Government sponsored enterprises
by Beverly Mann
I Beg to Differ (in Part), Mr. Will
A few days ago I posted a post on my blog that responds to George Will’s claim in his weekend Washington Post column that the auto bailout was a privatization of profits but a socialization of losses. The full post, which is at Annarborist, and is called I Beg to Differ (in Part) Mr. Will, George Will says:
In 1994, Bill Clinton proposed increasing homeownership through a ‘partnership’ between government and the private sector, principally orchestrated by Fannie Mae, a “government-sponsored enterprise” (GSE). It became a perfect specimen of what such “partnerships” (e.g., General Motors) usually involve: Profits are private, losses are socialized.
—“Burning Down the House,” George F. Will, Washington Post, June 30
Will’s column discusses a new book by Getchen Morgenson and housing-finance expert Joshua Rosner that Will says “will introduce you to James A. Johnson, an emblem of the administrative state that liberals admire.” Johnson, for those of you who (like me) don’t instantly recognize the name, headed Fannie Mae during (I guess; Will doesn’t specify the dates) during the 1990s and early 2000s. He says the book details how Johnson and a few others, acting under the guise of compassion, used the government’s backing of Fannie and Freddie loans and the public policy of encouraging homeownership, to hugely enrich themselves.
Will writes:
Morgenson and Rosner report that in 1998, when Fannie Mae’s lending hit $1 trillion, its top officials began manipulating the company’s results to generate bonuses for themselves. That year Johnson’s $1.9 million bonus brought his compensation to $21 million. In nine years, Johnson received $100 million.
Fannie Mae’s political machine dispensed campaign contributions, gave jobs to friends and relatives of legislators, hired armies of lobbyists (even paying lobbyists not to lobby against it), paid academics who wrote papers validating the homeownership mania, and spread “charitable” contributions to housing advocates across the congressional map.
But he also suggests, if I understand correctly, that it was Johnson and the other Fannie and Freddie folks, rather than the Wall Street crowd, who instituted the concept of securitized mortgages and credit default swaps—and (inferentially) then caused European banks to spur, say, the Irish housing bubble, which, last I heard, was not funded in any part by Fannie and Freddie. And he wrote the quote that opens this post, in which he claims that the government’s bailout—loans, most of which have been repaid—to GM and Chrysler have resulted in merely private profits. Unlike, y’know, the very substantial tax breaks given to oil companies.
The estimates about the number of jobs saved by those bailouts ranges from about 500,000 to (ultimately; i.e., indirectly) 1.5 million. Will is saying, in other words, that the federal government has no legitimate business involving itself so directly in the preservation of, or for that matter, the creation of jobs, because, after all, job preservation and job creation are private, not public, financial gains. The proposition is preposterous and relies upon the sleight of hand that only company and shareholder profits count as “profits”—a conceit that is likely to be seen for what it is, in places like Michigan, Indiana and Ohio. Assuming, of course, that Will is read in such places, or that some other wingnut picks up the argument and runs (literally, may) be with it there.
(Please, please, Paul Krugman. Respond to Will’s bizarre claim. You’re the only one who could do this and who has a wide enough readership for it to matter. We both know that no response to this type of canard will be forthcoming from the White House. Ever. Okay, well, at least until 2017.)
Two or three weeks ago, Newsweek ran a lengthy article by Bill Clinton listing 14 proposals for job creation. (Oh, for the days when the Democrat in the White House had some actual ideas, some energy, and the willingness—the eagerness, in fact!—to discuss his policy proposals, in detail and concertedly, with the public.) One of them concerned one of the Obama administrations (very) few policy ideas: Substantial tax credits and outright loans to green-tech startups, which resulted in an increase in America’s share of worldwide production of batteries for battery-powered cars from 2% to 20% before until our dear leader quietly—why raise this issue publicly during negotiations when it’s just so much easier to simply give the Republicans what they want—caved, er, negotiated away this law during last December’s budget white-flag waving, er, compromise. Clinton, of course, suggests that this program should be brought back, immediately, and expanded to other types of industries.
Won’t happen, of course. Well, maybe in 2017.
As for Johnson and his ilk, hopefully there’s still time, statute-of-limitations-wise, to prosecute these folks. And hopefully, the Morgenson and Rosner book will cause enough pressure for that to happen. And I agree with Will completely that one of the most despicable aspects of what happened with Fannie and Freddie was the fraudulent claim of compassion. Wonder, though, whether Will would agree with ME that the Repubs’ genuine compassion for, say, oil company execs and shareholders is just as unseemly, in its own way. Nah.
“the government’s bailout—loans, most of which have been repaid—to GM and Chrysler”
Can you please provide a citation for the “most of which”
As for the jobs saved stats – hogwash. Companies go through pre-pack bankruptcies all the time.
Here’s a little more history on “pass thru” MBS. If you go back far enough, it was a government invention. Wiki says BofA did the first “private label” MBS in 1977. But I’ve read elsewhere that it was Lew Raneri at Soloman around that time that got Wall Street going in it big time, and he was instrumental in getting some laws and tax treatment (REMICS) changed to make things more attractive. Then Larry Fink at First Boston quickly copied Soloman. Then wiki says it led to the S&L crisis.
F&F underwriting standards steadiliy declined beginning around 1995. So I guess you can make $100 Million buying and reselling crappy loans. Wish I knew that in college. Could have slept thru all those calculus and engineering courses.
I think post GM IPO, the taxpayer only got half our money back. Then again, if we lose a mere $25 Billion, I’ll celebrate our cheapest stimulus or bailout program of the millenium. I think the S&L Crisis cost over $100B in 1990 dollars, so look’n good there too.
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Securitization
Ginnie Mae guaranteed the first mortgage passthrough security of an approved lender in 1968.[8] In 1971 Freddie Mac issued its first mortgage passthrough, called a participation certificate, composed primarily of private mortgages.[8] In 1981 Fannie Mae issued its first mortgage passthrough, called a mortgage-backed security.[9] In 1983 Freddie Mac issued the first collateralized mortgage obligation.[10]
In 1960 the government enacted the Real Estate Investment Trust Act of 1960 to allow the creation of the real estate investment trust (REIT) to encourage real estate investment. In 1977 Bank of America issued the first private label passthrough,[11] and in 1984 the government passed the Secondary Mortgage Market Enhancement Act (SMMEA) to improve the marketability of such securities.[11]
The Tax Reform Act of 1986 allowed the creation of the […]
Cedric:
Ghost in the Machine Slowly Grinding to a Halt
The market for collateralized debt obligations is slowly grinding to a halt, according to Bloomberg, threatening one of Wall Street’s sacred cash cows – (read: $8.6 bln in annual underwriting fees) – and reducing the availability of credit for everyone from major Wall Street buyout firms to homeowners themselves.
· Sales of collateralized debt obligations (CDOs), which are used to pool bonds, loans and their derivatives into new debt, fell to $9.1 billion in July, down from $42 billion in June, analysts at JPMorgan Chase (JPM) said, according to Bloomberg.
· What’s behind the declining appetite for CDOs?
· The near collapse of two Bear Stearns (BSC) hedge funds, for one. The downgrade of 75 CDOs by the ratings agency S&P, for two. And concern about growing losses due to rising homeowner mortgage defaults, for three. Those are just for starters.
· OK, so what are we really talking about here with these so-called CDOs?
· CDOs were created in 1987 by bankers at Drexel Burnham Lambert.
· Wait a minute.
continued:
· Did you say Drexel Burnham Lambert?
· Isn’t that the same firm that was driven into bankruptcy in 1990 due to illegal trading in junk bonds driven by Drexel employee Michael Milken?
· And did you say they were created in 1987?
· The same year the market crashed?
· And wasn’t the 1980s known as the “Decade of Greed”?
· Yes, yes, yes, yes and yes.
· So let’s see if we got this right.
· Today, in 2007, the market for securities that were created in the “Decade of Greed” by a firm that was only a short time later forced into bankruptcy due to illegal trading in high-risk bonds is grinding to a halt?
http://seekingalpha.com/article/42485-cdo-history-repeating-itself-liquidity-crunch-looms
http://en.wikipedia.org/wiki/Collateralized_debt_obligation
MBS are not quite the same as CDOs
m.jed:
Would ypu prescribe the same medicine for the manicured nails Wall Street bokers and scam artists? Not likely. Why is such supposed to be dealt to Labor when little of the CDS, Naked CDS, and CDO has little (IF ANY) labor content and consists of gambling and betting on the failure and rise of certain companies.
http://abcnews.go.com/WN/general-motors-repays-81-billion-government-loans/story?id=10437944
http://detnews.com/article/20110524/AUTO01/105240403/Chrysler-celebrates-after-repaying-government-loans
So is Goldman Sachs a bank or an investment firm? Or are they livinmg on the Main Street teat as of today?
Beverly,
George Will’s dislike of the auto bailout and the roles of Fannie Mae and Freddie Mac were stated on more than one occasion back in 2008, 2009, and 2010.
Meanwhile, Joseph Stiglitz, Barney Frank have responded to ‘Reckless Endangerment’ allegations. Stiglitz acknowledged the problem. I don’t expect such a response from Frank.
Three Fed publications come to mind when discussing the subprime mortgage market: The Rise and Fall of Subprime Mortgages from the Dallas Fed (Nov 2007), The Evolution of the Subprime Mortgage Market from the St. Louis Fed (Jan 2006), and A Primer on the Mortgage Market and Mortgage Finance from the St. Louis Fed (Jan 2008). Note Figure 2 on page 5 of the last reference. This background material allows for a more focused discussion on related market derivatives, which in my judgment killed the financial markets and crashed the economy.
I am confused as to your position on government controlled enterprises (GSE). Are you recommending an expansion of GSEs? For what purpose? You may want to read this legal analysis – When the Government Is the Controlling Shareholder (2011) – prior to pushing for more government intervention and control of commercial firms’ activities.
Tracking down specific government funding actions and payback for the automobile industry bailout at the U.S. Treasury is a pain, but here are some key Treasury references: Automotive Industry Financing Program (the automotibile industry bailout Treasury press releases are available here), Investment Transactions – Auto Industry Financing Program, TARP transactions reports, and the latest TARP transactions report, 07/01/2011, go to pdf pages 19-20. The footnotes on page 20 are the key to sorting it out. Good luck.
The Competitive Enterprise Institute has challenged some statements by Treasury and GM. Further challenges about Chrysler’s bailout and payback are here.
You mentioned Clinton’s “14 Ways to put America back to […]
CDOs are a dangerous mutant. For a long time there was nothing wrong with simple pass thru MBS issued by Fannie. Back when they required 20% down and a good credit rating. But that standard was slowly eroded away.
CDOs are “traunched” and go thru statistical alchemy to spead risk vs yield choices over a range of traunches you can choose from. These were all done by the investment banks, and the basic underwriting of loan quality sucked. Then they pushed the rating agencies to over rate them.
Volume on these has gone to about zero lately, I hear.
Dean Baker on the same: George Will Spreads Some Lies About the Economic Crisis
cedric:
I wanted to make sure we differentiated between the two as they are both different. Bev makes this comment:
“concept of securitized mortgages and credit default swaps”
which together allows me to believe she is discussing the CDO, tranched, insured by CDS, and AAA rated by Moody or S&P ( god love them and how they can tell the US their debt/deficit is a problem when they whored themselves out to investment banks and banks alike).
It would seem unusual for investment banks/banks to give up such a profitable vehicle such as a cdo; but, I too have not heard or red much. I would like to see The Fed force Sachs to decide what they wish to be, a bank or an investment firm. Too many freebies to being both.
The GSE’s played a crucial role in the growing of the credit bubble. The crucial point came in the early 90’s when Greenspan recognized that the GSE’s coud provide a significant source of credit to the system during the period when the banks were impaired during the 91-92 recession. Along with the growth Wall Street structured finance. Greenspan conciously encouraged both in order to create a new systematic credit structure which was not dependent on the banks. A funny thing really it was to lessen the role of banks in the system but he knew that already by the early 90’s systematic credit was too big and that debt deflation would take hold unless more credit was created.
The GSE’s had already been in existence for 60 years but were just a minor source of systematic credit but it was understood by Greenspan, Wall Street and every politician in the land that ample credit and the rising prices it fostered in the household sector was a win win situation for them and the system. For the first two it came from the understanding that credit growth itself was the mother and father of the system, which raised all boats. For American citizens who have always loved easy credit and asset inflation being allowed to participate directly in the game was greeted with lust.
Everyone is to blame. While the occasional old school Republican protested the form of the GSE’s they were careful not to recognize that housing inflation was a boon to households and the entire economy. Keeping their protests to ideological talking points and knowing full well they would not disrupt the system. Not with Greenspan and Wall Street behind them 100%.
As to everyone else, Barney Frank perhaps being the poster boy, the downside or endless home ownership expansion and endless rising home prices was beyond their comprehension.
The framing of the GSE’s as the culpret in the disaster is half right but it was private label MBS that blew up in the end. The operated on the old GSE model but turbocharged it and drove the final mad dash of mortgage debt expansion. Still blaming the GSEs is a widespread political project now as the drive to absolve the big banks and the financial world of responsibility for the mess. Just because the GSE’s provided the model for endless non bank loan driven credit expansion that does not mean that they were mostly responsible for the crisis. To borrow an old trope, guns don’t kill, people do. It was the sub prime and option ARM and multiple mortgages for maids provided untimately by the Wall Street bank MBS machine which amounted to the crazy guy taking the gun into the crowd to wreck havoc.
I am quite sure that securitized mortgages were introduced by Fannie or Freddie. This is a matter of public record and can be checked. Ooops it was Ginnie Mae. It was a GSE.
“Ginnie Mae guaranteed the first mortgage passthrough security of an approved lender in 1968.[8]”
http://en.wikipedia.org/wiki/Mortgage_backed_securities#History
This required no googling. I just went to the Wikipedia and typed
mortgage backed securities
I don’t see anything wrong with mortgage bonds (I think they are the most recent useful financial innovation). The problem was mortgage companies without skin in the game. These have nothing to do with the GSEs who bought mortgages from banks. Also sub prime mortages — which originally meant mortgages which don’t meet Fannie and Freddie’s standards. Later the GSEs got in the sub prime game and were burt, but it was originally a way to get around them.
It is very easy to refute the GSE’s and CRA did it nonsense. But you have to write about things that happened after 2000 and not make an incorrect claim about what happened in 1968.
I’d also say that the Obama administration has many detailed constructive proposals which are ignored as they have no chance in congress. Oh and that one of Clinton’s bright ideas was welfare reform which is a necessary condition and crucial partial cause of the current record level of severe poverty (I admit records don’t go back very far for some reason).
I don’t think it was the IBs choice to give up CDOs. They relied on origination mills to make “liars loans” and such. Then the buyers of CDOs got smart and stopped buying. Some of the IBs got stuck with the crappy loans in inventory. Some attempts were made at CDO Squared to further camouflage the scam. Then there were the engineered short deals like ABACUS and Magnetar.
If we could make a wish, and make the banking genie go back in the bottle, it would be a return to Glass Steagall, and also disallow IBs as public corporations. Go back to the days when they were partnerships and the partners gamble with their own money, and that of their accredited investor clients.
I recall seeing some news reports just before Fannie went under that indicated they did about 10% of the total subprime market. Also, I don’t think they did securitize and resell these subprime loans. They kept those loans on the books. Fannie also sells corporate bonds to fund loan buying, and when things started unraveling they were locked out of the corporate bond market.
Robert,
According to Wikipedia’s Ginnie Mae entry:
“Ginnie Mae neither originates nor purchases mortgage loans, nor does it buy, sell or issue securities in the U.S. capital markets. The credit risk on the mortgage collateral underlying its MBS securities primarily resides with other insuring government agencies. Rather, Ginnie Mae is the guarantor of MBS issued by government-approved securities issuers who participate in Ginnie Mae’s program.”
I have no background whatsoever in finance. My real purpose in posting that post was to refute Will’s claim that the GM buyout is privatization of profits and socialization of losses—y’know, in contrast to, say, the tax credits heaped upon the oil industry. Any time I begin to discuss financial instruments and the like, I recognize pretty quickly that I’m in over my head. But it looks to me from that Wikipedia entry that Ginnie Mae simply guaranteed, rather than initiated, those early mortgage-passthrough securities of an approved lenders. I assume that the original lender, in 1968, originated the idea.
That said, I confess that I thought MBS were a fairly recent innovation. In any event, it was MBSs in their recent incarnation—the once in which, as you say, the mortgage companies had no skin in the game—that I was talking about. And, unfamiliar as I am with the intricacies of finance, even I can see that, also as you say, these have nothing to do with the GSEs who bought mortgages from banks—IF the GSEs even securitize and resell these subprime loans; Cedric says that, from what he can tell, they did not. So it appears that the concept of type of MBS that caused the collapse of the economy WAS originated by Wall Street.
As for Clinton, I’m no great fan of his administration. Welfare reform was by no means his only “triangulation” legislation he signed. He signed two of the most blatantly appalling federal laws ever: a 1996 statute that effectively removed—or at least has been interpreted by the Supreme Court to remove; the statute’s language is so clumsy and convoluted that it is incomprehensible—the right of federal-court habeas corpus review of state-court convictions, and a companion statute that severely limits the right of prisoners to challenge the constitutionality of prison conditions.
In the 2008 primaries, I supported John Edwards until it became clear that race was solely between Obama and Hillary Clinton, and then switched my allegiance to Obama because I didn’t want another craven “triangulation” administration. But another craven “triangulation” administration is what we have, in spades. And worse still, we have a president who won’t trouble himself to actually speak to the public, in […]
No, I can’t provide a citation. It was reported in the news a couple of months ago.
As for your claim that GM and Chrysler would have survived without the bailouts, THAT’S hogwash. The companies DID file for bankruptcy, but the bankruptcies were pre-pack, as you put it, only by the grace of the bailouts. THAT was the issue regarding the bailouts: whether to allow the companies to file NON-pre-pack bankruptcies that, it was recognized virtually unanimously, would have resulted in liquidations of both companies, or instead provide the government bailout that would allow the companies to emerge from bankruptcy.
Yes, George Will has repeatedly used the auto-industry bailout as his punching bag. Not the Wall Street bailout; just the auto-industry bailout. How DARE the government prevent the collapse of an industry that directly or indirectly employees more than a million non-wealthy folks, when that very same money could be used instead for additional tax breaks to the socialized-profits oil industry, right?
As for my position on GSEs, I’m not sure what in my post you think suggests that I support their expansion? I support direct loans and tax credits for certain types of business startups and for R & D, such as for batteries for electric-powered cars. That has nothing to do with GSE’s and the government being a controlling gshareholder. And I support the government’s bailout of GM and Chrysler, in which the government did become the controlling shareholder of the companies, but only temporarily.
Does the legal analysis “When the Government Is the Controlling Shareholder (2011)” discuss what happened when the government became the controlling shareholder in GM and Chrysler? If not, it should have.
Thanks, rjs. Glad to see that.
Correction of two minor typos:
The sentence beginning “Johnson, for those of you who …” should read:
“Johnson, for those of you who (like me) don’t instantly recognize the name, headed Fannie Mae during (I guess; Will doesn’t specify the dates) the 1990s and early 2000s.”
The word “until”, after “from 2% to 20%”, should not be in the sentence beginning “One of them concerned one of the Obama administrations (very) few policy ideas: …”
Ah, but y’all understood the post even with the typos.
GSE’s what they are the issue is 30 years of voodoo economics.
And who in the Bush adminsitration or fed waited until a bow tied baseball maven figured this out?
MG,
Check out the fed’s balance sheet.
UPDATE: I just amended the clause “who instituted the concept of securitized mortgages and credit default swaps” to read: “who instituted the concept of securitized mortgages in their recent, destructive form,* and credit default swaps …”
The footnote for the asterisk says:
“That sentence was amended on July 4 to add “in their recent, destructive form”, in light of comments to my identical post on Angry Bear indicating that mortgage-backed securities were conceived apparently all the way back in 1968 or so.”
The blog post is at http://annarborist.blogspot.com/2011/07/i-beg-to-differ-in-part-mr-will.html.
Mark Thoma is on the case, too, beverly:
Reckless Endangerment of the Truth
I just read Thoma’s article, and it’s terrific. What George Will did in his column, and maybe what the authors of reckless endangerment do—it’s hard to tell from Will’s column—is to conflate the issue of the (apparent) personal corruption and eventual obscene income of James Johnson with the issue of what actually caused the subprime-loans/subprime-MBS frenzy.
I share Will’s outrage at Johnson’s use of the government’s tacit underwriting of subprime mortgages to walk away with astronomical personal gains while claiming that he was doing good deeds at Fannie. But that’s an issue entirely separate from the question of what caused the bubble that led to the crash.
Run/Beverly,
The press reports on the repayment of loans by Chrysler and GM are essentially the result a shell game. AIG has done something similar, but at least AIG in their quarterly earnings financial supplement lays out a majority of the sources of financing (AIG doesn’t talk about the canceled non-cumulative dividends or the conversion of preferred to common at a discount when it should have been done at a premium).
GM repaid its loan by drawing down a different committment. “Also during bankruptcy, New GM signed an agreement with Treasury that converted the remaining $48.5 billion in debt into a $6.7 billion debt not, $2.1 bn in preferred stock and a 60.8% stake in New GM’s common stock.”
“Subsequent to emerging from bankruptcy, New GM retired the $6.7 billion in debt, leaving Treasury with $2.1 billion of prefeered stock and 60.8% of the common stock, which has a cost basis of $39.7 bn. . .In order for Treasury to recoup its common stock investment in the New GM. . .New GM would need to receive an average of $133.78 per share”.
http://grassley.senate.gov/about/upload/2010-08-30-Letter-from-SIGTARP.pdf
Further, GM retained its net tax loss carry forward, which I understand is unusual for companies that went through bankruptcy.
Chrysler had a loan forgiven and Treasury monetized a portion of its stake by selling to Fiat – except the form of that monetization was as a result of the DOE providing an additional subsidized loan to Chrysler for R&D for fuel efficient vehicles.
As for pre-pack’s – because the bondholders were anticipating a govt bailout they were unwilling to negotiate a private pre-pack at what would have been (presumed at the time before the Administration flushed centuries of bankruptcy precedent down the toilet) less favorable terms.
As a very relevant example, Lehman actually went through a non-prepack bankruptcy and Barclays bought it out of bankrupty – maintaining the employment of a vast majority of the research, sales & trading, and investment banking platform.
more on this, ok?
mark got a letter from josh rosner re his aforementioned post in which he defends Reckless Endangerment as non-partisan & mark responds to it: “We Do Not Blame CRA”
& david beckworth has a chart that shows mortgage debt outstanding held by the GSE’s declined during the housing boom while the asset-back security issuers’ share increased:
Market Share of Mortgage Debt Outstanding
Thanks. I’d love to see an op-ed by Thoma in the NYT or Washington Post. Or an article on Slate, which I’m pretty should would be happy to publish it. A piece by Thoma and Beckworth together would be especially powerful.
PS: I’d also love to see an op-ed piece exposing for what it is Will’s claim about the auto-industry bailouts–that, unlike the tax breaks to, say, the oil industry, the auto-industry bailouts are socialization of losses and privatization of “profits,” a claim that depends entirely on a curiously narrow definition of “profits” that strikes me as a non sequitur when used in a discussion of the auto bailout, which clearly saved a huge number of middle- and upper-middle-income jobs. Especially when the auto bailout is targeted for that criticism but the Wall Street bailout receives no mention by the author.
The phasing out of Fannie Mae and Freddie Mac will bring back private capital and banks to the real estate market and the playing field will be level for private capital investment. Borrowers will also be required to put down a larger down payment.
http://www.gmacmortgage.com
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