Wednesday reports released
The NYT reports on the Financial Crisis Inquiry Commission.
“The Republican members of the commission appointed by Congress to investigate the causes of the financial crisis plan to release on Wednesday a document that assigns government housing policies substantial blame for the origins of the 2008 financial crisis. “
Update from MG: Here is the Republicans’ primer on the commission report which we will not see until next year. They don’t call it a report.
http://keithhennessey.com/wp-content/uploads/2010/12/Financial-Crisis-Primer.pdf
Also in the NYT is an Dept. of Energy report on the rare earth situation:
“The United States is too reliant on China for minerals crucial to new clean energy technologies, making the American economy vulnerable to shortages of materials needed for a range of green products” reports the NYT.
So warns a detailed report released on Wednesday morning by the United States Energy Department.
that assigns government housing policies substantial blame for the origins of the 2008 financial crisis.
As this plays out, more and more I am starting to believe this is true.
The “Housing Bubble” was enabled by FINANCING, and the financing was enabled by the Fannie/Freddie AAA imprimatur.
The proof of this is where the losses are occuring. While the private sector financials have largely recovered, the losses at Fannie and Freddie continue to balloon, anywhere from $350B to $1T. This means that those deals that are souring wouldn’t have gotten done without Fannie/Freddie.
It was not the CRA but rather the desire of the GSE’s to maintain market share at all costs, so they decided to ignore their own old rules to keep their market share up. The exec’s went for market share to maximize their bonuses, just like everyone else on wall street. In many respects this point of view makes a lot of sense as greed has been known for a long time to result in bad outcomes. It appears that the GSE’s knew they had two choices lower their standards or fade away, wall street had of course wanted them to fade away because in that fashion they could make more money. They decided not to fade away and instead lowered their standards, which in the past controlled the kinds of loans that were made.
In addition they allowed cash out re-fis which apparently 75% of the sub prime were. It was not to purchase homes but to get the money out of them that people re-fied and invented their salaries.
If Warren had a modicum of sense she would push to ban cash out re-fis. Houses are not ATM machines, and should not be allowed to be so.
I’ve been curiously watching this debate for the past couple of years and haven’t seen a convincing analysis yet. Krugman lets Fannie and Freddie off the hook by citing various data primarily showing they got into the game too late to be blamed–I say only maybe, and there are some reasonable counterarguments. Speaking politically, however, the claim is the government encouragement of risky home purchase loans by low-earners was the cause of our financial crisis–and on that point I am entirely unconvinced and haven’t seen data analyzed to support or refute the contention. I am somewhat dubious of a claim that loans to low earners, for low-end home purchases, were responsible for much of anything. Instead, I am more tempted to follow the money–risky loans to higher earners for more expensive properties, second mortgages, and refinancing with higher balances. But I’m open minded and if somebody has actually broken down the numbers in a way that directly addresses the political claim, I’d enjoy seeing it.
I believe that this is the report from the four Republican members of the commission:
http://republicanleader.house.gov/UploadedFiles/Financial_Crisis_Primer_Final.pdf
I believe that this is the report from the four Republican members of the commission:
http://republicanleader.house.gov/UploadedFiles/Financial_Crisis_Primer_Final.pdf
Keith Hennessey, a member of the commission, steps up. Here’s his blog entry.
http://keithhennessey.com/2010/12/15/financial-crisis-primer/
No derivatives? Say what?
I haven’t read the report, but I have seen a few articles mention that the four Republican members did not include derivatives as a cause of the financial meltdown. If true, perhaps someone can try to justify why the four Republicans didn’t include derivatives. What the hell is up with that?
LOL.
Keith Hennessey, a member of the commission, steps up. Here’s his blog entry.
http://keithhennessey.com/2010/12/15/financial-crisis-primer/
Here is the Republicans primer on the commission report which we will not see until next year.
http://keithhennessey.com/wp-content/uploads/2010/12/Financial-Crisis-Primer.pdf
Keith Hennessey, a member of the commission, steps up. Here’s his blog entry.
Financial Crisis Primer, 15 Dec
http://keithhennessey.com/2010/12/15/financial-crisis-primer/
Here is the Republicans’ primer on the commission report which we will not see until next year. They don’t call it a report.
http://keithhennessey.com/wp-content/uploads/2010/12/Financial-Crisis-Primer.pdf
Minitruth speak!
What’s that odor from over in the corner, half digested peanuts? Or half digested oats?
Ban the word ‘deregulation’ from the report! “Pleasingly Orwellian” [some other poster on other comment section/blog].
So, where are the foreclosures? How many are speculative buys? How many second and vacation homes, how many new condo communities in So FL? How many from ‘underserved, poor’ communities?
How many busted MBS’ contain CRA mortgages?
When did Wall St become an underserved community? Yeah, it is the government’s fault but not the CRA!
Go to the data.
Are retirement areas in Florida, bubbled areas in So Cal, and Las Vegas historically under served?
What part of the TARP went to Fannie and Freddie?
Ignore the elephant or the horse in the room.
MG,
CRA is not alone; let’s blame veterans’ VA loans, too.
Hennessey for an honorarium in Minitruth.
Here is from pg 3 [7/13 of the .pdf from the second link in your post:
“The GSEs were not the only means by which the government supported the financing of high-risk mortgages. Through the GSEs, FHA loans, VA loans, the Federal Home Loan Banks, and the Community Reinvestment Act, among other programs, the government subsidized and, in some cases, mandated the extension of credit to high-risk borrowers, propagating risks for financial firms, the mortgage market, taxpayers, and ultimately the financial system.”
Nota Bene: this is the only place CRA is mentioned in the primer [so olde Yankee], in the same line as FHA, and VA both of which programs I have used and passed the deal under scrutiny.
The next paragraph Hennessey states that the financial intermediaries were then taken in by the government’s risky actions, although there is no foundation in fact for the statement. No effort to show how any of them failed in due diligence, certainly not enough to excuse the failed honest services of the financial intermediaries.
The tone of this agitprop misnomer primer is: big government bad, Wall St taken in by big gumint!!!
MG,
In 2005 I knew it was a house of cards, in 2003 I knew the condo I was looking to buy was overpriced and walked from the deal. Short money chasing long, $250 per sq ft and 100K an acre…..
Helicopter Ben in 2002!!
Where is my 8 figure bonus for being smarter and doing better [minimal] due diligence than Wall St?
CRA is not alone; let’s blame veterans’ VA loans, too.
Hennessey for an honorarium in Minitruth.
Here is from pg 3 [7/13 of the .pdf] from the second link in your post:
“The GSEs were not the only means by which the government supported the financing of high-risk mortgages. Through the GSEs, FHA loans, VA loans, the Federal Home Loan Banks, and the Community Reinvestment Act, among other programs, the government subsidized and, in some cases, mandated the extension of credit to high-risk borrowers, propagating risks for financial firms, the mortgage market, taxpayers, and ultimately the financial system.”
Nota Bene: this is the only place CRA is mentioned in the primer [so olde Yankee], in the same line as FHA, and VA both of which programs I have used and passed the deal under scrutiny.
The next paragraph Hennessey states that the financial intermediaries were then taken in by the government’s risky actions, although there is no foundation in fact for the statement. No effort to show how any of them failed in due diligence, certainly not enough to excuse the failed honest services of the financial intermediaries.
The tone of this agitprop misnomer primer is: big government bad, Wall St taken in by big gumint!!!
Yes
Fannie and Freddie have mounting losses in large part because they bought deals after the fact. Private financials “recovered” with CountryWide being taken over, WaMu being taken over, many smaller originators going out of business. GSEs doing badly is in large measure a reflection of policy decisions after the fact, not while they were mostly private. Financials doing better now is in large measure due to policies actions taken to help them, as well as a survivor effect. None of that supports claims that the GSEs drove the housing bubble. Krugman doesn’t rely exclusively on timing issues. He has also, rightly, noted that there were housing bubbles in a number of European countries with no CRA-like policy and where our GSEs don’t function. Very hard to maintain the GOP line on the causes of the mortgage crisis if you consider all the facts. That’s why it is so disappointing to see a break on the commission entirely along partisan lines. Looks like the Republican members of the commission were appointed under orders to come to a certain conclusion, rather than to consider the facts.
Fannie/Freddie AAA imprimatur.
These guys do not assign bond ratings!! That would be Moody’s etc
ilsm,
They were assigned AAA because Freddie & Fannie were implicitly guaranteed by the Federal Govenment.
I know I’m missing something here, but either this “KABUKI” called U.S.Government with all the attending players is just shy of being inept, or are just shy of being totally corrupt, having sold out their position, for some ego stretching reason. Either way, it looks like, smells like, therefore must be, criminal. When the hell are the American people going to put a stop to it???
The issues are so widespread that everyone gets to be a little right when assigning blame. This study could have been used to quantify with numbers areas where things went wrong, but they chose not to do it that way. Instead they want to tell us how evil poor people took advantage of the kindness and naivete of well meaning bankers (note that F&F don’t originate loans, although they set underwriting standards for what they will buy) . Then F&F did start paying private sector competitive bonuses to management. This is so that they can attract “good people”, and insure the company doesn’t go all to hell.
The other point, which I mean is true stuff, is that private sector subprime was much larger than F&F subprime. Then all the private subprime was securitized and sold off to investors. F&F kept theirs on the books and sold corporate bonds to raise those funds. F&F blew up, so did the banks. The USG nationalized F&F, but bailed out the banks ($700B from TARP, $3.3 Trillion in emergency Fed programs).
So this revisionism of history makes it difficult to find numbers, but I’ll try and upload a graphic here which at least breaks down the dollar amounts of all the various kinds of securitized RMBS and CMBS paper out there.
Then yesterday there was a Senate Judiciary hearing on the foreclosure mess broadcasted on a CSPAN3 webcast. Kind of long, but has some entertaining parts. One of our AZ congreessmen took advantage of his “question” period to launch a mini speech about how the government completely screwed up the housing and mortgage market WITH regulation!!!!!! They caused bankers to do dumb things!!!!!
You CAN just make this stuff up.
http://www.c-span.org/Watch/Media/2010/12/15/HP/A/41948/House+Judiciary+Cmte+Hearing+on+Foreclosure+Crisis.aspx
Mortgage breakdown:
The thinking of the Republican members isn’t the real issue at this point. The fight was over complying with the legally mandated release date for the final report. The five Democrats and one Independent overrode the objections by the four Republicans and the report won’t be released until next year.
The Republicans released their financial crisis primer, specifically stating that it is not a report. But many will call it a report and howl at the Republican members of the commission.
Meanwhile, the five Dems and one Indep are dragging their feet, blowing off the legal deadline. What’s up with that?
The tone of this agitprop misnomer primer is: big government bad, Wall St taken in by big gumint!!!
It shouldn’t be. Wall St. saw “AAA” and took it. So if you want to find “stupidity” it’s in the government guarantee. Well intentioned, but stupid.
There is a chance that the private sector would have perpetuated the bubble on it’s own, a la AIG, but the government was first in line with their checkbook, so we’ll never know.
Deductions for real estate taxes and mortgage interest are more a cause of the meltdown than F&F.
‘Implicit guaranteed’ implies there might be no limit to neglect for doing due diligence about F&F portfolio. Huh?
I do not know. Do you imply that F&F are a moral hazard? To whom, buyers of their notes?
I did not hold, nor did I consider holding F&F bonds from 2006 on. The whole thing was a sham.
F&F retained the mortgages they bought which were not bundled into CDO’s or MBS’, and raised funds with sales of F&F bonds, which may or may not be rated AAA because of the GSE status.
I recall some conversations here or at Calculated Risk about F&F bonds, and the ‘implied’ strong ratings.
I recall that the implied guarantees depended on someone funding them, which weakens the argument that there was a guaranty. There was some level of risk and uncertainty there in addition to the craziness going on in originating mortgages.
The difference which I suggest we should consider is that F&F buy mortgages to move them off private sector lenders’ books so that the private lenders can lend to create more mortgages.
Does that make F&F guilty of encouraging the bubble by allowing short money holders to make more mortgages? They did that all the time and for many years. It is part of keeping the real estate and construction industries running. A moral hazard then is the real estate interest and tax deduction which also encourage home ownership. But that hazard is to the common man chasing the American dream, a moral hazard there is okay!
So, F&F played a small part of the music, but F&F did not make the tempo nor have the button more than 10 or so percent of the time, nor reduce the number of [musical] chairs.
This line of thinking does not imply F&F nor VA, nor CRA made the conditions for there to be so many more walkers than chairs when the music stopped.
So, blaming F&F, VA, CRA etc, is saying the government created huge moral hazard. This is a meme not supported in logic often used by libertarians.
Are the republican members libertarian?
So, blaming F&F, VA, CRA etc, is saying the government created huge moral hazard
This is exactly correct. The definition of “moral hazard” is economic actors behaving differently in the presence of insurance. In this case the insurance was the government guarantee, so underwriting standards and buyer due diligence were irrelavent.
Actually, I’ve heard F&F is one of the strongest lobbyist on the Hill. So…define government.
Then all our monoline insurers are almost gone from insuring private sector structured products. AIG sold lots of CDS and bit the dust. Insurance, backstops and bailouts causes moral hazard? With financial products and banking, yes. But if I buy car insurance I don’t go trying to get in an accident. It doesn’t pay a juicy bonus.
The government had lax regulation. The industry lobby fought for it.
Saying it was the government that created moral hazard is a bit simplistic when you can’t tell the difference between the government and the FIRE industry.
What do you call moral hazard from the government after the fact?
It is true trashy paper will not be written if there is no one to buy it. That is where CDO’s came in, which had no concern for the appraisal etc.
F&F and VA are not much of the secondary mortage market in 2003 until 2008.
At the time not a big player compared to the CDO’s etc turning short money back from the 30 year notes the poriginators wrote.
F&F got into risk taking mode when the bubble burst and the CDO’s began to unravel to keep the mortgage churn from collapsing which it did anyway.
Who in 2004 thought the US G would be holding a multi trillion $$ bag?
How are the American people going to put a stop to it? Isn’t that the problem?
Look at the $8 billion plus in earmarks that the U.S. Senators stuck in the tax bill that was just sent over to the U.S. House. All of those guys need to be fired.
It will take a few more election cycles to wipe out the deadheads in D.C..