Economics

How Freddie and Fannie Slipped the Noose Earlier in the Century…

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The AP has an interesting story about how mortgage giants Freddie Mac and Fannie Mae worked to rebuff attempts to reduce the gambles they were taking with taxpayer-backed funds:

Freddie Mac secretly paid a Republican consulting firm $2 million to kill legislation that would have regulated and trimmed the mortgage finance giant and its sister company, Fannie Mae, three years before the government took control to prevent their collapse.

In the cross hairs of the campaign carried out by DCI of Washington were Republican senators and a regulatory overhaul bill sponsored by Sen. Chuck Hagel, R-Neb. DCI's chief executive is Doug Goodyear, whom John McCain's campaign later hired to manage the GOP convention in September….

In the midst of DCI's yearlong effort, Hagel and 25 other Republican senators pleaded unsuccessfully with Senate Majority Leader Bill Frist, R-Tenn., to allow a vote.

"If effective regulatory reform legislation … is not enacted this year, 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," the senators wrote in a letter that proved prescient….

In the end, there was not enough Republican support for Hagel's bill to warrant bringing it up for a vote because Democrats also opposed it and the votes of some would be needed for passage. The measure died at the end of the 109th Congress.

I'm not sure what "secretly paying" means in this context and the AP story is unfortunately wrapped in a partisan blanket (the story is big on the connection between McCain and DCI personnel, despite the fact that McCain signed Hagel's letter).

There's no question that the Republicans behaved abysmally during their time controlling the Congress and the White House. They should have done what Hagel suggested or more to cut the FMs loose. But the Dems did nothing either, except possibly push for no action at all:

Democrats did not like the harshest provision, which would have given a new regulator a mandate to shrink Freddie Mac and Fannie Mae by forcing them to sell off part of their portfolios. That approach, the Democrats feared, would cut into the ability of low- and moderate-income families to buy houses.

The political backdrop to the debate "was like bizarre-o-world," said the second of three people familiar with the program. "The Republicans were pro-regulation and the Democrats were against it; it was upside down."

Look past the partisan stuff and read about how lobbying works in DC and I think all but the most hardened ideologue will agree that the Fannie Mae/Freddie Mac story perfectly exemplifies why the government should not be in the business of backing particular entities (yeah, yeah, implicitly!).

Read the whole story here.

And as you ponder the government getting more and more intricately involved in the actual ownership (not just the regulation, which they've shown virtually no talent for) of all sorts of financial institutions, remind yourself as the Dems get ready to lock down control of the White House and Congress for the first time in over a decade of Rep. Barney Frank's behavior in all this. As U.S. News' Sam Dealey wrote a month ago:

Five years ago, there was one of those rare moments in Washington when the branches and personalities of government-in this case, the Bush administration-are less interested in protecting or expanding their turf than in fixing a looming catastrophe. What was Frank's response to the proposal?

"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."

As Frank mentions in his press release today, two years after it was first proposed, the House finally voted on a bill reforming the mortgage giants. Alas, the legislation was watered down to the point of being meaningless-that's why it passed the House with such wide margins (122 Democrats and 209 Republicans). But even then, and despite his high regard for bipartisanship now, Barney Frank wasn't among the yeas.

More here.

It will be good come November to see the Republicans get the ass-kicking they so richly deserve. It will be bad to see what comes next.

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  1. It would have been nice to see a bit of Large-L adult supervision at this point. I predict the Obama landslide allows a LOT of voters who otherwise wouldn’t have to go third party, and despite Barr’s many faults he’ll probably exceed a million votes.

  2. “The political backdrop to the debate ‘was like bizarre-o-world,’ said the second of three people familiar with the program. ‘The Republicans were pro-regulation and the Democrats were against it; it was upside down.'”

    Not at all. The DNC has learned the value of captive market based schemes – government intervention using quasi market clothes. Freddie and Fannie are but one example of this. The complex of “free trade” coupled with heavy subsidies is another. Free market enterprise was compromised so quickly and so severely in this country that it’s fair to say it never realy got off the ground. Whats more, it has always had to exist in the shadow of the vestiges of New Deal interventionism.

  3. It’s a shame that the only place you get to hear the tapes of Democrats defending FM & FM is on fox news and talk radio. The economy is going down the tubes because of Democratic crookedness and America is about to give them total control. Hopefully they totally destroy the country within two years, before Republicans are completely redistricted out of government.

  4. I am voting for Barr this year as a first time LP voter. I personaly think the guy is a shameless opportunist – but I live in NJ, so my vote is meaningless except for federal matching dollars and future ballot access, so…

  5. the AP story is unfortunately wrapped in a partisan blanket

    Watch out Nick.As I’ve learned from many of my fellow commenters, suggesting the MSM is partisan makes you a Republican shill.

  6. “The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”

    Frankly, Barney is a wonderful example of consistency:
    he is both figuratively and literally a cocksucker.

  7. Fluffy,

    I don’t buy that the business would have just drained out to other firms. If the government stopped gaurenteeing loans, it would make sense that people would be less likly to make them. Further, it doesn’t take that much to stop a bubble. Also, the deficits had nothing to do with the housing bubble. We have had deficits before but didn’t get housing bubbles. The Fed’s short term interest rates did, but the deficit? That strikes me as you just saying that “Bush must be responsible for it somehow.” In 2002 or so, the Fed should have raised interest rates and busted the bubble and the government should have pulled the plug on Freddie and Fannie. That would have of course caused a hell of a recession, but it would have saved us all of these problems now.

  8. The Reagan deficits coincided with the less extreme asset price bubble that ended in the S&L crisis.

    The fact that two recent periods of rapid deficit growth coincided with asset price bubbles is a pretty good correlation.

    On the causation side, the Reagan deficits and Bush deficits were both instances of dramatic stimulus. That stimulus overflowed the banks of domestic productive capacity, and fed rapid import growth and rapid increases in the prices of financial assets and real assets. It’s not that complicated.

  9. In 2002 or so, the Fed should have raised interest rates and busted the bubble and the government should have pulled the plug on Freddie and Fannie.

    In the absence of the Fed action you describe and the massive Bush deficits, the only policy change needed vis-a-vis the agencies would have been to remove their implicit guarantee.

    The guarantee was the real issue.

  10. Sorry, I reversed the sense of your statement. That should have read, “If the Fed had not acted as they did…” etc.

    I’m not sure even a rate raise was necessary – what was necessary was accepting the mild recession we were due that year and not lowering rates to 1.000%. The mere absence of dramatic Fed action would have been enough.

  11. So why are Fannie & Freddie still not in receivership?

  12. If the government stopped gaurenteeing loans, it would make sense that people would be less likly to make them.

    But John, they wouldn’t have. This bill would have gotten Freddie and Fannie out of the primary mortgage market, while leaving them to continue to buy loans, buy MBSs from banks, and resell the loans they’d buy from banks as MBSs.

    They would have been even more involved in securitizing the loans from private-sector lenders.

  13. “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.”

    There are those who continue to assert that the government led (both parties are guilty) push for affordable housing had nothing to do with the foreclosure/MBS/liquidity crisis.

    It will be good come November to see the Republicans get the ass-kicking they so richly deserve. It will be bad to see what comes next.

    QFMFT!

  14. Hagel and 25 other Republican senators pleaded unsuccessfully with Senate Majority Leader Bill Frist, R-Tenn., to allow a vote.

    Frist- that fucker should definitely be in the first wave across the guillotine.

  15. but I live in NJ, so my vote is meaningless except for federal matching dollars and future ballot access, so…

    Actually it is meaningless for ballot access as well. For ballot access in NJ a party needs 10% of all votes cast in the most recent statewide election for the Assembly (lower house).

  16. Frist- that fucker should definitely be in the first wave across the guillotine.

    Say what you will, but he does have an excellent mug shot.

  17. “There are those who continue to assert…”

    Am I the only one who can’t tell what Buddy Holly is trying to get across?

  18. “””The economy is going down the tubes because of Democratic crookedness and America is about to give them total control.”””

    Give it up, you act like the republicans haven’t been in charge for 6 of the last 8 years.

  19. Nick,

    Great analysis!

    James B.,

    You know that Frist is now an ex-Senator, don’t you?

    All that said, I think I am voting for Bob Barr and if he does not win I am LEAVING the country!

  20. Am I the only one who can’t tell what Buddy Holly is trying to get across?

    He’s trying to say that the minute segment of the financial market concerned with low-income housing caused the financial meltdown.

  21. Some Guy, you’re thinking of Tom Delay, his House counterpart.

  22. sorry for the threadjack but this McCain quote just left me in stitches and I felt the need to share. From Fox News Sunday, yesterday.

    WALLACE: Senator, let me ask the question.

    MCCAIN: Yeah, sure.

    WALLACE: But, Senator, according to a New York Times poll this week – and let’s put it up on the screen – there you can see it – 62 percent of independents now think you’re spending more time attacking Obama than explaining what you would do as president.

    Haven’t you gone on the attack against Ayres because you’re behind?

    MCCAIN: Facts are stubborn things.

  23. I am not now, nor have I ever been, a Republican (registered or otherwise), but there was a time I would have grudgingly conceded that Republicans were marginally less evil, and slightly less likely to completely destroy the economy. Bill Frist, as Senate Majority Leader, helped cure me of that delusion.

  24. Thanks joe – your way was much more succint and readable.

  25. It will be good come November to see the Republicans get the ass-kicking they so richly deserve. It will be bad to see what comes next.

    True that.

  26. Am I the only one who can’t tell what Buddy Holly is trying to get across?

    He’s trying to say that the minute segment of the financial market concerned with low-income housing caused the financial meltdown.

    For those taking ESL cvourses, the push to grant housing loans to low income folks was a significant part of the mortgage crisis. If you had bothered to read the links provided to the Fox Newslike New York Times, you might see corraborating evidence supporting that opinion.

    But that would place some responsibility on those with good intentions, and we can’t hold those folks responsible.

  27. 15 days until joe begins defending the notion of an all-powerful executive.

  28. For those taking ESL cvourses…

    joez law: Yes We Can!


    If you had bothered to read the links provided to the Fox Newslike New York Times, you might see corraborating evidence supporting that opinion.

    Actually, the offer corroborating opinions, absent a plausible argument. A bit short on numbers, though.

  29. Wouldn’t it be awesome if we had a thread consisting of the expression and consideration of ideas, absent partisan poo-flinging?

    Nah, fuck it.

    Countdown, your tears on so yummy and sweet. Hope ya like skinny Kenyans!

  30. NEWSFLASH: Congress is ineffective at solving nation’s problems!

    now back to your regularly scheduled programming

  31. “There are those who continue to assert that the government…had nothing to do with”

    I did skim the links. My confusion arose when you made a statement of fact instead of taking a position. I could say: “there are those who assert that Iraq had nothing to do with 9/11” without revealing my own view on that subject…

  32. All that said, I think I am voting for Bob Barr and if he does not win I am LEAVING the country!

    susan sarandon’s alt account is starting to get annoying.

  33. But the point here is that low income mortgages are important in the crisis (regardless of their numbers) because that’s why Frank refused to assert more control Fannie Mae and Freddie Mac.

  34. It will be good come November to see the Republicans get the ass-kicking they so richly deserve. It will be bad to see what comes next.

    Best two sentence summary of politics since 2000 ever!

  35. cmace,

    But once again, the proposal to “assert more control over Freddie Mae and Fannie Mac” weren’t intended to do anything about the problem that caused the crisis, and wouldn’t have done anything to prevent it. It would have just caused them to buy mortgages on the secondary market, and MBSs, in place of originating mortgages. The business they would have gotten out of would have simply been picked up by the good people at Countrywide and Ameriquest, while Freddie and Fannie would still have been buying their loans, either as loans or as MBSs.

  36. cmace,

    I think it’s becoming “common knowledge” that subprime lending to unqualified people “caused” the housing bubble and susequent crash. I am generally suspicious of common knowledge. Certainly the defaults showed up in the subprime sector firt – though it has now moved to alt-A, and even prime loans. That’s just a post hoc ergo propter hoc argument for causation. The credit bubble couldn’t have occurred without excess credit – subprime loans was simply an outlet for that credit. I think much too much focus has been put on “who is at fault” and not nearly enough on “should we change the rules so it can’t happen any more – and if so, how”

  37. joe, interesting that you point this out. I actually believe that efforts to force Fan/Fred to sell those subprime mtgs that Frank et all crammed down their throats would have simply caused the crisis to precipitate that much sooner and more rapidly. By the time they considered this measure, the bubble was already fully inflated. Country wide probably wouldn’t have been able to expand it’s balance sheet enough to accomodate the excess mortgages, as they were no more than a lamprey swimming along side of Fan/Fred implicit guarantee – opportunistically offloading ever more toxic crap to any one they could.

  38. You really can’t make this shit up.

    Bernake regarding a stimulus package, today:
    “If Congress proceeds with a fiscal package, it should consider including measures to help improve access to credit by consumers, homebuyers, businesses and other borrowers,” Mr. Bernanke said. “Such actions might be particularly effective at promoting economic growth and job creation.”

  39. Maybe the Congress should cap credit card rates at four per cent, so everybody can buy flat-panel teevees for Christmas. And Congress can let GM use their newly guaranteed line of credit to buy Chrysler.

  40. So I’m asking Congress to pass my Zero Down Payment Initiative. We should remove the 3 percent down payment rule for first time home buyers with FHA-insured mortgages. (Applause.) This change could help as many as 150,000 people become homeowners in the first year alone.

    To help low- to moderate-income rural families purchase homes, I’ve requested $2.7 billion in loan guarantees, and $1.1 billion for direct loans to low-income borrowers that can’t get bank loans. These initiatives will help thousands in rural communities across America achieve the dream of home ownership. Adding more qualified buyers won’t accomplish much if there are no affordable homes to buy. My administration has set a goal of 7 million more affordable homes in the next 10 years.

    George W. Bush (2004)

    http://www.whitehouse.gov/news/releases/2004/10/20041002-7.html

  41. John | October 20, 2008, 9:12am | #

    In 2002 or so, the Fed should have raised interest rates and busted the bubble and the government should have pulled the plug on Freddie and Fannie. That would have of course caused a hell of a recession, but it would have saved us all of these problems now.

    Yes, but your argument is based on the premise that politicians have the backbone to make hard and potentially unpopular decisions in the present in order to prevent disaster in the future.

    In spite of the many efforts at demagoguery and partisan shillery, this is an institutional problem.

    Govt/Fed intervention attempts to prop up an asset bubble because it gives everyone the illusion that wealth is being created is nothing new.

    I refer you to 1926-1929 (the great american depression), 1983-1987 (the S&L collapse), the mid/late 90’s (tech stock bubble), ad nauseum…

  42. domoarrigato,

    What mortgages that “Frank et al” crammed down their throats?

    Freddie Mac and Fannie Mae, like mortgage originators all over the country, were jumping at the chance to originate and package sub-prime mortgages. The whiz kids on Wall Street thought they had discovered the magical golden key for “managing risk” – the Mortgage Backed Security.

    The vast majority of stupid mortgages were given out by the private sector, who were thrilled to do so. Why would Freddie and Fannie have been forced to do something that everyone else in the business was eagerly rushing to do, and considered a magical combination of secure and highly profitable?

  43. KFP,

    The Fed did push interest rates higher in the 1990s. I recall wondering why Greenspan was pushing rates higher to “avoid inflation” in about 1994 or 1995, a period when the industrial economy was nowhere near full capacity, and the stock market wasn’t remotely bubbly yet.

  44. The whole line of thought about the “implicit guarantee” encouraging people to do more risky things with mortgages founders on one simple fact: those MBSs, the ones that included really stupid, unaffordable mortgages, were very highly rated by the ratings agencies.

    Freddie, Fannie, banks, mortgage companies, Wall Street, the Fed, Congress, the President – these players weren’t ignoring risk, they were underestimating it, because the system they were using to evaluate that risk failed.

    The LA regional transit system and a certain county in Florida got in trouble because they put a big chuck of their short-term account money into highly-rated MBS-based bonds. They didn’t do this because they expected to be bailed out if they failed, but because they thought they were buying AAA-safe real estate investments.

  45. Joe, you are right in this regard: That all of the suspects you named had a hand in this. But…none of it would have happened if our policy makers weren’t so intent on maintaining the illusion that real estate values could rise forever.

    People with large amounts of investment capital didn’t acquire the capital in the first place by being stupid. They saw a gravy train being pulled at top speed by Fed/Govt policy, and couldn’t resist jumping on board.

  46. “””none of it would have happened if our policy makers weren’t so intent on maintaining the illusion that real estate values could rise forever.”””

    Real estate value has in someways been promoted as a right. There are places where you can’t have a non-licened car on your property because it will lower the property value of your neighbor. Your neighbor’s right to real estate value is greater than your right to decide what you can keep on your personal property.

  47. I think it’s obvious that loose credit terms allowed Freddie, Fannie, Countrywide et al to make a bucket of money.

    The stated reason for these loose terms was “affordable housing.” The real reason was vast truckloads of money, with the gubment taking all the downside risk.

    So, when sober politicians questioned the ponzi scheme, Freddie and Fannie greased a few palms, and Barney yelled “affordable housing!”

    I think there’s plenty of room to blame congresscritters (primarily Democrats in this particular case), financial critters and yuppies who were flipping condos.

    ACORN (and their ilk) may have had good intentions. Or they may have had a nefarious plot to destroy capitalism.

    I find it amusing that of all the Dem Senators (or Governors) the Dem party picks one with enough ties to the current crisis that it’s not obvious to the entire country that it’s no longer the GOP’s turn to run the White House.

    How’s that for a double negative?

  48. KfP,

    Thank you for telling us what your position is.

    The next step would be to put together an argument with evidence demonstrating it.

    Like I did with the poing about the bond rating companies. You tell me that, no, the investors didn’t overestimate the security of MBSs because they were overrated – well, why do you say that? Why would the overestimation of MBS’s security NOT explain why people across the board considered them safer than they actually were?

  49. Joe,

    That is a good point about the bond rating companies. They completely failed in this. What I can’t understand is how or why no one stood up and said that the MBS were a dumb idea. A lot of smart people thought they were a way to get rid of risk when instead they were a way to actually create a ton of risk.

  50. John, I give you Bank of America, who chose to stay out of the MBS scene altogether, because they smelled a long-term rat. Look at their financial strength now compared to all the “smart money”.

  51. “Smart money”? Yeah. Can we please take MBA and finance programs and relegate them to trailers outside of community colleges now and fire everyone who has one of them before they do more damage?

  52. John,

    As I understand it, the bond rating companies were divisions of the companies offering the MBSs in the first place, or which otherwise stood to gain financially from deals with companies selling MBSs. I’ve also heard, but don’t know enough to say, that this situation came into being through a deregulatory effort that broke down the wall between bond rating firms as other playas in the financial sector.

    And on an even higher level of spouting off, I’ve been told that MBSs used to be much safer, but became more dangerous in the 00s as more crummy mortgages got rolled into them, while the rating companies continued to treat them just as before.

  53. Bank of America is subject to the Community Reinvestment Act.

    I just wanted to say that, and some of you know why.

  54. Freddie, Fannie, banks, mortgage companies, Wall Street, the Fed,
    Congress, the President – these players…

    Joe, you left out that other player: the guy who ran up his credit cards, bought a house he couldn’t afford, assumed the value would never depreciate, assumed he had a high-paying job for life…all so he could deny reality in an attempt to keep up with the Joneses. Can’t anyone admit the fact that many Americans–our so-called “Main Street”–have attempted to thwart reality, and now it’s time to pay the piper?

  55. Nano Man,

    Did you bother to read what I wrote?

    What the hell does a guy with a credit card and a mortgage have to do with the valuation of MBSs?

    Look, I know you have this point that you really, really want to make, but if you’re going to address something to me, in response to something I write, could you try to make it have something to do with what I wrote?

  56. Although the real estate bubble burst by itself is harmful and would have led to a recession (IMHO anyway), the prime drivers of the current meltdown are the MBS’s and especially the CDS’s out there. These are the “toxic assets” which are dragging the financial institutions down. MBS’s were diced into complex instruments in the belief that any real estate “correction” would be regional, rather than national in scale, and that there would always be a liquid market available to them. Rating agencies relied on complex computer models developed with subjective data and were beset with conflicts of interest (rate my product too low and I’ll take my business elsewhere).

    CDS’s were made too complex, and their lack of a transparent market made for suboptimal decision-making on the part of the buyer and the seller. In addition, and I believe this is important, buyers of MBS’s also bought CDS’s as a hedge should their MBS investment fall through. In essence, buyers bought MBS’s believing default rates were low, and then bought CDS’s as insurance against the chance their MBS went sour in which case the seller of the CDS (not big govt) would pay them instead of the lenders. Unfortunately, those insurers were leveraged into oblivion and unable to pay. BTW–regulations governing leverage were loosened in 2004 and CDS’s were exempt from regulation under the CFMA.

    With over $60 trillion of CDS’s out there, and no reserve requirements for sellers, I think many will never be paid out. This causes massive uncertainty in corporate books.

  57. Look past the partisan stuff and read about how lobbying works in DC and I think all but the most hardened ideologue will agree that the Fannie Mae/Freddie Mac story perfectly exemplifies why the government should not be in the business of backing particular entities (yeah, yeah, implicitly!).

    How is this not a partisan issue? And how can you disagree with government choosing winners and losers without being a hardened ideologue?

  58. What the hell does a guy with a credit card and a mortgage have to do with the valuation of MBSs?

    Fucking everything dipshit. Your ignorance of how markets function and how things are valued in a market is astounding in its ineptitude.

    Market value is determined by guess what fuck idiot….THE MARKET!!

    MBSs are not valued by appraisers on how well they think each and every loan in the MBS will do….they appraise it on how much they will sell for in the market.

    If government backed Fannie is buying them up and jacking up the price then the appraiser will look at the jacked up market value period.

    GOD DAMN JOE YOU ARE A FUCKING MORON!

  59. Your tears are so yummy and sweet, joshua.

    I love how much I get to you. Did I ever tell you that? I can drive you to red-faced sputtering, and I love that.

    MBSs are not valued by appraisers on how well they think each and every loan in the MBS will do….they appraise it on how much they will sell for in the market.

    That’s nice, dimwit, but the statement was about the appraisal of the securities’ RISK, and the pricing of that RISK, not their actual value.

    No, dimwit, the rating agencies do not base their estimates of the risk of securities based on “how much they will sell for in the market.” Just the opposite, the value of bonds and securities in the market depends, to a large degree, on the security rating given to them by the ratings firms.

    Please, tell me more about how little I understand markets. Good Lord, haven’t you noticed any sort of pattern about how things work out when you go off on my like this? Any at all? Or are you just a masochist?

  60. joshua, when you hear about an agency’s bonds or some other security being rated “Triple A” or “Junk Bond” or something in between, are you under the impression that that rating is based on transactions in the marketplace?

    You probably do, come to think of it. You have a remarkable capacity for knowing things that aren’t true.

  61. What the hell does a guy with a credit card and a mortgage have to do with the valuation of MBSs?

    The value of MBSs is driven by the default rate on the underlying mortgage loans.

    The people who default on their mortgages tend to be people who overextended themselves, you know, the guy who ran up his credit cards, bought a house he couldn’t afford, assumed the value would never depreciate, assumed he had a high-paying job for life…all so he could deny reality in an attempt to keep up with the Joneses.

  62. joe sez That’s nice, dimwit, but the statement was about the appraisal of the securities’ RISK, and the pricing of that RISK, not their actual value.

    and pulls the zipper right onto his dick.

    The price of something INCLUDES the risk component joe, not just the “actual price”. That would be, oh something called the market price, wouldn’t it?

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