Patterico's Pontifications

9/23/2008

Greed, Stupidity, Delusion, Fannie and Freddie

[Posted by Karl]

John Steele Gordon — an author who has chronicled the booms and busts of US economic history — guest-posts at the NYT’s Freaknomics blog that the current mess on Wall Street is due in part to self-delusion by traders and bankers, as well as failures by credit ratings agencies such as Moody’s and Standard and Poor’s (who were part of a government-created oligopoly until 2007) to learn from their mistakes in cases like Enron:

But at the heart of the problem is Congress and its deeply corrupt relationship with Fannie Mae and Freddie Mac. Congress was equally at the heart of the savings and loan disaster 20 years ago and, obviously, learned nothing from it.

RTWT.  Gordon also credits The Wall Street Journal editorial page for warning for years that this was a disaster waiting to happen.  Now that public attention is riveted on the issue, the WSJ has another op-ed today by Charles W. Calomiris and Peter J. Wallison, explaining how these two government-sponsored enterprises (GSEs) and their political patrons bear a major potion of the blame:

How did we get here? Let’s review: In order to curry congressional support after their accounting scandals in 2003 and 2004, Fannie Mae and Freddie Mac committed to increased financing of “affordable housing.” They became the largest buyers of subprime and Alt-A mortgages [a/k/a “liar loans” -K] between 2004 and 2007, with total GSE exposure eventually exceeding $1 trillion. In doing so, they stimulated the growth of the subpar mortgage market and substantially magnified the costs of its collapse.

It is important to understand that, as GSEs, Fannie and Freddie were viewed in the capital markets as government-backed buyers (a belief that has now been reduced to fact). Thus they were able to borrow as much as they wanted for the purpose of buying mortgages and mortgage-backed securities. Their buying patterns and interests were followed closely in the markets. If Fannie and Freddie wanted subprime or Alt-A loans, the mortgage markets would produce them.

Calomiris and Wallison also notes (as previously noted here) that Senate Republicans, including John McCain, supported a strong reform bill for the GSEs, while Democrats opposed it or — like Barack Obama — remained silent.

Yesterday on the campaign trail, Obama claimed that McCain was a champion of the deregulation that led to the current turmoil in US markets.  As McCain was the champion of reform on this issue and the deregulation he supported is one of the few saving graces of the current crisis, Obama’s claim seems remarkably dishonest.  Yet Obama’s in-the-tank media pals like the Politico’s Ben Smith and the oh-so-probing New York Times have not bothered to remark upon it.

–Karl

32 Responses to “Greed, Stupidity, Delusion, Fannie and Freddie”

  1. Barack Obama did not remain silent.

    He voted “present”.

    Icy Truth (74c635)

  2. Obama’s claim seems remarkably dishonest.

    That is being pretty generous, Karl.

    I am still waiting to see what kind of contemporaneous leadership Baracky provided on this issue, or any other issue.

    So far, he has not demonstrated even a scintilla of leadership, except in fundraising.

    JD (41e64f)

  3. I blame Bush. And Rove. And Kyoto. But not Halliburton.

    JD (41e64f)

  4. http://www.bloomberg.com/apps/news?pid=20601070&sid=aQIOOr9klOnE

    McCain Transition Head Lobbied for Freddie Mac Before Takeover

    By Jonathan D. Salant and Timothy J. Burger

    Sept. 23 (Bloomberg) — The lobbying firm of the man Republicans say John McCain has chosen to begin planning a presidential transition earned more than a quarter of a million dollars this year representing Freddie Mac, one of the companies McCain blames for the nation’s financial crisis.

    Timmons & Co., whose founder and chairman emeritus is William Timmons Sr., was registered to lobby for Freddie Mac from 2000 through this month, when the federal government took over both Freddie Mac and Fannie Mae.

    Newly available congressional records show Timmons’s firm received $260,000 this year before its lobbying activities were barred under terms of the government rescue of the failed mortgage giant. Timmons, 77, is listed as a lobbyist for Freddie Mac on the company’s midyear financial-disclosure form.

    markg8 (5ea1db)

  5. markg8 cuts and pastes:

    McCain Transition Head Lobbied for Freddie Mac Before Takeover

    And people on his campaign staff have lobbied for the GSEs in the past. Yet McCain supported reforming the GSEs, while Obama became their second favorite guy in the Senate and sat on his hands.

    Karl (1b4668)

  6. markg8 cuts and pastes

    markg8 doesn’t do much apart from cutting and pasting.

    daleyrocks (d9ec17)

  7. Karl – They have their marching orders. Memes of the day, if you will.

    JD (41e64f)

  8. JD,

    I know; it’s just that their talking points aren’t very good.

    Karl (1b4668)

  9. From the Federal Election Commission:

    Fannie Mae and Freddie Mac
    Directors/Officers/Lobbyists
    Contributions

    Name McCain Obama
    —————– —— ——-
    Geoffrey Boisi $70,100 $0
    Alfonse D’Amato $30,800 $0
    William Lewis, Jr $0 $4,600
    Herbert Allison, Jr $0 $2,300
    Brenda Gaines $0 $2,300
    Jerome P. Kenney $2,300 $0
    Patrick Swygert $1,000 $1,000
    Robert Glauber $0 $1,000
    Daniel Mudd $1,000 $0
    John Sites $1,000 $0
    Louis Freeh $200 $0
    Others (29 lobbyists) $63,500 $4,800
    ——————– ———- ——-
    Total $169,900 $16,000

    Who’s information isn’t very good?

    John McCain’s campaign manager Rick Davis was paid more than $30,000 a month for five years as president of an advocacy group the Homeownership Alliance, set up by the mortgage giants Fannie Mae and Freddie Mac to defend them against stricter regulations, current and former officials say.

    Several current and former executives of the companies came forward to discuss the role that Rick Davis, Mr. McCain’s campaign manager and longtime adviser, played in helping Fannie Mae and Freddie Mac beat back regulatory challenges when he served as president of their advocacy group, the Homeownership Alliance, formed in the summer of 2000. Some who came forward were Democrats, but Republicans, speaking on the condition of anonymity, confirmed their descriptions.

    “The value that he brought to the relationship was the closeness to Senator McCain and the possibility that Senator McCain was going to run for president again,” said Robert McCarson, a former spokesman for Fannie Mae, who said that while he worked there from 2000 to 2002, Fannie Mae and Freddie Mac together paid Mr. Davis’s firm $35,000 a month. Mr. Davis “didn’t really do anything,” Mr. McCarson, a Democrat, said.

    Mr. McCain was never a leading critic or defender of the mortgage giants, although several former executives of the companies said Mr. Davis did draw Mr. McCain to a 2004 awards banquet that the companies’ Homeownership Alliance held in a Senate office building. The organization printed a photograph of Mr. McCain at the event in its 2004 annual report, bolstering its clout and credibility.

    The spokesman, Tucker Bounds, also noted that the Homeownership Alliance included nonprofit organizations like Habitat for Humanity and the Urban League. “It’s not controversial to promote homeownership and minority homeownership,” Mr. Bounds said.

    (Wow don’t tell Republicans in congress that because they’re busy trying to blame minorities for almost bringing down the world’s financial markets by buying houses)

    More than a half-dozen current and former executives, however, said the Homeownership Alliance was set up mainly to defend Fannie Mae and Freddie Mac by promoting their role in the housing market, and the two companies paid almost the entire cost of the group’s operations.

    “They were financed largely, possibly exclusively, by Fannie and Freddie,” said William R. Maloni, a Democrat who is a former head of industry relations for Fannie Mae. “We thought it would be helpful to have someone who was a broadly recognized Republican to be the face of the organization, and that person became Rick Davis.” Mr. Maloni added, “Rick, for that purpose, turned out to be quite good.” (Several executives said Mr. Davis’s compensation was not unusual for the companies’ well-connected consultants.)

    “You can say what you want about free-market distortions, but people like the system because it gets them into houses cheap,” Mr. Davis said to Institutional Investor magazine in 2000, adding that he would run the advocacy group out of his Alexandria, Va., lobbying firm.

    The organization also hired Public Strategies, a communications firm that included former Bush adviser Mark McKinnon. Mr. Davis wrote letters and gave speeches for the group.

    Most of the above was pasted together from the NYT that had Schmidt and Davis whining and stamping their feet yesterday. Now sometimes I cut and paste and sometimes I write my own stuff.
    I’m kind of busy right now, have an 10:30 appt., so you’ll have to make due with this.

    markg8 (5ea1db)

  10. markg8 – Try doing your homework before copy and paste hatchet jobs.

    JD (41e64f)

  11. “(Wow don’t tell Republicans in congress that because they’re busy trying to blame minorities for almost bringing down the world’s financial markets by buying houses)”

    markg8 – It’s always about race for the dems! I haven’t seen anyone on the rignt try to frame what is going on in this manner. Could you point out one
    markg8 please? Otherwise this seems more like a straw man of your own construction. Subprime and Alt-A loans get made to people of all races. Get your head off the identity politics card.

    daleyrocks (d9ec17)

  12. daleyrocks – Identity politics is all they have got. Period.

    JD (41e64f)

  13. It’s always about race with Dems? Go to CSPAN and look at any of the speeches by Repub house members yesterday. They blame it all on Bush’s “ownership society” programs and there’s more than enough innuendo and code for even you to get it daleyrocks.

    And it’s not the Dem candidate who put the one black fella at FM in an ad, who McCain would have you believe is to blame for everything that happened there, who Obama met for 5 minutes once. Why do you think the rest of these guys, Republicans and Democrats alike, were so outraged by the hypocrisy they sang about Davis to the Times?

    Seriously do you think anybody is buying John McCain acting all of a sudden like he’s William Jennings Bryan when just last week he was the great deregulator?

    markg8 (5ea1db)

  14. there’s more than enough innuendo and code for even you to get it daleyrocks

    Where can we find our super secret decoder rings, markg8?

    And it’s not the Dem candidate who put the one black fella at FM in an ad, who McCain would have you believe is to blame for everything that happened there, who Obama met for 5 minutes once.

    Complete and utter histrionics and objectively false statements. Hack.

    JD (41e64f)

  15. markg8 – Did McCain, or did he not, call for increased regulations on this issue? Yes or no? Were said deregulations passed or blocked by the Dems?

    JD (41e64f)

  16. The Obama talking points are all over today. By 2004, it was apparent that the press was part of the Democratic Party. That’s why Palin is such a big help this year. They can’t keep themselves from covering her. The UN thing is just more of it. She is going to be like Reagan in being able to reach people over the heads of the MSM.

    Mickey Kaus is right that the Dems have more to fear from the VP debate next week.

    Luskin has a pretty good discussion of the bailout today.

    Mike K (f89cb3)

  17. Sept. 23 (Bloomberg) — The lobbying firm of the man Republicans say John McCain has chosen to begin planning a presidential transition earned more than a quarter of a million dollars this year representing Freddie Mac, one of the companies McCain blames for the nation’s financial crisis.

    Timmons & Co., whose founder and chairman emeritus is William Timmons Sr., was registered to lobby for Freddie Mac from 2000 through this month, when the federal government took over both Freddie Mac and Fannie Mae.

    Newly available congressional records show Timmons’s firm received $260,000 this year before its lobbying activities were barred under terms of the government rescue of the failed mortgage giant. Timmons, 77, is listed as a lobbyist for Freddie Mac on the company’s midyear financial-disclosure form.

    Readnek (105b91)

  18. Gordon

    “The Wall Street Journal editorial page has been giving chapter and verse for years on why this was a disaster waiting to happen (Pulitzer Prize judges, please note). The Bush administration tried way back in 2003 to change the system. It got nowhere. Alan Greenspan, then the chairman of the Federal Reserve, frequently noted the danger of Fannie and Freddie’s weak capitalization. He was ignored. Congressman Mike Oxley, then chairman of the House Financial Services Committee, introduced a bill in 2005 to correct the situation. Lobbyists from Fannie and Freddie succeeded in gutting it to the point that Rep. Oxley pulled the bill.”

    We’ve been through this three times already. This gets boring

    The critics have forgotten that the House passed a GSE reform bill in 2005 that could well have prevented the current crisis, says Mr Oxley, now vice-chairman of Nasdaq.

    He fumes about the criticism of his House colleagues. “All the handwringing and bedwetting is going on without remembering how the House stepped up on this,” he says. “What did we get from the White House? We got a one-finger salute.”

    The House bill, the 2005 Federal Housing Finance Reform Act, would have created a stronger regulator with new powers to increase capital at Fannie and Freddie, to limit their portfolios and to deal with the possibility of receivership.

    Mr Oxley reached out to Barney Frank, then the ranking Democrat on the committee and now its chairman, to secure support on the other side of the aisle. But after winning bipartisan support in the House, where the bill passed by 331 to 90 votes, the legislation lacked a champion in the Senate and faced hostility from the Bush administration.

    Adamant that the only solution to the problems posed by Fannie and Freddie was their privatisation, the White House attacked the bill. Mr Greenspan also weighed in, saying that the House legislation was worse than no bill at all.

    “We missed a golden opportunity that would have avoided a lot of the problems we’re facing now, if we hadn’t had such a firm ideological position at the White House and the Treasury and the Fed,” Mr Oxley says.

    Next I’ll have to link again[!] to the statements of fact that Fannie and Freddie are not the biggest players in this garbage game, by far.. And now there’s this from the White House

    With respect to executive pay, again, I’m not going to get into specific, point-by-point details on what our views are on that, other than the Secretary of Treasury said it would make more difficult to make this plan work and effective if you provide disincentives for companies and firms out there who are holding mortgage-backed securities and other securities from participating in the program. You have to remember, these are not all weak or troubled firms that own mortgage-backed securities. A lot of them are very successful banks and investment houses that have done very well, have been responsible, are holding performing assets that have value. They were not necessarily irresponsible players, and so you have to be careful about how you deal with them.

    Pigs at the trough.

    Readnek (105b91)

  19. Readnek,

    And we could go through whether Oxley’s account is accurate, too. None of which would change the relative positions of the candidates for president, or the relative positions of the parties in Congress.

    Karl (61d1c1)

  20. markg8 – Why do you think it is racist to put black people in an ad? Do you think black people are sinister as some people on the left claimed? Do black people scare you?

    daleyrocks (d9ec17)

  21. readnek – That Oxley bill was weak ass regulation, that’s why it was threatened with a veto. You could figure that out if you did some homework instead of just regurgitating somebody else’s talking points.

    daleyrocks (d9ec17)

  22. “Next I’ll have to link again[!] to the statements of fact that Fannie and Freddie are not the biggest players in this garbage game, by far”

    readnek – As I recall, those were statements of opinion, not fact. If you’ve got facts, let them fly.

    daleyrocks (d9ec17)

  23. And since Readnek asserted that “Fannie and Freddie are not the biggest players in this garbage game,” let’s note:

    With all the old rules out the window, Fannie and Freddie gobbled up the market. Using extraordinary leverage, they eventually controlled 90% of the secondary market mortgages. Their total portfolio of loans topped $5.4 trillion — half of all U.S. mortgage lending. They borrowed $1.5 trillion from U.S. capital markets with — wink, wink — an “implicit” government guarantee of the debts.

    This created the problem we are having today.

    Karl (1b4668)

  24. Karl – That’s not nice.

    daleyrocks (d9ec17)

  25. here you go kids

    And this should interest you.

    Also unconvincing is the claim made by some conservatives that the Clinton Administration’s 1995 Community Reinvestment Act (CRA) regulations, which pushed banks to lend in poor communities, caused the subprime mortgage lending binge that sparked the current troubles. It’s certainly conceivable that Washington’s long-held obsession with fostering home ownership helped fuel the housing bubble. But when the subprime lending binge really took off from 2003 to 2006, financial institutions subject to CRA weren’t the ones leading the way. Neither were government-sponsored behemoths Fannie Mae and Freddie Mac.

    No, starting in 2003, as a long boom in house prices and mortgage lending that had at least some foundation in economic reality (lower interest rates, higher incomes) gave way to an orgy of ever-sharper price increases fueled by ever-dodgier loans, the folks in the drivers’ seat were the mortgage brokers that made the loans and the Wall Street investment banks that packaged them into private-label mortgage-backed securities.

    And these people were barely regulated at all, at least not in the sense that bankers are regulated. “You had a regulatory mechanism that was targeted very narrowly to prudential regulation of the banking industry,” says Gene Ludwig, who as Comptroller of the Currency oversaw the nation’s big banks from 1993 to 1998. What that did, Ludwig explains, was to motivate banking companies to move activities to their less-regulated affiliates, and give a leg up to competitors (stand-alone investment firms, hedge funds, mortgage brokers, you name it) that weren’t being watched by banking regulators at all.

    Readnek (105b91)

  26. Readnek – Still nothing except opinion to back up your statement:

    “Next I’ll have to link again[!] to the statements of fact that Fannie and Freddie are not the biggest players in this garbage game, by far”

    Waiting on facts.

    daleyrocks (d9ec17)

  27. When all of the fall-out hits the ground, it will be interesting to find out how much of the hundreds of millions of dollars in mortgages initiated by ACORN have contributed to the MBS melt-down?
    And, how much of this volume will have the fingerprints of a certain “community organizer” from Chicago on them?
    Or, the fingerprints of his friends like Ayers?

    Another Drew (e8be76)

  28. Since one of Ludwig’s big jobs at the OCC was working on the CRA, it’s not unusual that he finds it had no significant impact on subprime lending. After all that would be accepting blame and he wouldn’t want to do that.

    daleyrocks (d9ec17)

  29. Looks like the Obama campaign spending is paying off in the influx of Obama spin trolls.

    SPQR (26be8b)

  30. Karl, I have enjoyed your posts. And wow, the title of this one, “Greed, Stupidity, Delusion…”, could so aptly lend itself as the biographical working title for a good number of choice players on the left in this campaign. I won’t name names…

    Serious multi-tasking writing. :)

    Dana (4d3ea0)

  31. Where’s readnek with those facts?

    daleyrocks (d9ec17)

  32. A Few facts for this spirited debate.

    Both Fannie’s and Freddie’s mortgage portfolios were capped at about $725 Billion each, by their federal regulator. Currently, because the regulaltor wanted the companies to do more to stimulate the mortgage market, the growth limits have been relaxed by 2% or so.

    More importantly, the legsilation which has now led to both companiees being placed in “conservatorship,” called for each to have portfiolos of about $850 Billion and a mortgage purchase ceiling of about $600,000, to stimulate the near moribund and former “jumbo markets,” loans that had been to high for F&F to purchase when their maximum mortage ceiling was $425k.

    Fannie’s financial failure (which i think was judged prematurely based on the available capital on their books) came from buying the same Wall Street poison that most every investor instituional did–securities backed by subprime mortagges “guaranteed” by Wall Street. That si why our losses are so high nationally and why everyone is dying from the same illness. It is hardly unique to F&F. (These were subprime loans sent directly to the Street by mortgage broekrs and securitized and sold by the investment banks.) Fannie and Freddie wouldn’t originate them, but they bought them and their CEOs, their companies, their employees, and likely the nation paid a huge porice, when they were take out of the private market.

    Each company has a “new CEO”–picked by the Treasury Department–and will be run by these gentlemen on rules dictated by the Treasury and the entities federal regulator. Nobody knows, yet, what rules or market sensitivity they will be permitted to utilize.

    So get ready to aim your cannon elswehere. F&F won’t be your problem. In fact, Treasury likely will use them to manage some of this $700 billion in mortgage trash that soon will be on the governments’ books.

    Where were the Bush regualtores when “contemporary” subprime was born in the early years of this century?

    Where was the SEC, the Fed, the Coucnil of Economic Advisors, the “Great Deregulator” Senator McCain?

    Absent or asleep. All on George Bush’s watch.

    DC Straight Talker (9cd521)


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