July 12, 2011
The Cause Of The Meltdown
Peter Wallison's column in today's Wall Street Journal sets the story straight on the financial meltdown. It was not unregulated banks and Wall Street brokers who got us into this mess. As Mr. Wallison rightly points out, at the root of crisis was the housing bubble, and the major culprits were — guess who:
Far from being a marginal player, Fannie Mae was the source of the decline in mortgage underwriting standards that eventually brought down the financial system. It led rather than followed Wall Street into risky lending.
Yes, Fannie and Freddie ,as facilitators of government housing policy, were instrumental. Mr. Wallison is the Arthur F. Burns Fellow in Financial Policy Studies American Enterprise Institute. His Journal column might be considered a reply to a remarkably dishonest piece by one Phil Angelides that made the pages of the Washington Post some time ago. In that column Angelides said that the "real causes of our economic crisis" were Wall Street greed and excessive deregulation. Translation: The Bush administration was to blame.
The report of the Financial Crisis Inquiry Commission detailed the recklessness of the financial industry and the abject failures of policymakers and regulators that brought our economy to its knees in late 2008. The accuracy and facts of the commission’s investigative report have gone unchallenged since its release in January.
Where have we heard that before? Oh, yes. It's the Democratic partly line, the one about how President Obama inherited a mess from the Bush administration, but then heroically saved the nation (and the world, too) from a worse depression than the one we're in. Mr. Angelides was chairman of the aforementioned Financial Crisis Inquiry Commission, so naturally he had good things to say about its work. Said he:
The accuracy and facts of the commission’s investigative report have gone unchallenged since its release in January.
In reality the report was immediately challenged by none other than Peter Wallison, who as a member of the commission wrote the dissenting statement in the Commission's report (see page 443). His dissent says what most people already know. If we are looking the single most significant cause we have to look at the housing bubble.
There are always many factors that could have caused an 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 fnancial 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.
The financial crisis would never have happened without the housing bubble, and the housing bubble was created by U.S. government housing policy. The odd thing about the Financial Crisis Inquiry Commission was that it was initiated and did all of its work after congress had already passed and the president had already signed the Dodd-Frank financial reform legislation which we were told was intended to prevent future crises. Good luck.
The question I have been most frequently asked about the Financial Crisis Inquiry Commission (the “FCIC” or the “Commission”) is why Congress bothered to authorize it at all. Without waiting for the Commission’s insights into the causes of the financial crisis, Congress passed and the President signed the Dodd-Frank Act (DFA), far reaching and highly consequential regulatory legislation. 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 staf —“Never let a good crisis go to waste.” Although the FCIC’s work was not the full investigation to which the American people were entitled, it has served a useful purpose by focusing attention again on the financial crisis and whether—with some distance from it—we can draw a more accurate assessment than the media did with what is often called the “first draft of history.”
What, then, was the purpose of the Commission? And who was Phil Angelides? According to Wikipedia:
Philip Nicholas "Phil" Angelides ( /ˌændʒɨˈliːdɨs/ an-jə-lee-dees; born June 12, 1953 in Sacramento, California) is an American politician who was California State Treasurer and the unsuccessful Democratic nominee for Governor of California in the 2006 elections. Angelides currently serves as the Chair of the Apollo Alliance and of the Financial Crisis Inquiry Commission.
Well, there's some confidence inspiring information. A former California State Treasurer is telling the rest of the country about managing finances. Shortly after Mr. Angelides wrote his Washington Post column, Investors Business Daily responded with more insight:
Earlier this week, Phil Angelides, the Democratic hack who ran the Financial Crisis Inquiry Commission's sham investigation, felt compelled to write a column for the Washington Post to try to plug the holes in the dike before it can spring any more inconvenient facts.
He insists his final report proves the crisis was caused by "the recklessness of the financial industry," and that the history books should be closed on the subject — period, end of story. But Angelides' report is a 550-page cover-up.
For starters, it glosses over the affirmative-action quotas HUD used to drive Fannie and Freddie deep into the subprime market. And it fails to cite any of HUD's statements about its efforts to reduce underwriting rules at Fannie and Freddie.
The historical record is clear. Yet instead of documenting it for the public, which lost $14 trillion in the crisis, the Angelides Commission rewrites it.
What's more, the hundreds of "fair lending agreements" HUD strong-armed private mortgage bankers like Countrywide Financial into signing, aren't even mentioned in his artifice. The pledges, which committed bankers to targeting credit-poor minorities for loans, ensured a continuing flow of funds into riskier and riskier mortgages.
Also missing from the report: quantifiable evidence that the government was responsible for more than two-thirds of the 27 million subprime and other bad mortgages that were outstanding when the market crashed in 2007.
In his column, Angelides railed against "Wall Street's conflicts of interests," but his own are legion.
In fact, Angelides ran a dirty investigation. He fixed it so trial lawyers who donated more than $225,000 to his political campaigns in California could leverage banks for class-action settlements for union pension funds that invested in bad subprime securities.
As IBD first reported, Robbins Geller Rudman & Dowd — the country's dominant plaintiffs law firm for class-action securities lawsuits — ran the crisis inquiry through chief investigator Chris Seefer (a Robbins Geller partner) and FCIC commissioner Byron Georgiou (a Robbins Geller counselor).
Last September, months before the FCIC had closed its "investigation," Georgiou and Angelides spoke at a conference in Laguna Beach, Calif., hosted by Robbins Geller. Congressional investigators are probing whether the two violated ethics rules when they talked about their ongoing commission work.
Talk about unfair advantage: The commission essentially provided a massive discovery operation and service for trial lawyers at public expense.
Angelides dumped millions of pages of subpoenaed confidential bank documents on the FCIC website so his trial lawyer pals could get a multibillion-dollar payday.
Angelides and his cronies pinned the crisis on banks to justify more bank regulations, while protecting the real culprits — Democratic politicians who pressured banks to make "predatory" multicultural loans.
This is the Obama administration at work. Nothing is done without somebody getting paid off somewhere, with the payoff aimed in such a way that a chunk of it will come back into Democratic party coffers. With Obama invariably putting political advantage ahead of all other considerations, it's small wonder that the Great Recession drags on. The recession will not end until Obama leaves the White House. Let's make it sooner rather than later.
Posted by Tom Bowler at 01:18 PM | Permalink
TrackBack URL for this entry:
Listed below are links to weblogs that reference The Cause Of The Meltdown:
The only institutions that required bailouts were institutions that bought mortgage backed securities containing faulty loans.
The loan originators of the faulty loans got off scott free.
Fannie and Freddie were two of several institutions that required a bailout. They did not require a bailout because they were loan originators or underwriters. They required a bailout because they were buyers of faulty mortgage backed securities.
Unlike institutions on Wall Street, Fannie and Freddie were limited in the mortgage backed securities they could buy. Thus, they lost market share to institutions that were not limited in what they could buy. Thus, they lobbied the Bush administration to relax the standards for what they could buy -- which the Bush administration did.
Posted by: SteveJ | Jul 13, 2011 1:30:27 PM
As I said above, "The financial crisis would never have happened without the housing bubble, and the housing bubble was created by U.S. government housing policy."
So could you explain how the Washington Post article disputes that statement?
In 2004, as regulators warned that subprime lenders were saddling borrowers with mortgages they could not afford, the U.S. Department of Housing and Urban Development helped fuel more of that risky lending.
Eager to put more low-income and minority families into their own homes, the agency required that two government-chartered mortgage finance firms purchase far more "affordable" loans made to these borrowers.
Fannie and Freddie were leaders, not followers, in the mortgage market.
In order to curry congressional support after their accounting scandals in 2003 and 2004, Fannie Mae and Freddie Mac committed to increased financing of "affordable housing." They became the largest buyers of subprime and Alt-A mortgages between 2004 and 2007, with total GSE exposure eventually exceeding $1 trillion. In doing so, they stimulated the growth of the subpar mortgage market and substantially magnified the costs of its collapse.
Or maybe you're just reflexively trying to blame the Bush administration for everything. But that doesn't wash.
The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.
Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry.
The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios.
As the Washington Post article to which you refer acknowledges, HUD was pushing Fannie and Freddie for more affordable housing for years.
Since HUD became their regulator in 1992, Fannie and Freddie each year are supposed to buy a portion of "affordable" mortgages made to underserved borrowers. Every four years, HUD reviews the goals to adapt to market changes.
Bush's push for greater oversight was an attempt to wrest regulatory control of Fannie and Freddie away from HUD.
Posted by: Tom Bowler | Jul 14, 2011 9:25:58 AM
My understanding of a comments section is that you can add your thoughts. I did not consider my comment a refutation of most of your article or analysis which I find quite good. It certainly wasn't a support of Democrats. I find it interesting that you jumped to the conclusion that I meant it as such.
Having said that, you act as if HUD was somehow independent of the Bush administration. HUD was part of the administration. HUD pursued many of the same policies under Bush as it did under Clinton -- in an even more reckless manner. And why should that surprise anybody?
This is a guy in Bush who never vetoed a spending bill, signed Ted Kennedy's Medicare Part D legislation, and expanded the Department of Education as well as virtually every other facet of government.
Can you honestly say that a Ronald Reagan HUD would have behaved as it did under Bush? Not a chance.
The idea that Bush pushed for greater oversight because of comments made at a hearing by his treasury Secretary is questionable when he didn't follow it up.
Bush was a major cheerleader for affordable housing for the poor under so-called "compassionate conservatism" -- which was neither Conservative nor compassionate.
If there is one disconnect on your web site, it is that you support the Tea Party, but continue to laud a person in George W. Bush who is one of the major reasons a Tea Party became necessary.
Posted by: SteveJ | Jul 14, 2011 11:53:52 AM
My apologies for misunderstanding the import of your comment. And I will say, you are correct about my support for George Bush, which was due in the larger part to his willingness to fight the war on terror. I've been inclined to give him a pass on other issues because of it.
That said, HUD spent years pushing Fannie and Freddie, who were not unwilling players, into buying riskier and riskier loans, and because of that I tend to take issue with folks who call it Bush administration policy. Especially when the Bush administration was pushing for reform of Fannie and Freddie, unsuccessful though they were.
Posted by: Tom Bowler | Jul 14, 2011 12:52:23 PM
I am mary, a member of financial communities. I have found your site (libertarianleanings.com) in Google while searching with the KP "faulty mortgage loans", as I found the articles really worth reading. The quality of your content is so good & interesting that it made me request you something. I love to write financial articles and would like to contribute something for your blog which is absolutely free of cost. I can give you an original guest post and later if you want, you can suggest me any other topic and I will write it accordingly. Not only that, I give you the total rights to edit the article and modify it as per your needs.
Please let me know your thoughts. Waiting for your positive reply.
If you have any questions or need anything feel free to contact me at : maryg1591[at]gmail[.]com
Posted by: mary gomez | Sep 13, 2011 7:35:33 PM