Two weeks into Occupy Wall Street protests, movement is at a crossroads

@DrewDad,

DrewDad wrote:

I don't think that is the truth. Fannie Mae and Freddy Mac have certain criteria that have to be met before they will purchase or guarantee a mortgage.

The problem was with the sub-prime mortgages, not with the normal mortgages that Fannie Mae and Freddie Mac would guarantee.

I don't agree. The main role of Fannie and Freddy in accelerating the crisis was in recapitalizing the primary mortgage lenders. In quickly buying up their newly issued mortgages they endlessly replenished the lending capital of the iussuing banks, enabling them to float ever more mortgages in a rapidly expanding bubble. In addition, by creating a situation in which the issuing banks could be confident of their ability to quickly unload newly issued mortgages (within weeks of issue) they created a moral hazard that quickly degraded the lending standards that previously existed in the market.

Fannie and Freddy didn't do it alone: it also took greed and unbscrupulous behavior on the part of the issuing banks and even some of the borrowers. However Fannie and Freddy were indispensible in creating the crisis. Moreover the default rate on loans guaranteed at issue by Fannie and Freddy was high enough to deflate the notion that they were doing that aspect of the job well. We still haven't seen the full extent of the losses that will be borne by the public treasury from the direct operations of Fannie and Freddy. However it is known they are far greater than those of any of the banks that were balled out.

1 Reply

@georgeob1,

Yeah, but didn't the folks reselling the mortgages just lie about how risky they were?

Fannie and Freddy were dupes; the primary cause was lenders who loaned money to people who couldn't pay the mortgage.

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@Robert Gentel,

That is an interesting article Robert but you should read the details

Quote:

By dollars: Forty-nine percent of the $9.42 trillion in outstanding first lien mortgages are
subprime or Alt-A ($4.622 trillion/$9.42 trillion).

Quote:

Determining Fannie’s contribution to Alt-A:
As of 6.30.08, Fannie‘s six key product features totaled $1.214 trillion gross dollars and
7.944 million gross loans.30 Multiplying by 80% to adjust for duplicates yields $0.971
trillion and 6.354 million net loans. The loan volume for two of the six key product features
(FICO<619 and FICO of 620-659) total $0.394 trillion gross and net dollars and 2.882
million gross and net loans.31 This results in the remaining 4 product features (negatively
amortizing loans, interest-only loans, loans with an Original LTV >90%, and Self-
denominated Alt-A) having a total of $0.820 trillion gross dollars (

Quote:

Determining Freddie’s contribution to Alt-A:
As of 6.30.08, Freddie‘s six key product features totaled $0.752 trillion.35 Multiplying by
80% to adjust for duplicates yields $0.602 in unique loans comprised by the six key product
features. However, the two key product features already accounted for in Table 4
(FICO<619 and FICO of 620-659) total $0.240 trillion.36 This results in the remaining four
products (negatively amortizing loans, interest-only loans, loans with an Original LTV
>90%, and Self-denominated Alt-A) having a total of $0.512 trillion gross dollars and
$0.362 trillion net dollars and 2.359 million net loans.

So Fannie and Freddie held less than 1/3 of the subprime loans.
Which beggars the question of how Pinto reached his conclusions that Fannie and Freddie were the main cause.

1 Reply

@DrewDad,

That's true. However, it is hardly effective public policy for these government controlled (and guaranteed) quasi corporations to so eagerly use massive amounts of public credit to feed capital into an obviously exploding capital market and to knowingly create the obvious moral hazard they did among the lenders. It wasn't so much the loansd they guaranteed themselves as itt was the far larger quantity of loans they securitized using their implied government guarantee to accumulate cheap capital.

Without Fannie and Freddy's eager replenishment of their capital and fast purchase of their newly issued mortgages, the banks would have quickly run short of cheap capital; reducing the pace of their lending and thereby slowing the growth of the bubble in prices. The added limits on their ability to resel and securtitize their mortgages would have caused them to be more selective in their qualification standards, further reducing the price pressures in the exploding market.

Instead thery did exactly the opposite of what was called for in the situation - and the politically appointed leradferts of these institutions made fortunes in the process. In some respects it was a bit like our Justice Department selling automatic weapons to drug cartelds in the misguided fantasy thaty they could thereby develop legal cases against them. The result was no legal cases and lots of crime with the weapons.

1 Reply

@Robert Gentel,

Quote:

It is certainly possible to find prime borrowers among people with incomes below the median. But when more than half of the mortgages Fannie and Freddie were required to buy were required to have that characteristic, these two government-sponsored enterprises had to significantly reduce their underwriting standards.

That statement by Pinto is unsupported. The sources I linked to show that wasn't the case at all since the majority of loans were to people with 600 or better FICO scores.

Quote:

My argument is that this created a very large moral hazard. That a huge amount (even if you want to dispute the 70% figure the opposing side comes up with figures like 50%) of this market that the government essentially insured provided incentive to gamble very riskily.

That would be the case if Fannie and Freddie bought the majority of those loans. But they didn't. They didn't even buy half of them. You are arguing that by buying loans that had a better risk factor they created a moral hazard for ones with a greater risk factor. Please explain how you think that is true.

Quote:

Can you draw the connection for me, to my argument?

Banks, Fannie and Freddie are subject to the CRA. Since those entities didn't create the majority of the subprime loans there is no way that 70% of the loans were held by companies subject to the CRAs. Less than 50% is NOT 70% in my world.

1 Reply

@Robert Gentel,

Quote:

my argument is that they had some motivation to because the GSEs were guaranteeing so much of the market and that by doing so they created a moral hazard,

How much of the market do you think the GSEs were guaranteeing?
How much of the BAD loans do you think the GSEs were guaranteeing.

The simple fact of the matter is that based on the actual numbers GSEs did not guarantee more than 1/3 of the loans and they didn't touch most of the really toxic ones.
It's easy to claim the GSE's lowered their underwriting standards to create the problem. It's harder to prove when you read the actual numbers I posted from the FED.

1 Reply

@Robert Gentel,

Quote:

Thing is, if the data from the Fed doesn't contradict the argument in any meaningful way, then it's a big red herring.

That's funny Robert.
If the data doesn't contradict the argument then it's a red herring?

What if NO date SUPPORTS the argument? Does that still make data that doesn't support it while not directly contradicting it a red herring? I'm unclear how I am supposed to contradict something that doesn't have much data supporting it.

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@parados,

parados wrote:

Quote:
Thing is, if the data from the Fed doesn't contradict the argument in any meaningful way, then it's a big red herring.

That's funny Robert.
If the data doesn't contradict the argument then it's a red herring?

What if NO date SUPPORTS the argument? Does that still make data that doesn't support it while not directly contradicting it a red herring? I'm unclear how I am supposed to contradict something that doesn't have much data supporting it.

Dude, your Facts can't change their Narrative. I think that the folks you are talking to have already made up their minds about what's happened, and will hold to their story no matter how little evidence there is to support it.

Cycloptichorn

1 Reply

@parados,

parados wrote:

So Fannie and Freddie held less than 1/3 of the subprime loans.
Which beggars the question of how Pinto reached his conclusions that Fannie and Freddie were the main cause.

He wasn't just talking about those two GSEs and also included private-sector banks that are subject to additional regulations in his claim. But like I already said, even if you dramatically reduce the figures it just changes the scope of the argument and doesn't change that the government was insuring this industry against a huge amount of risk. I even went so far as to explicitly say that even if it were 30% I would find it to have contributed significantly.

Robert Gentel wrote:

Thing is, if the data from the Fed doesn't contradict the argument in any meaningful way, then it's a big red herring.

I can cite the numbers that those who argue against these ideologues use, but even if you cut that number in half it still doesn't really change the fundamental argument, it just modifies the scope of it a bit.

If we were guaranteeing even just 30% of all these bad mortgages I think it was too much. My point is that we should not be in the business of owning that much of the housing market, especially not as a guarantee to irresponsible lenders.

So if they come up with a number like 50%, and think that this point is no longer valid, I think it's gotcha politics that evades the point of the argument.

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@parados,

parados wrote:

That statement by Pinto is unsupported. The sources I linked to show that wasn't the case at all since the majority of loans were to people with 600 or better FICO scores.

That doesn't mean that they did not lower their standards. They internally admit to having done so, I'm not sure what your point is in trying to dispute this.

Quote:

That would be the case if Fannie and Freddie bought the majority of those loans. But they didn't. They didn't even buy half of them.

There is no "more than 50%" pre-requisite for a moral hazard parados. And even well under 50% I consider it significant.

Quote:

You are arguing that by buying loans that had a better risk factor they created a moral hazard for ones with a greater risk factor. Please explain how you think that is true.

The recapitalization of the industry players allows them to engage in risk at greater volume for just one thing. And I've also posted more about it, including this excerpt from this article.

NY Times wrote:

The ripple effect of Fannie’s plunge into riskier lending was profound. Fannie’s stamp of approval made shunned borrowers and complex loans more acceptable to other lenders, particularly small and less sophisticated banks.

Quote:

Banks, Fannie and Freddie are subject to the CRA. Since those entities didn't create the majority of the subprime loans there is no way that 70% of the loans were held by companies subject to the CRAs. Less than 50% is NOT 70% in my world.

The 70% did not just reference the GSEs, if you want to be pedantic you should at least try to compare apples and apples and not compare it to different metrics and pretend you've indicted them.

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@parados,

parados wrote:

It's easy to claim the GSE's lowered their underwriting standards to create the problem. It's harder to prove when you read the actual numbers I posted from the FED.

Then why do they say they did? Here is an excerpt from the NY Times article I've already cited and they interviewed insiders admitting to doing so.

NY Times wrote:

But by the time Mr. Mudd became Fannie’s chief executive in 2004, his company was under siege. Competitors were snatching lucrative parts of its business. Congress was demanding that Mr. Mudd help steer more loans to low-income borrowers. Lenders were threatening to sell directly to Wall Street unless Fannie bought a bigger chunk of their riskiest loans.

So Mr. Mudd made a fateful choice. Disregarding warnings from his managers that lenders were making too many loans that would never be repaid, he steered Fannie into more treacherous corners of the mortgage market, according to executives.

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@Cycloptichorn,

Cycloptichorn wrote:

Dude, your Facts can't change their Narrative. I think that the folks you are talking to have already made up their minds about what's happened, and will hold to their story no matter how little evidence there is to support it.

I can only aspire to be less of an ideologue and more open-minded like parados and Cycloptichorn. Laughing

Edit: The funny part is that you've already agreed with my essential argument here. We are of the same mind about this, if you will. With agreement like this, who needs disagreement?

1 Reply

@parados,

parados wrote:

That's funny Robert.
If the data doesn't contradict the argument then it's a red herring?

Yes, if it doesn't contradict the argument it is.

Quote:

What if NO date SUPPORTS the argument?

That isn't the case though. That is just your absolutist claim.

What if you are arguing like Glen Beck? I'm just asking the tough questions here.

Quote:

Does that still make data that doesn't support it while not directly contradicting it a red herring? I'm unclear how I am supposed to contradict something that doesn't have much data supporting it.

I'm not sure why you've made up your mind to contradict it then, if you don't even know what it is. All I was saying was that I hope that my interlocutors try to address my the thrust of my argument. Not just throw out slightly-related ( but clearly different! ) numbers to try to argue that way.

1 Reply

@georgeob1,

Well, the key word to me is "knowingly."

You agree they're dupes, but then you try to turn around and say they "knowingly create the obvious moral hazard."

Make up your mind.

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@Robert Gentel,

Robert Gentel wrote:

Cycloptichorn wrote:
Dude, your Facts can't change their Narrative. I think that the folks you are talking to have already made up their minds about what's happened, and will hold to their story no matter how little evidence there is to support it.

I can only aspire to be less of an ideologue and more open-minded like parados and Cycloptichorn.

Edit: The funny part is that you've already agreed with my essential argument here. We are of the same mind about this, if you will. With agreement like this, who needs disagreement?

Well, I think there's a big difference in our opinion, in that I believe that corporate greed was responsible for the problem far more than lax regulations and misguided gov't programs that tempt bankers to take risks. When you encourage an atmosphere of risk-taking, and make it clear that you aren't interested in investigations - and certainly not criminal investigations - than no matter what regulations you have, what rules you have, this group will find a way to exploit it for their gain and our loss. It's necessary to attack the problem here - not just the symptoms.

That's why I don't understand why you think none of the banks should be broken up into pieces, and none of the people responsible should be investigated, and basically nothing should change, except a little bit tougher regulations. It isn't going to be enough to solve the problem. We need a national conversation about what Wall Street is and what we want it to DO for us, as a country.

Most of what I see you write seems to place quite a bit more blame on the gov't than on the banks, and not on those banksters who made affirmative decisions to participate in these unethical and probably illegal actions. I feel that's the wrong focus.

Cycloptichorn

1 Reply

@Cycloptichorn,

Cycloptichorn wrote:

Well, I think there's a big difference in our opinion, in that I believe that corporate greed was responsible for the problem far more than lax regulations and misguided gov't programs that tempt bankers to take risks.

I think this is just something else we agree on differently. They clearly have more responsibility for actions that led to this crisis, but I see them as having less responsibility to society to act in a way that is in societies interest than the people who actually do have the responsibility to constrain their activities for the benefit of society.

So what I want to change is the government and the government's regulations. I expect the corporations to continue to pursue their interests. While their roles in this are greater than that of the government it is the government's role to regulate them.

Quote:

When you encourage an atmosphere of risk-taking, and make it clear that you aren't interested in investigations - and certainly not criminal investigations - than no matter what regulations you have, what rules you have, this group will find a way to exploit it for their gain and our loss. It's necessary to attack the problem here - not just the symptoms.

Yeah, and I see the problem as being the systemic deficiencies and the symptom as being the people who have best exploited it to their advantage, instead of vice versa.

Quote:

That's why I don't understand why you think none of the banks should be broken up into pieces, and none of the people responsible should be investigated, and basically nothing should change, except a little bit tougher regulations.

Well perhaps it's because you largely made up this position for me on the spot. I've never said anything about people not being investigated at all. I think there should be any kind of investigation you can think up of. I'm even down with anal-probing investigation and mandatory maximum sentences for any crime they are found guilty of. I am not all that interested in it, because I think that it won't help to just replace some players instead of fixing the rules to the game but I have nothing against it. My priority just happens to lie with fixing the game.

I do disagree that banks should be broken up, and have explained why I think so: it is because I think that the "too big to fail" problem should be solved by stipulating that banks become nationalized when they cross a pre-defined red-line and near insolvency. I think that there should be no bailouts without nationalization. If the institution is too big to fail, then it should be bailed out while being nationalized and privatized at the discretion of the underwriting public.

I do not think we should just break up banks for the sake of preventing them from becoming too big to fail, because I prefer to address them through this other manner, which is hardly the "do nothing" that you portray it as. It's an old trick to say the other guy wants to do nothing if he doesn't agree with what you want to do but I've already said what I want to do about that.

Quote:

It isn't going to be enough to solve the problem. We need a national conversation about what Wall Street is and what we want it to DO for us, as a country.

I know what I want imposed on Wall Street and have been talking about it. I don't think conversation is what is lacking though.

Quote:

Most of what I see you write seems to place quite a bit more blame on the gov't than on the banks, and not on those banksters who made affirmative decisions to participate in these unethical and probably illegal actions. I feel that's the wrong focus.

I don't approach this issue from a perspective of "blame" so much as "what are the ways to best address the problem" and to me the answer that is that while we can get angry at people for exploiting the system to their interest till we are blue in the face that the problems are largely systemic and that we should go about fixing the rules of the system.

I focus my efforts on the government, because that is how this happens. The government would have to regulate Wall Street, they aren't going to regulate themselves. So I want to pressure and criticize the government policies that fail to adequately restrain their commercial activity.

I just think just being more vehemently anti-corporation does not meaningfully help fix the systemic problems and that the government whose responsibility it is to set the rules should be scrutinized to identify where they are failing to do so.

I don't like that the blame game tends to deflect from the meaningful systemic change. Hanging a villain isn't gonna fix the broken system, and it's a common way to distract from the systemic problems in the first place.

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@hawkeye10,

hawkeye10 wrote:

Quote:
The whole world is living on credit, and it is the only way capitalism can survive... It simply takes too much out of people to exist on a cash and carry basis, and so it must advance money to people so it can take even more out of their futures which the people have the good sense to realize they will never see without taking the credit and living today...The people have no choice but war or revolution... They must either survive as the victims of their own economies or steal the lives and welfare of other peoples... I can't say I know what will happen, but I do not expect it to be pretty...

You and Robert both miss the point, your memory seems to be dysfunctional. It was said over a period of years by the PR apparatus of the corporate class and our government that citizens had a duty to consume, and that borrowing to do it was not only not a problem but was our patriotic duty. To now go back and blame the masses for doing what they where told to do because it turned out badly is immoral. You MUST put the majority of the blame on those where where in power, on those who claimed to be the experts and who's expertise the government vouched for, they who continually pushed bad policy and pushed for bad behavior from all.

The masses had a duty to get educated and to be cynical of stories that sounded too good to be true, the masses do share in the blame, but most of it does not belong to them. You hear this if you listen from those in the OWS movement, and they are correct.

You are correct that the government, in bed with capitalism does encourage and to an extent participates in consumption... The fact the governments around the world and people around the world are living on credit, and pay off later, to buy the good produced today is proof positive that capital has sucked too much wealth out of the societies and populations of the world... We have no money... Borrowing money is buying money with more money... The first mortage I had on this house had me paying three times the value I agreed to pay for the property because of interest... Now that I know what it takes to build a house I would never have bought this old trap; but more than that, I can recognize all the forces t hat conspired to inflate the price of property, and to raise the price of the money necessary to pay for it... Wages are not low so much as forced down... Property relieved of taxation can be held for speculation... Government can encourage home ownership to maintain political support for property rights, and they can support outrageous interest rates simply by not taxing home interest paid... Where is the good result of the situation where government denies itself the ability to tax interest, and the people are forced to accept high interest to have anything??? Home ownership is wasteful, and renting is pointless and without gain what so ever... This is only one instance where government has neutered itself when it needed to govern and make wise choices... We have been ruined by high interest, and low wages, and many robbed of jobs they had reason to count upon must see their own capital taken outright, or thrown on a buyers market at a loss... The misery of the people is not the object of government, but it is the result of our government enthralled with the ideology of capital...Capital and government must both be swept away, unless capital can be made to serve the needs of the whole people, and our government will not do this...

Hawk;
You should stop thinking of the masses as an individual multiplied... Since even a room full of people can contain a diversity of opinion and experience, so a mass of people can do so as well... The result is, that the masses are the resistence to the masses who feel the need for change... We must overcome ourselves to overcome capital, and there is no nice way to do that, and there is no way to do so short of hard work and intense education... When change is possible it will be made so by spontainious action spurred on by universal frustration and fear... It will not be the result of studied knowledge, and certainly not the news, and it will not be rational at all... What you are seeing is rational, but it does not express the depth of anger this people feels that is directed at other parties rather than at the cause, which is certainly a problem with us, and with all masses, that they are not one thing, but all things making all thing alike possible and impossible...We all need change, and all fear change... We want control and fear responsibility... We always trust in the kindness of strangers, until we realize the strangers are our enemies... And they are our enemies, and the class war is in progress from their end...Until fear, hate, frustration and anger can move the people to action, we do not have a case or a cause...

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@Robert Gentel,

Quote:

Yes, if it doesn't contradict the argument it is.

So.. you argued that 70% of the bad loans were the result of CRA which leads to your conclusion that it created a moral hazard.
I point out that 70% of the loans were made by entities NOT subject to the CRA.
Even though the facts you used to make your conclusion are wrong, you claim that even IF the totals were 30% you would reach the same conclusion.

It looks to me like you are just adjusting the facts to suit your conclusion Robert and then claiming the real facts are a red herring because they don't directly contradict your conclusion.

2 Replies

@parados,

You are (perhaps intentionally) missing the point. The principal moral hazard arose from the widespread securitizing of mortgages of all kinds, thereby quickly relieving the issuers of any risks associated with them and, at the same time replenishing their caqpital so they could make more loans. Fannie and Freddy were principal players in this market, and, because of their implied government guarantee, could borrow at very low rates and direct abnormally high levels of capital to an already expanding bubble.

Fot those who see our salvation in government regulation, this is an excellent example of government intervention significantly worsening a cyclic market excess. It turns out the regulators are just as likely to be wrong as the market, and, though the means are different, just as corrupt.

2 Replies

@georgeob1,

The ultimate cause of the bubble is not addressed by your theory... When property was taxed to support the government, property was relatively cheap and the labor necessary to make it pay taxes was dear... With labor taxed, property can be held for speculation for years on end because the taxes on it do not in the least represent the cost of defending it, while the price of labor carrying both government and profit can be driven into the dirt... Leaving mortage interest free of taxation only deprives government of revenue while making high interest rates, meaning higher profits for bankers seem more acceptable to those spending their lives to pay them... Ultimately, it is the government and all the people whether property owners or not who are supporting interest income for the rich... The moral hazzards are too numerous to count... There is nothing in our constitution saying the object of government was to support the capitalist economy, and yet, we the people have had capital on life supports for near seventy years... enuf is an efin nuff...

1 Reply

Two weeks into Occupy Wall Street protests, movement is at a crossroads

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