Tuesday, March 10, 2009

Blaming Fannie Mae and Freddie Mac

In the never-ending game to affix blame for the Housing crisis, Jean sent me this YouTube video:

Timeline shows Bush, McCain warning Dems of financial and housing crisis; meltdown

There is something to all this, of course: Fannie Mae and Freddie Mac regulatory weakness was a part of the bigger problem (but not the most important part). But there is a lot of double-speak here.

When McCain and the Republicans complained about a lack of regulatory oversight, they weren't really complaining about a lack of regulatory oversight. Remember, the Republican mantra has always been that things work better with less regulation! So, why the difference here?

In the early 2000’s, various Wall Street players looked with envious eyes at Fannie Mae's and Freddie Mac's business (the bulk of the first-time purchaser U.S. housing market) and were trying various ways to sideline them. The complaints were about as real as a three-dollar bill and were whomped up in order to help force Fannie Mae and Freddie Mac from the market - so the Wall Street insiders could get more of the business, not because anybody thought they were under-regulated. (In retrospect, maybe the Democrats should have stopped playing defense and let them!)

The real problem was the securitization of home mortgages and converting them into opaque CDO’s. Then, the Wall Street players secured loans based on the values of the opaque CDO’s. The leverage was huge and there were huge regulatory weaknesses there too: AIG, for example, was not required to set aside reserves based on the values of CDO’s (a special goody that Republican Senator Phil Gramm from Texas inserted through legislation he introduced). Effectively, AIG was running an insurance company without reserves: with clueless aplomb, AIG saw it as a matter of satisfying their customers with up-to-date financial services.

It takes a lot to run a Ponzi Pyramid. I tend to see Fannie Mae and Freddie Mac as chumps in a game mostly not of their own devising. Their job was to bring unprepared newbie homeowners into the game, a game that they were in danger of being cut out from.

The folks collecting the fees at the top of the Pyramid bear the lion’s share of the blame for everything falling apart. The game was not sustainable and they knew that and they didn’t care. Blaming everything on Fannie Mae and Freddie Mac is quite predictable, and mostly wrong. Fannie Mae and Freddie Mac may be to blame for the timing of the collapse, maybe, but not its inevitable end. All Ponzi Pyramids end, generally when there aren’t enough qualified newbies entering the Pyramid. Fannie Mae and Freddie Mac can be blamed for not finding enough newbies. Damn Fannie Mae and Freddie Mac, damn them for eternity, for that!

At the end of the chain of blame shouldn’t lay just millions of Patsies holding homes with declining values, however. It isn't just a matter of folks getting too upwardly-mobile before their times. There are other, more blameworthy, folks around, and they are trying to scuttle away from this flaming disaster just as fast as their six legs will let them....

No comments:

Post a Comment