Saturday, December 12, 2009

Anatomy of a Train Wreck

I have spent months studying the causes of the economic mess we are in and I stumbled upon the following report from the Independent Institute, written by a renowned economics professor Stan J. Liebowitz, that pretty well summarizes all that I have found.

I have spent hours going through HUD reports from back in the 80’s to present, as well as going through every OFHEO (regulator for Fannie and Freddie) report since its inception in 1992 (the origianl OFHEO website is now defunct, but see I’ve studied all the different legislation that has impacted the mortgage and mortgage securities markets dating back to the mid- 1970s until now. I’ve watched hours of video, and read reams of records, from House and Senate Finance Committee hearings regarding safety and soundness and corruption issues at Fannie and Freddie from the mid 1990’s to present. After all that, I’ve come to the exact same conclusions as Mr. Liebowitz.

Please read this report carefully and then consider the video and other links below, especially the Sept 2003 House Financial Services Committee Hearing on tighter oversight of Fannie and Freddie (link below). Watch the whole thing and you tell me who blocked efforts to better oversee what had become a 2 to 3 trillion dollar ticking time bomb at Fannie and Freddie, and in the name of what poorly handled cause. The government has done more damage to those they were claiming to help than a truly free market with properly guided oversight could ever have done.

The truveo link below is a good compilation of video clips from House Finance Committee hearings involving OFHEO and their findings of problems at Fannie and Freddie in from mid 2003 to late 2004. I know this one is a partisan compilation, so I have followed it up with th actual full length C-Span videos if you think anything might have been taken out of context.

July 17, 2003
Senate Committee on Banking, Housing, and Urban Affairs
Freddie Mac Accounting Practices Oversight

September 25, 2003

House Committee Financial Services
Regulation of Fannie Mae and Freddie Mac

October 6, 2004

House Committee Financial Services
Management of Fannie Mae

April 6, 2005

House Committee Financial Services
Fannie Mae

I was also able to find many of the written records.  See
and check out document numbers 108-43, 54, 64, 100, and 115).

It is interesting to note that a few committee members to this day still have the gall to place full blame on the Bush Administration for THEIR failure to enact legislation in 2003/2004 to better oversee Fannie and Freddie.  They justify their own failure to support GSE oversight reform by claiming that the Administration was putting too much emphasis on safety and soundness concerns vs. fair housing goals. Read the records and see the truth about why the reform efforts were stalled and by whom. After all that has happened, and everything Ron Paul and many witnesses, regulators, and conservative members of the House Banking Committee had warned would happen, the attacks on the Bush administration continue, and incredibly from the same mouths that dismissed the concerns about "systemic risk" in 2003/2004 and beyond.

Here’s a good written summary of statements made at various hearings:

Good articles regarding the history of Fannie and Freddie, certainly opinion pieces, but focus on the facts. Start at the bottom of the page and work your way up the chronology:

Here is an excellent insiders look at the history and dealings at Fannie and Freddie from a 2005 article in Fortune Magazine:

One of my fellow bloggers responding to an article on Media Matters provides the following indisputable summary:

In 2003-2004 Fannie & Freddie ramp up their lobbying in response to the attempt to put more legislation. You can verify this at which publishes a detailed database of all lobbying activites.

They use this money to convince most Democrats in the house financal services subcommittee and some Republicans to block the legislation. The quid pro quo is that Fannie & Freddie will massively increase their support for low cost home ownership. There is plenty of video of the hearings that backs up the fact that Barney Frank and the rest of the democrats on the committe fought hard against more oversight.

In 2004-2006 they go on a buying spree of Wall Street paper littered with subprimes. This purchasse of this paper fuels the ability to originate subprimes. They don't buy and hold this paper and the Wall St firms don't have the capital to issue them. OFHEO stopped them in mid-2007. From the OFHEO release:

"Fannie Mae and Freddie Mac hold approximately $370 billion in private-label securities, almost all of which carry the highest investment grade rating. Approximately $170 billion of these securities are backed by subprime mortgages. Since these securities were acquired before the implementation date, they will not be affected by the guidance …"

During this period Fannie & Freddie also buy increasingly exotic mortgages and repackage them for resale as mortgage backed securities...securities that are toxic because the are littered with subprimes and alt-a loans.

To understand the scope and impact of this, consider that Fannie Mae's book of business alone is $3 trillion, almost 25% of the entire mortage market.

In 2005-2006, the regulatory legislation returns. This time it passes the House, but Barney Frank still votes against it. He says it has amendments he doesn't like. The Senate cannot muster the 60 votes it needs to reach cloture and the bill is never presented to the floor.

2007, Barney Frank, now the committee chair, since the Democrats now have control reintroduces reform legislation. It dies. In 2008, the key language is reintroduced as part of a larger set of legislation and passes into law on July 30, 2008.

Too late. The financial infrastructure of the US (and the world) is mortally wounded.

Both parties play in this. Fannie & Freddie's avarice plays in this, but Barney Frank plays a very big role, regardless of what he now says or Democratic Cover Media Matters thinks.
Another excellent resource here:

Excerpts from an Autopsy of The American Financial Meltdown

Here is a recent Congressional Report outlining the history of this mess and concluding with lessons we should learn from it:

JULY 7, 2009

Many with whom I argue these facts claim to detest partisanship when discussing such matters, but it is important to understand who did what and why so that the same mistakes can be avoided in the future. Instead we rush headlong into first a huge bipartisan bailout of the banking system, and now a massive trillion dollar “solution” to the economic problem that does absolutely NOTHING to address the root cause. And the exact same idiots in Congress who got us into it in the first place are at the helm! The really frustrating part is that, rather than seeking the truth, they continue with the same stale partisan rhetoric that it was solely the failure of the Bush administration and the republicans over the last 8 years that got us where we are. Clearly there is plenty of blame to go around within BOTH parties and within the industry. Honestly, at this point I could care less whose fault it was as long as the truth is brought to bear so that proper steps can be taken to see it doesn’t happen again, and that we don’t mortgage our children’s future in the process!

The testimony, foresight, and recommendations of regulators, industry experts, and voices of reason like Ron Paul at the hearings in 2003/2004/2005 need to be reviewed again, and not be swept under the rug in the name of meeting so called “fair housing goals”. Go ask the people who have lost their homes and their livelihood if they think the Government meeting those goals benefitted them in the long run.

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