Quotable

In 2003, the New York Times published an article about growing concerns over growing debt, risky mortgages, and questionable accounting practices at quasi-government businesses Fannie Mae and Freddie Mac.  The following passage, featuring move-along, nothing-to-see-here quotes from the now-chair of the House Financial Services Committee Barney Frank (D-Mass) and committee member Rep. Melvin Watt (D-N.C.), seems relevant given what we know today:

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.

''These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''

Representative Melvin L. Watt, Democrat of North Carolina, agreed.

''I don't see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing,'' Mr. Watt said.

Comments

[John-David]

Barney might not know shit about finance and all, but at least he worked to allow us to play poker for money on the interwebs.

[JMR]

Don't worry, McCain did just enough to prevent internet poker, because it interfered with his lobbyist buddies' business plans. But he's "a maverick" who isn't in the least affected by said lobbyists, if everyone keeps saying it often enough.

[JP]

Every day on my walk to the office, I pass a bank. Prominently displayed in the lobby is a large US flag on a stand. Today for the first time that sight sent a chill up my spine.

"One hand washes the other," as the saying goes.

Maybe the gold bugs aren't so crazy after all? Hmmm...

[joe]

Fannie and Freddie's internal accounting practices were certainly a mess, but the problems that bill was mean to address had very little to do with the meltdown.

[robc]

Considering that in (at least) 2002 and 2003 Ron Paul introduced a bill to end the Fannie/Freddie government guarantees become of the coming financial crisis, I wonder who, at least in part and indirectly, Frank was addressing that comment to?

Okay, I guess I dont wonder.

[robc]

joe,

Is it really that hard for you to type "Barney Frank was an idiot and clearly wrong"?

[Episiarch]

Barney Frank: proving that even though you can be good on certain civil liberties, if you aren't good on economic liberties, you are still a shithead.

[Fluffy]

One thing, among many, that disturbs me about the bailout process is the way winners and losers appear to be about to be selected.

We have a few institutions using Fed and FDIC support to take over failing companies. Those failing companies had a lot of bad assets. But the Treasury Department is about to pay an above-market premium for those bad assets.

This sets up a huge windfall for the institutions that have been using the Fed's money to do these takeovers and workouts. Why not just save Wachovia directly, for example? If the Treasury department is going to own those bad assets eventually anyway, why use Fed and FDIC money to hand Wachovia to Citi for pennies on the dollar, and then buy Wachovia's bad assets from Citi later for 65 cents on the dollar?

[Reinmoose]

in the process weakening the bargaining power of poorer families and their ability to get affordable housing

Funny how this sentiment in 5 short years turned from "bargaining power" to "these people are too stupid to bargain correctly, and the lenders are preying on these poor people."

[John]

I have come to the conslusion that this country is going to end up communist. There is no stopping it. The genius of the left is that they can create things like Fannie Mae and the idea that credit is a civil right and utterly distroy capitalism from the inside. Then, thanks to a completely ignorant, provential and dogmatic national media, blame the entire collapse on the market and use their very failure as a justification for more socialism, which will intern fail and be blamed on the market and justify further lurches left.

It is just hopeless. If we had a media that would tell the truth and explain things to people, Barney Frank and Raines and the whole lot of them would be going to jail. Instead, Frank is running banking policy in the US.

If Obama wins, the entire media will then act as a ministry of truth for the government. As things get worse, the media will dutifully blame everything on the market and sell the chosen one's crackpot sollutions.

Think about this for a moment. Well over 90% of academia are committed socialists and or Marxists. An equally high percentage of practicing journalists are the same. At some point that has to start having an effect. Most people are not ideologues. Most people don't have time to sift through the enormous amount of bullshit put out by the media. If you put out enough lies for long enough eventually the truth gets lost. I don't see any way to stop it.

[miche]

I agree, Fluffy but I thought it'd be the taxpayer buying an 'asset' @ 50 cents on the dollar then selling to another (connected) group at 20 cents on the dollar while taking a loss and starting over with the coffers refilled with the sale portion and the original allotment of $700 billion.

Of course I wear a tin foil hat too and my thoughts are here.

[P Brooks]

Among the groups denouncing the proposal today were the National Association of Home Builders

Barney Frank: working for the little guy.

[miche]

by taxpayer I meant Treasury Dept.

[R C Dean]

One thing, among many, that disturbs me about the bailout process is the way winners and losers appear to be about to be selected.

No kidding. Any time a bunch of politicians pick economic winners and losers, I feel an urge to vomit. I have yet to say a way for politicians to select winners and losers that isn't nauseating.

[Fluffy]

No kidding. Any time a bunch of politicians pick economic winners and losers, I feel an urge to vomit. I have yet to say a way for politicians to select winners and losers that isn't nauseating.

In this case, it seems uglier than usual.

The government has decided to overpay for a certain class of asset.

But while they are preparing this windfall with one hand, they seem to be using the other hand to use regulatory authorities to see to it that this windfall is visited upon the "right" people.

Unless WAMU and Wachovia were literally on fire, I don't see why there was such insurgency to shut them down right before the state was about to dramatically increase the value of their wasted assets. Unless someone thought that other companies were more deserving recipients of that state largesse.

[joe]

robc,

Is it really that hard for you to read and comprehend "Fannie and Freddie's internal accounting practices were certainly a mess?"

Or is it the separation of four whole comments between "Barney Frank says there's no problem" and "Frannie and Freddie's internal accounting practices were certainly a mess" that is tripping you up?

Would a pantomime help? First word. Sounds like...

[Fluffy]

I have to stick up for joe [and Barney] here.

There were a pair of political contests surrounding Fannie and Freddie during the time frame contemplated by this article.

There was the basic "The government shouldn't be implicitly backing these guys" argument advanced by people like Greenspan and Paul. Those guys turned out to be right.

But that wasn't the battle Frank was fighting here. And it's not what he was arguing against.

The OTHER political battle was being fought between Fannie's congressmen and the congressmen belonging to rent-seeking banks. These banks wanted Fannie's activities circumscribed not because of any real limited-government concern or genuine solvency concern, but because they wanted Fannie's securitization market for themselves. They didn't like having Fannie as a competitor, and used libertarian-sounding rhetoric against Fannie even though they themselves were sucking on the tit of the state just as much as Fannie was, if not more.

It can be a dangerous business to figure out who was right and who was wrong in any given regulatory dispute, because unless you follow the industry involved very, very closely it can be hard to know who's using libertarian-sounding rhetoric because they believe it, and who's using it to create some NEW statist advantage for themselves.

[robc]

joe,

I get that you acknowledge some of the mess.
Barney's comment doesnt do that. I just want to see you slam him for his comment. Just because he is a dem (and a Masshole dem at that) is no reason for not calling a moran a moran.

[joe]

Barney's comment didn't do that, robc, mainly because neither his comment, nor the bill he was commenting about, had anything to do with this mess.

I can't believe you feel the need to whine like this because I wrote a substantive statement about why he was wrong instead of a schoolyard taunt.

[robc]

Fluffy,

Heck, I think Frank was probably right on the particular bill in question. At the least, Watt was right about it being a shell game, just shuffling stuff around (whether that was a good reregulation or a bad reregulation I will leave for people like joe to determine, since he claims to be able to distinguish) But, his quote doesnt address the particular bill, it says "not facing ANY kind of financial crisis", even though they clearly were facing them.

[Fluffy]

Oh, I guess I should expand on my last statement to say that if the current crisis is the result of loose lending practices brought about by a real estate bubble that formed due to state monetary and fiscal policy, it would not have mattered if Fannie was superficially reined in.

The other conduits simply would have moved into the gap created if Fannie took baby steps backward. The problem was investor appetite for mortgage-backed securities during the housing bubble. Someone was going to make those loans, package them, and sell them. Trimming Fannie's sales a fraction just would have allowed someone else to make those loans at a higher premium. It would have been nothing more than rearranging the deck chairs on the Titanic to give the Street guys one or two more chairs and Fannie one or two less.

[robc]

joe,

Do you not realize that ALL bogus authority figures should be taunted (preferably to their face, but even anonymously on the internet) at all times?

[joe]

In 2003, the claim that there was some kind of crisis involving Fannie Mae and Freddie Mac was based on accusations that they were cooking their books.

The actual financial crisis that unfolded in 2006-2008 had nothing to do with that issue, but with the collapse in the value of the MBSs brought about by higher-than-expected foreclosure rates.

Had this bill been passed, Fannie Mae would have had to do a much better job of accounting for its assets and liabilities, but it still would have been counting its MBSs at their speculative value.

[robc]

Farnk's statement should have been:

This bill doesnt fix anything. It ignores the real crisis, which at least is covered by the Paul bill, which I am burying mercilessly in committee to never see the light of day. That one, while I disagree with its approach, acknowledges the real crisis facing Fannie and Freddie.

Failure to do that makes Frank a tool that needs mocking.

I dont mind politicians playing partisan bullshit games as long as they admit they are playing partisan bullshit games.

[Fluffy]

I will leave for people like joe to determine, since he claims to be able to distinguish) But, his quote doesnt address the particular bill, it says "not facing ANY kind of financial crisis", even though they clearly were facing them.

In 2003, they weren't.

My entire argument about the crisis all along has been that it's the Fed's responsibility and the Bush administration's responsibility because their policies created macroeconomic conditions that made these companies' business practices appear sound.

The crisis exists because an entire class of asset changed dramatically in value as the macro picture changed.

As fun as it might be to bash Frank, I think doing so actually undermines the libertarian case here, and doesn't enhance it. To bash Frank, you have to accept the premise that there was some magical regulation or magical regulator that could have prevented the consequences of the real-estate bubble, even as other branches of government were doing everything they could to pump that bubble. My argument has always been that this magical regulation or regulator did not exist. If it did not and could not exist, then there is no reason to find fault with Frank for not discovering it.

[robc]

In 2003, the claim that there was some kind of crisis involving Fannie Mae and Freddie Mac was based on accusations that they were cooking their books.

False. The crisis that was getting public attention had to due with their books. The crisis that some (read: Paul) were addressing, directly related to the 2006-2008 problems.

The crisis I cared about back then wasnt the accounting crap.

[robc]

Fluffy,

In 2003, they weren't.

Yes, they were. Only a tiny number of people apparently recognized it though.

[Anonymous]

John @ 9:31am: You're not the only one.

[robc]

Fluffy,

As fun as it might be to bash Frank, I think doing so actually undermines the libertarian case here, and doesn't enhance it. To bash Frank, you have to accept the premise that there was some magical regulation or magical regulator that could have prevented the consequences of the real-estate bubble, even as other branches of government were doing everything they could to pump that bubble. My argument has always been that this magical regulation or regulator did not exist. If it did not and could not exist, then there is no reason to find fault with Frank for not discovering it.

I think there was a magical deregulation that was not only already discovered, but had been submitted as a bill to the house (and to Frank's committee, I think) multiple times by 2003. It would have deflated the housing market before 2004, well before it got completely out of control. With the other shenanigans going on at Fannie/Freddie at the time, it may have led to them crashing and burning then. Even, if we would have bailed them out then, it would have been much, much cheaper and would have completely changed the face of the mortgage industry over the last 5 years.

[R C Dean]

Oh, I guess I should expand on my last statement to say that if the current crisis is the result of loose lending practices brought about by a real estate bubble that formed due to state monetary and fiscal policy, it would not have mattered if Fannie was superficially reined in.

The real problem, IMO, was that the prohibition on Fannie and Freddie buying sub-prime loans was lifted. Back in the day, Fannie and Freddie could only buy "standard" mortgages - 15 or 30 year loans with at least 10% down. When that was the case, a bank that wanted to issue a different (subprime) loan had to keep the loan and the risk.

Would better oversight and honest accounting have caught the colossal risk that the inclusion of these sub-prime loans was cooking into the entire spectrum of mortgage-backed securities before it started threatening the entire financial sector? I dunno (and neither does anyone else). Couldn't have hurt, though.

The actual financial crisis that unfolded in 2006-2008 had nothing to do with that issue, but with the collapse in the value of the MBSs brought about by higher-than-expected foreclosure rates.

Rates that were higher-than-expected because of the bubble in real estate driven by the explosion in sub-prime lending created by allowing Fannie and Freddie to buy these loans, and by the inclusion of these loans in the loan pools securitized in mortgage-backed securities.

[joe]

Ron Paul's bill had nothing more to do with the meltdown that actually happened than the 2003 described in the article.

Absent the proliferation of MBSs, the growth and collapse of a real estate bubble wouldn't have brought down the financial sector like it has. The popping of the tech stock bubble didn't.

Low interest rates don't require or even facilitate the creation of implausible securities.

There are three different points getting smooshed together:

Fannie Mae had shady accounting practices.

Monetary policy and easy credit during the 90s and 00s fostered a highly-leveraged real estate bubble.

The proliferation of mortage-backed securities based on that bubble wrecked the financial sector.

There are relationships between these issues, the last two in particular, but they're not the same thing.

[dhex]

Think about this for a moment. Well over 90% of academia are committed socialists and or Marxists. An equally high percentage of practicing journalists are the same.

that's just fucking stupid.

the state is inevitable because right and left wish it to be so; and we are lost in their maya.

[miche]

Found this online a few minutes ago. It's reportedly info from the conference call this morning between the Treasury Dept. and financial services industry.

http://www.nakedcapitalism.com/2008/09/mussolini-style-corporatism-in-action.html

[Fluffy]

Rates that were higher-than-expected because of the bubble in real estate driven by the explosion in sub-prime lending created by allowing Fannie and Freddie to buy these loans, and by the inclusion of these loans in the loan pools securitized in mortgage-backed securities.

The problem here is that you're buying into the talking points of leftists about the events in question.

Fannie and Freddie were relatively minor players in subprime securitizations. The subprime market essentially existed because Fannie and Freddie weren't in those markets in a major way, and their absence from that market meant that subprime loans weren't subject to the margin-suppressing commoditization effects the agencies had created in the conforming loan market.

The subprime mortgage market exploded because the people selling subprime mortgage bonds could point to decreasing foreclosure rates and claim that the bonds were good risks. Those decreasing foreclosure rates were almost exclusively a product of bubble conditions allowing troubled borrowers to refinance or sell their way out of distress. In retrospect, this seems very obvious to everyone, but to prevent subprime lending from getting out of hand at the time, you would have needed regulators to prevent the making of loans that the data said were good risks - and there just was no way that was going to happen.

[joe]

Interesting point, RC. What do you make of Fluffy's point here?

The other conduits simply would have moved into the gap created if Fannie took baby steps backward. The problem was investor appetite for mortgage-backed securities during the housing bubble. Someone was going to make those loans, package them, and sell them. Trimming Fannie's sales a fraction just would have allowed someone else to make those loans at a higher premium. It would have been nothing more than rearranging the deck chairs on the Titanic to give the Street guys one or two more chairs and Fannie one or two less.

[Fluffy]

RC and ROBC:

Please remember that I am judging Frank's statement in the context of the policy dispute in the article - which was merely an argument about what regulator should have responsibility for Fannie, and whether that regulator should restrict Fannie's overall asset growth and by how much.

It wasn't an argument between regulation and laissez-faire.

[Fluffy]

In retrospect, this seems very obvious to everyone, but to prevent subprime lending from getting out of hand at the time, you would have needed regulators to prevent the making of loans that the data said were good risks - and there just was no way that was going to happen.

I'm going to drill this point home a bit more.

Remember that we were in a time of record low foreclosure rates. In retrospect, it's obvious that those low rates were the result of the bubble, but if you'll remember at the time everyone involved was patting themselves on the back about how well our regulated system was managing risk, and how clever everyone was.

Now picture a proposed regulation preventing institutions from making certain types of subprime loans we'll call "X".

The political argument surrounding that proposal would have been marked by the Republican members of the Congress saying, "We can't stop the market from making 'X' loans because that interferes with economic freedom! These loans are good risks and the data proves it! Let the bankers do their jobs!" and the Democrat members of saying, "This regulation would deny credit to segments of the public who have not been served by traditional lending! The data prove that these customers are good risks and denying them credit is discrimination! We have to use the market to accomplish the social good of promoting access to credit for everyone!"

Voila - no regulation.

Everyone here knows that this is exactly what would have occurred.

[brotherben]

Yes I am an ignorant slut. If the "rescue plan" is so peachy, why is the market going down like a whore at a viagra reps convention?

[robc]

joe and Fluffy,

The Paul bill didnt DIRECTLY deal with the 3 issues that joe brought up. However, by removing the government guarantee of Fannie/Freddie were part of what led to the market conditions that allowed for the bubble. Without Fs backing a larger percentage of the mortgages, credit would have been much harder to come by. That artificial easing of credit was the whole purpose of Freddie/Fannie after all. That created an inefficiency in the market because money chased property instead of whatever the more efficient use was. Especially after the Tech crash, a lot of big money moved into real estate instead of into whatever it would have gone to otherwise. The whole conditions for the MBSes were created by environmental rules that involved F&F.

Radically change the environmental rules of the game and you get radically different results. Money would have stopped artificially flowing into real estate. The "ownership society" concept would have been dead. The building boom, the flipping boom, etc would have never happened.

This is sort of the reverse of the Law of Unintended Consequences. In this case, things that seem unrelated wouldnt have happened, only this time it was Intended, even if the exact thing it prevented was unknown.

One of the things Paul warned about was that the additional capital going into real estate due to Fannie/Freddie was going to lead to a bigger than normal boom followed by a bust.

Yeah, F&F could have been kept around and MBSes could have been tightly regulated and some other regulations could have been done, but those didnt fix the fundamental problem. All this other stuff was messing around the edges (and that messing, if done right, and if allowed to happen, considering how sound the MBses looked at the time, could have prevented the crisis), Paul was trying to fix the fundamental issue that was screwing things up.

[robc]

Please remember that I am judging Frank's statement in the context of the policy dispute in the article

Please remember that I (and Balko) are not. We are judging what he actually said. As I posted, he could have made the distinction clear, but chose not to.

[robc]

Everyone here knows that this is exactly what would have occurred.

Not only would have, but did. There were people outside of congress screaming about the problems of sub-prime loans well before any problem actually existed. Congress did nothing, of course.

[Dr. Kenneth Noisewater]

Fannie and Freddie were relatively minor players in subprime securitizations.

I'd like to underscore Fluffy's point. There is a certain brand of conservative (and vulgar libertarian) that has tried to pin the blame for the financial mess on affordable housing mandates that FDIC-insured banks and Fannie/Freddie were subject to. The truth of the matter is that it was the investment banks that were making the killing in sub-prime securitization, with Fannie/Freddie getting in on the act late in the game because they were losing market share.

If someone wants to make the case against such mandates, I'm all ears. Just don't hijack the current crisis to do so because the facts simply don't support it.

[Mad Max]

Some legislative history on the Paul bill:

H.R.5126

Title: To prohibit the provision of Federal funds to the housing-related government-sponsored enterprises and to remove certain competitive advantages granted under law to such enterprises.

Sponsor: Rep Paul, Ron [TX-14] (introduced 7/15/2002)

Cosponsors (None)

Latest Major Action: 7/29/2002 Referred to House subcommittee.

Status: Referred to the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises.

SUMMARY AS OF:

7/15/2002--Introduced.

Free Housing Market Enhancement Act - Prohibits providing Federal funds to the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), or any Federal Home Loan bank (Such entities are referred to as government sponsored enterprises, or GSEs.)

Amends the Federal National Mortgage Association Charter Act ( Fannie Mae) and the Federal Home Loan Mortgage Corporation Act (Freddie Mac) to repeal: (1) the State tax exemption; (2) the requirement that the Treasury approve debt issues; (3) Treasury authority to purchase Fannie Mae/Freddie Mac obligations; (4) depositary authority; and (5) the designation of obligations as lawful investments.

Amends the Federal Home Loan Bank Act to repeal: (1) the State tax exemption; (2) Treasury authority to purchase bank obligations; (3) depositary authority; and (4) the designation of obligations as lawful investments.

Amends the Federal Reserve Act to prohibit Federal Reserve purchase of GSE debt.

Repeals the eligibility of GSE obligations for unlimited investment by national banks, federally chartered thrifts, and credit unions.

MAJOR ACTIONS:
***NONE***

ALL ACTIONS:

7/15/2002:
Sponsor introductory remarks on measure. (CR E1258-1259)

7/15/2002:
Referred to the House Committee on Financial Services.

7/29/2002:
Referred to the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises.

--------------------------------------------------------------------------------
COSPONSOR(S):
***NONE***

[robc]

Mad Max,

He reintroduced in in 2003 too. I think the results were exactly the same.

[Mad Max]

From Rep. Paul's arguments for his bill in the Congressional Record:

Mr. PAUL. Mr. Speaker, I rise to introduce the Free Housing Market Enhancement Act. This legislation restores a free market in housing by repealing special privileges for the housing-related government sponsored enterprises (GSE). These entities are the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the National Home Loan Bank Board. According to the Congressional Budget Office, the housing-related GSEs received 13.6 billion worth of indirect federal subsidies in Fiscal Year 2000 alone.

One of the major government privileges granted the GSEs is a line of credit to the United States Treasury. According to some estimates, the line of credit may be worth over $2 billion dollars. This explicit promise by the Treasury to bail out the GSEs in times of economic difficulty helps the GSEs attract investors who are willing to settle for lower yields than they would demand in the absence of the subsidy. Thus, the line of credit distorts the allocation of capital. More importantly, the line of credit is a promise on behalf of the government to engage in a massive unconstitutional and immoral income transfer from working Americans to holders of GSE debt.

The Free Housing Market Enhancement Act also repeals the explicit grant of legal authority given to the Federal Reserve to purchase the debt of the GSE. GSEs are the only institutions besides the United States Treasury granted explicit statutory authority to monetarize their debt through the Federal Reserve. This provision gives the GSEs a source of liquidity unavailable to their competitors.

Ironically, by transferring the risk of a widespread mortgage default, the government increases the likelihood of a painful crash in the housing market. This is because the special privileges of Fannie and Freddie have distorted the housing market by allowing Fannie,
[Page: E1259] GPO's PDFFreddie and the home loan bank board to attract capital they could not attract under pure market conditions. As a result, capitol is diverted from its most productive use into housing. This reduces the efficacy of the entire market and thus reduces the standard of living of all Americans.

However, despite the long-term damage to the economy inflicted by the government's interference in the housing market, the government's policies of diverting capital to other uses creates a short-term boom in housing. Like all artificially-created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged over-investment in housing.

Perhaps the Federal Reserve can stave off the day of reckoning by purchasing the GSE's debt and pumping liquidity into the housing market, but this cannot hold off the inevitable drop in the housing market forever. In fact, postponing the necessary, but painful market corrections will only deepen the inevitable fall. The more people invested in the market, the greater the effects across the economy when the bubble bursts.

No less an authority than Federal Reserve Chairman Alan Greenspan has expressed concern that the government subsidies provided to the GSEs make investors underestimate the risk of investing in Fannie Mae and Freddie Mac.

Mr. Speaker, it is time for Congress to act to remove taxpayer support from the housing GSEs before the bubble bursts and taxpayers are once again forced to bail out investors who where misled by foolish government interference in the market. I therefore hope my colleagues will stand up for American taxpayers and investors by cosponsoring the Free Housing Market Enhancement Act.

[Mad Max]

In contrase, see the remarks of Rep. Frank:

"These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis."

[joe]

"Please remember that I am judging Frank's statement in the context of the policy dispute in the article

Please remember that I (and Balko) are not. We are judging what he actually said."

What he actually said was in reference to the policy dispute in the article. So you're taking his comment out of context in order to pretend he was talking about a subject he never addressed, then bashing him for making an inaccurate statement about that subject.

To each his own.

[Patrick]

Fannie surely, and even Freddie, were casualties of crap being done in the investment banks. I know Libertarians always hated them, but they are not the root cause of the problem.

The implicit guarantee is a red herring, because all these big financial firms had an implicit guarantee given to them by Greenspan.

The people that seem to be getting the pass in this whole mess are the ratings agencies. All this stuff that nobody wants to own was rated AAA. Lehman was rated A+ until a few hours AFTER they declared bankruptcy. S&P, Fitch, et al are probably going to go the way of Arthur Andersen. I'm not sure why they are still in business.

[robc]

joe,

Ive already covered this. He used absolute language. He could have said what I suggested he say up above. But he didnt. Even you said there was a mess in your first post. But he didnt acknowledge that either. Dont use the phrase "not facing any kind of financial crisis" if you dont mean it.

[joe]

A fairminded person making a reasonable effort to understand his point cannot read the statement the way you wish to. You are purposely misreading it because, as you say, you just like to make fun of politicians.

Fine, but don't pretend you've made some point beyond that.

[R C Dean]

Fannie and Freddie were relatively minor players in subprime securitizations. The subprime market essentially existed because Fannie and Freddie weren't in those markets in a major way, and their absence from that market meant that subprime loans weren't subject to the margin-suppressing commoditization effects the agencies had created in the conforming loan market.

I'll admit that I haven't been involved in mortgage securitization for some years now, but I was in on it at its inception. Mortgage pools back then consisted of "conforming" loans as defined by Fannie and Freddie. The securities themselves were not issued by Fannie and Freddie, but nobody would touch a pool unless it consisted of conforming loans.

Generally speaking, subprime loans could not be resold to anyone; the market for resale of loans was set by Fannie and Freddie, and they said no sub-primes. So there were relatively few sub-primes made, because the banks making them had to keep them.

I'm not arguing that Fannie and Freddie were big players in the sub-prime securitization market; I don't know that they were big players in any mortgage securitization market, including the conforming loan securitization market.

What I'm saying is that loan securitization is a form of re-selling mortgages, and Fannie and Freddie have always been the market makers for re-selling mortgages. When they began taking sub-primes, banks no longer had to keep the risk of sub-primes, and the lid came off, leading to the reselling of subprimes as part of securitized loan pools.

Maybe the lid would have come off anyway, but I don't believe that's the way it happened historically.

[R C Dean]

S&P, Fitch, et al are probably going to go the way of Arthur Andersen.

No kidding. I have to believe the class action papers are being drawn up now.

And the ratings and securities issuances were all accompanied by opinions by big accounting firms and law firms as well; they will be named, and could all be going down. Historically, professional malpractice and liability insurance have excluded the risks associated with securities, so these firms are likely all naked of any insurance coverage for these claims.

[robc]

joe,

A fairminded person making a reasonable effort to understand his point cannot read the statement the way you wish to. You are purposely misreading it because, as you say, you just like to make fun of politicians.

I think I was reading it the way Balko intended. Are you saying Balko isnt fairminded?

Do you apply this same standard to republican politicians and posters on this blog? (I know the answre to the latter - it is no)

And, I still think Frank was NOT ONLY talking about the specific bill, but was also taking a shot at Paul and others who discredited F&F in general.

[Invisible Finger]

In 2003, the claim that there was some kind of crisis involving Fannie Mae and Freddie Mac was based on accusations that they were cooking their books.

The were 2 crises with those GSE's. The first was the accounting accusations, the second was the fact that their market share was shrinking rapidly because they were confined to only buying loans with traditional underwriting practices. The shrinking market share for the GSE's should have been the sign that there was a housing bubble, instead it was framed as an affordability crisis which resulted in loosening the reins on the quality of loans the GSE's were allowed to buy.

[Bronwyn]

Oh, good! My mom called me to come downstairs and watch the replay on Fox News of Frank making those comments. I was hoping I'd see those words brought up here, too.

Wish I'd read them first... that man's voice annoys me immensely.