Wednesday, September 17, 2008

Getting myself educated about Fannie and Freddie

neo-neocon summarizes the beginning:
[T]he process of deregulation began at the tail end of the Carter Administration. Reagan continued it, with Bush I bailing out the offenders during the Savings and Loan Crisis, an act that reinforced the idea on the part of management that risky behavior wouldn’t have such terrible consequences because the government would provide a safety net.

Investors Business Daily zeroes in on the accelerant:
[I]t was the Clinton administration, obsessed with multiculturalism, that dictated where mortgage lenders could lend, and originally helped create the market for the high-risk subprime loans now infecting like a retrovirus the balance sheets of many of Wall Street's most revered institutions.

Tough new regulations forced lenders into high-risk areas where they had no choice but to lower lending standards to make the loans that sound business practices had previously guarded against making. It was either that or face stiff government penalties.
Yes, the market was fueled by greed and overleveraging in the secondary market for subprimes, vis-a-vis mortgaged-backed securities traded on Wall Street. But the seed was planted in the '90s by Clinton and his social engineers. They were the political catalyst behind this slow-motion financial train wreck.
In the end, Fannie had to pay a record $400 million civil fine for SEC and other violations, while also agreeing as part of a settlement to make changes in its accounting procedures and ways of managing risk.

But it was too little, too late. Raines had reportedly steered Fannie Mae business to subprime giant Countrywide Financial, which was saved from bankruptcy by Bank of America.

At the same time, the Clinton administration was pushing Fannie and her brother Freddie Mac to buy more mortgages from low-income households.

The Clinton-era corruption, combined with unprecedented catering to affordable-housing lobbyists, resulted in today's nationalization of both Fannie and Freddie, a move that is expected to cost taxpayers tens of billions of dollars.

And the worst is far from over. By the time it is, we'll all be paying for Clinton's social experiment, one that Obama hopes to trump with a whole new round of meddling in the housing and jobs markets. In fact, the social experiment Obama has planned could dwarf both the Great Society and New Deal in size and scope.

There's a political root cause to this mess that we ignore at our peril. If we blame the wrong culprits, we'll learn the wrong lessons. And taxpayers will be on the hook for even larger bailouts down the road.
Market failure? Hardly. Once again, this crisis has government's fingerprints all over it.

Webutante posts a personal recollection:
I'm a stockholder in a small town, solid little bank in Middle Tennessee. It's a bank that for the past 120 years has a reputation as good as gold----with a record of making good loans at about the rate of +90% or more---almost unheard of in today's free wheeling markets.

For some years my father, a small town businessman and employer, was chairman of the board of this little bank and continued the tradition of good business and solid loan practices. The community flourished.

Several years after he retired as chairman, the Feds in the Clinton Administration came in and started dictating to this bank as well as banks across America: they had to start making a certain percentage of bad loans even if management knew the loans would never be repaid. In essence the bank was told to start a policy that in effect was the same as giving a portion of its money away. If my hometown bank failed to comply with this insane new banking policy, it would face stiff penalties from the Feds.

Then, the Feds came in and strongly urged another insane policy: my hometown bank and over 8,000 other banks across this nation were strongly urged to buy millions of dollars of Fannie Mae preferred stock.

After this urging, management of this bank felt obliged to buy FNM preferred stock almost as an act of patriotism. Today, this FNM preferred stock is worthless and my privately held bank will have to write off over $5,000,000 losses. The bank is also having to write off a number of bad loans that the Feds told them they had to make.

Is this any way to run a bank or a business? Of course not. Does government really have a right to make businesses that are solid weaker because some bureaucrat in D.C. thinks it a good idea? Of course not.

Thankfully my hometown bank is still solvent and solid, though not as much as it once was--- had government intervention/supervision not stepped in.

I and my fellow stockholders in this small, conservatively run bank are going to eat the excesses of $5,000,000 of the Fannie Mae preferred. We'll do our part to take the hit from others' gross mismanagement far away in D.C. and in the investment banks that are falling.

Meanwhile, I say again: poorly run and mismanaged companies ---like Fannie and Freddie and Lehman Brothers---need to be allowed to fail and held accountable by stockholders and markets for the errors and excesses of their ways. Saving Fannie Mae and Bear Stears were monumental mistakes by the Feds.

In 2000, the Treasury Dept. succeeded in getting Congressional hearings in an effort to get Congress to reign in Fannie and Freddie. Congress declined to act.

Ed Morrissey says the Bush Administration tried to push through a regulatory solution in 2003:
Bush wanted to tighten oversight with a new regulatory board for Fannie Mae, Freddie Mac, and other government recipients for the express purpose of addressing bad loan practices — and Democrats blocked it.

The New York Times reported this five years ago:
The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.

Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry.

The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios.

The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac — which together have issued more than $1.5 trillion in outstanding debt — is broken. A report by outside investigators in July concluded that Freddie Mac manipulated its accounting to mislead investors, and critics have said Fannie Mae does not adequately hedge against rising interest rates.
This should have been a no-brainer, right? With hindsight, we can see that the Bush administration had accurately diagnosed the problem in the lending market and had a plan to address it. Fannie Mae and Freddie Mac reluctantly supported the plan. However, Democrats objected:
Among the groups denouncing the proposal today were the National Association of Home Builders and Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing.

WaPo says Fannie and Freddie escaped oversight by influencing Congressmen via campaign donations:
The companies kept growing, the dangers posed by their scale and financial practices kept mounting, critics kept warning of the consequences. Yet across official Washington, those who might have acted repeatedly failed to do so until it was too late. Last weekend, the federal government seized control of the two companies to protect the very mortgage market they were created to lubricate. The cost to taxpayers could run into the tens of billions of dollars.

As policymakers now set out to decide what role government, and the two companies, should play in the mortgage business, the failures of the past two decades offer a cautionary tale.

Blessed with the advantages of a government agency and a private company at the same time, Fannie Mae and Freddie Mac used their windfall profits to co-opt the politicians who were supposed to control them. The companies fought successfully against increased regulation by cultivating their friends and hounding their enemies.
Related: Jamie Gorelick, Mistress of Disaster


Webutante said...

You know, I really don't think people on the left want to know the real causes of this would take some time and thought to really grasp all this. It's far too easy to grab some superficial talking point and start pointing fingers. But you and I, as taxpayers, owe it to ourselves and children to connect the dots.

Anonymous said...

I think the people on the right are in denial. The congress and the senate were controlled by the republican party from 1994 to 2006 and Bush has been in office for the past, almost 8 years but everything they screw up is all Clinton's fault. And to think they promised to return responsiblity and ethics to government and yet this has been the most secretive government since Ulysses Grant.

Of course Bush wanted to "overhaul" it but do a little more checking and you'll find that imposing regulations wasn't what he had in mind at all. He wanted to give Wall Street and his uber-rich even more power (taking that power away from congress and we the people).

I was a republican for 26 yrs but I started waking up and smelling the coffee around 2003 and I changed parties in 2004 (if you'd told me 10 years ago that I'd ever been a democrat I'd have told you "never"). Stop listening to a.m. radio and Faux and biased news (Fox). And don't let your preacher tell you how to vote. The wall st folks are in cahoots with the religious right and it is through the efforts of the religious reich that they've been able to fool ordinary people into voting against their own economic interests. Tell the people that "God's people" only vote republican and you are able to trick them and steal their money.

Anonymous said...

I wish I had a dollar for everytime I heard Reagan, Bush, Rush, Sean, Bill, and the rest of the "gang" tell us that deregulation was a good thing. They molded us serfs out here into believing them and voting in people who'd get the deregulation thing done not only with big corporations but even in regards to deregulating the media so that all the rich people could buy up the media outlets and pump out even more propaganda that would get us to be good little "nazis" and go along with their programs, as we cloaked ourselves with the flag while grasping our bibles tight (you really ought to read that thing'll make your hair curl). Half the shit they say is in it...ain't in it; and the rest of the shit that's in it is stuff they don't want to talk about OR it's unfit reading for decent human beings. Day-um we have been led around by the nose and now we're gonna pay the price....while the "moral" leaders and the real elitists take the money and run. -- I bet Bush can't wait to prance off to Crawford. Boy, he had a lot of nerve after all he's done to this country to offer up a "bailout" that insisted on total control being the hands of one man...Paulson. That whole republican elite bunch and all their fat-cat cronies must harbor an amazing amount of contempt and loathing for us serfs out here.

gcotharn said...


I think you are an operative for Barack. I've responded to your comment here: Talking Points; Whack-A-Mole Times Infinity.

If you are real, you are invited to go there and reply.