“It’s All Fannie and Freddie’s Fault.” – Really?
October 4, 2008
I know I promised no politics. But I’m tired of hearing people in the media repeat the Republican party line that our current financial troubles are all the fault of Fannie and Freddie. The Two F’s are wrapped up in our troubles, but they didn’t cause them.
From the a series in the New York Times:
Fannie never actually made loans. It was essentially a mortgage insurance company, buying mortgages, keeping some but reselling most to investors and, for a fee, promising to pay off a loan if the borrower defaulted.
…
Dozens of interviews, most from people who requested anonymity to avoid legal repercussions, offer an inside account of the…. pressure from Wall Street firms, Congress and company shareholders, [which caused Fannie's CEO Daniel Mudd to take] additional risks that pushed the company, and, in turn, a large part of the nation’s financial health, to the brink.
…
Shortly after he became chief executive [8 years ago], [Fannie CEO Daniel] Mudd traveled to the California offices of Angelo R. Mozilo, the head of Countrywide Financial, then the nation’s largest mortgage lender. Fannie had a longstanding and lucrative relationship with Countrywide, which sold more loans to Fannie than anyone else.
But at that meeting, Mr. Mozilo … threatened to upend their partnership unless Fannie started buying Countrywide’s riskier loans. [Mozilo said] that Countrywide had other options. For example, Wall Street had recently jumped into the market for risky mortgages. Firms like Bear Stearns, Lehman Brothers and Goldman Sachs had started bundling home loans and selling them to investors — bypassing Fannie and dealing with Countrywide directly.
“You’re becoming irrelevant,” Mr. Mozilo told Mr. Mudd.
Indeed, Fannie’s share of the mortgage reselling marketplace had plunged by more than half in the year before the Mozilo-Mudd meeting. Adding to the pressure, Capitol Hill demanded Fannie buy more mortgages made to low-income and other risky borrowers. Fannie complied, purchasing more than 3 times as many risky loans between 2005 and 2007 as they previously had.
By the middle of 2007, it all added up to a toxic mess as homeowners started defaulting on their mortgages in droves. Fear of unknown toxicity sitting on banks’ books trickled up through the credit markets, eventually freezing the short-term bank-to-bank and bank-to-business credit cycle.
The rest is (recent) history, as Treasury Secretary Paulson took over both Fannie and Freddie, then oversaw the FDIC bailout of IndyMac, orchestrated the Bank of America buyout of Merrill Lynch, watched as Lehman Brothers imploded, stepped in to bail out AIG and oversaw the WaMu seizure as well. Friday saw the passage of a landmark $700 billion “rescue plan”.
In this campaign season, the Republican spin-meisters have a loose association with fact. It makes a good soundbite to lay the blame at Fannie and Freddie’s feet, whereas it takes a little time, a little digging and a little nuance to explain what The Two F’s actually did. Doggone it, we can’t be bothered with nuance at a time of crisis like this. The American people just want government to get out of the way and cut their taxes. It’s all about job creation, Katie. <wink> You betcha!
Related Post – An Economist Backs Up This Post with Nifty Charts
October 4, 2008 at 8:45 pm
Except the blame game is being played both directions, as evidenced by Speaker Pelosi’s comments from last Monday.
There’s plenty of blame to go around yet each side is busy trying to pin it on the other.
October 4, 2008 at 11:50 pm
I won’t go as far as saying they caused the current credit crisis we are in, but when government steps in as a stunt double for a corporate entity bad things typically happen.
Greed and politics tend to create an ugly combination that overwhelm the risk/reward equation in economics. We wouldn’t be where we are today if these two government entities didn’t exist.
Government has an important role to regulate businesses and control the money supply in the economy. It should never cross over to where it is in the unique position of being on both sides of the fence – basically funding, risk budgeting and regulating itself. This structure creates very negative incentives that ultimately harm the American taxpayer.
I’m not convinced that any type of bailout will be successful for the same reasons I just mentioned. This is too complicated of a problem to just throw money at and hope that it corrects itself. It also makes me feel uncomfortable that our idea of capitalism in this country comes with a government financial backstop.
It took us a long time to create this mess and my guess is that it will take quite some time to work our way out of it.
October 6, 2008 at 1:22 pm
On the contrary, Ms. Barr tells much less than half of the story. Lehman Bros. and other Wall Street giants only got into the mix in the last several years when they started buying up the risky mortgage bundles which had been created earlier. The crisis began at least as far back as the early 1990′s, when the Clinton administration and the (then) democrat controlled congress passed legislation which encouraged Freddie and Fannie to insure subprime mortgages in a misguided attempt to provide opportunities to low-income first time homebuyers. Democratic members of Congress, like Barnie Frank then repeatedly denied/stonewalled when regulators warned of an impending crisis. See:
http://www.ibdeditorials.com/IBDArticles.aspx?id=307241242284619
Also:
http://query.nytimes.com/gst/fullpage.html?res=9c0DE7DB153EF933A0575AC0A96F958260&sec=&spon=&pagewanted=all
Note the original publication date.
Happy researching,
Chris
October 15, 2008 at 9:44 am
Great job finding that article from 1999, Chris! Today’s talking heads who claim “nobody saw this coming” aren’t quite accurate are they?
I did note that the NY Times article blamed the Clinton administration, but also said “banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers.”