The myth live on that Fannie Mae and Freddie Mac started the housing crisis.

[JoeChalupa]

http://www.nytimes.com/2011/12/24/op...&smid=fb-share

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 Ins ute, 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. Pinto claims that as of June 2008, 27 million “risky” mortgages had been issued — “and a lion’s share was on Fannie and Freddie’s books,” as Wallison wrote recently. Never mind that his definition of “risky” is so all-encompassing that it includes mortgages with extremely low default rates as well as those with default rates nearing 30 percent. These latter mortgages were the ones created by the unholy alliance between subprime lenders and Wall Street. Pinto’s numbers are the Big Lie’s primary data point.

Allies? Start with Congressional Republicans, who have vowed to eliminate Fannie and Freddie — because, after all, they caused the crisis! Throw in The Wall Street Journal’s editorial page, which, on Wednesday, published one of Wallison’s many articles repeating the Big Lie. It was followed on Thursday by an editorial in The Journal making essentially the same point. Repe ion is all-important to spreading a Big Lie.

In Wallison’s article, he claimed that the charges brought by the Securities and Exchange Commission against six former Fannie and Freddie executives last week prove him right. This is another favorite tactic: He takes a victory lap whenever events cast Fannie and Freddie in a bad light. Rarely, however, has his intellectual dishonesty been on such vivid display. In fact, what the S.E.C.’s allegations show is that the Big Lie is, well, a lie.

Central to Wallison’s argument is that the government’s effort to encourage homeownership among low- and moderate-income Americans is what led to the crisis. Fannie and Freddie, which were required by law to meet certain “affordable housing mandates,” were the primary instruments of that government policy; their need to meet those mandates, says Wallison, is what caused them to dive so heavily into those “risky” mortgages. And because they were powerful forces in the housing market, their entry into subprime dragged along the rest of the mortgage industry.

But the S.E.C. complaint makes almost no mention of affordable housing mandates. Instead, it charges that the executives were motivated to begin buying subprime mortgages — belatedly, contrary to the Big Lie — because they were trying to reclaim lost market share, and thus maximize their bonuses.

As Karen Petrou, a well-regarded bank analyst, puts it: “The S.E.C.’s facts paint a picture in which it wasn’t high-minded government mandates that did [Fannie and Freddie] wrong, but rather the monomaniacal focus of top management on market share.” As I wrote on Tuesday, Fannie and Freddie, rather than leading the housing industry astray, got into riskier mortgages only after the horse was out of the barn. They were becoming irrelevant in the most profitable segment of the market — subprime. And that they couldn’t abide.

(The S.E.C., I should note, had its own criticism of my column, saying that I conflated its allegations regarding the lack of disclosure of subprime mortgages, with an entirely different set of charges it has brought regarding disclosure of so-called Alt-A loans. I still maintain that the S.E.C.’s charges are weak, and that the agency brought the case in part for political reasons: how better to curry favor with House Republicans than to go after former Fannie and Freddie executives?)

Three years after the financial crisis, the country would be well served by a real debate about the role of government in housing. Should the government be helping low- and moderate-income Americans own their own homes? If so, is there an acceptable level of risk? If not, how do we recast the American dream?

To have that debate, though, we need a clear understanding of what role the government’s affordable-housing goals did — and did not — play in the crisis. And that is impossible as long as the Big Lie holds sway.

Which, now that I think of it, may be the whole point of the exercise.


~~What say you? Scott?

[boutons_deux]

When the crisis hit, lying wrongies were in here blaming F&F and CRA for forcing lenders to write sub-prime/exploding-ARM mortgages, perpetrating The BIG LIE literally from day one of the economic/mortgage catastrophe.

As we see now with HAMP and other mortgage modification/relief programs, the govt can't force the banks/lenders to do anything.

Repeating the lies from many places and 1000s of times convinces disengaged/unserious/stupid people that lies are the truth.

AEI's and other VRWC stink tanks' lies have been a very effective campaign to deflect blame from the real causes and criminals. Even Obama punted by saying the financial sector may have been unethical, but was not illegal. And of course Congress will never make the destructive "ethics" of their benefactors' financial sector illegal.

[boutons_deux]

btw, untouchable mortgage interest tax deductions so beloved by everyone actually subsidize the lenders, who also benefit enormously from the govt insuring mortgages. Private gain, taxpayer risk.

[Viva Las Espuelas]

nice opinion......

[Opinionater]

nice opinion......

[boutons_deux]

nice contribution.

[boutons_deux]

GFY

Stiglitz on what really happened, what didn't happen (bailing out finance didn't bail out the real economy), etc

The Book of Jobs

Two conclusions can be drawn from this brief history. The first is that the economy will not bounce back on its own, at least not in a time frame that matters to ordinary people. Yes, all those foreclosed homes will eventually find someone to live in them, or be torn down. Prices will at some point stabilize and even start to rise. Americans will also adjust to a lower standard of living—not just living within their means but living beneath their means as they struggle to pay off a mountain of debt. But the damage will be enormous. America’s conception of itself as a land of opportunity is already badly eroded. Unemployed young people are alienated. It will be harder and harder to get some large proportion of them onto a productive track. They will be scarred for life by what is happening today. Drive through the industrial river valleys of the Midwest or the small towns of the Plains or the factory hubs of the South, and you will see a picture of irreversible decay.

Monetary policy is not going to help us out of this mess. Ben Bernanke has, belatedly, admitted as much. The Fed played an important role in creating the current conditions—by encouraging the bubble that led to unsustainable consumption—but there is now little it can do to mitigate the consequences. I can understand that its members may feel some degree of guilt. But anyone who believes that monetary policy is going to resuscitate the economy will be sorely disappointed. That idea is a distraction, and a dangerous one.

What we need to do instead is embark on a massive investment program—as we did, virtually by accident, 80 years ago—that will increase our productivity for years to come, and will also increase employment now. This public investment, and the resultant restoration in G.D.P., increases the returns to private investment. Public investments could be directed at improving the quality of life and real productivity—unlike the private-sector investments in financial innovations, which turned out to be more akin to financial weapons of mass destruction.

The second conclusion is this: If we expect to maintain any semblance of “normality,” we must fix the financial system. As noted, the implosion of the financial sector may not have been the underlying cause of our current crisis—but it has made it worse, and it’s an obstacle to long-term recovery. Small and medium-size companies, especially new ones, are disproportionately the source of job creation in any economy, and they have been especially hard-hit. What’s needed is to get banks out of the dangerous business of speculating and back into the boring business of lending. But we have not fixed the financial system. Rather, we have poured money into the banks, without restrictions, without conditions, and without a vision of the kind of banking system we want and need. We have, in a phrase, confused ends with means. A banking system is supposed to serve society, not the other way around.

That we should tolerate such a confusion of ends and means says something deeply disturbing about where our economy and our society have been heading. Americans in general are coming to understand what has happened. Protesters around the country, galvanized by the Occupy Wall Street movement, already know.

http://www.vanityfair.com/politics/2...n-201201.print

=============

[boutons_deux]

Housing Bubble and the Big Lie



This is butt simple stuff. All you have to do is look at one simple chart to see exactly what happened. And yet, conservatives don't care. As Paul Krugman says, this "isn’t just a case where different people look at the same facts but reach different conclusions. Instead, we’re looking at a situation in which one side of the debate just isn’t interested in the truth, in which alleged scholarship is actually just propaganda."

Fannie and Freddie were bad actors in a lot of ways, and that makes them an easy target for conservatives who are desperate to absolve the private sector of any blame for the financial crisis. But when it comes to assigning blame for the housing bubble, the evidence against them is laughably thin. Like it or not, this was Wall Street's fault.

http://motherjones.com/kevin-drum/20...le-and-big-lie

[scott]

Hey Joe, this isn't really a big area of academic study for me and I probably won't be able to educate myself enough to make a good comment anytime soon, so I won't provide any economic analysis to the story (which I can admit to not even reading, for the aforementioned reasons)

[JoeChalupa]

Hey Joe, this isn't really a big area of academic study for me and I probably won't be able to educate myself enough to make a good comment anytime soon, so I won't provide any economic analysis to the story (which I can admit to not even reading, for the aforementioned reasons)

Yeah, I kind of thought so afterwards.

[Winehole23]

...it's a fact, Viva.

81% of subprime loans originated from private lenders. True, a bunch of them ended up parked at Fannie and Freddie later, starting around August of 2007 when the market began to perceive the real estate bubble (i.e. credit contracted)

The GSE's weren't the cause of the mess, but they were used as sponges afterward to help mop up the blood on the trading floor.

[boutons_deux]

And many of regulated banks created non-regulated subsidiaries to get in on the sub-prime fee action.

The unregulated shadow banking system and hedge/capital funds remain a huge risk to the country, even to the world's financial system.

Ain't unregulated, greed-driven, predatory, sociopathic capitalism wonderful?

The financial system is so complex, opaque, and powerful ($$$ to politicians) that I have little hope that it will ever be controlled and rendered harmless to the non-financial system.

[Wild Cobra]

They were only doing what they were pressured to do by those who held they kkey to their success.

Congress.

[boutons_deux]

You NEVER stop your LYING

[Wild Cobra]

You NEVER stop your LYING

Really now. Everyone who participated is at fault. However, congress pressured the banking industry to make bad loans. The banks said we will not carry that burden of responsibility for bad loans, so congress made a legal method to move those loans off the banks books.

The banks that got caught with bad house loans on their hands should have had to deal with their own mismanagement as well.

There should have been no bailouts. Period.

[boutons_deux]

"congress pressured the banking industry to make bad loans"

again, the banks can't be forced to do by govt.

the selling mortgages was a govt "innovation", I doubt that, but if it were, the financial sector paid Congress to approve it.

The bailout should have been nationalization of all the big banks who were ALL bankrupt, split them up, sell off the good stuff, wipe out the shareholders and bond holders, start over, re-implement a hard-core Glass-Steagall.

[CosmicCowboy]

But the S.E.C. complaint makes almost no mention of affordable housing mandates. Instead, it charges that the executives were motivated to begin buying subprime mortgages — belatedly, contrary to the Big Lie — because they were trying to reclaim lost market share, and thus maximize their bonuses.

So a quasi-governmental agency was mis-managed by crooks that were not accountable to anyone (including free market losses) trying to pad their bonuses which led to the housing crisis...

And your point was?

[boutons_deux]

7 of the Nastiest Scams, Rip-Offs and Tricks From Wall Street Crooks

Fraudclosure/Robosigning

Pushing Subprime Loans

Betting Against Designed-to-Fail Bonds

An “Epidemic” Of Mortgage Fraud

Ratings Agencies Gave AAA to CDOs

Banksters Who Made Out Like … Bandits

Insiders Profiting From Being … Insiders

Again, no one is being prosecuted.

After the “S&L Crisis” there were 1,100 prosecutions and more than 800 bank officials went to jail. This time – even with the appearance of widespread criminality in the financial industry – not so much. In fact, not any.

http://www.alternet.org/module/printversion/153530

=====

Of course, MSM won't touch these crimes.

[Winehole23]

dp

[RandomGuy]

Hey Joe, this isn't really a big area of academic study for me and I probably won't be able to educate myself enough to make a good comment anytime soon, so I won't provide any economic analysis to the story (which I can admit to not even reading, for the aforementioned reasons)

My understanding is that the Fanny/freddy slice of the mortgage backed derivatives is dwarfed by the other ins utions.

They started the ball rolling, and the other banks jumped on the chance to do something similar.

In the process the demand for good new loans to package up exceeded the capacity of the economy to supply it quickly, driving incentives to relax standards and increase the amount supplied.

The end result is that Fanny/Freddy are neither entirely blameless, nor entirely to blame.

As usual, the Free Marketeers will only push the side of the narrative they like, as is the case here, i.e. it is all Fanny/Freddy's fault and the private larger banks are innocent victims of evil government interference.

[RandomGuy]

Really now. Everyone who participated is at fault. However, congress pressured the banking industry to make bad loans. The banks said we will not carry that burden of responsibility for bad loans, so congress made a legal method to move those loans off the banks books.

The banks that got caught with bad house loans on their hands should have had to deal with their own mismanagement as well.

There should have been no bailouts. Period.

I would almost agree.

The banks should face up to their part. People should be out of jobs or in jail.

BUT

Such sentiments miss the larger picture.

Let's add in the externalities.

First, let's add in the fact that the credit default swaps on these ins utions are not tied to the value of their assets. There is effectively no cap at all to the CDS's issued on their debt, somewhere in the hudreds of trillions of dollars worth and climing daily. We could be using the words "quadrillions of dollars" in my lifetime.

Let's assume you get your policy solution. The bank goes under.

How much does the wider economy lose?

Debt = worthless.

1) Your insurance premiums go up for everything from car insurance, house insurance, EVERYTHING. The insurers have to make up for the lost value/revenue somehow, and there is only one other way outside of getting lucky on the bond market.

2) For every ONE dollar of loss to the direct bond holders, you also get multiples of that in losses from those CDS'

3) Who issued those CDS'?
Hedge funds. Hedge funds will have to sell assets to cover those losses.
Who invests in hedge funds? Banks and insurance companies, in part, retirement funds for the rest of it.

4)So what happens to the perfectly healthy banks whose assets are now impaired? Their equity gets wiped or reduced. They can't loan as much money.

5) When the banks stop loaning money, financial needs aren't met, and customers start missing payments to other lenders.

6) Loans are assets on the books of banks. What happens when their investments AND their loans are suddenly worth less money? They go bankrupt, and default on THEIR debt.

Do you like where this is going? Do you really think that is better than the bailouts that happened?

Now what is your solution to preventing it in the future?

[boutons_deux]

Bloomberg reported last week that the Republican line has been rejected “by the chairman of the Federal Reserve, many economists and even three of the four Republicans on the government commission that investigated the meltdown,” but Romney & Co. don’t care about facts; they care about convincing voters to believe ideologically-satisfying nonsense. Sure, the evidence points to a lack of regulations, but since when does evidence matter?

The thing that makes this storyline so absurd is that it requires one to pretend that there was no profit motive at play. Wall Street, having broken the traditional connection between lender and borrower through the securitization process, was making a fortune, and it was the hunger for a fat stream of fees, rather than desire to conform with some nonexistent regulatory requirement, that caused them to lower lending standards to nothing.

This story, by Michael Hudson, offers a glimpse behind-the scenes in the mortgage industry:

Greg Saffer says conscience and common sense prevented him from pushing the product his bosses wanted him to sell – “Option ARM” home loans that, he says, put homeowners at risk.

“I’m not going to steer people into a loan program that might not be good for them just because it’s more profitable for the company,” he says.

JP Morgan Chase Bank counters that Saffer didn’t sell because he didn’t have the chops to close deals.

[...]

Saffer charged in a lawsuit filed in 2009 in Los Angeles Superior Court that he was forced out of his job for refusing to take part in “fraudulent schemes.” In testimony in the lawsuit and in do ents in arbitration proceedings, he claims WaMu retaliated against him because he refused to push “toxic” Option ARMs and mislead borrowers about how the loans worked and how much they would cost.



Saffer’s case is notable because, as a salesman, his job description was different from most of the ex-employees who’ve made whistleblower claims against mortgage lenders. Many were fraud investigators or loan underwriters who claim they were punished for uncovering fraud by sales reps and sales executives.

Saffer’s legal claims paint him as one of what may have been a distinct minority among the mortgage industry’s sales corps during the nation’s home-loan frenzy – a salesman who said no to the dirty tactics that became pervasive during the boom. Former industry insiders say salespeople who refused to go along were often weeded out, to make way for others who had a more pliable sense of right and wrong.

Saffer’s attorney, Carney Shegerian, represents two other former WaMu sales reps who, like Saffer, claim that WaMu fired them because they resisted pressure to engage in improper lending tactics. Their case has also been ordered into arbitration.

Shegerian says his clients not only lost their jobs because they refused to go along with the practices at the bank, “their good names were totally soiled for having been employed by WaMu.

[...]



WaMu, the nation’s largest savings and loan, was putting up big numbers peddling exotic home-loan products that, just a few years before, had been on the margins of the mortgage industry.

These included subprime mortgages designed for borrowers with weak credit as well as “payment-option” adjustable-rate mortgages generally targeted at borrowers with good credit.

Option ARMs allowed borrowers to make minimum payments that didn’t keep pace with interest charges on their loans. In other words, loan balances would grow rather than drop as each month ticked by. It’s known as a negative amortization loan, or “NegAm” in industry parlance.

Option ARMs accounted for roughly half of Washington Mutual’s home-loan production during the mortgage boom years, according to federal regulators.

WaMu chief executive Kerry Killinger touted Option ARMs as the bank’s “flagship product.”

It was no wonder.

WaMu earned more than five times as much on Option ARMs as it did on fixed-rate home loans, according to internal company do ents. Mortgage investors on Wall Street loved them because their growing loan balances and escalating interest rates translated into big returns.

http://www.alternet.org/module/print...ndviews/753853

[Winehole23]

http://www.bloomberg.com/news/2011-1...-culprits.html

[boutons_deux]

Just another BIG LIE from the Repugs. It's in their genes.

[Winehole23]

it fits the preexisting narrative that minorities and welfare recipients have ruined everything