Fab Five Freddie Told Me Everybody's Fly

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Maybe somebody convinced John McCain* that while voters are fretting about the economy, he should… actually talk about Obama's economic policies. Mark Halperin has the speech:

This crisis started in our housing market in the form of subprime loans that were pushed on people who could not afford them. Bad mortgages were being backed by Fannie Mae and Freddie Mac, and it was only a matter of time before a contagion of unsustainable debt began to spread. This corruption was encouraged by Democrats in Congress, and abetted by Senator Obama.

Senator Obama has accused me of opposing regulation to avert this crisis. I guess he believes if a lie is big enough and repeated often enough it will be believed. But the truth is I was the one who called at the time for tighter restrictions on Fannie Mae and Freddie Mac that could have helped prevent this crisis from happening in the first place.

Senator Obama was silent on the regulation of Fannie Mae and Freddie Mac, and his Democratic allies in Congress opposed every effort to rein them in. As recently as September of last year he said that subprime loans had been, quote, "a good idea." Well, Senator Obama, that "good idea" has now plunged this country into the worst financial crisis since the Great Depression.

Up to now McCain has handled this issue terribly. He's allowed Obama to turn McCain's Fannie/Freddie-connected advisors into a liability bigger than Obama's own homeownership philosophy—one that basically excuses and agrees with the goals of the GSEs, pre-meltdown. He tried to "lead" on the issue with his campaign suspension stunt, which made his campaign take on water faster than the Lusitania.

Tonally I don't know if the attack works. As with everything McCain, the issue is framed more as a matter of honor (Obama has none! I've got tons!) than understanding of the problem. But there's some understanding here. More importantly, there's the understanding that McCain has to provide answers on the crisis or he'll get crushed in 30 days.

*Not Sarah Palin, though.

UPDATE: I just tuned into a McCain campaign press call on the speech, led by Wisconsin Rep. Paul Ryan (R), who insisted that "all roads lead back to Freddie Mac and Fannie Mae" and that McCain had wanted to regulate them while Obama proposed nothing. He also credited McCain with improving the bailout bill. "He not only gave us political support, he gave us moral support, so we were able to add taxpayer protections," Ryan said. "This bill passed after we made it substantially better."

Obama, on the other hand: "He was not doing anything until the votes were not there the first time. We're seeing some of the implications of that today" as the market crashes.

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  1. Maverick!

  2. That would be a perfect speech for McCain, in that it contains so much that is untrue.

  3. “Would be”? Joe, those are McCain’s remarks.

  4. Whatever strange calculus that goes on in the minds of the electorate, the MSM reports that they trust Obama on the Economy more than McCain. McCain should be able to at least hold his own on the economic battleground. But so far, he appears to be giving ground.

  5. If there’s “so much that is untrue” there has to be a specific thing that is untrue.

  6. If there’s “so much that is untrue” there has to be a specific thing that is untrue.

    Yep.

  7. The Axiom of Choice,

    Jesus! That makes my head spin reading your comment! Why can’t you be like joe and use simple, easy to understand arguments.

  8. McCain needs to go all O’Reilly on Obama in tomorrow’s debate if he still wants to make this election. He needs to point out the contributions the Lehman’s of this world made to Democrats like Dodd & Clinton.

  9. McCain needs to go all O’Reilly on Obama in tomorrow’s debate if he still wants to make this election. The problem is, people seriously marked him down last time for being too mean. So he’d have to go after Obama, but do so in a manner that didn’t look grouchy or disrespectful. Tough act for anyone and this is John McCain.

    He needs to point out the contributions the Lehman’s of this world made to Democrats like Dodd & Clinton. To which Obama replies that their PACs, as opposed to their employees, gave much more money to Republicans, and now we’re in the weeds of campaign finance.

    There’s an opening for McCain, but it’s a tough one for him to navigate.

  10. I find it unbelievable that Weigel wrote this article.

  11. Doesn’t matter if McCain understands the economy better than Obama, as long as McCain’s just itching to blow out the national debt on military adventures.

  12. To which Obama replies that their PACs, as opposed to their employees, gave much more money to Republicans, and now we’re in the weeds of campaign finance.

    Yeah that would not help Obama.

    “I did not get money from Fannie Mae I got it from Fannie Mae employees”

    Scary black weathermen in church from the 60’s has more play then that.

    The problem for McCain is not the issue it is that he might be too late.

  13. Justin Fox has discussed McCain’s Fannie/Freddie argument before, here (and some older detail here). Others have fleshed this out, but I find the general argument — Fannie and Freddie stepped in after the S&L scandal, but they were overtaken by the private market during the overheating period — plausible. Fannie and Freddie certainly deserve blame as freakish public/private organizations, as does Greenspan for directing a dot.com bubble into a housing bubble, but the meltdown was led by the shadow banking sector. All this knee jerk “regulation always bad! No, regulation always good!” stuff is getting old.

    I have stopped paying attention to the campaigning, so I have no idea how McCain’s approach will play as strategy. It would seem to open the door to revisiting the S&L scandal (which Obama may already be doing).

    Anon

  14. “I did not get money from Fannie Mae I got it from Fannie Mae employees”

    to which McCain replies “I did not get money from Fannie Mae, I got it from a PAC run by Fannie Mae.”

    It doesn’t have to “help Obama.” It’s not his attack.

  15. I find it unbelievable that Weigel wrote this article.

    Yeah I think he’s playing us. He’s just saying McCain’s got game so that after the debate he can link back and go “Whoa! I though McCain might have enough shit to put the stink on Obama. But oh snap! He got pwned”.

    *Humor Alert*
    Did you get that I was kidding? I mean, I’ve got no idea what fiendish agenda Weigel’s pushing these days. It’s a perfectly fine post. I just thought the above, with the right dead pan delivery, would be funny. But even if it was, this kind of ruins it doesn’t it. But I hate to let all this… Uh what would you call this… Creative discharge go to waste, so I’m submitting it anyway.

  16. “pushed on people who could not afford them. Bad mortgages were being backed by Fannie Mae and Freddie Mac”

    At what point do we blame the idiots who made these loans?

    I keep asking: Did someone put a gun to their head?

  17. Check out http://keatingeconomics.com/ for what the Obama campaign is currently doing with the Keating 5 scandal.

    The problem is that after reading up on it a bit, I actually liked McCain more for his restraint in the matter – and that’s from a confirmed McCain basher. I hope this doesn’t backfire – I doubt it will as long as they can keep the swing voters from understanding what went on.

  18. The loans themselves are one problem–big, but not end-of-the-world big.

    TEOTWAWKI is possible because these piece of shit loans were packaged up and leveraged and re-leveraged, all by affluent, well-mannered, highly educated dipshits on Wall Street. It is THIS action that threatens to collapse the whole Ponzi scheme that is the modern American economy.

    The scapegoating of marginal lending can only go so far–the rest was done by people who should have known better, and probably did, but just didn’t give a fuck because of the short-end bucks involved.

  19. I’m gonna go gonzo free market here, and say that sub-prime loans were a good thing.

    At some risk premium, any loan is profitable, or at least when such loans are aggregated. If housing prices weren’t dropping (and, yes, I’m aware that the two are intertwined), the risk is relatively limited. Repossess the house and audition another loan-buyer with it. The problem now is, nobody wants to take back the less-valuable house.

    If you believe there are no proper beneficiaries of sub-prime loans and other creative financing, then you have to believe that the market had perfected risk/benefit analysis for mortgages in 2000, and everything since then has been responses to government-generated moral hazard. I don’t see it that way.

    This is way too subtle an argument to make in a presidential race, but I think it’s important not to buy into the view that we’re here because a bunch of losers who could never afford any home got mansions. I blame the masters of the universe who were supposed to calculate (and price) the risk, and apparently used a method less reliable than a Ouija board.

    Or, I think it’s a matter of one entrepreneur makes a complex and subtle calculation of how you can manage risk, and profits by it. People start to copy them, and then people start to copy the copiers, and pretty soon the formula has been reduced to “lend money to risky borrowers = easy profit”. This works only as long as things are going well, which is why you need to insure against a downturn. And then the insurers start playing the same game.

    Splat!

    And in the end, it doesn’t matter, because Henry Paulson and his buddies at Goldman Sachs will appoint the winners and losers.

    Sigh.

  20. At what point do we blame the idiots who made these loans?

    Exactly.

    A bank has exactly one intelligent function – to determine the creditworthiness of their lease/loan customer. The rest is mostly just bookkeeping.

    Hell, you want less regs? Just shut the banks down and let everyone borrow directly from the Fed.

  21. Oh boy. Both candidates are trying to take cxredit for this abortion of a bill. They agreed on telecom immunity too.

    Vot third party. If none is available, leave that slot blank. If you think that delinquincies and defaults in the packages are high now, wait until the government instead of greedy corporations is holding the debt. Hell, if I owed on a mortgage, I’d seriously consider getting into arrears. What? The government ain’t gonna start throwing people into the street. Only evil greedy corporations do that.

    Oh noes! Yhe gub’mint is throwing Aunt Flossy out of her home! This shitstorm hasn’t even started. If you pay taxes, you’re going to be selling houses to deadbeats at a loss.

  22. joe | October 6, 2008, 2:47pm | #

    If there’s “so much that is untrue” there has to be a specific thing that is untrue.

    Yep.

    The point is, you should provide a specific thing that is untrue before making the blanket assertion that “so much is untrue”.

  23. I made a point of replying with precisely the degree of specificity in the original McCain speech.

    But to take it a step further – the bill McCain claims would have prevented this crises would have 1) required Fannie Mae to purchase more MBSs, and 2) implemented accounte changes that, regardless of their merits, would have still counted the MBSs at the heart of this problem was their speculative value. The first would have either done nothing to avoid the problem or possibly made it worse (but probably done nothing, because the GSEs owned a small fraction of the MBSs anyway), while the second would have done nothing about the problem. There was no language whatsoever in that bill about the standards for the underlying loans.

    That doesn’t make it a bad bill, but it wouldn’t have prevented the meltdown.

  24. Now, in English:

    But to take it a step further – the bill McCain claims would have prevented this crisis would have 1) required Fannie Mae to purchase more MBSs, and 2) implemented accounting changes that, regardless of their merits, would have still counted the MBSs at the heart of this problem at their speculative value. The first would have either done nothing to avoid the problem or possibly made it worse (but probably done nothing, because the GSEs owned a small fraction of the MBSs anyway), while the second would have done nothing about the problem. There was no language whatsoever in that bill about the standards for the underlying loans.

  25. “I did not get money from Fannie Mae I got it from Fannie Mae employees”

    Employees give money to candidates for lots of reasons. PACs generally give money for one reason. Which one do you think helps or hurts either candidate?

  26. At what point do we blame the idiots who made these loans?

    I keep asking: Did someone put a gun to their head?

    By buying up sub-prime loans Fannie created the market and for the most part was the market.

    If Fannie was not buying up these crappy loans then the guy who made the loan never would have made it because no one would have bought it.

    For some reason the left has a really hard time understanding this. It is almost as if they have a fundamental misunderstanding of how markets work.

  27. To be more specific, if I give money to a candidate, it’s because he/she shares my values, or I like his/her view on foreign policy, or I think he/she will be able to handle the economy better. You have to go pretty far down the list of reasons I’d give before you’d find “because I think they’ll help my employer specifically.”

    Employees of Fannie Mae and Freddie Mac most likely give on a similar calculus. PACs, not so much.

  28. You have to go pretty far down the list of reasons I’d give before you’d find “because I think they’ll help my employer specifically.” Employees of Fannie Mae and Freddie Mac most likely give on a similar calculus

    Why do you guys have this weird notion that Fannie Mae had a bunch of disinterested coal miners working for them is beyond me.

    Seriously this will get no play…the only thing people will look at is how much money Obama got and how much McCain got.

  29. By buying up sub-prime loans Fannie created the market and for the most part was the market. Not even close.

    If Fannie was not buying up these crappy loans then the guy who made the loan never would have made it because no one would have bought it. 72% of mortgage-backed securities (a pretty good proxy) are owned by the private sector.

    If there was no market for buying crappy loans and their derivatives, what’s up with Bear Stearns, Merrill, and Lehman being so screwed when the foreclosure rates spiked?

    For some reason the left has a really hard time understanding this. It is almost as if they have a fundamental misunderstanding of how markets work. There’s going to come a day when joshua corning is going to cease accusing “the left” of ignorance in comments that grossly misstate the facts, but nobody knows when that day will be.

  30. Hell, you want less regs? Just shut the banks down and let everyone borrow directly from the Fed.

    Wow….just wow.

  31. the only thing people will look at is how much money Obama got and how much McCain got.

    I think most of them will hear charges about donations going back and forth. People who look closer will see that McCain’s campaign manager is a Fannie Mae lobbyist.

  32. If there was no market for buying crappy loans and their derivatives, what’s up with Bear Stearns, Merrill, and Lehman being so screwed when the foreclosure rates spiked?

    if the government started buying up poison with no regard for the fact that it is poison then other investors would get in on the action as well.

    “The government insures the value of poison. Lets get in the poison buying business”

    Why is this so hard for you to understand?

    Seriously what part of “created the market do you not understand”?

  33. People who look closer will see that McCain’s campaign manager is a Fannie Mae lobbyist.

    ….

    Really joe?

    You want to go there?

    You need to look at Obama’s team a little harder.

  34. “At what point do we blame the idiots who made these loans?”

    How about the idiots who borrowed the money and failed/refused to prudently live within their means?

    Of course those folks are voters so it is not a political winner for any of the politicians to finger them. They are all merely “victims”

  35. You need to look at Obama’s team a little harder.

    The whole point is that McCain will be the one making these attacks. Obama doesn’t need to use this line of attack. If McCain makes this attack, there’s a pretty simple defense that pretty much thwarts it. If the attack scores no points, it’s a dead issue and a win for Obama.

  36. How about the idiots who borrowed the money and failed/refused to prudently live within their means?

    To be fair the right has their share of “market understanding” ignoramuses as well.

    It is not the loaners or the borrowers fault…it is government economic planning that is at fault.

    The loaners and the borrowers where rationally following market signals….they just did not dig deep enough to realize that market signals were being manipulated by government created/sponsored/funded/insured Fannie Mae.

  37. “He not only gave us political support, he gave us moral support, so we were able to add taxpayer protections,”

    Taxpayer protections? We use to call it pork.

  38. if the government started buying up poison with no regard for the fact that it is poison then other investors would get in on the action as well.

    “The government insures the value of poison. Lets get in the poison buying business”

    The government buying MBSs doesn’t insure the value of privately-held MBSs, joshua. You’ve hears some arguments that you didn’t quite folllow, but they blamed the Democrats, so you tried to repeat them.

    Why is this so hard for you to understand?

    Because, however much you keep straining with the condescending tone, your argument doesn’t make sense. Do you even know that there’s a difference between buying a mortgage and selling one?

    If the private lenders were making crappy loans because they could just sell them off, and didn’t think those loans would actually perform or those securities actually retain their value, there wouldn’t have been such a large majority of them in private hands.

  39. The whole point is that McCain will be the one making these attacks. Obama doesn’t need to use this line of attack. If McCain makes this attack, there’s a pretty simple defense that pretty much thwarts it. If the attack scores no points, it’s a dead issue and a win for Obama.

    Lets assume for the moment that McCain took as much money as Obama (in fact he took less) and has equal number of ties (he has less)….there is the small fact of the senate vote that does not play well for Obama.

    Joe has bragged a lot about Obama’s senate record…perhaps you should look close at that record and see how many times “affordable housing” and “Fannie Mae” comes up it in it.

  40. perhaps you should look close at that record and see how many times “affordable housing” and “Fannie Mae” comes up it in it.

    This is why fools like joshua go for this fool’s gold. It’s the reason why they try to drag in the CRA: because to a certain type of thinker, anything related to Fannie Mae or affordable housing that came before the Senate is exactly like everything else. Any reform proposed for Fannie Mae would have stopped the mortgage meltdown.

  41. “The loaners and the borrowers where rationally following market signals….they just did not dig deep enough to realize that market signals were being manipulated by government created/sponsored/funded/insured Fannie Mae.”

    The government’s actions via Fannie & Freddie certainly did distort the market for mortgages and had the effect of making credit much more available to risky borrowers than would otherwise be the case.

    HOWEVER, none of that relieves any individual from the responsibilty for his own actions and decisions or is any excuse for his own foolishness.

    Just because someone else is willing to lend you money does not mean you can actually afford to carry that loan over it’s term. Ultimately it is the responsibilty of each individual to live within his means and understand the contracts he is entering into.

    Some of those people were “investors” out to make a quick buck by flipping houses. Others foolishly thought it was the responsiblity of the bank to decide for them if they could really afford the house they wanted. The government has been pushing the notion that home ownsership is some sort of “entitlement” and a lot of people bought that hook, line and sinker.

  42. He not only gave us political support, he gave us moral support, so we were able to add taxpayer protections,

    I think he’s using the word “protection” here in a certain, erm, prophylactic sense. Kinda like telling your girlfriend not to worry, you’re wearing “protection.” A thin layer of “protection” doesn’t change the fact that someone’s getting fucked.

  43. there wouldn’t have been such a large majority of them in private hands.

    You need to look at those numbers again.

    Fannie had close to half a trillion tied up in them, and was the largest, by far, holder of them.

    What do you think the value of sub-prime loans would be if Fannie Mae never entered the market?

    Take a close look at the value before Fannie got into it.

    They were the market.

    In 1995, Fannie Mae and Freddie Mac began receiving affordable housing credit for purchasing mortgage backed securities which included loans to low income borrowers. This resulted in the agencies purchasing subprime securities.[82] Subprime mortgage loan originations surged by 25% per year between 1994 and 2003, resulting in a nearly ten-fold increase in the volume of these loans in just nine years.[83] As of November 2007 Fannie Mae held a total of $55.9 billion of subprime securities and $324.7 billion of Alt-A securities in their portfolios.[84] As of the 2008Q2 Freddie Mac had $190 billion in Alt-A mortgages. Together they have more than half of the $1 trillion of Alt-A mortgages.[85] The growth in the subprime mortgage market, which included B, C and D paper bought by private investors such as hedge funds, fed a housing bubble that later burst.

    A September 30, 1999 New York Times article stated, “… the Fannie Mae Corporation is easing the credit requirements on loans… The action… will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough… Fannie Mae… has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people… borrowers whose incomes, credit ratings and savings are not good enough… Fannie Mae is taking on significantly more risk… the government-subsidized corporation may run into trouble… prompting a government rescue… the move is intended in part to increase the number of… home owners who tend to have worse credit ratings…” [86]

    On September 10, 2003, U.S. Congressman Ron Paul gave a speech to Congress where he said that the then current government policies encouraged lending to people who couldn’t afford to pay the money back, and he predicted that this would lead to a bailout, and he introduced a bill to abolish these policies.

  44. joshua,

    Fannie had close to half a trillion tied up in them, and was the largest, by far, holder of them. Fannie owned 13% of all MBSs. Freddie owned another 5%.

    That leaves 72% for the private sector. This delusion was systemic, on both sides of the public/private line.

    There’s a plausible argument to be made that Freddie and Fannie and the Fed encouraged too much credit to be expanded, but the assertion that John McCain was trying to stop this or that Barack Obama stopped reforms that would have stopped it is nonsense.

  45. Just because someone else is willing to lend you money does not mean you can actually afford to carry that loan over it’s term.

    But y’know calling people stupid doesn’t really get us anywhere.

    In ye olde ideal world, people wouldn’t have made this mistake.

    But if, as Joshua claims (though joe denies), the market was distorted by central planners to make home loans more attractive to marginal would-be purchasers (perhaps because lenders had a greater incentive to push such arrangements), then one would expect some percentage of those marginal would-be buyers to fall for it. Sure, they’re still responsible for their actions, but if the government is responsible for skewing the market in such a way that it led to this, then that’s the part of the equation that most interests me, because that’s the part that has to do with public policy (unless one were to enact laws that decided for people what they can and can’t afford, which I sure as fuck hope doesn’t happen!).

  46. here is a good one joe:

    http://online.wsj.com/article/SB122212948811465427.html?mod=googlenews_wsj

    Subprime and Alt-A originations in the U.S. rose from less than 8% of all mortgages in 2003 to over 20% in 2006.

    hmmm i wonder what Fannie Mae was doing between 2003 and 2006?

  47. There’s a plausible argument to be made that Freddie and Fannie and the Fed encouraged too much credit to be expanded, but the assertion that John McCain was trying to stop this or that Barack Obama stopped reforms that would have stopped it is nonsense.

    Can’t speak for anyone else, but I’m more interested in what we can learn from this mess about good public policy rather than about its implications for the presidential race.

  48. Anyone catch seeing McCain’s rally where he gave the speech?

    His rallies are taking on bizarre, yet entertaining, characteristics. During todays rally, people just start screaming random things in an attempt to get a chant going. Only it ends up being about 7 or 8 people competing among 5 or 6 groups of 7 or 8 people all chanting different things. And all these different groups seem to seize on the most awkward and inoportune time to start yelling, completely throwing McCain off. Then, McCain will make a minor point only to be interupted by some lone wacko screaming – usually just “NOOOOOOO!” or LIIIIIARRRR”(when Obama’s name is mentioned) – which then causes McCain to have to stop and grin a creepy grin while looking completely uncomfortable.
    And if McCain did the quotes gestures with his fingers once while being overly sarcastic he did it 20 times.

  49. John McCain was trying to stop this or that Barack Obama stopped reforms that would have stopped it is nonsense.

    What about S.190?

    http://thomas.loc.gov/cgi-bin/bdquery/z?d109:SN00190:@@@P

    I don’t know if Obama was for or against this bill..(i assume from his love of Fannie Mae that he was against it)..but I am positive McCain was for it.

  50. Senator Obama was silent on the regulation of Fannie Mae and Freddie Mac, and his Democratic allies in Congress opposed every effort to rein them in.

    These facts are inconvenient and burdensome. What’s next: a public denial of Barney Frank’s infamous yet fabulous Freddie “Pitcher” Mac bukkake party?
    There are no clean hands in this debacle.
    The chickens’ homecoming is hilarious if not tragic for those few innocents amongst us.

  51. “Sure, they’re still responsible for their actions, but if the government is responsible for skewing the market in such a way that it led to this, then that’s the part of the equation that most interests me, because that’s the part that has to do with public policy (unless one were to enact laws that decided for people what they can and can’t afford, which I sure as fuck hope doesn’t happen!).”

    I’m not saying attention should not be focused on the government’s foolish attempts to engineer the specific economic outcome of increased home ownership by lower income people (a function that is nowhere assigned to the federal government in the text of the Constitution by the way), all I’m saying is that the irresponsibilty of individuals seems to be largely getting a pass in all this because it isn’t a political winner.

    There was a time when there was such shame in society associated with defaulting on debt that it was a desperate last resort for people and people were more prudent about getting into debt in the first place.

    Now the concept of individual responsibilty has been eroded so much that people feel no shame at all about welching on deals that they made. And the politicians who let them off the hook by calling them “victims” further exacerbate the notion of individual responsibilty.

  52. Can’t speak for anyone else, but I’m more interested in what we can learn from this mess about good public policy rather than about its implications for the presidential race.

    I guess it sort of depends on who wins the election on what will be done to correct the policies.

    I have little faith in Republicans to fix it and no faith in Democrats to fix it.

    I guess we can always put our faith into government technocrats to whisper into the ear of the winner.

  53. Whatever strange calculus that goes on in the minds of the electorate, the MSM reports that they trust Obama on the Economy more than McCain.

    That is strange; it is like voters think he has experience or something.

  54. I think you should refer to the original speach where Obama said that sub-prime loans were a good idea :

    “Subprime lending started off as a good idea – helping Americans buy homes who couldn’t previously afford to. Financial institutions created new financial instruments that could securitize these loans, slice them into finer and finer risk categories and spread them out among investors around the country and around the world.

    In theory, this should have allowed mortgage lending to be less risky and more diversified. But as certain lenders and brokers began to see how much money could be made, they began to lower their standards. Some appraisers began inflating their estimates to get the deals done. Some borrowers started claiming income they didn’t have just to qualify for the loans, and some were engaging in irresponsible speculation. But many borrowers were tricked into glossing over the fine print. And ratings agencies began rating bundles of different kinds of these loans as low-risk even though they were very high-risk.”

    I believe I have heard these types of opinions express in your pages in the past.

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