Credit Crunch Pieces
Posted by Joshua Claybourn on 2 October 2008 | 7 responses
Of all of the articles I’ve read over the last few weeks regarding the state of the financial system – and I’ve read numerous – this piece by Michael Flynn is the best I’ve come across. Good recommended reading.
Meanwhile, Politico has published a list of the 25 Senators who voted against the recent bailout/economic rescue bill.
7 Responses to “Credit Crunch Pieces”
Make that 24. The vote was 75-24 with Ted Kennedy out of commission.
A very odd both-ends-against-the-middle pack of no-votes, with the exception of a few head scratchers like Libby Dole.
Politico lists 25 Senators, so I’ve revised it to reflect that number.
This is the second ITA post linking to an article by someone on the right who would like to try to shift blame for the financial crisis from the government to Fannie Mae and Freddie Mac. This one is from Michael Flynn:
“At the same time, Fannie Mae and Freddie Mac were going through a crisis. In 2003 and 2004, an accounting scandal was revealed. The two public-private partnerships were cooking the books to show phantom profits. The Bush administration and its allies on the Hill pushed a strong bill to reform how these institutions operated. The measure came very close to passing, but Fannie and Freddie cut a deal. They would refocus on expanding mortgages for low-income borrowers if the feds kept out of their operations. The bargain worked. Virtually all the Democrats and a few Republicans backed the two companies and the reform effort failed.
Fannie and Freddie then went on a subprime bender. They made it clear that they wanted to buy all the subprime or Alt-A mortgages that they could find, eventually acquiring around $1 trillion of the paper. The market responded. In 2003 subprime mortgages made up less than 8 percent of all mortgages. By 2006, they were over 20 percent. Banks knew they could sell subprime products to Fannie and Freddie. Investments banks realized that if they laced ever increasing amounts of subprime mortgages into the MBSes, they could juice the returns and so earn bigger fees. The rating agencies, thinking they were simply dealing with traditional mortgages, didn’t look under the hood.”
Yes, there was an accounting scandal at Fannie and Freddie. But they did not go on any “subprime bender.” That is just not true. Says Paul Krugman:
“…regulators, responding to accounting scandals at the companies, placed temporary restraints on both Fannie and Freddie that curtailed their lending just as housing prices were really taking off. Also, they didn’t do any subprime lending, because they can’t: the definition of a subprime loan is precisely a loan that doesn’t meet the requirement, imposed by law, that Fannie and Freddie buy only mortgages issued to borrowers who made substantial down payments and carefully documented their income.”
Says Michael Ettlinger, Vice President for Economic Policy at American Progress:
“Fannie and Freddie did not guarantee and securitize subprime loans. Such loans didn’t meet their conforming loan standards. In fact, as the subprime market was building, Fannie and Freddie lost market share because they were under stricter standards. Thus, their participation in the secondary market did not assist in the creation of the subprime market.
It’s true, however, that Fannie and Freddie were damaged by the subprime crisis because everyone in the housing sector was damaged by falling home prices and, more significantly, the two companies branched out into a broader investment portfolio. In that portfolio were included mortgage-backed securities that hurt all of those who purchased them. Fannie and Freddie weren’t the biggest players in this and, most importantly, started this practice very late in the game. In fact, the subprime market had already started to go bad when they started their purchases (which speaks poorly for Fannie and Freddie’s decision making, but precludes them from responsibility for the crisis).
Fannie and Freddie were supposed to be more closely supervised than other lenders—with their own regulator, which was supposed to keep a special eye on them because they are important institutions. Those regulators, who were part of the Bush administration, failed along with the rest of the Bush regulatory apparatus to stop the problem.”
There’s also this Bloomberg News story the International Herald Tribune from June of 2007:
“While subprime mortgages got battered, the fixed-rate loans that Fannie Mae and Freddie Mac prefer to package into bonds and guarantee increased to 82 percent of new mortgages from 63 percent in mid-2005. The amount of mortgage bonds sold or guaranteed by the companies rose by a net $93 billion this year, up 38 percent from the same period in 2006, according to estimates by Credit Suisse.
Fannie Mae is “confident” about increasing its share of bond sales, Thomas Lund, senior vice president for single-family mortgages, said in an interview last month.
Shareholders are reaping the benefits. Fannie Mae rose 19 percent since the end of March and Freddie Mac gained 14 percent, beating the 8.1 percent increase in the Standard & Poor’s 500 index.
“The fact they did not get mired in the subprime market and are now able to pick up the pieces is positive for Fannie and Freddie,” said Marshall Front, whose Chicago money management firm, Front Barnett Associates, owns 337,000 Fannie Mae shares.”
Enough already.
This is the second ITA post linking to an article by someone on the right who would like to try to shift blame for the financial crisis from the government to Fannie Mae and Freddie Mac.
Actually this article, and my prior post on the subject, are quite clear in demonstrating the connection and relationship between the government and Fannie Mae / Freddie Mac. Thus – at least in my opinion – the problem is not Fannie Mae and Freddie Mac per se, but rather the government’s influence and corruption of those institutions.
Josh,
The other post I was referring to was Eric’s post linking to the “overview” of the credit crunch by science fiction writer Jerry Pournelle.
Jerry,
You keep saying “science fiction writer” like it’s a bad thing. In my experience, sci-fi writers are likely to be at least as intelligent as your average pundit or blogger. (Isaac Asimov, Arthur C. Clarke, Ray Bradbury…) Pournelle has Ph.D.’s in psychology and political science, and M.S. degrees in statistics and systems engineering.
I have no interest in making Fan and Fred the scapegoat for bad government policies, so I have no problem at all with you posting quotes of your own in defense of them. But bashing Dr. Pournelle for writing sci-fi is the lowest sort of ad hominem argument.
…And now here’s Deepak Chopra, Phd on how the global economic crunch will impact the equity derivatives market. Riveting!