How the Democrats Created the Financial Crisis: Kevin Hassett

[PeterS]

Bloomberg.com: News

Sept. 22 (Bloomberg) -- The financial crisis of the past year has provided a number of surprising twists and turns, and from Bear Stearns Cos. to American International Group Inc., ambiguity has been a big part of the story.

Why did Bear Stearns fail, and how does that relate to AIG? It all seems so complex.

But really, it isn't. Enough cards on this table have been turned over that the story is now clear. The economic history books will describe this episode in simple and understandable terms: Fannie Mae and Freddie Mac exploded, and many bystanders were injured in the blast, some fatally.

Fannie and Freddie did this by becoming a key enabler of the mortgage crisis. They fueled Wall Street's efforts to securitize subprime loans by becoming the primary customer of all AAA-rated subprime-mortgage pools. In addition, they held an enormous portfolio of mortgages themselves.

In the times that Fannie and Freddie couldn't make the market, they became the market. Over the years, it added up to an enormous obligation. As of last June, Fannie alone owned or guaranteed more than $388 billion in high-risk mortgage investments. Their large presence created an environment within which even mortgage-backed securities assembled by others could find a ready home.

The problem was that the trillions of dollars in play were only low-risk investments if real estate prices continued to rise. Once they began to fall, the entire house of cards came down with them.

Turning Point

Take away Fannie and Freddie, or regulate them more wisely, and it's hard to imagine how these highly liquid markets would ever have emerged. This whole mess would never have happened.

It is easy to identify the historical turning point that marked the beginning of the end.

Back in 2005, Fannie and Freddie were, after years of dominating Washington, on the ropes. They were enmeshed in accounting scandals that led to turnover at the top. At one telling moment in late 2004, captured in an article by my American Enterprise Institute colleague Peter Wallison, the Securities and Exchange Comiission's chief accountant told disgraced Fannie Mae chief Franklin Raines that Fannie's position on the relevant accounting issue was not even ``on the page'' of allowable interpretations.

Then legislative momentum emerged for an attempt to create a ``world-class regulator'' that would oversee the pair more like banks, imposing strict requirements on their ability to take excessive risks. Politicians who previously had associated themselves proudly with the two accounting miscreants were less eager to be associated with them. The time was ripe.

Greenspan's Warning

The clear gravity of the situation pushed the legislation forward. Some might say the current mess couldn't be foreseen, yet in 2005 Alan Greenspan told Congress how urgent it was for it to act in the clearest possible terms: If Fannie and Freddie ``continue to grow, continue to have the low capital that they have, continue to engage in the dynamic hedging of their portfolios, which they need to do for interest rate risk aversion, they potentially create ever-growing potential systemic risk down the road,'' he said. ``We are placing the total financial system of the future at a substantial risk.''

What happened next was extraordinary. For the first time in history, a serious Fannie and Freddie reform bill was passed by the Senate Banking Committee. The bill gave a regulator power to crack down, and would have required the companies to eliminate their investments in risky assets.

Different World

If that bill had become law, then the world today would be different. In 2005, 2006 and 2007, a blizzard of terrible mortgage paper fluttered out of the Fannie and Freddie clouds, burying many of our oldest and most venerable institutions. Without their checkbooks keeping the market liquid and buying up excess supply, the market would likely have not existed.

But the bill didn't become law, for a simple reason: Democrats opposed it on a party-line vote in the committee, signaling that this would be a partisan issue. Republicans, tied in knots by the tight Democratic opposition, couldn't even get the Senate to vote on the matter.

That such a reckless political stand could have been taken by the Democrats was obscene even then. Wallison wrote at the time: ``It is a classic case of socializing the risk while privatizing the profit. The Democrats and the few Republicans who oppose portfolio limitations could not possibly do so if their constituents understood what they were doing.''

Mounds of Materials

Now that the collapse has occurred, the roadblock built by Senate Democrats in 2005 is unforgivable. Many who opposed the bill doubtlessly did so for honorable reasons. Fannie and Freddie provided mounds of materials defending their practices. Perhaps some found their propaganda convincing.

But we now know that many of the senators who protected Fannie and Freddie, including Barack Obama, Hillary Clinton and Christopher Dodd, have received mind-boggling levels of financial support from them over the years.

Throughout his political career, Obama has gotten more than $125,000 in campaign contributions from employees and political action committees of Fannie Mae and Freddie Mac, second only to Dodd, the Senate Banking Committee chairman, who received more than $165,000.

Clinton, the 12th-ranked recipient of Fannie and Freddie PAC and employee contributions, has received more than $75,000 from the two enterprises and their employees. The private profit found its way back to the senators who killed the fix.

There has been a lot of talk about who is to blame for this crisis. A look back at the story of 2005 makes the answer pretty clear.

Oh, and there is one little footnote to the story that's worth keeping in mind while Democrats point fingers between now and Nov. 4: Senator John McCain was one of the three cosponsors of S.190, the bill that would have averted this mess.

(Kevin Hassett, director of economic-policy studies at the American Enterprise Institute, is a Bloomberg News columnist. He is an adviser to Republican Senator John McCain of Arizona in the 2008 presidential election. The opinions expressed are his own.)

Interesting take but you seem to be saying it wasn't sub-prime lending but how a portion of it was handled that is the problem. And it is a real hoot to think that liberal democrats are at fault for failing to regulate. If you like I'll have some "lets regulate" posters printed up so you pro regulation cons can put them on your walls. No charge....

 

[The Paperboy]

Fannie and Freddie didnt fund 3rd party subprime wholesale bank loans, the subprime loans are 2/3 of the problem. Your focusing on the lesser of 2 evils because Obama has ties to Fannie. Do you even know what kind of loans Fannie and Freddie did?

From the Washington Post August 19, 2008:

Fannie's Perilous Pursuit of Subprime Loans

As It Tried to Increase Its Business, Company Gave Risks Short Shrift, Documents Show

Fannie Mae chief Daniel H. Mudd says few predicted a downturn.

By David S. Hilzenrath
Washington Post Staff Writer
Tuesday, August 19, 2008

In January 2007, as years of loose mortgage lending were about to send the nation's housing market into devastating decline, Fannie Mae chief executive Daniel H. Mudd wrote a confidential memo to his board.

Discussing the company's successes, Mudd said one of Fannie Mae's achievements in 2006 was expanding its involvement in the market for subprime and other nontraditional mortgages. He called it a step "toward optimizing our business."

A month later, Fannie Mae outlined plans to further expand its activities in the subprime market. The company recognized the already weak performance of subprime loans but predicted that they would get better in 2007, according to another Fannie Mae document.

Full Story here

Note: Dig deeper and you find out why there was even a sub prime market to begin with: Lenders were competing with Fannie Mae. All roads lead back to Fannie and Freddie.

 

[jschuck12001]

From the Washington Post August 19, 2008:



Full Story here

Note: Dig deeper and you find out why there was even a sub prime market to begin with: Lenders were competing with Fannie Mae. All roads lead back to Fannie and Freddie.

I dont need to dig deeper, I have been in mortgages for over 12 years and worked at 2 of the biggest banks in the US. Fannie and Freddie never wrote subprime loans but they had Expanded approval level I, II, and III. The fact that they were looking to get into subprime is extremely stupid especially since the bubble started bursting in about Oct of 2006(at least here in Florida). The fact is they were greedy and they were crooks but that was your typical Exec's at the top playing big boy games. They never did write 1 subprime loan so Freddie and Fannie can be blamed for being mismanaged and corrupt in their accounting practices which in my mind were no doubt the doings of the Senior Management but this thing goes much deeper and if it werent for the subprime industry and many greedy, real estate agents , brokers and appraisers we probably would have been in this bad of a mess and we could have dealt with Fannie and Freddie in a different way instead of a bailout. If you want to be passionate about this issue then you must not ignore the biggest part of it or it becomes the same old propaganda.

 

[I Missthe North]

I dont need to dig deeper, I have been in mortgages for over 12 years and worked at 2 of the biggest banks in the US. Fannie and Freddie never wrote subprime loans but they had Expanded approval level I, II, and III. The fact that they were looking to get into subprime is extremely stupid especially since the bubble started bursting in about Oct of 2006(at least here in Florida). The fact is they were greedy and they were crooks but that was your typical Exec's at the top playing big boy games. They never did write 1 subprime loan so Freddie and Fannie can be blamed for being mismanaged and corrupt in their accounting practices which in my mind were no doubt the doings of the Senior Management but this thing goes much deeper and if it werent for the subprime industry and many greedy, real estate agents , brokers and appraisers we probably would have been in this bad of a mess and we could have dealt with Fannie and Freddie in a different way instead of a bailout. If you want to be passionate about this issue then you must not ignore the biggest part of it or it becomes the same old propaganda.

It is my understanding that Fannie Mae and Freddy Mac took absolutely zero part in actually handing out sub-prime mortgages, but made it possible by buying up the securities of firms who were (giving the companies who were involved with sub prime mortgages the capital to continue to do so to help their bottom line). It also seemed like they partook in handing out "near prime" mortgages that were almost as bad as sub-prime, which certainly did not help the situation. I am sure you know more about this then I do seeing as how you are actually involved in the industry, but I think I am on the right track. Let me know if I am wrong.

Here is a link that I have found helpful. The author seems to be very credible and it has helped me to understand the situation better.

Did Fannie and Freddie Cause the Mortgage Crisis? - Seeking Alpha

 

[PeterS]

From the Washington Post August 19, 2008:



Full Story here

Note: Dig deeper and you find out why there was even a sub prime market to begin with: Lenders were competing with Fannie Mae. All roads lead back to Fannie and Freddie.

So is it your contention that the whole house of cards fell because Fannie held $388.3 billion in Alt A and sub-prime loans? Explain.

 

[PeterS]

It is my understanding that Fannie Mae and Freddy Mac took absolutely zero part in actually handing out sub-prime mortgages, but made it possible by buying up the securities of firms who were (giving the companies who were involved with sub prime mortgages the capital to continue to do so to help their bottom line). It also seemed like they partook in handing out "near prime" mortgages that were almost as bad as sub-prime, which certainly did not help the situation. I am sure you know more about this then I do seeing as how you are actually involved in the industry, but I think I am on the right track. Let me know if I am wrong.

Here is a link that I have found helpful. The author seems to be very credible and it has helped me to understand the situation better.

Did Fannie and Freddie Cause the Mortgage Crisis? - Seeking Alpha

Fannie and Freddy were restricted as to the types of sub-prime loans they could buy--essentially only allowed to purchase the least risky--and what they purchased was only the tip of what was out there. By structure, it was virtually impossible for them to have been the driver in the sub-prime mess.

There is blame galore to be passed around here. What we are reading here is purely political--an attempt to make McCain look like the great regulator. But it was the deregulation that allowed for the sub-prime environment to flourish where the problem lies and I will bet a dollar against your nickel McCain backed the deregulation that made all this possible...

 

[jschuck12001]

It is my understanding that Fannie Mae and Freddy Mac took absolutely zero part in actually handing out sub-prime mortgages, but made it possible by buying up the securities of firms who were (giving the companies who were involved with sub prime mortgages the capital to continue to do so to help their bottom line). It also seemed like they partook in handing out "near prime" mortgages that were almost as bad as sub-prime, which certainly did not help the situation. I am sure you know more about this then I do seeing as how you are actually involved in the industry, but I think I am on the right track. Let me know if I am wrong.

Here is a link that I have found helpful. The author seems to be very credible and it has helped me to understand the situation better.

Did Fannie and Freddie Cause the Mortgage Crisis? - Seeking Alpha

You nailed it. I cant believe this sudo-government agency was allowed to do this, this is the part that really pisses me off because Fannie only wrote A paper and those loans default at a much lower rate and if they hadn't have become greedy they probably wouldn't have needed our help to bail them out. This is more of a problem with their senior management than the company itself. The initial goals of the Fannie I used to know were good.

 

[jschuck12001]

So is it your contention that the whole house of cards fell because Fannie held $388.3 billion in Alt A and sub-prime loans? Explain.

The articles are all wish washed, the 388.3 billion in subprime is the EA level I, II, and III approvals which most wouldn't consider subprime because they werent arm products, they were fixed. They seem to be clumping in the level approvals with the same market that sold 2 and 3 yr adjustables and thats like putting BMW's and Saturns in the same category, they are not the same.

 

[The Paperboy]

You nailed it. I cant believe this sudo-government agency was allowed to do this, this is the part that really pisses me off because Fannie only wrote A paper and those loans default at a much lower rate and if they hadn't have become greedy they probably wouldn't have needed our help to bail them out. This is more of a problem with their senior management than the company itself. The initial goals of the Fannie I used to know were good.

My reading of all this is that there is plenty of blame to spread around and Fannie was a major part of the problem. It is also my undertanding that the Congress and the past two administrations were asleep at the wheel. It is also apparent that several former Clinton Administration appointees walked away with boatloads of money from Fannie. Also Obama has received a whole more money from Wall Street and Fannie than McCain. On the other hand McCain unlike Obama actually co sponsored legislation to reform Fannie.

 

[Chris]

I dont need to dig deeper, I have been in mortgages for over 12 years and worked at 2 of the biggest banks in the US. Fannie and Freddie never wrote subprime loans but they had Expanded approval level I, II, and III. The fact that they were looking to get into subprime is extremely stupid especially since the bubble started bursting in about Oct of 2006(at least here in Florida). The fact is they were greedy and they were crooks but that was your typical Exec's at the top playing big boy games. They never did write 1 subprime loan so Freddie and Fannie can be blamed for being mismanaged and corrupt in their accounting practices which in my mind were no doubt the doings of the Senior Management but this thing goes much deeper and if it werent for the subprime industry and many greedy, real estate agents , brokers and appraisers we probably would have been in this bad of a mess and we could have dealt with Fannie and Freddie in a different way instead of a bailout. If you want to be passionate about this issue then you must not ignore the biggest part of it or it becomes the same old propaganda.

I think they prefer propaganda.

Phil Gramm created the crisis, because for 67 years those firewalls were in place, and he removed them.

 

[Gunny]

I think they prefer propaganda.

Phil Gramm created the crisis, because for 67 years those firewalls were in place, and he removed them.

In other words you have no idea what created the crisis and are just spewing partisan crap out your ass, as usual.

 

[Chris]

In other words you have no idea what created the crisis and are just spewing partisan crap out your ass, as usual.

Like I said, once the industry was deregulated,it was ripe for abuse.

Now everyone is calling for regulation including Gramm's buddy, John McCain.

 

[Toro]

Hassett's premise is ridiculous.

http://www.usmessageboard.com/elect...onomy-mccains-winning-issue-3.html#post796123

 

[I Missthe North]

Fannie and Freddy were restricted as to the types of sub-prime loans they could buy--essentially only allowed to purchase the least risky--and what they purchased was only the tip of what was out there. By structure, it was virtually impossible for them to have been the driver in the sub-prime mess.

There is blame galore to be passed around here. What we are reading here is purely political--an attempt to make McCain look like the great regulator. But it was the deregulation that allowed for the sub-prime environment to flourish where the problem lies and I will bet a dollar against your nickel McCain backed the deregulation that made all this possible...

I understand what you are saying and you are correct, but in a way they supported the sub-prime mortgage market through the back door. By buying up the securities of the companies that were providing the sub prime mortgages to the public they essentially were supporting/promoting/perpetuating the cycle. They provided the capital/credit support to these companies to continue their risky lending practices. If you didn't get a chance, you should check out that link a posted earlier. It does a pretty good job explaining the situation.

 

[Gunny]

Like I said, once the industry was deregulated,it was ripe for abuse.

Now everyone is calling for regulation including Gramm's buddy, John McCain.

Why? To protect morons who aren't smart enough to figure out how much they can afford to pay out based on how much they make?

Tell me, does Uncle Sugar change your dirty diapers too?

 

[PeterS]

The articles are all wish washed, the 388.3 billion in subprime is the EA level I, II, and III approvals which most wouldn't consider subprime because they werent arm products, they were fixed. They seem to be clumping in the level approvals with the same market that sold 2 and 3 yr adjustables and thats like putting BMW's and Saturns in the same category, they are not the same.

I didn't write the article but simply used the largest number provided as a question to how it lies at the root of the problem. I am making no defense of Fannie or Freddie but the problem is so much larger that pointing a finger solely at them is clearly for purposes of a red-herring.

The problem is clearly how we deregulated. If it wasn't we wouldn't be in the process of trying to re-regulate would we...

 

[PeterS]

I understand what you are saying and you are correct, but in a way they supported the sub-prime mortgage market through the back door. By buying up the securities of the companies that were providing the sub prime mortgages to the public they essentially were supporting/promoting/perpetuating the cycle. They provided the capital/credit support to these companies to continue their risky lending practices. If you didn't get a chance, you should check out that link a posted earlier. It does a pretty good job explaining the situation.

I read the article and it doesn't change much. Here is a slightly different version found on Economist View. There is no question that Fannie and Freddie played a part but the suggestion that legislation, if passed in 2006, aimed at one part of the problem would have stopped the slide by 2008 is a bit ludicrous.

 

[jschuck12001]

My reading of all this is that there is plenty of blame to spread around and Fannie was a major part of the problem. It is also my undertanding that the Congress and the past two administrations were asleep at the wheel. It is also apparent that several former Clinton Administration appointees walked away with boatloads of money from Fannie. Also Obama has received a whole more money from Wall Street and Fannie than McCain. On the other hand McCain unlike Obama actually co sponsored legislation to reform Fannie.

I think if you keep digging you will find out everyone had a hand in the pot and thats my point. Here is the list of contributors. Obama took a little over $100k, thats nothing, it doesn't even pay for a newspaper add and so what, what does it mean that Obama took $126k in contributions from Fannie. Are you saying a Harvard Law grad would sell out his whole career and hide something over $126k. That is a fricken joke. Why dont you talk about the $285,000 Mccain has taken from the oil companies. Thats more than Obama, and the oil companies have hit record earnings for 8 straight quarters. Your argument is weak and frankly its stupid. You republicans are trying to say he was in the pocket of Fannie but $126k is not being in the pocket. He could make 5 times that with his Law degree.

Link for contributors

http://www.opensecrets.org/news/2008/09/update-fannie-mae-and-freddie.html

 

[jschuck12001]

I read the article and it doesn't change much. Here is a slightly different version found on Economist View. There is no question that Fannie and Freddie played a part but the suggestion that legislation, if passed in 2006, aimed at one part of the problem would have stopped the slide by 2008 is a bit ludicrous.

Exactly, Thats why I get tired of hearing that Mccain wanted to pass a bill in late 2005. The damage was done and they could have passed any bill they wanted to and we would still be in the situation we are in today.

 

[The Paperboy]

I think if you keep digging you will find out everyone had a hand in the pot and thats my point. Here is the list of contributors. Obama took a little over $100k, thats nothing, it doesn't even pay for a newspaper add and so what, what does it mean that Obama took $126k in contributions from Fannie. Are you saying a Harvard Law grad would sell out his whole career and hide something over $126k. That is a fricken joke. Why dont you talk about the $285,000 Mccain has taken from the oil companies. Thats more than Obama, and the oil companies have hit record earnings for 8 straight quarters. Your argument is weak and frankly its stupid. You republicans are trying to say he was in the pocket of Fannie but $126k is not being in the pocket. He could make 5 times that with his Law degree.

Link for contributors

OpenSecrets | Update: Fannie Mae and Freddie Mac Invest in Lawmakers - Capital Eye

OK. I admit, Obama is a saint. There, I said it.