In regards to today’s Wall Street Journal and an article entitled “The Fannie and Freddie Hate Storm” by Holman W. Jenkins, Jr.
Over the last several years there have been countless writes ups and editorials of who is to blame for the housing meltdown and eventual financial market collapse. I have a fundamental problem with the fact that Fannie and Freddie continue to take a tremendous amount of slack with some other clear goats going very much unscathed. Fannie and Freddie surely had their hands in this mess, but it seems to me that other variables that contributed to our financial mess are not always mentioned when their contributions far outweigh any damage that Fannie and Freddie did.
Like amoebas feuding in a drop of water, pundits have been savaging each other all year over whether Fannie Mae and Freddie Mac “caused” the financial crisis. Lately the argument has become apoplectic….
The role of Fannie and Freddie in all this? Very little, except that their seizure accelerated the unraveling of equity values across the banking system as investors feared nationalization would be the fate of other large and flailing financial institutions.
But here’s the relevance today: We still don’t have consistent and coherent stabilization of the financial sector or fixing of its bad incentives. And don’t kid yourself that these lawsuits are the beginning of such an effort.
I completely understand the lawsuits that were brought by shareholders of the two government subsidized entities, after all there were clear cut misrepresentations taking place for years. Even with the apparent disclosures that both had holdings in “unconventional” mortgages. That said, many argue why is the SEC harping on this now? Why shouldn’t we go after the enablers? You can blame the banks, or like I do the rating agencies but we should indict anyone that we as a country put in office to protect our interests. These elected officials gambled with our governments finances with no regard yet we continue to blame the Bush administration.
But why don’t we ever question the rating agencies more for the lack of true knowledge of the mortgage backed securities that flooded the markets from 2000-2006. Whether it was Fitch, Standard and Poor’s or Moody’s they all missed the ball here. Funds were throwing slop together and selling it as A paper with the rating agencies on board. No investigation, no digging deep and no real research being done. Except for those that actually caught on to the fact that the funds were essentially defaults waiting to happen and began to bet against the funds. If there was real accountability and regulation from the start much of this mess would have been avoided.
Additionally, the principles of mortgage banking were violated in that lending standards were so loose that there was no real assurance that loans would be repaid and even further that property values were justified. Some may say that this is why privatization is so important because no sound investor or institution would rightfully risk capital to invest in such securities. However that is precisely what happened. Institutions heavily invested in what was called good paper and everyone was fooled. Fannie and Freddie at the time had backed less then a third of what they currently back years after the collapse. So to blame them and blame the government on creating the bubble would be 100% misguided albeit there is certainly fault to be had.
And what about the measures congress took in the early part of the last decade which declared credit default swaps and other derivatives to be unregulated, banning SEC, the Fed or any State Department of Insurance or Banking from any meaningful oversight. No need to explain what happened next. (Credit Default Swaps destroying AIG Lehman and led to the future bailouts of many other institutions)
I can go on forever… Congress then required Fannie to dedicate 50% of its business to low income homes and Clinton pushed for more subprime lending by both entities.
The fact is there are many contributors to the housing and financial collapse, but why does Jenkins and many other writers continue to come back to Fannie and Freddie and only write about them. More needs to be brought to the public about the rest. Again I strongly encourage “The Big Short”, it was a great book and provided great insight that one can not get from his/her local news…
Lastly, Jenkins is right on at the end of his article in that, “The financial crisis isn’t over, and around the world the problem is not housing but governments whose commitments far exceed their resources.” I can write a book on this comment and am not about to begin now.
Blog Post Written by- Marc E. Shaw, Esq.
Title Attorney for World Wide Land Transfer