Like catching Colonel Mustard in the Dining Room with a Candle Stick, Conservatives have been claiming they found the culprit for our massive economic problems. And that culprit is the Government and it's two largest Government Backed Loan Security Agencies Freddie Mac and Fannie Mae.
We've heard it from Gingrich, when he claimed that Chriss Dodd and Barney Frank should go to jail because of the influence Freddie and Fannie had on the Dodd-Frank Bill.
Nevermind the $1.6 he himself took from Freddie Mac as a "Consultant". The fact that Gingrich is so afraid of being associated with Freddie, or Fannie is the interesting point.
What did they do?
Here again Blaming the Government First, along with Fannie and Freddie is what Rep. Joe Walsh did in his Pro Bank Rant. (His Office has taken down the original clip since i was soo popular - but I found this one, with excerpts)
Yeah, ok, don't blame the Banks for offering Mortgages to people without a Credit Check or any assets, then bundling those bad Mortgages into Securities, slicing them up and selling them off to Wall Street Firms that then Falsely Rated Them as "AAA" and sold them to Pension Funds around the nation as "Good" investments. Right, the Government, Fannie and Freddie Made Them do all that. It's like blaming the FBI for a Bank Robbery, because they were having a donut break while somebody just walked in and Took All The Money.
Yeah, but don't blame the thief. Blame the Lazy (Regulatory) Cop with the Donut crumbs stlll on his lips and their Side-Kick Freddie who wasn't even there?
But then again, I could be wrong - let's hear Michael Bloomberg explain how people shouldn't even be mad at, or demonstrating against Wall Street - because they're completely "Innocent", and it's really all the Governments Fault.
"I hear your complaints," Bloomberg said. "Some of them are totally unfounded. It was not the banks that created the mortgage crisis. It was, plain and simple, Congress who forced everybody to go and give mortgages to people who were on the cusp. Now, I'm not saying I'm sure that was terrible policy, because a lot of those people who got homes still have them and they wouldn't have gotten them without that.
"But they were the ones who pushed Fannie and Freddie to make a bunch of loans that were imprudent, if you will. They were the ones that pushed the banks to loan to everybody. And now we want to go vilify the banks because it's one target, it's easy to blame them and congress certainly isn't going to blame themselves. At the same time, Congress is trying to pressure banks to loosen their lending standards to make more loans. This is exactly the same speech they criticized them for."
"I think it's fun, I think it's cathartic, but I think they should be trying to go out and make the world better".
So, there you have it. Why are people getting pepper sprayed and assaulted by police in Zuccotti Park? Why are their possessions, books, laptops, generators, tents to protect them from winter being confiscated and destroyed? Because Bloomberg doesn't even believe in the legitimacy of your complaint against Wall Street.
He puts it in less frantic terms than Joe Walsh. He doesn't think it criminal and law makers should be Jailed like Gingrich but he's basically spreading the exact same line that they are. It's all Freddie and Fannie's Fault.
And Congresses fault.
None of them mention that the Congressional Laws they're complaining about - including the Community Reinvestment Act were passed in 1977, while the repeal of Glass-Steagall which broke down the firewall between Mortgage Banks and Investment Banks happen in 1998.. We're supposed to believe a Bill that was passed the year that Star Wars came out suddenly blew up in our faces in 2006, but one passed in 1998 didn't really do anything?
So how do we determine the truth? What are the facts? Who did it really?
Well fortunately, the Senate actually did a Report which documents how the Financial Crisis Occurred. (And maybe Bloomberg shouldn't be blamed for being completely ignorant of it, since when I searched his own News Service Bloomberg News - It Doesn't Show up!) But the Senate Report, is Right Here (pdf), and it doesn't exactly point the finger at Freddie and Fannie. Far From it.
Here are some excerpts:
As a result, the multi-trillion-dollar U.S. swaps markets operated with virtually no disclosure requirements, no restrictions, and no oversight by any federal agency, including the market for credit default swaps which played a prominent role in the financial crisis. On September 23, 2008, in a hearing before the Senate Committee on Banking, Housing, and Urban Affairs, then SEC Chairman Christopher Cox testified that, as a result of the statutory prohibition, the credit default swap market “is completely lacking in transparency,” “is regulated by no one,” and “is ripe for fraud and manipulation.”85 In a September 26, 2008 press release, he discussed regulatory gaps impeding his agency and again raised the issue of swaps: “Unfortunately, as I reported to Congress this week, a massive hole remains: the approximately $60 trillion credit default swap market, which is regulated by no agency of government. Neither the SEC nor any regulator has authority even to require minimum disclosure.”86 In 2010, the Dodd-Frank Act removed the CFMA prohibition on regulating swaps.87
A second significant obstacle for financial regulators was the patchwork of federal and
state laws and regulations applicable to high risk mortgages and mortgage brokers. Federal bank regulators took until October 2006, to provide guidance to federal banks on acceptable lending practices related to high risk home loans. 88 Even then, the regulators issued voluntary guidance whose standards were not enforceable in court and failed to address such key issues as the acceptability of stated income loans.89 In addition, while Congress had authorized the Federal Reserve, in 1994, to issue regulations to prohibit deceptive or abusive mortgage practices – regulations that could have applied across the board to all types of lenders and mortgage brokers – the Federal Reserve failed to issue any until July 2008, after the financial crisis had already hit.
A third problem, exclusive to state regulators, was a 2005 regulation issued by the OCC
to prohibit states from enforcing state consumer protection laws against national banks.91 After the New York State Attorney General issued subpoenas to several national banks to enforce New York’s fair lending laws, a legal battle ensued. In 2009, the Supreme Court invalidated the OCC regulation, and held that states were allowed to enforce state consumer protection laws against national banks.92 During the intervening four years, however, state regulators had been effectively unable to enforce state laws prohibiting abusive mortgage practices against federally chartered
banks and thrifts.
Ok, I don't see any mention of "Fannie and Freddie" in there. I see basically Banks Gone Wild with Fraudulent Mortgage Securities without a Bouncer to check to see if they were above drinking or minimum FICA score range.
So what did the Senate Report Say about Freddie and Fannie?
Fannie Mae and Freddie Mac. Two government sponsored entities (GSE), the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), were chartered by Congress to encourage homeownership primarily by providing a secondary market for home mortgages. They created that secondary market by purchasing loans from lenders, securitizing them, providing a guarantee that they would make up the cost of any securitized mortgage that defaulted, and selling the resulting mortgage backed securities to investors. Many believed that the securities had the implicit backing of the federal government and viewed them as very safe investments, leading investors around the world to purchase them.
The existence of this secondary market encouraged lenders to originate more loans, since they could easily sell them to the GSEs and use the profits to increase their lending. Over time, however, Fannie Mae and Freddie Mac began to purchase larger quantities of higher risk loans, providing a secondary market for those loans and encouraging their proliferation. Between 2005 and 2007, Fannie Mae alone purchased billions of dollars in high risk home loans, including Option ARM, Alt A, and loans with subprime characteristics. For example, data from Fannie Mae shows that, in mid 2008, 62% of the Option ARM loans on its books had been purchased between 2005 and 2007.94 Likewise, 84% of its interest-only loans were purchased in that time frame, as were 57% of those with FICO scores less than 620; 62% of its loans with loan-to-value ratios greater than 90; and 73% of its Alt A loans.95 While these loans constituted only a small percentage of Fannie Mae’s purchases at the time, they came to account for some its most significant losses. By the middle of 2009, Fannie Mae reported an unpaid principal balance of $878 billion for its loans with subprime characteristics, nearly a third of its total portfolio of $2.7 trillion.96
Let's point out that Fannie and Freddie aren't lenders. They bought loans from other lenders and backed them by the Government. The idea was to provide a back-stop against the risk those loans presented and allow those lenders greater leverage to loan to people who the lenders had previously been skittish about.
In and of itself, that isn't a bad thing. But is that Forcing Lenders to do anything, or is it simply giving them an option which they can either take or not take? Joe Walsh talks about it like Banks had a "Gun to their Head" provided by the Government - like the the scene from BattleStar Galactica where the Cylons force Baltar to sign the Death Warrants with a Gun to his head right after shooting his girlfriend Caprica-6 in the forehead.
Sign it! SIGN YOUR NAME!!...Sign It!.
But it wasn't really like that.
For one thing, as GSE's (Government Sponsored Entities) both Freddie and Fannie were Regulated while - as the report lays out - Federal Banks were not when it came to the Credit Default Swaps and Risky Lending. In fact, Freddie and Fannie were specifically prevented from issuing Sub-Prime Mortgages to Lenders who couldn't possibly pay those loans back. The only reason they began to take on more risk in 2005, is because the entire industry was doing the same thing since there were no Regulations Against High-Risk Loans until 2006!!
The problem wasn't Freddie and Fannie - it was FRAUD. it was the Inaccurate and fraudulent rating of Good Investments, that were in fact - Lousy.
Traditionally, investments holding AAA ratings have had a less than 1% probability of incurring defaults. But in 2007, the vast majority of RMBS and CDO securities with AAA ratings incurred substantial losses; some failed outright. Analysts have determined that over 90% of the AAA ratings given to subprime RMBS securities originated in 2006 and 2007 were later downgraded by the credit rating agencies to junk status. In the case of Long Beach, 75 out of 75 AAA rated Long Beach securities issued in 2006, were later downgraded to junk status, defaulted, or withdrawn. Investors and financial institutions holding the AAA rated securities lost significant value. Those widespread losses led, in turn, to a loss of investor confidence in the value of the AAA rating, in the holdings of major U.S. financial institutions, and even in the viability of U.S. financial markets.
Inaccurate AAA credit ratings introduced risk into the U.S. financial system and
constituted a key cause of the financial crisis. In addition, the July mass downgrades, which were unprecedented in number and scope, precipitated the collapse of the RMBS and CDO secondary markets, and perhaps more than any other single event triggered the beginning of the financial crisis.
Fannie and Freddie didn't rate these credits. Wall Street Did. And Fannie and Freddie didn't falsify the loan application data - The Banks Did.
According to the WaMu Home Loans Credit Risk Mitigation Team that
conducted the 2005 internal investigation, it was initiated in response to “a sustained history of confirmed fraud findings over the past three years” involving the two offices, known as Downey and Montebello.317 Each office was located in a low-income area of Los Angeles and headed by a loan officer who had won repeated WaMu awards for high volume loan production.
A presentation prepared for WaMu management provided additional detail.320 It stated
that, out of the 751 loans produced, the Risk Mitigation Team had selected 180 loans for detailed review, of which 129 had been completed.321 It stated that 42% of the reviewed loans had “contained excessive levels of fraud related to loan qualifying data.”322
The presentation indicated that the loan fraud involved primarily “misrepresentation of loan qualifying data,” including misrepresentations of income and employment, false credit letters and appraisal issues.324
Ok, Look - Fannie and Freddie didn't make WaMu perpetrate Loan Fraud, just so they could sell them another Mortgage. So, why did they do it? They did it so that their partner Goldman Sach could falsely rate these bad Mortgages, Securitize them, then making a killing in the market by betting against them.
Nevertheless, in May 2006, Goldman acted as co-lead underwriter with WaMu to securitize about $532 million in subprime second lien mortgages originated by Long Beach. Long Beach Mortgage Loan Trust 2006-A (LBMLT 2006-A) issued approximately $495 million in RMBS securities backed by those Long Beach mortgages. The top three tranches, representing about 66% of the principal loan balance, received AAA ratings from S&P, even though the pool contained subprime second lien mortgages – loans which could recover funds in the event of a default only after the primary loan was repaid — and even though the loans were issued by one of the nation’s worst performing mortgage lenders. Yet Goldman was able to use two-thirds of that extremely risky debt to issue AAA rated securities which Goldman then sold to its customers.
...
Goldman lost $2.5 million from the unsold Long Beach securities still on its books,
but gained $5 million from the CDS contract shorting those same securities. Overall, Goldman profited from the decline of the same type of securities it had earlier sold to its customers
And that's why they did it, because at the end of the day - their balance sheets were still positive. They were making Money on this Ponzi Scheme, so why should they stop? Who cares if the fraudulent loans went bad, and the securitization contaminated other loans and investments and they all went bad? If you know they're bad ahead of time, you can use that knowledge to your advantage - and that's exactly what Goldman did.
They didn't care that the loans would fail, or that the investments based on those loans would fail. They knew it would fail, and they didn't care since by shorting them against their own clients interests - they still made money.
On June 1, 2007, Goldman Sachs sold $36 million in Timberwolf securities to a Korean life insurance company, Hungkuk Life, that had little familiarity with the product. The head of the Korean sales office said his office was willing to sell the company additional securities, if assured the office would receive a 7% sales credit. Goldman agreed, and said “get ‘er done.” The sales office sold another $56 million in Timberwolf securities to the life insurance company which paid $76 per share when Goldman’s internal value for the security was $65.
Within ten days of that sale, Thomas Montag, a senior Goldman executive, sent an email to the Mortgage Department head, Daniel Sparks, stating: “boy that timeberwof [Timberwolf] was one shitty deal.”1598 Despite that comment, Goldman continued to market Timberwolf securities to its clients.
Again, Fannie and Freddi didn't do this. If anything, they were on the receiving end of a shitty deal and frankly had no motivation for willfully putting themselves there. But the Banks did because once the bad assets were securitized and sold - it wasn't their problem anymore -and Wall Street did because once they got their investor to buy those "shitty deals" all they needed to do was bet against them in the market and they would make more than what they were losing.
Where exactly was the upside in this deal for Fannie and Freddie? They've been left on the hook for $Trillions in this Shitty Deal, while Goldman has skated away and continue to make profits.
It was A perfect little Ponzi Scheme that eventually brought most of the Economy Crashing Down. We've found out that it wasn't Colonel Mustard, it was Professor Plum and he's still holding the Bloody Candle Stick.
Even if you don't buy my reading of this - Rachel Maddow laid all of this out just last week before interviewing Beau Biden. Chapter and Verse.
Part 1 - On Elliot Spitzer's Campaign against Wall Street
Part 2 - After the Fall of Spitzer - Wall Street Gone Wild!
Bloomberg is Wrong. Walsh is Wrong. Gingrich is Wrong.
But that won't stop them from continuing to lie and scapegoat Fannie & Freddie - like Voldemort and his pure blood mania, they just can't stop themselves from trying to create of a Mudblood/Government Entity Holocaust. And just like Goldman, they don't care about the collateral damage either...
...they're getting paid to bet against the House.
Vyan
9:33 AM PT: More on this from Barry Ritholtz Financial Writer at the WaPo.
What Caused the Financial Crisis? The Big Lie goes Viral
Wall Street has its own version: Its Big Lie is that banks and investment houses are merely victims of the crash. You see, the entire boom and bust was caused by misguided government policies. It was not irresponsible lending or derivative or excess leverage or misguided compensation packages, but rather long-standing housing policies that were at fault.
Indeed, the arguments these folks make fail to withstand even casual scrutiny. But that has not stopped people who should know better from repeating them.
(Some Actual causes)
●(Arificially) Low (Interest) rates meant asset managers could no longer get decent yields from municipal bonds or Treasurys. Instead, they turned to high-yield mortgage-backed securities. Nearly all of them failed to do adequate due diligence before buying them, did not understand these instruments or the risk involved. They violated one of the most important rules of investing: Know what you own.
●Fund managers made this error because they relied on the credit ratings agencies — Moody’s, S&P and Fitch. They had placed an AAA rating on these junk securities, claiming they were as safe as U.S. Treasurys.
●The Securities and Exchange Commission changed the leverage rules for just five Wall Street banks in 2004. The “Bear Stearns exemption” replaced the 1977 net capitalization rule’s 12-to-1 leverage limit. In its place, it allowed unlimited leverage for Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns. These banks ramped leverage to 20-, 30-, even 40-to-1. Extreme leverage leaves very little room for error.
●Glass-Steagall legislation, which kept Wall Street and Main Street banks walled off from each other, was repealed in 1998. This allowed FDIC-insured banks, whose deposits were guaranteed by the government, to engage in highly risky business. It also allowed the banks to bulk up, becoming bigger, more complex and unwieldy.
Bloomberg was partially correct: Congress did radically deregulate the financial sector, doing away with many of the protections that had worked for decades. Congress allowed Wall Street to self-regulate, and the Fed the turned a blind eye to bank abuses.
If Congress & the SEC did anything seriously wrong, it was to take a "hands off" attitude and allow the Financial Doctors to Operate On Themselves- which led to nothing but ALLFAIL!
And the GOP wants more of this?