Andrew Sullivan answers: Who caused the financial collapse?

[Swede]

He posts links to back up his case: Fannie and Freddie played at best a marginal role in the crisis, largely by belatedly following the private sector's reckless innovations in the sub-prime market, from 2006 onwards. They are not beyond criticism, but Bloomberg's off-the-cuff remarks are baseless. He should withdraw or amend them.




http://andrewsullivan.thedailybeast.com/2011/11/dish-check-who-caused-the-financial-collapse-not-fannie-and-freddie.html

[dkf]

1. If Fannie and Freddie are at fault, it's for not doing better due diligence on the loans they were

Accepting.

[kentuck]

5. True.

But didn't Fannie and Freddie purchase these mortgages from the big banks under certain assurances and conditions? And were those sales fraudulent?

[dkf]

11. Just think if they had done a quality control check on random loans.

Ugh found this...

Mudd said he worried that while the company focused on its accounting problems, "the business itself would get away from us." He said the company avoided that pitfall but now faced another: intense competition from "usurpers and innovators."

Buying Alt-A and subprime mortgages was part of Fannie Mae's effort to meet the challenge. Fannie Mae sought to reap the rewards and protect itself from the downside of the investments through a feat of financial engineering it called its "Risk Transformation Facility," which was meant to transfer the riskiest elements to other investors.

"We engaged in the subprime market, for the first time closing deals to guarantee and securitize subprime loans, with help from the new facility that allows us to sell off the riskiest layers," Mudd wrote. By October, the company had signed $3 billion of such deals.

Although the deals discussed in Mudd's memos were small in relation to the overall scale of Fannie Mae's business, they reflected the company's appetite for subprime and Alt-A mortgages. The company had a long and deep involvement in this market through a different form of investment.

http://www.washingtonpost.com/wp-dyn/content/article/2008/08/18/AR2008081802111_pf.html

[Aerows]

12. Loan money to people that can't pay it back, knowingly

Trade the paper on the stock market floor, decimate people's retirement funds, then blame it on the people that got a loan they should never have gotten in the first place?

FORGE loans for people that never should have gotten one in the first place, knowing you would be shuffling paper to benefit from robbing people's 401K's?

"I'm not a crook. I just saw some people that I thought might be stealing, and decided to steal a hell of a lot more."

[dkf]

13. Fannie enabled a market like this...

In other internal documents, there was a common refrain: One of Fannie Mae's objectives for 2006 was to "increase our penetration into subprime."

In an interview, Fannie Mae Executive Vice President Thomas A. Lund said the company pursued the purchase of subprime loans in 2006 and 2007 at the request of lenders, who wanted Fannie Mae to take the loans off their books. He said Fannie Mae hoped to bring higher standards to the market, and he added that the loans helped the company in its struggle to meet goals the government had set for Fannie Mae's advancement of affordable housing.

Fannie Mae spokesman Brian Faith said that as early as 2005, the company's management was publicly expressing concern about loans with layer upon layer of risky characteristics.

At a conference in spring 2005, Lund warned about the danger to borrowers, asking, "Are we setting them up for failure?" according to news reports.

Despite such reservations, Fannie Mae moved ahead.

http://www.washingtonpost.com/wp-dyn/content/article/2008/08/18/AR2008081802111_pf.html

[Aerows]

14. Nope

Mortgage-backed securities *caused* the problem, *were* the problem, and had the individual institutions taken the hit, they would have just plain failed (rightly). That isn't what happened.

It got escalated up the chain to the point where no one knew who owned what, still don't, but cried "bailout".

Cause a problem (Bush government), escalate it (deregulation), then blame everyone that was suckered into it.

[Hassin Bin Sober]

17. Fannie didn't "enable" the market. They caught on at the tail end ..

... and bought in to the sub-prime market when the meteoric graph was in full "hockey-stick."

The loans that killed fannie/freddy were purchased in the last throws of the market - 2007 and 2008.

Wall street was "enabling" this market with MBS, CDS, and CDOs before those "profits" fannie desired were even a glimmer in fannie's eyes.

Lehman had a mortgage purchasing branch by the name of "Aurora Loan Services."

Aurora's list of programs/guidelines were very extensive. Basically, anyone could get a loan if the rate was right. Our boss had the authority to underwrite to these guidelines but refused and opted to send files directly to their underwriters for two reasons:

1.)The programs were so complicated no one could keep track of the changes 2.) the loans were complete garbage that could never be sent ANYWHERE else if you missed a guideline and needed a back-up lender.

Bear Sterns had a mortgage purchasing branch, H&R Block had one, Capitol One had one - I forget the names but they all had one. All before fannie got in the game.

[dkf]

18. If the banks couldn't get them off their books would they have done so many?

That is why they were pushing Fannie to get in.

[kentuck]

20. Interesting.

Can you explain that further? Did the banks sell these mortgages to Fannie? Do you think they were intentionally fraudulent?

[Aerows]

24. You don't get "things" off the books when

they are falsely rated as AAA. That's the other part of the fraud that happened. Fraud on this layer and to this magnitude takes layers of corruption.

[Hassin Bin Sober]

32. Nobody was pushing fannie to do anything except for FANNIE....

.... and their management who saw a huge profit potential in all those sexy loans.

That's what cracks me up about right-wingers....

Turn Fannie in to for profit entity and then bitch when it gets too greedy and fucks up.

Push for privatization and de-regulation and then blame Clinton for signing a REPUBLICAN bill that enabled the melt-down.

[Aerows]

23. Thank you!

There appear to be people around here who (willfully) forget the history of the collapse.

[libinnyandia]

2. Bloomberg is clueless.

Thank God he won't get a 4th term. Maybe then the media won't give him so much air time.

[county worker]

3. Here's the rub. It makes very little difference if we know what really caused the financial

collapse. Bloomberg was feeding the ditto heads, freepers and brain dead tea party idiots what they want to here. "It is all the government's fault that you have economic problems."

The right lies with impunity. Truth only has usefulness for us.

[Aerows]

26. No, it matters little unless they are PROSECUTED

They knew, without a doubt what they were doing was against the law. When wholesale corruption emerges, you don't turn a blind eye and say "Well, they were all doing it"!

You prosecute the wrong-doers, no matter how many there may have been, and take steps to make sure nobody else does it. A third grade teacher could tell you this once the kids get out of hand.

[abelenkpe]

4. K&R please read!

Too many Believe the lie that programs to benefit the poor and first time buyers are the ones that brought down the economy. It's part of the blame the poor meme that needs to be countered. So spread this info as much as possible. :)

[yourout]

6. Most of it tracks back to The Gramm–Leach–Bliley Act. Without it this mess would not have been......

possible.

<http://en.wikipedia.org/wiki/Gramm%E2%80%93Leach%E2%80%93Bliley_Act>

[kentuck]

7. I agree...

That was the beginning.

[Warren Stupidity]

8. According to my rightwing B.I.L: a conspiracy of poor people

who by the millions hoodwinked banks all across the country to issue them sub-prime mortgages they could never possibly pay off. Those evil poor people took advantage of the innocent, gullible, bankers, knowing full well that the naive bankers would not know what they were getting into until it was way too late to do anything about it. Or something like that.

[onethatcares]

15. I thought it was Barney Frank that caused it

at least that's the meme I keep hearing. If it wasn't for Barney Frank (insert explative of choosing here), banks wouldn't have been forced to loan to

those people that couldn't afford mortgages.:banghead:

[redqueen]

9. K&R

[Aerows]

10. Everyone's fault but those who failed to do due diligence

And they know it, that failure to do due diligence was the cause.

If you lend $100 to a crack addict, pressing him to take the money, then don't get it back, who is at fault?

(note that I'm not saying home buyers were crack addicts, just using a hyperbolic analogy - desperate people do desperate things)

[kentuck]

16. And when it is guaranteed by the US Government...

who cares?

I think that was the thought of the big banks when they sold their bad mortgages to Fannie and Freddie. The executives of Fannie and Freddie wanted to make big money like the executives of the big banks so they slacked off also. Because they all knew it was backed by the taxpayers, they were at no risk. So the entire system became rotten to the core. The mortgages sold to Fannie and Freddie were supposed to be solid and good but they were not. Then they started wrapping them in bundles of securities and selling them around the world. That is why we don't know who is holding those mortgages today.

[Aerows]

25. Yep, that's exactly it

"I think someone is stealing, they didn't get caught, I'll steal, too".

[EC]

19. The big banks pushed for less docs on

sub prime loans...they had run out of qualified borrowers, so they needed to create a new market, so they lobbied for those no proof of income loans and other sub-prime loans that would give them a good profit in interest and many were with prepay penalties. They wanted the low income borrowers, they didn't care if they defaulted, they were selling off the mortgages anyway, they wouldn't be left holding the bag, was their thought.

They also pushed people into ARMS when they qualified for fixed rates, telling them that they would have a lower interest rate and when it went up they could refinance. They were also told that when the rate went up it "wouldn't be for that much, maybe $50. or so" (That's what they told my daughter and her SO).



This is the investigation Issa stopped because it wasn't pointing to Freddie and Fannie like he had wanted it to. It was pointing to the loosening of regulations for the banks.

[Rex]

21. The Feds.

They could have practiced real capitalism and let a competitor step forward to take the place of these criminal corporate empires.

[Aerows]

28. Yep

They are the ones that are supposed to be the ultimate overseers, and boy, have they ever become ultimate overseers - just not of what we wanted them to oversee.

They are the lion we let loose in the street to take care of the wolf problem, and now we have a lion problem.

[KG]

22. piss on Andrew Sullivan

[Aerows]

27. He's not wrong

He's just not digging deeper into the issue because he, like everyone else, is terrified to name the real culprits.

[Aerows]

29. I'll just post it here as a reply

The Federal Reserve was the ones that were supposed to be the ultimate overseers, and boy, have they ever become ultimate overseers - just not of what we wanted them to oversee.

They are the lion we let loose in the street to take care of the wolf problem, and now we have a lion problem. And wolves that they also enable because the hunting has gotten so easy they want to keep it that way.

[BlueCheese]

30. Why does anyone still take Sullivan seriously?

I say this as a former avid reader of his. The man is certifiable.

[girl gone mad]

35. Yeah, where'e he been the last few years?

That's right.. defending much of the looting which has taken place.

[DeSwiss]

31. Hey Bloomy, your flawed bullshit meme's showing!!!

Why would anyone still be listening to any of these people? Neither the obviously stupid ones (like this Bloomberg asshat), nor the slick-talking faux-populists (U Know Who)?

Why? Why? Why?

http://en.wikipedia.org/wiki/Dunning%E2%80%93Kruger_effect">The Dunning–Kruger effect is a cognitive bias in which unskilled people make poor decisions and reach erroneous conclusions, but their incompetence denies them the metacognitive ability to recognize their mistakes. The unskilled therefore suffer from illusory superiority, rating their ability as above average, much higher than it actually is, while the highly skilled underrate their own abilities, suffering from illusory inferiority.

- Oh, well. There's that........

K&R

[truedelphi]

33. The Freddie/Fannie people are peanuts compared to the half a

Quadrillion dollars of losses brought about by the exotic instruments that Wall Street and other big Time financiers were using to play with the public's money.

And even if it were true that it was Fannie and Freddie's fault, the middle class has no sway over the regulations used to deal with mortgage schemes. You have to have a much more established criteria to get a change in the overall Fannie/Freddie regulations.

When I held a R.E. license back in the late seventies, a person had to have one fifth to one third down to get a loan. They had to have credit. They had to have a decent job and decent work history, or else a co-signer.

All those conditions were modified by the same people who are now claiming that the Democrats "made them give houses to the poor."

In fact, it was George W that said that the society was now properly set up so that anyone who wanted a home could have one.

[zbdent]

34. how about all those mortgages bundled up and sold to other banks so that

the originating bank could raise some cash to buy other banks and appease the angry stockholders?

I never hear anything about those "causes" ...

[econoclast]

36. Fannie and Freddie set the benchmark for "SAFE"

In much the same way that the Fed controls interest rates by setting the Fed Funds rate, Fannie and Freddie controlled the mortgage market by setting the benchmark for what was understood to bea SAFE loan. Any loan that Fannie and Freddie WOULD buy was understood by the market to be safe. So it's not informative to look at how much they actually bought, but rather what they stood ready to buy. When HUD lowered the lending standards for what Famnie and Freddie COULD buy, this incentivized the private market to redefine SAFE. Fannie and Freddie didnt have to but the riskier mortgages initally, because private market players DID the buying themselves.

I have looked at the prospectuses of some of the riskiest securitized loans. In the sections defining the collateral they say " underwritten to the standards of FNMA". In effect they were telling prospective investors "Fannie Mae would buy these .. Why shouldn't you?!?!?"

Fannie and Freddie only stepped in to buy these mortgages late in the game after private investors who had been big buyers began to shy away. But Fannie and Freddie set the bar. By standing ready to buy the riskiest assets they provided the confidence that these assests were safe.

Look not at what they actually did ... Nut rather at what they were willing to do. That is what the market looked at to define what a SAFE mortgage was. If Famnie and Freddie WOUKD buy it... It was thought to be SAFE.

[Hassin Bin Sober]

37. That's bullshit.

You may have seen some vanilla Jumbo loans with that wording on the prospectus - but not any goofy loans like negative amortization or 100% LTV non-owner-occupied or fresh-out-of-bankruptcy or 100% LTV no-income no-asset loans. Or short term ARMS with crippling margin adjustments after the initial period.

No. The investment houses, through their mortgage outlets, were the pioneers of that junk.


Often times, Jumbo lenders would accept the fannie automated underwriting findings that would read Approve/Ineligible. Approve would mean it meets fannie credit guidelines but is Ineligible for delivery to Fannie - in the case of jumbo loans the reason for ineligible was due to loan size. So the jumbo investors would purchase the loan based on that credit finding.

Those jumbos were pretty vanilla loans minus the loan size. Even their other ALT-A loans were very conservative compared to all the investment house buyers.