Attacks of Fannie and Freddie: Red Herrings?

[Swingblade]

If CSI Las Vegas was investigating which party was responsible there would be enough DNA,finger prints ,and blood evidence left at the scene to convict both.

[texdav]

Well it was a corporation setup byt eh federal governamnt to get loans for those who could not other wsie affros one. just look at the failure rate.The funny thig is that both CEOs were reward on now much business they did in bonuses, Congress fired bot and has long refused to let them be audited as requaeted before 2008 by some senators. Barney frank said ;we can always bail them out which is what has happened and we are not through doing it. Berannke said today that it needs to be resolved on shutting both down.Why fight a audit if there is nothig to be fond?

[InformedConsent]

Originally Posted by damie

Who backed Mortgage Based Securities with CDS? (You know the insurance that isn't actually insurance because you didn't actually have to have cash on hand for the security you were supposedly backing?) Who was actually betting against their own MBS?

You mean the $7 Trillion worth of MBS Fannie and Freddie fraudulently misrepresented as lower risk than they actually were?

Do you know how much bigger the CDS market is than the Housing Market?

Yes. Do you know why that is?

The CDS would not have become a problem if Fannie and Freddie had not fraudulently misrepresented the risk on $7 Trillion worth of MBS.

I'm not really missing any pieces here... F & F wasn't the problem it was complicit in a problem that already existed. The Sub Prime Market existed before they entered it. That's why EVERYONE defaulted on mortgages when the market went belly up - the rich included. In fact they defaulted at a HIGHER percentage.

You're still not getting it.

Pinto: "CRA and GSE Act promoted "innovative or flexible" lending practices such as downpayments of 5% or less, acceptance of impaired credit, higher debt ratios and creative definitions of income. This loosened underwriting resulted in total CRA originations and non-overlapping GSE AH acquisitions by the GSEs of $7 trillion over the period 1993-2007. This tsunami of high risk lending spawned and sustained a housing bubble unlike any this country has ever seen."
RealClearMarkets - How Did Paul Krugman Get It So Wrong?

Now regardless if you feel like F &F was principally responsible for the Housing Bubble (they weren't) but even if you felt that they were - the housing bubble burst could have been contained if Wall Street wasn't allowed to leverage themselves against those bad MBS. That's PRECISELY what got AIG in trouble. Not the housing market imploding, but the CDS (Credit Default Swaps) that they sold against the housing market. They didn't have the money to back that insurance. The CDS allowed them to become overleveraged.


That's what got AIG into so much trouble. It sold cheap protection on huge amounts of subprime mortgage bonds and collateralized debt obligations but never put money aside to make good on potential claims—leaving taxpayers on the hook to pay them off.

Credit Default Swaps: Who Wins If The US Goes Bankrupt? - Newsweek


The CDS that AIG and others sold had NOTHING to do with F & F and were the direct cause for their overleveraging (i.e us having to bail them out). So explain to me, anyone, how we must first address F & F in order to fix this problem? That's a rhetorical question. You don't. The most dire problems were addressed in Wall Street Reform. F & F is just the excuse du jour for more obstructionism.

Wow. No.

"We have seen no credible data that any of the large banks or other underwriters of mortgage backed securities ("MBSs") or collaterized debt obligations ("CDOs") or firms like AIG selling protection on same actually misrepresented the character of underlying collateral. This is in direct contrast to the allegations of Edward Pinto as printed by the Wall Street Journal. If Pinto is correct such that the mis-marking of mortgages by the GSEs and the discovery thereof destroyed confidence in the accuracy of ratings in mortgage backed securities and their derivatives (and it seems probable to suspect that he is) then it seems almost beyond question that the policies (or policy malfeasance) of Fannie and Freddie, and not the actions of large banks or firms like AIG are the proximate cause of not just the credit crisis, but also the continuing multi-act, multi-bailout farce that continues to be passed off to the public as necessary "stimulus."
Origins of an American Kleptocracy | zero hedge

[InformedConsent]

And of course, straight from the horse's mouth...

"BEN BERNANKE: Oh, the worst moments were back in September. The financial crisis began with Fannie Mae and Freddie Mac, the large housing companies that were taken over by the government, and subsequent to that a number of very large financial firms came under enormous pressure. One of them, Lehman Brothers, an investment bank, failed. Others came close to failure, needed government support, not just in the United States, but around the world. And those were some very long nights I spent on the sofa in my office as we worked to try to keep the financial system running."
At Forum, Bernanke Defends Fed's Aggressive Moves | Online NewsHour | July 27, 2009 | PBS

[workingclasshero]

Originally Posted by InformedConsent

And of course, straight from the horse's mouth...

"BEN BERNANKE: Oh, the worst moments were back in September. The financial crisis began with Fannie Mae and Freddie Mac, the large housing companies that were taken over by the government, and subsequent to that a number of very large financial firms came under enormous pressure. One of them, Lehman Brothers, an investment bank, failed. Others came close to failure, needed government support, not just in the United States, but around the world. And those were some very long nights I spent on the sofa in my office as we worked to try to keep the financial system running."
At Forum, Bernanke Defends Fed's Aggressive Moves | Online NewsHour | July 27, 2009 | PBS

so much for the llibs 'red herring'

[damie]

Originally Posted by InformedConsent

Yes. Do you know why that is?

The CDS would not have become a problem if Fannie and Freddie had not fraudulently misrepresented the risk on $7 Trillion worth of MBS.

CDS was one of a number of reforms that needed to be enacted. What you are arguing is like someone saying the avalanche wouldn't have happened as long as no one clapped their hands. The avalanche was poised to happen because of how the CDS was set up. It is not what they were betting, it's that they were betting money they didn't have. That is precisely what happened to AIG - did you read the article I linked?

You're still not getting it.

Pinto: "CRA and GSE Act promoted "innovative or flexible" lending practices such as downpayments of 5% or less, acceptance of impaired credit, higher debt ratios and creative definitions of income. This loosened underwriting resulted in total CRA originations and non-overlapping GSE AH acquisitions by the GSEs of $7 trillion over the period 1993-2007. This tsunami of high risk lending spawned and sustained a housing bubble unlike any this country has ever seen."
RealClearMarkets - How Did Paul Krugman Get It So Wrong?

It seems like you're not understanding your own articles. Pinto is arguing against the CRA (and to some extent the GSE Act as well...) - not specifically F & F. You know how we can be certain of this? We can read the very next paragraph of the article you linked.

Why did GSE Act and CRA's mandated lending have such a huge impact? Historically home prices were determined by supply and demand at a local level. These two acts changed this local dynamic. Both operated nationally, due to the fact the Fannie and Freddie, along with the big banks responsible for the overwhelming majority of announced CRA commitments, were all national in scope. They were not only largely independent of local supply and demand pressures; their loosened credit standards created demand.

Are you seeing it now? Big banks. Everything Pinto is saying about F & F he is also saying about Big Banks... because his argument is against the mechanisms that allows both to engage in subprimes the way it did - the CRA Act. F & F had a share of the sub-prime market. A small share it turns out (roughly 25% by the time the market imploded).
Private sector loans, not Fannie or Freddie, triggered crisis | McClatchy

Now how do you reconcile this fact with what you are suggesting? That F & F alone was fraudulently misrepresenting their MBS as lower risk than they actually were? That is the accusation against the entire market of which F & F was a minority share owner. The bubble burst for EVERYONE - not just CRA originated loans. The rich have defaulted on loans at a higher percentage than anyone.
Rich People: More Likely To Default On Mortgages Than You Are - The Consumerist

Wow. No.

"We have seen no credible data that any of the large banks or other underwriters of mortgage backed securities ("MBSs") or collaterized debt obligations ("CDOs") or firms like AIG selling protection on same actually misrepresented the character of underlying collateral. This is in direct contrast to the allegations of Edward Pinto as printed by the Wall Street Journal. If Pinto is correct such that the mis-marking of mortgages by the GSEs and the discovery thereof destroyed confidence in the accuracy of ratings in mortgage backed securities and their derivatives (and it seems probable to suspect that he is) then it seems almost beyond question that the policies (or policy malfeasance) of Fannie and Freddie, and not the actions of large banks or firms like AIG are the proximate cause of not just the credit crisis, but also the continuing multi-act, multi-bailout farce that continues to be passed off to the public as necessary "stimulus."
Origins of an American Kleptocracy | zero hedge

LOL - you cannot be serious. I'll overlook the fact that this article is written by Marla from Fight Club (i.e. the author is anonymous), that it is time stamped January 1, 2010, which is a date later than the article I linked from Newsweek, March 17, 2010 that says CDS is precisely what got AIG in trouble, I'll even overlook the bad logic used by Marla (i.e. absence of evidence is evidence of absence - this is demonstratably flawed logic) - what I can't overlook is that you think this proves your point. If anything it proves mine - that this issue is a red herring. You are citing anonymous sources, using bad logic, and no data to support your position. That seems reasonable to you?

Now all that said, we know it wasn't just CDS that were the problem. There was overleveraging (by mechanisms other than CDS - Lehman Brothers for example) and there were of course people who betted against their own products (Goldman Sachs) but NONE of that is the issue. These are all Wall Street related items. And Wall Street Reform should cover them. What is dishonest and despicable is that folks are disingenuously invoking F & F, as a cause de jour to avoid supporting a reform bill because it came under a Democratic Administration. It's as obvious as it is ridiculous.

F & F had a quarter stake in a market, whose overall market was already riding a bubble. If you want to argue that with their 25% stake they made things worse, go ahead - but it is patently obvious that had nothing to do with the bets that Wall Street was placing on MBS and how they went about doing it. Nothing in F & F made Goldman Sach create a product that they sold to investors that they were secretly betting against. Nothing F & F did made AIG issue CDS that they couldn't cover. The argument that F & F was the lynch pin to Wall Street Reform is bankrupt.