Origins of an American Kleptocracy

Marla Singer's picture

Some days ago we wondered aloud at the blank check extended to Fannie and Freddie along with the suspiciously convenient timing of those announcements on Christmas Day.  Back then we wondered if we had been told the entire story.  To wit:

So.  Let us summarize:

 

We do not expect the GSEs to grow their portfolios at all, so we are fixing the bloated portfolio problem by easing the portfolio caps to permit a quarter trillion dollar expansion thereof.

 

We do not expect either of the GSEs to need more help from the Treasury, so we are responding to the underutilized $400 billion "lifeline" the GSEs have with the Treasury ($111 of which is currently used) by expanding it to... infinity.

 

Oh, and though they have collectively lost nearly $200 billion, we are paying the CEOs around $6 million each.

 

Great work team!  It's already almost 11:00.  Let's go to lunch.

The other shoe having now dropped, Bloomberg has joined in our skepticism:

Taxpayer losses from supporting Fannie Mae and Freddie Mac will top $400 billion, according to Peter Wallison, a former general counsel at the Treasury who is now a fellow at the American Enterprise Institute.

 

“The situation is they are losing gobs of money, up to $400 billion in mortgages,” Wallison said in a Bloomberg Television interview. The Treasury Department recognized last week that losses will be more than $400 billion when it raised its limit on federal support for the two government-sponsored enterprises, he said.

Wallison continues:

“It was always safe to buy these notes,” he said. The U.S. government was always going to stand behind them. They’re as good as Treasury notes.”

We are no longer sure this is the most inspiring comparison. Wallison also chimes in via the Wall Street Journal and points to a darker vein shot through the GSE story:

New research by Edward Pinto, a former chief credit officer for Fannie Mae and a housing expert, has found that from the time Fannie and Freddie began buying risky loans as early as 1993, they routinely misrepresented the mortgages they were acquiring, reporting them as prime when they had characteristics that made them clearly subprime or Alt-A.

 

In general, a subprime mortgage refers to the credit of the borrower. A FICO score of less than 660 is the dividing line between prime and subprime, but Fannie and Freddie were reporting these mortgages as prime, according to Mr. Pinto. Fannie has admitted this in a third-quarter 10-Q report in 2008.

 

But because of Fannie and Freddie's mislabeling, there were millions more high-risk loans outstanding. That meant default rates as well as the actual losses after foreclosure were going to be outside all prior experience. When these rates began to show up early in 2007, it was apparent something was seriously wrong with assumptions on which AAA ratings had been based.

 

Losses, it was now certain, would invade the AAA tranches of the mortgage-backed securities outstanding. Investors, having lost confidence in the ratings, fled the MBS market and ultimately the market for all asset-backed securities. They have not yet returned.

It has become conventional wisdom, perhaps even cliche, to pin the origins of the credit crisis on the big banks or, AIG or even the practice of financial modeling.  Certainly, these actors have received the most play in the media, and have now endured the focus of populist ire for more than a year.  We now think that the analysis leading commentators to focus blame on these entities is fatally flawed.

We have seen no credible data that any of the large banks or other underwriters of mortgage backed securities ("MBSs") or collaterized debt obligations ("CDOs") or firms like AIG selling protection on same actually misrepresented the character of underlying collateral.  This is in direct contrast to the allegations of Edward Pinto as printed by the Wall Street Journal.  If Pinto is correct such that the mis-marking of mortgages by the GSEs and the discovery thereof destroyed confidence in the accuracy of ratings in mortgage backed securities and their derivatives (and it seems probable to suspect that he is) then it seems almost beyond question that the policies (or policy malfeasance) of Fannie and Freddie, and not the actions of large banks or firms like AIG are the proximate cause of not just the credit crisis, but also the continuing multi-act, multi-bailout farce that continues to be passed off to the public as necessary "stimulus."

It takes only a cursory examination to suspect that misdirection plays a key part in the latest act of the ongoing crisis theater of the absurd.  Misdirection to distract attention from the key complicity of GSEs in the crisis.  Misdirection to deflect scrutiny away from the political personalities from both sides of the aisle responsible.  Misdirection to conceal what could only be described as the most damaging acts of accounting and securities fraud in the history of accounting, securities or fraud.

Precious few assumptions are required to come to conclusions laying responsibility for the largest economic disaster in recent memory at the feet of the GSEs.

First, that the GSEs had substantial influence over the mortgage market.

This is a no-brainer with the GSEs either holding or guaranteeing 51% of outstanding home mortgage debt in 2003.  To put this in perspective, that figure was around 33% of the GDP of the entire United States in 2003.  Read that last line again.  Anyone wishing to play in the market had to compete with the rates set by Fannie and Freddie.

Second, that the GSEs artificially depressed rates (read: underpriced risk).

This is equally trivial to find given that this precise mandate has been the express purpose of the GSEs since at least 1993.  The GSEs were not tasked with increasing the capacity for mortgage lending.  They were tasked with making loans "affordable."  They used a number of tools to do so, but the key elements were acting as a proxy for quasi-government guarantees and bundling mortgages into risk tiers to act as a sort of clearing house for securitization pools.  It is often said that providing a guarantee (particularly governmental) reduces risk.  This is, of course, a fantasy.  All that explicitly or implicitly tax dollar backed guarantees do is socialize risk.  However, they manage to do so without requiring consolidation of the resulting liabilities on the government's balance sheet.  Convenient that, yes?  A guarantee is a subsidy.  Period.  Failing to understand this is what permitted the political class to mislead the American public into thinking that cheap loans for everything from housing to small businesses to education (the next fiscal disaster on the horizon) come with no cost.  (Or that cheap debt wouldn't pump up the price of everything from education to housing).  Today's pundits seem to enjoy blaming "moral hazard" (by which they mean "corporate moral hazard") for the crisis.  Oddly, government guarantees, particularly those that everyone assumes will be costless, are not typically part of this definition.

These assumptions, on their own should be sufficient to indict the GSEs, the totally unqualified and unaccountable recipients of political payoffs who occupied the executive offices of these fiscal singularities1 and their other supporters (including the voters who continued year after year to return these jokers to public office) on charges of gross negligence.

If, as Pinto suggests, we add purposeful misrepresentation of underlying collateral to the mix three things become apparent:

First, absent some intervening criminal act by actors farther downstream (and we may yet find some), we have isolated absolutely the cause of all that followed.

Second, it becomes quite easy to construct a criminal case for literally millions of counts of accounting, securities, wire and mail fraud against the GSEs.  To the extent executives at Fannie and Freddie signed off on financial statements disclosing the portion of their balance sheets that held "AAA" securities and these had been purposefully misidentified we should be exploring prosecution for violations under e.g., Sarbanes-Oxley.  (Given, however, Rham Emanuel's involvement in Freddie and Fannie, we aren't holding our breath).

Third, given the presence of blatant government price fixing in more than a third of the entire economy, the United States hasn't been anything like a "free market" since before 2003.

It should shock you that literally a third of the U.S. economy should become a playground for the social experiments of any political group of any party affiliation.

It probably will not shock you (since you are reading Zero Hedge) to find what may be the largest example of securities fraud ever directly connected to elected officials of the United States and their cronies.

Taking a step back, it should shock you that power over literally a third of the U.S. economy should ever have been allowed to become concentrated in two entities with blatantly socialist aims and under the control of executives with no relevant qualifications of any note other than loose purse strings on their political contribution satchels.

What should grip readers with even more substantial alarm is the combination of blank checking for Fannie and Freddie backstops, and the shifty manner in which these disclosures were made.  Is it possible anymore to doubt that the administration simply lied through its teeth while promising us it expects no need of increased credit lines for the GSEs while simultaneously expanding same literally to infinity?

Given that Fannie, Freddie and the FHA have now taken up the mandate of supporting housing prices at any cost (to the taxpayer via endless bailouts and unlimited credit) is it possible in any way to credit the current "upturn" to fundamentals?  When we factor in similar capture of the FDIC and the like, where does this leave us, exactly?

Permit us to ask a few questions:

1.  Why are Fannie and Freddie still operating in any way whatsoever?

2.  Given that their credibility for reliable (or even remotely non-fiction) financial disclosure nears complete obliteration, who is likely to buy anything from these entities in the future?  (If you said "The Fed" you may advance to the bonus round).  Surely the conflict of interest implicit in government ownership does nothing to improve the situation.  Perhaps the news that the Fed plans to issue securities to shrink its balance sheet and reverse "quantitative easing" describes an attempt to securitize the tattered reputation of the GSEs?  Will the Fed simply aggregate its balance sheet and issue tranches?  Does that make the Fed simple the collateralized debt obligation ("CDO") of last resort?  Who will do the rating?  Who will be writing protection on CDO Fed Tranch A-1 (AAA)?

3.  Given that neither entity is currently monitored by an Inspector General (despite what used to be statutory language so mandating) and both entities are completely captured by the current administration, how can it be anything other than insanity to expect any result from these entities other than the formation (or expansion) of a ravenous fiscal black hole?

4.  Given increasing government control beyond Fannie and Freddie that now extends far beyond 33% of GDP, what can we expect if we continue to permit political parties of any stripe to exercise command and control influence over what is now probably a simple majority of our economy?

There was a time when we hoped that the United States would learn its lesson with respect to permitting political control over large swaths of private markets.  Today that time seems very long ago, and somewhat naive.

Perhaps we are being too harsh on the likes of Barney Frank and other GSE proponents.  Adopting a slighty more relativistic economic morality, we might count Frank as one of the greatest legislators of all time.  Consider:

To the extent Mr. Frank and his ilk self-identify as advocates for low-cost housing for those ill-able to afford it, or beset by poor credit, the last 20 years have represented the largest single wealth transfer (composed primarily of real estate and flat screen TVs) to that sector known to us.  Not only that, but given the de facto nationalization of MBS portfolios (we'll give you three guesses who have been the largest MBS buyers over the last several quarters) the GSEs and their supporters have managed to get taxpayers to pay for it all.  Of course, had they simply proposed such a measure in Congress it would have been laughed from the chamber.  And yet, it almost seems as if these individuals simply wrote a multi-trillion dollar check to their constituents that happened to be drawn on the United States Treasury.

It almost seems this way because it was this way.

  • 1. Just consider Fannie Mae's torrid leadership history: James A. Johnson (Fannie CEO 1991-1998, Democratic luminary, Obama fundraiser, John Kerry vice presidential selection committee chair, $21 million in Fannie compensation). Franklin Raines (Fannie CEO 1999-2004, Clinton's Director Office of Management and Budget, $90 million+ in Fannie compensation later the subject of a civil suit) Daniel Mudd (Fannie CEO 2005-2008, $80 million in Fannie compensation) Herbert M. Allison (Fannie CEO 2008-2009, National Finance Chair, John McCain Campaign).  Freddie's record is no better.

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Anonymous's picture

The Fan/Fred move was the final step in creating a control economy. The Fourth Branch of US government is complete and they no longer need Congress or China or other third parties to continue the Ponzi scheme ad infinitem. Watch for the Job Guarantee program next.

wesa's picture

"Why are Fannie and Freddie still operating in any way whatsoever?"

They are apparently in business to make home loans affordable, courtesy of our Congress.  They have done their job.

The only problem is that they have also done a good job of crippling our financial system.

 

 

Silver Bullet's picture

They worked fine for decades until Wall St got into the business and thy had to lower their standards for what mortagages they would buy. And then...TIMBER!

Marla Singer's picture

Sorry, can you walk me through the steps you took to get to this conclusion?

Anonymous's picture

See Marla, even as early as 1993 those nefarious Wall Streeters were pushing the helpless, powerless FNM and FRE to relabel their own crappy loans as "prime."

With sophistry like Silver Bullet's you could just as easily argue that Wall Street was crowded into making subprime loans by the GSE's dominance of the prime mortgage market with their "implicit" guarantee-backed debt issuance. But that wouldn't allow one to pin the blame for the crisis on "capitalism" as I'm sure he is seeking to do.

Silver Bullet's picture

Yessssssssssssssss.

I'm blaming capitalism. You got me!

...Fucking dipshit.

Anonymous's picture

Dear Silver Bullet, aka fucking dipshit.

Brilliant ... and such elegant manners.

You must be a politician seeing as how you have conveniently swept decades of legislation under the rug and pulled out the classic Democrat response to anyone who dares expose the opposite side of any issue you happen to be on ... demean the one who exposes the stupidity and falsehood of your argument and turn a blind eye to the facts.

Let's review some of the facts, shall we?

Yes, fucking dipshit, Fannie and Freddie provided a bona fide public service until your accomplices, the Democrats, pushed social engineering over economics starting with Jimmy Carter and the Community Reinvestment Act (CRA), followed by a massively expanded (and purely political) mandate in CRA II - Bill Clinton's contribution to this debacle.

The scam was protected by those fierce watchdogs of fiscal responsibility and integrity, Chris Dodd and Barney Frank, and financed by their Democrat accomplices over at Fannie and Freddie.

Who are you trying to kid?

Next thing you'll tell us is that the Global Scamming (sorry, I meant Warming) Scheme was not Al Gore's brainchild and that he didn't stand to benefit in his position as Partner at Kleiner Perkins, and that the paid off scientists just made minor, honest mistakes.

Sad ... fucking dipshit.

The truth will come out regarding this great housing disaster just as it did for global warming and is in the process of occurring with Health Care. When it does the Dem's (and any Repubs involved - like Kent Conrad) will get thrown out of office come November.

To argue otherwise demonstrates the shamelessness of your position.

Arthor Bearing's picture

You simplify issues to suit your beliefs like anyone, and you're pretty sensitive

Silver Bullet's picture

Well, Fannie has been around since the late 30's with little in the way of problems. Then, Wall St. decides to get into wide, mass scale securitization of mortgages. In order for Fannie and co. to compete, they have to lower their standards (Remember, at this time, the F & F boys were much more private then public institutions, incentive for being profitbale was much higher.)

So we have 60 decent years of Fannie and 25 years of Freddie. So this is simple, add Wall St. to Fannie and Freddie's effective monopoly on the market and F & F clearly were not ready for the competition.

Stevm30's picture

"In order for Fannie and co. to compete, they have to lower their standards..."

Nominated for most ignorant post of the (albeit short) year.

Anonymous's picture

You forgot the part where he said the GSEs' "monopoly was not ready for the competition."

Hurrr Durrrrr....

Silver Bullet's picture

Could you please elaborate?

Are you suggesting that Fannie and Freddie didn't lower their standards in the past 10 years?

Or, are you attempting to be sarcastic and condescending in saying that they have always had low standards for the mortgages they purchase? And in a sense, blaming poor people for our current crisis?

 

Stevm30's picture

Pardon the flippant response... Fannie and Freddie borrow money at below market rate, so they have a structural advantage vs any Wall Street firm.

Silver Bullet's picture

I understand that. However, if Wall St. is buying any and all mortgages, (no matter how ridiculous) Fannie and Freddie are going to have to lower their standards if they want to keep market share.

Stevm30's picture

Please define, as specifically as possible, to what you refer when you write "Wall Street."  Investors?  Banks?  Bankers?  Executives?  The actual physical area of Manhattan called "Wall Street?"

Anonymous's picture

Anything east of the Appalachians and north of the Mason-Dixon line is Wall Street. South and west is Pitchforkland, Jesusland, whatever you want to call it. The people in Pitchforkland are mad at the people on Wall Street. They will rise up in spontaneous revolution, which will be put down by the leader of Wall Street, aka POTUS, with the help of UN troops. Shortly after the insurrection is quashed, the powers that be will begin the enslavement of all. Those who can will flee to the capital of Pitchforkland (aka Texas) where the people are simply too ornery and stubborn to submit. They will fight to the last man if necessary, but it won't be necessary. The hubris of Wall Street will cause it to underestimate the will of the people in Pitchforkland. I mean, seriously, they can't even beat a ragtag bunch of rebels in Afghanistan. What chance do they have of marching into Austin or San Antonio?

Out of the ashes, a new republic will be born. One where people can afford to buy homes for cash if they choose. There will be attempts to establish a financial district in Dallas. They will be routinely ignored by the majority of the people who are more worried about the loss of the honeybee and their inability to buy ammo. We will elect as our new president Mike Leach, the former football coach at Texas Tech. He will lock Yankee dissenters in dark rooms until they submit. The rest of us will be free.

Guns up!

At least that's the way I see it.

Anonymous's picture

Sorry but the rate advantage is peanuts compared to the advatantages Wall Street got:

- Upfronted profits, leverage, fees, multiple expansion....

Anonymous's picture

It is not blaming the poor to realize lowering lending standards will lead to default. The point is, the people who profited from the act of lowering standards and passing it on further to gain greater market share violated securities laws.
Great try at defaulting the topic to sympathy...

Cursive's picture

I would add the repeal of Glass-Steagall and the merger of commercial and investment banking.  In the search for more and more money to feed the Ponzi, you need less and less oversight, looser lending standards and ever looser money.

Anonymous's picture

The point is that the GSE's were part and parcel of the implementation of loose standards and loose money, and one that came along much earlier than the repeal of Glass-Steagall. What other purpose is there for creating lenders with an implicit government guarantee than to provide easy credit where the market would otherwise refuse?

Anonymous's picture

This was Robert Rubin's grand vision to keep feeding the bottom of the pyramid:

"Citigroup officials said they saw tremendous lending potential in Mexico and hoped to use the company's Banamex brand name to serve the fast-growing Hispanic population in the United States as well. Citigroup's vice chairman, Robert E. Rubin, engineered the $20 billion bailout of the Mexican financial system when he was United States Treasury secretary and helped put the latest deal together. Officials from Grupo Financiero Banamex-Accival, known as Banacci, called him about a month ago, he said in an interview yesterday. ''Today's announcement represents Citigroup's commitment to Mexico and to the belief in the potential of this country, to the belief in the further integration of Mexico and the U.S. economy, and to the grander vision of the North American economy,'' Mr. Rubin said at a press conference."

sohbetme's picture

I like your ideas and thoughts. by chat sohbet Greetigns..

Marla Singer's picture

I find this line of argument simply fascinating, primarily for its complete paucity of facts and the depth of torture applied to the logic therein.  Let's take the assumptions one by one:

Well, Fannie has been around since the late 30's with little in the way of problems.

Relying on this assumption in the instant argument would require of us the further assumptions that:

The Fannie of the "late 30's" resembled the Fannie of, say, 1993.  Given the absolute flood of mortgage related legislation in the 1980s and the 1990s as Congress discovered it could use HUD and the GSEs to manipulate the market this seems like a very weak (even reckless) position to take.  Let's just take a small sample of the proposed legislation that was making the rounds in 1989-1990:

The HUD Reform Act of 1989: To ensure competitiveness in procedures for approving applications for housing assistance and to provide for refinancing of mortgages, loans, and advances of credit under the lower income homeownership program of section 235 of the National Housing Act.

The Homebuyers and Renters Relief Act of 1989: To increase the affordability of homeownership for first-time homebuyers and promote the development of low-income rental housing.

The Housing Opportunity Zones Act of 1990: To remove legislative and administrative barriers to the production of new and substantially rehabilitated housing that is affordable to lower-, moderate-, and middle-income families.

The Department of Housing and Urban Development Accountability Act of 1989: To prevent abuses of the process for selection for housing assistance under programs administered by the Secretary of Housing and Urban Development.

The Community Housing Investment Partnership Act.

The Recycling of Existing Assets for Cost-Effective Housing Act of 1989: To authorize the Secretary of Housing and Urban Development to make grants to States to establish revolving funds to assist low- and moderate-income homebuyers and renters.

The Low-Income Housing Credit Act of 1989: To amend the Internal Revenue Code of 1986 to improve the effectiveness of the low-income housing credit.

The Low Income Housing Preservation Act of 1989.

The Housing Affordability Act.

Homeownership and Opportunity for People Everywhere Act of 1990 (The "HOPE" Act). "There are authorized to be appropriated for grants under this title $96,000,000 for fiscal year 1991, $260,000,000 for fiscal year 1992, and $400,000,000 for fiscal year 1993. Sums appropriated pursuant to this subsection shall remain available until expended."

Fair Lending Enforcement Act of 1990: To amend the Equal Credit Opportunity Act and the Home Mortgage Disclosure Act.

The Housing and Community Development Act of 1989.

The Housing and Community Development Act of 1990.

The Community Housing Investment Partnership Act.

The Homeownership Assistance Act of 1989: To authorize the insurance of certain mortgages for first-time homebuyers, and for other purposes.

The Home Mortgage Overcharge Prevention Act of 1989: To amend the National Housing Act to limit the amount of interest paid by a homebuyer upon the prepayment of a mortgage insured under the Department of Housing and Urban Development single-family mortgage insurance program.

The Neighborhood Mortgage Lenders Accountability Act: If any examination of an approved mortgagee by the Secretary (including an examination under subsection (d)) discloses that the mortgagee has failed, in the determination of the Secretary, to meet the lending needs of the community served by the mortgage (as determined by the Secretary under subsection (a)(1)) with respect to residential housing lending, the Secretary may, in the discretion of the Secretary, require that the mortgagee, for continued status as an approved mortgagee for purposes of this Act, develop and submit a plan for remedying such deficiencies.

The First-Time Homebuyers Assistance Act of 1989: To authorize the Secretary of Housing and Urban Development to establish a demonstration program to insure mortgages with no downpayment for moderate-income first-time homebuying families.

The Homeownership Through Sweat Equity Act of 1989: To authorize the Secretary of Housing and Urban Development to carry out a demonstration program of providing grants to housing development agencies to acquire abandoned and vacant housing for rehabilitation and rehabitation by homeless and low-income families.

Getting the picture yet?

This fantasy that Fannie and Freddie just coasted along benignly before Wall Street showed up is just delusional.

Then, Wall St. decides to get into wide, mass scale securitization of mortgages. In order for Fannie and co. to compete, they have to lower their standards.

Quiz: Who did the first mortgage securitization?  Ginnie Mae.  1970.

Amount of pooled mortgages: $7.5 trillion.

Amount securized by or guaranteed by GSEs or government agencies: $5 trillion.

Wow, if only Wall Street hadn't gotten involved!

Only someone willfully blind or selling something would assert that, given this kind of legislative meddling even back in 1989, GSEs and Congress are mere victims in this disaster.  It continues to shock me that people repeat this stuff.  Then I wake up and it doesn't shock me at all anymore.

Anonymous's picture

Marla: your (very) short history of securitization scratches me right where I itch. Can you (or anyone else, really) point me in the right direction on where one might find a history on the origins, development, and proliferation of the securitization model?

heatbarrier's picture

Modern MBS starts with REMICs in 1986 and ABS starts in 1985.

http://financialservices.house.gov/media/pdf/110503cc.pdf

Ms. Singer, attractive woman such as yourself, perhaps you should look at the history of non-agency MBS and ABS before putting all the blame on GSEs?

http://www.fdic.gov/bank/analytical/regional/ro20063q/na/2006_fall01.html

On the other hand, you are too kind with Jim Johnson, the rabbit hole goes much deeper,

http://en.wikipedia.org/wiki/James_A._Johnson_(businessman)

As for "Origins of an American Kleptocracy", well, that would require more than a short essay.

Howard_Beale's picture

Actually, the REMIC replaced the CMO, which were underwritten in 1983 by Salomon, First Boston, etc. The original CMO was usually a 3 traunche deal. The REMIC launch turned it all into a shitstorm with deals having as many as 108 traunches (Kidder's Mike Vranos created the most toxic deals) by the early 90's. I was there for the show so I know of what I speak.

I might add that much of the legislation occurred at the time of the S&L meltdown and the creation of the Resolution Trust Corp. FIRREA was enacted and thrifts were liquidated which had served a large role in the mortgage lending arena prior to the mess. It's all connected, folks.

Scooby Dooby Doo's picture

1. Why are Fannie and Freddie still operating in any way whatsoever?

Any idea how much foreign investment is loaded up on the Mac family? If that family sees any sizable long term losses the run on Treasuries would be epic. Hence the full scale taxpayer backed support. It's for our own good, youknow.

Anonymous's picture

Or could the owners be very large public and private pension funds whose insolvency would make the social consequences of GM’s threatened collapse look like a picnic?

justrichard's picture

Marla, thanks for reporting Pinto's work on fraud by the GSEs and for your own succinct essay.  Proximate cause never seemed so clear.  Arguments to the contrary border on the bizarre.

Orly's picture

It is clear that the basis of our financial problems have to do with the symbiotic relationship between Wall Street and Washin'DC.

The thread asks for some "proof" that Wall Street was there or- that legislation was somehow corrupted by Goldman bandits as a matter of course.  As everyone knows who has seen a gangsta flick, most of this stuff is done with a wink and a nod, a casual dinner over Sicilian spaghetti or even a nice rowboat trip in the middle of a lake in the middle of the night.  Nothing is ever codified or left with a paper trail!  C'mon, these boys are pros.

You won't be able to trace a line directly to such-and-so peson as the culprit here.  Instead, what you will find is a pervasive and insipid culture and method of thinking that led directly to a symbiosis throughout the entire process of getting people into as many mortgages as possible.

After the boy's club had been established, it seems that the whole scheme went entropic; barriers were broken through the revolving door of government and private business, such that one became the other, became the one.

Then, either they became so cannibalised and inbred that the very species developed into an exercise in fantasy finance and opaque self-preservation; or, the whole kit-and-kaboodle was deliberately moved off the reservation in order use sleight-of-hand accounting tricks and outright lies to defraud the American people of Trillions of their own dollars.

I cannot believe that these people were that smart (and they are smart, don't get me wrong...).  But I can believe that they would be that evil.  Either way, a travesty beyond belief.

Anonymous's picture

+10 for this nuanced analysis.

To say that all the blame lies in either the gov or the financial sector is to ignore the deep incestuous relationship that binds them together. Gov does NOTHING without the approval of finance, and to-big-to-fail finance relies on gov to keep the ponzi scheme backstopped.

The definition of fascism is a merging of corporate and state power.

Daedal's picture

Marla, why have you not responded to any of Leo Kolivakis's posts? Given the obvious difference of opinion, I find it interesting that this has not yet happened -- nor has Leo responded to your posts. (as far as I know)

hayleecomet's picture

Right on, Marla. 

The information revealed in your writings keeps me on a steady flow of Pepdid-AC (max strength), as the hole in my gut continues to burn at each act of audacity by our government.

I hope that someday you and the writers at Zero Hedge will be able to come out of hiding and take credit for your incredible investigative journalism.

Readers, at least take the time to rate these articles.  It's a small offering, but at least it's a way to show our gratitude.

Thank you, Marla, and thank you to all the contributors at ZH.

 

 

ConfederateH's picture

Marla, I've only ever said this about the Marines and perhaps Petraeus. 

Marla, you are my hero!  The Democrats through Fannie and Freddie caused the entire melt down, and now they are continuing their good works throth the debasing of the currency by all their insane guarantees and money printing.

I'll say it again for anybody who can't get past their partisanship to figure it out.

THE DEMOCRATS ARE THE PROBLEM!

mojine's picture

You are halfway correct.

and to mention "getting over partisanship" sheesh...

Anonymous's picture

Agreed...

The irony of "getting over partisanship" by becoming partisan for the "other side" is very rich.

Democrat, Republican, Wall Street... There is plenty of blame for all of them, and the attempts to place it 1 or 2 of the 3 to protect one of the others are tranparent and pathetic imo.

phaesed's picture

Yeah, those Taxpayer funded wars costing American lives (of the disenfranchised poor of course, but make sure you don't blame those business owners paying minimum wage) are a definite boon to our economy. Thanks Republicans!

 

I mean after all, when you compare health care to the pleasure of blowing the head off an Iraqi kid.... who needs a healthy colon!

Marla Singer's picture

What's this have to do with the GSEs?

ConfederateH's picture

Phaesed, you are another Democrat in Denial.   Your new president is holding you 6 inches off of the ground with your back against the wall, with his hand around your throat, and he is bitch-slapping and spraying spittle on your face with his lies and corruption:  Withdrawel from Iraq, close Guantanamo, Fannie and Freddie bailouts,  Stimulus pork fest, $4Trillion Barney Frank emergency slush fund, Kow-towing, Transperency, Bi-partisanship, Paygo, GM bailout, GMAC bailouts and on and on and on.

And all you can do is point your finger at the Republicans.

You sir, are a flaming liberal partisan, in denial.  And you too, are the problem.

Anonymous's picture

Pull your head outta the sand man. There is no difference between the parties these days. They're all bought and paid for. It's called The Establishment for a reason.

berlinjames02's picture

Marla,

1) I want to thank you for all your hard work! On several recent posts I've seen you defending your work. I really appreciate the content and hard work you, Tyler, and crew create every day. Thank you!

2) I am glad Silver Bullet asked this question and you responded because I've been thinking a lot about the 'natural' rate of US home ownership going forward. The info you provided coincides nicely with the data- beginning in 1990 the home ownership rate starts to take off. (http://www.census.gov/hhes/www/housing/hvs/charts/files/fig05.pdf) It peaked in 2007 at just under 70%, and has dropped to about 67.5%.

So, what will be the natural rate in the future? I think it'll be in the 63-64% range, which means another 3-4% of 'home owners' will become renters. It's fun to do financing tricks to create demand, but that doesn't mean people can afford the homes. (Take a look at real household incomes over the same time frame: http://en.wikipedia.org/wiki/File:Household_income_65_to_05.png)

That's why I love the green shooters claiming bottoms in the housing sector despite long term evidence suggesting the EXACT opposite.

Thanks again and keep up the GREAT WORK!

RockyRacoon's picture

Good post! 

The same sentiment can be directed at the oft quoted "statistic" that the U. S. consumer is 70% of the economy. 

That number is soon be be proven inaccurate!

Anonymous's picture

This is a great point! This statistic is thrown around as much as "Amen!" in a church service. The idea that consumers are in charge when the government has taken over such large portions of our housing industry is laughable. Thanks for a great and brief reality check! +1000

Anonymous's picture

Marla-

Bear and Lehman and their associated subprime mortgage businesses were 100% non-Fannie/Freddie. The whole point of "subprime" is that it did not conform to Fanne/Freddie standard (on which FNM/FRE take ALL credit risk).

However you feel about these loans now (no-doc, low-doc, stated income, low money down, etc.) the FACT is they we absurdly profitable from the early 90s all the way to 2006. Bear and Lehman were there first and built the biggest businesses (Countrywide and small MBS brokers as well). In the early days, spread were too high as economic growth and house price increases caused ALL the loans to pay. Many billionaires were made.

THEN... and this is so typical of capitalism. Seeing all the money being made, everyone decided THE FUTURE WOULD BE LIKE THE RECENT PAST. And then we had a bubble. Bubbles are natural features of capitalist speculation (Internet stocks, Bonds and Japan in the 90s, Commodities in the 70s and 2007, Shipping stocks in 17th century England, Tulips, etc.

Looking back, fixing this problem was quite simple -- REGULATORS needed to demand MORE DOWNPAYMENT to secure the largest institutions. Its a shame no one did this. Regulators slept. The typical point of failure in the capitalist system is regulating the amount of leverage (Reg T). Its funny, because even today... the downpayment is not priced. I do not get a lower rate for 50% down on my home purchase. (Not even on Jumbo loans which are 99% market driven).

Please dont overstate the role of FNM/FRE/CRA of housing regulation in congress. This had little effect on housing speculation in south florida, pheonix, and southern california. States with better regulatory regimes have had drastically lower foreclosure problems.

The role of FNM/FRE themselves is also probably healthy and will continue. However they should not be "private for profits" and then the taxpayers problem when they lose money. Also remember FNM/FRE got in trouble for posting "too little earnings" just 2 years ago. How silly.

Anonymous's picture

No, it's much worse than that because actually FNM was started in 1938 as a government entity, but jettisoned in 1968, where they of course floated shares and installed a board of directors and CEO. This latest government takeover is the second time around.

ghostfaceinvestah's picture

The saddest thing about that is, they were sold to the public to help pay for the Vietnam War.