Hope you had a good cup of coffee.

Ever hear of credit default swaps. That’s said to be a $50-$70 TRILLION market, totally unregulated, and very much to blame for our current mess. Credit default swaps are a form of insurance, but no one regulates that the issuer of the insurance has enough money to cover the guarantee. And the firms that issued these guarantees are going belly up every day.

Then, there is the fact that the banks that invested in crappy paper in many cases hid it away in off balance sheet companies, which deceives the investor. What did the SEC do? Nothing.

Then there is the tremendous leverage that the banks used, buying crappy paper with debt-equity ratios as high as 33-to-1. What did the Fed do? Nothing.

Then there is the fact that by far most of the crappy mortgages were issued by commercial mortgage companies, not by Fannie and Freddie.

Maybe this will amuse you:

http://www.washingtonpost.com/wp-dyn/content/article/2007/08/22/AR2007082200049.html

and this:

http://www.guardian.co.uk/world/2007/feb/08/usa.iraq1

and this:

http://www.nytimes.com/2008/09/27/business/27sec.html?_r=1&scp=4&sq=sec&st=cse&oref=slogin

And, by the way, by far the bulk of sub-prime loans were made by commercial mortgage lenders whose paper was sold mainly to the troubled investment banks, such as Lehman and Bear Sterns, and a lot of foreign banks including UBS, Deutsche Bank and the Bank of China. Fannie and Freddie are required by law to hold mainly conservative mortgages (though they do have some sub-prime).

And other than in loans made by commercial mortgage brokers, it seems so far that minority defaults run at about the same as white defaults. Where there have been huge default rates is among the people who borrowed in order to speculate:

The Wall Street Journal February 6, 2008

Speculators May Have Accelerated Housing Downturn:Rising Number of Defaults
Also Could Complicate Effort to Help Homeowners
By RUTH SIMON and MICHAEL CORKERY February 6, 2008; Page B8

As lenders pore over their defaulted mortgages, they are learning that the number of people who bought homes as investments is much greater than previously believed. Such borrowers turn up frequently in analyses of loans that defaulted within months after origination.

In many cases, these speculators lied on loan applications, saying they intended to live in the homes in order to obtain more favorable loan terms or failed to provide the requested information. Roughly 20% of mortgage fraud involved “occupancy fraud,” or borrowers falsely claiming they intended to live in a property, according to an analysis by BasePoint Analytics, a provider of
fraud-detection solutions in Carlsbad, Calif.

Another study, by Fitch Ratings, looked at 45 subprime loans that defaulted within the first 12 months even though the borrowers had good credit scores. In two-thirds of the cases, borrowers said they intended to live in the property but never moved in. Some home builders have come to similar conclusions: They now believe that as many as one in four home buyers in some markets were
investors during the boom, up from their earlier estimates of one in 10 buyers. The high number of hidden speculators helps explain some of the problems roiling the housing and mortgage markets.

The loans backing these speculator purchases turned out to be riskier than ratings agencies and
investors who bought mortgage-backed securities once thought. Investors tend to be more likely than borrowers who live in the homes to walk away from their purchases when home prices fall. “We couldn’t understand what was driving so many borrowers to default so early in the life of their
mortgage,” said Glenn Costello, a managing director at Fitch. Much of the occupancy fraud was concentrated in markets such as Florida, Nevada and Arizona, where prices were appreciating by double-digit percentages annually, said Kevin Kanouff, president of Denver-based Clayton Fixed-Income
Services, a unit of Clayton Holdings Inc. that reviews about seven million loans a month on behalf of investors. In Las Vegas, as many as 60% of the foreclosures last year involved non-owner-occupied homes, according to Applied Analysis, a real-estate-research firm.

So, once again. They were a small part.

Uhm… Sheesh… Let me get a cup of coffee, okay?

Cheers

The disaster that struck Fannie and Freddie was a business disaster just like the disasters that wiped out Washington Mutual and the others. So do not talk about it as if it were a moral disaster. To be sure, several years ago Fannie had a scandal stemming from a huge misstatement of its earnings. But then so did Goldman Sachs a few years ago. But in both cases those scandals were long past when the crisis arose, both had fixed their financial statements.

Fannie and Freddie went belly-up, to be sure. But the main result of it going belly up was that stockholders were wiped out. The US government has to pay off its bonds, and its lending go on as before. So, for a time, Fannie and Freddie have become part of the US government. That is perhaps a bad thing in the long run. But it is no different from the FHA. In fact, if it is a government objective to increase the sales of homes, to make an increasing percentage of Americans homeowners and not renters, then what is wrong with having Fannie and Freddie part of the government? (As you say, that would make us like Sweden.) Okay, so the solution is simple; let’s not have a government goal of increasing homeownership.

Now, let’s get back to the allegation that the Democrats struck down legislation that would have tightened controls over Fannie and Freddie in 2005. Turns out this was not true. The Democrats, including Barney Frank, voted for a bill sponsored by then chairman of the House Financial Services Committee Republican Michael Oxley and the Republican chairman of the House Banking Committee Richard Baker to pass the Federal Housing Finance Reform Act of 2005 through the House. It passed by a wide margin, with votes from both parties. But it got nowhere in the Senate. It didn’t even get out of committee.

The Federal Housing Finance Reform Act of 2005 was very similar in terms of its tough regulatory provisions to the bill sponsored by Hagel and co-sponsored by McCain (known as the Federal Housing Enterprise Regulatory Reform Act of 2005). (For confirmation, see http://www.opencongress.org/bill/109-h1461/show and click on “more” after “amends the housing”). But the White House didn’t like some of the provisions of this act. Something other than the regulation, I suppose.

I do not know why, but they asked their strong supporters to vote against the Housing Finance Reform Act in committee, and it failed. In response, the strong supporters of the Housing Finance Reform Act voted against the Housing Enterprise Regulatory Reform Act. Even if it had passed, it would have had to go back to the house of representatives, where it would have had to be approved by Republicans Oxley and Baker, who were irritated that their bill had been chopped down.

Oxley is now saying how pissed he was by the treatment that bill got, and by the impression given that all the good ideas about regulating Fannie and Freddie came from McCain and none from Oxley. Also, the House Democrats also voted for the Federal Housing Finance Reform Act of 2005, but the current blogging is saying that they were opposed to any tightening of regulation over Fannie and Freddie.

Oxley says (quoting from the Financial Times):

In the aftermath of the US Treasury’s decision to seize control of Fannie Mae and Freddie Mac, critics have hit at lax oversight of the mortgage companies. The dominant theme has been that Congress let the two government-sponsored enterprises morph into a creature that eventually threatened the US financial system.

Mike Oxley will have none of it. Instead, the Ohio Republican who headed the House financial services committee until his retirement after mid-term elections last year, blames the mess on ideologues within the White House as well as Alan Greenspan, former chairman of the Federal Reserve.

The critics have forgotten that the House passed a GSE reform bill in 2005 that could well have prevented the current crisis, says Mr Oxley, now vice-chairman of Nasdaq. He fumes about the criticism of his House colleagues.

“All the handwringing and bedwetting is going on without remembering how the House stepped up on this,” he says. “What did we get from the White House? We got a one-finger salute.” The House bill, the 2005 Federal Housing Finance Reform Act, would have created a stronger regulator with new powers to increase capital at Fannie and Freddie, to limit their portfolios and to deal with the possibility of receivership.

Mr Oxley reached out to Barney Frank, then the ranking Democrat on the committee and now its chairman, to secure support on the other side of the aisle. But after winning bipartisan support in the House, where the bill passed by 331 to 90 votes, the legislation lacked a champion in the Senate and faced hostility from the Bush administration.

Adamant that the only solution to the problems posed by Fannie and Freddie was their privatisation, the White House attacked the bill. Mr Greenspan also weighed in, saying that the House legislation was worse than no bill at all.

“We missed a golden opportunity that would have avoided a lot of the problems we’re facing now, if we hadn’t had such a firm ideological position at the White House and the Treasury and the Fed,” Mr Oxley says. (See: http://www.ft.com/cms/s/0/8780c35e-7e91-11dd-b1af-000077b07658.html?nclick_check=1)

Now some things you have written were wrong. When Fannie and Freddie were private (but government sponsored, of course), the taxpayers did NOT have to pay off losses. When they made losses, and in quite a few years they DID make losses, they dealt with them like GE or GM (General Motors) making losses.

What is also true is that the US government had an implied backing of these companies, and so if they failed, then the US government had to take them over. Yes. This is true, but the fault was not their making loans, it was the fact that they were private companies. They could not have failed if they were government agencies, and they have not failed in the long-term sense, since they are still backed by trillions of dollars worth of homes – which have long term value.

Now you go to considerable extent to show that Democrats loved Fannie and Freddie. So? Republicans loved Enron.

Raines earned $100 million in bonuses. Big deal. That was normal in private companies, and he was head of a private company. Did you know that in the early days of the Iraq war someone in government sent $12 BILLION in cash to Iraq and it all was lost or stolen? (http://www.guardian.co.uk/world/2007/feb/08/usa.iraq1) Twelve billion dollars! Twelve BILLION! ( No one knows who made the decision to send it; no one knows why. No one even seems to care. You care about $100 million paid by a private company.

Or, how about this one:

WASHINGTON — As Congress prepares to debate expansion of drilling in taxpayer-owned coastal waters, the Interior Department agency that collects oil and gas royalties has been caught up in a wide-ranging ethics scandal — including allegations of financial self-dealing, accepting gifts from energy companies, cocaine use and sexual misconduct.

In three reports delivered to Congress on Wednesday, the department’s inspector general, Earl E. Devaney, found wrongdoing by a dozen current and former employees of the Minerals Management Service, which collects about $10 billion in royalties annually and is one of the government’s largest sources of revenue other than taxes.

Or this one:

A recent congressional report estimated that federal spending on contracts awarded without “full and open” competition has tripled, to $207 billion, since 2000, with a $60 billion increase last year alone. The category includes deals in which officials take advantage of provisions allowing them to sidestep competition for speed and convenience and cases in which the government sharply limits the number of bidders or expands work under open-ended contracts. (http://www.washingtonpost.com/wp-dyn/content/article/2007/08/22/AR2007082200049.html)

A small point, but Lay died before he could go to jail.

Let me repeat my main point, which is though Fannie and Freddie failed, they were a small part of the crisis. Bear Sterns had already failed, AIG would have failed anyway, and so would Lehman and Washington Mutual. These companies failed because of bad financial practices, being over leveraged and taking bad investments. No one forced them to be over leveraged and no on forced them to take bad investments. The investments went bad because of the collapse of the housing bubble. The housing bubble was caused mainly by millions of middle class Americans buying second homes and flipping homes, and to only a small extent caused by lending to poor people.

The cause of the crisis is widespread. It includes the over-leverage of firms on Wall Street, and such banks as Washington Mutual. The lack of oversight over the banks, which allowed WaMu to have such over-leverage, the lack of investigations by the SEC into investment banks keeping their assets in off-the books companies. The reliance on Credit Default Swaps which were untested (and which led to the collapse of AIG). The rating by the credit agencies of paper that was said to be AAA but was really CCC. And you want to blame it all on Fannie and Freddie.

Sure they were a part, a small part.

Excuse me????

Was it or was it not Fannie Mae that went belly up????

It wasn’t the FHA or the VA

Nice try…

Your argument is specious at best.

Better go back and work on that one a bit more before you try to obfuscate the issue….

The History of a Financial Disaster

1997:

Fannie Mae is a GSE (Govt. Sponsored Entity) regulated by Congress.

Fannie Mae buys mortgages from other companies.

It is backed by the taxpayers for all losses, but keeps all profits!!!

President Clinton loosens Home Loan Requirements.

1998:

Banks begin making thousands of bad loans, 0 down, no documentation, for 120% (1998 – 2008).

Executives at Fannie receive huge bonuses if loan targets are met.

Franklin Raines and Jamie Garelick from the Clinton Administration are appointed to run Fannie Mae.

2003:

President Bush proposes a new oversight committee to clean up Fannie Mae, but Democrats derail the effort.

Rep. Melvyn Watt, (D-NC) Committee on Financial Institutions & Consumer Credit stated, “I don’t see much other than weakening the bargaining power of poorer families to get affordable housing.”

1999-2004:

Raines earns $100 million in bonuses

Garelick earnse $75 million in bonuses

In 2004, Enron collapses, congress investigates, Executives Skilling & Lay go to jail for fraudulent bookkeeping.

Congress responds with the Sorbanes-Oxley Act, more heavy regulation of corporations

2004:

An OMB investigation finds massive fraudulent bookkeeping at Fannie Mae.

False numbers triggered executive bonuses every year.

Congress holds no hearings, no one goes to jail, or is punished.

WHY NOT?

1999 – 2005

Fannie Mae gives millions to Democratic causes, examples: Jesse Jackson & ACORN.

Fannie Mae pays millions to 354 Congressmen and Senators, from both parties

Who got the most money?

Top Four Recipients:

#1 – Sen. Christopher Dodd, (D-CT) Chairman of the Banking, Housing, & Urban Affairs Committee

#2 – Sen. Barack Obama, (D-IL) Federal Financial Management Committee

#3 – Sen. Chuck Schumer, (D-NY) Chairman of the Finance Committee

#4 – Rep. Barney Frank, (D-MA) Chairman of the House Financial Services Committee

2005:

Franklin Raines & top execs are forced to resign from Fannie Mae.

They DO NOT go to jail…

There is no media “perp walk.”

They keep all of their bonuses.

They finally pay $31.4 million in civil fines.

The Federal Housing Enterprise Regulatory Reform Act is sponsored by:

#325 – Sen. John McCain, (R-AZ) Armed Services & Commerce, Science & Transportation

McCain said, “If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.”

NONE of the Top Four Recipients support the legislation

The Reform Act is blocked by Democrats, never even making it out of committee

NONE of the politicians return ANY of the money, tainted by fraud.

2008:

Fannie Mae & Freddie Mac goes bankrupt and the Govt. takes them over COMPLETELY.

Lehman Brothers goes bankrupt from investing in bad mortgages.

AIG gets $85 million in loan guarantees, after insuring bad loans & projects

Taxpayers will ultimately pay BILLIONS!

Franklin Raines is now an adviser to the Obama Campaign which wants the Govt. to take over more of the economy.

Did Government involvement in the mortgage market work out???

How will even MORE government involvement make it better? Do you want to be Sweden?

McCain favors revising regulations & loan standards, selling off Fannie & Freddie

Sources:

Congressional Record, 5/25/06

Hannity & Colmes, Fox News, 9/16-17/08

Herald Tribune, 4/18/08

New York Times, 9/13/03

http://www.govtrack.com, 9/17/03

——————-

Prof. Dennis Jantz, 2008

Moreover, the extent to which the US government drove Fannie and Freddie to increase their loans to poor people is overstated. According to “Assessing the Public Costs and Benefits of Fannie and Freddie” a report prepared by the Congressional Budget Office in 1996, the Government set a goals for F&F to make $4.6 billion worth of loans (Fannie) and $3.4 billion worth of loans (Freddie) to households which made below 80% of the median household income of their area in 1996. Does this sound like a lot?

Well in that year, the same report shows that Fannie made $770 billion worth of loans and Freddie made $570 billion worth of loans. So $4.6 and $3.4 billion are about 6/10 of one percent.

The real organizations that make loans to the poor in the USA are, of course, the FHA and the VA — and no one seems to be questioning their financial health.