Subprime Commission

IBD Editorials ^ | September 11, 2009

[Kaslin]

Financial Crisis: Congress has impaneled a "bipartisan" commission to get to the bottom of the subprime scandal. Will it? Only if it listens to a panelist who predicted the disaster.

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That panelist — one of 10 making up the newly formed Financial Crisis Inquiry Commission — is former Reagan Treasury official Peter Wallison. He first sounded alarms in 1999, as Fannie Mae began easing credit rules to please the Clinton administration, which accused it of racial discrimination.

Under mounting political pressure, the mortgage giant took on riskier loans in underserved — mostly minority — communities. Wallison warned that those loans could turn bad if the economy turned south, triggering a government bailout similar to that of the S&L rescue.

"This is another thrift industry growing up around us," Wallison told the New York Times. He gave the interview in September 1999 as a resident fellow at the American Enterprise Institute. "If they fail," he added, referring to Fannie Mae, "the government will have to step up and bail them out the way it bailed out the thrift industry."

His prescience was limited only in underestimating the damage, as this bailout will, in the final analysis, dwarf the S&L bailout.

Today Wallison isn't getting the credit he deserves because he doesn't toe the conventional line regarding the root causes of the debacle. He doesn't blame unscrupulous mortgage brokers. Or greedy investment bankers. Or incompetent rating agencies. Or foolish investors. Or whiz-kid investors of complex derivatives.

[Kaslin]