The Housing Bubble

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From the Houston Chronicle. “On Wednesday, Senate Republicans ended their blockade to financial reform and filed their own proposal for preventing a repeat of the financial crisis. The dissipating cloud of political rhetoric revealed something surprising. The two plans aren’t all that different. The Democrats’ bill, sponsored by Sen. Christopher Dodd, D-Conn., would tax banks to create a $50 billion bailout fund, while Republicans would use a structure similar to the Federal Deposit Insurance Corp. Both plans also would provide more oversight to rating agencies, though neither offers many details. Neither, it seems, would change the current system in which rating agencies are paid by the firms whose securities they rate.”

“Then there’s the problem of Fannie Mae and Freddie Mac. The Dodd bill doesn’t address the increasingly expensive issue of the secondary mortgage firms. Democrats have said that needs to be handled separately. The Republican proposal would set up a separate regulator to oversee the government-controlled companies and ensure that they never again suck up taxpayer dollars.”

The New York Times. “Several prominent experts say that the legislation does not even address the right problems, leaving the financial system vulnerable to another major crisis, Binyamin Appelbaum and Sewell Chan report in The New York Times. Some point to specific issues left largely untouched, like the instability of capital markets that provide money for lenders, or the government’s role in the housing market, including the future of the housing finance companies Fannie Mae and Freddie Mac.”

“Critics say the government helped to seed the crisis through its efforts to increase home ownership, including the role of Fannie Mae and Freddie Mac in buying mortgage loans to make more money available for lending. The companies are now owned by the government after incurring enormous losses on loans that borrowers could not afford to repay.”

“Republicans have repeatedly criticized the administration for advancing legislation that does not address the companies’ future. The Obama administration says drafting a new housing policy is on its agenda for next year.”

“Lawrence J. White, a finance professor at New York University, said it made no sense to overhaul financial regulation without addressing the future of federal housing policy. He said he was trying to find the strongest possible words to describe the omission of Fannie Mae and Freddie Mac from the legislation. ‘It’s outrageous,’ he finally said.”

From Investment News. “The hearings last week by the Senate Permanent Subcommittee on Investigations into The Goldman Sachs Group Inc.’s behavior during the mortgage bubble was a show trial designed to deflect responsibility for the bubble and its aftermath from Washington. The real purpose of the hearing was to identify yet another scapegoat for the financial crisis and to reignite public anger at Wall Street, which had declined to a simmer in the aftermath of the rancorous debate over the health care reform bill.”

“If Sen. Carl Levin, D-Mich., and others in Congress say ‘Wall Street greed’ often enough, the public might forget the roles played by members of Congress, the Federal Reserve Board, Fannie Mae and Freddie Mac, and others. No one will point fingers at Rep. Barney Frank, D-Mass., who fought off efforts to rein in Fannie and Freddie as they helped finance thousands of subprime mortgages.”

“No one will ask if the efforts were blocked because 29 members of both parties received more than $40,000 each in campaign contributions from Fannie and Freddie between 1989 and 2009. No one will ask why regulators failed to identify and halt the fraudulent practices of mortgage brokers and many homebuyers. No one will ask about the enormous fiscal stimulus from deficit spending in which both parties were complicit and which helped spark the real estate boom.”

“No one will question the roles of Federal Reserve chairmen Alan Greenspan and Ben Bernanke in keeping rates low and money too easily obtained, facilitating the boom.”

The Kansas City Star. “It’s hard to say which side looked worse in last week’s Goldman Sachs show trial. You had the suits from New York, squirming before the Senate inquisitors. And you had the politicians, preening themselves as guardians of financial rectitude — a display far from convincing.”

“The courts will decide whether Goldman Sachs was guilty of fraud. The main purpose of last week’s spectacle was to deflect much of the blame for the crisis from the political class to Wall Street. Yet bankers didn’t set the crisis in motion. Washington did.”

“The genesis of the debacle was a campaign, sustained over many years, to extend homeownership to people who manifestly could not afford it. Last year, the House Committee on Oversight and Government Reform issued the following findings: ‘The housing bubble that burst in 2007 and led to a financial crisis can be traced back to federal government intervention in the U.S. housing market intended to help provide homeownership opportunities to more Americans. … Government intervention … created a nexus of vested interests — politicians, lenders and lobbyists — who profited from the ‘affordable’ housing market and acted to kill reforms. … The ultimate effect was to create a mortgage tsunami that wrought devastation on the American people and economy.’”

“In the late 1990s, Fannie Mae and Freddie Mac — the two government-sponsored mortgage giants — began buying up and guaranteeing subprime mortgages on a vast scale. By 2008, Fannie and Freddie held or guaranteed $1.6 trillion in dodgy loans, for which the taxpayers are now on the hook. Alarms had been raised earlier, to no effect. Efforts in the Bush administration to rein in the two mortgage giants came to naught.”

“Sen. Chris Dodd of Connecticut helped derail the reform effort with filibuster threats. Rep. Barney Frank declared Fannie and Freddie perfectly sound. ‘These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis,’ Frank said in 2003. ‘The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.’

“Fannie and Freddie later went bust, with projected losses of more than $380 billion.”

“Meanwhile, Wall Street had discovered that buying up subprime mortgages and packaging them into bonds was highly profitable, mainly because the ratings agencies — outfits including Moody’s and Standard & Poor’s — were willing to give these securities their highest rating, triple-A.”

“The agencies’ blessing made possible the dizzying array of subprime-related products — mortgage bonds, collateralized debt obligations and all the rest — derivatives of derivatives of derivatives. Yet the financial reform bill now before the Senate does next to nothing about the ratings agencies, which operate as a government-sanctioned cartel.”

“Wall Street’s excesses sent the markets and the economy off a cliff, but the seeds of the debacle were planted by politicians and richly fertilized by their creations: Fannie and Freddie and the ratings-agency cartel. Now we have the politicians, frantically blaming the bankers for the whole shebang — a story, in other words, that’s woefully short of good guys.”

The Daily Tribune. “Discussion of the pending finance reform bill throws me into the deep end of the pool without my floaties. To help me understand what is going on, I posed three questions to a couple of local men who know a lot more about this subject than I do. Richard Perryman is Senior Vice President and Trust Officer with GB Financial. Larry Cannaday is owner of Cannaday Financial Services. Here is what they had to say.”

“What do you think of the financial bill and its restrictions on derivatives?”

Cannaday: To give a somewhat convoluted answer I do believe that meaningful financial services reform is needed. I have no problem with having more transparency and disclosure in the area of financial services. However, if you look closely at the ‘problems’ that are being played out in the news media, you will find that there are existing laws already in place that will and would have fixed the problems. What is really need is for the government agencies already in place to actually do their jobs and fulfill their obligations set forth when the agencies were created. The SEC / FDIC / FINRA / SIPC / FED, and on and on have the regulations already in place.”

“The major problem is that they are all subject to ‘political appointments’ which carries ‘political strings’ attached. Most of the major economic problems we are currently facing can find their origins in Congress. We really don’t need more government agencies that will not do their jobs any better than the existing ones. The current financial bill is primarily being used to simply establish more government agencies to ‘watch over’ the same things the current government agencies were set up to do. Maybe we should look at reforming the government agencies - No, that would make too much sense.”

“Perryman: I am not impressed. Yes, there are issues that need addressing and I do think some regulation of the derivatives market is in order; however, from what I have read about ‘the bill’ I do not think it properly addresses the causes of the recent financial crisis.”

“The financial bill does not address: The failure of monetary policy during this period n keeping interest rates too low for too long. The interference by politicians of both parties to press for more home loans for subprime borrowers, which both Fannie Mae and Freddie Mack obligingly did.”

“The refusal to rein in Fannie’s and Freddie’s lending activities, even after Mr. Greenspan warned that Fannie and Freddie’s lending policies posed systemic risk to the financial system. The refusal in 2007 and 2008 to allow the regulators of these entities (Fannie & Freddie) to rein in their explosive underwriting of subprime mortgages. During the last years of the housing bubble some two trillion dollars of subprime mortgages were made.”

“The continuing problems with Fannie & Freddie’s operations which will only add to the cost of their failed policies to taxpayers.”

“The bill does address: Institutionalizing ‘too big to fail’ through a $50 billion resolutions fund putting the American taxpayer on the hook to bailout reckless activities, again.”

“The bill allows the government to stay in the ‘bailout game’ by letting the FDIC borrow as much as it needs to bail out failing financial firms if they “pose a threat to the country’s financial security.”

“Provide for a new federal agency that is funded ‘off budget’ and not subject to Congressional oversight. Funding comes from a surcharge on the earnings of the Federal Reserve.”

“My take on the solution: Yes, let there be regulation of the derivatives market that makes it a ‘real market’ with transparency; where there are no opaque side bets on future values of homes. Yes, clamp down on excessive bank leverage on and off balance sheet that allowed companies to become too leveraged. No to ‘too big to fail’ and the American taxpayer being on the hook for poor business practices.”

The Bennington Banner. “Alan Greenspan spent a few days testifying before the so-called Financial Crisis Inquiry Commission (one of those public relations cabals that Congress is fond of convening after the horse has been stolen, even if no one ever proposes locking the barn in the future). Mr. Greenspan no doubt relished being called the ‘Maestro’ during his days as chairman of the Federal Reserve, when he wielded his deregulation baton the way Jack the Ripper worked his knife. He must have savored being regarded as the grand high wizard of American economics while the housing balloon was inflating and he concentrated on conducting the New World Symphony.”

“But someone neglected to inform Greenspan that a balloon is incapable of withstanding the infusion of too much air. It doesn’t seem a particularly difficult a concept to grasp, even if it may be rooted more in physics than in economics. Perhaps Mr. Greenspan should have stopped the first 7-year-old kid on the street and inquired.”

“None of the debacle that Greenspan left in his wake was his fault, you’ll be happy, if unsurprised, to hear. No, Mr. Greenspan was more right than wrong, he arrogantly asserted. Greenspan opines that he was right 70 percent of the time, but that figure involves mathematics to some degree, so you probably should take it with a grain of skepticism.”

“No, it wasn’t the Maestro. It was Freddie Mac, it was Fannie Mae, it was labyrinthine bank practices. It was that damn kid who knew about balloons hoarding nickels in his piggy bank. And Mr. Greenspan’s contention that the financial tailspin caught nearly everyone by surprise conveniently ignores one glaring problem: None of them was the head of the Federal Reserve.”

“They should change the national motto from ‘In God We Trust’ to ‘It’s Not My Fault.’ We certainly hear an awful lot more of the latter than we do the former. And while ‘In God’ smacks of that annoying intermingling of church and state that is anathema to a lot of people, ‘It’s Not My Fault’ has emerged as a verbal summation of the age in which we live. Passing the buck has become an activity that has supplanted baseball as the true national pastime.”

“We don’t hear any words more frequently or more transparently, disgustingly self-serving. It isn’t, of course, that the rest of us don’t know precisely where the fault lies. It just would be nice, once in a blue moon, to hear someone in authority take some degree of responsibility. It might even inspire some kind of mass national catharsis once the shock had worn off.”