I continue to hear a number of commentators blame the entire collapse on Fannie Mae. Like the prior group of cads who tried to blame the collapse on the CRA, this one tends to come from political hacks seeking to avoid responsibility for their past errors.
There certainly are legitimate criticisms of the GSEs — they were cesspool of fraud and bad judgment — which is why we told clients in 2007 to short Fannie Mae. And several academics and independent analysts have excoriated Fannie for its failings, separately from and long before the economic collapse.
But I digress. Here is my Fannie Mae thought experiment:
The Facts: Its 1995, and the private securitization market has developed on its own. Fannie Mae looks around, and notices that they are not really all that necessary anymore. Wall Street had become a securitizer of not just mortgages, but student loans, credit card receivables, auto loans.
The Hypothetical Counter-Factual: So the CEO of Fannie announces they were going to sell off their mortgage portfolio, dissolve,, returning their capital to shareholders.
Question: Would the Housing boom and bust have occurred? What about the credit bubble? Derivative crisis? Abdication of lending standards? Leverage increases to Wall Street? Misaligned Compensation packages?
Unless your answer is NO to all of these, than its impossible to blame Fannie Mae for the collapse . . .
~~~
Previously: Fannie Mae Looks Like Hell (November 16th, 2007) http://www.ritholtz.com/blog/2007/11/fannie-mae-looks-like-hell/
Fannie Mae: Ouch! (November 20th, 2007) http://www.ritholtz.com/blog/2007/11/fannie-mae-ouch/
Fannie Mae and the Financial Crisis October 5th, 2008 http://www.ritholtz.com/blog/2008/10/fannie-mae-and-the-financial-crisis/
CRA Thought Experiment (June 26th, 2009) http://www.ritholtz.com/blog/2009/06/cra-thought-experiment/
Who is to Blame, 1-25 (June 29th, 2009) http://www.ritholtz.com/blog/2009/06/who-is-to-blame-1-25/
I want those of you who want to comment to actually think hard about this scenario . . .
There is no blame but the Federal Reserve System which failed to tie credit creation to ~2% increases in real domestic GNP. The Clinton euphoria of dot com equity to the moon and fake millennium worries demand push crash’s fix leading to the whooppie!! we’re all gonna’ get rich on our houses while our kids sit on the curb. Weordinary kids got schooled for nothing while our kids came out with 6 figure humps on their back specifically exempted from declaring bankruptcy in this grand scheme. Where was the adult Fed? Its member banks were too stoned on free cash and bonuses to notice. No Barry, Fannie was not the blame: FNM and FRE just brought two big bags of “beak” to the party.
I think it is unfair to say that it has to be all or nothing. I believe that if you answer yes to half of your questions, you could logically say that the GSEs were large contributers to the problem and it would be reasonable to say we would not have crashed as far or at all because we would have had a smaller problem and more time for the market to work it out.
That’s right, ToNYC. None of this happens without the Fed. And the kicker? They’re doing it AGAIN.
Im not going to argue with your points BR, because I would answer yes to most, if not all of them. FNM and FRE sure poured gasoline on the fire and greatly magnified the bubble because of their implied Federal Goverment Backing and the fact that they are exempt from tier 1 capital restrictions. Allowing them to become leveraged at greater than 80:1 Setting the stage for them to provide a wave of cheap available credit with very low Spreads over Treasuries If the price of something (credit) becomes much cheaper, the demand will go up. Without all the other factors you mentioned, credit bubble? No, but with all those factors you get a massive accelerant to a raging fire and then an explosion.
I feel like this topic has been hashed and rehashed so many times, it’s pureed at this point. Do we have nothing else relevant going on today?
An even better thought experiment, because it’s true: It’s 2005. Because of a string of accounting scandals, Fannie and Freddie sharply curtail their activities. A crowd of private-label issuers takes their place – with much lower standards (for LTV ratios, documentation …) than the GSEs. Did the crisis happen?
Yep.
I thought Barry’s analysis of this issue in “Bailout Nation” put an end to this nonsense of blaming just the GSEs and the CRA for the meltdown, but apparently not everybody has bothered to read the book. When my sister was ranting and raving about this issue talking about all the “bad loans that Freddie and Fannie made”, I first had to inform her that the GSEs didn’t originate one loan. Upon reflection, I thought that’s how misinformed many people are about just what FRE and FNM do. Moreover, I asked her since Fannie has been around since the 30s and Freddie since 1970, what took so long for the GSEs to take down the American housing market if they and their original mission were to blame? While they certainly were part of the problem, I guess it’s just easier for some people to believe some talk show guy screaming about Freddie and Fannie causing the problem than to deal with the actual complexities of the issue. One again, thanks to Barry for trying to set the record straight and have his voice heard over the cacophony of talking heads who push this meme via talk radio and cable “news.”
Short answer: Mannwich says all that needs saying.
Longer answer, @Bsilisc: You think Fannie and Freddie had high standards? By what metric? They had this God-powerful thing called a “conventional conforming” loan that started out as truly “A” paper in the nineties, but by 2005, through desk-top underwriting and other nefarious go-arounds (i.e., plain old fraud) was labeling “A” on every pile of shit that came in the door. It’s why they’re insolvent now.
I am not sure that commentators (and my earlier post in open thread) blame the entire collapse on Freddie/Fannie since there were clearly other forces such as excess leverage on Wall Street at work. However, I think the difference is that the extent of the collapse – which nearly brought down the financial system – resulted in large part from the quantity of what became toxic assets directly attributable to the GSEs and, importantly, the market distortions they engendered. We may have had a crisis, but let’s just say a “normal” crisis not a nuclear meltdown.
Yes, mannwich andthey are doing it again…until we replace these academic Wall Street myrmidons with a simple algorithm that ties credit to real economic work-product metrics. The Fed Reserve is a private bank monopoly protection racket..read the history of usury and fractional credit monopoly schemes at http://www.zerohedge.com/forum/wilsons-folly-our-private-central-bank-allows-member-bankers-collect-rent-exponentially-invent ..it’s a club and we’re not in it. Many great presidents stemmed the tide, but Wilson fell down..another Princeton man. The big FAIL that we must immediately puke up to start the cure.
BR-
your point is noted-
the problem w/ the GSE’s is their debt was viewed as risk free (implicit- now explicit guarantee) w/ a very low risk premium over treasuries-
could the USG ever let them default?
n0-
did everyone know this-
yes-
so it was all a big show- because the GSE’s are de facto government agencies- separated in 1968 from the USG by Johnson- to “supposedly” free the government from their liabilities- and make it easier to finance the Vietnam War
what’s the line between intellectual dishonesty and delusion?
I think the banksters have a gun to the head of America and they’re saying they’ll shoot the hostage if they don’t get a flight to a no-extradition-treaty country.
We have to realize that even if we pay the ransom and give them a flight, they won’t release the hostage.
We need the gov’t to take out the banksters, pure and simple. Take your shot gov’t – it’s our only chance to walk away from this thing.
If the GSEs had not existed surely some other player would have stepped into their shoes and issued the same questionable mortgages.
The “facts” as I understand them are (and those with a different perspective, please let me know):
1) Government policy makers, unable to increase direct funding for low income housing, wanted banks to make additional mortgage loans to low income individuals.
2) Banks did not want to make these loans. They were not a good use of investment capital. Low income individuals have on average a higher risk of default. Banks would make less profit or incur losses on their available investment capital.
3) Banks at the time were and still are influential in Washington politics and have demonstrated a keen ability for behind the scenes negotiations of provisions to further their financial interests.
4) Politicians are concerned with helping their constituencies. Few understand the intricacies of finance.
My question all along has been, what did the banks offer and what did government policy makers agree to as the quid pro quo that led to banks agreeing to issue high risk mortgages even though to do so was not in their best interests? Who proposed them and who agreed to them?
The only issue with this idea is: if embedded additional risk was somehow created by the FNM construct – a tipping point – which may have created the marginal additional bad mortgage loan(s.) That seems like a stretch to me.
Simply put: Raines, O’Neal what’s the difference?
BR asks the wrong question. If you are a foreigner, the fact the Federal National Mortgage Assn has its seal of approval on the mortgages beats Countrywide Credit’s seal. Or Merrill Lynch’s.
So the answer to BR’s questions is the same. Fannie/Freddie’s seats at the party made the bacchanalia much larger and the hangover much worse.
One can blame Bush and his SEC etc and also blame Barney Frank and his GSEs.
BR,
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