The U.S. government takeover of Fannie and Freddy

Well, a little over a week passed, during which time I read and learned a lot more about the issue. I'm still ignorant in many, many ways on the topic, so I have no problem with people taking what I say with a grain of salt. But the more I learn about this, the more starting the government's involvement becomes.

This is true, but in some cases they're connected. AIG wasn't government-run, but when you're the largest insurer in the world, and the largest holder of secondary mortgages goes under, it's going to have a major impact. And obviously the mere act of backing them to any significant degree introduces a very destablizing factor into the market.

This is complicated a bit by the fact that Freddie and Fannie are often mentioned as having "implied" credit beyond their actual credit level, simply because everyone knew the Government was backing them. It was widely inferred that the government would step in if things went belly-up, and they appear to have inferred correctly.

I wouldn't say purely. Business make mistakes all the time. But a broad, systemic problem with subprime mortgages at the same time the government is both compelling those mortgages AND buying them up? It's hard to imagine how that could not be the primary factor. Apply the thinking to any other industry: you can be less efficient and this government entity will take the results off your hands! How could this have ended up any other way, other than for the banks to thwart the government en masse and suffer the penalties?

I'll have a look. As a general rule, though, I think business that are left to their own devices tend to try to do what's best for themselves. And obviously issuing subprime loans to people who have a high rate of default isn't good for any lender...unless someone's willing to take the risk off their hands, of course.

I don't want to overstate anything, so I agree, it might be a bit much to suggest that what I'm describing is the "sole" lesson. I do think it's the pertinent one, however.

The idea behind a deregulated approach is that businesses wouldn't have taken these mortgages on to begin with. Deregulation would leave banks free to make these loans, sure, but they weren't making them when left to their own devices before, so I don't think they'd make them if left to their own devices going forward.

Heh, yeah, but i was only referring to your pre-investigation post, where you still came up with a conclusion

Which is one of the intriguing side-effects of all this - we're all jumping to our preferred positions on the deregulation/regulation scale when appointing blame.

That said, this does look pretty damning...

Obviously it would be good to try and track down if there are other factors weilding significant influence (such as the potential 'high leverage' risk-management failure that i linked to). I wouldn't want to see any over-compensatory jumps towards one of the extremes of de/regulation. Needlessly/unfoundedly that is

As it is, it seems the talking heads are all as divided as ever on whether 'invisible hands' or 'hands on approaches' work best. So we'll probably just end up with a muddle of techniques, as usual

Yeah, there's a question mark in my mind over the 'disguise' issues surrounding the 'handed on' sub-primes - as to whether it tallies with my standard reservation about high levels of deregulation: the 'externalising' of 'losses' thing. (Whether it be ecological damage, 'unsustainable' dumping on defenceless little guys/countries {unredressed by philanthropy/aid etc}, or what have you). As you say tho, it may be a position they were forced into by (bad) regulation.

[/layman ignorance]

(if only )

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Virtual Reality chatter on a movie site? Got endless amounts of it here. Reviews over here

Well, I said something about "small scale solutions" in some other thread.....

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The novelist does not long to see the lion eat grass. He realizes that one and the same God created the wolf and the lamb, then smiled, "seeing that his work was good".

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They had temporarily escaped the factories, the warehouses, the slaughterhouses, the car washes - they'd be back in captivity the next day but now they were out - they were wild with freedom. They weren't thinking about the slavery of poverty. Or the slavery of welfare and food stamps. The rest of us would be all right until the poor learned how to make atom bombs in their basements.

They should deliver repossession notices by miniature train?

( )

To quote the late Sen Everett Dirkson (R. Ill. d.1969) in earlier happier times "A billion here, a billion there, pretty soon, you're talking real money".

To put things in perspective, the money talked about for the financial bailout is 700 billion dollars. If the United States were to allow all these financial institutions to fail, they could take that 700 billion dollars, and using the figure of 200,000,000 Americans of the age 18 years and older, they could redistribute that money and each of these 200,000,000 Americans would receive $3,500,000.

It was deregulation and failure to apply applicable regulations on the banking industry that got us into this mess in the first place.

This column from Thursday's Washington Post is informative reading:
http://www.washingtonpost.com/wp-dyn...src=newsletter

It is not really that simple. Unless the value of the real estate that is involved goes to zero, which I guess is possible, but certainly not probable.

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“The gladdest moment in human life, methinks, is a departure into unknown lands.” – Sir Richard Burton

Well, I was rather thinking in terms like putting mice in office.

Gah! Gol, I can't argue with you! You always take nuanced, moderated positions. Yes, there are a variety of factors and your point about "externalizing" losses is a good one and one of the reasons some regulation is always needed, particularly in certain sectors. You should fly off the handle more so I'd have more to disagree with.

I don't see anything in that article that supports the idea that deregulation had anything to do with this; it seems mainly concerned with the possible solutions.

When you have an environment where the government is openly threatening banks that don't issue subprime loans, AND offering to take them off their hands, AND doing it often enough to account for 80% of the secondary mortgage market, how exactly can this be called a "deregulated" market? That is a massive, pervasive market presence, and it existed all the way down to the root level: the lenders themselves.

I've heard a lot of people toss the word "deregulation" around, but I haven't heard anyone explain just how it's supposed to be the cause of what's happened, nor have I heard anyone account for the things I've been describing. I've just heard a lot of vagaries about "greed" on Wall Street. It's the kind of thing people say and never get called on, as bankers and brokers make convenient villains.

The time for putting mice in orifices has gone. (I also hear cigar shops are doing very badly )

Ta I have become horribly 'centrist' these days (And in a further act of non-arguing, i'm planning to contribute to your 'Political Experiment' sometime soon too )

I'm still trying to dig out a 'deregulation' article i read tho, which put a ratio on the change in risk that financial institutions were allowed to take on - at least that's how i read it at the time.

Generally tho i think i'm gonna sit back for a while and wait for the flack to stop flying on this one. Gimme simple emotive arguments about sex-mad insects altering the weather any day

Yoda, as I wrote in my post it was not just deregulation, which actually began in the Clinton years, but it was also the failure to apply applicable regulations that got us into this mess.

I have read a number of articles that have attempted to explain this mess and perhaps it would be better to say that it was an overall regulatory failure.

One of the problems from my point of view is that no one, Congress, the Fed, the ASEC, the Treasury Department, the public, no one has a clear understanding of this meltdown.

In regards to solutions, yesterday's column by Thomas Freidman I found interesting:
http://www.nytimes.com/2008/09/28/op...ml?ref=opinion

Another great article on the crisis - One I agree with quite a bit.

Saving Capitalism from the Capitalists

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ACORN

What applicable regulations were not applied?

And you're right that there was some deregulation under Clinton. But if you're referring to Gramm-Leach-Bliley, it's certainly not one of the root causes. It's one of the many pieces of legislation over the last decade that has had unintended consequences because of the subprime problem, however.

As complicated as the effects and implications of all this may be, the core of the matter is startlingly straightforward: the banks wouldn't issue high-risk loans. The government compelled them to with serious penalties. The banks issued the loans to comply, and many people defaulted on their mortgages. Does anyone here dispute this chain of logic? Does anyone dispute that the paramount fact when discussing mortgage failure is the criteria used to determine who qualifies for mortgages?

This is completely from the For What It's Worth Department:

On Language
No Docs
By Jack Rosenthal

Subprime was voted the word of the year by the American Dialect Society in recognition of the mortgage scandal and crisis that has for months enveloped housing and real estate around the country. But that umbrella term, describing cheap — often suspiciously cheap — mortgages, encompasses a whole glossary of often-colorful expressions that could be described as sub subprime. They reflect the deceit, cynicism and scandalous exploitation that are taking the homes of many thousands, perhaps millions, of families.

Some other words, words that betoken possible rescue and relief, are also finally entering the vocabulary. Meanwhile, people everywhere — a widow in the Bronx who needs money for a new roof or a young couple in San Diego looking for their first home — confront an array of bewildering, often deceptive practices described by sub subprime words like the following.

Exploding ARM sounds violent and is for many families. It describes an adjustable-rate mortgage for which the interest rate goes up so fast that borrowers, who could afford the monthly payments for the original mortgage, are driven out of their homes. For example, a typical $100,000 loan at 4.5 percent would call for a monthly payment of $500. The same loan at 7.5 percent would cost $700.

Foreclosure rescue sounds benevolent but it’s not, says Sarah Ludwig, director of the Neighborhood Economic Development Advocacy Project in New York. On the contrary. “Typically, it’s a scam to steal a home,” in which the owner is gulled into signing over title to the house in exchange for promises to pay off the arrears.

Jingle mail is the answer. What’s the question? Listen to Gretchen Morgenson of The Times, who has written scathingly about the subprime scandal since it first surfaced: What do banks call it when troubled borrowers abandon their homes, sending them the keys?

Liars’ loans describes one form of come-on to potential home buyers. Joe Nocera, the Times business columnist, describes these as loans offered by banks that have “practically begged borrowers to fib about their income.”

Ninja loans, short for No Income, No Job or Assets, is the sardonic way people in the business describe poorly documented loans that were blithely made to high-risk borrowers.

No-docs loans and low-docs loans are variations on the same theme, mortgage loans made by lenders hungry to get in on the action during the real estate boom years. Another variation: stated-income loans, for which avaricious lenders simply took borrowers’ claims at face value and did not even pretend to ask for documentation of their ability to pay.

Alt-A loans. “A-paper” refers to high-quality loans made to borrowers with excellent credit scores who document their income and assets. Lenders are now growing concerned about a step down, alternate-A loans, made to borrowers with good credit scores but who can’t or, for whatever reason, won’t fully document their finances.

One-stop shop. Sarah Gerecke, the head of Neighborhood Housing Services in New York, calls attention to this form of sometimes-fraudulent operation, one that preys on unwary borrowers by offering, all at once, house, mortgage lawyer, inspector and appraiser.

Property flipping is what some real estate speculators do in neighborhoods where many houses have been foreclosed and blank windows and tall grass push down values generally. They buy them up at bargain prices and then quickly resell them, with fraudulent overappraisals, to unsuspecting first-home buyers.

Toxic waste. A large dimension of the subprime crisis is the bundling of many mortgages into securities that are sliced into anonymized packages and sold to investors. Michael Hickey, executive director of the new Center for New York City Neighborhoods, hears this term used to describe the lowest-rated portion of such a security, usually sold to the investor with the greatest tolerance for risk.

Upside down is the status of an estimated nine million homeowners who bought during the boom years but now owe more than their houses are worth. Consequently, they are stuck, unable to refinance or to sell even for what they owe.

I've finally found a seemingly even-handed article that's helped clarify my thoughts on all this a bit.... if you'll indulge me...

A short history of modern finance - The Economist - Oct 16th 2008
(NB The Economist is actually a stalwart defender of free trade and free markets)

As the title suggests, it's a bit of a slog, but I think I could summarise some of it's assertions & conclusions like this:

We wouldn't have been any better off if politicians had been steering the ship (poor regulation & comparable complacency):

• They insisted on the problematic high-risk loans (especially in the US); were more than happy to rake in the benefits of the credit-based 'liquidity' that abounded (getting as complacent as anyone during the 'predictable' calm of 'The Great Moderation'); and pushed the banks a step too far with the poorly-targeted regulations of the Basel accord(s).

Deregulation gave the vulnerable banks enough rope to hang themselves with (opacity & greed):

• Governments put the banks on a teetering chair when they regulated them into dangerously 'high leveraged' positions, but a string of deregulation events had created dubious 'risk trading' packages (notably CDSs & 'Securitisation' practices) that were too tempting for them and others to pass up, and were desperately in need of 'transparency'...

What regulation can (and should) have done:

• Regulating 'watchdogs' have concentrated on "making sure that deals were well documented or settled through a central clearing house". But that is "something yet to be achieved for CDSs". The takeaway lesson being: "Bankers and traders were always one step ahead of the regulators."

There's a whole lot more in there of course, and I've probably skewed and muddied somewhat in my attempt to navigate the jargon, and my own prejudices.

It seems fair to say, though, that various financial entities were using these 'risk trading' techniques regardless of the poor mortgage & risk regulations implicated above - and that said packages were an accident waiting to happen.


--- DISCUSSION ---


Markets cover more ground when they're freewheeling, that much is clear. But regulation still seems to be required in certain 'paternal' roles, to stop them charging en masse into a wall.

• The key one the above article seems to suggest is insistence on 'transparency' - which makes a certain layman's sense (only cheaters/'free riders' have got something to hide etc)

• Another one I've picked up on my travels through the economic tittle-tattle is the idea of implementing a degree of risk/leverage limitation - although of course, execution is all, and it can certainly be done badly (as displayed by Basel 'et al' ).

On this last point I'd just highlight a few voices from the sidelines: (There are plenty of shrill ones out there during these doom-mongering times, but these guys {pay per view}, for example, seem to have the market's best interests at heart, above any particular partisan creed. And that biases me towards listening to them scream )

The article looks at some alternative risk-assessment models (which you can snort or cheer at, considering it's risk-assessment that has partially got us into this mess ). They're trying to correct past failures and inadequacies, are generally disparaging of a prominent school of thought called 'Equilibrium theory', and are mainly examining 'flocking' behaviours in markets to explain 'busts'. One group in particular caught my eye with their focus on leverage:

There are guys 'further afield' like Nassim Taleb (pdf) who've been telling us that the 'black swans' of the market are inherently unpredictable, and optimists like this fellow, who point out the social benefits of booms and busts. But right now I'd seize on the idea that we need to keep the market free-flowing, but make sure our risk-assessment techniques are robust, and not leading us over a cliff as we try to eat pie in the sky

---

The two regulatory tasks I mention above are clearly a huge ask, especially in the face of the impish creativity and deviousness of the assorted 'bankers' out there (scurrying over the variously-levelled playing field). I get the feeling they've been neglected somewhat though. Taking on the big boys & looking out for long-term stability are two things that rarely sit happily alongside political dreams

Let us ask Acorn and their "lawyers" about this.

Hmm, this article seems to do a convincing job of clearing F&F & the Community Reinvestment Act of major blame in the subprime snafu.

Some key facts summarised here, but whole thing is worth a read/forage-through ...

Sorry for the delay, Gol, and thanks for the reminder in Mark's thread.

Anyway, I don't have time to go into scads of detail right now, but the basic problem with the article (to my mind) is that going through a middleman doesn't actually subvert the rules in place. I've heard a lot of people point out that X percentage of subprime loans were through private brokers, but the brokers simply handle the interaction with the banks in question.

I think the rub lies in the end of the third bullet point quoted above: "directly subject" (emphasis added). I think the article's premise hinges on that one word. They don't have to be directly subject, because the source of the lending is. Unless I'm misunderstanding part of the article; I admit, I didn't have the 90 minutes necessary to read it all the way through .

That seems a reasonable objection, but the key article cited (I know, more reading ) seems to suggest that a lot of the actual lenders were independent operators pursuing profit and not beholden to this federal law.

The suggestion seems to be that they weren't 'brokering' deals for CRA-beholden banks/F&F, but acting off their own back. But again, i know next to nothing about this stuff, so may well have got me lines crossed here too

The problem is some fuzzy terminology; in this case, I think it's "underwrote." I don't think they elaborate on what they means, but I believe they're referring to organizations which buy up bundles of these mortgages, repackage them, etc.

If so, then they're still missing the entire point, which is that the initial mortgages are still issued by organizations subject to the CRA. Think of it like a bar: the guy at the door checks your ID, so if the bartender sees you inside, he trusts that you've been checked out. The only mistake a lot of these investment banks made was assuming that the bank screening process was still sound -- which is a reasonable assumption, given that it almost always has been. They weren't behaving in a risky manner any more than it's risky for me to assume ground beef at the grocery store is okay because it's FDA-approved.

There are certainly some organizations that issued loans that are not subject to CRA, like localized credit unions, but funnily enough those organizations are in better shape than their CRA-subject counterparts. That's not a coincidence.

And, again, if all the technical stuff is too dense, we need only to think about the core logistics: the entire idea of loaning money and setting rates of interest is based around the idea that some people are better at paying back loans than others. Though no system is perfect, industries of this size inevitably get very, very good at calculating these risks. It's what they do for a living, and they don't stay in business if they're not good at it.

Inserting additional influences and stipulations into this process is bound to have disasterous effects. And it makes a lot more sense than the idea that thousands of businesses all decided to abanon the core principles of their industry in relatively close proximity to one another.