Thursday, October 09, 2008

More on Fannie and Freddie

From smrstrauss:

"And the Republicans were in charge of Congress during the time when the Democrats were said in this article to have blocked legislation. How did the minority party block legislation without the support of members of the majority party?"

Easy. By peeling away enough Republicans like Sen. Bennett (with the help of Fannie money) to switch to their side and form a majority coalition to block reforms for Fannie and Freddie. The democrats were solidly against Fannie's oversight then, all they needed were a few repubs to jump ship.

And Daniel Gross:

"The right blames the credit crisis on poor minority homeowners. This is not merely offensive, but entirely wrong."

The Republican aren't blaming blacks and poor people. They're blaming the people who ran fannie mae to the ground (the ground zero for this financial crisis) and it's Democrat enablers. I myself think the idea of expanding home-ownership to poor black communities is a wonderful idea, BUT only if it's done right and without recklessly overdoing it for profit. Everything should be done in moderation.

See, the problem with democrats is that we can't have an honest discussion of how we got into this mess without somebody playing the race card.

THAT'S the problem.


smrstrauss said...

I see you admit that some Republicans were responsible for failing to regulate Fannie and Freddie. You allege that some of them did so because they had received contributions from Fannie and Freddie.

If so, you would have to assume that the tax breaks for oil companies was due to the oil industry contributing mainly to Republicans (Exxon Mobil, 86% to Republicans, 14% to Democrats, according to

However, it is also possible to believe that that despite contributions Democrats and Republicans vote the way that they believe. For example, the regulations Bush proposed over Fannie and Freddie were passed in early 2008, and Barney Frank said on television a few days ago that he had passed it out of committee in early 2007. The senate appears to have dawdled.

In any case, when the need became clear, the Democrats acted.

So what about 2003,2004, etc. Well, obviously the need was not clear. If you take a look at Fannie and Freddie's stock prices, you will see that they held up fairly well despite the accounting scandal. Wall Street apparently thought that the mis-statement of earnings was just a blip in a otherwise good record, and so why should not the Democrats.

We are not all blessed with the ability to see four years into the future. In fact, if you look back only a month or two ago, our secretary of the treasury was not forecasting massive problems on Wall Street. (And he should know since he used to work there as head of Goldman Sachs).

However, there are a number of other good explanations over why Democrats did not get all enthusiastic about Bush's proposals. First, Bush had shafted the Democrats so many times in the past, they were not likely to cooperate with him -- since he did not cooperate with them.

Second, Bush at one time knew how to get bipartisan support for a bill other than in a crisis. The way that he did it with No Child Left Behind was to get some prominent Democrats (Kennedy for one) involved and let them take some of the credit. Not like that in this case.

And third, the Democrats had been trying for years to get regulation of Commercial mortgage companies -- where the VAST bulk of sub-prime mortgages were sold -and the Republicans had given them the shaft.

But, most important of all, the lack of regulation of Fannie and Freddie is only a small cause of the crisis. What about the credit default swaps, worth some say $62 TRILLION. We do not know to what extent they are tripping the markets, but that is the real problem -- not knowing. If our treasury secretary and head the federal reserve board do not KNOW about how big the Credit Swap market is, and who can pay their obligations and who cannot, well obviously we are in a mess.

Here are a couple of articles that look more deeply into the financial situation. Both conclude that Fannie and Freddie were part of the problem, a small part.


From the Wall Street Journal

OCTOBER 1, 2008

The GOP Blames the Victim
Capitalism sure is fragile if subprime borrowers can ruin it.

Two weeks ago, I wrote that the breakdown of the nation's financial industry was undeniably a self-induced injury; that it would finally force conservatives to own up to the wrongheadedness of their deregulatory project; that they couldn't possibly blame the disaster on any of their traditional bogeymen…..

There is no doubt that Fannie and Freddie enabled the subprime neurosis, but for certain conservatives they are virtually the only malefactors worth noting. The dirge goes like this: Fannie and Freddie were buying up subprime mortgages, and they were doing it for (liberal) political reasons. Mortgage originators thus had no choice but to hand out mortgages like candy. Had market forces been in charge, loans would, no doubt, have been administered with a rigor and sternness to make John Calvin blanch.

I asked Bill Black, a professor of economics and law at the University of Missouri-Kansas City and an authority on the Savings and Loan debacle of the 1980s, what he thought of the latest blame offensive. He pointed out that, for all their failings, Fannie and Freddie didn't originate any of the bad loans -- that disastrous piece of work was done by purely private, largely unregulated companies, which did it for the usual bubble-logic reason: to make a quick buck.

Most of the mistakes for which we are paying now, Mr. Black told me, were actually made "by four entities that under conservative economic theory should have exercised effective market discipline -- the appraisers, the originators of the mortgages, the rating agencies, and the investment banking firms that packaged the subprime mortgage-backed securities." Instead of "disciplining" the markets, these private actors "served as the four horsemen of the financial apocalypse, aiding the accounting fraud and inflating the housing bubble." It is they, Mr. Black says, who "turned a crisis into a catastrophe."

Ah, but truth is no ally to a conservative with his back to the wall. So much more helpful are the trusty narratives on which the movement was built. So when we have dispatched this first canard, we learn from other conservatives that it is the sub-prime people who are to blame; that by taking out loans they couldn't possibly pay off, these undesirable borrowers have ruined us all.

There is no way to measure the number of people who took out mortgages they knew they couldn't afford, of course, but for what it's worth, a 2007 report by the Mortgage Bankers Association reports that the FBI estimates "80 percent of all reported fraud losses arise from fraud for profit schemes that involve industry insiders." That means the lenders, not the borrowers.

Just imagine the flights of fancy that the theory of borrower malevolence and Wall Street victimization requires conservatives to take: All these no-account folks, you see, got together and forced investment banks to engineer subprime mortgages into highly leveraged securities. Then they tricked all manner of hedge funds and pension funds and financial institutions into buying these lousy products. Just for good measure, these struggling homeowners then persuaded bond-rating agencies to misrepresent the risk associated with these securities.

Now imagine what such a fantastic scheme, if true, would mean for capitalism itself. This economic system, glorified by all, dominates the globe today, bidding prices up and down, forcing entire nations to change their ways to better suit its needs, and yet it is so fragile that, when challenged by the weakest members of society and a handful of community organizers, it simply crumbles. Thank goodness the Soviets never figured this out.

End Quote

Second article, from Slate

Subprime Suspects
The right blames the credit crisis on poor minority homeowners. This is not merely offensive, but entirely wrong.
Slate Magazine
Daniel Gross

Posted Tuesday, Oct. 7, 2008, at 2:08 PM ET

We've now entered a new stage of the financial crisis: the ritual assigning of blame. It began in earnest with Monday's congressional roasting of Lehman Bros. CEO Richard Fuld and continued on Tuesday with Capitol Hill solons delving into the failure of AIG.

On the Republican side of Congress, in the right-wing financial media (which is to say the financial media), and in certain parts of the op-ed-o-sphere, there's a consensus emerging that the whole mess should be laid at the feet of Fannie Mae and Freddie Mac, the failed mortgage giants, and the Community Reinvestment Act, a law passed during the Carter administration. The CRA, which was amended in the 1990s and this decade, requires banks—which had a long, distinguished history of not making loans to minorities—to make more efforts to do so.

The thesis is laid out almost daily on the Wall Street Journal editorial page, in the National Review, and on the campaign trail. John McCain said yesterday, "Bad mortgages were being backed by Fannie Mae and Freddie Mac, and it was only a matter of time before a contagion of unsustainable debt began to spread." Washington Post columnist Charles Krauthammer provides an excellent example, writing that "much of this crisis was brought upon us by the good intentions of good people."

He continues: "For decades, starting with Jimmy Carter's Community Reinvestment Act of 1977, there has been bipartisan agreement to use government power to expand homeownership to people who had been shut out for economic reasons or, sometimes, because of racial and ethnic discrimination. What could be a more worthy cause? But it led to tremendous pressure on Fannie Mae and Freddie Mac—which in turn pressured banks and other lenders—to extend mortgages to people who were borrowing over their heads. That's called subprime lending. It lies at the root of our current calamity." The subtext: If only Congress didn't force banks to lend money to poor minorities, the Dow would be well on its way to 36,000. Or, as Fox Business Channel's Neil Cavuto put it, "I don't remember a clarion call that said: Fannie and Freddie are a disaster. Loaning to minorities and risky folks is a disaster."

Let me get this straight. Investment banks and insurance companies run by centimillionaires blow up, and it's the fault of Jimmy Carter, Bill Clinton, and poor minorities?

These arguments are generally made by people who read the editorial page of the Wall Street Journal and ignore the rest of the paper—economic know-nothings whose opinions are informed mostly by ideology and, occasionally, by prejudice. Let's be honest. Fannie and Freddie, which didn't make subprime loans but did buy subprime loans made by others, were part of the problem. Poor Congressional oversight was part of the problem. Banks that sought to meet CRA requirements by indiscriminately doling out loans to minorities may have been part of the problem.

But none of these issues is the cause of the problem. Not by a long shot. From the beginning, subprime has been a symptom, not a cause. And the notion that the Community Reinvestment Act is somehow responsible for poor lending decisions is absurd.

Here's why.

The Community Reinvestment Act applies to depository banks. But many of the institutions that spurred the massive growth of the subprime market weren't regulated banks. They were outfits such as Argent and American Home Mortgage, which were generally not regulated by the Federal Reserve or other entities that monitored compliance with CRA. These institutions worked hand in glove with Bear Stearns and Lehman Brothers, entities to which the CRA likewise didn't apply. There's much more. As Barry Ritholtz notes in this fine rant, the CRA didn't force mortgage companies to offer loans for no money down, or to throw underwriting standards out the window, or to encourage mortgage brokers to aggressively seek out new markets. Nor did the CRA force the credit-rating agencies to slap high-grade ratings on packages of subprime debt.

Second, many of the biggest flameouts in real estate have had nothing to do with subprime lending. WCI Communities, builder of highly amenitized condos in Florida (no subprime purchasers welcome there), filed for bankruptcy in August. Very few of the tens of thousands of now-surplus condominiums in Miami were conceived to be marketed to subprime borrowers, or minorities—unless you count rich Venezuelans and Colombians as minorities. The multiyear plague that has been documented in brilliant detail at IrvineHousingBlog is playing out in one of the least-subprime housing markets in the nation.

Third, lending money to poor people and minorities isn't inherently risky. There's plenty of evidence that in fact it's not that risky at all. That's what we've learned from several decades of microlending programs, at home and abroad, with their very high repayment rates. And as the New York Times recently reported, Nehemiah Homes, a long-running initiative to build homes and sell them to the working poor in subprime areas of New York's outer boroughs, has a repayment rate that lenders in Greenwich, Conn., would envy. In 27 years, there have been fewer than 10 defaults on the project's 3,900 homes. That's a rate of 0.25 percent.

On the other hand, lending money recklessly to obscenely rich white guys, such as Richard Fuld of Lehman Bros. or Jimmy Cayne of Bear Stearns, can be really risky. In fact, it's even more risky, since they have a lot more borrowing capacity. And here, again, it's difficult to imagine how Jimmy Carter could be responsible for the supremely poor decision-making seen in the financial system.

I await the Krauthammer column in which he points out the specific provision of the Community Reinvestment Act that forced Bear Stearns to run with an absurd leverage ratio of 33 to 1, which instructed Bear Stearns hedge-fund managers to blow up hundreds of millions of their clients' money, and that required its septuagenarian CEO to play bridge while his company ran into trouble.

Perhaps Neil Cavuto knows which CRA clause required Lehman Bros. to borrow hundreds of billions of dollars in short-term debt in the capital markets and then buy tens of billions of dollars of commercial real estate at the top of the market. I can't find it. Did AIG plunge into the credit-default-swaps business with abandon because Association of Community Organizations for Reform Now members picketed its offices? Please. How about the hundreds of billions of dollars of leveraged loans—loans banks committed to private-equity firms that wanted to conduct leveraged buyouts of retailers, restaurant companies, and industrial firms? Many of those are going bad now, too. Is that Bill Clinton's fault?

Look: There was a culture of stupid, reckless lending, of which Fannie Mae and Freddie Mac and the subprime lenders were an integral part. But the dumb-lending virus originated in Greenwich, Conn., midtown Manhattan, and Southern California, not Eastchester, Brownsville, and Washington, D.C. Investment banks created a demand for subprime loans because they saw it as a new asset class that they could dominate. They made subprime loans for the same reason they made other loans: They could get paid for making the loans, for turning them into securities, and for trading them—frequently using borrowed capital.

At Monday's hearing, Rep. John Mica, R-Fla., gamely tried to pin Lehman's demise on Fannie and Freddie. After comparing Lehman's small political contributions with Fannie and Freddie's much larger ones, Mica asked Fuld what role Fannie and Freddie's failure played in Lehman's demise. Fuld's response: "De minimis."

Lending money to poor people doesn't make you poor. Lending money poorly to rich people does.

End quote

john marzan said...

smrstrauss: "In any case, when the need became clear, the Democrats acted."

by then, it was already too late.

smrstrauss: So what about 2003,2004, etc. Well, obviously the need was not clear. If you take a look at Fannie and Freddie's stock prices, you will see that they held up fairly well despite the accounting scandal. Wall Street apparently thought that the mis-statement of earnings was just a blip in a otherwise good record, and so why should not the Democrats.

We are not all blessed with the ability to see four years into the future.

i understand. but you don't need a 9/11 type catastrophe in the financial markets before you take the republican's proposed oversight body and reforms for fannie enron seriously. if there is justice in the world, those in congress who played the race card vs the bush administration on fannie enron in 2003-2005 and opposed their efforts to fix the problem should lose their seats in 2008.

smrstrauss said...

What do you mean "played the race card" on the Bush administration???

If you are implying that Democrats wanted to make loans to minorities and Bush did NOT want to, you are being very unfair to Bush, and you are factually wrong, wrong, wrong.

In fact, Bush was very proud of the extend of lending to minorities, and proposed his own programs to increase it further. (

It is often quoted by the right with some shock that Andrew Cuomo increased the percentage requirement on Fannie Freddie loans to average and poor people (NOT to minorities specifically) from 42% to 50%. But in 2004 -- during the height of the real estate bubble -- the Bush administration, through HUD, increased that requirement further, to 56%. see:

The next thing we should ask is whether it was purely because of pay-offs in terms of contributions that kept Democrats from tightening regulations on Fannie and Freddie for so long? I find, however, that Freddie (which was formed by Richard Nixon, a Republican) actually contributed more to Republicans from 1990 through early 2008 according to The figures says OpenSecrets is a total of $9.6 million contributed by Freddie, of which 57% went to Republicans.

You may say what about Fannie? Sorry, there are not similar figures because OpenSecrets does not consider Fannie to be a major contributing organization.

(It does however consider the American Bankers Association to be a major contributing organization, having contributed $29 million 1990-2009, 57% of it to Republicans.)

Want to know why Republicans were not terribly interested in regulating commercial mortgage lenders?????

In recent TV interviews, Frank has admitted quite frankly that had he known in 2001-2005 what he knows know about the looming crisis, he would not have said what he said about Fannie/Freddie being in great shape. But he also points out that the Republicans were in charge of both houses, and he asks why didn't THEY act???

He notes that for much of this period, the senate committee in charge of F/F was the Banking Committee, headed by McCain's economic adviser, Sen. Lindsay Graham, and nothing emerged from Graham's committee. In contrast, Frank cooperated with Republican congressman Michael Oxley to pass a bill tightening regulation of Fannie and Freddie, which passed the House, but failed in the senate.

Now, let us ask about the role of President Bush in all of this. It is said that he called repeatedly for tighter regulation, which is true. But, he did not take any step to cooperate with the opposition party, which he had done with No Child Left Behind.

If you had been president, and you believed that a serious financial crisis was looming, and you needed some votes from the other party, wouldn't it be smart to at least invite them to lunch? Moreover, if you REALLY thought it was vital, well you could let them get their names on the bill (like Graham Dodd, one Republican, one Democrat), but nothing of a bipartisan nature was really backed by the Bush administration, whose attitude, the Economist recently noted, had long been "my way or the highway." (Economist, Oct. 4-10,2008, page 36.)

On the lack of perfect foresight. As I have pointed out, Republicans lacked it too, since no clear majority of them voted in favor of the Fannie/Freddie regulation proposals 2002-2005. And they certainly lacked it on regulation of COMMERCIAL mortgage companies, which they opposed, and which originated MORE THAN 80% of sub-prime mortgages.

But lack of perfect foresight is hardly a sin. Just a couple of weeks before the financial crisis a broker was advising me to put a lot of money into Citibank and Bank of America -- since they were rock solid and paid a high dividend.

I've seen some similarly positive financial articles on Fannie/Freddie too.

john marzan said...

What do you mean "played the race card"

oh, like what barney frank did recently to squelch any criticism of fannie mae and democrats' role to block reforms.


Frank says GOP housing attacks racially motivated
Oct 6 08:12 PM US/Eastern
AP Political Writer

BOSTON (AP) - Rep. Barney Frank said Monday that Republican criticism of Democrats over the nation's housing crisis is a veiled attack on the poor that's racially motivated.

The Massachusetts Democrat, chairman of the House Financial Services Committee, said the GOP is appealing to its base by blaming the country's mortgage foreclosure problem on efforts to expand affordable housing through the Community Reinvestment Act.

He said that blame is misplaced, because those loans are issued by regulated institutions, while far more foreclosures were triggered by high-cost loans made by unregulated entities.

"They get to take things out on poor people," Frank said at a mortgage foreclosure symposium in Boston. "Let's be honest: The fact that some of the poor people are black doesn't hurt them either, from their standpoint. This is an effort, I believe, to appeal to a kind of anger in people."


here's more. watch how dems beat up on a regulator and calling the investigation that found the illegal activity of franklin raines (the african-american CEO of fannie) a "lynching")

john marzan said...

re that slate article by daniel gross

read this by conn carroll.