Robert Ganshorn

The Mouth Piece (Peace?)

Filed By Robert Ganshorn | October 06, 2008 1:00 PM | comments

Filed in: Living, Politics
Tags: financial crisis, mortgage, Republican agenda

This is a video that should surprise you. It is not my opinion, but it is really something to think about when we dismiss all people as being "friend or foe." I did not like this video because it came off as homophobic by one standard and racist by another, but the information is interesting to know. The fear it deliberately inspires is necessary to understand and refute. This video is going around the world as we speak and claims to be absolutely true- and much of it is.

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So, they try to pin the Subprime Mortgage Meltdown on Fannie Mae and Freddie Mac.

And nobody mentions the Commodity Futures Modernization Act of 2000, the bill that then-Senator Phil Gramm snuck into an omnibus spending bill in December 2000. It was voted on without debate and signed into law by President Clinton on 21 December. It deregulated the financial instruments that made Enron and the Subprime Mortgage Bubble possible (indeed, Enron lawyers and accountants helped write it.)

I didn't watch this video to the end, I just noted that it seemed to be scapegoating Freddie Mac and Fannie Mae, and trying to tar and feather a bunch of people they (whoever 'they' may be) dislike intensely.

And Joe and Jane Sixpack will believe it because it fits the frames that have been cultivated in them...

The stupid, it burns!!!

This is a very long comment because this video is part of an emerging trend on the right to try to blame the current financial situation on fannie, freddie, and their Democratic friends. I think people need facts to rebut that incorrect argument.

The problem with the video is not so much in the specific facts and charts (although some of those are misleading). The problem is with the premise that risky behavior by Fannie and Freddie caused the current problems. I think that is demonstrably false. In the early 2000s, Fannie and Freddie (the Enterprises) were always several steps behind private-label securitizers in accepting risky mortgage products. That, along with regulatory pressure, pushed down the Enterprises' shares of the mortgage market in the mid-2000s. Fannie and Freddie did buy some of these private-label securities to hold on their books or re-securitize, but not in high numbers. It was when delinquency rates had already started ticking up and investors in private-label securities became worried that Fannie and Freddie seized the opportunity and/or were pressured to "step in" and start dealing with more low credit quality and/or non-traditional mortgages in order to "save the market." In other words, Fannie/Freddie started investing in private-label securities and riskier loans when it was already clear that there were a lot of credit problems. They did so because they saw a business opportunity and because of political pressure to try to support the market for mortgage-backed securities. They didn't bargain for just how bad the mortgages were, nor for the extent to which the market would panic and drive up their borrowing costs (which is a serious failure on the part of the Enterprises' management), which is why they ended up in conservatorship.

Now that Fannie and Freddie are in conservatorship, spreads between Enterprise MBS and treasuries have dropped. In other words, investors aren't concerned the federal government will allow anyone who owns Fannie/Freddie MBS or senior debt to take a hit. The so-called "toxic mortgage debt" that has everyone worried is the non-Enterprise stuff (private-label securities) that's floating around without the federal guarantee. And the homeowners who are facing default because they were encouraged to take loans they couldn't afford are not mostly people whose mortgages got sold to Fannie or Freddie--regulatory pressure prevented the Enterprises from investing in subprime or non-traditional mortgages in anywhere near the numbers that private-label securitizers did so (this changed some with the pressure in 2007 (after things already started to go south) to "support the housing market," but not in numbers close to that of other securitizers.

Yes, Fannie's and Freddie's business models were to make money off the spread between their borrowing costs (which were subsidized by the implicit government guarantee) and everyone else's. Yes, Democratic legislators protected the Enterprises in exchange for campaign contributions and alleged support for "affordable" housing (which by HUD's requirements actually included any loans made to middle-income families). Yes, Fannie and Freddie engaged in accounting misstatements in order to smooth earnings, but those accounting "failures" are not related to the credit quality of mortgage originations or the credit crunch.

To the extent that Fannie and Freddie fairly get some blame, it's that (1) some people lost money when the Enterprises' stock prices plunged to near-zero, thereby making wall street as a whole drop slightly and perhaps inspiring fear, (2) the visible trouble of Fannie and Freddie may have spread panic, and (3) the housing Enterprises helped build the housing bubble by, in general, promoting homeownership to the general public and making it cheaper to get mortgages. By the third argument, we should also blame the mortgage interest tax deduction and Bush's speeches promoting homeownership for the housing bubble and subsequent collapse. The first two arguments relate to market psychology, not to the underlying dynamics which caused the problems.

I hate that this video (and similar arguments by other people) has put me in the position of defending Fannie and Freddie. These companies were out to make a buck, and they used all the means at their disposal to do so (accounting manipulations, making friends with congresspeople to lighten regulatory pressures, exploiting special privileges from their Federal charters, etc). But they didn't cause the current financial crisis, and it isn't fair to blame them and, by extension, the Democrats for what friend-of-the-GOP investment banks created.

Robert Ganshorn Robert Ganshorn | October 7, 2008 12:41 AM

If you line up enough "true facts," and point them in a direction, you can rather quickly come up with an alternate universe. Excuse me, the floor just fell up as I wrote this.

Robert Ganshorn Robert Ganshorn | October 7, 2008 12:54 AM

If you line up enough "true facts," and point them in a direction, you can rather quickly come up with an alternate universe. Excuse me, the floor just fell up as I wrote this...

I am surprised no one caught up on McCain's being willing to regulate tobacco and campaign finance issues has nothing to do with Fannie or Freddie. His "willingness to regulate" is minimal at best. I know it is a long eleven minutes, but at 10:22 is the dig against Barney Frank that is anti LGBT.

Personally, I think we're fucked by both Dems and Republicans. Everyone knows that the Repubs are greedy ruthless bastards only concerned with lining their own pockets at the expense of the common man.

Or is that the democrats lately?