, it would prove the exact opposite to what Ryan was inferring.

  48. philipat says:

    @Joe Friday

    So the SEC, FDIC etc had no influence? I guess not, which was, of course, my point.

  49. Joe Friday says:

    Irwin,

    In all due respect, I am afraid it is you that is ignorant of the secondary market.

    Obviously not.

    Your coomnts are too filled with ignorance to argue.

    Suuuuuure.

    The GSE’s were heavily involved in buying subprime paper all the way back to the year 2000.

    Once again, almost 83% of the subprime loans to low-income and moderate-income borrowers were made by UNREGULATED PRIVATE LENDERS.

  50. Joe Friday says:

    philipat,

    So the SEC, FDIC etc had no influence?

    Exactly what part of the fact that the PRIVATE LENDERS who wrote almost 83% of the subprime loans to low-income and moderate-income borrowers were NOT COVERED BY ANY REGULATIONS are you not comprehending ?

    Under what possible authority would you have had either the SEC or the FDIC act ???

  51. UncleMilty says:

    @ Frilton Miedman:

    …And you’ve missed my point.

    If everyone pays their mortgage, none of this matters. Even the crappiest product was backed by a borrower AND a house. If home values held steady, most of these products would have been OK. It’s easy to sit back now and say how this was all a scam, but it was not so obvious back then. A lot of local banks got killed too because they used real estate as collateral. A lot of families got in way over thier head. Bubbles do that.

    There were obviously some bad actors, but most people involved at the banks had no idea what was coming. If they did, they wouldn’t have lost so much money. Just look a stock chart for C, BOA, the GSEs, JMP, GS, and the rest of them. This was on purpose? A big scam? Really?

    Greedy home buyers created the bubble long before the evil bankers got involved, and when housing crashed, it took everything else with it.

    Your car dealer analogy has a big flaw. The buyers of these packaged loan products were investors, not Joe Six Pack buying a 2001 mini-van. You shouldn’t buy investments if you don’t understand what you’re buying. Anyone who knew housing would get whacked would not have bought these securities. It’s no different than the Internet bubble or the Tulip bubble or any of the others.

  52. Dr. Goose says:

    A party that needn’t be named
    Made GSEs chiefly to blame
    For the mortgage collapse,
    Though inquisitive chaps
    Say the data don’t back up this claim.

    http://www.limericksecon.com

  53. Frilton Miedman says:

    UncleMilty Says:
    November 6th, 2011 at 9:30 pm
    @ Frilton Miedman:

    ….. It’s easy to sit back now and say how this was all a scam, but it was not so obvious back then. A lot of local banks got killed too because they used real estate as collateral. A lot of families got in way over thier head. Bubbles do that.

    There were obviously some bad actors, but most people involved at the banks had no idea what was coming. If they did, they wouldn’t have lost so much money. Just look a stock chart for C, BOA, the GSEs, JMP, GS, and the rest of them. This was on purpose? A big scam? Really?

    Greedy home buyers created the bubble long before the evil bankers got involved, and when housing crashed, it took everything else with it.

    Your car dealer analogy has a big flaw. The buyers of these packaged loan products were investors, not Joe Six Pack buying a 2001 mini-van” ”

    If you’re right and no one knew, fine, but just because that car dealer didn’t know the car engine was going to blow due to a rear main leak doesn’t exempt him from the fact, however, in the case of the banks, they knew at the top but also amongst the ranks there was a lot of chatter (as exemplified in the “shitty deal” Email and others).

    The entire premise is in self regulation, the removal of Glass-Steagall and creation of the CFMA.

    If you want to invoke “Uncle Milt’s” name, wrong, he was averse to technical monopolies and the concentration of power (not just in government), his name has become the misused mantra for the rise of corporatism.

    When you can, look online for Dave Faber’s “House of Cards” documentary from CNBC, he interviews people at all levels, from a home buyer who could barely speak English all the way up to Greenspans acknowledgement that he was mistaken to go the “free market” route when CDO’s first hit his radar.

    You’ll walk away from one interview with a derivatives broker with an entirely different opinion on whether the big banks knew, they did, this guy not only admits to it, but openly discusses how he was constantly calling mortgage brokers and R.E. agents to push them for a many bad loans as possible because the big banks were calling him for more, regardless of quality.

    That’s fraud, I don’t care how you try to spin it, or what Nobel prize winning economists name you attach to it.

    Kyle Bass also discusses how the contents of CDO’s were hidden, so well that even banking executives couldn’t answer his questions, everyone was taking Moody’s and S&P at their word and the banks were paying them to lie About those ratings.

    Your premise that it was the buyers fault is the same as telling a car buyer it’s their fault the dealer lied About the leaking rear main seal and simply taking the word of the dealer’s third party appraisal service.

    Fraud is fraud, period.

  54. [...] article was sparked off by Mayor Bloomberg’s comments on Friday in which the Mayor parroted the Fox talking points saying: “It was not the banks that created the [...]