In a recent e-mail exchange, I discussed with a local conservative blogger the nature of the financial meltdown. Among the things which I discussed was the role Fannie Mae and Freddie Mac in the meltdown . Fannie Mae and Freddie Mac are private companies chartered to buy FHFA conforming loans from qualified lenders.
FM/FM DID have a contributing role, albeit a small one, in helping to bolster the credit default swap bond market by sinking money into those markets. An estimate I read said they probably contributed to 50% of the growth in the market during one six month period after they invested in the market. They sank money into the CDS market on two occasions, though the other time had a much smaller impact. Consequently, they had a a part, if a small part.
Yet, my friend (Mitch), espoused that it was instead the guarantee of the ability to resell mortgages which caused this problem. In fact, he asked me to ask experts I know whether this was an important factor. I let him know that such a question really wasn't necessary, first because subprime loans don't qualify for FM repurchase (normally - unless fraudulently presented), nor, in contrast to his co-author's earlier claims, do subprime loans qualify for consideration as CRA eligible loans. I steered Mitch instead to a couple of articles about how Lehman and Bear Stearns were taking risks simply because it made short-term profits, and those risks would have been taken with or without FM/FM. Nowhere in the various reports did anyone mention FM/FM as a causation of risk taking due to assurances of being able to off-load that risk. In fact, this meme' from the right (that FM caused the financial crisis) is nothing short of yet another grasp at straws, much like CRA was such a grasp.
Yesterday, Alan Greenspan (and others) reinforced this reality, when Greenspan noted the primary issuers of subprime loans were non-bank lenders. Note, the "Bowen" quoted below is Richard Brown, who headed the mortgage underwriting arm of CitiGroup.
From a story on USA Today online, April 7, 2010..
"Bowen says he issued many warnings to management about the mortgage risk starting in 2006, and e-mailed Rubin in November 2007.
Bowen's testimony is part of three days of hearings by the Financial Crisis Inquiry Commission.
Earlier Wednesday, Alan Greenspan defended his tenure as head of the Federal Reserve before the Financial Crisis Inquiry Commission. As he has in the past, he disputed critics who say he kept interest rates too low for too long, encouraging risky lending.
Greenspan also rejected criticism that his Fed failed to regulate high-risk loans to borrowers who couldn't afford them. Many of those risky loans became the toxic assets that sparked the crisis.
Greenspan insisted the Fed lacked authority to regulate the nonbank lenders that issued most risky subprime mortgages"
Note, what Greenspan did not say. He did not fault FM/FM, though he has often been a critic of Freddie and Fannie. In fact, conforming loans are not generally issued by non-bank lenders, and both Freddie and Fannie have borrower qualification standards which were above the subprime standards by a fair margin. That said, both were rightly criticized for misstating profits in 2002-2004, a tactic which lead to the firing of their CEOs in 2004 - and, by the way, long before this crisis really got going. In fact, both were subsequently subjected to much more scrutiny, including having to report their books to the SEC, after the 2004 discoveries. However, it would be beyond naive' to say they did not own/hold poor quality loans, clearly they did. Yet..
They took on those loans as private companies, they owned the responsibility to see to it loans met FHFA standards, and if those standards slipped (by the way I haven't seen evidence they did), doubtless FM/FM had great authority to lobby and control such slippage since they, as a private company, had to own the risk. they hid losses, not the government, and Greenspan's complaints about FM/FM was a lack of oversight, not forcible mortgage repurchases. In short, FM/FM operated like other risky lenders when allowed to - and it was a lack of oversight, not regulation, which lead to most of the issues for FM/FM.
However, ALL of that aside, it is beyond disingenuous to suggest that because FM/FM were available to effectively underwrite risk that the much more broad primary market started or broadly expanded offering poor quality loans. This is a meme', and it is untrue, flatly, given the huge number of experts who've said exactly the opposite, that in fact it was a desire for short-term profits and an attitude that they'd worry about later.. well, later, I think given all the testimony and expert opinion, to suggest this risk off-load scenario was the cause, is nothing less than a lie. One other point, while FM/FM bought CDS' in 2006, by and large their role was to sell CDS bonds, not buy them, thereby creating situations where others were buying their risk, not the other way around.
Consequently, I told my friend Mitch that experts I know don't agree with this lie, and asked him cordially to provide me evidence to the contrary, to offer up any objective expert who agreed that FM/FM were the primary or even a significant cause.
To date, all I've heard is crickets...
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