Wednesday, December 28, 2011

Heavyweight Combat!!

In the past two weeks, Joe Nocera and Peter Wallison have gone at one another over GSE history. Others, see below, have weighed in on this scrap. Enjoy the reading.

Happy 2012.

The Big Lie
The New York Times, Pg. 21
Dec 24, 2011

By Joe Nocera

So this is how the Big Lie works.

You begin with a hypothesis that has a certain surface plausibility. You find an ally whose background suggests that he's an ''expert''; out of thin air, he devises ''data.'' You write articles in sympathetic publications, repeating the data endlessly; in time, some of these publications make your cause their own. Like-minded congressmen pick up your mantra and invite you to testify at hearings.

You're chosen for an investigative panel related to your topic. When other panel members, after inspecting your evidence, reject your thesis, you claim that they did so for ideological reasons. This, too, is repeated by your allies. Soon, the echo chamber you created drowns out dissenting views; even presidential candidates begin repeating the Big Lie.

Thus has Peter Wallison, a resident scholar at the American Enterprise Institute, and a former member of the Financial Crisis Inquiry Commission, almost single-handedly created the myth that Fannie Mae and Freddie Mac caused the financial crisis. His partner in crime is another A.E.I. scholar, Edward Pinto, who a very long time ago was Fannie's chief credit officer. Pinto claims that as of June 2008, 27 million ''risky'' mortgages had been issued -- ''and a lion's share was on Fannie and Freddie's books,'' as Wallison wrote recently. Never mind that his definition of ''risky'' is so all-encompassing that it includes mortgages with extremely low default rates as well as those with default rates nearing 30 percent. These latter mortgages were the ones created by the unholy alliance between subprime lenders and Wall Street. Pinto's numbers are the Big Lie's primary data point.

Allies? Start with Congressional Republicans, who have vowed to eliminate Fannie and Freddie -- because, after all, they caused the crisis! Throw in The Wall Street Journal's editorial page, which, on Wednesday, published one of Wallison's many articles repeating the Big Lie. It was followed on Thursday by an editorial in The Journal making essentially the same point. Repetition is all-important to spreading a Big Lie.

In Wallison's article, he claimed that the charges brought by the Securities and Exchange Commission against six former Fannie and Freddie executives last week prove him right. This is another favorite tactic: He takes a victory lap whenever events cast Fannie and Freddie in a bad light. Rarely, however, has his intellectual dishonesty been on such vivid display. In fact, what the S.E.C.'s allegations show is that the Big Lie is, well, a lie.

Central to Wallison's argument is that the government's effort to encourage homeownership among low- and moderate-income Americans is what led to the crisis. Fannie and Freddie, which were required by law to meet certain ''affordable housing mandates,'' were the primary instruments of that government policy; their need to meet those mandates, says Wallison, is what caused them to dive so heavily into those ''risky'' mortgages. And because they were powerful forces in the housing market, their entry into subprime dragged along the rest of the mortgage industry.

But the S.E.C. complaint makes almost no mention of affordable housing mandates. Instead, it charges that the executives were motivated to begin buying subprime mortgages -- belatedly, contrary to the Big Lie -- because they were trying to reclaim lost market share, and thus maximize their bonuses.

As Karen Petrou, a well-regarded bank analyst, puts it: ''The S.E.C.'s facts paint a picture in which it wasn't high-minded government mandates that did [Fannie and Freddie] wrong, but rather the monomaniacal focus of top management on market share.'' As I wrote on Tuesday, Fannie and Freddie, rather than leading the housing industry astray, got into riskier mortgages only after the horse was out of the barn. They were becoming irrelevant in the most profitable segment of the market -- subprime. And that they couldn't abide.

(The S.E.C., I should note, had its own criticism of my column, saying that I conflated its allegations regarding the lack of disclosure of subprime mortgages, with an entirely different set of charges it has brought regarding disclosure of so-called Alt-A loans. I still maintain that the S.E.C.'s charges are weak, and that the agency brought the case in part for political reasons: how better to curry favor with House Republicans than to go after former Fannie and Freddie executives?)

Three years after the financial crisis, the country would be well served by a real debate about the role of government in housing. Should the government be helping low- and moderate-income Americans own their own homes? If so, is there an acceptable level of risk? If not, how do we recast the American dream?

To have that debate, though, we need a clear understanding of what role the government's affordable-housing goals did -- and did not -- play in the crisis. And that is impossible as long as the Big Lie holds sway.

Which, now that I think of it, may be the whole point of the exercise.

Paul Krugman

Joe Nocera Gets Mad
The New York Times
Dec 24, 2011

By Paul Krugman

And it's a beautiful thing to see.

Today Joe once again goes after the Big Lie the claim that Fannie and Freddie caused the crisis and drives home the point that the people advancing this story aren't just wrong but are acting with intent, engaged in deliberate deception:
In Wallison's article, he claimed that the charges brought by the Securities and Exchange Commission against six former Fannie and Freddie executives last week prove him right. This is another favorite tactic: He takes a victory lap whenever events cast Fannie and Freddie in a bad light.

Rarely, however, has his intellectual dishonesty been on such vivid display. In fact, what the S.E.C.'s allegations show is that the Big Lie is, well, a lie.Read the whole thing.

Basically, Joe is arriving where I've been since 2000: what's going on in the discussion of economic affairs (and other matters, like justifications for war) isn't just a case where different people look at the same facts but reach different conclusions. Instead, we're looking at a situation in which one side of the debate just isn't interested in the truth, in which alleged scholarship is actually just propaganda.

Saying this, of course, gets you declared "shrill", denounced as partisan; you're supposed to pretend that we're having a civilized discussion between people with good intentions. And you're supposed to match each attack on Republicans with an attack on Democrats, as if the mendacity were equal on both sides. Sorry, but it isn't. Democrats aren't angels; they're human and sometimes corrupt but they don't operate a lie machine 24/7 the way modern Republicans do.

Welcome to my world, Joe.

Rep. Barney Frank

Who Is Really Responsible for the Housing Crisis?
The Atlantic

Dec 26, 2011

By Barney Frank

Peter Wallison's recent article in The Atlantic, "Hey, Barney Frank: The Government Did Cause the Housing Crisis," is part of his ongoing attempt to show that the private financial industry was the victim, not the cause, of the financial crisis.

Mr. Wallison protests my characterization of him in a recent interview in The
Atlantic as "a real extremist." Yet his article again proves his extremism which is marked by his denial that a failure of regulation of reckless or imprudent practices in the private financial services industry played any significant role in the crisis, and his complete rejection of the regulatory reforms in the 2010 Wall Street Reform and Consumer Protection Act.

It is important to remember that Wallison's unique interpretation of the financial crisis has been rejected by every other member of the Financial Services Inquiry Commission, including the three Republican commissioners on the panel. Wallison's disagreement with the other members was so strong that he refused to sign their dissent and instead wrote his own dissent to the majority opinion. In subsequent Congressional testimony Wallison referred to them disparagingly as the "The Group" because he found them woefully inadequate because in his mind they did not place sufficient blame on the government for the housing crisis. A report on the FCIC by Democratic members of the House Oversight Committee revealed the degree to which other commissioners struggled to deal with Wallison's extreme position.

Mr. Wallison is also far out of the mainstream in his recommendations for dealing with Fannie Mae and Freddie Mac. In 2009 and 2010, while Democrats were working to pass the financial reform law that Mr. Wallison believes to be wholly unnecessary, the Republican Members of the Financial Services Committee offered a bill drafted by Mr. Wallison which would abolish Fannie and Freddie without putting anything in their place to support the mortgage market. Senator Dodd, I and many other Democrats believed that a new system was needed, but we did not think that abolishing Fannie and Freddie without creating some kind of arrangement for the guarantee of securitizations of 30-year mortgages would adequately serve our nation's housing needs. The Republican members of the House-Senate Conference Committee were contemptuous of our position, and they pushed hard to get us to adopt the bill which Wallison had drafted.

This year, House Republicans abandoned Wallison's position. As the majority party in the House, Republicans have the power to advance Wallison's legislation to abolish Fannie and Freddie. But they are fully aware that groups concerned with housing - realtors, homebuilders, lenders, low-income housing advocates, etc. - believe that Mr. Wallison's approach would be a disaster. For this reason, Republicans did not even introduce the bill the until after we embarrassed them by noting its absence. The current posture of the Republican committee leadership, articulated by Congressman Scott Garrett, Chairman of the relevant subcommittee, is that they cannot move on the bill because they need guidance from Secretary Geithner; they cannot act on their own principles and views until the Obama administration tells them how to do it. The fact is that they cannot advance the bill because they know it is too extreme.

Wallison's positions are formulated on the basis of his extremely selective account of the financial crisis and steps taken to address its causes. For example, he omits mention of the passage in 1994 of the Homeowners Equity Protection Act (HOEPA), which directed the Federal Reserve to establish rules to prevent mortgages from being given to people who could not afford them. A decade later, as the housing bubble inflated, Federal Reserve Chairman Alan Greenspan refused to use the power given to him under this law to restrict predatory lending, arguing that free markets would naturally lead to the best results. In 2008, after the peak of the financial crisis, Greenspan appeared before the House Committee on Government Oversight and admitted that his assumptions had been wrong. "I found a flaw," he told Chairman Henry Waxman. "I don't know how significant or permanent it is, but I've been very distressed by that fact."

Wallison has apparently not yet discovered this flaw.

Wallison criticizes me for having said in 2003 that I was for "rolling the dice" on Fannie and Freddie. But his memory for the period between 2004 and 2008 becomes extremely selective to the point of being dishonest. In 2004, the administration of President George W. Bush began a conscious plan of trying to increase levels of homeownership as part of its "Ownership Society," raising affordable housing targets for Fannie and Freddie. I opposed this policy because I thought people could end up with mortgages they could not afford. Wallison also omits Democratic efforts to pass legislation to reduce predatory lending -- this was blocked on direct orders by House Majority Leader Tom DeLay. He also conveniently ignores the fact that my Democratic colleagues and I worked with moderate House Republicans to try to pass legislation to increase regulation of Fannie Mae and Freddie Mac -- this was killed by the Bush administration, which according to Republican Chairman Mike Oxley, "gave us the one-finger salute." Finally, he omits the fact that in 2007 House Democrats passed an even stronger Fannie and Freddie bill which later became law. The legislation allowed Bush Treasury Secretary Henry Paulson to put Fannie Mae and Freddie Mac into conservatorship, arresting behavior that could cause further losses. The law has won widespread praise.

To be fair, there is one aspect of Wallison's piece in the Atlantic which reveals a partial retreat from his extremist positions. Mr. Wallison has long contended that the 1977 Community Reinvestment Act was a significant cause of the financial crisis. In page 85 of his dissent to the Financial Crisis Inquiry Commission report, Wallison writes that "the most controversial element in the vast increase in NTMs (non-traditional mortgages) between 1993 and 2008 was the role of the CRA." But in his response to my characterization of him as an extremist, he now repudiates his earlier position, writing that "As far as I can tell, CRA was a relatively small contributor to the crisis, when compared to the GSEs and the affordable housing requirements."

This is small but significant retreat from Wallison's very extreme position on the financial crisis. But overall his views remain clearly on the furthest margin of opinion, rejected even by his three Republican colleagues on the Financial Crisis Inquiry Commission and by conservative members of the House Financial Services Committee.

Maloni, 12-28-2011


Anonymous said...'s my question. Despite mainstream media and most/all pols saying the GSEs are govt. "owned", they certainly are still publically traded (including the pref's). With the latest pass through fee increase for new business going directly to the TSY and NOT being deducted from the GSE tab, how can this possibly be legal? There are a number of issues along the same vein of abuses...the tendering of sub debt at a premium, the admin's housing plans (HAMP, HARP), etc. It could certainly be argued that these, most notable the most recent action, are NOT in the best interest of shareholders. How can holders (ie. prefs) continue to stand by and not demand explanation? There are some huge names buried in these things right now. Thanks for your insight.

Bill Maloni said...

My brief--pun intended--answer is that you are correct, I don't think it is.

But absent a formal complaint--ideally a law suit--there is no reason for the Treasury to back away from its scheme.

I've written about how the Treasury, by fiat, took away F&F's corporate first amendment rights, when they denied them power to--independently--speak to the Congress about what was being done to or for them.

It's seems to me, a non-lawyer, that a solid case exists there.

No other financial institution or auto company, which got Uncle Sam's tax dollars, were told it could not communciate with the Congress, except to respond to the the latter's inquiries.

The bottom line is that government can do wehatever it wants, unless challenged ultimately in court.

That would be a worthy 2012 goal for preferred owners.

Having said all of that, my cynical opinion--stated often--is that the companies have been so demonized, it will take a brave judge and, likely, Supreme Court to rule in favor of Fannie/Freddie, the companies or their investors.

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