September 17, 2008

Sub-Prime Crisis On a Nutshell: Corrupt Democratic Mortgage Manipulation

Hatched by Dafydd

The good: President George W. Bush; Sens. John McCain and Phil Gramm; Senate Republicans.

The bad: Presidents Jimmy Carter and Bill Clinton; Sens. Chris Dodd and Barack Obama; Congressional Democrats; the propagandistic "news" media.

The cowardly and flummoxed: House Republicans.

All else is dicta. (Dicta follows below.)

Credits: I am indebted to a post by "Karl" over on Patterico's Pontifications; Karl has all the information... but (pace) I found his explanation a bit compressed and opaque. I wrote this post as much to understand it all myself as to explain to anybody else! I also call your attention to an excellent post on Wolf Howling, from which I learned a great deal. Also, a pair of posts by Captain Ed Morrissey at Hot Air explain much of this (with links galore).

Note that I am not a lawyer, and I really don't understand all this as well as do those who actually work in the field as lawyers, mortgage brokers, or loan agents. If anyone who knows what he's talking about can correct any misinformation I have here, I will pay close attention. Thanks!

I hope you have all taken note that Barack H. Obama has been rising in the polls and is now ahead of John S. McCain on several major tracking polls. If McCain doesn't do something quick, we will head right back to where we were six months ago, in early March, with Obama consistently leading by 5% in the polls. Obama could win and Democrats take huge majorities in both House and Senate.

If you're wondering why this is happening now, it's unquestionably because McCain is losing again on the economy -- what with the whole ongoing, slow-motion collapse of the entire charade of "sub-prime mortgages"... which the Democrats, aided by the elite media, of course, have blamed entirely on President George W. Bush -- and on McCain. This allows the Democrats to campaign on fear, their favorite "issue."

Economic fear drove the huge sell-off on the stock markets today. Money panic drives people to the Democrats, who promise to "tax the ultra-wealthy" and give that money to everybody else. If McCain doesn't calm voters down immediately, he will lose.

At the end of this post, I suggest that McCain cut a new commercial with him speaking directly to the American people, himself. This is what I suggest he say:

My friends, let me give you some Straight Talk about the economy. The American economic system is not the problem. The free market is not the problem. The problem is sub-prime lending, where the government forced banks to lend too much money to people who cannot meet the payments; when they default, the taxpayer picks up the bill. This is nothing less than housing welfare.

Now it's time for some straight talk from my opponent. Sen. Obama blames the Republicans; but he knows the entire failed program was created by his fellow Democrats, who have stopped Republicans from reforming it for decades.

He talks the talk of reform but refuses to walk the walk. Any plan that doesn't get the government out of the business of forcing banks to issue bad mortgages is a sham and will only make the crisis worse.

There's no time left for Sen. Obama and his fellow Democrats to dither. We must reform mortgage lending now. I've put a detailed plan on my website to resolve this crisis, reform the system, and return to fiscal sanity, giving a powerful, short-term boost to the economy. The long-term fix must come from cutting out-of-control spending, letting you keep more of your own money, and producing dramatically more real energy right here in America.

I'm John McCain, and I emphatically approve this message.

For the rest of the story, please click the Slither On.

Where things stand

John McCain must speak directly to the American people about the economy, lest Obama and the Democrats get a chance to "define" McCain as an old, out of touch beltway boy. Voters can see that we're in the midst of a collapse in the mortgage market, as lender after lender (and now insurers, like American International Group) goes belly-up or must find a buyer; and folks want to hear what McCain himself has to say.

But perhaps the public doesn't understand -- as I didn't until this month -- just how much of that collapse was in fact orchestrated by the socialist hijinks of congressional Democrats (including Obama), by Bill Clinton, and by Jimmy Carter: Between them, they forced banks and S&Ls into the volatile and risky sub-prime market; and then the Democrats repeatedly prevented any attempt by congressional Republicans (and by President Bush) to oversee and regulate that market.

Why would they do this? First, because Democrats have long been getting huge campaign donations from banks and other mortgage lenders; in fact, the top two recipients of such money are Sens. Chris Dodd (D-CT, 95%) and Barack Obama. Both subsequently encouraged exactly the sort of loan speculation they now decry, an act that reeks of corruption. In addition, many former members of the Clinton administration, including Franklin Delano Raines, former Commerce Secretary William Daley, and Deputy Attorney General Jamie Gorelick (of "Gorelick's wall" infamy), ended up running Fannie and Freddie or lobbying for them... and incidentally raking off tens of millions of dollars for themselves.

But the real culprit in this collapse isn't just Democratic corruption; it's the leftist demand to increase minority home ownership by lending low-income borrowers more money than they qualify to borrow, with higher mortgage payments than they are able to pay. That is, offering mortgages that violate the most basic rules of banking, as a form of "housing welfare." That is the crux of this very real, but very specific crisis.

What caused the sub-prime mortgage crisis?

One of the most evil, anti-capitalist movies ever made is also one of the most beloved by audiences and critics (including supposedly capitalist critics and pundits such as Michael Medved and Hugh Hewitt): It's a Wonderful Life, directed by liberal fascist Frank Capra and starring conservative Jimmy Stewart.

In that movie, George Bailey (Stewart) is shown to be a great guy because he offers mortgages to people who cannot afford to pay them -- and then lets them slide on their payments without foreclosing. Such a wonderful life! (Well, not for the bank's investors; and not for the depositors, when the bank fails -- as it inevitably will do.) In a sense, then, Philip Van Doren Stern (author of the short story, "the Greatest Gift," that was the basis for the movie) invented the utopian idea of "sub-prime mortgages."

It's a Wonderful Life makes great theater but lousy economics, and the financial events of the past few months illustrate why.

The primary rules to prevent the collapse of banking are (1) not to lend money to unqualified borrowers -- you can't give a mortgage to someone who cannot possibly pay it -- and (2) to maintain a sufficiently high cash reserve that people who need to draw out all their money can do so -- the bank can't lend out all its depositors' money. But those rules make it more difficult for the poor (disproportionately minorities and Democrats) to obtain housing loans: They're restricted to much smaller mortgages for a smaller percentage of the total cost of the house; and because the bank can't lend out every penny, it must pick and choose to whom to lend.

This infuriates liberals, who believe the very purpose of a bank is to give the poor a chance to own their own home (even without pulling themselves out of poverty first). Thus, liberals have long championed a supposed "reform" that is actually an element of unbridled liberal fascism: That government should force private banks to make bad loans to Democratic constituents, under threat of massive fines from the SEC... or even loss of their license.

Democrats in Congress forced that act of semi-nationalization on the banks as long ago as 1977, where they pushed through Congress the anti-capitalist, Carter-era Community Reinvestment Act (CRA) of 1977. That was the year that was: Democrats in the 95th Congress, still surfing the tsunami of Watergate, enjoyed a 61% majority in the Senate and a 67% majority in the House; and in Jimmy Carter, they had the most left-liberal Democrat in office since FDR. It was the perfect storm of socialism.

The umpires strike back

In 1999, Republicans, who by then controlled the House and Senate, tried to do away with that horrible piece of utopianism. Sen. Phil Gramm, then chairman of the Senate Banking Committee, offered a sweeping deregulation of the financial industry (S. 900, later called the Financial Services Modernization Act, FSMA). It was true deregulation that left the financial institutions free to decide what activities to engage in and with whom, but left them accountable for their actions; and it explicitly removed the CRA mandate to offer mortgages to poor people who couldn't afford them.

Democrats voted en masse against this version of the FSMA, with only one Democrat -- Sen. Ernest F. Hollings -- voting for it. Nevetheless, it passed the Senate by 54-44; every single Republican voted for this clean version, including John McCain. But President Clinton threatened to veto the bill for that very reason: He wanted to strengthen the CRA, not gut it! Clinton wanted to make it even easier for low-income borrowers to get a mortgage... and even easier to find somebody else to make the payments (while the borrower kept the house) when the inevitable happened. So President Clinton made it clear that the bill, as passed by the Senate, would never become law:

Administration officials say the President would veto the Senate version because it would dilute requirements that banks make loans to minorities, farmers and others who have had little access to credit. The legislation also contains provisions that have been criticized by Treasury Secretary Robert E. Rubin because they reduce his department's oversight of banks.

But privately, some Democrats and Administration officials say that Mr. Clinton might agree to legislation if the objectionable provisions in the Senate measure were watered down or eliminated when the House and Senate negotiate a final bill in conference.

Alas, that is exactly what happened. Throwing gasoline to the winds, Senate Democrats insisted on retaining the It's a Wonderful Life provision, Jimmy Carter's CRA; the final version of the FSMA, passed in 1999, still compelled banks and S&Ls to issue sub-prime mortgages. The provision was inserted during the House-Senate conference, and no senator or representative ever got to vote for it... very similar to an earmark, except it was designed to protect Democratic votes (the poor and irresponsible being their natural constituency), rather than enrich some particular Democratic crony.

Shamefully, the Senate Republicans eventually agreed to this version, which passed 90-8. The only Republicans who did not vote for it were Richard Shelby (R-AL, %), who voted Nay, and John McCain, who did not vote.

I suspect McCain wanted to vote Nay, but he did not want to oppose his longtime friend and ally Phil Gramm -- who voted for this version, since it did contain most of the deregulation he wanted. Gramm and the other Republicans who went along probably thought the sub-prime lending was just a small "bone" they'd thrown to the Democrats.

But it was exactly this Democratic bone that led to the current collapse, the Law of Unintended Consequences in full cry.

President Bush tries to reform Freddie and Fannie

Fannie Mae (Federal National Mortgage Association) was part of Franklin Roosevelt's New Deal; founded in 1938, its purpose is to buy mortgages from banks and savings & loans to inject more liquidity (cash) into the mortgage market. In other words, it's a legal way for the government to pump more money into the banking industry... exactly the sort of government intervention in the market that is rightly dubbed "liberal fascism." It was turned into a quasi-private corporation in 1968, to get it off the government accounts due to its perennial shortfalls. (This sort of quasi-private company is called a "government sponsored enterprise," or GSE.)

Freddie Mac (Federal Home Loan Mortgage Corporation) is another GSE, this one founded in 1970; its purpose is to create the illusion of competition with Fannie Mae. Fannie and Freddie have been in near constant financial deep water for decades because of their very nature -- but especially after they became the primary avenues for implementing Jimmy Carter's vision of housing welfare, the CRA.

As of September 7th, 2008, both Fannie Mae and Freddie Mac were placed under conservatorship of the federal government, due to extraordinary mismanagement by the former members of the Clinton administration who have been running the two GSEs.

In 2003, Bush proposed a major reform of Freddie and Fannie. Specifically, he wanted regulation to be put under the Treasury Department, which would tighten the lending rules... again, trying to bring some capitalist rationality to Carter's CRA. But again, the Democrats threw themselves athwart fiscal sanity and cried "stop!" As the New York Times reported:

Significant details must still be worked out before Congress can approve a bill. Among the groups denouncing the proposal today were the National Association of Home Builders and Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing.

''These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''

Representative Melvin L. Watt, Democrat of North Carolina, agreed.

''I don't see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing,'' Mr. Watt said.

Bear in mind that to Democrats, "affordable housing" is code for giving Democratic constituents mortgages that they cannot pay to buy houses they cannot afford -- with the proviso that when they default on their loans (as so many do), you, the American taxpayer, will pick up the tab so that other fellow can keep his house.

Bush's reform attempt went nowhere, due to lack of congressional support, primarily by Democrats but without much help from Republicans, either. (In this sense, it was very much like Bush's attempt to reform Social Security. Thanks, GOP Congress!)

Republicans' last shot at averting the looming disaster

Republicans, including John McCain, made one more valiant effort to stave off the implosion that he and others actually foresaw; in 2005, just three years ago, McCain joined as a co-sponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005.

The bill sought to shift authority over Fannie and Freddie from HUD -- which historically pushes lenders towards quasi-socialism and liberal fascism, including the It's a Wonderful Life provision -- to an independent agency, the Federal Housing Enterprise Regulatory Agency.

McCain spoke powerfully in its favor; but Democratic Sen. Chris Dodd killed it in the Senate Banking Committee, in which he was ranking minority member. (Thanks, Senate parliamentarians!)

Bottom line

Here are the "straight talk" bullet points you need to know about the sub-prime mortgage crisis:

  • Starting three decades ago, Democrats have used every parliamentary trick in the book to construct exactly the system we have today, where banks are bullied into making bad loans to borrowers who cannot afford them; then they sell those bad loans to Freddie Mac or Fannie Mae; and when a borrower defaults, taxpayers pick up the bill for the defaulter's nice, new house. This amounts to housing welfare for Democrats;
  • Republicans have tried repeatedly to kill that program, warning that such an anti-capitalist practice can only result in a complete, diastrous collapse;
  • Democrats "denounced" those warnings as "exaggerated." Because of the arcane rules in the House of Representatives and especially in the Senate, Democrats have repeatedly managed to squash those attempts at real reform -- whether they were in the majority or the minority;
  • Now that the warnings are proved prescient, and the collapse is underway and impossible to conceal any longer, Democrats point their fingers at President Bush, John McCain, and Republicans in general -- "Look what you made us do!"
  • Democrats pretend that the collapse was caused by a lack of regulation and government control -- when it was actually caused by overregulation, amounting to quasi-nationalization of mortgage lenders, vigorously pushed by Democrats in 1977, 1999, 2003, and 2005 -- the It's a Wonderful Life provision;
  • Democrats pretend that John McCain was pushing for complete deregulation of Fannie and Freddie, when in fact he was pushing for greater oversight -- but favored the rescinding of the particular Democratic provision that has now led to the collapse. Barack Obama and Joe Biden have consistently supported this provision -- and now blame McCain when its inevitable, predictable, and predicted consequences come crashing down upon us.

What's to be done, then?

Very simple: It's time for some straight talk from Mr. Straight Talk himself.

So far, McCain hasn't said anything stupid about this crisis. But he hasn't said anything smart, either. In fact, he has barely said anything at all.

John McCain needs to move and move quickly. He needs to jump out in front of this issue and not allow himself to become "Katrina-ed." McCain needs to cut a commercial; and taking a page from his opponent, he should simply talk straightforwardly to the camera and say something along the following lines:

My friends, let me give you some Straight Talk about the economy. The American economic system is not the problem. The free market is not the problem. The problem is sub-prime lending, where the government forced banks to lend too much money to people who cannot meet the payments; when they default, the taxpayer picks up the bill. This is nothing less than housing welfare.

Now it's time for some straight talk from my opponent. Sen. Obama blames the Republicans; but he knows the entire failed program was created by his fellow Democrats, who have stopped Republicans from reforming it for decades.

He talks the talk of reform but refuses to walk the walk. Any plan that doesn't get the government out of the business of forcing banks to issue bad mortgages is a sham and will only make the crisis worse.

There's no time left for Sen. Obama and his fellow Democrats to dither. We must reform mortgage lending now. I've put a detailed plan on my website to resolve this crisis, reform the system, and return to fiscal sanity, giving a powerful, short-term boost to the economy. The long-term fix must come from cutting out-of-control spending, letting you keep more of your own money, and producing dramatically more real energy right here in America.

Both parties contributed to this collapse, and it's time to hold both accountable... and come together to fix this problem before it wrecks our otherwise strong economy.

I'm John McCain, and I emphatically approve this message.

I agree we should let John McCain be John McCain; but for God's sake, can't he be John McCain a little faster and louder, please?

Hatched by Dafydd on this day, September 17, 2008, at the time of 10:55 PM

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Comments

The following hissed in response by: Mr. Michael

Excellent synopsis, Dafydd... it finally makes sense out of the mess; especially as it applies to the Sub-Prime aspect of the problem. It never made sense to me WHY banks would make so many bad loans... sure, I understand why Real Estate salesmen would sell the homes to folks that couldn't afford it, and why Mortgage Brokers would fill out the paperwork. But I look at the loans made to my FAMILY members and I think "Good Lord man, that's idiotic! Anybody could tell they're going to have problems paying that back - I hope you aren't making a habit of this!" As we all know now, they did.

I know you want John McCain to step up, but what of George W. Bush?

Remember him? Sitting President of the United States?

I understand that he has a low approval rating, but he certainly has the responsibility to stand up and make some news on this issue. If indeed he's been trying to institute some reforms, he should danged well stand up and say so... perhaps even use his 'unpopularity' to say what nobody in the Political World wants to have said.

Mind you, your analysis covers only the first step of the problem... Companies like Bear Stearns, AIG, and Lehman Bros for example don't offer loans, they got caught up buying, trading and insuring those bundled bad loans as investments. (Trying to 'out Fannie' Fannie May!) (Off topic: There has GOT to be a joke in our Fannie getting too large)

The best analysis I've found on the sale and trade of these types of funds was done by a comedy duo, Bird and Fortune. Here's a link to a video of their satirical analysis; it'll make you laugh... and then weep.

The above hissed in response by: Mr. Michael [TypeKey Profile Page] at September 18, 2008 1:36 AM

The following hissed in response by: Insufficiently Sensitive

If you're wondering why this is happening now, it's unquestionably because McCain is losing again on the economy

I respectfully disagree. The McCain polls are sinking on account of the overwhelming hurricane spewed by the MSM in its efforts to assassinate the candidacy (not yet the person) of Governor Palin. Said windstorm is all too successful, since there's very little penetration to the public from any countervailing viewpoints - the MSM still owns a huge majority of the ears and eyeballs of the public at large.

This is actually a very severe blow to the democracy of the USA. We have an ironclad monopoly, against the public interest, of partisan Democratic supporters in the 'news' media who are not only in the tank for Obama, but are continuing a six-year hatefest directed against the Bush administration which has successfully prevented rational analysis of its policies as well. And they want "change", just like the mobs in Berkeley in the 60s did - the establishment must be smashed, and there are no enemies on the left.

It should be a simple matter for the McCain campaign to point out the Democratic origins of the sub-prime debacle, and to illuminate that Obama's financial advisors are themselves some of the culprits. That would make an excellent tactic for McCain and Palin as a team - to divert enough public attention to the subject that the sordid anti-Palin soap opera would have some competition.

The above hissed in response by: Insufficiently Sensitive [TypeKey Profile Page] at September 18, 2008 8:11 AM

The following hissed in response by: wtanksleyjr

The McCain polls are sinking on account of the overwhelming hurricane spewed by the MSM in its efforts to assassinate the candidacy (not yet the person) of Governor Palin.

That's what they'd like you to think -- that their assassination was successful. But their assassination preceded her popularity; all it did was put her name in lights.

No, McCain's sank down partially because the convention bump naturally faded (they normally do), partially because Obama finally was able to stop talking about Palin, and (upcoming) because Obama was able to talk a LOT about how Republicans are to blame for the economy.

McCain's not responding well -- the most I've heard from him is some vague populism, which is _really_ bad, since that's all Obama has too, and Obama's much better at vague populism. (Or, as someone else said, "you can fool some of the people all of the time, but they were already voting for Obama anyhow.")

The above hissed in response by: wtanksleyjr [TypeKey Profile Page] at September 18, 2008 9:28 AM

The following hissed in response by: GW

Your ad is preciely what McCain needs to be saying. Possibly the only addition I would make to it would be McCain quoting himself from his 2005 speech when he warned that Fannie and Freddie were on the brink and would take the financial system with them.

The above hissed in response by: GW [TypeKey Profile Page] at September 18, 2008 2:28 PM

The following hissed in response by: Dafydd ab Hugh

GW:

Possibly the only addition I would make to it would be McCain quoting himself from his 2005 speech when he warned that Fannie and Freddie were on the brink and would take the financial system with them.

I was scrambling to squeeze a good description into less than one minute's worth of speaking. Of course, McCain should make five or six ads: the first like what I wrote, giving the overview; the others explaining each aspect in more detail.

Wtanksleyjr:

McCain's not responding well -- the most I've heard from him is some vague populism, which is _really_ bad, since that's all Obama has too, and Obama's much better at vague populism.

McCain is now readjusting his aim, as Wolf Howling reports here. His current speech is much more specific, intelligent, and aggressive.

E.g.:

Senator Obama talks a tough game on the financial markets but the facts tell a different story. He took more money from Fannie and Freddie than any Senator but the Democratic chairman of the committee that regulates them. He put Fannie Mae’s CEO who helped create this disaster in charge of finding his Vice President. Fannie’s former General Counsel is a senior advisor to his campaign. Whose side do you think he is on? When I pushed legislation to reform Fannie Mae and Freddie Mac, Senator Obama was silent. He didn’t lift a hand to avert this crisis. While the leaders of Fannie and Freddie were lining the pockets of his campaign, they were sowing the seeds of the financial crisis we see today and enriching themselves with millions of dollars in payments. That’s not change, that’s what’s broken in Washington.

And he even offers the beginnings of a solution:

We cannot wait any longer for more failures in our financial system. Structures like the resolution trust corporation that dealt with the failed savings and loan industry were designed to clean up the system and worked. Today we need a plan that doesn’t wait until the system fails. I am calling for the creation of the mortgage and financial institutions trust – the MFI. The priorities of this trust will be to work with the private sector and regulators to identify institutions that are weak and take remedies to strengthen them before they become insolvent. For troubled institutions this will provide an orderly process through which to identify bad loans and eventually sell them.

This will get the treasury and other financial regulatory authorities in a proactive position instead of reacting in a crisis mode to one situation after the other. The MFI will enhance investor and market confidence, benefit sound financial institutions, assist troubled institutions and protect our financial system, while minimizing taxpayer exposure. Tomorrow I will be talking in greater detail about the crisis facing our markets and what I will do as President to fix this crisis and get our economy moving again.

As a certain fellow oft writes, read the entire article. (Generally appended after he quotes 93.8% of it!)

Dafydd

The above hissed in response by: Dafydd ab Hugh [TypeKey Profile Page] at September 18, 2008 3:08 PM

The following hissed in response by: GW

Touche.

The above hissed in response by: GW [TypeKey Profile Page] at September 18, 2008 7:03 PM

The following hissed in response by: GW

Touche.

The above hissed in response by: GW [TypeKey Profile Page] at September 18, 2008 7:03 PM

The following hissed in response by: wtanksleyjr

Starting three decades ago, Democrats have used every parliamentary trick in the book to construct exactly the system we have today, where banks are bullied into making bad loans to borrowers who cannot afford them; then they sell those bad loans to Freddie Mac or Fannie Mae;

There's a very important link in this chain that you didn't substantiate. To the best of my knowledge, although Fannie and Freddie _do_ have a policy of being stupid about their loans, they do NOT accept subprime creditors (Fannie and Freddie's policies are one definition of "prime", according to Wikipedia). Thus, I find it hard to believe that they regularly buy subprime debt from other lenders.

However, my knowledge on this subject is slim to none. What's your source?

and when a borrower defaults, taxpayers pick up the bill for the defaulter's nice, new house. This amounts to housing welfare for Democrats;

If you're wrong about the above, the logic here doesn't hold; you need to insert the fact of the bailout (after which the logic is perfectly fine, so obviously this conclusion is correct).

Like I said, I don't KNOW that you're wrong, but someone called me on that one fact, and I'd like to provide a cite.

The above hissed in response by: wtanksleyjr [TypeKey Profile Page] at September 19, 2008 3:16 PM

The following hissed in response by: wtanksleyjr

McCain is now readjusting his aim, as Wolf Howling reports here. His current speech is much more specific, intelligent, and aggressive.

You're right, that's a great speech.

I skipped over it because it starts out with the populist whine that this is all due to greed... Well, no. Greed is a given; our systems should handle greed as a matter of course. If you have an idea that works unless someone gets greedy, you don't have an idea that works.

BUT, the rest of the speech was very good. I'm glad you forced me to read it.

It was reported in most newspapers that mentioned it as something like "McCain speaks against Wall Street greed." Looks like I'm not the ONLY one who only reads the first paragraph :-/.

The above hissed in response by: wtanksleyjr [TypeKey Profile Page] at September 19, 2008 3:37 PM

The following hissed in response by: Dafydd ab Hugh

Wtanksleyjr:

There's a very important link in this chain that you didn't substantiate. To the best of my knowledge, although Fannie and Freddie _do_ have a policy of being stupid about their loans, they do NOT accept subprime creditors (Fannie and Freddie's policies are one definition of "prime", according to Wikipedia). Thus, I find it hard to believe that they regularly buy subprime debt from other lenders.

A fair question. You're correct that they do not themselves issue subprime mortages, nor do they securitize them directly -- that's when you package a bunch of mortgages into what are called "mortgage-backed securities" (MBSs), collateralized debt obligations (CDOs), and other such asset-backed securities (ABSs), and sell those to investors... paying a rate usually 50 basis points lower than the rate of the loans (if you're packaging loans with an average rate of 6.5%, you would offer a rate of 6.0% on the ABS).

However, Freddie and Fannie do also participate in the secondary market of ABS... and they do buy subprime mortgage-backed and related securities.

Will you accept as authority the 2008 report to Congress by the Office of Federal Housing Enterprise Oversight (OFHEO)? (The link only works well on Internet Explorer.) On page 1 of the pdf (not page i but 1 as listed on the document itself), we read:

Risk and Risk Management

The weakening of Enterprise underwriting standards and the contractual impediments to guarantee fee increases as market conditions worsened contributed to poor financial performance. The Enterprises also experienced substantial deterioration in the market values of their subprime- and Alternative A (Alt-A)-backed private-label securities portfolios, although the portfolios remained overwhelmingly AAA-rated and have not recorded substantial impairment losses. The credit quality of the Enterprises’ principal counterparties—seller-servicers, derivative issuers and mortgage insurance companies—also deteriorated, increasing counterparty risk. Both Enterprises have taken steps to better manage credit risk, modifying risk management and business practices, but continuing house price declines and market turmoil will impact 2008 results.

This is quantized in Table 2, found on page 43, Subprime Asset-Backed Securities Portfolio (as of 12/31/2007), where we find that Freddie Mac has $152 billion in such subprime MSBs, CDOs, and such... in 16.4% of which, the underlying mortgages are 60+ days delinquent.

Now this is tough sledding, and I have no expertise or training in this area; but unless I very much misunderstand this report, it seems to indicate that they do have $152 billion of subprime-backed securites in their portfolio.

So you're correct that it's not as simple as I phrased it (I'll probably rewrite that section to make it more accurate); but it is correct, it appears, to say that Freddie and Fannie do hold some subprime debt devices. They don't hold direct subprime mortgages, but they do hold subprime securitized mortgages.

It may be a small portion of their portfolio; but they do appear to buy subprime debt, they do appear to buy such debt off of the banks and S&Ls, and they do appear to be at great risk at least partially because of the collapse of the subprime mortgage market.

Make sense?

Dafydd

The above hissed in response by: Dafydd ab Hugh [TypeKey Profile Page] at September 19, 2008 6:35 PM

The following hissed in response by: wtanksleyjr

Dafydd, makes perfect sense. Thank you.

The above hissed in response by: wtanksleyjr [TypeKey Profile Page] at September 20, 2008 12:49 PM

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