In 2008, the stock market crashed, more and more Americans started losing homes to foreclosure and Lehman Brothers collapsed, causing a catastrophic recession and endless finger-pointing in Washington.
Fast-forward three years, and the once hidden Fannie Mae and Freddie Mac are starting to endure some of the public finger-pointing that, until recently, has been reserved for big banks, originators, loan officers, rating agencies and anyone on Wall Street who braved the walk to work in a Brooks Brothers suit.
In fact, economists and financial analysts who have long objected to the narrative that Wall Street alone caused the crisis breathed a sigh of relief when former executives for the two mortgage giants ended up on the opposite side of Securities and Exchange Commission lawsuits.
Technically, it was the government suing the government, but for Peter Wallison — a dissenter on the Financial Crisis Inquiry Commission — it was vindication.
Wallison objected to the idea that capitalism and regulation run amok pushed America into its worst financial crisis since the Great Depression. He wanted government involvement taken to task and felt the commission's final report hit financial firms and credit rating agencies while leaving the government-sponsored enterprises in the shadows.
In an article published this week by the American Enterprise Institute, Wallison and Edward Pinto write that "the left is losing the argument over the financial crisis" because more Americans are surmising that the GSEs held about half of the mortgages in the United States and used a business model that maximized profit while socializing risk.
They say claims by the SEC push his viewpoint further.
"The SEC findings add $219 billion and 1.43 million loans to our original Fannie and Freddie subprime and Alt-A totals (in terms of exposure), bringing the combined subprime and Alt-A total to $2.04 trillion and 13.37 million loans," they wrote. Pinto, of course, is a former chief credit officer for Fannie Mae.
The two men conclude:
"All told, after adding the SEC's new data to our original estimates, there were approximately 28 million subprime and Alt-A loans outstanding on June 30, 2008, before the financial crisis, with a value of approximately $4.8 trillion. This was half of all mortgages in the United States. Of these loans, over 74% were on the books of U.S. government agencies and firms subject to government housing finance policies. This shows where the demand for these low quality loans came from. Fannie and Freddie were themselves exposed to more than 13 million subprime or Alt-A loans, or 65%, of the government total."
Pinto and Wallison took aim at New York Times columnist Joe Nocera who considers Wallison's findings a "big lie." Pinto and Wallison pushed back at Nocera, saying his article avoids the facts and financials.
Nocera writes that "Fannie and Freddie, rather than leading the housing industry astray, got into riskier mortgages only after the horse was out of the barn. They were becoming irrelevant in the most profitable segment of the market — subprime. And that they couldn’t abide."
Mark Calabria with the Cato Institute, who has previously outlined the GSE's role in the market bubble, analyzed both viewpoints. He found that while the evidence is somewhat inconclusive showing GSE housing goals alone led to increased credit risk, it is clear the GSEs were heading toward pain.
"Being leveraged over 200-to-1, as was the GSE guarantee business, is a recipe for disaster regardless of credit quality," Calabria wrote.
Write to Kerri Panchuk.
In 2008, the stock market crashed, more and more Americans started losing homes to foreclosure and Lehman Brothers collapsed, causing a catastrophic recession and endless finger-pointing in Washington.
Fast-forward three years, and the once hidden Fannie Mae and Freddie Mac are starting to endure some of the public finger-pointing that, until recently, has been reserved for big banks, originators, loan officers, rating agencies and anyone on Wall Street who braved the walk to work in a Brooks Brothers suit.
In fact, economists and financial analysts who have long objected to the narrative that Wall Street alone caused the crisis breathed a sigh of relief when former executives for the two mortgage giants ended up on the opposite side of Securities and Exchange Commission lawsuits.
Technically, it was the government suing the government, but for Peter Wallison — a dissenter on the Financial Crisis Inquiry Commission — it was vindication.
Wallison objected to the idea that capitalism and regulation run amok pushed America into its worst financial crisis since the Great Depression. He wanted government involvement taken to task and felt the commission's final report hit financial firms and credit rating agencies while leaving the government-sponsored enterprises in the shadows.
In an article published this week by the American Enterprise Institute, Wallison and Edward Pinto write that "the left is losing the argument over the financial crisis" because more Americans are surmising that the GSEs held about half of the mortgages in the United States and used a business model that maximized profit while socializing risk.
They say claims by the SEC push his viewpoint further.
"The SEC findings add $219 billion and 1.43 million loans to our original Fannie and Freddie subprime and Alt-A totals (in terms of exposure), bringing the combined subprime and Alt-A total to $2.04 trillion and 13.37 million loans," they wrote. Pinto, of course, is a former chief credit officer for Fannie Mae.
The two men conclude:
"All told, after adding the SEC's new data to our original estimates, there were approximately 28 million subprime and Alt-A loans outstanding on June 30, 2008, before the financial crisis, with a value of approximately $4.8 trillion. This was half of all mortgages in the United States. Of these loans, over 74% were on the books of U.S. government agencies and firms subject to government housing finance policies. This shows where the demand for these low quality loans came from. Fannie and Freddie were themselves exposed to more than 13 million subprime or Alt-A loans, or 65%, of the government total."
Pinto and Wallison took aim at New York Times columnist Joe Nocera who considers Wallison's findings a "big lie." Pinto and Wallison pushed back at Nocera, saying his article avoids the facts and financials.
Nocera writes that "Fannie and Freddie, rather than leading the housing industry astray, got into riskier mortgages only after the horse was out of the barn. They were becoming irrelevant in the most profitable segment of the market — subprime. And that they couldn’t abide."
Mark Calabria with the Cato Institute, who has previously outlined the GSE's role in the market bubble, analyzed both viewpoints. He found that while the evidence is somewhat inconclusive showing GSE housing goals alone led to increased credit risk, it is clear the GSEs were heading toward pain.
"Being leveraged over 200-to-1, as was the GSE guarantee business, is a recipe for disaster regardless of credit quality," Calabria wrote.
Write to Kerri Panchuk.
Tags: American Enterprise Institute, capitalism, Cato Institute, credit rating agencies, D.C., Fannie Mae, FCIC, financial crisis, Financial Crisis Inquiry Commission, financial firms, freddie mac, government, Great Depression, Lehman Brothers, Peter Wallison, recession, regulation, SEC, Securities and Exchange Commission, The New York Times, Wall Street, Washington
Posted in Commentary | No Comments »