Wall Street Did It? ( Not! Govt. Housing Bubble )

But based on the number of toxic loans in the system in 2008, the government was responsible for not just a simple majority, but more than two-thirds. It's quantifiable — 71% to be exact (see chart). And the remaining 29% of private-label junk was mostly attributable to Countrywide Financial, which was under the heel of HUD and its "fair-lending" edicts.

To be fair, the blame-Wall Street narrative has cemented in the public consciousness, and is hard to crack. That's because in the wake of the crisis, the Obama White House and Pelosi-Reid Congress engineered a cover-up of Washington's role in the mess through the Democrat-led Financial Crisis Inquiry Commission. The national media now defer to it as the final authority on what caused the crisis and ensuing recession.

The problem was the underlying assets: low-quality mortgages. We've never had so many junk home-loans poisoning the financial well before. And who poisoned the well? Washington and its affordable-housing policies.

It was Washington that declared prudent home-lending standards racist and gutted traditional underwriting rules in the name of diversity. It was government that created the risk on Main Street. Yes, Wall Street spread it, with the help of Treasury-backed Fannie and Freddie. But who's at greater fault for harming the village — the person who poisons the well or the one who distributes the water?

The historical record is clear, the evidence overwhelming, if only someone would litigate the case on the national stage. While GOP leaders dither, the Democratic National Committee has launched a coordinated attack with the Obama re-election campaign to link GOP candidates closer to Wall Street and the crisis.

By criminalizing Wall Street, they hope to sour voters to their biggest defender. Polls show the strategy is starting to work. Time to fight fire with fire.

LOL I LOVE idiots who point to the last domino and try tell us it is the first one that caused the rest to fall. Here stupid, live and learn then never reply to me again with your idiocy: Event #1. In 1977 Congress passed the Community Reinvestment Act (CRA) to address alleged discrimination by banks in making loans to poor people and minorities in inner-cities. They called it ‘red-lining’. The act provided that banks have ‘an affirmative obligation’ to meet the credit needs of the communities in which they are chartered. In 1989 Congress amended the Home Mortgage Disclosure Act requiring banks to collect racial data on mortgage applications. University of Texas economics professor Stan Libowitz has written that: ‘Minority mortgage applications were rejected more frequently than other applications but the overwhelming reason wasn’t racial discrimination but simply that minorities tend to have weaker finances.’ Libowitz also condemns a 1992 study conducted by the Boston Federal Reserve Bank that alleged systemic discrimination. He said that study was tremendously flawed: ‘A colleague and I show that the data it had used contained thousands of egregious typos such as loans with negative interest rates. Our study found no evidence of discrimination. But the study became the standard in which government policy was based.’ In 1995 the Clinton administration’s Treasury Department issued regulations tracking loans by neighborhoods, income groups and races to rate the performance of banks. The ratings were used by regulators to determine whether the government would approve bank mergers, acquisitions and new branches. By the way, does it sound like an unfettered mortgage market to you so far? No, the government’s all over this business; and for all the wrong reasons! The regulations also encouraged statist-aligned groups such as ACORN and the Neighborhood Assistance Cooperation of America to file petitions with regulators (or threaten to) to slow or even prevent banks from conducting their business by challenging the extent to which banks were issuing these loans. By the way, one of the lawyers for ACORN who did this…Barrack Obama. With such powerful leverage over banks some groups were able, in effect, to legally extort banks to make huge pools of money available to the groups; money they in turn used to make loans. The banks and community groups issued loans to low income individuals who often had bad credit or insufficient income. These loans, which become known as ‘sub-prime loans’, made available 100% financing, did not always require the use of credit scores and were even made without documenting income; by government regulation and litigation from the left. Therefore the government insisted that banks, particularly those who wanted to expand, abandon traditional underwriting standards. One estimate puts the figure of CRA-eligible loans at 4.5 trillion dollars in sub-prime toxic loans based on government policy. Oh, that unfettered free market! [spoken with sarcastic tone] Event #2 (of four events). In 1992 the Department of Housing and Urban Development (HUD)… Who was the secretary then? Andrew Cuomo the popular Democrat in New York. …HUD pressured two government-chartered corporations known as Freddie Mac and Fannie Mae to purchase (or securitize, if you will) large bundles of these loans for conflicting purposes of diversifying the risk and making even more money available to banks for risky loans. Andrew Cuomo’s fingerprints are all over this. Does anybody seek to hold him accountable? Nobody. Congress also passed the Federal Housing Enterprises Financial Safety and Soundness Act eventually mandating that these companies buy (that is, Freddie Mac and Fannie Mae) 45% of all loans from people of low and moderate incomes. Consequently, a second market was created for these loans by Fannie Mae and Freddie Mac. And in 1995 the Treasury Department established the Community Development Financial Institutions Fund which provided banks with the tax dollars (you’re money) to encourage even more risky loans. Gee, does this sound like an unfettered free market to you? For the statist, however, this still was not enough. Top congressional Democrats including Representative Barney Frank, Senator Chris Dodd and, yes, Senator Charles Schumer among others repeatedly ignored warnings of pending disaster insisting that they were overstated and opposed efforts to force Freddie Mac and Fannie Mae to comply with the usual business and oversight practices (say like SEC reporting). And the top executives of these corporations, most of whom had worked in or with Democrat administrations, resisted reform while they were actively ‘cooking the books’ in order to reward themselves with tens of millions of dollars in bonuses. Gee, that unfettered free market again! Event #3. […] A byproduct of this government intervention and social engineering was a financial instrument called the derivative which turned the sub-prime mortgage market into a ticking time-bomb that would magnify the housing bust by orders of magnitude. A derivative is, in essence, a contract where one party sells the risk associated with the mortgage to another party in exchange for payments to that company based on the value of the mortgage. In other words, it’s a bet. It’s a bet that the mortgage will last or will go under; you bet on one side or the other. In some cases investors who did not even make the loans would bet on whether the loans would subject to default. Although imprecise, perhaps derivatives in this context can best be understood as a form of insurance. Now, derivatives allowed commercial and investment banks, individual companies and private investors to further spread and ultimately multiply the risk associated with these mortgages. Certain financial and insurance institutions invested heavily in derivatives such as American International Group (or AIG). You might say ‘hey, what are they doing?’ What do you mean ‘what are they doing?’ These mortgages are the creation, directly, of federal liberal policy. Event #4. The Federal Reserve Board’s role in the housing boom and bust cannot be understated. The Pacific Research Institute’s Robert Murphy explains that the Federal Reserve slashed interest rates while this was going on; slashed them repeatedly starting in January 2001 from 6.5% percent until they reached a low of 1% in June 2003. When the easy money policy became too inflationary for comfort, the Fed under Alan Greenspan and then new chairman Ben Bernanke, at the end, began a steady process of raising interest rates back up from 1% in June 2004 to 5.25% in June 2006. Therefore, when the Federal Reserve ended its role as steward of the monetary system and instead used interest rates to artificially and inappropriately manipulate the housing market, it interfered with the normal market conditions and contributed to destabilizing the economy. Ladies and gentlemen, the Treasury Department, HUD, Congress, the Community Redevelopment Act, other laws passed by Congress, the Federal Reserve…none of these are private sector entities. All of them combined to create the economic situation we are confronting today and the housing bust we are confronting today. And so when the President of the United States says ‘Wall Street did this! Bankers did this! You and I did this! Everybody did it but the government and the answer is more government, more programs, more Barney Frank and Chris Dodd, he is a liar. But then again, what would you expect from Obama; he is a serial liar.” ============================================= The True Story of the Financial Crisis By Peter J. Wallison from the May 2011 issue As many readers of The American Spectator will know, I was a member of the Financial Crisis Inquiry Commission, a 10-member body appointed by Congress to investigate the causes of the financial crisis of 2008. The Commission issued its report in late January 2011, with a majority concluding that the crisis could have been avoided if the private sector had not taken so many risks and government regulators had not been asleep at the switch. I dissented from the majority's view, arguing in my dissent that the financial crisis would not have occurred if government housing policies had not fostered the creation of an unprecedented number of subprime and otherwise risky loans immediately before the financial crisis began. After the majority's report was published, many people lamented that it was not possible to achieve a bipartisan agreement even on the facts. But the way the Commission was organized and run made this impossible. One glaring example will illustrate the problem. In March 2010, Edward Pinto, a resident fellow (and my colleague) at the American Enterprise Institute who had served as chief credit officer at Fannie Mae, sent the Commission a 70-page, fully sourced memorandum on the number of subprime and other high-risk mortgages in the financial system in 2008. Pinto's research showed that he had found more than 25 million such mortgages (his later work showed that there were approximately 27 million). Since there are about 55 million mortgages in the U.S., Pinto's research indicated that, as the financial crisis began, half of all U.S. mortgages were of inferior quality and liable to default when housing prices were no longer rising. In August, Pinto supplemented his initial research with a paper documenting the efforts of the Department of Housing and Urban Development (HUD), over two decades and through two administrations, to increase home ownership by reducing mortgage-underwriting standards. This information, which highlighted the role of government policy in fostering the creation of these low-quality mortgages, raised important questions about whether the mortgage meltdown would have been so destructive if those government policies had not existed. Any objective investigation of the causes of the financial crisis would have looked carefully at Pinto's research, exposed it to the members of the Commission, taken Pinto's testimony, and tested the accuracy of his research. But the Commission took none of these steps. Pinto's memos were never made available to the other members of the FCIC, or even to the commissioners who were members of the subcommittee charged with considering the role of housing policy in the financial crisis. Ultimately, I dissented from the Commission majority's report. There was no alternative. The Commission's management -- particularly its chairman, Philip Angelides, a former Democratic treasurer of California and unsuccessful gubernatorial candidate -- would not allow the staff to pursue any theories about the causes of the financial crisis other than those embodied in the standard left-wing narrative. And in the end a majority of the commissioners -- never having been presented with any contrary evidence -- signed on to a report that said the financial crisis could have been avoided if there had been better regulation of the private sector. The question I have been most frequently asked about the Commission is why Congress bothered to authorize it at all. Without waiting for the Commission's report, Congress passed and the president signed the Dodd-Frank Act (DFA), far-reaching and highly consequential regulatory legislation that I believe will have a strong adverse effect on U.S. economic growth in the future. In enacting the DFA, Congress and the president acted without seeking to understand the true causes of the wrenching events of 2008, perhaps following the precept of the President's chief of staff -- "Never let a good crisis go to waste." But to avoid the next financial crisis, we must understand what caused the one from which we are now slowly emerging, and take action to avoid the same mistakes in the future. If there is doubt that these lessons are important, consider the ongoing efforts to amend the Community Reinvestment Act of 1977 (CRA), which currently requires all insured banks and S&Ls to make loans to borrowers at or below 80 percent of the median income in the areas the banks service. If these loans were profitable, of course, there would be no reason to require by regulation that they be made. In the last session of the 111th Congress, a bill was introduced to extend the CRA to all "U.S. nonbank financial companies," and was lauded by House Financial Services Committee chairman Barney Frank as his "top priority." If enacted, the proposal would have applied to the whole financial community the same government social policy mandates that were ultimately responsible for the mortgage meltdown and the financial crisis. Because of the 2010 election, it is unlikely that supporters of this idea will have the power to adopt similar legislation in the current Congress, but in the future other lawmakers with views similar to Barney Frank's may seek to mandate the same requirements. At that time, the only real bulwark against the government's use of private entities for social policy purposes will be a full understanding of how these policies were connected to the events of 2008. What Caused the Financial Crisis? GEORGE SANTAYANA is often quoted for the aphorism that "Those who cannot remember the past are condemned to repeat it." Looking back on the financial crisis, we can see why the study of history is often so contentious and why revisionist histories are so easy to construct. There are always many factors that could have caused a historical event; the difficult task is to discern which, among a welter of possible causes, were the significant ones -- the ones without which history would have been different. Using this standard, I believe that the sine qua non of the financial crisis was U.S. government housing policy, which led to the creation of 27 million subprime and other risky loans -- half of all mortgages in the United States -- which were ready to default as soon as the massive 1997-2007 housing bubble began to deflate. If the U.S. government had not chosen this policy path -- fostering the growth of a bubble of unprecedented size and an equally unprecedented number of weak and high-risk residential mortgages -- the great financial crisis of 2008 would never have occurred. In this article, I will outline the logical process that I followed in coming to the conclusion that it was the U.S. government's housing policies -- and nothing else -- that were responsible for the 2008 financial crisis. The inquiry has to begin with what everyone agrees was the trigger for the crisis -- the so-called mortgage meltdown that occurred in 2007. That was the relatively sudden outbreak of delinquencies and defaults among mortgages, primarily in a few states -- California, Arizona, Nevada, and Florida -- but to a lesser degree everywhere in the country. No one disputes that the losses on these mortgages and the decline in housing values that resulted from the ensuing foreclosures weakened financial institutions in the U.S. and around the world and were the precipitating cause of the crisis. This raised a significant question. The U.S. had experienced housing bubbles in the past. Since the Second World War, there had been two -- beginning in 1979 and 1989 -- but when these bubbles deflated they had triggered only local losses. Why was the deflation of the housing bubble in 2007 so destructive? The Commission's answer was that there were weaknesses in the financial system -- failures of regulation and risk management, excessive leverage and risk-taking -- that were responsible for the ensuing devastation. To establish this idea, the Commission had to show that these weaknesses were something new. It didn't attempt to do this, although that was an essential logical step in establishing its point. And the Commission ignored a more obvious answer: the quality of the mortgages in the bubble. As I noted earlier -- and as the Commission never acknowledged or disputed -- by 2008, half all mortgages in the U.S. -- 27 million -- were subprime or otherwise risky loans. If the Commission had really been looking for the reasons that the collapsing bubble was so destructive, the poor quality of the mortgages in the bubble was a far more likely hypothesis than that there had been a previously undetected weakening in the way the U.S. financial system operated. This in turn raised two other major questions. Why were there so many weak and risky loans in this bubble? What had happened to mortgage underwriting standards in the preceding years that caused such a serious deterioration in mortgage quality? "Affordable Housing Goals" and the Deterioration in Underwriting Standards RESEARCH SHOWED that the turning point came in 1992, with the enactment by Congress of what were called "affordable housing goals" for Fannie Mae and Freddie Mac. These two firms, which were shareholder-owned, had been chartered by Congress more than 20 years earlier to operate a secondary market in mortgages. The original idea was that they would buy mortgages from banks and other originators (Fannie and Freddie were not permitted to originate mortgages), standardize the mortgage document, resell those mortgages to institutional and other investors, and in that way create a national market for U.S. mortgages. From the beginning, Fannie and Freddie's congressional charters required them to buy only mortgages that would be acceptable to institutional investors -- in other words, prime mortgages. At the time, a prime mortgage was a loan with a 10-20 percent down payment, made to a borrower with a good credit record who had sufficient income to meet his or her debt obligations after the loan was made. Fannie and Freddie operated under these standards until 1992. The 1992 affordable housing goals required that, of all mortgages Fannie and Freddie bought in any year, at least 30 percent had to be loans made to borrowers who were at or below the median income in the places where they lived. Over succeeding years, the Department of Housing and Urban Development (HUD) increased this requirement, first to 42 percent in 1995, to 50 percent in 2000, and finally to 55 percent in 2007. It is important to note, accordingly, that this occurred during both Democratic and Republican administrations. At the 50 percent level, Fannie and Freddie had to acquire at least one goal-eligible loan for every prime loan that they acquired, and since not all subprime loans were goals-eligible Fannie and Freddie were in effect required to buy many more subprime loans than prime loans to meet the goals. As a result of this process, by 2008, Fannie and Freddie held the credit risk of 12 million subprime or otherwise risky loans -- almost 40 percent of their single-family book of business. But this was not by any means the full extent of the problem. HUD took Congress's enactment of the affordable housing goals as an expression of a congressional policy to reduce underwriting standards so that low-income borrowers would have greater access to mortgage credit. As outlined in my dissent, by tightening the affordable housing goals, HUD put Fannie and Freddie into competition with the Federal Housing Administration (FHA), a government agency with an explicit mission to provide credit to low-income borrowers, and with subprime lenders such as Countrywide, that had pledged to reduce underwriting standards in order to make more mortgage credit available to low-income borrowers. Moreover, all these organizations were joined by insured banks and S&Ls, which as noted above were required under the CRA to make mortgage credit available to borrowers who are at or below 80 percent of the median income in the areas where they live. Of course, it is possible to find borrowers who meet prime loan standards among low-income families, but it is far more difficult to find such loans among these borrowers than among middle-income groups. And when Fannie, Freddie, FHA, subprime lenders like Countrywide, and insured banks and S&Ls are all competing to find loans to borrowers in the low-income category, the inevitable result was a significant deterioration in underwriting standards. So, for example, while one in 200 mortgages involved a down payment of 3 percent or less in 1990, by 2007 it was one in less than three. Other credit standards had also declined. As a result of this government-induced competition, by 2008 19.2 million out of the total of 27 million subprime and other weak loans in the U.S. financial system could be traced directly or indirectly to U.S. government housing policies. Private Sector Securitization of Subprime Loans IF THE GOVERNMENT was responsible for 19.2 million of the 27 million subprime and other risky loans, that leaves 7.8 million similar loans that came from other sources. These were mortgages securitized by the private sector (often called Wall Street in the Commission's report) and held by financial institutions around the world. How were these mortgages the result of U.S. government housing policy? This is an important question. Even though these privately securitized mortgages were less than one-third of the total number of subprime and other risky loans outstanding, they are the reason that banks and other loan originators generally have been blamed -- in the media, in most books and films about the financial crisis, and of course by the Commission -- for the financial crisis. The securitization of subprime and other risky loans was also a new phenomenon in the housing bubble that ended in 2007, and it was a direct result of the extraordinary growth of the bubble itself. Most bubbles in the past lasted three or four years. In that time, delinquencies begin to appear and the inflow of speculative funds begins to dry up. The bubble that deflated in 2007, however, had an unprecedentedly long 10-year life. The reason was that the money flow into that bubble was not from private speculators looking for profit, but primarily from the government pursuing a social policy by directing the investments of companies or agencies it regulated or otherwise controlled. Housing bubbles tend to suppress defaults. As housing prices rise, people who can't meet their obligations can sell the house for more than they paid, or can refinance, so delinquencies are limited. By 2002, five years into the bubble that began in 1997, investors were beginning to notice that subprime and other risky loans -- which usually carried higher than normal interest rates because of their risk -- were not showing delinquencies or defaults commensurate with their risks. In other words, the data suggested that mortgage-backed securities (MBS) made of these loans were offering unusually high risk-adjusted yields. This stimulated the development of a private market in securitized subprime loans -- something that had never existed before. This market was about 4 percent of all mortgages made in 2002, but by 2004 had grown to 15 percent. It kept growing through 2005 and 2006, but completely collapsed in 2007, when the 10-year bubble finally topped out and began to deflate. Thus, the 7.8 million subprime and other risky loans that were securitized during the 2000s and still outstanding in 2008 were also the indirect result of U.S. government housing policies, which had built an unprecedented bubble in the late 1990s. The bubble created the necessary conditions -- a long run of subprime loans without the expected losses -- for the growth of a huge securitization market in subprime and other risky loans in the mid-2000s. Before leaving this subject, it is important to address one statement that has appeared again and again in the mainstream media, in statements by members of the Obama administration, and was repeated in the Commission report. This is the claim that Fannie and Freddie became insolvent because, seeking profits or market share, they "followed Wall Street" into subprime lending. This idea neatly avoids the question of why Fannie and Freddie became insolvent in the first place, and focuses the blame again on the private sector. The statement, however, as the following quote from Fannie's 2006 10-K report makes clear, is untrue: [W]e have made, and continue to make, significant adjustments to our mortgage loan sourcing and purchase strategies in an effort to meet HUD's increased housing goals and new subgoals. These strategies include entering into some purchase and securitization transactions with lower expected economic returns than our typical transactions. We have also relaxed some of our underwriting criteria to obtain goals-qualifying mortgage loans and increased our investments in higher-risk mortgage loan products that are more likely to serve the borrowers targeted by HUD's goals and subgoals, which could increase our credit losses. Subprime and Other Risky Loans Cause the Financial Crisis WITH HALF OF ALL mortgages weak and of low quality by late 2007, an eventual financial crisis was a foregone conclusion. No financial system could withstand the huge losses that occurred when the delinquencies and defaults associated with 27 million subprime and other risky loans began to appear. Alarmed by these unexpected and unprecedented numbers of these delinquencies and defaults, investors fled the multi-trillion dollar market for MBS, dropping MBS values -- and especially those MBS backed by subprime and other risky loans -- to fractions of their former prices. Mark-to-market accounting then required financial institutions to write down the value of their assets -- reducing their capital positions and causing great investor and creditor unease. In this environment, the government's rescue of Bear Stearns in March of 2008 temporarily calmed investor fears but created significant moral hazard; investors and other market participants reasonably believed after the rescue of Bear that all large financial institutions would also be rescued if they encountered financial difficulties. However, when Lehman Brothers -- an investment bank even larger than Bear -- was allowed to fail, market participants were shocked; suddenly, they were forced to consider the financial health of their counterparties, many of which appeared weakened by losses and the capital writedowns required by mark-to-market accounting. This caused a halt to lending and a hoarding of cash -- a virtually unprecedented period of market paralysis and panic that we know as the financial crisis of 2008. The Policy Stakes THE FAILURE OF THE Financial Crisis Inquiry Commission to do its job is one more obstacle to persuading the American people that the Dodd-Frank Act is illegitimate and should be repealed. The act is far and away the most restrictive piece of legislation ever imposed on the U.S. economy, and it will have a long-term effect in slowing economic growth, just as the uncertainties it has created have already slowed the recovery from the recession. The DFA was sold to the American people by the media and the Obama administration as necessary to prevent another financial crisis, but as outlined in this article and made very clear in my dissent, the financial crisis was not caused by weak or ineffective regulation. On the contrary, the financial crisis of 2008 was caused by government housing policies -- sponsored and promoted by many of the same people who framed and ultimately enacted the DFA. If we don't learn that important lesson, we will make the same mistake again, and then we really will have another financial crisis. http://spectator.org/archives/2011/05/13/the-true-story-of-the-financia/print Triggers of the Financial Crisis http://www.aei.org/paper/100174 Most explanations of the financial calamity have been indecipherable to people not fluent in the language of “credit default swaps” and “collateralized debt obligations.” The calamity has lacked human faces. No more. Put on asbestos mittens and pick up “Reckless Endangerment,” the scalding new book by Gretchen Morgenson, a New York Times columnist, and Joshua Rosner, a housing finance expert. They will introduce you to James A. Johnson, an emblem of the administrative state that liberals admire. The book’s subtitle could be: “Cry ‘Compassion’ and Let Slip the Dogs of Cupidity.” Or: “How James Johnson and Others (Mostly Democrats) Made the Great Recession.” The book is another cautionary tale about government’s terrifying self-confidence. It is, the authors say, “a story of what happens when Washington decides, in its infinite wisdom, that every living, breathing citizen should own a home.” The 1977 Community Reinvestment Act pressured banks to relax lending standards to dispense mortgages more broadly across communities. In 1992, the Federal Reserve Bank of Boston purported to identify racial discrimination in the application of traditional lending standards to those, Morgenson and Rosner write, “whose incomes, assets, or abilities to pay fell far below the traditional homeowner spectrum.” In 1994, Bill Clinton proposed increasing homeownership through a “partnership” between government and the private sector, principally orchestrated by Fannie Mae, a “government-sponsored enterprise” (GSE). It became a perfect specimen of what such “partnerships” (e.g., General Motors) usually involve: Profits are private, losses are socialized. There was a torrent of compassion-speak: “Special care should be taken to ensure that standards are appropriate to the economic culture of urban, lower- income, and nontraditional consumers.” “Lack of credit history should not be seen as a negative factor.” Government having decided to dictate behavior that markets discouraged, the traditional relationship between borrowers and lenders was revised. Lenders promoted reckless borrowing, knowing they could offload risk to purchasers of bundled loans, and especially to Fannie Mae. In 1994, subprime lending was $40 billion. In 1995, almost one in five mortgages was subprime. Four years later such lending totaled $160 billion. As housing prices soared, many giddy owners stopped thinking of homes as retirement wealth and started using them as sources of equity loans — up to $800 billion a year. This fueled incontinent consumption. Under Johnson, an important Democratic operative, Fannie Mae became, Morgenson and Rosner say, “the largest and most powerful financial institution in the world.” Its power derived from the unstated certainty that the government would be ultimately liable for Fannie’s obligations. This assumption and other perquisites were subsidies to Fannie Mae and Freddie Mac worth an estimated $7 billion a year. They retained about a third of this. Morgenson and Rosner report that in 1998, when Fannie Mae’s lending hit $1 trillion, its top officials began manipulating the company’s results to generate bonuses for themselves. That year Johnson’s $1.9 million bonus brought his compensation to $21 million. In nine years, Johnson received $100 million. Fannie Mae’s political machine dispensed campaign contributions, gave jobs to friends and relatives of legislators, hired armies of lobbyists (even paying lobbyists not to lobby against it), paid academics who wrote papers validating the homeownership mania, and spread “charitable” contributions to housing advocates across the congressional map. By 2003, the government was involved in financing almost half — $3.4 trillion — of the home-loan market. Not coincidentally, by the summer of 2005, almost 40 percent of new subprime loans were for amounts larger than the value of the properties. Morgenson and Rosner find few heroes, but two are Marvin Phaup and June O’Neill. These “digit-heads” and “pencil brains” (a Fannie Mae spokesman’s idea of argument) with the Congressional Budget Office resisted Fannie Mae pressure to kill a report critical of the institution. “Reckless Endangerment” is a study of contemporary Washington, where showing “compassion” with other people’s money pays off in the currency of political power, and currency. Although Johnson left Fannie Mae years before his handiwork helped produce the 2008 bonfire of wealth, he may be more responsible for the debacle and its still-mounting devastations — of families, endowments, etc. — than any other individual. If so, he may be more culpable for the peacetime destruction of more wealth than any individual in history. Morgenson and Rosner report. You decide. http://www.washingtonpost.com/opinions/burning-down-the-house/2011/06/30/AGeRSGuH_story.html?hpid=z3 America's Fannie Pack By Joseph Lawler from the September 2011 issue Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon By Gretchen Morgenson & Joshua Rosner (Times Books, 352 pages, $30) THE "EVIL MAN" theory of the Great Recession, coined by the Atlantic's Megan McArdle, parallels the Great Man theory of history. The idea is that all of our economic problems can be traced back, ultimately, to one mustache-twirling malefactor. The left has plenty of favorite Evil Men, George W. Bush first among them. Alan Greenspan is not far behind. Clinton treasury secretary Larry Summers, who provided intellectual cover for deregulating investment banks, is a frequent progressive scapegoat. With Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon, Gretchen Morgenson and Joshua Rosner have provided the right with an Evil Man of their own: James Johnson, the former CEO of Fannie Mae and Mondale campaign manager. Morgenson, a New York Times financial reporter, and Rosner, a financial analyst, recount Johnson's transformation of the government-sponsored housing enterprise (GSE), intended to stabilize the housing market for the middle class, into a government-backed profit machine. Johnson's evil genius was to combine the most advantageous features of government -- income tax-free status in D.C., opaque accounting, and implicit taxpayer support in the case of failure -- with those of the private sector -- profit seeking and executive bonuses -- into one entity. Johnson doled out both political and financial favors in lobbying Congress relentlessly, ensuring that there would be no obstacles to Fannie's growth. His actions guaranteed that the company would one day implode, leaving taxpayers to foot the bill. More than anyone else, Johnson pushed the industry toward the kinds of abusive and reckless mortgage lending that led to the financial crisis. In Morgenson and Rosner's narrative, Johnson's accomplices included almost every major figure of the Democratic establishment of the past 20 years. From the open-borders group La Raza to Obama budget chief Peter Orszag, they're all involved, either buying influence or peddling it. The normally cautious Walter Russell Mead of the American Interest read Reckless Endangerment and concluded that "If the GOP can make this narrative mainstream, and put this picture into the heads of voters nationwide, the Democrats are toast.…If Morgenstern [sic] and Rosner are to be believed, the American dream didn't die of old age; it was murdered and most of the fingerprints on the corpse come from Democratic insiders." START WITH THE ROLE played by the Association of Community Organizations for Reform Now. More commonly known as ACORN (a major right-wing bogeyman), the group catalyzed Fannie's disastrous push into affordable housing by publicizing a flawed study showing racial discrimination in mortgage lending. Johnson responded by taking up the mantle of affordable housing and using it as political cover for its otherwise naked greedy ventures. After all, who could criticize a company that gave lower-class minorities the opportunity to own their own homes? Ultimately, however, Congress's 1992 bill imposing affordable housing mandates on the GSEs, "more than any single act," led to the home lending abuses of the 2000s, according to Morgenson and Rosner. The mandate meant that, in 1999, 42 percent of Fannie and its counterpart Freddie Mac's loan purchases serviced low- and moderate-income families. Bill Clinton's director of the Department of Housing and Urban Development raised the requirement to 50 percent, funneling even more loans to people who could hardly afford them. That director was Andrew Cuomo, now the governor of New York and rising Democratic Party star. Cuomo had great visions for HUD's housing goals, predicting that "it will strengthen our economy and create jobs." In order to meet the goals set by Cuomo, Fannie and Freddie had to buy riskier and riskier loans, including subprime. Morgenson and Rosner report that GSE purchases of subprime began increasing sharply in 1999, and in 2008 Fannie and Freddie purchased $1.6 trillion of toxic mortgages, almost half of the entire market. When critics challenged that Fannie and Freddie, which were technically private companies, posed financial risks to taxpayers in the case of a market downturn, the noted economists Peter Orszag and Joseph Stiglitz defended the companies in an academic paper published in a journal sponsored by Fannie Mae. Orszag, of course, would become the director of the Office of Management and Budget under Obama, while Stiglitz, a Nobel Prize winner, is a preeminent left-wing public intellectual. Today, taxpayers have already spent more than $300 billion bailing out the GSEs, and are on the hook for much more. Similar scenarios would play out countless times before the financial crisis: an independent voice would point out the recklessness of Fannie and Freddie's lending and the dangers they posed to the housing market and the taxpayers, and in response Fannie and Freddie would mobilize bought-and-paid-for elected officials, administrators, academics, and businessmen to their defense. In this respect, the ultimate Johnson henchman was Massachusetts representative Barney Frank. Frank established a rewarding relationship with the GSEs early on (his boyfriend landed a job at Fannie in 1991, among other things), and he steadfastly defended the GSEs until after they were bailed out. He overruled objections to affordable hosing mandates in 1991, complaining about an undue "focus on safety and soundness." When regulators looked into Fannie's rigged executive compensation scheme in 2004, he brushed them off by claiming that "it serves us badly to raise safety and soundness as a kind of general shibboleth, when it does not seem to be the issue." Even in 2010, after the financial regulation bill co-sponsored by him totally left the GSEs alone, Frank stated that "blaming Fannie and Freddie as a primary cause of the crisis is a mistake." As Peter Wallison has demonstrated in The American Spectator, by 2008 half of all mortgages in the U.S. would have traditionally been considered low-quality loans. Slightly fewer than half of those were on the books of the GSEs. The affordable housing mandates and relentless quest for profits ushered in by Johnson, aided by Frank, are largely to blame. Why did Johnson do all this? For personal gain. Morgenson and Rosner claim that a study found that for many years, you could predict Fannie's year-end earnings per share almost to the penny, based on what the earnings-per-share bonus payout target was. Over the course of his tenure, Johnson banked $100 million. ASSIGNING BLAME for the financial crisis is tricky, because there are levels of causality. As with a murder, what's of interest is not the proximate cause (the banks collapsing), but the ultimate cause, which could be any one of a thousand possibilities. If the economy is a victim, what we want to know is who fired the gun, not what wounds exactly caused it to die. Some, like Mead, have suggested that Reckless Endangerment proves, once and for all, that government policy, through Fannie and Freddie, was squarely behind the trigger. That proof--definitive proof--would reinforce, and reward, the political right's prejudices. Yet the book doesn't quite do that. It provides plenty of circumstantial evidence: Fannie and Freddie owned the same model of gun that was used in the crime, they associated with known murderers, their recent behavior was alarming, and investigators found unexplained deposits in their bank accounts. And Morgenson and Rosner establish that, without a doubt, the crisis would have been less severe without Fannie and Freddie's influence. The difficulty is proving a negative: incomprehensible assets backed by toxic mortgages would not have brought Wall Street down without Fannie and Freddie's influence. It's possible, even likely, but extremely hard to prove beyond a reasonable doubt. Of course, Reckless Endangerment makes it seem likely that the large market for subprime loans wouldn't have existed without the GSEs. Morgenson and Rosner demonstrate that, for instance, Countrywide Financial--one of the most abusive lenders--was "at heart a Fannie Mae clone," with its CEO, Angelo Mozilo, enjoying an extremely close relationship with James Johnson. Yet regardless of who is to blame for the crisis of 2008, Reckless Endangerment powerfully undercuts the progressive narratives about economic growth and social advancement, as well as explanations for the financial crisis. The idea that concentrated government can be directed toward specific societal goals has been irrevocably shaken. There is no denying that, in one decade, progressivism's brightest lights decided to increase homeownership using the tools of power, and then, in the next decade, they were co-opted by rent-seekers and the housing market was utterly destroyed. In the end, regardless of who pulled the trigger of the gun, it was progressives who ordered the hit. http://spectator.org/archives/2011/09/02/americas-fannie-pack/print

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