Hey, Occupiers! What about protesting Fannie and Freddie?
E. Thomas McClanahanWe’re told constantly that the cause of the ‘08 panic and ensuing recession was reckless behavior on Wall Street. Well, Wall Street was the proximate cause, the trigger. Firms levered up to stuff their cupboards with toxic loans and plunged wholeheartedly into subprime origination and the public ire generated by the collapse and ensuing bailout is understandable. But remember, the securities that blew up were labeled, albeit wrongly, triple-A — supposedly investment grade. Wall Street’s greatest sin was not so much greed but towering ignorance. The top executives didn’t understand the risks their firms were running.
But how did subprime get started in the first place? In the popular mind, this will always be about Wall Street greed. It’s an easy story to tell. But this narrative misplaces the blame for the origin. The facts have already forced some reassessments.
Earlier this year, Michael Cembalest, chief investment officer of JP Morgan Private Bank, felt compelled to revise his 2009 account of what caused the financial crisis. Under the general heading of “retractions, the primary catalyst for the housing crisis,” he wrote:
“US Agencies played a larger role in the housing crisis than we first reported. In January 2009, I wrote that the housing crisis was mostly a consequence of the private sector … However, over the last 2 years, analysts have dissected the housing crisis in greater detail. What emerges … is something quite different: government agencies now look to have guaranteed, originated or underwritten 60% of all ‘non-traditional’ mortgages, which total $4.6 trillion in June 2008. What’s more, this research asserts that housing policies instituted in the early 1990s were explicitly designed to require US Agencies to make much riskier loans, with the ultimate goal of pushing private sector banks to adopt the same standards.”
“Non-traditional loans” is polite-speak for financial garbage: subprime and Alt-A loans to lousy credits or people with no documentation of income. The US Agencies he refers to are Fannie Mae, which took the lead in degrading credit standards, followed by Freddie Mac. These are the two government-sponsored mortgage giants, to which the taxpayers have shoveled more than $140 billion in bailout money.
They made the market in toxic loans. They got the ball rolling, and it’s doubtful that the subprime mania would have been possible without the taxpayer guarantees that Fannie and Freddie applied to the stinky paper they bought. The best account of how it happened is “Reckless Endangerment,” by Gretchen Morgenson (of The New York Times) and Joshua Rosner. In their book, they serve up chapter and verse on how Fannie Mae worked to relax the normal underwriting standards of the U.S. mortgage market..
This was the seedbed of the credit crisis that burst forth in the fall of ‘08, and the stagnant labor market that has demoralized the nation ever since. If the Occupy Wall Street people seek the real origin of the economy’s ills, they should spend some time with Morgenson and Rosner. If they seek a proper target for their protests, how about the HQ of Fannie Mae?
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