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The Foreseen Crisis

Submitted by Pat on Tue, 09/30/2008 - 2:43pm

Rarely in our political history has a crisis of this magnitude been so thoroughly, so accurately predicted as the credit liquidity crunch we currently face. The warning signs were plain. A responsible leader, in a position of power, called our attention to it. Two Presidents have seen the risks. But despite the best efforts of that leader, those two Presidents, and others with similar vision, only token reforms were accomplished before it was too late.

Four years ago, October 6, 2004, then-Congressman Richard Baker wrote Fannie Hits Bottom, an op-ed in the Wall Street Journal warning about the coming crisis. Because of the public importance of this subject, I am reprinting the entire column below the fold, and you should read the whole thing. Here's a key portion:

Then there's the lesson of a company, Frankenstein-like, seemingly grown so powerful that it can intimidate and arrogantly flout all accountability to the very government that created it.

This last is indeed scary because, as Fannie and Freddie have grown, they have amassed $1.7 trillion of debt. They raise the debt to purchase more mortgages. Although their bonds bear the disclaimer "not backed by the full faith and credit of the U.S. government," the market does not believe it and looks right past the companies' risk strategies to the taxpayers' pockets.

Given lawmakers' justifiable fears that their constituents could be on the hook for $1.7 trillion, Fannie and Freddie's most persuasive case for staving off reform has been that they are both well managed. Therefore the mortgage giants don't necessitate, as some of their allies like to say, "a solution in search of a problem." An astronomy buff myself, I can, unfortunately, reply today: "Houston, we have a problem."

Remember that the year before, in 2003, Rep. Baker had warned:

I have concerns that if appropriate resources aren't allocated for internal risk management, the consequences will be far more severe than just a real estate slowdown. The losses would fall quickly through the capital these companies have and down to shareholders and taxpayers. These companies have some of the lowest capital margins of any financial institution in the nation, yet, at the same time, they are two of the largest. The concern is that if something doesn't work out the way they predict, the American taxpayer could be called on to pay off the debt in some sort of bailout.

Well, Baker was right. So was Dr. Greg Mankiw, in 2003 the chair of President Bush's Council of Economic Advisors, who said:

The enormous size of the mortgage-backed securities market means that any problems at the GSEs matter for the financial system as a whole. This risk is a systemic issue also because the debt obligations of the housing GSEs are widely held by other financial institutions. The importance of GSE debt in the portfolios of other financial entities means that even a small mistake in GSE risk management could have ripple effects throughout the financial system.

The Democrats, however, were the party with their head in the sand... with one very notable exception. We'll get to the exception in a moment. But first, remember what the Democratic Congressman in charge of the subcommittee overseeing Fannie Mae and Freddie Mac had to say about Rep. Baker's concerns, back in 2001:

Our second topic concerns H.R. 1409, the Secondary Mortgage Market Enterprises Regulatory Improvement Act [the bill being promoted by Rep. Baker]. This bill would dramatically restructure the current regulatory system for Fannie Mae and Freddie Mac. In my opinion, it also represents a solution in search of a problem. Nearly a decade ago, Congress created a rational, reasonable, and responsive system for supervising GSE activities, and that system with two regulators is operating increasingly effectively. H.R. 1409 would unfortunately interrupt this continual progress.

You can hear for yourself what other Democrats had to say about Rep. Baker's efforts to bring attention to the potential for catastrophe:

Most of the Democratic Party (and far too many Republicans) adopted a see-no-evil, hear-no-evil, speak-no-evil approach to Fannie Mae and Freddie Mac. They enjoyed the campaign contributions, the dinners, the post-government-service employment, the publicity of "cheap mortgages for all" provided by Franklin Raines, Jim Johnson, and the other over-paid miscreants running Fannie and Freddie. They didn't want to rock the boat.

One Democrat, at least, saw the problem. His approach (and his wife) have now been rejected by the "reality based community" which the Democratic Party has become, but President Clinton saw the potential for problems and did his part to try to correct it. Unfortunately, he got no help from the members of his party in Congress. Clinton's thoughts on the subject are brought to us courtesy of the latest McCain ad on the subject:

Please, all of you. Read and watch what the Democrats said while fighting off Republican attempts at GREATER regulation of these government sponsored entities holding $1.7 trillion or more in debt. Keep that in mind the next time Nancy Pelosi or some idiot Kossack rails against "Republican greed" and "Republican corruption." It was Republicans (at least some of them) demanding reforms, demanding increased regulation. It was the Democrats, all of Nancy Pelosi and Barack Obama's friends, who refused to look a gift horse in the mouth, who refused to listen to serious warning signs, who refused to accept greater regulation of an incredibly risky segment of the financial market.

Some bailout may be necessary at this point. We must not accept one, however, that doesn't come with major political consequences for those who got us into this mess, and that includes the entire Democratic leadership in Congress and those Republicans who themselves resisted Richard Baker's reform efforts. While those people are still in positions of leadership in Congress, Americans should unite in refusing to tolerate any bailout. Their bad judgment caused this. They shouldn't get to stay in power while we are forced to pay for their mess.

UPDATE by Pat: In the comments, Richard Baker stops by and offers a few historical tidbits about his struggles to warn people of the coming crisis.

Related posts:

More of the record on Fannie Mae and Freddie Mac
Rewarding Bad Judgment
The (non-) Bailout

More posts about the crisis generally:

Ten points about the finance crisis
USA bad, but its government is safest place for money right now?
It's a Wonderful Life
The bailout fails

The complete text of Rep. Baker's 2004 op-ed is available here for the next 7 days. Because of the importance of this issue to public debate right now, I am reproducing the entire text of the column here so it remains available:

Fannie Hits Bottom
By Richard H. Baker

Fannie Mae does not like to be crossed. Just ask Gary Gensler. On March 22, 2000, Mr. Gensler, then undersecretary of the Treasury, testified before my subcommittee of his concern for the rapid growth of housing finance companies Fannie Mae and Freddie Mac. He expressed the Clinton administration's general endorsement of legislation I had introduced to strengthen oversight of these government-sponsored enterprises (GSEs). For his pains, spokesmen for Fannie responded by calling the testimony "inept," "irresponsible," and "unprofessional," and accused Mr. Gensler of boosting mortgage rates and hurting "approximately 206,000 families."

Despite the untruth of this last assertion (Freddie's national surveys showed no rise in mortgage rates in the weeks to follow), Fannie's aggressiveness helped scuttle reform that year, as it has bogged down similar legislative efforts since then. But four years later, this episode continues to provide lessons applicable to today.

The first is that reform does not have to be a partisan effort. As in 2000, it is possible for Democrat and Republican alike to support the mission of Fannie and Freddie, which Congress created to help low- to moderate-income homebuyers by providing liquidity to the mortgage market, while also working to ensure that the companies operate in a financially sound manner.

A second, less pleasant, lesson is that even to argue for stronger oversight of Fannie is to risk personal attacks and accusations of being irresponsible, or worse, "anti-housing," as if greater assurances of Fannie's safety could somehow lead to less, and not more, stability and certainty in the bond market.

Then there's the lesson of a company, Frankenstein-like, seemingly grown so powerful that it can intimidate and arrogantly flout all accountability to the very government that created it.

This last is indeed scary because, as Fannie and Freddie have grown, they have amassed $1.7 trillion of debt. They raise the debt to purchase more mortgages. Although their bonds bear the disclaimer "not backed by the full faith and credit of the U.S. government," the market does not believe it and looks right past the companies' risk strategies to the taxpayers' pockets.

Given lawmakers' justifiable fears that their constituents could be on the hook for $1.7 trillion, Fannie and Freddie's most persuasive case for staving off reform has been that they are both well managed. Therefore the mortgage giants don't necessitate, as some of their allies like to say, "a solution in search of a problem." An astronomy buff myself, I can, unfortunately, reply today: "Houston, we have a problem."

My own interest in Fannie and Freddie was historically not about their competence, which I never had cause to doubt, until now. Following the savings-and-loan scandals of the 1980s, which impacted Louisiana, I thought it wiser for policymakers to act before it was too late, to avoid another situation where taxpayers were tapped to pick up the tab for a massive bailout they played no part in producing. Perhaps we could be on the lookout for "systemic risks" to the financial system, the hallmarks of which are companies that are large, with high leverage ratios of debt to capital, operate with inadequate oversight and transparency, and have extensive reach within the economy. Fannie and Freddie qualify on all counts. For example, as of March 31, 2003, some 3,103, or 39.5 %, of all FDIC-insured lending institutions in America held GSE debt as 100% or greater of their own Tier 1 capital reserves. A major stumble by either of these mortgage giants would make the downfall of the S&Ls look Lilliputian by comparison.

The only thing standing between unforeseen catastrophe and the taxpayers is the Office of Federal Housing Enterprise Oversight, or Ofheo, a small, underfunded outfit lacking many of the basic oversight powers of other financial regulators, a situation I have again introduced legislation to remedy.

But standing in the way of reform, first, is the tenacity of the companies themselves, aided by a combined annual subsidy of $19.9 billion, which they enjoy by dint of certain advantages in the marketplace and their closeness to the government. According to the Congressional Budget Office, rather than pass on the full subsidy in cost savings to homebuyers, Fannie and Freddie retain about a third, or $6.3 billion, for themselves, which they use in part to bankroll an army of high-priced lobbyists to besiege Washington with no apparent mission beyond protecting this lucrative arrangement.

A second obstacle has been the reluctance of lawmakers who genuinely believe that Fannie and Freddie contribute invaluable service in "opening doors" to the "American dream." The irony, based on new information from Ofheo, is that only 2.8% of the mortgages purchased by Fannie, and 1.5% of Freddie's, are from homebuyers who could afford down payments of 5% or lower, while 82.1% and 83.4 %, respectively, are loans in which homebuyers put down 20% or more. Considering the size of Fannie and Freddie's subsidy, this is an appalling record of helping low-income, first-time homebuyers, and one might expect lawmakers of both parties to join in demanding better.

Fannie's recent accounting trouble gives new cause for urgency. After an accounting scandal at Freddie last year, a special examination by Ofheo has now revealed flaws in Fannie's accounting. The findings, says Ofheo, "raise doubts concerning the validity of previously reported financial results, the adequacy of regulatory capital, the quality of management supervision, and the overall safety and soundness" of Fannie.

From all that has been disclosed to date, most disturbing was to learn that one consequence of the accounting manipulation was that Fannie executives were unjustly enriched. At the same time these executives underperformed their mission to low-income Americans, they were also cooking the books to pocket an extra $27 million in bonuses for themselves. Whether or not the numbers of Fannie's deception come to match those of the Enron fraud, this kind of greed in a company entrusted to implement important public policy is a betrayal of public trust of a more deplorable quality than Enron's ever was.

Today, my subcommittee will hear testimony from Ofheo's director and top officials at Fannie so lawmakers can start to sort the sunny appearance Fannie projects to the world from the reality of the deceptive and irresponsible corporate culture portrayed in the report, and to question whether real accountability will come to those who committed wrongdoing or were in a position to keep it from occurring. Meanwhile, the SEC has begun an inquiry on behalf of investors, and the Justice Department has launched a criminal investigation into Fannie's actions.

Now we begin to understand what Fannie was trying to hide and why they've been fighting so strenuously and for so long to avoid close scrutiny. But the last leg of Fannie and Freddie's argument against reform -- that they are well run and don't represent a concern -- is crumbling beneath them, and it is no longer tenable simply to take their word for it. It's imperative that we act, this time, before it's too late.

Rep. Baker (R., La.) is chairman of the House Financial Services Committee's Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises.

Pat, I think you make a compelling case why many of the

Congresscritters now laying all kinds of blame shouldn't throw stones, but couldn't one argue that the GOP is primarily to blame, since they had the majority, just as Pelosi and the Dem leadership may ultimately get the blame for failing to get the bailout passed?

It's true that Baker was right, yet sadly ignored and ridiculed by many Dems, but the GOP didn't do their job either, and they were in charge. In this case, the GOP leadership failed to deliver the votes for the bailout, but it Dems are in charge, and 95 Dems defected.

One more thing, are you advocating that no bailout should pass in order to teach the guilty parties a political lesson, or do you simply think that any good bill ought to be untouched by the hands of those whose negligence caused this fiasco?

I think that a good bill should pass, and the political fallout can be dealt with later, at the ballot box. I'm in total agreement that those who caused this ought to pay, and I'm talking about both parties.

"In the world you will find tribulation, but be of good cheer, for I have overcome the world."

John 16:33

I don't think that'll work, Rafique...

On the subject of blame, I have, of course, been careful to mete out a goodly portion of it to the GOP congressional leadership. But I don't think they deserve the primary blame for the failure of the necessary reforms to pass, just as the Democrats don't deserve the entire blame (nor credit) for the failure of the bail-out package yesterday. At least there were SOME Republicans pushing for major reforms; no Democrats were -- even President Clinton's support became tepid once he saw the harsh reaction his fellow party members had to raising any doubt at all about the wisdom of Fannie and Freddie. Yes, in an ideal world, the GOP leadership would have pushed harder and overridden the objections of the minority party, accepting the inevitable whining and complaining about being power-mad and uncaring about racial minorities, etc., etc. But that's not terribly realistic to expect.

I remain unconvinced that a bailout SHOULD pass, in part because I have ZERO trust in either Paulson, Bush, or the Congressional leadership of either party on this subject. I don't trust their evaluation of the current situation, I don't trust them to accurately assess how the markets will react to various possible interventions, I don't trust them to craft a bill which ensures that the people who made risky decisions suffer some significant financial consequences as a result, I don't trust them to craft a bill which doesn't create more problems than it solves.

One of the primary reasons I don't trust them is their proven track record of not accurately understanding the risks which brought us to this point. If Nancy Pelosi gave a speech acknowledging that the Dems had been wrong for the past 8 years to defend Fannie and Freddie, then that might be a sign of learning from their mistakes. But so far, they don't even admit that. They are either hopelessly partisan and removed from any concern for reality, or they are utterly incapable of recognizing reality. Either fundamentally disqualifies them from trying to fix a problem. How can you craft a solution for a problem when you have no idea what actually caused it?

And as a practical matter, the ballot box is unlikely to provide a solution here. I don't get to vote for Paul Kranjorski. The people in his district probably like him, because he brings home a lot of pork from his position of power. His party people clearly consider him a stalwart, upstanding member, a fine leader. No, if the problem is as serious as they all seem to be saying, then we should demand that they act like it. The Democrats, in particular, are always railing against President Bush for not demanding "sacrifices" from us in the Iraq war. Well, I want to see some political sacrifices.

Every member of Congress who opposed the Baker reforms, frankly, ought to resign. Certainly they should resign from their leadership positions. Otherwise, they are, merely and demonstrably, selfish and power hungry, putting their own personal interests above those of the country. Why should we trust such people to craft a "good bill"?


I appreciate the generous time and attention given to the efforts of the past, but there are a considerable number of additional steps to this history. The review of the enterprises lasted over a fifteen year period, and was of wide ranging scope. However, the effort only began to gain some momentum when the more sensational charges gained some press recognition. It wasn't just members of Congress who thought I was on a stupid crusade, it was observers from every perspective, until...

Gary Gensler, an assistant secretary of Treasury under the CLINTON administration testified in favor of the Baker bill (which was one of many Baker bills), and created quite a stir. It was one of the first administration efforts to formally take such a position. As effective a communicator as Clinton was, he couldn't get the bill moving either.

In another year I learned of the compensation for the top twenty executives at Fannie, from the regulator (appropriately) and he subsequently informed Fannie I had the information. Fannie then hired Ken Starr, yes the real one, to threaten me with civil liability if I released the information.

The fact is that all twenty were making over a million dollars a year, before the big bonuses. This was made public at one of my numerous committee hearings, and the whole room went crazy. Now, they weren't mad at Fannie, they were mad at me.

Keep in mind, this was a congressionally created entity to help low income folks get access to home ownership, for which the taxpayer was responsible for the financial liabilities of the enterprise.

Only later did I discover that the financials had been "arranged" so that they hit the target necessary for maximum bonus payout to 1/10,000 of a cent accuracy. I'm sure it was a coincidence.

Oh, and by the way, $245 million dollars in bonuses were paid out to executives over a five year period. Not bad work if you can get it.

And to put a concluding chapter for all of this activity, I wrote the Justice Department in 2006 and asked they investigate the circumstances for the award of the ill gotten gains to Fannie executives. To my knowledge, no action was taken.

All this to say, as long as the system generated good returns for all participants involved, there was no appetite to change the rules. Whether the Savings and Loan debacle in the 80's, the tech bubble of the 90's, or the Fan/Fre fiasco, too much money chasing too few opportunities has always ended by costing the innocent bystanders a lot of money.

I know I share some of the blame for not having delivered the message in a convincing manner. I'm probably at fault with some because I am a Republican. Others are probably upset the Clinton administration supported my efforts. I'm just mad because they got away with it.

[Editor's Note by Pat: Former Congressman Baker originally left his comment on Rafique's thread about Sen. Obama's hawkish foreign policy; I've moved it to this thread.]

Thanks for your work, sir

Thank you very much for stopping by. You were my own Congressman for many years, and you are deeply missed.

Kind of tough, fighting leaders in 2 parties at once, I bet. Can't imagine what you must be feeling, watching your worst predictions come true, despite your best efforts to prevent them.

As I said in one of my posts, if our political leaders actually had any sense, they'd be hounding you on the phone, asking you to return to public service. As the one with the clearest and earliest understanding of the problems, it would seem obvious that the country should be seeking your advice on what to do to get us out of this mess without creating more problems than we solve.

This is a huge story that is

This is a huge story that is flying under the radar screen. Many thanks to Pat for bringing it to our attention, and to Mr. Baker for stopping by here to give more details.

But this is so important that it needs to be heard by every voter in America. How do we get this out to a wider audience?

Bail out

I'm a broker and knew all about Fannie Mae for at least eight years because a ton of people (mostly those awful Republicans) had laid it out there in Congressional hearings. But I was astounded when listening to O'Reilly on FOX the other night when he started yelling at some helpless guest, "I didn't know. I didn't know," in effect blaming the administration for the Fannie May blow up and "cover up." The press blacked everything out to the best of their ability but there was some. I think that our corrupt media bears at least a large part of the accountability.

I heard that segment on

I heard that segment on O'Reilly too and had the same thought. It's good that he's honest enough to admit that the press was asleep at the wheel, but his assertion that they aren't to be faulted for that is bizarre. Does he think that elected officials are going to put out press releases about their misdeeds?

Why I don't bother with him...

His "No Spin Zone" is in fact an "I'm going to insist on my own pre-formed opinion no matter what you say as I shout you down and keep you from saying anything at all"-zone.

Yeah, unfortunately, Bill-O's rare moments of relative clarity

are usually dwarfed by his all too frequent moments of bluster, ego, and railing against his list of enemies.

"In the world you will find tribulation, but be of good cheer, for I have overcome the world."

John 16:33

Oh, absolutely. I find more

Oh, absolutely. I find more often than not if I watch his show it's because I was flipping channels and noticed that he had a guest on that I was interested in hearing- but then I end up disappointed in most cases because he interrupts and talks over them so much that you don't even get to hear much from the interviewee.

I appreciate your good work, Mr. Baker, and as Pat does, I

lament that your words weren't heeded, or that your counsel isn't being sought now by the leadership. Pat has done a great job bringing this up, and even thought we disagree on the bailout, I really think this advances the debate immensely.

"In the world you will find tribulation, but be of good cheer, for I have overcome the world."

John 16:33

Not just Dem leadership, And Not Just Fannie/Freeddie

I don't like monopolies, and that's what Fannie and Freddie are; I'd rather see their privileges abolished, or at least made a generally-accessible mechanism by any bank. IMHO they're a relic of the days when you had plenty of nice, fat plums to give your troops after you won. One of the problems monopolies pose is that they have lots of concentrated money and power to lobby with, as Mr. Baker saw, to his regret. I'm glad they've had to disband their lobby team for now.

And I'm not happy about people being so cozy and willing to look the other way; I've grumbled on Centerfield that we Dems ran on the wrong issue, corruption, when we're so corrupt in Congress as well. I think it's a more bipartisan ranking than you're saying - you gonna tell me Hastert and DeLay were a big Freddie M reformer? Meanwhile, a Dem party leader was on the reform side until he gave up.

You and MCain are, I'm afraid, way overstating how much a Fannie/Freddie reform would've saved. If it were just Fannie and Freddie, the dimensions of our trouble would be much smaller and simpler, if still really expensive.

Shortsighted greed hardly only rests in Fannie/Freddie leadership. It also extended in the same way to Countryside and WaMu caring more about bulk than about fiscal sanity or living in a very shortsighted world. It also extended to the Wall Street investment banks no longer with us abandoning any kind of notion about reasonable capital margins and keeping cash reserves instead of options for, oh yeah, rainy days like today. It also extended to one stupid division of AIG as well.

It's fascinating to read this first person account, Mr. Baker. Thanks for leaving it.

I'm sure not going to say that...

Jon, I certainly wouldn't say that Hastert and DeLay were big reformers. Check my earlier posts today, where I made that quite clear. Which Dem party leader are you referring to? Pres. Clinton?

But the bottom line, I think, is that Fannie and Freddie are indeed the root of this problem. Without them either buying or guaranteeing a LOT of loans made by those other biggies you mention, they would never have made them.

The problem with the capital margins is that many banks were counting these mortgage-backed securities as part of their reserves. When their value plummeted, the value of their reserves plummeted (because of the mark to market rule), and BAM! they were "insolvent." They had actual assets, not just options, but the assets were just more risky than anybody admitted until the housing bubble burst.

I generally agree that F&F

I generally agree that F&F as quasi government/quasi private institutions was problematic and doomed to failure, but I would disagree that they are the root of the current crisis--rather, they are like any other financial institution that invested in subprime junk. Fannie and Freddie didn't cause the housing bubble (although effectively lowering interest rates certainly did push up home ownership levels). This mess is mainly caused by subprime lending, which by definition F&F didn't do (I realize that is an I oversimplification). Plus, F&F's ability to lend was being curtailed around the time the housing boom was taking off--private speculators began entering the game in a pretty big way a few years ago. So, while one can make an argument that F&F contributed to the mess, they are only one of the factors in a perfect storm of cheap money, bad regulations, bad govt policy, poor understanding of risks and good old fashioned greed.

Say what, Justin?

"This mess is mainly caused by subprime lending, which by definition F&F didn't do"?

Care to go look at the report linked to by Tully earlier and back up that massively wrong statement?

No one is saying that greed by the private sector didn't play an ample part in this fiasco. It certainly did. But the private sector by itself would never have engaged in the massively wide-spread risky behavior it did had it not been for the subsidies and guarantees provided by Fannie Mae and Freddie Mac (and, through them, you and me). We should be outraged that we even had to bail out Fannie and Freddie. To have to bail out all the other morons is outrageous. But I can take care of my own investments myself, move them to local banks, stay out of the stock market for short-term investments, whatever. As a citizen, a voter, I do have some influence over Congress, and I want to fire all the ones who played a heavy part in allowing this fiasco to occur.

F&F did start buying private

F&F did start buying private subprime loans, but I haven't seen any data to suggest that their pretty modest portfolio of subprime caused the meltdown, and I think it's not correct to say that F&F were subprime lenders (again, I realize that their involvement or lack thereof in subprime is being simplified by me here). It was private players who started the real subprime lending craze, that fannie and freddie jumped into it in their own convoluted way, but they were jumping into a market that was already very hot by 2004. In other words, the private subprime market existed without freddie and fannie's help, and they ended up getting burned (or rather, the taxpayers got burned) like everyone else--by buying risky junk they didn't understand.

Well, Justin...

All I can say is that more than 8 years ago, in 2000 or before, the then-chair of the House Financial Services Subcommittee charged with overseeing Fannie Mae and Freddie Mac became concerned of systemic risk, potentially at the level of the Savings & Loan crisis, and he identified Fannie Mae and Freddie Mac as a huge potential risk. By the year 2004, they had already amassed $1.7 trillion in debt that the taxpayer was ultimately on the hook for (though Fannie & Freddie's proponents denied this taxpayer backing almost right up until the Feds stepped in and took them over a couple of weeks ago). In March 2003, 39% of all FDIC-insured lending institutions relied on Fannie & Freddie-backed mortgages for 100% of their Tier 1 capital reserves.

That same chairman predicted in 2004 that if Fannie & Freddie stumbled, it would "make the downfall of the S&Ls look Lilliputian by comparison."

Fannie & Freddie stumbled. We face a crisis which President Bush says is potentially as bad as the Great Depression. Now, you really want to tell me that Fannie and Freddie don't bear prime responsibility for this mess?

I don't disagree with the

I don't disagree with the analysis that freddie and fannie were ticking time-bombs, but rather what I'm saying is that the subprime meltdown caused the F&F failures, and not the other way around. F&F took on too much risk and got burned like everyone else when the market collapsed. I thought your post was very good, I just don't agree that the current financial meltdown is primarily caused by F&F.

Scope and scale....

But the private sector by itself would never have engaged in the massively wide-spread risky behavior it did had it not been for the subsidies and guarantees provided by Fannie Mae and Freddie Mac (and, through them, you and me).

Er, they did that before F & F became a top player, prompted massively by the loosening of standards from the '95 CRA and the CRA "quotas," especially for expanding/merging banks. What F & F did was compound and expanded the problem by providing a quasi-insured marketplace for those loans and traunches, while their top mgmt's self-serving book-diddling concealed it and let it swell even larger.

It's like a square dance. You can't do it all by yourself, or even with just one partner. It's a team clusterflop. A lot of folk are pointing the finger at their favorite goat and saying "It's all THEIR fault!" to draw attention away from their own associated goats.

But it wasn't just manicly-expanding-megabank idjits, and it wasn't just CRA and resulting "community organizer" pushed lending, and it wasn't just fat-cat Wall St. money-mongers securitizing and claiming soundness for the not-so-sound traunches, and it wasn't just F & F's radical and humongous expansion of the market for subprime and their book-diddling, and it wasn't just insureres like AIG and their moronic failure to differentiate a systemic-risk price versus specific-risk price on CDS's, and it wasn't just conumer-idjits who thought real estate would go up forever and kept buying those stupid loans to get spending money and too much house, and it wasn't just the venal enablers and defenders of all of the above in Congress.

It was ALL of them. Each and every one of those players has a honking big share of both prime and primary responsibility for this mess.

The only people that really come off looking good at all (if anyone can) in my book are the regulators and exec-branch people who tried to stop the runaway train, and the very few in Congress and the exec branch (in more than one admin, mind you) who listened to them and fought (unsuccessfully) to triage the train wreck before it grew any bigger.

very well put.

very well put.

Interesting though, that

Interesting though, that public opinion appears to have it backward as to which presidential candidate falls on which side of the line separating those who were part of the problem and those who attempted to be part of the solution.

I thought this was a pretty

I thought this was a pretty good summary:

It's a fair capsule summary

It's a fair capsule summary of one of the key driving factors.

I've said this elsewhere but I'll say it again here. I have seen CRA-driven lending work very well in increasing owner-occupied low-income housing with minimal default rates when done right, even under HUD/CDBG grant originations. That includes some insightful screening and requiring some actual down payment and/or sweat equity, with the loans originating with and being held by local banks that knew their markets in cooperation with local well-run CHDO's doing the middle-manning and new-construction contracting.

I can also see how it would be public/consumer money flushed down the drain in graft and corruption and greed if those conditions are NOT present. Sadly, the local political conditions that allow such succesful programs are not those of most larger urban areas.

Good points, and I

Good points, and I appreciate your insights, Tully.

One thing I'm still confused about (particularly having trouble understanding it with enough specificity to argue with those who say that Fannie/Freddie were not at the center of this, or that the CRA didn't set us up for the meltdown.)

Do I understand correctly that the subprime mortgage products that were created in response to CRA (in order to fill the mandates) were then promoted and advertised to the general population (which obviously led to people of higher incomes getting involved in trading up for houses they couldn't really afford, and speculators getting a piece of the action?)

IOW, I'm confused about how and why the subprime mania spread from just the low income prospective homeowners, and what perhaps could have been done to limit the metastasis of the cancer of these high risk loans. I do get that a large instigator to the spread was the securitization which allowed the investment firms to spread and pass on the risk, but I'm specifically asking about how and why this problem started with the low income loans but then grew into a larger systemic problem.

From Scott Ott

He posted this Sunday, but it's certainly relevant to the ongoing discussion about responsibility and accountability:

(2008-09-28) ? Sen. John McCain said reluctant Republicans would sign on to a $700 billion federal bailout of ?Big Finance?, as soon as Democrats agree ?to require criminally-negligent Wall Street CEOs and their enablers in Congress to perform a videotaped and broadcast perp walk, of not less than 10 yards per million dollars squandered.?

The 11th-hour negotiations were said to focus on whether Sen. McCain would concede to Democrat demands for ?handcuffs and business suits?, or if he would stubbornly stick with his original proposal to require full shackles and fluorescent orange jumpsuits as the perpetrators walk to court to face federal fraud and racketeering charges.

To which I add simply, "If only..."

That would be fun. My

That would be fun. My personal joy would be to reinstitute the stocks, and I don't mean shares, and give us all a chance to tell the guilty what we thought of them with our choice of produce. I'm torn between using rancid pumpkins, or fresh coconuts.

Justice coming around

At least in Boston, Wall street is not the sole perpetraitor of the fiscal crisis

Herald readers put blame on Barney Frank


I brew the beer I drink

Why make a choice?

Both are good. Fruit salad with a little piss and vinegar for dressing. Yes, I like that!

Hey, Donna!

Thanks for stopping by. Sorry your post was held up for a few minutes. We have to turn on comment moderation to keep from being overwhelmed with spam.

If you like it here (we're not perhaps as eclectic as Annie's place), feel free to register so your comments will appear immediately and you won't have to do any math problems or stuff before posting a comment.

And yes, that's exactly what's being fed to us at the moment. I'm wanting to send all GOP members of Congress a note asking if they remember what happened at the polls to George H. W. "Read My Lips" Bush.

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