Fanniegate: Gamechanger For The GOP?
Published on: June 7, 2011
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  • One would think that someone who liked America would evaluate this narrative for its truth or falsity, rather than whether it’s a “killer ap” for this or that party.

    As we know, it is false. Fannie and Freddie lost share during the bubble, and only changed their requirements to catch up to private lenders. See, e.g., and

    Also, if Fannie and Freddie invented the housing bubble, it wouldn’t have taken place in much of the rest of the industrialized world.

    Now, that doesn’t mean that everything F&F did was sunshine and rainbows. If there’s corruption here, let’s prosecute the evildoers.

    But we know that F&F did not cause the crisis. That’s what the data shows.

    This is rather a curious blog post.

  • Peter Dellas

    Actually, if you understand what Fannie did with the securitization of those mortgages, you would know that this is wholly, or at least MOSTLY, true and verified.

    The narrative that Mead writes here, I wrote some 4 years ago. Some of the details have been filled in since I wrote of it. But the diabolocal scheme was clear then and has become even clearer today. And, may I add, I lost millions to it as did many retirees who thought they had found the perfect investment in mREITS. After all, what investment was safer than the American mortgage? The historic level of foreclosures had been fkatlining for many years. Many of those people who were fooled by this scheme are now working at 7-11 to keep their home.

    There is a special place in hell for those who perpetrate such a vast evil upon the elderly and hard-working, stealing in one fell swoop what represents their entire life savings. And that’s not even to mention how the poor were scammed.

    I don’t care about the Republican Party getting an upper hand. I am a Libertarian. But I will not rest until I see many of those who did this taken away in cuffs.

  • Thanks for the heads up. I’ll be sure to tell all my friends.

  • Luke Lea

    So you do read Steve Sailer occasionally, may I presume? (Don’t answer.) He’s a much maligned but very good journalist in my opinion.

  • Luke Lea

    “many cooks were required to spoil this broth”

    Did you mean cooks or crooks? I misread it the first time.

  • Luke Lea

    “The Democratic Party today is a fragile coalition of elite liberals, traditionally Democratic ethnic blue collar whites, African Americans and Hispanics.”

    Traditionally Democratic ethnic blue collar whites? Not too many of those left.

  • Luke Lea

    “The American establishment does not have the necessary moral strength and intellectual acuity to run the affairs of this country; Tea Party believers will find much in this book that confirms their worst fears.”

    Therefore, watch out for Sarah Palin! She cut her teeth reigning in corporate greed in Alaska. To write her off as dumb and ignorant is, well, pretty dumb and ignorant. Not saying I’m going to vote for her, mind.

    [BTW, to be fair to the Democrats and as Steve Sailer points out, “the Housing Bubble didn’t get supersized until after George W. Bush’s October 15, 2002 “White House Conference on Increasing Minority Homeownership”. There, the Republican President recklessly denounced down-payments as the foremost hurdle to closing the racial gap in homeownership.”]

  • Glen

    Wow! This qualifies as a blockbuster post!

    No doubt many will attemp to discredit Reckless Endangerment. That will be difficult, however, since its authors are both well-respected members of the mainstream press.

  • Thrasymachus

    Whatever the truth of those overheated allegations may be, the politics of this narrative make it anything *but* a “killer app” for the Republican Party, for two major reasons. First, this tale is complicated, and requires a great deal of explanation that independent voters are unlikely to attend to. Second and more importantly, *even if every word of it is true*, this sounds like the kind of insane Tea Party conspiracy theory that the broader electorate has been resolutely dismissing for years. This *sounds* like it’s about conservative racism, just like the Clinton impeachment *sounded* like it was about conservative prudishness and sanctimony. . . and that’s as much as the mainstream needs to hear, if it’s coming from the Right. Fair or not, both major parties have certain kinds of stories that they cannot credibly tell.

  • nadine

    Peter, any GOP candidate who gets this narrative out will have to find a way to do it over the heads of the MSM. The press has absolutely been in the tank for every self-serving excuse Barney Frank et. al. have used since 2008. They have said some variant of “it’s all George Bush’s fault” a million times, and the dirt has stuck.

  • I, for one, had already heard about this book and I really thought this was a well written, informative post. I’m going to read the book and I have no doubt that the blame is enough to take many people down.

    The sad fact is that so many people only care about themselves and money that they sell out the people who don’t understand. The housing crisis is huge and is affecting so many people.

    We are manufacturers is that industry and there’s been nothing this bad since the depression. I hop the people who brought this on rot in [a very bad long term destination in the afterlife].

    Between reading this and watching Too Big to Fail it looks like we are truly [messed up].

  • The housing crash was engineered, that fact is indisputable. Now that we have names associated with the crime, we have some ammunition against the progressive left and their highly destructive agenda to turn America into a third-world banana republic, with them in charge, naturally.

    I can’t wait to read this book. I’m very interested in hearing how the Affordable Housing Act signed by Jimmy Carter and later altered by Bill Clinton played a role in our current economic crisis. Forcing lending institutions to give loans to people who can’t afford them is, as we’re seeing very clearly today, a recipe for disaster.

  • FlashHarry

    An ongoing egregious lack of transparency has always been the primary symptom of government malfeasance and corruption.

    American voters of all political persuasions can recall the Obama 2008 campaign repeatedly promising that their administration would place a particular emphasis on the practice of transparency.

    A vast majority of these voters believe that the process of running for President of the United States should be the toughest public job interview on the planet.

    The sad fact remains that the current president, according to longstanding government clearance protocols, could not be hired as a janitor in a federal building with the amount of personal background information that he has provided.

    Run for President? No problem.

    Get any other federal job? No way.

    Quite apart from the issue of any sort of birth certificates, real or imagined, genuine or forged, is the fact that Barack Obama’s school records, SAT and LSAT scores, college and law school admission records and scholarship paperwork and grade transcripts and thesis papers, medical records, passport history, Illinois state senate tenure records, presidential campaign foreign donor lists, complete White House visitor logs and many other relevant records and documents have all never been released or allowed to be subjected to any sort of scrutiny, despite several years of repeated requests for disclosure by numerous individuals and non-traditional media organizations.

    Virtually the entire paper trail of Barack Obama’s existence has always been deeply hidden away in a tight shroud of secrecy.

    The Obama 2008 campaign and subsequent administration have to date spent a substantial sum on legal fees, estimated in the millions of dollars, to fight Freedom of Information Act filings and other motions and requests to examine some of this material. The powerful international law firm Perkins Coie, the counsel of record to the Democractic National Committee, has been their primary provider of these services and continues in that role.

    It had become customary in postwar modern times for presidential candidates to allow for the release and scrutiny of the substantive body of their personal records and credentials, up until 2008 largely because of a strong interest from the mainstream media.

    The appearance of Barack Obama upon the national political stage changed that tradition, and he was given an astonishing special exception from this important unofficial practice that American voters had come to expect.

    In their eagerness to “make history” by helping to elect The Chosen One as the first black president, the mainstream media failed in their esential national responsibility to report with thorough impartial objectivity. They ignored their duty to search for the truth and should be regarded with disdain by all people who value information in a free society.

    Barack Obama’s past associations, ideological convictions, behavioral influences and ongoing relationships are matters of great concern to a vast number of people who just want to understand the truth about this man of mystery.

    This is the sort of information about their presidential candidates that American voters believe they have the need, and the right, to know.

    The sort of information that Obama and his handlers are obviously quite determined to continue to keep from them.

  • CatoRenasci

    A fascinating post, I now have the book on order.

    An aspect of the narrative that will reinforce the Republican use of this is that the Republicans and the Bush administration tried twice to investigate Fannie and Freddie, and were shut down by Democratic resistance – especially Brothers Frank and Dodd, and Sister Pelosi.

  • ThomasD

    I agree with Mr. Dellas. In the main this information is nothing new to anyone who has been paying attention since the crisis began.

    John McCain could have, and should have used this very issue during the last election. He had the megaphone of his candidacy, had he chosen to speak forcefully and repeatedly on this the press would have had no choice but to cover it. But, like much of the ruling class, he chose to avoid it, probably fearing that the rot would cut both ways (or maybe enough of his advisers feared it – given that they play both sides of the two party gravy train.)

    Well, for the most part this mess doesn’t cut both ways. It is as close to a pure indictment of one party as is possible given the nature of the cesspool that is Washington DC. There is plenty of video that can be marshaled to paint the picture for the American public – Barney Frank saying he’s ‘willing to roll the dice’ on a Fannie/Freddie default, etc. But it will require a concerted effort to break the Make Believe Media’s opposition.

    Seeing this as something that ‘benefits’ the Republicans indicates a view that Washington DC is, and always will be, a zero sum game. Partisanship is not easily overcome, but everyone needs to recognize that nothing in Washington will truly improve without significant change (the real kind, not a Madison Avenue Slogan.) A short term benefit to the Republicans should not be feared, and a new,revitalized, and less corrupt opposition party would certainly be something that the nation needs. You simply cannot reform both parties at once, so best to focus on what is possible.

    Failure to address this merely systematizes the corruption.

  • Rob Crawford

    “But we know that F&F did not cause the crisis.”

    That’s the left’s line, because it protects them.

    What’s your excuse for buying it?

  • Wayne Lusvardi

    What this new book says has been said before. What makes it important is WHO is saying it: a business reporter for the liberal New York Times. And instead of invoking “greed” of banks, Wall Street and mortgage brokers as the cause it turns greed on its head and blames Congress, regulators, and the public sector.

    But why did the Bank Panic of 2008 occur? I have a hypothesis (or a conspiracy theory whichever you choose): the huge public pension funds were the ONLY market players with enough market power, political lobbying, and motive to influence the whole food chain of mortgage finance from Congress, to rating agencies like Standard and Poors, to the mortgage broker working in a one man loan shop.

    The reason: huge public pension funds were way underfunded and needed financial markets to close the gap. In other words politicians over committed public pensions in order to get elected and stay in power then speculated in financial markets on the assumption that markets always rise 8% per year and never suffer a recession.

    The story of the role of public pension funds in all this has not been told yet. But David Crane, former budget advisor to Arnold Schwarzenegger in California, has recently spilled the beans that the pension funds were the culprits.

    The real blockbuster book about the Bank Panic of 2008 is former FDIC Chairman William Isaac’s book titled Senseless Panic: How Washington Failed America with a forward by Paul Volcker. The book convincingly indicates that the mortgage crisis was manageable. So the crisis was a “panic” not a “meltdown.” In fact, the crisis may have been a way to cut off an even worse meltdown.

    Reading between the lines of Isaac’s book, it was Wall Street itself that pulled the plug on sub-prime loans and sliced and diced mortgage bonds. The panic was a revolt by Wall Street against bad banks, insurers, and politicians. Wall Street knew that “junk” loans had contaminated the world system of finance and put a stop to it with 200 phone calls to Tim Geitner at the onset of the crisis aptly timed right before national elections.

    For anyone interested go to William Isaac’s website and read the reviews of his book. It is also a blockbuster book but not given much attention.

  • John

    Congress as we speak is worried that as we wind down Fannie and Freddie the 30 year mortgage will go away. They of course are working on new legislation to replace F and F.

    If you understand investing you understand that longer duration on underlying financing and government guarantees can increase financial leverage. (Allows for a smaller payment to control an asset) Fannie and Freddie do both.

    You can also find Maxine Waters on YouTube bragging about 100% LTV financing because of Fannie and Freddie. (more leverage)

    Fannie and Freddie are massive enablers of financial leverage.

  • I agree it is a HUGE scandal, and I agree that it SHOULD bring down the Democrats. But I guess I can’t see how.

    I remember ads run in 2008 that showed that Barney Frank was in the middle of all of this. It’s not like it wasn’t known. And the problem with this story is that it’s hard to explain in sound bites. “Bush Lied!” is easy. “Republicans want to end Medicare!” is easy–whether or not they’re true. But how do you make this into a soundbite that people can understand? The truth is that so few people actually want to THINK about the issues that they won’t sit and listen to a long explanation of anything. And so until someone can explain this easily in 20 seconds, I’m not sure it will go anywhere, even though it should.

  • Rob H

    I’m not sure the data support F & F being the main drivers of the mortgage fraud. It was the securitizing of these mortgages in bundles that did the job. (they were sold to banks and others all over the world).
    Greed was the driver and it occurred from Congress to Wall Street to the individual. Take the home owners who mortgaged their homes to get into the market or bought “investments” paying 2-3 times going bond rates without wondering how this could occur without high risk.
    Somehow almost no one thought it bizarre that their home doubled in “value” in less than 4 years and worse, almost no one thought it wouldn’t continue.
    To quote an old saying, “we have seen the enemy and it is us”.

  • John


    That’s what F and F do. They securitize mortgages in bundles and then throw a government guarantee on top of them.

    The guarantee was implicit (understood to have federal backing). It is now explicit.

    Over 50% of the secondary market for CMOs is guaranteed by F and F. These days it’s over 90% as Ginnie Mae (another GSE) is taking over more of the slack.

  • Luke Lea

    The Monty Python version.

  • richard40

    I’ve know from the beginning that Fannie Mae, and the connunity redevelopment act, were prime causes of the housing crash, and that both those entities were mainly supported by dems. I agree this truthful narrative needs to get out, to counter dem propoganda that the housing crisis was a failure of capitalism and from insufficient regulation. In truth, the crisis was caused mainly by gov, with the prime causes being gov created entities, and gov mandates.

  • Rock Collier

    Democrats didn’t create credit default swaps. They didn’t create derivatives. They didn’t create synthetic CDOs. These are the financial weapons of mass destruction that nearly destroyed us. Democrats didn’t create no-doc loans and they didn’t force mortgage lenders to falsify mortgage documents and lie and cheat borrowers out of billions of dollars. The only thing that Democrats are guilty of, like Republicans, is turning a blind eye to what was going on when people were warning them about the impending doom. Bash Freddie and Fannie all you want, but the average middle class American wouldn’t have a home without them and because of that, we wouldn’t have had the economic growth over the decades without them.

    If you want to read a couple of good books regarding this topic, I suggest these…

    Read this one first so you get an idea about subprime lending market…–/dp/0805090460/ref=sr_1_1?s=books&ie=UTF8&qid=1307548517&sr=1-1

    Then read this one to get an overall, detailed explanation of what cause the collapse of our markets…

  • Happycrow

    @Rob H.

    No, not really. Investigations WERE held. Honest people DID try to protest (disgust over it was a huge factor in me quitting my job in corporate real-estate banking). F&F’s foot-soldiers among the ‘activits’ and political ‘roofs’ in Congress are the only reason it was able to happen.

  • Ken James

    It’s not really a story if no one tells the story and no one listens. Republicans can talk, talk, talk in their droll tones as they always do and no one will be listening. Sometimes the truth needs to be shouted and a fist pounded on the table a few times. And the tables that needs to be pounded are those located at the alphabet channels, and those commentators are the ones who need to be shouted at and shouted down when they try to negate or belittle the story. The GOP needs to stop being so damned meek and accommodating.

  • Mark A

    Fortunately for the Democrats, the Republicans are the Stupid Party.

  • JoeYnot

    #17 Wayne L hits the nail directly on the head: “What this new book says has been said before.What makes it important is WHO is saying it: a business reporter for the liberal New York Times.”

    I was a consultant, on and off, from 2000 – 2005 for Fannie (a little bit too, for Freddie). Based on the reviews I’ve read and Dr. Mead’s here, there’s nothing new in the major points, but everything in that finally they are being published in a mainstream way that will forced them to be paid attention to.

    What the contra-posters here don’t (or won’t) (or can’t) understand is that the epicenter of the housing collapse was F&F’s over-rating of mortgages because of the mandate from Congress for affordable housing. F&F provided the secondary market for mortgages, per their mandate, but that was a formality. F&F’s people were in the field, partnering with banks to make mortgages that the banks would turn around and immediately packages and sell to Fa or Fr. The banks had to make these loans or face holy hell from the regulators for not implementing the banks affordable housing requirements (I’m simplifying the process and terminology radically).

    The result was a huge over-evaluation of real estate — A BUBBLE — wherein the market value of housing was forced artificially high. All the evil comes from that. And the root of the evil was non-prime mortgages being re-classified into a prime category so F&F could buy the mortgages. This, in turn, pushed even higher risks into a lower risk category and finally non-mortgable property and purchasers into high-risk mortgage terrain.

    I’m looking forward to seeing if this book goes into American Community Funds, which was even worse, and Chuck Schumer’s inciting a panic on IndyMac, then forcing its sale to his contributors (A Goldman-Sachs offshoot, Soros, etc.), then repositioning it as a default mortgage buyer. THAT is the most disgusting story of all, also public info, also ignored.

  • Joseph Somsel

    My finance professor in my MBA program circa 1996 warned us that GSEs Fannie and Freddie empowered by CRA would bring big losses to the US taxpayers.

    Big surprise was it?

    As we’ve discussed on previous of Professor Mead’s blog posts, the American elites have really let Americans down and need to be replaced wholesale. Vote out imcumbents, abolish tenure for academics, pass “right to work” laws in all 50 states, hold the line on internet freedom, decentralize finance.

    All the above are much easier and neater than defenestration or decapitation if not quite as emotionally satisfying!

  • Jim

    This is not the story of greed. It is the story of hubris.

    Every time Progressives think they can distort markets to implement ‘social justice,’ it turns into a mess of gargantuan proportion.

    That they invariably use top-down bureaucracies instead of emergent markets is part of the problem, and reveals they know nothing at all of markets after all.

  • Naif Mabat

    “It was the securitizing of these mortgages in bundles that did the job.”

    If the mortgages underlying the MBSs had been sound, then securitizing and bundling them wouldn’t have suddenly made them unsound.

  • JoeYnot

    #24 Rock C: “Democrats didn’t create credit default swaps. They didn’t create derivatives. They didn’t create synthetic CDOs. These are the financial weapons of mass destruction that nearly destroyed us.”

    The reason these “weapons” “nearly (remains to be seen) destroyed us” is because they were built on a lie–that the mortgages that they were based on were legitimately rated. The problem is that they were not, and that was becuase the US Congress set up a mortgage regime that demanded such fake ratings be made in order to be executed.

    This is not to say that there wasn’t unnecessary risk, deceit, outright fraud, et al involved, but that the rotten edifice it was all built on was a real estate bubble caused by congressional fiat: to make mortgages that shouldn’t be made. All comes from that.

  • Naif Mabat

    Even if every word in this book is the whole truth and nothing but, it’s not a political game changer. It’s too intricate and took place over too long a period of time too long ago.

    Now, Barry and Michelle torturing puppies in an HD video posted to youtube… that would be a game changer.

  • Mary Malone

    NJ Tea Party Coalition is on it.

    We have investigated roots of the financial crisis and are educating legislators, the Governor, County Clerks and citizens on Systemic Mortgage Fraud.

    Gretchen’s columns have been a source for our work and we look forward to reading her book.

    We’d like to add another bad actor to the cast of characters in this morality play – Eric Holder

    Before joining Obama White House, Holder was a partner at Covington & Burling, the white shoe law firm that represented MERS. Holder’s firm wrote the legal opinion that justified MERS business model to the lending and title industries.

    MERS primed the MBS pump and:
    -Clouded title on 60 million homes
    – Defrauded investors
    – Deprived local governments of $2.4 Billion in land recording fees
    – Illegally seized 7 Million homes
    – Abbrogated 400 years of property law

    MERS was the energizer bunny for the control fraud.

    Check out our presentation on

  • According to Rock: “Democrats didn’t create credit default swaps. They didn’t create derivatives. They didn’t create synthetic CDOs. These are the financial weapons of mass destruction that nearly destroyed us. Democrats didn’t create no-doc loans and they didn’t force mortgage lenders to falsify mortgage documents and lie and cheat borrowers out of billions of dollars. The only thing that Democrats are guilty of, like Republicans, is turning a blind eye to what was going on when people were warning them about the impending doom.”

    What Democrats did was create the incentives for all this to happen. And in case you forget, mortgage lenders and banks are in business to make money. They were literally forced by congress to make loans to people who were greater credit risks. So they had to find a way to mitigate the risk, thus all these funky financial instruments. But remember this as well, all the credit rating agencies who are supposed to warn us about the risk of debt obligations said everything was great, until it wasn’t.

    Anyone who claims moral equivalence between the parties in this debacle simply refuses to see the truth. I have plenty of problems with the Republican establishment, but what is at fault, and continues to be, is the liberal-progressive mindset, worldview and policies. As Thomas Sowell has written, the “unconstrained vision” of such people contributed untold misery to untold millions in the 20th Century and continues in this one. This is only their latest “unintended consequence.”

  • Engineer

    I fall in with Mr. Dellas and company. Not being in finance I read a lot in 2009 (John B. Taylor and Nichole Gerlinas were on topic) and it seemed to me that the root of the problem was junking prudent lending standards in the name of affirmative action home ownership. The GOP wasn’t faultless in recklessly promoting home ownership, but when the GOP congress tried to rein in the bottomless lending (~2005/2006), the Senate Dem’s blocked the reform legislation with a filibuster. That might have well been too little, too late. The financial “engineering” of derivative investment vehicles had a different flaw insofar as they were over-leveraged to what was, in hindsight, foolhardy levels.

    Overall, I think Dr. Mead lays out a reasonable roadmap for interpreting the crisis. Morgenson’s book is on my shopping list, but I haven’t had the opportunity to buy it yet.

  • Orson

    Thrasymachus objects: “First, this tale is complicated, and requires a great deal of explanation that independent voters are unlikely to attend to. Second and more importantly, *even if every word of it is true*, this sounds like the kind of insane Tea Party conspiracy theory that the broader electorate has been resolutely dismissing for years”

    Perhaps. Or is the ‘wishful thinking’ issue more on your side?

    Consider that the Happy Days of the 90s when a presidential scandal about lying got converted into being all about sex – despite the absence of ANY sex in Clinton’s impeachment – is long gone. With sky-high unemployment rates, people have time to reflect, something they didn’t have back then. In addition, with so much investment blood on the floor – including my own- the people are motiviated to “take back America,” just as the Tea Part slogan goes. Despite these dithering elites attempt to smear the Tea Party movement, most people have positive view of it.

    In other words, your objection is dated by changing events.

    I’m voting for Palin because her judgement has in fact been unfailing (and I was for her before she was greenlighted as Puppie Veep canididate), and because it [deeply annoys] off those who need dissing in America – our self-righteous political class. This thesis, first outlined by Thomas Sowell, needs airing and debate. Making the campaign killer in its effectiveness is now the question – just as Mead says.

  • Luke Lea

    Republicans can’t get off scot-free. It happened on their watch.

  • teapartydoc

    1.The bubble spread overseas for the reasons given in the post: the derivatives were packaged for international trade. This prodded foreign banks to imitate what was happening in the US, because our perfidy was made to look like safe activity.CDS’s were traded overseas and foreign traders were able to profit from them early on.
    2.Democrats didn’t have to create the mechanisms for repackaging bad mortgages, all they had to do was to create an environment where they would be the next logical step in spreading out risk by forcing banks into risky loan situations.
    3. If this was a Republican-made crisis, we would have already been seeing ads on TV for the “shovel-ready” documentaries and historical fiction movies about it. These aren’t being made because they would draw attention to the real murderers of our economy.
    4.I have trouble understanding how people so attuned to not wanting to upset environmental balances and so hung up on sustainability can be so cavalier about balancing the books and economic and governmental sustainability.

  • Wayne Lusvardi

    Reply to John Ynot;
    Certainly rating firms were a “cause” of the crisis but was it the base cause? As best as I have been able to track it down, it was the underfunded public pension funds that had enough market power to affect the entire food chain of the housing finance system from CRA legislation, bond rating firms, etc. The whole intent was to create a bubble to bail the pension funds out of a jam.

    BTW this is what happened with the California Energy Crisis of 2001. Government intentionally created a pricing fever – a bubble – to pay off $42 billion in stranded debts on old polluting power plants that were forced to be shut down by the EPA. Then it was all blamed on Enron. So California is no stranger to manufacturing bubbles.

  • I haven’t even hard of the book, but it seems to mesh with other facts.

    A September 1999 article in that right-wing conservative mouthpiece, the New York Times, said …

    “Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

    “In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates — anywhere from three to four percentage points higher than conventional loans.

    “In moving, even tentatively, into this new area of lending, FANNIE MAE IS TAKING ON SIGNIFICANTLY MORE RISK, which may not pose any difficulties during flush economic times. But the government-subsidized corporation MAY RUN INTO TROUBLE IN AN ECONOMIC DOWNTURN, PROMPTING A GOVERNMENT RESCUE similar to that of the savings and loan industry in the 1980’s.”

    And it only spiraled ever downward toward taxpayer-financed bankruptcy over the coming decade.

    You can read more about it from a prior blog post.

    Fannie, Freddie, and You as the Secret Santa

  • JoeYnot

    #40 Wayne L: It’s not the rating firms, it’s the ratings by F&F’s underwriters, working with the banks making the original mortgages to ensure that they could be immediately sold to F&F for to be packaged into investment instruments. Banks and other financial firms which in turn bought these securities did so under the misapprehension that the mortgages in a security were still rated according to the old standards, which they were not. Hence, when these securities were insured by others, the premiums paid to them by the security holders were to low, and so when the crash came, the insurers were undercapitalized. They thought they were getting “free money,” since the type of mortgages in the security were the type that historically had an extremely low default rate, while the type of mortgages they really were had a higher default rate. Furthermore, the distortions all of this wrought in the market lead to a much bigger bubble and greatly exacerbated the default rate. For what it’s worth, I think what’s ulitmately at the bottom of the Fed’s incresingly worrisome money printing is to inflate the country out of its mortgage debt.

    What you said at the end about CA and Enron is extremely interesting to me. Do you have any links?

  • lroy

    I picked this book up at the library; and read enough that day to have my stomach turn; as the text I was staring at revealed what I had seen and experienced to be true. The manipulation of the housing and lending by lobby and by congress as revealed here is shattering; and the depth of it is defeating. I don;t think we have the champions; or the time to indict all that are responsible here, as it was massive and corrupt. So many of us lost life savings and retirements, as we believed our real estate or investments were secure. Dodd survives, with a cushy job as does B Frank, Maxine Watters, Rangel and so many others. Look at them. Ask why they are/were in such positions of power? It is still happening folks, the expansion of government handouts to the entitled non-working rabble rousers at the expense of the stooges who continue to work and earn and pay tax and hope for a better day. There will be a reckoning; there will be a day when they will face a judgement.

  • LHF

    Jim Johnson is not a household name, but it sure should be. This book is a fascinating read – describing in detail the incredible hypocrasy of the Democratic establishment. While using its usual mantra of helping the poor with government programs as cover, members enriched themselves to an extraordinary degree.

  • sub

    Frank, Waters, Rangel, Dodd should rot in [a very unpleasant long term facility] for what they did here. This wouldn’t pass muster in Nigeria. I agree, there should be prison sentences, public censure, a long and factual history that we, as a nation, will hopefully never forget and never repeat.

  • Andrew P

    The bubbles were baked into the cake by the steady decline of long term bond rates from the 1981 peak through 3 decades. This made huge profits available from leveraging up the US economy and cleverly skimming off the cream, and it was inevitable that someone would take advantage of it. It just so happened that Democratic crooks were well positioned and skillful enough to game the system for their own benefit, but if they hadn’t done so, some other group of crooks would have filled the vacuum. The previous episodes of the S&L crisis and the dot com bubble are the perfect examples of what I am talking about. When there is a way to game the system to tap free cash flow, someone will do it. The Democrats profited handsomely (and so did a lot of Republicans), and they may have to pay a price for it, but so what?

  • Anthony

    Fannie Mae had a dominant position in a critical market! It had a stranglehold over the market for conforming mortgages (underwriting standards Fannie demanded for guarantee). Additionally, Fannie had critics on both left and right (not doing enough to help poor people buy homes; Fannie had no place in the private housing market).

    Basically, what got Fannie Mae in trouble was that after its profits grew exponentially (Fannie’s market value went from 10.5 billion to over 70 billion) Fannie became determined to protect both its special priviledges and its bottom line, therein laid Jim Johnson inside contribution.

    In 1992, congress gave Fannie a clear definition to help lower income Americans buy homes. At the same time Jim Johnson was Fannie’s new CEO replacing David Maxwell. As a long time political insider, Johnson leveraged congress, lobbyists, housing markets, etc. to acquire wealth/influence to long term detriment of U.S. housing market. WRM’s assessment is on target; Jim Johnson brought political operative skills as well as insider connections to Fannie. Nevertheless, although primarily democrats, under Jim Johnson Fannie utilized key republicans also. All in all, I don’t know if republican hands are clean enough to use Fannie housing abuse as cudgel to batter democrats in 2012.

    Under Jim Johnson, Fannie Mae lost sight of David maxwell’s foremost consideration given Fannie’s purpose: to supply liquidity when the housing market needed it sans ever increasing profits.

  • gia

    JoeYnot: The pressure on banks to offload these bad mortgages was extreme. I recall that Andrew Cuomo in the late 1990s, was Secretary of HEW. At a news conference after the CRA was revitalized, a reporter asked him what the government would do if banks refused to make these subprime mortgages. His stunning reply was, “I will put them in jail!”

  • Adam Washington

    Professor Mead, you refer to the ratings agencies as “clueless”; I think that is too generous. I believe they were willing — nay, eager — aiders and abettors of Wall Street crimes, collecting handsome fees for their role, knowing they would be booted from the gravy train if they did not continue the AAA ratings.

  • “lroy”,

    You say that “I don’t think we have the champions or the time to indict all that are responsible here, as it was massive and corrupt.” Oh, but we do.

    What we have lacked is the mechanism to begin using the Constitution’s warranty so aptly laid out in the Federalist Papers and so quickly circumvented by political careerists.

    If you think this financial fraud was ‘massive and corrupt’, try to put a total dollar amount on the crime of counterfeiting, enabled by Congress, since 1913 and every day thereafter. That body, each member of which takes an oath to obey the Supreme Law, has been collectively violating it serially, to the tune of several hundred trillion dollars thus far.

    The crime families operating collectively as ‘the Federal Reserve’ are doing nothing more or less than counterfeiting, according to Art I, Sec 8 of the US Constitution — causing every State legislature to collude in the racket, according to Art I, Sec 10.

    For a century so far; now THAT is mega-crime.

    My book “This Bloodless Liberty” (available at Amazon and B&N) lays out the Madisonian rationale for the end of electoral politics and the beginning of informed popular sovereignty using the courts of the sovereign States. The AmericaAgain! Indictment Engine(TM) would be no more than occasional jury duty (actually just signing on as a co-plaintiff in criminal actions against corrupt members of Congress); the sovereign duty of every American anyway.

    Criminals in Congress enable all the rest; they are the ones, too, who give the IRS Commissioner his annual goals and operating parameters. According to Article I Section 8, we granted a mere 17 powers to Congress in our name; the rest we retained (we and our States) in perpetuity.

    It’s time to begin exercising some of them, and it takes nothing like a majority to do so in the criminal courts of the sovereign States.

    (I consciously capitalize ‘State’ and never capitalize ‘federal’, to help begin restoring the creator/creature distinction.)

  • Jim Austin

    While the policy of lowering mortgage requirements so low income families in inner cities could buy homes may have been bad policy, it became a lot worse when banks expanded that to middle income families in suburbs.
    Look at the homes that are in foreclosure now. They’re not just in the poor neighborhoods. These are the homes that are next to you and me.
    And the banks weren’t forced into lowering requirements for the middle income people. They WANTED to do it!
    The problem got worse when these bad mortgages were bundled with other assets and sold to other financial institutions that didn’t know what they were buying.

    Again, lowering mortgage requirements to inner city families may have been bad policy, but it got a lot worse when the banks expanded that policy to middle income families, and then the problem got severe when these junk investments were sold elsewhere.

    What gets me about the tea party is that while their hearts may be in the right place, they don’t make a coherent argument. They’re against financial regulations, yet they’re against Wall Street abuses and they believe banks shouldn’t be too big to fail.

  • JRD

    Sounds exactly like Peter Schweizer’s “Architects of Ruin” which was released in 2009.

  • Jim Austin

    Reply to Wayne Lusvardi:

    Concerning the California energy crisis, there were several factors contributing to it. First, no new power plants were built during the previous 20 years in the state, due mainly to NIMBY syndrome, during the same time of significant population growth.

    Secondly, California was (and still is) a state that relies on buying power from surrounding states that had excess energy capacity. However, those states were growing in population and had less power to export.

    Another factor was Governor Davis’ incompetence. A year before the energy crisis happened, energy experts at the Cal-ISO (non profit organization in charged of managing the statewide grid and a participant in the deregulation of energy) noticed market signals indicating that companies such as Enron were testing the newly deregulated electrical market for ways for gaming purposes. The experts also saw the real possibility that there could be a lack of power available the following year.
    These warned Davis and those in his administration to buy long term low cost electricity contracts at that time. That advice was ignored until the crisis happened. By that time, with their backs against the wall, the Davis administration bought power at significantly higher prices.

    And then, there was the market manipulation by Enron and other companies. That is a huge subject by itself, and I suggest one to do simple google search if you more information.

    The point to all of this, there were a lot more factors involved besides the mothballing of aging power plants that contributed to the California energy crisis.

  • BeReal

    Life is easy. When a theft is commited it is easy to spot the thief and the victim. The thief is the one holding the sack of money and the victim is the one left broke, holding the bag!! Home owner are broke, bankcrupt or under water. Wall Street banker are flush with cash and sitting on piles of dough. Sell fantacy all you want, we can all see the reality..

  • JamesOfConnecticut

    There is simply no excuse for the federal government purchasing or guaranteeing any mortgage that a prudent individual such as you or I would not willingly invest in. The seeds of destruction were sown when we somehow allowed government to become by far the biggest player in the economy, a player that also has the power to pick winners and losers. Let’s work our way back to a free market approach, where the greedy must take responsibility for their own actions, and must play the game with their own money (as opposed to yours and mine).

  • Steve

    Disappointed to see the usually discerning Mead buy into this exaggeration and the old myths about poor people driving the real estate bubble. I’ve worked with enough of the quantative data to know it isn’t true. Just for thought, here a couple of simple points that make that clear:

    – Epicenters of the housing bubble have been in Florida, Phoenix, Las Vegas, and parts of California. These are not majority-minority areas.

    – Compare the impact of a bad loan for a 750,000 McMansion in Vegas with a 250,000 low income owner in Watts. It takes the default of 3 people in Watts to cause the same damage to balance sheets as one middle class default.

    The share of low income dubious lending and the size of the loans involved is just too small for it to be the real driver of the

    Its a simple matematical fact that the bulk of the housing bubble was caused by middle and upper-middle class people buying more house than they could afford, and pointing the finger at ACORN misses the entire structural dynamic.

    There may have been dubious dealings among these people, but they are just a rounding error in the overall housing crisis.

  • Jana Bell

    I totally understand the drive to blame the “democrat establishment” for this entire mess. The evidence against the republican establishment is just as overwhelming, and occasionally it’s the exact same evidence – revealing that the political leadership of the US is far less divided than we think, when it comes to giving out favors to huge corporate interests.

    Since hyper-partisan writers and public figures cannot accept the notion that their preferred party has any culpability for any problems whatsoever, it’s natural that you would bend over backward to blame the opposing party, even if it leads you to such ludicrous depths as saying that, ultimately, it was ACORN and La Raza (and Bill Clinton) that are to blame for this disaster.

    But of course “Reckless Endangerment” says no such thing, and you have to have a lot of guts even to imagine that it says these things. Yes, government intervention played a part in the disaster, but government intervention alone rarely makes such a big mess; the mess comes when people find the loopholes and perverse incentives that the government accidentally put in place. The government (led by flag wavers on the right and on the left, beginning with Reagan and Bush and continuing right through the present day) did not force anyone to make huge profits off of subprime mortgages; they did not force banks to leverage themselves 1,000 to one. The government–as usual, acting from high-minded motives but without the skill necessary for proper execution– set up a poorly thought-out system that was ripe for exploitation. (Step 2 after exploiting these loopholes is generally to ensure that you don’t have to pay taxes on what you earned through the exploitation.)

    While people like Mr. Mead continue living in a fantasy world in which the greed of poor people is the root cause of our problems, the rest of us will continue trying to find productive solutions for this pressing issue.

  • Loathes is not a strong enough word.

    If it were possible, the GOP base would literally tar, feather and hang the striped suited thieves that populate Wall Street.

    Wall Street destroyed the personal net wealth of 1/2 the American population when they destroyed the housing market.

    There is no forgiveness the the corporate looting done by Wall Street…….. only revenge.

  • Domino Dem

    It was decades of Republican deregulation for Wall Street that led the US economy to crash in 2008, not Democrats! The Democratic Party looked out for the welfare of the poor and the middle class families, ensuring that they can get housing at affordable prices. Why are you people are so against that?! What’s wrong with you?! Rethuglicans, Wall Street, and powerful corporations conspired to crash the economy and deprived Americans of their hard-earned money. Bush tax cuts made it all worse! We had a surplus by 2001 but Bush sunk it all with his wars! Morgenson and Rosner are probably paid for by GOP to write this book to smear the Democrats and President Obama ahead of the election.

    Decades of Republican deregulation of Wall Street caused the crash in 2008!

  • bruce

    time to heat up the tar and break out the feathers.

  • A. Hick

    If the American people can be duped by right wing hucksters into believing that the Democratic Party is solely responsible for the financial crash that has lead to the current masked depression, and use that as an excuse to vote the GOP back into total power, they deserve the damnation they will get.

    One person laughing at all the possibilities of what would be the biggest political lie since Joseph Goebbels is no doubt Phil Gramm, corrupt right wing Republican, former Senator from Texas, author of the Financial Services “Modernization” Act of 1999 (Gramm Leach Bliley Act), and the Commodity Futures “Modernization” Act of 2000. One thing missing from this “tea party” rewrite of history is how the Democratic Party is actually complicit in all this. Bill Clinton signed those laws, prodded by “insiders” from his administration like Robert Rubin of Goldman Sachs, and public lobbying from right wing Republican fed chairman, Alan Greenspan.

    The Republicans are getting ready to nominate one of the 1980s and 1990s most successful corporate raiders as their Presidential choice. The so called “tea party” will fall in line and embrace him, and their great con will be underway.


    Help hose down PETA! Join the “Poop on America 2012” campaign today!

  • gene Erbstoesser

    Mr. Mead is spot on here. This song needs to be sung over and over…..not just to win a single election but so that the populace really understands who committed the crime of the century.

    BTW – not sure if Morgenstern included it in her book but for a smoking gun check out the Sept. 1999 NY Times article reporting that in the waning days of the Clinton administration the underwriting criteria were weakened to accommodate previously uncreditworthy borrowers – the article presciently observes that the viability in a downturn of such a decision was “uncertain”. I’l say.

  • JLK

    Love the article. It is about time someone called out the govt and their chief enablers…Barney and Chris (a friend of Angelo’s BTW)for their integral part in this mess.

    As originally conceived, Fannie was another of FDR’s Hail Marys but also included racial redlining because it was Conventional Wisdom in the 1930’s that Black people were not responsible or smart enough to repay or even understand the 30 year mortgage. So much for Liberal icons.

    But the original Fannie also included 20% down requirements and all those other “Medieval” requirements that would indicate sound judgment and ability to pay on the part of the borrower.

    Fast forward to the late 1990’s and you have the start of criminalization of F & F. Johnson and Frank Raines were in it for one thing…the money. Barney and Chris were in it for one thing: political power (well maybe on the part of Dodd…both). They knew as the Trial Lawyers know that if you create a specious and simplified story line that would APPEAR to be speaking from the moral high ground you can get away with murder.

    And get away they did. With the “implied” backing of the US govt F & F were able to borrow at low rates and build portfolios of such an incomprehensible vastness that the public was unable to understand the size of the bomb ticking away under their feet.

    And anyone that tries to imply that F & F were not at the heart of the “Crisis” is either an Econ illiterate or is willfully ignorant. There is NO WAY the mortgage industry could have created this mess without the knowledge that huge percentages of SIV tranches could be either sold to, or guaranteed by F & F.

    When CMO’s were invented by Salomon Bros in the early 80’s the industry was small enough to allow a certain number of elite players to make personal fortunes without damaging the economy. But then, by the early-mid 2000’s, every Tom Dick and Harry mortgage broker or small banker could “wet their beaks” in one the greatest fraudulent schemes in American History.

    These smaller players who were so instrumental in taking the whole house-of-cards down could never have entered the game without the backing of F & F.

    Lastly Morgenson is not exactly a knuckle-dragging Neo Con. That she happens to be smart and Liberal should give her credibility with the Left, but considering that she has attacked some of their more precious shibboleths it is probably too much to hope for.

  • Huntigula

    So, unregulated CDO swaps and derivatives had nothing to do with the crisis?

    Fannie and Freddie played a big part, but not the main part, and they certainly were not the cause. Nice narrative for the right, but simply untrue.

  • Uh Oh, but Rush is now talking about the book. The cat is now officially out of the bag. We’ll see what the Republican presidential field does with it, and how assiduously the mainstream media ignores it.

  • Greg

    Sounds like a concocted bunch of lies and half truths from the neo-Nazi right. don’t waste your time with this tripe. It doesnt have legs.

  • Carol Webb

    The bigger problem here is the big banks and the big financiers and hedge fund managers who own both sides of the aisle. We are functioning under an oligarchy. We must face the fact and we the people have to elect people who will do things like break up these monsters. If we get enough new people in the Congress and they work fast, it could happen.

  • Doug Rogalla

    This is all really old information. Peter Dellas says he wrote much of this four years ago. I remember reading about this along time ago. Why would anyone think that this would get any traction in the media now? I am not sure how the DEMs get away with creating problems then blaming them on others.

  • vinnie

    from what i’ve read, here and otherwise, is that it’s all in the eyes of the beholder. both parties, greed, and lax regulation are to blame. i’m not a financial guy, but i was on the ground. i bought my first house for $95K and sold it a year later for $160K. that kind of rampant growth is insane, and was being repeated all around the country. putting the brakes on such rampant market growth, through regulatory or financial pressures, might have decelerated the growth and made it more sustainable.

    getting us out of this mess won’t take tax breaks; it’ll take good ol’ fashioned investment in our country’s infrastructure and future. note i said INVESTMENT – you anti-stimulus people can just hold your breath. investment (optimally) results in a payoff, while stimulus is a shot in the dark. infrastructure banks will employ the middle class and get them spending again. it’s been said that some 70% of america’s economy is based on concumption by the middle class – let’s get them consuming again.

  • John Selig

    Nadine, you put too much stock in what the mainstream media can do. Fox News can easily promote this story about Fannie Mae’s role in the financial crisis. Fox News supposedly has the highest viewership ratings in the country. Hardcore liberals ignore Fox News, but many independent voters do not. Moreover, the GOP presidential candidate can use this as a major debating point against Obama — if he or she only will.

  • cc88

    I’ll believe this will be a game changer against democrats when the GOP steps up and abolishes Fan and Fred, as well as all federal underwriting of mortgages. Unlike Mediscare, Americans DO understand that housing is affordable when it affordable, and not simply inflated in price with cheap mortgages.

    In the 70’s,federal rules abolished “net gaming”, in which housing prices were deliberately inflated during the purchase contract phase, in order to max out federally backed loans. The spirit of this protection was effectively evaded when the “market” for housing skyrocketed over the last 10 yrs, and ordinary due diligence became a dead letter (how did so many illegal aliens qualify, when numerous localities require citizens to produce a driver’s license at closing?–personal experience in NY)

    Funny, you will read many articles now about aberrations in particular housing markets, with their particular economic issues. You will find much solicitude for the Case-Schiller index by liberals, but you will have found no similar probity in the last 15 years, when particular localities got mortgage largesse while others were adept at saying “no”. Dollars to donuts, the biggest trough-holders were likely the most politically connected to DC. The trail leads through title companies,lawyer lobbyists for arcane closing documents to inflate fees,developers who gobble up open land to build particle board mcmansions, and local pols who accomodate them every step of the way with select regulations and endless piety over “ratables” and new school construction.

    I am disgusted to be an American. But don’t get me wrong. Like most of us, I just looked the other way. If you can’t afford The American Dream, it’s just your own damn fault.

  • Westie

    Peter Wallison @ AEI has done tremendous work regarding this financial disaster. He was on the Financial Crisis Inquiry Commission and dissented from the majority opinion.
    “Dissent from the Majority Report of the Financial Crisis Inquiry Commission’, By Peter J. Wallison, AEI Online, (January 26, 2011)

  • Frank Castle


    Jim Johnson (D) is one thing.

    Why isn’t F.D. Raines (D), Slick Willie’s pal, in the joint?

    And his deputy, Jamie Gorelick (D), [Secretary Cllinton’s] pal?

    About dang time.

  • J R Williamson

    I was fully expecting someone to bring up the “Fannie lost share” shibboleth, and it’s no surprise that it came up first. To this day, Fannie and Freddie set the lending standards for the entire mortgage industry. As anyone in the business knows, for a loan to be sold on the secondary market, it has to meet Fannie Mae standards, whether or not it is sold through Fannie Mae. That they had a lower percentage share during the housing boom is completely irrelevant. Yes, the big lenders put pressure on F & F, but it has become abundantly clear that the political hacks running the GSEs either had no backbone or were just adding up their multi-million dollar bonuses. “Sub-prime” originally meant that the loan did not meet Fannie Mae standards, but by 2006, the term had become, well, meaningless.

    The idea that they were somehow “playing catch up” by drastically lowering their lending standards, 26 times between 1996 and 2006, is just spin.

  • LHF

    A former Fannie Mae employee has a blog post attacking Morgenson and defending Jim Johnson. I think the book answers most of the charges, but it might be worth Mead taking a look:

  • Donald Joy

    Peter Schweizer published a similar book a couple of years ago titled “Architects of Ruin.”

    Egalitarian, race-hustling do-gooders are at the root of all of this. It all goes back, really, to LBJ’s Great Society, and to Carter’s and Clinton’s enforcement of the Community Reinvestment Act, not to mention endless similar wealth redistribution social engineering scams.

    Barack Obama was ACORN’s lawyer back in 1995 and he sued CITIBank on behalf of ACORN, forcing them to make mortgage loans to [unqualified buyers] in the name of “fairness” and “equal opportunity” and of course, “affordable housing.”

    Prudent, sane, common-sense lending standards (vilified as “racist” and “discriminatory”) were eventually destroyed in the name of affirmative-action shakedown schemes.

    Big government do-gooders assured banks they would be protected from all the excessive risk of these horrible financial practices because, after all, entities such as FNMA/FDMC and the Federal Reserve, FHA, OFHEO, HUD, and so on existed mainly to have the taxpayers basically wind up holding the bag–the banks were forced to make horrible loans, but the GSEs and myriad federal programs back-stopped and underwrote it all.

    Once lending standards were abandoned, no wonder that everyone and their brother got in on the frenzy. Greed played a role, yes, and CDOs/derivatives were merely creative spin-offs as means of mitigating, and profiting from, all of the risk, chicanery, and coercive egalitarianism enforced by the do-gooders. Wall Street only responded to the fact that the democrats basically made affirmative action the only game in town, by the armed force of law, and an endless parade of dystopian mal-incentives to distort values and falsify ratings.

    The GOP has had at least 2 1/2 years to explain all of this to people. They haven’t. McCain could have explained it in 2008. He didn’t. There are many reasons for this, among which are that McCain is too stupid and politically-correct to explain it, and that the GOP also seeks to benefit (as G.W. Bush did) from promoting “equal opportunity” scams, affirmative action, “fairness,” and “affordable housing.” It all sounds so…so…”socially just”–yeah, that’s the ticket! Social justice! BARF

    Only when the word “discrimination” returns again to its rightful meaning will our Western Civilization and economy see the corresponding restoration of REAL sobriety and values.

  • Mercer

    There is a big problem with trying yo blame the housing bubble on the Dems. It occurred when the GOP controlled Congress and the White House. In a very long post Mead does not say what the GOP was doing about housing during the bubble when they controlled the government. To fill in the gap here is some words from speeches Bush made during 2002:

    “The problem is we have what we call a homeownership gap in America. Three-quarters of Anglos own their homes, and yet less than 50 percent of African Americans and Hispanics own homes. … So I’ve set this goal for the country. We want 5.5 million more homeowners by 2010—million more minority homeowners by 2010. (Applause.) … ”

    “One of the programs is designed to help deserving families who have bad credit histories to qualify for homeownership loans.”

    Here is one of the programs the GOP Congress passed and Bush signed into law in 2003. It was a program for the federal government to help people, who didn’t have the money for a down payment, buy a home by giving them money from the taxpayer.

    Government support for housing has been popular with both parties for decades.

  • Donald Joy

    Moral hazard means unless money/property was actually earned by whoever has control over its disposal, there is heightened likelihood of fraud, waste, dereliction, neglect, and abuse.

    The word “poor” used to mean, chiefly, “inferior.”

    Nowadays, the Marxists have succeeded in converting the meanings of words into their opposite, a la Orwell’s Animal Farm. “Poor” now means, instead of a condition resulting mainly from inferior conduct, a condition of moral superiority, even quasi-royalty, by virtue of being perceived as invariably an innocent victim of something or other. And politicians exploit such sentiment because universal suffrage guarantees that the lowest common denominator determines the outcome of elections.

    Even after the collapse of the housing bubble and economy, democrats in the senate are still screaming that a 20% down payment in order to receive a mortgage is “unreasonable.” !

  • mark

    wow. good post donald joy. I think I enjoyed your post better than the article. The cycle of BS social engineering is now so developed that it now has actual ramifications like the current downtrend we’re in. All of this makes me think of Global Warming and the derivatives markets they want to create and money being thrown around that load of BS social engineering. thanks liberals, commies, socialists….I’ll take my individual freedom please…you can have your terrible ideas and social engineering in yours.

  • T-Man

    This has been clear for a long while. The single best chance to have exposed it was lost when GWB decided to bail out F&F instead of letting them default. This IMO was GWB’s single greatest failing, more so than Iraq or the prescription drugs entitlement. He should have protected the taxpayer and made clear that he wanted to clean the mess up in 2005 but the Democrats wanted to keep their gravy train. Now it is probably too late to expose the Democrats role in F&F.

  • Maria

    Personally, I believe Obama hasn’t a prayer of being re-elected. His ever-present image on TV, his constant lectures, his verbose and haughty speeches – the whole WORLD is weary of this clown. Maybe if anything – ONE THING – he has done actually worked, things would be different. Sure – Bin Ladin was killed – but no one believes Obama actually had anything to do with it. He’s arrogant. His wife wants to tell us how to live. What a bunch of maroons the Obamas are.

  • Tom E

    How can Republicans, who fall all over themselves to help Wall Street banks rip-off Americans have ANY credibility on this issue?

  • WM

    Fannie and Freddie are government-sponsored enterprises, not Wall Street. Wall Street is private sector.

    Any Republican candidate caught grandstanding against Wall Street will be primaried. There are almost no Rooseveltians left in the conservative movement.

  • richln

    the republicans are going to be so bummed when obama wins re-election, which he will; why? because the obama political machinery will work the same miracle they did in 2008, i.e., they will succeed in persuading the people of color, the poor & the young to turn out to vote; those 3 demographics, or combination thereof, represent 75% of Americans; & the obama machinery will do it smartly, targeting the states they need with the most electoral votes

  • JimBeam

    @Mercer: Truth is one thing, politics is another.

    The “Big Lie” works and it works well. It doesn’t matter that the Republicans of 2004 were in on it as long as the Republicans of 2012 can convince the people that they weren’t.

    You can post all the links with GWB bragging about how many poor people are now owning their home, but it won’t matter. The Republicans have both a story and a scapegoat and that’s all they need.

  • Luke Lea

    richlin: “the people of color, the poor & the young to turn out to vote; those 3 demographics, or combination thereof, represent 75% of Americans;”

    We’ve reached a new watershed. America’s working class — that 80% of the workforce which the Bureau of Labor classifies as “non-supervisory hourly wage workers,” is now classified as “poor.”

  • Luke Lea

    There have been few heroes in this whole sorry saga and most of them have been female: Brooksly Born, Sheila Bair, Elizabeth Warren, Sherron Watkins, Gretchen Morgenson . . .

  • Sandra Bartolin

    The Tea Party is as crooked as any other politcal party, because they are a political party. Look who their leader is!

  • Polly

    Tom, Jim,

    Try checking what the Repubs were trying to do and what the Dems were refusing to do, the re-state that it’s really the Repubs’ fault:

    Unless, of course, you can’t handle the truth.

  • Polly

    Good gracious, Sandra, please turn the channel from MSNBC for a minute, maybe try Fox News.

    I’ve been to TEA Party rallies. The TEA Party is NOT a “political party” but a coming-together of ordinary Americans who don’t embrace Leftist policies. People who think those policies do not lead to a successful country. People who are being proved right by your good friend, Obama.

    And we have no leader, only people who agree with us AND are in the news. Makes it hard to organize but easier to remain pure.

  • David

    I read Reckless Endangerment and, frankly, it does sicken you. It is well documented and consistent with most of the other literature. So, I believe it is factually correct.

    It is, to me, a perfect example of how basically good people become corrupted. Yes, the thoughts of allowing the lower middle class access to loans is a good one. But, as the program got morphed over time, so did the incentives. Everyone became corrupted. Afterall, if it was for a good cause, a little corruption could be tolerated. Unfortunately, all that matter by the end was corruption.

  • wew49

    Run hard on this boys! The GOP is a dying breed unless they can attract minorities in the future. May I get the gun for you to shoot yourself in the foot?

    It is firmly engrained in the public’s mind that the Banksters gambling & Bush’s incompetence caused the crash, not the Dems. The prez just hired the first Latina Campaign Director. If she does her job, you are so screwed!

  • Odd but I have a new blog up at http://FinalRacKoonsAgainBlog.blogtownhall.comon this very subject. And Rush today,even mentioned a new book dealing with the author’s charges. When one sees a Prez actually destroying a legal entity in Boeing, the Coal Industry, our entire Domestic Energy system whereby we could have energy independence,and the horrors of Obamacare finally waking up the public to its socialist tendency to destroying free enterprise, one is not stunned by this person’s charges. After all, some have already mentioned in other media outlets that Fannie and Freddie was a collusion between liberal flacks like Frank Dodd with their corporate leftist cronies to kill the housing industry too. As the Dow crashes and this Prez tells us, ‘forget the Dow’ when over 51% of Americans invest, we know we are not on solid ground. This team of socialists in 2012, must be defeated. Not only in the WH,the Congress but in the varied state legislatures who think that tax and spend is the right policy for America while capitalism fades away.

  • Joe Bill

    Always remember, Bill Clinton signed it into law, he could have vetoed it………if you think this was bad wait for the results from obamacare….follow the money. Now Hillary wants to head the world bank. we’re screwed.

  • John Minehan

    Well, in practice, the story is somewhat more complex.

    The Carter Era CRA allowed creditworthy people to borrow at commercially reasonable rates in “Redlined” (i.e., majority Black or Hispanic) areas. It made a lot of sense.

    Under Clinton (and Bush 43) CRA became a way to get clients like the Investment Banks paid with things like securitized mortgages. No real issue with this part of the book’s thesis.

    In practice, a lot more NINJA loans are performing than prime loans. Since the derivative instruments are valued by an algorythm until they pay off, this fact alone created huge problems with the derivative markets since iot made the value of these instruments not “0,” but the more troubling “Undefined.”

    There are positive reasons for why sub-prime mortages are doing better than predicted: 1) a fair number of people who took them are VERY committed to re-establishing credit and are selling blood to make payments; or 2) people were not prime credit risks because of one or more crisis events (divorce, major illness) and their situation naturally improved.

    However, if you talk to real estate lawyers, they will tell you a lot of the real, bare NINJA loans were: 1) people in the underground economy who decided not to say they were “waste-management consultants;” or 2) they were “strawman” purchases for over-seas and other investors who wanted to keep a low profile. No surprise that these had a better than expected return.

    If the banks had been allowed to fail; if there had been a return to a divison between investment and commercial banking; if we returned to a banking model of smaller institutions with more local knowledge, as in Canada, I think we would be in better stead.

    I think one faction of the schismatic Republican Party will go in that direction after the Second Era of Good Feelings i think will follow the realization that the Democrats are no longer a national party.

  • The basic premise of this blog is wrong. The Democratic Party never included Wall Streeters in it’s ranks. I don’t know who they mean by the “elite liberals”, but bond traders and Wall Street CEOs have never been a member of this designation in my view. And yes, our Democrat politicians have also not stood up for the people, but it has nothing to do with the Democratic ideology, but with a system that almost requires pandering to the super-rich. It costs $millions to get elected. All politicians, especially at a federal level, face an inherant ethical dimemna. Until we have public financing of campaigns, until politicians are no longer dependant on corporate doners, we can’t expect them to act in the best interests of the people. People’s bosses are those that pay them. That is capitalism. We can’t expect politicians to not follow the usual rules. The housing bubble was caused by Wall Street and the politicians (both Republicans and Democrats) who supported de-regulation of banks.

    However now, our Democratic President is attempting to regulate, and put ethical people in charge (Elizabeth Warren) and Republicans are attempting to stop him. I hope that Federal Democratic Politicians are able to get this point accross to the voters.

  • Toni in Texas

    James Johnson makes a fine character through whom to explain Fannie Mae’s failings, and whose political manipulations enriched himself and led to the housing crisis. But he was the master chef who used ingredients Democrats had already provided, in the form of mandates that banks lend to “underserved” communities and people. See the Community Reinvestment Act of 1977 and its later amendments.

    Of course, not lending to people or businesses based on race or neighborhood is wrong. Redlining needed to be banned. And some prudent people benefitted from easily available mortgages, buying homes but not for more than they could repay. (Just as newly available subprime credit cards enabled the prudent to build good credit records.)

    But long after Johnson left Fannie Mae, Democrats enabled and expanded its lending spree (and stiff-armed Bush 43 when he tried to rein in Fannie Mae). Mr. Mead is right. Democrat pandering to its minority base and its Wall Street financiers created the crisis. Their actions were and remain scandalous.

    The mystery is why Mr. Mead has faith in Democrats, given their faith in big, activist government. Unintended consequences always ensue.

  • Uncle Tom

    Neta Halperin, You are not correct. NYC and Wall St are the cash cow of the Democratic Party. Look at how much money Obama raised from the investment banks vs the Republicans in ’08. The reason why the Democrats want more regulation is bc it will funnel more money into their party. Regulation is a means for politicians to exercise power and extract money for reelections. Why do you think regulatory capture happens with 100% certainty after enough time? The Republicans like Sheila Bair want to end TBTF, whereas the Democrats want to keep it alive but “regulate it.” What does that tell you?

  • Chagrined

    Nice try! While there is blame all over the place, Ms. Morgenson is misguided and misrepresents the facts. Probably to take the focus off the really, really bad boys on Wall Street Profits were privatized and losses were socialized! Oh, those freeloading bankers on Wall Street who were responsible for the financial crisis from which over a billion people around the globe are suffering because of incompetence and greed and Republicans are synonymous with incompetence and greed!

    Treasury Secretary Henry Paulson knelt on one knee as he pleaded with House Speaker Nancy Pelosi for her support of the $700 billion Wall Street bailout. Paulson resorted to literally begging Congressional leaders to approve the $700 billion bailout. And, of course, congress obliged and compelled Main Street to bail out Wall Street.
    I weep for my country and my heart breaks for the people who are struggling because Republicans squandered the surplus left by President Clinton by giving the richest Americans a tax cut during wartime for the first time in our history and we now have the largest debt in history! When Mr. Bush took the oath of office in 200l, the nonpartisan CBO projected $5.6 trillion in federal budget surpluses through 2011. Now, our economy is in crisis due to greed and incompetence on Wall Street. Greenspan, who stepped down in 2006, called the banking and housing chaos a “once-in-a-century credit tsunami” that led to a breakdown in how the free-market system functions. The free market is a system that privatizes the profits and socializes the losses. President Obama inherited a trail of deficits and debt left by President Bush and he is attempting to repair the damage our country has suffered by stimulating the economy while Republicans continue their destruction of America and journalists continue their distortion of the facts!

  • Tom Kinney

    Easily the most important piece I’ve read this year. Great verbal takedown of Breck Boy John Edwards, and a very sly and apropos referencing of Dylan’s Desolation row (“the flower girls throw flowers”–in the Dylan version, relying on the memory of one turning 65 this year, “Ezra Pound and T.S. Eliot, fighting in the captain’s tower, as calypso singers throw flowers”), or if it wasn’t, still nicely put. But it if is, what’s more apropos to America’s economic condition today than Dylan’s magnificent downer, Desolation Row.

    Note on the name dropping of Paul Krugman: in the very near future, his name will make the name Mudd sound like the image of flower girls throwing flowers looks.

    But, but but but, the most impressive connectivity here is when Mead extrapolates away from the economic scandal to suggest this is possibly the end of liberalism as we know it. This has long been my contention as one who converted to conservatism post 9/11, and it was nice to hear it from a “lifelong liberal.”

    Liberalism has always existed on a continuum that includes socialism and communism, and while it has been their weak sister this many years, it carries the same DNA as its older and stronger and now extinct sisters. The path to prosperity that has allowed 2 billion global citizens to reach the lower rungs of the middle class in the past 2 to 3 decades is that of the globalized free market operating as unhindered as possible, a reality in what has happened, but also a validation of a long-running conservative foundational tenet; that free markets left to the animal spirits of those who engage in them creates wealth that is then spread around from top to bottom and back up the chain. It is not the constant toss-outs of liberal entitlements–essentially done as if from a limo speeding through a ghetto tossing Benjamins out its spout of a skylight–to the writhing and begging masses, that creates wealth and raises the lot of those on the bottom.

    I wonder if Mead has followed the evolution of David Mamet’s personal politics. Because Mamet’s route to conservatism is likely to become a generational–as in the baby boomer gen–phenomenon, as this most selfish of generations (disclosure: I am a founding member of its first year) will soon come to see the error of its ways and by extension the ways of liberalism and drop it like the very bad habit it is.

    My experience is identifical to Mamet’s, who says that he just assumed liberalism as a young man in the late 60s and never questioned until recent years. Those who follow Mamet’s work know that he was exploring conservative themes throughout his career, and yet he failed to realize that he was probably always conservative. Same for me. It wasn’t until 9/11 that I realized the scandalous apologisms of Edward Said, a Palestinian who lived in NYC, had poisoned the historical well of Muslim and Arab studies which was my area of study for several years in the late 60s after i returned from hitching through virtually all of the Middle East and the Eastern end of North Africa.

    All this makes me wonder if Mead isn’t on his way to a conversion as well. Regardless, he scores another huge point here by noting that the nature of our bipolar political system is that the party on the decline reinvents itself while the party in ascendency slacks off and starts into a downward spiral. Fact is, we need both parties for achieve a rough balance, which like all balances, like a seesaw, is almost never exactly even and still in its middle decline/ascendency.

    Great piece from a writer who in my opinion is perhaps the leading voice of all that’s happening today here and everywhere else.

  • Bill Thomas

    The Inventor and ‘Godfather’ of THE SUBPRIME MORTGAGE was a Bush appointee to the Netherlands, a Billionaire and Holocaust Survivor..Roland Arnall.

    Both parties are culpable for destroying the US Economy and both parties voted FOR the Bailout.

    Partisan politics bores and is dishonest.
    Both are owned BY Banksters.

  • Bill in Ohio

    The GODFATHER of THE SUBPRIME MORTGAGE was a Bush appointee to Ambassarod to the Netherlands, Billionaire and Holocaust Survivor.
    His name was Roland Arnall.

    So much for partisan politics.

    A bad Hack job attempt for this piece.

  • Christopher in Philadelphia

    This article has serious problems with the timeline and mentions personal failings of Frank, Pelosi and Henry Cisneros, that are well known. None of these people are running for president so the attention span of the general public won’t be spent on them; only the Tea Party.

    But the biggest problem with this article is the timeline. There is no mention of Glass-Stegall and there is no mention of the Gramm-Leech-Bliley Act (excuse me for spelling). The repeal of Glass by the GBA act is what gave us the concept of megabanking. This act is what triggered massive consolidation in the financial services industry and led to the rise of “TBTF” banks. Namely, the GBA Act was passed for one purpose: So Citibank could merge with Travelers Insurance [they have since parted ways]. Democrat regulators approved the merger, but a Republican senate made it legally possible for them to combine.

    When GBA passed this removed a wall that separated Retail Banking from Investment Banking. Before GBA it was impossible to have a mortgage securities casino because Investment Banks did not have the available capital to write mortgages, and only National Association institutions, credit unions and small private mortgage lenders could originate mortgage paper. Investment banks could not.

    Investment banks could also not directly purchase mortgages and there was no marketplace to securitize them into bonds. The only entity in the world who did this was FannieMae and FreddieMac in what used to be called Housing Bonds. Fannie and Freddie sold these bonds for decades and always had to hold on to the assets in the bonds. There were no such things as MBS and tranches then.

    And finally, another missing item in here are second mortgages. Specifically, home equity loans and lines of credit. If you remember your financial history, many states, especially Phil Gramm’s Texas had bans on residential second mortgages which date back to the Depression. A second push happened in all the state legislatures that had bans on second mortgages on the books. These were all gone by 2000 and all 50 states could allow any homeowner to then cash out the equity in their home in the form of a HEL or HELOC, and many did so.

    A lot of people even used their HELOCs to get capital to flip housing. “House flipping” didn’t even become a catch phrase until the mid 2000s, again when the US Treasury and the Federal Reserve were under Republican control.

    The story of the housing implosion spans a period between 1996 to 2008. And the nightmare in the derivatives regulation market goes back another 2 years before that.

    So politically, this is so cloudy there is no one “thing” you can clearly pin unequivocal blame on and say “yes, if it weren’t for THAT, then all this bad stuff wouldn’t have happened.”

    And the China angle? Well, I still remember when Clinton got in trouble when nameless Chinese businessmen were getting free sleepovers and dinners at the White House (they turned out to be Chinese suppliers connected to Wal-Mart who were lobbying for MFN status).

    George Bush Sr., George Bush The Young, and now even Obama and Clinton woo the Chinese. Both Democrat and Republican controlled Congresses in the 1990s were totally absent when it come to setting up the lopsided trade deals which have sucked much of the wealth out of America.

    Yeah, globalization has turned out just great. Let’s sign some more free trade agreements! That will surely fix our economy!!

  • Christopher in Philadelphia

    Additionally concerning Fannie Mae: I have serious doubts that the broad American public really understands what it is Fannie Mae (and Freddie) actually do on a day to day basis, like the debt they issue or the paper they buy.

    On a basic level, homeowners must understand that a mortgager only holds your mortgage for a few hours the day you sit down at the settlement table and sign your name away to the deed and the note.

    Fannie Mae and Freddie Mac were supposed to deliver liquidity to the mortgage market. That is, if your mortgage lender could not find deposits fast enough in order to lend, then your mortgager would have to stop writing new loans until some of his loans paid off and get enough principal back in order to originate a new loan.

    Fannie and Freddie are supposed to buy up quality paper from homeowners they believe are mostly upstanding and pay your mortgager off; then your mortgage payments get funneled to Fannie and Freddie, who in turn give part of your money over to the investors who bought bonds that Fannie and Freddie sold in the market to raise money to do this operation.

    On the whole, Fannie and Freddie actually functioned as intended for many many years. The well was poisoned when Fannie thought it had to compete with Wall Street and had to start purchasing doubtful loans in order to keep itself going.

    After all, if the shadow banking system is swallowing more of the mortgage market, that competes against FannieMae, and if it gets big enough, there might not be any good paper for Fannie to buy in order to keep turning a profit and issuing quality debt. Investors might turn their noises up at Fannie and Freddie debt because their share of the mortgage pie is shrinking and the returns aren’t as juicy as the bonds that Bear Stearns was selling. That’s what the people sitting in the corner offices were thinking, anyway.

    Now… from this backstory, how much do you think the average white $60,000/yr foreclosed family will understand any of this?

    Gretchen Mortgensen has written extensively on the mortgage securitization crisis and I don’t believe for a second that this demographic actually sits down on the weekends and reads her columns for the New York Times. Will this translate into new votes for Tea Party favorites?

    With high unemployment more likely to be the focus in 2012, I seriously doubt it.

    I think Fannie Mae will go largely ignored in the campaigns. I could be wrong, but on this very complex issue, I think you can pretty much bank on it.

  • subprimedequity

    The ethically challenged leaders of our financial entities have earned their moral hazard degree while enriching themselves in record numbers .Their lack of basic math skills & ignorance of basic 200 year old land ownership law ( recording )shows willful criminal acts . Their mortgage backed CDO’s lacked the NOTE, breaking SEC & IRS laws. Their non-recorded chain of title notes,stiffed every county in US, and has filled the courts with millions of fraudulent lost note affidavits.Nearing 3 years out from crises & they are paying 10 lawyers per rep to keep the status quo .Our economy trembles from no serious effort by corporations to stop paying reps to protect their profits . Keep up the senseless political ranting it has some entertainment value .

  • Bill Burns

    Anyone who thinks there was less than 15 primary causes of the housing collapse needs to have their head examined.

  • Tennwriter

    Joe knows of this accusation. He understands some of it, and is able to articulate some of it at a crude level. He’s mad at the Dems therefore.

    Now Bob the Semi-Clever Lefty tries to poke holes in Joe’s arguements. Joe then goes to Mike the In-Depth Pundit who explains that if you look at the whole thing in detail, yes, it still looks real bad for the Dems. Joe goes back and laughs at Bob.

    Joe still can’t explain everything in detail, but he knows enough, and he has confidence that if he spent the time to really suss it all out, the Dems would still look real bad.

    Joe is ticked. Joe votes Tea Party.

    Bob whines on TV about this. Mike uses Bob [in a dishonorable fashion — ed], and then tosses him into the trash on TV.

  • Yahzooman

    A previous poster writes:

    “Anyone who thinks there was less than 15 primary causes of the housing collapse needs to have their head examined.”

    I agree. But I also agree with Professor Mead that a GOP presidential candidate who can synthesize Gretchen’s theme into a 5-minute stump speech will skyrocket to the front of the pack.

    My guess would have been old green-eyeshade, sharpened pencils Mitch Daniels. The plain-speaking Midwesterner could have done the deed. Without him in the race, I see Herman Cain setting the example and then a viable candidate, like Rick Perry, Tim Pawlenty or Mitt Romney stealing his vibe. (With so many debates and primaries, candidates often steal the best ideas and lines delivered by competitors.)

    This is dynamite. But it has to be handled the right way, by the right guy. Because most explosives, when juggled by incompetents, blow up in their faces.

  • Randall Martin

    Worthy of the Grimm Brothers….a moral tale without evidence. Do I see a citation? Do I see hard numbers? Do I hear witnesses corroborating actual testimony? If this is what it takes to get something published, I can do it in spades….even the author mentions that this is a “story.” Fiction or truth? There are about 15 doctoral dissertation studies that could be generated from this gratuitous, sensational, gravely unsupported opinion. The author is crazy enough to become a snake-handler. At least the snake would force him to be serious. Where is the risk in writing this tripe?

  • Randall Martin

    By the way, the Facebook marker has only a thumbs-up symbol. I guess they got their history right…..the Roman emperor’s symbol at gladiatorial games denoting the death of a defeated warrior was not thumb down, but thumb up, again, contrary to the current popular belief, and this article deserves much more research… a matter of fact, if you incite me to start a blog, I will do the research and deliver a response!

  • Gandydancer

    There may be more than 15 ways that the Federal government caused the housing price bubble, but it IS the primary cause.

  • Don Rose

    and here’s a guy who predicted the whole mess in spring 2004 !

  • Lee

    You can tell that Mr. Mead is really onto something hot because the first five replies were clearly liberal hacks frantically trying to obfuscate this issue. “15 primary causes” indeed! The truth is that exposure of the rancid backstage machinations that led to the subprime collapse injects fatal poison into the Dems reelection message.

  • Bill from Indiana

    I was in the subprime industry for 10 years. What Mr. Mead says is absolutely correct, and then some. The subprime industry would not have existed in its size and destructive power without Fannie Mae!

  • Handsome

    Sorry but there are quite a few holes in the story.

    Most subprime lenders were not regulated by the 1977 Community Reinvestment Act, which is the linchpin of the thesis that “the gubmint made
    banks make loans to people who could not pay.” The CRA applied strictly to deposit banks such as Bank of America, Wells Fargo, etc. IndyMac, American Home Loan Corporation, and New Century were mortgage banks that got money from private investors and from selling their loans on the secondary market; could not go to them and start a savings or checking account.

    According to Randall Kroszner, former Fed governor, Bush appointee and Milton Friedman disciple, the CRA’s contribution to
    subprime crisis did not exist. Less than 10% of CRA covered lending institutions engaged in subprime loans. According to a study by
    Compliance Tech, using data from LendingPatterns, nearly 71 percent of
    subprime borrowers were white, middle income borrowers; findings published in Real Estate Magazine in July 2008.

    Sheila Blair, a Republican and FDIC chair also disputes these claims

    Federal Reserve data also showed that over 80 percent of subprime
    loans were by private institutions. GOP claims about Fannie and
    Freddie being at core of meltdown is yet another distortion of

    The role of Fannie and Freddie in the subprime market began in the 1990s when the Clinton administration allowed Fannie and Freddie to receive affordable housing credits for purchasing subprime loans;
    believing Fannie and Freddie would impose their strict standards on such lenders. However, since Fannie and Freddie purchased the loans after the fact and sold investments based on those mortgages, called
    mortgage backed securities (MBS) and were not the actual loan originators, this was an unrealistic expectation. While in 2000, HUD
    did place some restrictions on Fannie and Freddie receiving credit for buying loans with excessive costs, the successive Bush administration took a more deregulatory track.

    John C. Weicher, assistant HUD secretary under President Bush requested that Fannie and Freddie keep pace with the private
    investment market in buying subprime loans; keep the money flowing into the housing market. While Andrew Cuomo, who was Clinton’s HUD secretary, came under fire for a mixed record in dealing with Fannie Mae and Freddie Mac, most of the poor quality of loans that the agencies purchased took place during the Bush administration; in 2004, they bought 44% of subprime market products; 33% in 2005 and 20% in 2006; a total of 97% of subprime loans bought by Fannie and Freddie were under a Republican administration and Congress.

    Which leads to the also false talking point that Republicans tried to reform Fannie and Freddie in 2005. The Republicans never brought the Fannie/Freddie reform proposal to the floor for a vote. While the bill
    made it out of the Senate banking comittee, it never moved forward to the full Senate floor. Democrats never had a chance to filibuster it; never happened. Cut and dry, that is it.

    This story is nothing more than rehashed Fox News garbage that has been discredited time and again. We can all agree that Fannie Mae was a bad actor but it was due to acting like a Wall Street bank and not so much the “insuring that minorities can own a home.” That may have been Johnson’s sales pitch to lawmakers and regulators but the facts remain that most subprime borrowers were suburban whites who likely often came out of the tech or dot com business and now were calling themselves “investors” or “real estate specialists” and thought owning a home was instant millions; refinancing and HELOCS, as if their houses were ATMs spewing cash. Plus, most subprime loans as we know them gained steam under a government in which all branches were GOP controlled. In 2004-2005, Barney Frank was in the MINORITY PARTY. What committees did he chair? His pulling favors for his boyfriend was bad but that is not at issue here. What is at issue is Republicans peddling false narratives to deflect from the fact that their orthodoxy of deregulation and unfettered markets is not the end all, be all; that Gramm-Leach was more of a culprit than the Community Reinvestment Act and that the Democrats’ role in this fiasco is more of their ties to Wall Street-Larry Summers, Robert Rubin, Tim Geithner and their support for Gramm-Leach; going along with Republicans on the idea of financial services deregulation.

    But, to try and turn this into political hay for electoral politics reasons is below low. It is peddling false narratives and scapegoating in order for Republicans to cover their behinds and not have to admit deregulation is not an economic silver bullett; blame poor minorities rather than rich corporations.

    Anyone who disputes this best do so with facts from reputable sources, not Fox, not Limbaugh or any other AM Radio shock jock and not the RNC; also, not MSNBC, The Nation or the DNC. If all anyone has are talking points, their arguments are worthless on their face and their IQ is lower than the temperature of a [vulgar comparison deleted — ed].

  • MJDrabik

    OK, correct me if I get any of this wrong.

    The Feds (under both parties) tried to increase home ownership in the US by flooding the housing market with liquidity via Fannie Mae. The idea was that home ownership is an unqualified GOOD THING since real estate always increases in value over time so more home owners means more widely spread prosperity and greater financial stability.

    This flood of liquidity pushed the housing market wider, i.e. in order to loan out all of the money being made available by the Feds bankers had to seek out more and more home buyers. It didn’t matter to the bankers that the home buyers were poor credit risks since the banks would immediately sell the mortgage to the Feds for a profit. It didn’t matter to the Feds that the home buyers were poor credit risks since the Feds thought they were protected by the sheer volume of mortgages they were purchasing and the supposed inevitability of real estate price increases.

    As this continued, home prices were artificially inflated since the available supply of homes couldn’t keep up with the government-driven spike in demand. Otherwise known as the housing bubble.

    Previously, the Feds had sign on to the Basel Accords, an international treaty designed to stabilize global financial markets by setting minimal capital requirements for banks. Investments by banks that were considered to be high risk under the Basel Accords would be discouraged by requiring banks to carry extra capital to cover this risk.

    This created a demand by banks for investments that would be considered to be low risk under the Basel Accords. Fannie Mae responded to this by increasing the number of Mortgage Backed Securities (MBS) it issued, which were rated to be very low risk (35% risk weight). At the time, it didn’t matter what the actual market risk of these securities were since by international treaty and federal law banks had to treat them as low risk.

    Around this same time, the Feds passed Sarbanes-Oxley which required banks and other institutions subject to the SEC to change how they valued assets on their books. Instead of using the purchase price of the asset, you would have to use the present market value of the asset. This law was meant to force publicly traded companies to honestly disclose the value of their assets to stock owners.

    In the case of an MBS, the value of the security was determined to be what the security would sell for on a given day, as opposed to the cash flow value of the mortgages which backed the security. If the MBS actually was a low-risk investment, then these two methods of determining the value of the MBS would be nearly identical. Unfortunately, this was not the case.

    So, through an unforeseen confluence of well-intentioned government actions meant to prevent financial crises, banks were forced to treat a high-risk investment as if it were a low-risk investment while recording the value of that investment on their books in the most volatile manner possible.

  • Don

    Banks are supposed to give away toasters, not houses. Advocates of Liberal Social Engineering used the power of the Federal Government to force banks to give loans to the “poor” who could not pay for them. This emptied the bank vaults, so Fannie and Freddy purchased the “paper” and refilled the bank vaults. To refill their own vaults F&F sold the paper to Wall Street. To refill their own vaults Wall Street sold the paper to the world. Repeat until collapse.

  • Joe H

    Where in this distorted narrative is the simple fact that Republicans were in COMPLETE control in Washington D.C. from at least 2003 through 2006, and effectively longer than that? “Ownership society” enthusiasm and a fixation on (fictitious) household net worth, to the neglect of dangerous debt levels, contributed at least as much to the housing debacle as actions of the “villains” cited inthe book. I have little doubt that some of the Right will continue to blame the crisis on housing opportunity initiatives, as they’ve done all along. But the ultimate cause lies in tax and transit policies that distort the value of owner-occupied housing and makes renters second-class economic citizens.

  • concerned

    ‘Handsome’s’ cherry picked facts do nothing to discredit the thesis that ‘Reckless Endangerment’ presents and that Mead elaborates on the potentialities of. For instance, it is true that beginning in 2004, more subprime loans were taken out for equity reasons than by those with low incomes, but what of it? By then, Fannie Mae and the whole rotten Democrat plan had already pulled many millions of low to lower middle class households into subprime mortgages that they could not possibly support for long, once the Democrat bubble began collapsing. Virtually all of ‘Handsomes’ information is partial and biased, that is when he does not descend into actual lies in his attempt to deny Republican efforts to restore sanity to the mortgage industry and are chosen to give a false picture that is specifically intended to perpetuate the economic injustices and injuries that Democrats have inflicted on society over the last 20 years. Purely for Left Wing partisan reasons, I might add.

  • Handsome








    [vulgar suggestion deleted]

  • Paul A. London

    The great weakness of “Reckless Endangerment” jumps out when it is read in tandem with Fintan O’Toole’s prize winning description of the Irish housing bubble and its collapse in “Ship of Fools.” Both books describe runaway speculations in housing that at first made developers and their lenders immensely rich but that in the end left millions of home buyers in Ireland and in the U.S. with enormous debts.

    But Ireland had no Fannie Mae or Freddie Mac. The idea that Fannie and Freddie caused this debacle collapses from the simple fact. Ireland like the U.S. just had greedy garden variety speculators fed by greedy garden variety bankers. Both were abetted by Alan Greenspan and his Irish equivalent who did not believe that they had to supervise banks.

    No political leader in either country had the guts to tell the speculators — in O’Toole’s words — “when to stop” principally because during the 8 years of the Bush Administration and its Irish equivalent the belief was that their friends in business knew what they were doing.

    Alexander Hamilton in 1792, told his friend Wm Duer, who was a speculator in government bonds, that it was time to stop. When Duer did not take Hamilton’s advise and the speculation collapsed, Duer went to debtors prison and Hamilton let Duer die there. Wouldn’t it be a good lesson if a few dozen housing speculators, overpaid bankers, and officials who failed to do their duty were now sitting where Duer sat.

  • Handsome

    Paul London,

    I am afarid your post is intelligent and intelligence and facts to right wing blowhards are like holy water and crosses to vampires. Example, concerned admits that most subprimes were taken out as ATM type equity lines yet continues with his (or her) debunked talking points and claims my post is full of cherry picked facts and biased sources yet never offered up any links or evidence that is not RNC or Fox approved. Cherry picked and biased are two key accusations made by people who cannot argue the facts or the merit so they accuse anyone who does offer up links and sources of being biased and that is because they cannot win on merit. It is like accusing a football team of playing dirty just because they play tough, physical football (NY Jets, Baltimore Ravens for example) simply because you cannot beat them on the field and block and tackle better.

    As you have shown, Ireland had a housing crisis as well and it too stemmed from Ayn Randian thinking: financial deregulation.

    It has been proven time and again that most American subprime lenders were non-regulated or loosely state regulated mortgage companies that had no obligations under the CRA and it has been proven again and again bulk of subprime loan purchases by F&F were under Bush at behest of his Asst. HUD secretary in order to match the private investment conduit market. It has been established by FACTS that the GOP F&F reform talking point is exactly that, a LIE. The Senate Banking Committee passed the bill but it was NEVER introduced on the floor of the full Senate so therefore, it could not have been filibustered by Democrats.

    Facts have shown most consumers of subprimes were middle income non Hispanic Whites, not inner city blacks or barrio Hispanics.

    But, for folks like concerned, don’t bother them with the facts. They already have their mind made up. For them, why bother thinking? It’s harder than listening to AM Radio or watching Fox.

    Thanks for your reference to Alexander Hamilton, a true conservative and American Revolutionary of the first order.

  • Timstigator

    How can the author of the book continue to write at the NYT?? Did they know she was writing it? She’s toast.

  • AD

    Did anyone mention the millions of dollars in bonuses that had to be repaid by executives at Fannie and Freddie?
    If they weren’t doing anything wrong, why would they have to give the money back?
    I think Morgenson and Rosner have got it right, and this story will hurt.

  • gary hemminger

    The Fed was the main culprit behind the meltdown. Interest rates at 0% killed this economy and were and are the root cause of the financial meltdown. Read John Taylor. Democrat’s like Barney Frank just used their power and the 0% rates to blow up the housing bubble. Excessive and stupid government spending is what you get when rates are 0% for this long. I am a lifelong Democrat but I now see that my party is a party of pigs that cannot be controlled. Greens, the Democratic party machine, and public sector pensions will eventually have to be thoroughly confronted. They will take and rape everything until there is nothing left. The question isn’t if they need to be confronted, the question is will we do it before or after the complete meltdown? Either way it is going to happen.

  • Edward J. Dodson

    Reading this book caused me to wonder if I actually worked for the same company the authors described. I worked for Fannie Mae from late 1984 to early 2005 as a manager in quality control group, then as a market analyst and business manager. There is truth in the book, but there is much that is missing that deserves being brought to light. I recently decided to write an extensive review of the book. If anyone would like to read what I have to say, contact me by email at [email protected].

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