Elizabeth Warren Destroys Financial Crisis Myth

[bemildred]

Source: HuffPo

Speaking five years after the financial crisis began, Sen. Elizabeth Warren (D-Mass.) rejected that affordable housing mandates for Fannie Mae and Freddie Mac caused the financial crisis.

"While the crisis was massive and painful -- and its impact continues to weigh on middle-class families to this day -- its underlying cause was fairly clear," she said, in remarks to the Mortgage Bankers Association’s 100th Annual Convention & Expo in Washington. "The GSEs [government-sponsored enterprises] made significant mistakes -- mistakes that cost taxpayers dearly -- but those mistakes were not the underlying cause of the crisis."

"Although Fannie and Freddie purchased securities backed by subprime loans, and some of those purchases helped fulfill their affordable housing goals, the St. Louis Fed economists found that the housing goals had no impact -- no impact -- on either the number of subprime loans originated or the price of those loans in the private-label market," she said. "Affordable housing goals have been scapegoated by those who have been itching to get rid of the goals for a long time, but I think it’s time to drop that red herring."

Warren blamed Fannie and Freddie's mistakes -- they have cost taxpayers $187 billion since being taken under government conservatorship in 2008 -- on trying to make increased profits to please shareholders.

Read more: http://www.huffingtonpost.com/2013/10/29/elizabeth-warren-financial-crisis_n_4174123.html

---

So, greed then.

[jtuck004]

1. Ritholtz has some great write-ups on that. It was the banks that we are paying $85 billion a month

to, money that is piling up in the Fed while they are being paid interest on it, that caused the Financial Crisis as they took advantage of laws like the Financial Modernization Act, with Alan Greedspan's encouragement, and our government failing to regulate.

His book, Bailout Nation is a great read, but you can search his website. He made an open and very public offer, I think it was $100K, to anyone who could prove that it was Fannie and Freddie that cause it. He still has his money

The Big Picture, here.

1) The origination of subprime loans came primarily from non-bank lenders not covered by the [Community Reinvestment Act, a law pushing the two GSEs to purchase more loans in the secondary markets and thus expand access to housing loans to low-income neighborhoods];

2) The majority of the underwriting, at least for the first few years of the boom, were by these same non-bank lenders;

3) When the big banks began chasing subprime, it was due to the profit motive, not any mandate from the President (a Republican) or the Congress (Republican controlled) or the GSEs they oversaw;
Prior to 2005, nearly all of these sub-prime loans were bought by Wall Street—NOT Fannie & Freddie;
In fact, prior to 2005, the GSEs were not permitted to purchase non-conforming mortgages;

4) The change in FNM/FRE conforming mortgage purchases in 2005 was not due to any legislation or marching orders from the President (a Republican) or the the Congress (Republican controlled). It was the profit motive that led them to this action.

________

Fannie and Freddie screwed up, but they were so late to the game that it is laughable to blame them. Only ignorant people and people who want to cover for criminal behavior either pay attention to or use such a tactic, nothing more than someone dangling shiny objects in front of them to distract from the real cause.

[bemildred]

2. I'm not interested much in the argument over who to blame.

The problem is unrestrained greed, and poor or no judgement at all applied: whoring after money instead of taking care of business, I mean they conflate the two, if you make a boatload of money, it's OK if you destroy the business in the process. Vulture Capitalism, applied to our housing supply is what happened.

[jtuck004]

5. Oh, I am. Because that failure to assign responsibility is what furthers the very things you are

talking about. The penalty for unrestrained greed and vulture capitalism is boatloads of money injected into continuing your criminal enterprise, and, since no one has been held accountable, the opponents are free to blame Fannie, Freddie, the Easter Bunny, whomever, and the people who don't read past the headlines may well begin to believe their lies.

One can complain about their behavior, even get rid of them, but unless they are held to account for it there will always be another one waiting in the wings for what has proven to be a richly rewarding path.

[bemildred]

6. That's OK too, go for it. Some legal process would be nice. I'll back you up. nt

[jtuck004]

12. Unfortunately they have bought off nearly anyone who could do anything about it, thus

insuring not only their lack of accountability, but the ability to do it again. And I seriously doubt that ability of the people to recognize their position on the plantation and do anything about it. That analogy grates on me, but it sure describes what is happening.

And the response from the people is to continue the party, because leaving the plantation scares them to death.

[JDPriestly]

17. I agree with you.

The banks are paying huge fines.

That's the theory.

The reality is that the depositors in the banks are paying the fines.

How? Incredibly low interest rates. In fact, one very large bank that has huge liability for the housing crisis charges a monthly fee to people with small savings accounts. You put in $500, and you pay a monthly fee. Takes some time, but eventually that small account of $500 is eaten up by the fees.

The bankers are not paying for this, not one penny.

Meanwhile, the stock market is a huge bubble that will blow up. That too is just a matter of time.

[bvar22]

34. Then assign responsibility to those who de-regulated the Banking Industry in 1999.

The Celebration at the signing of the Gramm–Leach–Bliley Act,
which de-regulated the Banking Industry,
and removed the firewall between Commercial Banks and Investment Banks.

[jtuck004]

35. Absofreakinlutely!

There is so much to go around with the "leadership". Back when Carter was pres, he and Volcker, in response to worsening economic conditions, told the country that we needed to reign it in, quit borrowing and spending so much, and we would regain control. The country gave him a big FU, along with a whole lot of Democrats, who promptly broke away from their New Deal programs and voted for Reagan. And that started a wholesale sell off (sell out?) of the means of wealth-creation by working people, and led us to exactly where we are today.

And still people don't realize what they've done, think if they could just get another loan, everything would be peachy.

[bvar22]

36. Had we stuck with Carter's Energy Conservation & Alternative Energy Program,

we would be so much better off today.

[jtuck004]

38. This was such a much better country back then. We had all sorts of experiemental things

going on. I never would have guessed this was our future. Didn't see the rug being pulled slowly out from under us, I guess.

[burnsei sensei]

37. +1

And if Hillary Clinton runs in 2016, I wonder how enthusiastic she will be about undoing THIS.

[JimboBillyBubbaBob]

23. I do like...

...your succinct manner of expressing things. Sums it up.

[bemildred]

25. Thank you. nt

[progressoid]

3. The same Freddie and Fanny that the administration wants to privatize.

[srican69]

7. freddie and Fannie ARE private ...

They securitize the loans and sell it to everyone .. there is an assumption that the US govt will step in to prevent default on the securites sold by GSE ...

[progressoid]

16. That's a pretty fair assumption.

As the Feds return control of Fannie and Freddie to private hands, they will go back to business with the backing of the Gov't.

Public burden - private profits.

[Mnpaul]

39. They are profitable again

Everyone wants a piece now.
http://money.cnn.com/2013/08/08/news/companies/fannie-freddie-bailout/

[ErikJ]

4. How subprime lending all started in Orange County.

.......................clip

This is the story of how local lenders and Wall Street investment bankers got together.

Securitization of mortgages wasn't invented here. Fannie Mae — the Federal National Mortgage Association — had been doing that for decades with conventional mortgages. And subprime lending - previously known as "hard money" or C and D lending to people with subprime credit - had a long history.

But until the 1990s, subprime lenders like Long Beach Savings could only resell their mortgages to private investors willing to take bigger risks for higher returns. Once Wall Street began issuing public securities, the lenders' capital grew exponentially.

Komperda said executives from Long Beach approached Greenwich with the idea of securitizing their mortgages because Greenwich had already dealt in similar issues. To make the Long Beach deal acceptable, Komperda persuaded insurers to cover the issue and ratings agencies to give it an AAA rating.

"They didn't understand the product," said Komperda, now 48, who left Greenwich in 1997 to join an offshoot of Long Beach Savings. "It wasn't mainstream."

Godfathers of subprime

Established in 1979 by Roland Arnall, Long Beach Savings grew rapidly after Wall Street opened the credit tap. It moved to Orange in 1991 and gave up its banking license in 1994, converting to a pure mortgage company.

In 1997, Long Beach Savings split into privately-held Ameriquest and a publicly traded subsidiary, which sold for $350 million in 1999 to become the subprime arm of Washington Mutual Inc.

Other companies were started by executives who learned the ropes at Long Beach Savings: ResMae Mortgage Corp. in Brea in 2001 and Encore Credit Corp. in Irvine in 2002.

"We did it here because you had a lot of talent," said Jon Daurio, an alumnus of Long Beach Savings who co-founded Encore and now runs a company that buys distressed mortgage loans. "You also had the Godfathers of subprime."

Daurio said the Godfathers were Arnall, Brian Chisick of Irvine-based First Alliance Mortgage Co., Russell and Rebecca Jedinak of Guardian Savings & Loan in Huntington Beach, and John T. French, founder of Santa Ana-based Plaza Savings & Loan.

French, now 76, said in an interview that the local lending industry evolved in response to market and regulatory changes. French worked with clients who had black marks on their records - a bankruptcy, missed payment, divorce - but who on close inspection seemed reliable.

"The idea was to broaden the spectrum of underwriting," said French, who lives in Newport Beach.

.......................clip

http://www.ocregister.com/common/printer/view.php?db=ocregister&id=14214

[thesquanderer]

8. "So, greed then."

Basically, the answer to everything that is ever wrong with any part of society.

[bemildred]

9. Well, it's not always money.

Sometimes its sex. Sometimes its having personal servants. Sometimes you just want someone suitable to dump on when you feel bad and the Doc said you can't drink.

[ErikJ]

10. RUnaway unbridled greed can be controlled with adequate taxation

There was much less greed in the US before Reagan when the top tax rate was over 75%. The top now is 39% and 20% for cap gains/dividends. It has been found that whenever the top tax rate goes under 50%, market bubbles will begin to develop. The rich have so much "money to burn" they put it in the latest hottest market.
Before Reagan companies would keep top salaries lower to avoid the top tax rates and plow the profit back into the company itself for expansion and JOBS. Now they give it to their top level execs who either gamble with it or stash it in offshore tax havens.

[bemildred]

11. +1. Yes, this is no accident, not at all. nt

[JDPriestly]

18. Yes. Excellent point.

And we had better schools. Student loans were not so overwhelming. The job market was healthier. Everything was better before Reagan. We did have the Viet Nam war that put us in debt and the first oil crisis in 1973-74 that caused upheaval in the finances of the entire world.

Then we opened to China. Reagan followed through with "free trade." And all was lost. It's sad the damage that Ronald Reagan and his gang of thieves did to our country.

[Myrina]

13. Too bad she is one of only handful calling it out in such plain language ...

n/t

[DirkGently]

14. Yes. Nothing to do with 30-yr-old affordable housing laws.

[7962]

15. "St Louis Fed economists"? Ha. Some of them said there wouldn't be a bubble bursting too.

These are some of the same economists who were saying there wouldnt be a bursting housing bubble, housing prices never go down, etc.
Dont get me wrong, I think banks are to blame the most by far, but I believe they also used the relaxed lending rules to excuse their stupid behavior.
SO MANY loans were made to people who had no business getting them, there's no way it didnt have an effect. I can only speak for the area I live in, but there were BIG numbers here.

[JDPriestly]

19. Do you have any links to any statements by the St. Louis Fed economists prior to the

2008 financial crisis?

I have never understood why the Fed and the banks gave as you say "so many loans . . . made to people who had no business getting them" when a simple sense of logic combined with the information that housing prices were skyrocketing while wages were stagnant meant that people would not be able to pay the loans. Houses in my area were 7-8 times the prices at which we bought our property just 15 years earlier. Wages had not risen like that.

And our area was not unique.

[7962]

20. I'll try to find a link when I get off this phone (cheap) and back to computer

The statements were made by Bernanke, but all the Fed generally speaks with the same voice from the Chairman as far as I've seen in the past.

7-8 times higher? Wow, thats a LOT more than my area. But I was seeing "NINJA" loans....No Income, No Job, No Assets. Thats when I knew we were headed for a heartbreak. My brother lives in Gainesville Fl, and I was there a few days, He showed me a condo where he lived that was 150k. Yr before they were 115K. He said "people from Miami come up here and pay cash and rent them and figure they'll be 180 next year". But even at that time, after you factored ins, fees and taxes, you would make more money in a CD. I told him the musical chairs of "flipping" was about to end after I saw his area. And the following year it did.

[7962]

27. Links below

http://www.pbs.org/newshour/bb/business/jan-june12/federalreserve_01-13.html

http://www.washingtonpost.com/wp-dyn/content/article/2005/10/26/AR2005102602255.html

There are more stories like this out there too.

[JDPriestly]

31. How does the St. Louis Fed figure into those articles? They are about the Fed, but not about

St. Louis from what I can tell. The St. Louis Fed is the issue.

[7962]

33. When Bernanke speaks, he speaks for the entire Fed

You don't hear dissenting opinions from the Atlanta fed, or St Louis, etc. The Board Of Governors covers a broad base of the entire Fed and when he speaks, its generally a consensus opinion. And as the PBS story mentions, it wasnt just Bernanke who shrugged off the coming problems. No, it doesn't mention the St Louis Fed economists specifically, so I guess you could give them a pass. As a matter of fact, its possible the economists who Warren uses for her opinion may not have even BEEN part of the Fed back during those years. I don't know; the paper she cites is over a year old and focuses only on subprime loans instead of the broader-based Affordable Housing laws that other papers studied.
When those types of loans were the majority of the foreclosures, I dont see how it couldnt have been a major factor. I think the HuffPo article title "Destroys the Financial Crisis Myth" is also a stretch. Destroys? She simply points out the findings of one paper that differs from other papers. Here's a differing opinion.
http://news.investors.com/ibd-editorials-perspective/122012-637924-faults-community-reinvestment-act-cra-mortgage-defaults.htm
Actually, you can find about an equal number of opinions on both sides! Which means the truth probably falls somewhere in the middle.

In my area, in addition to those types of loans, bankers trying to play big shots also loaned too much money to "developers" who took on too much risk. I use the quotes "" because you could be a developer just by telling the bank thats what you were. I know of people who had regular jobs and were building houses "on the side". One sold, so why not build two? And so on. Till they DIDNT sell.

[FogerRox]

21. Credit default swaps, codified by the

Commodities & Futures Modernization Act of 2000.

Prior to that the 1996 partial repeal of the Glass Steagall Act, theses are the 2 largest order effects that started the financial crisis.

[Igel]

22. Warren phrased her defense very narrowly.

St. Louis Fed economists.

Housing guidelines for Freddie and Fannie.

And their effect on loan origination and interest rates in the private market.


The counter-argument is that it was implicit demands bolstered by the threat of governmental and non-governmental action on private markets, followed by a loosening of the securitization of mortgages by small private lenders to meet unofficial housing goals.

Once things were made legal for that reason, it only stands to reason that people would what the law of the land said was legal, all the more since it served personal and officially stated public interests. Nobody objected when corners were cut in one year, and so the following year, the year after that, and for years after that the same corners were cut.

Esp. since it helped the target audience. People exulted when lower-income and minority households could afford to buy houses--even though what made it possible was the original laxing of the securitization laws in the early-mid '90s. And the families themselves didn't balk and demand greater accountability. There was something they wanted; they were told they were eligible for it and could afford it. And confirmation bias rooted in self-interest did the rest.

Lots of guilt. Lots of players. For every transaction there was a private citizen involved, even if they did all ultimately funnel into the hands of a few. Lots of little forces were equalled by a few big forces. And the politicians said, "It is good," with their employees, the regulators, humming a Benedictus in the background.

[wildbilln864]

24. k&r! n/t

[Uncle Joe]

26. Kicked and recommended.

Thanks for the thread, bemildred.

[on point]

28. They functioned perfectly for DECADES. it was only privatization and deregulation

That caused the problems. Restore Glass Stegall and regulate bankers problem solved. The repuke economic agenda is a proven failure

[Wilms]

29. ^

[JEFF9K]

30. It's unlikely the myth has been destroyed. ...

... Rush and Glenn and Fox News, etc. will continue to use it.

[Enthusiast]

32. They created the myth to serve a purpose.

To absolve the guilty of responsibility. It goes like this, "Poor minority people caused it."

[Spitfire of ATJ]

40. The sub-prime and bundling and betting to fail and all that? Didn't happen on FOX "News"...

According to the right wing and the Republicans it wasn't telling crooks it was okay to be crooks.

It was an exercise in social engineering by LIBERALS that caused the housing market to collapse.

It goes like this, see if you can follow along with this twisted mindset. Ya see, Liberals wanted to have integration of the suburbs just like they did with the schools years ago. Let those dark folk move into "God Fearing" (©) white neighborhoods. The Liberals forced the banks to loan to minorities who couldn't make the payments and all those failed mortgages caused the value of white people's houses to fall.

Thus, the entire housing crisis is summed up with "Hate Liberals. Hate Minorities".

Next up, how Liberals and Minorities are to blame for having to change the damn clocks an hour.