Fannie and Freddie have overseas branches?

Congratulations you win today's award for being deliberately obtuse.

I forgot to mention - you can probably find the C-Span film footage I was referring to by going their website and searching archives.

The hearings were in 2004 and related to OFFEO's scathing report and the whole issue of Franklin Raines and the accounting problems at Fannie.

You could search on: Barney Frank, Maxine Waters, Greg Meeks, Lacy Clay and Artur Davis. The tapes are fascinating - all of them variously accusing OFFEO Director Falcon of incompetance, being on a witch hunt, scaremongering etc etc

Its a grotesque display.

For 18 years I have been in the lending and private equity world. As such, I simply have been in and around Wall Street and picked things up. So, no, I don't have specific links for you. Sorry. You can also see from Steve Verdon's comment (on MBS's) that without definitive research I can get things directionally correct but technically wrong.

I'm not sure I follow your "govt not in a vacuum" reference. The point I was making relates to human and organizational behavior. HUD put into motion a policy initiative (CRA/emphasis on home buying) and put its weight behind it. What ensued? Banks, being pressured to make bad loans naturally sought a venue to offload them - hence Freddie and Wall Street packaged securities. What next? Well, all the sudden any loan originator sees the opportunity to get a fee for origination and then sell the paper, and the risk, off. Then exotic loan terms are invented to make origination easier to keep the machine grinding. Naturally, lobbyists for Fannie and Freddie - now very lucrative enterprises - seek to protect their turf. And on and on it goes. Next thing you know you've got a really wicked web.

The only points I really think are important are these: 1) This whole mess started with social engineering in Andrew Cuomo's/Clinton's HUD, so be careful what you start and 2) entrenched interests (Barney Frank et al) prevented the regulators from throttling this down. Skip the Republican vs Democrat politics for a moment. What I just said is absolutely true. It was a classic example of terrible and irresponsible governance and it is having terrible consequences for many people. If there was any justice in the world Barney Frank would be put on trial.

A shame.

And anwyay, aren't SBC's sold to investors outside the US?

Steve

None of these explanations account for the international nature of this mess.

Mortgage backed securities are used in other countries as well, and they can be held by foreign banks and investors.

Try again.

The mortgage originators were making big dollars. Countrywide was flying. In my experience with money matters, making money is the biggest incentive.

Steve

I've seen Bithead post elsewhere.

Heh. So, you healed up OK, I take it?

If memory serves me correct, the first issuance of mortgage backed securities (a packaged portfolio of mortgage loans purchased from banks by myriad institutional investors) was conducted by Bear Stearns in 1997 or 1998. And of course the heavy lobbying of Freddie to buy loans is well documented.

Actually it was 1970 by Ginnie Mae. Bear Stearns may have gotten it really going in 1997/1998, but it was a creation of a government agency. See my post currently at the top of OTB.

Incidentally the data there shows a big jump in non-government MBSs in 1995...close to your 1998.

So as I noted, Pandora's box was opened, with all kinds of natural permutations of behavior by all kinds of players. And this gives rise to all the bickering I see on this comment thread. But make no mistake - this was all set into motion by government policy.

The problem I have, is people keep saying things like the above (intended or not) which seem to imply that gov't makes policy in a vacuum. It doesn't (and I know you don't think so, Drew)

For instance:

So was there a chance to stop this? As I noted, the regulators called out Fannie and Freddie. But the response was stunningly bad.

Yes it was stunningly bad. But you neglect to mention the "why". Because Fannie and Freddie fought tooth and nail to keep their privelaged status (for instance, being able to keep their capitalization at 10% instead of 20% like all the rest of the banks). And other banks where doing the same thing. They all had high powered lobbyists working capital hill.

There is plenty of blood on people's hand on this issue. But at its root, this is a monumental failure of government. We fail to recognized this at our peril.

Again Drew, I agree but... Government does not work in a vacuum. And that too, is a peril.

ps: You bring up Obama, so I feel the need to ask, who has a high powered lobbyist who spent years collecting money from Fannie/Freddie (only one of the 2 if I recall correctly) until just 2 months ago, and this man is in his campaign's inner circle? Here's a hint: His initials are NOT BO.

pss: I am sincere about the links Drew, I am trying to wrap my head around this mess.

1) Government didn't issue all of the MBS's, nor, I might add, did they issue the RISKIEST of them.

No, just up to 2003 they issued the majority of them.

2) Fannie Mae was not a government enterprise at the time--it was a private company.

As Dave has pointed out it, and Freddie were GSEs. Also Ginnie Mae issued MBSs and that was a government agency.

3) Government had very little role in the credit default swaps that were impacted by the MBS collapse.

Government deregulated that market in 2000. Bill signed by Bill Clinton and passed with lots of Republican votes.

4) The bulk of the housing bubble collapse was in California and Floirda, and the bulk of the homeowners impacted were white and middle-class and therefore not impacted by the government programs you're trying to blame.

True enough, but the CRA was the umbrella underwhich many of the changes took place.

5) Private lenders were much more heavily invested in the subprime markets than Fannie and Freddie were -- by about 4 to 1.

Actually I'd love to see the data on that. Fannie and Freddie were getting into that end of the business quite a bit near the end since it was getting harder and harder to find buyers.

6) Government intervention had nothing to do with the credit rating agencies providing AAA ratings to securities they knew should probably not have been given a rating at all (not even "junk" status, as noted in the article cited.)

Tricky since Ginnie Mae is a government agency and Fannie and Freddie are implicitly backed by the government and could borrow from the government. The take over of the latter two by the government says this statement while maybe technically correct really isn't.

7) Banks that chose not to dabble in the subprime, MBS, and CDS mess are doing fine (see e.g. BB&T).

No suprise there, but this doesn't really help your claim since MBSs were government created, government promoted, and often times government backed.

It’s stuff like this that irks me when both Democrats and Republicans each try to scream at each other to somehow take the blame for the current crisis. The fact of the matter is the root of this issue revolved around the risk of taking on these mortgage backed securities. Were it not for these securities, the increase in defaults in subprime mortgages would have had damages limited to the lending institutions involved, not the entire system.

Okay, but who was heavily involved in MBSs and when did they get their start? Hint it was a pretty long time ago.

And here is something from the SEC's website,

Most MBSs are issued by the Government National Mortgage Association (Ginnie Mae), a U.S. government agency, or the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), U.S. government-sponsored enterprises.

You'll do much better not to read Drum when it comes to economics, the man is hopelessly clueless.

It's seventy years since the Great Depression, and the right is still both blaming it on FDR and p*ssed about the New Deal.

For the rest of our lives, we'll see right-wingers claiming that the Crash of '08 (hopefully, not the Depression of '08-whatever) was the fault of the government and Evul Librulz.