I am please to report that calling out the Big Lie has now gone fully mainstream.

Recall last month, I had two Big Lie columns in the Washington Post:

What caused the financial crisis? The Big Lie goes viral.

Examining the big lie: How the facts of the economic crisis stack up

The first column was the most popular article on WashingtonPost.com for a full week. It generated nearly 1845 comments.

Since then, both Bloomberg.com and Reuters each have picked up the Big Lie theme. (Columbia Journalism Review as well).  In today’s NYT, Joe Nocera does too, once again calling out those who are pushing the false narrative for political or ideological reasons in a column simply called “The Big Lie“.

Nocera details exactly how its done:

“So this is how the Big Lie works.

You begin with a hypothesis that has a certain surface plausibility. You find an ally whose background suggests that he’s an “expert”; out of thin air, he devises “data.” You write articles in sympathetic publications, repeating the data endlessly; in time, some of these publications make your cause their own. Like-minded congressmen pick up your mantra and invite you to testify at hearings.

You’re chosen for an investigative panel related to your topic. When other panel members, after inspecting your evidence, reject your thesis, you claim that they did so for ideological reasons. This, too, is repeated by your allies. Soon, the echo chamber you created drowns out dissenting views; even presidential candidates begin repeating the Big Lie.

Thus has Peter Wallison, a resident scholar at the American Enterprise Institute, and a former member of the Financial Crisis Inquiry Commission, almost single-handedly created the myth that Fannie Mae and Freddie Mac caused the financial crisis. His partner in crime is another A.E.I. scholar, Edward Pinto, who a very long time ago was Fannie’s chief credit officer.”

Longstanding readers of TBP may recall the genesis of my interest in this:  When I was writing Bailout Nation, I did lots and lots of research into exactly what it was that led to the housing boom and bust, the stock market crash, and the Great Recession.

The answer was “its complicated.” There were many many factors, lots of bad ideas, plenty of poor judgement all around.

I summarized these into 7 broad categories. The incomparable Jess Bachman (of Wall Stats) created this fantastic graphic that is the centerfold of the book:

>

anatomy-of-a-crash

>

The perpetrators of the big lie all have something to hide. Whether they voted for more deregulation or passed the ridiculous the CFMA or supported the repeal of Glass Steagall or cheered Alan Greenspan’s monetary policy, the Big Lie supporters all bear some resposibility.

In the case of Peter Wallison, he was the Co-director of AEI’s financial market deregulation project. That was scrubbed from his AEI bio.

Ed Pinto has taken a different approach to trying to deflect the blame from the blameworthy. He has continually thrown shit against the barn wall to see what will stick. Originally, it was the fault of the CRA. When that argument failed, he blamed Acorn.  And now its the GSEs. Wallison and Pinto have had their greatest success with this — its now a talking point amongst many of the GOP contenders for the Republican niomination for President.

~~~

With this post, we move Peter Wallison an Edward Edward Pinto into the UnGuru category, where they can join the likes of Ben Stein, Elaine Garzerelli and Meredith Whitney as “Ungurus.” All posts that prominently mention these people include the category Unguru.

>

Source:
The Big Lie
Joe Nocera
NYT, December 23, 2011  
http://www.nytimes.com/2011/12/24/opinion/nocera-the-big-lie.html

Category: Bailout Nation, Bailouts, Really, really bad calls, UnGuru

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 “NYTimes Takes on “The Big Lie””

  1. PeterR says:

    Well done, Barry.

    Thank you for everything you do, and do so well.

    Peace on Earth

  2. flocktard says:

    And to think this theme all started with my tweet to Barry on October 27th:

    bluemax @flocktard 27 Oct Reply Delete Favorite · Open

    @ritholtz @CNBC Re GSEs: the Greatest Lie of our Times. The “Big Lie” technique, rent large.

    Its like Tahrir Square except the American Enterprise Institute is like Mubarak. Well, sorta……

  3. mmeir says:

    I think what you’ve done thus far is commendable. All the best in the New Year.

  4. Edoc says:

    Thank you Barry. You have made progress where I thought it was futile. So now we can see that inroads have been made among those persuaded by actual facts– sadly, that’s still a minority of people. Kudos nonetheless!

  5. Another comparable paradox (file under: The Emperor has no clothes…and is one ugly sucker too)

    TSA security measures are mostly useless, expensive theater

    Smoke Screening

    As you stand in endless lines this holiday season, here’s a comforting thought: all those security measures accomplish nothing, at enormous cost. That’s the conclusion of Charles C. Mann, who put the T.S.A. to the test with the help of one of America’s top security experts………… (cont)

    http://www.vanityfair.com/culture/features/2011/12/tsa-insanity-201112

    Btw as a contract pilot, I am THANKFULL for DHS/TSA’s approaches to increase awareness of those with
    the re$ource$ to get ‘off the fence’ and into private aircraft ownership/operations. Let the sheeple experience
    ‘deep cavity’ searches as a part/parcel of feeling “safe/secure” which is an illusion.

    Happy Holidays to all…and THANK YOU Senor Barry for your shining beacon of light/truth amidst all the MSM
    horses#it that is fed to the Sheeple.

  6. Sechel says:

    I wonder if we’re so focused on the last crisis that we’re not even looking for the next one. Derivative based ETF’s continue to grow and grow. Are these not the long to some hedge fund or Wall Street short? I never hear talk of counter-party risk either, but surely it must be there.

  7. Bill Wilson says:

    Under Ideology, I would add the “ownership society” mentality that was adopted by both conservatives and liberals. Certainly, the failure to regulate was caused by too much faith in free markets, but there was also too much faith in home ownership. In 2006, it was sacrilegious to suggest that anyone should be denied a mortgage. I remember hearing an interview with an executive from Freddie Mac where she described the lending practices of 2005 as the democratization of credit. Credit is not a democracy. In order to have affordable housing some borrowers need to be told no. If the government wants housing to be affordable, it should promote the building of affordable housing.

    ~~~

    BR: You can add that, but then you would be contributing to the data free, gut feel, pet peeve approach that the Big Lie in large part relies upon.

    There is simply no data that supports the “pro homeowner” philosophy/regulations/legislation as significant cause of the crisis.

    I would also suggest that the “ownership society” is another word for Capitalism — and as it applies to Housing dates all the back to the end of WW2 (if not further).

    Until I see convincing evidence that this contributed to the crisis, its merely another misguided argument — a corollary to the BIG LIE.

  8. FNG says:

    Merry Christmas Barry to you, your wife and all your staff at TBP and Fusion!

    I sincerely hope that you have a most happy and profitable New Year!

    Never Give Up, Never Surrender!

    Semper Fi!

  9. bobmitchell says:

    Fraud? Lots of data on that one.

  10. jnkowens says:

    Just want to echo the thank you’s expressed by others here for your commitment to the truth, Barry. This is one of my “go to” sites (along with Hussman, Mauldin, Grantham) because truth, not politics, is paramount. Happy Holidays and all the best in 2012!

  11. teraflop says:

    Hats off, great article.

    Where were all these geniuses as the crisis started years ago? I remember very few, Barry was among them, who was sounding alerts back in 2003-2004. In example, a certain high-end home builder burying discounts as appliance give-aways and upgrades.

    Anyways, love reading ‘em, even if they exhibit mad 20/20 skills. Am in the middle of Extreme Money then Currency Wars.

  12. Sechel says:

    It may be anecdotal, but everyone I know that got excited about Manhattan Condos cited the 250k/500k capital gains exclusion and even planned their next purchases and sales around it. It was seen as giving housing the edge over stocks or bonds. Are you serious? No evidence to support this?

    ~~~

    BR: How do you square that with 50 years of tax and policy support for home ownership and no crisis? What was it that changed in 2000-07 ?

  13. mitchw says:

    Let’s hope that Mayor Bloomberg, should he choose to run for President as a third party candidate, will be followed around by his attempt to blame congress rather than the banks for the crisis.

    http://www.politico.com/news/stories/1111/67340.html

    ~~~

    BR: Insiders say he cannot get work around Electoral college

  14. ToNYC says:

    “ownership society”

    Another big idea to build the sponge of debt=credit ever larger, syndicating the future promises to others while land-sharking the present cash value for self.
    They Shoot Horses Don’t They?

    Enjoy the the growing light of awakening on this special Winter Solstice.

  15. Bill Wilson says:

    Regarding housing, where is the data that supports the idea that “anti-regulatory zealots” are the reason that a free for all in lending was allowed. Sure, there was plenty of rhetoric, but there was plenty of “ownership society” rhetoric. Why didn’t the government crackdown on down payment schemes and other practices.

    And we will have to agree to disagree on the idea that the view of home ownership was consistent from WWII to 2007. Owning a house has always been viewed as a positive thing, but there was an understanding that it’s a privilege for those who can afford it. I doubt very seriously that a corporate officer at Freddie Mac would have talked about the “democratization of credit” in 1957.

    I think the top of a credit cycle is typically fueled by magical thinking. It’s magical thinking to think that markets don’t need to be regulated. It’s also magical thinking to think that credit can be democratized, and borrowers can decide their ultimate credit limit.

    Unfortunately, these magical ideas have not gone away. At the recent Republican debate, there was still plenty of talk about “deregulating are way to prosperity.” I still here housing industry groups wanting looser standards at our GSEs.

  16. leveut says:

    Hail Ritholtzia

    It seems odd that there was nothing worth charting before 2000, and only a few arrows were even worth mentioning. It is disappointing that Gretchen Morgenson’s book is fantasy.

    Ah well, history started when Geo W Bush began running for president.

    Hail Ritholtzia.

    Merry Christmas.

  17. Winston Munn says:

    “….an executive from Freddie Mac….described the lending practices of 2005 as the democratization of credit.”

    It is common for executives to create a narrative after-the-fact in order to justify actions already undertaken. It simply wouldn’t have done to say, “Well, we are losing too much market share and we feel that we have to dive into this junk with both feet.”

  18. formerlawyer says:

    @Bill Wilson & ToNYC

    Then how come Canada has a comparable home ownership ratio with their stricter mortgage rules and no mortgage deduction?
    (ditto Belgium, Ireland, Norway, Spain, United Kingdom, Israel)

    How come home ownership ratios have only changed within a narrow band since the 60′s?
    http://en.wikipedia.org/wiki/Homeownership_in_the_United_States#International_Comparison

    Btw Wikipedia has a perhaps more “balanced” assessment -read gentle- of the Big Lie at:
    http://en.wikipedia.org/wiki/Government_policies_and_the_subprime_mortgage_crisis

    (yes I know wikipedia is not authoritative but this was the best I could do with the Christmas rush)

  19. Bill Wilson says:

    formerlawyer,

    This is a nice chart by calculated risk that shows the recent home ownership rate in the United States. I would argue that it increased too much too fast during the housing bubble, and is back to a more sustainable range.

    http://www.calculatedriskblog.com/2011/11/hvs-q3-homeownership-and-vacancy-rates.html

    Don’t get me wrong. I have no problem with a high home ownership rate, or with the government promoting home affordability. Although I think there will always be some people who are better off renting. My problem is with the idea that home affordability should be promoted with lax lending standards. If we want to promote home ownership, it’s my belief that we should build housing that people can afford. I don’t know anything about Canada’s housing market, but the fact that their home ownership rate is the same as ours does not mean that they are borrowing beyond their means.

    I also don’t have a problem with regulation. I am a believer in it. I am only arguing that lax regulation of mortgage practices contributed to the financial crisis. Was that partly due to disciples of Ayn Rand promoting an environment of zero regulation? I think so. But, I also believe is was partly due to a well meaning but foolish belief in things like the “ownership society” and the “democratization of credit.”

    BR says that I have a pet peeve on this issue. He is correct. Just because it’s a pet peeve that doesn’t mean it’s wrong.

    I think we should build more of what people can afford, not lend more to people who can’t afford. I point to this study as evidence.

    http://www.comteam.org/news_zoning.htm

    Just like you, I need to get to the business of the holidays. I wish you a Merry Christmas or a Happy Holidays. Whichever you prefer.

  20. [...] ★ NYTimes: How the Big Lie works. (More) [...]

  21. DogBreath says:

    Interesting graphic, but it totally ignores any direct culpability of the government. Without this recognition, it leads the viewer to think that all these “causes” sorta happened all by themselves.

    ~~~

    BR: The government is specifically named in several places:
    1. The Fed’s ultra low rates
    2. Radical deregulatory legislation by Congress
    3. SEC, OCC others

    I detail all manner of government error in Bailout Nation

  22. JasonPappas says:

    Gretchen Morgenson also argues that FNMA led the way to loose lending standards. Can we ignore the role played by both the GSEs and private mortgage players in the origination and underwriting of mortgages without adequate downpayment?

    ~~~

    BR: We can look at the data and find a causative relationship or not. Until 2005, GSEs could only buy conforming mortgages. They REQUIRED a down payment, income and credit check. THE PRIVATE SECTOR DID NOT

    Gretchen’s co-author is Josh Rosner ( a buddy of mine), a good bank analyst but someone who has had a bug up his arse about GSEs for a decade

  23. Bill Wilson says:

    Oops, I wrote something about what a Freddie Mac executive would have said in 1957. Freddie Mac did not exist then.

    My point was that our attitude towards who is credit worthy got out of control during the housing bubble. The government has had an home interest deduction for years, but that doesn’t allow people to borrow beyond their means. Also, the GSEs have a legitimate mission of providing liquidity for fixed rate mortgages. That mission can still be accomplished without letting lending standards slide.

    Happy Holidays.

    ~~~

    BR: As the data overwhelming shows, the credit standards were dropped initially by private non bank mortgage underwriters to feed the Wall Street securitization demand.

  24. LifeOnMars says:

    “As the data overwhelming shows, the credit standards were dropped initially by private non bank mortgage underwriters to feed the Wall Street securitization demand.”

    Yes, credit standards were dropped by *both* CRA and non-CRA lenders for the following reasons:

    1) Accounting Control Fraud. Bank executives understand that the more loans they make, the larger their bonuses will be. If they can sell off these loans with no recourse, so much the better. (William Black, who was attacked by the Reagan administration for trying to bring the S&L criminals to justice, has been harping about this for over a generation now; perhaps it’s time we listened to him?) Accounting Control Fraud, in turn, drove the following government policy embraced by the Clinton and Bush administrations as well as Congress …

    2) Homeownership Ideology. The DOJ, under Bill Clinton’s authorization and Janet Reno’s direction, filed suit against significant numbers of lenders, accusing all of discriminatory lending practices. After quickly “thinking things over,” these banks decided to lower their standards (and make more loans, and collect more bonuses) rather than fight the deep pockets of the Justice Dept. Numerous other mandates came down from various government agencies promoting these ideological goals, including quotas. Roberta Achtenberg, Assistant Secretary of HUD under Clinton, summed up the moral imperative pretty well: “Fair housing has been the last *civil right* to be recognized and the most difficult to secure.”

    Quotas for loans to “discriminated borrowers” were initially established under Henry Cisneros, Clinton’s first HUD director, and then increased under Andrew Cuomo, Cisnero’s replacement. Clinton created the Fair Housing Council to promulgate these new lending laws; their first “voluntary” agreement was with Countrywide. (When Cisnero left HUD, he joined the board of Countrywide.)

    The Homeownership Ideology led directly to the following disastrous outcomes:

    A) Any fool that could fog a mirror was given a loan

    B) LTV rates ratched up towards 100% as loans became more “innovative”

    C) Regulatory oversight was eliminated. Rather than emphasize sound lending practices, lenders were chastised if they weren’t bending over backwards to hand out money irresponsibly:

    “Under the outstanding leadership of Mr. Frank Raines,
    everything in the 1992 Act has worked just fine. In fact, the
    GSEs have exceeded their housing goals. What we need to do
    today is to focus on the *regulator,* and this must be done in a
    manner so as not to impede the affordable housing mission — a
    mission that has seen innovation flourish from Desktop
    Underwriting to 100% [Loan-to-Value] loans.”
    [Rep. Maxine Waters, Dem - Los Angeles, CA, 2003]

    I fail to understand how you can say that the effect of these programs was insignificant.

    Was Greenspan culpable for keeping rates absurdly low? Yes. Were the ratings agencies operating under a gross conflict of interest? Absolutely. Did the large investment firms knowingly sell toxic assets to pension funds and operate under the assumption that they would get bailed out if they went bust? Most likely. Do we still have a disaster waiting in the wings in the form of unregulated CDSes? You bet.

    But none of this absolves the complicity of those who set national policy during all this time.

    While it may be difficult to quantify the effect of the Homeownership Ideology on the total cost of the crisis, I cannot believe that its effect is zero. Further, I would challenge anyone who says it *is* zero to explicitly quantify the effects of the reasons they *do* attribute to the crisis (Greenspan, Ratings Agencies, et al.).

    The argument has also been made that since there was a housing meltdown in foreign countries, policy decisions made by the US government can be dismissed. I disagree, for the simple reason that the US holds no monopoly on the ability for bankers to distort local government policy for their own benefit. Indeed, the corruption that occurs in Washington is most likely a far cry from what goes on abroad.

    I think it is more beneficial to study markets such as Canada’s, where housing prices have swelled — but not collapsed — and ask “What’s Different?” Could it be higher LTV ratios? Higher credit standards? Honest regulators? Less Accounting Control Fraud?

    Yes, there were many factors that contributed to the meltdown. I say that the “Homeownership Ideology” played a non-trivial role in furthering bankers’ interests at the ultimate expense of the taxpayer. Was it a primary cause? No. But a factor? Yes.

    And it’s still alive and kicking.

    So … am I lying?

    ~~~

    BR: No, you are telling a narrative, one that is not backed up by data — such as the volume and timing of non-bank underwriting and iBank securitization. And you have focused on the wrong govt policies, not the ones that can be shown to be factual causative y data.

    Some context about the facts you cite:

    1. The Homeownership Ideology (some call that capitalism) has been around for almost a century — at least since WW2. Yet it was never problematic prior. Why?

    2. Maxine Waters — a junior House member from a party out of from 1994 to 2006 — what influence did she have in 2003?

    3. The non conforming, 100% LTV mortgages were written in overwhelming numbers by non banks pursuing profit, not in response to policy or memos or out of power pols.

    4. The GSE purcgased mortgages defaulted in substantially lower numbers than the average; much lower than the private sector non banks. CRA loans at an even lower rate.

    You appear to be constructing a narrative that comports with your prior belief system — despite overwhelming data against your views,

  25. Bill777 says:

    Enjoyed the graphic until reading the last line “Behavior economics reveals traditional economics – Humans are rational, markets are efficient – is terribly wrong.”

    (To assess how blameworthy any factor is regarding the cause of a subsequent event, consider whether that element was 1) proximate 2) statistically valid 3) necessary and sufficient.)

    Not sure I see any evidence to support this statement. As your research clearly shows, certain deregulation in the US led to the collapse. However, this research does little to contrast ‘behavioral’ economics from ‘traditional’ economics. Hopefully, your superb research is not hijacked to create a different ‘Big Lie’ espoused by others.

  26. JasonPappas says:

    BR, you point out that private institutions were able to underwrite no-down payment loans even before 2005. Do I understand that you do consider inadequate down-payments part of the problem? That was my main point–not which institution was worse at reducing the down-payment below the standard of 20%, the traditional level for adequate equity. I’d like to know your view: was inadequate equity a substantial part of the problem?

    ~~~

    BR: In my research, I followed the trail — from ultra low rates, to AAA rated securitized mortgages, to the demand for higher yielding paper, to the abdicatyion of lending standards.

    When researching BN, I was seeking to determine exactly what happened, who did what, and when.

    Once you review the data, dollar, timeline, origination sources, default rates, etc., what ACTUALLY happened becomes obvious — and these false narratives are also apparent.

  27. ToNYC says:

    “Any fool that could fog a mirror was given a loan”
    The Housing Bubble was the Greenspan-led, Federal Reserve-blessed policy to prove unlimited growth was the answer to prosperity. The boomer, multiple-choice educated culture, ate up the best choices available while the 7-generation thinking and sustainable people resolutely sat on the curb, saving for their hope of Independence and Freedom here in the rule of law US and protector of intellectual property.
    Were this Housing Bubble to have proceeded unabated, we would have run out of warm bodies to sign and slowly at first, invented fake people and invested such debt-based credit and figured out who was going to grab that pile on the way to fake heaven swimming in junk on earth.
    Enjoy the happiness of the Sun appearing higher on the horizon as we get more light for the next half-rotation. Most people notice it about 3 or 4 days later, so it’s been going.

  28. DeDude says:

    I think the ownership society is as old as this country. Owning has always been a religion here in the US. If anybody thinks that people suddenly flocked to this idea of owning because the President and Congress critters were promoting it, then I have a bridge to sell them (real cheap, time share and all). The increase in home ownership was a direct result of innovative new financial products that allowed lenders to earn money on selling loans to people who could not afford them. They found a way to give people what they always had wanted and to cheat them into thinking that they actually would become owners (when reality was that they were destined to lose their home and down payment)

  29. cyaker says:

    Isn’t it amazing how McCarthy’s heirs have adopted Lenin’s truths

  30. parlor_tricks says:

    Hey Barry, that’s a great infographic, have you thought about releasing it on a creative commons licence or something? The best counter argument to the big lie can start from just showing that to people who haven’t read your book.

    ~~~

    BR: Ahhh, when you sell a book tot he publisher, you are giving the copyright for the material to them.

    What i would love to do is one of the RSA animated videos on the crisis itself.

  31. DeDude says:

    In seeking the truths we are constantly spoiled by our own brains. Humans like to quickly obtain an understanding of a situation. We also prefer simple linear paradigms where a single thing causes something that causes something, etc. So the people who are selling narratives that are simple and sounds right (because they are in harmony with our basic ideology), have a quick sell. After that it is human nature to ignore things that challenge our “knowledge” and to put excessive weight on things that support what we “know”. And the more complicated the issue the easier that selection process becomes.

    A true understanding of the economic crisis is up against all of that. No wonder that the big lies are having a field day within this subject. A true understanding of the causes of the economic crisis requires that you master things like multivariate analysis and how a large number of systems malfunctioned and affected each other. The minute you begin to talk about such complicated interacting “interactions” of systems, most peoples eyes glace over and they are ready to be saved by someone who have a simple explanation about how this is all the fault of their “favorite villain”.

  32. JasonPappas says:

    I fully respect your rejection of the single-cause theory. I emphatically agree with your criticism of the Fed’s easy money policy–and, of course, rating agencies, SIVs, high leverage, etc. I’m not quite clear if you agree with me that inadequate downpayment is a major part (not the only factor) of the problem. Do you think that there would have been a bubble with mandatory 20% down payments?

    ~~~

    BR: The no doc, no money down, no income check, no credit check was a huge part of the problem. We are in agreement on the abdication of lending standards by non banks private underwriters — the “lend-to-sell-to-Wall-Street-Securitizers — who were the original culprits here.

    What I am pushing back against is the false claim that “Congress that made Fannie/Freddie buy up all these junk loans.” THAT IS THE FALSITY HERE.

  33. Sechel says:

    From 2000 on Fannie & Freddie were in a unique position to notice the increased use of thinly capitalized mortgage insurers & piggy back seconds to make the first lien work. It was clear as early as then that mortgage underwriting standards were deteriorating.

    ~~~

    BR: Actually, that is incorrect, and you are merely repeating another false narrative, belied by facts.

    As the data overwhelmingly shows, it was the non banks — who has nothing to do with F&F — who started the ball rolling and then blew it up. Recall GSEs were private, non govt firms then — they could not have done anything about these competitors, underwriting mortgages to sell not to the GSEs but to Wall Street. Even Greenspan said to leave these “Innovators” alone.

    Underwriting standards began to deteriorate in earnest around 2002 — increased in 03, and then really surged in 04 — art least based on the foreclosure data we have. The rise of no income no docs really blew up in 04 as well.

  34. VennData says:

    I like moniker, “The Big Lie” After all, the ‘Ownership Society’ was really about Lebensraum.

    Sieg Heil

  35. hue says:

    As an mortgage originator during the mania, 2003-2006, no Fannie or Freddie loans allowed piggy back seconds up to 95 or 100 LTV. If they did, your credit score was very high, above 720 and you needed a lot of assets. The high LTV piggy backs were at subprime lenders like New Century or LongBeach, Wamu’s subprime arms, most of those lenders blew up in 2006. For A-paper at high LTV, CWide, Chase, GMAC mimicked Fannie’s underwriting engine and sold those loans to IBanks, not GSEs. A high LTV loan that was not approved at Fannie’s underwriting software, could be approved at places like CWide etc.

    We did very few Freddie loans, the underwriting engine was too strict, and underwriting took too long.

    Also many of the loans were in Florida and California and the loan values were over the conforming limit, which eventually went up to $417,ooo. I’m sure those jumbo loans blew up everywhere, and the GSEs had no hand in that.

    The borrower’s color of skin had no impact. We didn’t care if they were black, yellow, white or green. Most of my borrowers were white, middle class, some making six figures and didn’t have two nickels to rub together. I had a colonel who worked in the Pentagon very close under Rumsfeld in 2006. He needed to get a second mortgage to pay for college tuition, I can’t recall for sure what the money was for. Because he work for the gov’t and lived in a $800K house in Northern Virginia, his debt to income ratio was around 60% . DTI is measured by gross, not net income. We shopped and shopped but no one would do that second even with his 750 fico score.

    Most of the loans now are going to FHA, which is not equipped to handle to volume. FHA will be the next trouble spot.

  36. JasonPappas says:

    Thanks for you thoughtful response. Of course “no money down” was the most risky but 3.5% down is still a far cry from 20% down. While the zero downpayment loans were the extreme example, both private and governmental sponsored entities slowly dropped the standard 20% down starting in the 1990s. Government regulators and congress did push for that move; but I totally agree with you that Fannie and Freddie willingly embraced loose underwriting standards and even took it a step further. Remember that Fannie was no longer just an insurer of securitized products but ran a large and highly leveraged proprietary book funded at sub-Libor. It was the world’s largest hedge fund!

  37. JasonPappas

    There were a handful of 5% or less programs — some for Veterans, others for test runs in small areas. But the majority of loans bought by F&F were by design “conforming mortgages.”

    BTW, I am no apologist for the GSEs — We were very publicly short the stock of F&F before the collapse, and have been critics of the nationalized GSEs as backdoor bailouts for the major banks under both Bush (and even more) under Obama.

    I just want people to focus on the actual causation, and not their pet political or ideological peeves . . .

  38. victor says:

    Here’s an (incomplete) list of current Big Lies we run across almost daily; interestingly, some of the below listed Big Lies are routinely confronted by counter Big Lies and so, the beat goes on….

    1) The Holocaust didn’t happen

    2) Climate Change is fantasy

    3) China’s “State Capitalism” is superior to our Capitalism (as crony as it is)

    4) The plight of our inner cities is due to not enough funding

    5) The oil companies are price makers

    6) The oil companies pay no taxes

    7) Poor people don’t pay taxes

    8) Teachers (not parents) are to blame for poor education in the US

    9) Flat tax is the best way to reform taxation

    10) Illegal immigrants are root cause of bad economy

    11) Universal health care is best for the US

    12) China’s currency manipulation is root cause for our trade deficit

    13) Shale gas production via fracking damages the environment

    14) Keystone pipeline is bad for the aquifer

    15) US Government is broke

  39. parlor_tricks says:

    @BR.
    Ah, should have considered that the copyright was theirs now. My bad. Perhaps an update of the pic?

    The animation idea is great! That would make it to any top 10 list of presents for the coming year. Your commentary demolishing the lie step by step. It would help a lot of people from being lied to; and with the OWS protests, people are willing to pay attention. Hah, maybe the wapo guys would be happy to help out on this.

    Definitely would love to see it.

  40. DeDude says:

    Thanks Hue (@ 2:09PM,

    If loans rejected by the Fannie underwriting program, could be approved by the other private sector players, then it is pretty clear who drove the underwriting standards lower. Sorry F&F haters the GSE’s were chasing the private players lower because they were losing market share – and that is a fact.

  41. [...] and political messaging in particular doesn’t do complicated.  Thankfully Ritholtz also includes in his post the fold out graphic from Bailout Nation of all the contributors to the Financial [...]

  42. dienerdan says:

    Great article! … But -

    Is the total avoidance of mentioning MERSCorp (even in the comments) an absolution of part MERS played in this now-developing scandal?

    What would be the extent of the entire financial crisis if this quasi-government, quasi-bank, quasi-title insurance, quasi-legal entity…. this “deal making vehicle” embraced by our elected officials was not available to help Wall Street and the “others” create the Fraudclousure/Ponzi Fiasco that is now clouding the titles of millions of homeowners in every land records office of every state in our nation?

    Just asking.

    What law firm wrote the “legal opinion” that “blessed” the MERS business model… and what current office-holders were intimately involved

  43. AtlasRocked says:

    Maybe if you had a daughter that was coerced into $70,000 worth of college loans for an art degree, you would be a little more inclined to believe that government coercion in the home loan market played a bit more of a role, and it’s not a “lie” if someone disagrees with you, it’s just a different perspective.

    Coercion is much more insidious and ubiquitous than you admit, Barry. Once the government sends a message that it’s ok to get away with criminal activity, like when Clinton allowed the merger at Traveler’s BEFORE Glass-Steagall was repealed, the message to the private sector is – run, Forrest, run. It’s all bundled together. Us folks that are more upset with the government don’t believe the gov’t is solely at fault, we want the gov’t out of the coercion business, because Mr. Coercion and Mr. Regulation can’t be reporting to the same boss.

    These kinds of narratives, where you call others liars when they disagree with you, just sends the national conversation off into a completely wrong direction, BR.

    We need to prosecute the list of actors in the FCIC report, and do so assertively. With each moment that passes, a real lie – that a group of disparaged citizens, the 1%, caused the crisis instead, of mass lawbreaking, and bad policy choices, that lie gets more agreed to every day. Obama is a victim, a victim of the Bush policies, a victim of lobbyists and the 1%. On the current path, we’ll re-elect the Obama administration and nothing will change – no prosecutions, no re-do on Dodd Frank, no Glass Steagall, no adherance of the Social Security and medicare “mandatory” programs into Standard Accounting Practices. Hidden books for our most important benefit programs for the 99% – while the 99% complain about Wall Street being crooked.

    ~~~

    BR: Ahhh, now I have figured you out — it took a while, but I failed to consider one thing — YOUR OWN REFUSAL to accept responsibility for bad behaviors.

    You aren’t a Libertarian at all — you are a BLAME EVERYONE ELSE FOR YOUR BAD DECISIONS. I was fooled by your AtlasRocked handle.

    YOUR DAUGHTER WAS COERCED TO BE AN ART MAJOR? Now I get it — it was Picasso and DaVinci and Van Gogh’s fault — these artists are the Fannie & Freddie of overleveraged art graduates everywhere!

    I want to be angry at you, but I cannot — i am more saddened and embarrassed or you by your foibles. There are some people who lie to others to obtain gains; You lie to YOURSELF to avoid responsibility for your own bad decision making.

    #GIANTFAIL

  44. AtlasRocked says:

    Sorry, BR, but myself and my ex-wife repeatedly tried to tell her not to borrow this kind of money. She’s a huge Obama fan, and she trusted the loaners more than she trusted her mother and father. I offered to pay for her whole college costs if she lived in inexpensive student housing on campus, and gave up her car. Full ride, but a cheap ride.

    You just made the cockamamie argument that I am not a responsible person because my daughter refused to listen to me or her mother.

    I don’t need to call you a liar or use false logic to attack ideas, BR.

    ~~~

    BR: You rationalized your daughter’s decisions, blaming everyone but the decision-maker. You wrote “daughter that was coerced into $70,000 worth of college loans” — that was an economic choice she made.

    Perhaps you might be happier in a system where college is paid for by the state . . .

  45. AtlasRocked says:

    Blaming her does no good, Barry. She is stuck with the loans. She will probably never make the salary to pay those back, she’s just not a business person, she doesn’t care about money. It is a tragedy. Like Greenspan making rates too low and coercing unwary buyers, the college loan business is doing the same thing. Look up the loan data the fed publishes. The total of loans graph was nearly vertical the last time I looked. Kids are borrowing money to party their way through college while the economy is slack. And the jobs are not there for them when they get out.

    Why do you think loan forgiveness is near the top of the OWS’ list?

    My daughter is not capable of making rational decision on borrowing money, BR. Now she can’t get out from under those loans via bankruptcy, she can’t even find a job using her skills, and she’s getting madder at the world day by day, she views herself as a victim.

    Mr. Coercion and Mr. Regulator can’t be on the same team.

    ~~~

    BR: And what of Mr. Free Will ?

  46. AtlasRocked says:

    The government guarantees those loans, Barry. The loaner is making the loans without risk. The bank can take a young, unwary student and tell them it’s ok to borrow this fantastic amount of money without fearing of losing the repayment.

    You talk up a great story about regulation sometimes, now you miss the connection that the loan guarantors, the government, employs the teachers that are getting the benefits from this loans, and miss that a low aged, innocent young life has been coerced into an unpayable loan. An unforgivable loan.

    I cry at night about this choice she made, Barry. You could be speaking out against this unbalanced system. The loaners have to see the risk in all loans, or they’ll loan without fear right?

  47. stadtgeist says:

    Mr. Ritholtz,

    One of the most interesting explanations of the crisis I have seen is a 10 minute RSA animated video by David Harvey on the “crises of capitalism”. The RSA videos are fun to watch and it would be great to see one based on your work. Reading the comments/analysis here in the thread brings up a question related to the “ownership society” factor and the cultural aspects of the recent crisis in general. I’ll put the question out there and then provide a little background because in my experience, Harvey isn’t exactly the most popular author.

    If one were to try to design an analysis to determine if/how the ownership factor played a role, what would it look like? I ask this because in your WaPo follow-up to the Big Lie states:

    “It is highly unlikely that a simultaneous boom and bust everywhere else in the world was caused by one set of factors (ultra-low rates, securitized AAA-rated subprime, derivatives) but had a different set of causes in the United States. Indeed, this might be the biggest obstacle to pushing the false narrative.”

    I heartily agree the international aspect of the crisis represents the biggest obstacle as you say. It’s a powerful counter to claims like Mayor Bloomberg made because it jumps out at you when you put the data on the map. However, if one used a similar methodology, couldn’t researchers also employ an international chart of home owners as a % of the population embedded within a “modern” timeline to at least test for a correlation? I am struggling to reconcile how geography can be used within one framework but not another.

    This aspect has been nagging at me because I studied geography and I like thinking about problems across space. In the Harvey video, the animators drew a map when describing one of the four “explanatory formats” of the crisis he outlines in the book. Although he ultimately rejects these genres (1. cultural factors like home ownership 2. rational market theory 3. institutional failures 4. human nature) as the cause, the video presented a single statistic about home ownership rates that caught me by surprise. He claims only 22% of the Swiss own their own homes and compared it to the 60-something percent in the U.S. Like I said, I can’t internally reconcile the use of these analytical tools in one context but not another. This is an honest question-I am not peddling anything. I just want to fully understand the housing aspect of the crisis because I finished my graduate studies in urban planning and I want to be prepared in the workplace.

    Thanks and Happy Holidays

  48. Giovanni says:

    Thank you Barry for sharing your research, sources and conclusions on this. Thank you also for encouraging and contributing to the discussion here, it’s a great thread and I appreciate your taking time out from your holiday to respond.

    Belated merry Christmas, have a great New Year and please keep shining the proctoscope on all the bs being peddled to the masses. Hopefully people will continue to catch on and speak up.

  49. Stan Klein says:

    I think an additional factor that has to be considered is the rule that allows derivatives to be settled at the cash value of the underlying security or commodity on settlement day. If they had to be settled in the underlying security or commodity a lot of the high-flying gambling and crazy market games would be eliminated. The size of the derivatives market could never exceed the real market for the underlying security or commodity. It wouldn’t hurt real producers or end users of commodities, because it makes sense for them to ultimately settle in the commodity they produce or use. And it would eliminate the side-bet nature of derivatives.

    The tail started wagging the dog with “portfolio insurance” in the crash of 1987. The name keeps changing but the nonsense stays the same. And the most recent nonsense almost collapsed the world’s economy.

  50. AtlasRocked says:

    @BR: Mr Free Will will gladly indulge in loaning out as much money as he can to the unsuspecting fools borrowing the money, then collect the loan guarantees through the government. Mr. Free Will is making great money off the governments’ regulations, Barry – he’s gone into the education business and the bank business to make sure of that. He’s even added more ideas to the government’s list of a great education loans – called for-profit education.

    Mr. Free Will hides his advocacy and decides to make profit off the government policies when that is the easiest way to make money. He even professes to be an advocate of the policies, once he establishes a revenue stream.

    If Mr. Free Will has no guarantees on the student loans, he’ll make sure he only loans to college students that will generate ROI, the engineers and scientists and researchers that create new products. He won’t loan to artists and english majors and history majors. That sounds like a good idea to maximize ROI, right?

    ~~~

    BR: NOW I totally understand all of the Fannie & Freddie blamers. Boo hoo, the government guaranteed a loan, making me take it. I had no choice I was influenced

  51. I never considered that I could use the phrase GROW A PAIR YOU FUCKING PUSSY as a legitimate debating point, but now I have to reconsider.

  52. AtlasRocked says:

    @BR – I don’t understand why everyone has to be all-Freddie or no-Freddie. I have never said they were central to the crisis. My belief is the bad regulations were central to the crisis, largely aligned with your cogent analysis.

    Where we get in trouble, as a nation, is asking the same entity, the Federal government, to act in roles to promote some part of the market, instead of just creating and enforcing sane business practices. This is why you and the liberal policy advocates become enraged at the conservatives when we point out the key, fundamental problem: The government can’t play the role as promoter of various groups with political power and market regulator, they have to be kept separate. The founders omitted benevolence as a federal power for the reasons we are seeing now, benevolence and regulation pervert each other. Those against bad regulation get criticized as being anti-benevolence, which is not the case at all. Politicians co-mingle benevolence ideas with regulation ideas – really bad policy influence. “Hey let’s keep interest rates low for 5 years, guys, it makes the economy grow and provides lots of jobs and tax revenue!”

    Notice too, Barry, the US is failing in a manner similar to all benevolence-focused governments: graft, lawlessness, cronyism, and fiscal misconduct. Yes, Barry, $1 trillion a year of deficit spending, and mass fed money printing is an indicator of a bad economic policy, not a genius solution to economic growth. Clinton-Bush-Obama, all these guys are guilty of co-mingling benevolence with regulation with disastrous results.

    We can fix this by moving all the government benevolence programs back to the states, where they existing for 150 years just fine, and leaving the federal govt to do regulation w/o favoring any group. That gets a lot of money out of Washington.

  53. AtlasRocked says:

    I have grown a pair, Barry, that’s why I’m here taking on people who think all government polices to “help” people result in good outcomes.

    We need hard dialogues and hard questions Barry – I’m sorry you’re frustrated but you just spoke in favor of an easy money policy no different than Greenspan’s low interest rates, a policy that is putting a ton of our kids in lifetime debt servitude and is driving up the cost for everyone else. And who makes the money off of it? The bankers you claim to despise. Fat cat educators.

  54. “Everybody, soon or late, sits down to a banquet of consequences.” -Robert Louis Stevenson

  55. [...] The Big Story, December 24th, 2011, Barry Ritholtz NYTimes Takes on “The Big Lie” [...]

  56. LifeOnMars says:

    > BR: 1. The Homeownership Ideology (some call that capitalism) has been
    > around for almost a century — at least since WW2. Yet it was never
    > problematic prior. Why?

    Three quick points:

    1) Homeownership Ideology didn’t cause the meltdown. The banks caused the meltdown by wrapping themselves up in the Homeownership Ideology flag: it was their shield to sell loans to deadbeats and — in turn — collect massive bonuses.

    2) Those who don’t remember history are condemned to repeat it. Policy *matters*. Why did the S&L debacle happen in the 1980s and not in 1940/1950/1960/1970?

    3) Homeownership Ideology that causes government to promulgate horrific policy is most certainly *not* capitalism. If my company creates exercise equipment, it would be great if we could get the 70% of Americans that don’t own such equipment to start buying it. Under capitalism, we market the benefits of our product. Under *cronyism,* we get politicians to promote all manner of policies that subsidize and/or mandate the use of exercise equipment.

    Are you saying there’s no difference?

    > BR: No, you are telling a narrative, one that is not backed up by data

    The banks have our politicians in their pocket yet the policies these politicians force upon us don’t matter because this is just a “narrative?” Wow.

    > And you have focused on the wrong govt policies, not the ones that can
    > be shown to be factual causative y data.

    Wait: Janet Reno is suing lenders — all lenders, not just CRA victims — to reduce their lending standards and yet this isn’t relative?

    If I stick a gun to your head and force you to hand out money to deadbeats, do I become completely invisible? (Better: What if earlier you *paid me* to put the gun to your head so you would have an excuse to hand out this money?)

    > 2. Maxine Waters — a junior House member from a party out of from 1994
    > to 2006 — what influence did she have in 2003?

    So substitute Frank, Cisneros, Cuomo, etc. for Waters.

    > 3. The non conforming, 100% LTV mortgages were written in overwhelming
    > numbers by non banks pursuing profit, not in response to policy or
    > memos or out of power pols.

    That’s correct. Homeownership Policy was an essential tool used to destroy regulatory oversight.

    > 4. The GSE purcgased mortgages defaulted in substantially lower
    > numbers than the average; much lower than the private sector non
    > banks. CRA loans at an even lower rate.

    I never said the GSEs caused the meltdown. I *will* say that their leverage levels were criminal.

    > BR: What I am pushing back against is the false claim that “Congress
    > that made Fannie/Freddie buy up all these junk loans.” THAT IS THE
    > FALSITY HERE.

    Agreed — one of many.

  57. [...] The Washington Post published the Ritholtz piece, a good deal of supportive commentary emerged – as observed by Ritholtz himself: Since then, both Bloomberg.com and Reuters each have picked up the Big Lie theme. (Columbia [...]

  58. [...] Washington Post published the Ritholtz piece, a good deal of supportive commentary emerged – as observed by Ritholtz himself: Since then, both Bloomberg.com and Reuters each have picked up the Big Lie theme. (Columbia [...]