Posts Tagged ‘Fannie Mae’

Why opposition to the XL pipeline is insane.

Sunday, December 4th, 2011

We are on the cusp of a new era in energy production in North America. Soon, assuming the Obama administration is defeated next year, we will be independent of the increasingly unstable middle east for oil. We need nuclear energy for electricity production. That is the most efficient source for base electrical generation. For transportation, we need oil or natural gas. For home heating, natural gas is the most efficient as it can be supplied by pipelines embedded in the streets and serving each house in urban neighborhoods. Rural customers can be served by CNG or propane tanks on the property. Even solar panels may contribute in tropical settings like southern California (where I live) or Arizona.

The present political climate, especially that in California, is enamored of irrational environmentalist theories that are holding up efficient solution to problems. The ban on incandescent light bulbs is an example of irrational legislation that will, hopefully, be reversed, at least outside of California which is hopelessly infected with environmentalist nonsense.

We are facing a foreign policy catastrophe in the middle east where even Israel, our single ally, may go under, albeit in the gotterdammerung of nuclear war. The Obama people have tossed aside our ally in Egypt, Mubarak, as Jimmy Carter did the Shah. The results will be similar. We have no friendly governments in the middle east except Israel and the increasingly fearful Jordan. Turkey is gone as the government, now largely Islamist, is edging toward Iran in policy.

I am not an isolationist but we need to anticipate a world where we are surrounded by hostile regimes. Self sufficiency must be our policy and the delusions of environmentalism are dangerous. Those opposed to our use of energy resources should consider suicide to make room for those of us who want to enjoy the promise of American life. Drilling for oil in the Gulf has been seriously damaged by Obama as many of these expensive drill rigs have left the Gulf for other parts of the world and will not return any time soon. In fact, there is evidence that George Soros has invested in some of these rigs that are now positioning themselves off Brazil for the same deep water drilling techniques that were criticized by Obama acolytes when they were located in the Gulf of Mexico where they were shut down by Soros-beneficiary Obama.

The technique of “fracking” has been criticized by the same environmentalists who oppose all sources of energy independence. They, of course, oppose all forms of oil production. Wind and Solar, which they do support, are capable of producing less than 10% of all energy needed by our huge economy. That way lies economic suicide and one wonders at times if that is the purpose. Tom Clancy, who has done a very good job of predicting the technological future, including the use of a jetliner as a flying bomb, has a novel, called Rainbow Six that considers an environmentalist group so radical that they plan to kill most of the earth’s population, excepting themselves, of course. I sometimes wonder if he was too extreme in what he attributed to the radicals around Obama.

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Posted in energy, global warming, middle east | 3 Comments »

Revisiting the history of the collapse

Sunday, October 25th, 2009

Last year, I posted a lengthy piece on the origins of the mortgage industry collapse and the role Congress played. I have since closed the post to comments to reduce spam. A reader found it and sent me an e-mail about a Frontline piece that is apparently full of lies. UPDATE: I should change this to say that it is not lying that is the problem but the inability of the writers to see the merits of a free market and a determination that only regulation, and by extension a command economy, can safely run the financial markets. Derivatives were not the problem. The problem was the inability to estimate risk because the GSEs, Fannie Mae and Freddie Mac, were pushing the envelope with government guarantees to their risky loans. Every step which should have warned of the risk was failing because the parties saw huge profits and, at the end of the day, a guarantee by the Treasury that nobody could lose. Moral hazard was rampant.

Typically, it blames the Bush people (actually Greenspan and shows Bush giving him a medal) even though the problems were begun under Clinton and Congress was the chief villain. Here is an example of Congress on the job. Note the tactic of hiding incriminating videos by claiming copyright violation. At least one is still visible.

Rush Limbaugh discussed it on his show and there is a link to the PBS show.

Ladies and gentlemen, they had to do what they were told. The federal government created policies that made them make these loans to people who couldn’t pay them. That’s what the subprime mortgage crisis is all about. The architects of that are Bill Clinton, Barney Frank, Chris Dodd, and a whole bunch of other minor bit players. ACORN’s involved, ACORN’s running around hassling banks if they don’t make loans to people. So now, after following mandated policy, federal law, the Community Redevelopment Act under Carter, it was put on steroids in the late nineties with Clinton and the bunch and that thing forced the banks to make these loans. And so these banks, after following orders, are now being blamed for the problem.

My point in my post was that both parties contributed and those who tried to warn or to rein in the out-of-control Fannie and Freddie were punished or warned of punishment. Ms Born was warning but she did not see that the real risk was government intervention in markets (Fannie/Freddie) not deregulation.

Or consider the experience of Wisconsin Rep. Paul Ryan, one of the GOP’s bright young lights who decided in the 1990s that Fan and Fred needed more supervision. As he held town hall meetings in his district, he soon noticed a man in a well-tailored suit hanging out amid the John Deere caps and street clothes. Mr. Ryan was being stalked by a Fannie lobbyist monitoring his every word.

On another occasion, he was invited to a meeting with the Democratic mayor of Racine, which is in his district, though he wasn’t sure why. When he arrived, Mr. Ryan discovered that both he and the mayor had been invited separately — not by each other, but by a Fannie lobbyist who proceeded to tell them about the great things Fannie did for home ownership in Racine.

When none of that deterred Mr. Ryan, Fannie played rougher. It called every mortgage holder in his district, claiming (falsely) that Mr. Ryan wanted to raise the cost of their mortgage and asking if Fannie could tell the congressman to stop on their behalf. He received some 6,000 telegrams. When Mr. Ryan finally left Financial Services for a seat on Ways and Means, which doesn’t oversee Fannie, he received a personal note from Mr. Raines congratulating him. “He meant good riddance,” says Mr. Ryan.

Yes, this was a bipartisan scandal and PBS (government funded, of course) tries to avoid the truth and blame Bush and Greenspan. Why not ? Everyone else that is government funded does. Greenspan missed the impending crisis but the PBS program missed it too.

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Posted in corruption, financial, politics | 13 Comments »

More on how we got here

Wednesday, October 8th, 2008

Now that we have explained the bailout, how did we get here ? Milton Friedman might have said this.

This is an elegant piece on the moral hazard problem and where it came from. Richard Epstein points out how social engineering led us here.

Disasters like this latest financial meltdown don’t just happen. Mistakes this huge require an impoverished political philosophy to grease the skids. Fannie and Freddie didn’t design their horrific lending policies by chance. No, behind this lending fiasco lay the strong collective preference for the “patterned principles” of justice that Robert Nozick attacked so powerfully in his 1974 masterpiece, Anarchy, State, and Utopia.

I have ordered the Nozick book as it looks like that rare philosophy work that I can get through.

Anyway,

The key function of the legal system is to minimize the transactional barriers and increase the velocity of voluntary exchanges, all of which generate mutual gains for the parties. So long as one is sure that the given distribution of resources is obtained by legal moves from the original position, don’t worry about the relative positions of one person vis-à-vis the others. Don’t, in other words, use state coercion to create a distinctive pattern of rights deemed ever so desirable in the eye of some political beholder.

This is what we call the “market” and that market is the enemy of Barack Obama and his allies. They are concerned with ends, as well as means, and will tilt the scale to attain those ends. Was the market at fault? Russell Roberts says partly but not totally.

Many believe that wild greed and market failure led us into this sorry mess. According to that narrative, investors in search of higher yields bought novel securities that bundled loans made to high-risk borrowers. Banks issued these loans because they could sell them to hungry investors. It was a giant Ponzi scheme that only worked as long as housing prices were on the rise. But housing prices were the result of a speculative mania. Once the bubble burst, too many borrowers had negative equity, and the system collapsed.

Part of this story is true

But that is not the whole story.

Beginning in 1992, Congress pushed Fannie Mae and Freddie Mac to increase their purchases of mortgages going to low and moderate income borrowers. For 1996, the Department of Housing and Urban Development (HUD) gave Fannie and Freddie an explicit target — 42% of their mortgage financing had to go to borrowers with income below the median in their area. The target increased to 50% in 2000 and 52% in 2005.

For 1996, HUD required that 12% of all mortgage purchases by Fannie and Freddie be “special affordable” loans, typically to borrowers with income less than 60% of their area’s median income. That number was increased to 20% in 2000 and 22% in 2005. The 2008 goal was to be 28%. Between 2000 and 2005, Fannie and Freddie met those goals every year, funding hundreds of billions of dollars worth of loans, many of them subprime and adjustable-rate loans, and made to borrowers who bought houses with less than 10% down.

This was a Ponzi scheme alright but who was Ponzi ?

The Community Reinvestment Act (CRA) did the same thing with traditional banks. It encouraged banks to serve two masters — their bottom line and the so-called common good. First passed in 1977, the CRA was “strengthened” in 1995, causing an increase of 80% in the number of bank loans going to low- and moderate-income families.

Fannie and Freddie were part of the CRA story, too. In 1997, Bear Stearns did the first securitization of CRA loans, a $384 million offering guaranteed by Freddie Mac. Over the next 10 months, Bear Stearns issued $1.9 billion of CRA mortgages backed by Fannie or Freddie. Between 2000 and 2002 Fannie Mae securitized $394 billion in CRA loans with $20 billion going to securitized mortgages.

This money is all lost and will have to be repaid by taxpayers. Here is more about the CRA effect with examples.

Did the Bush Administration play a role in the fiasco ?

The Fed did its part, too. In 2003, the federal-funds rate hit 40-year lows of 1.25%. That pushed the rates on adjustable loans to historic lows as well, helping to fuel the housing boom.

The Taxpayer Relief Act of 1997 [which raised the capital gains exemption on houses-Ed]and low interest rates — along with the regulatory push for more low-income homeowners — dramatically increased the demand for housing. Between 1997 and 2005, the average price of a house in the U.S. more than doubled. It wasn’t simply a speculative bubble. Much of the rise in housing prices was the result of public policies that increased the demand for housing. Without the surge in housing prices, the subprime market would have never taken off.

I have a theory that the 9/11 attacks contributed to this bubble. There is also a theory that the Panic of 1907 was caused by the 1906 San Francisco Earthquake because of the enormous insurance losses. Most of the worst property damage in San Francisco was caused by fire producing a gigantic insurance loss since fire was covered when earthquake was usually not. The 9/11 attacks caused an enormous capital loss, both due to the property damage in New York and by the effect on airlines and oil prices that followed. The Bush Administration fought deflation with low interest rates and by telling people to “shop” as a contribution to national security. This has been widely quoted and attacked but it is misunderstood, like most of Bush’s policies. He has been almost criminally inept in explaining them.

The low interest rates were continued too long and contributed to the bubble. Had Bush and the Fed raised rates two or three years ago, the bubble would have popped with much less damage as the speculation might have stopped before the worst of the excesses had occurred. Here is someone who was warning about this years ago. He got nowhere.

Anyway,

Once Congress set in place a destructive lending policy, we could count on private parties to issue bad loans from which they profited, knowing that dear old Fannie and Freddie would happily pay face value for paper that everyone knew was worth a whole lot less.

But Congress lived in a dream world. It forgot that the quality of the paper would deteriorate as its ambitious social objectives let its underwriting go south. So, too late in the game, we learn from yet another case where Congress should have done good by doing nothing at all. Let people rent or buy in unsubsidized markets and then watch with supreme indifference what residential patterns emerge.

This does not explain how to recover but it does point out how unlikely it is that Congress will be helpful in the next phase of this crisis. Obama, in particular, has all the helpful instincts of Herbert Hoover. He is opposed to free trade. He is an interventionist. And he is stubborn and unwilling to acknowledge that raising taxes is the worst thing a government can do in this situation.

God help us all.

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Posted in financial, politics | 6 Comments »

The deal

Sunday, September 28th, 2008

UPDATE: This comparison looks better but the bill isn’t signed yet.

JP Morgan did a much better job with the Panic of 1907, a financial panic resulting from the San Francisco earthquake and immense insurance losses. I reviewed a book on this topic last spring.

The negotiations in Washington seem to have resulted in a deal. The resulting legislation is being drafted and will be posted on the internet at noon today. That will be the only positive development, in my opinion. The cause of this crisis has been described here in other posts. The essence of the solution, and the reason why I am pessimistic about it, is that the solution has been drafted by the same people who caused the crisis. Barney Frank and Chris Dodd are the parents of the monstrosities that Fannie Mae and Freddie Mac have become. The disastrous expansion of subprime mortgages has poisoned the credit markets of the world.

The story of John McCain’s suspension of his campaign has still not been very well explained. The Democrats have majorities in both houses of Congress. They did not need Republican votes for the original Paulson package if they were able to keep all their own people in line. What happened was that the House Republicans were not going to vote for the bill and Pelosi had stated that she would not bring the bill to the floor unless she was assured of 110 yes votes by Republicans.

When McCain announced he was returning to Washington, the Democrats quickly announced that they had arrived at a solution and his action was unnecessary. What they did not say was that they did not have the Republican votes that Pelosi said she needed.

“You were being asked to choose between financial meltdown on the one hand and taxpayer bankruptcy and the road to socialism on the other and you were told do it in 24 hours,” Representative Jeb Hensarling of Texas, head of the conservative group, said. “It was just never going to happen.”

If they were willing to pass the bill without Republicans, they were correct. They had a deal. The problem was that it was a deal between the Bush Administration and the Democrats. However, Pelosi was still determined to have Republican votes as cover for the huge groundswell of anger directed at the Congress and Wall Street over the crisis. What McCain did was sit down with the House Republicans and make sure they were included in the negotiations. The Democrats poisoned the bill with ludicrous provisions to fund radical socialist groups like ACORN, which has had many members convicted of vote fraud and which has been involved in expanding the toxic mortgages that are at the root of the problem. The worst provision was this:

DEPOSITS. Not less than 20 percent of any profit realized on the sale of each troubled asset purchased under this Act shall be deposited as provided in paragraph (2).

USE OF DEPOSITS. Of the amount referred to in paragraph (1) 65 percent shall be deposited into the Housing Trust Fund established under section 1338 of the Federal Housing Enterprises Regulatory Reform Act of 1992 (12 U.S.C. 4568); and 35 percent shall be deposited into the Capital Magnet Fund established under section 1339 of that Act (12 U.S.C. 4569).

REMAINDER DEPOSITED IN THE TREASURY. All amounts remaining after payments under paragraph (1) shall be paid into the General Fund of the Treasury for reduction of the public debt.

That means that ANY transaction that realizes a profit, regardless of profits, or losses, on the overall bailout program, will deposit 20% of that profit in a fund which goes to ACORN and similar organizations. These “community organizer” groups are at the root of the problem. They are Democrat activist groups and affiliated with the far left of the party, like Obama, who once worked for them.

A current comparison of provisions is linked here. It is a Word file. At present, the Republican leadership is circulating this list of provisions to correct a few concerns. However, not everybody is satisfied. A House aide sends this warning:

1) This is, essentially, the same bill. Total deal is $700b, which Paulson or next Treasury Secretary can spend the first $250b even if he believes unnecessary. He/She can spend second $450b if thought necessary. A new bill isn’t passed with veto proof majorities to repeal it. This is substantively identical to the original Paulson plan. Congress always had the power to repeal some or all of the authority if it has veto proof majorities.

2) As for Acorn and bankruptcy, they were never in the bill. Dodd/Frank tried to push those in mid/week, they weren’t in the plan already rejected by conservatives on Monday. Even Obama conceded that those provisions would come out. They were simply a red herring, used for extra bargaining power by the left.

3) Lipstick has been put on the pig, and perhaps some Members will be fooled by it, but their constituents will not. I think some political careers will be ended over this.

When I ask this aide if there is anything to be happy about, this aide replies:

Unclear. Still confusion over whether the “insurance” is a fig leaf (secretary’s choice to use – in which case, he wouldn’t) or substantive (mandatory).

We will see how this turns out but I am very pessimistic this morning.

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Posted in financial, politics | 3 Comments »

What do we do now ?

Wednesday, September 24th, 2008

UPDATE: I watched Bush’s speech and Gingrich afterword on Hannity’s show. I still have doubts that this bill will pass in present form. I hope that McCain, who is the only one with credibility on this topic, will rewrite the bill along the lines I have indicated here. Dodd, the banking chair, and Obama are the two biggest recipients of money from Fannie and Freddie. That story is here by the man who might be the McCain Secretary of the Treasury.

UPDATE #2 Here is someone who really doesn’t like the bailout. I don’t know that I’m there but he knows more than I do. Sarah Palin gave an interview to Katie Couric today and got asked some pretty tendentious questions. Especially about “mortgage amnesty” and that is a terrible idea. Here is more about the bad ideas of Senator Durbin.

UPDATE #3 Here is still another idea. Why are we not seeing more about this ?

John McCain has announced that he is suspending his campaign to work on the financial crisis with Congress. So far, we have a $700 billion proposal to bail out the holders of junk securities. The Wall Street Journal, which has been warning about the Fannie Mae problem for years, says we have no choice and have to bail out the system.

The reality is that last week we had a global panic that included a flight from even basic financial assets like money-market funds and commercial paper. This was not Hank Paulson’s invention. Panics are real events. If allowed to become crashes, they can have terrible economic consequences. We were lucky to forestall a crash last week, but the underlying sickness has to be addressed to avoid a recession, perhaps even a deep one.

Senator Jim De Mint, one of the spending hawks in the Congress says “I believe it is completely unacceptable”. There is other opposition from Republicans who are concerned that Congress caused the problem and is unlikely to get the fix right. There are even those who doubt there is a crisis at all.

Donald Luskin is worried about getting it right.

First: There’s simply no objective way to know whether the banking system is as close to disaster as top officials at the Treasury and Federal Reserve claim. They themselves don’t really know. This is a “banking crisis,” they say. But then again, other politicians claim there is a “health care crisis,” an “immigration crisis,” an “energy crisis,” and so on.

Senator DeMint says the last time he was presented with a deal that had to decided immediately, he was on a used car lot. Can we believe that this is as bad as it is portrayed ?

Next: Of the $1.26 trillion in non-prime mortgages — that is, “sub-prime” and “Alt-A” mortgages — $743 billion is already either owned or guaranteed by Fannie Mae and Freddie Mac, companies that were shored up by a government rescue earlier this month. That leaves $521 billion, which means the Treasury’s $700 billion would be more than enough to buy them all. And that’s even if the Treasury paid full value. In fact, the Treasury will get a steep discount, considering that many of the mortgages in question are in delinquency or default. Does the Treasury really have to buy every single non-prime mortgage — even the healthy ones — twice over?

Who is going to be setting the price of these distressed instruments ?

Third: The officials advocating this — Henry Paulson and Ben Bernanke — are the same ones who, in similar haste, engineered interventions this year in the collapses of Bear Stearns, Fannie Mae, Freddie Mac, and American International Group. With each intervention the banking crisis has gotten progressively more severe. Experts differ on this, but it is my professional judgment that these interventions actually made matters worse, because of the unintended consequences that were nearly impossible to forecast at the moment of decision. We simply cannot know what unintended consequences might be unleashed in the process of a massive acquisition of mortgage assets by the federal government.

This has been a slow motion car wreck. Who is to say this will end it ?

The present proposal is primarily about the government acquisition of unwanted assets from solvent banks. The RTC acquired its assets automatically when thousands of banks and thrifts became insolvent and fell under receivership by the FDIC and the Federal Savings and Loan Insurance Corporation. There were no troubling ethical questions about which assets would be acquired, from whom, in what priority order, and, most critically, at what price. All the RTC had to worry about was eventually selling the assets it already had.

This is a serious concern and must be solved. Holman Jenkins has his doubts.

Treasury’s plan is to enter the market at a higher level, buying the depressed mortgage securities supported by these houses. In brief and eye-opening remarks in the Senate yesterday, Ben Bernanke spun a scenario in which derivative mortgage debt would be boosted in market value closer to the value of the underlying cash flow, restoring the banking system to solvency. Then why not just let banks value them that way on their books now, so they aren’t teetering on insolvency? Wait for it. We’ll get there, but not now apparently.

Nor does the Paulson plan have the Occamite virtue of cutting to the heart of the problem, the housing market. So many mortgage cash flows have been sliced and diced and spread over different kinds of securities owned by holders all over the world — a big stumbling block to the private sector trying to manage its way out of a hole. It’s not clear the new agency offers a solution to this problem. It would probably have to buy the entire outstanding stock of questionable mortgage debt before it would have any hope at getting at the underlying collateral, i.e., houses. But then it would become the world’s biggest, most troubled landlord and biggest forecloser on homes. Politics would intervene — and any potential taxpayer gains would likely be frittered away to keep nonpayers in houses they can’t afford.

Jenkins has a suggestion:

Here it is: [One] Let the government be a buyer of last resort for mortgage derivatives for a set price (say, 25 cents on the dollar), hoping others will gain confidence to step in. Hope, too, that this whets the appetite again for investors to recapitalize hurting banks. If banks continue to falter even with the option to dump their mortgages on government for a deep discount, deal with those challenges as they occur, with forbearance where possible. Meanwhile, [Two] use taxpayer dollars to clean up the housing mess in the Southwest and Florida — the surprisingly confined source of all our troubles.

Every time we mention demolishing houses, somebody slaps us over the head with Bastiat — the French economist who’d say you don’t increase wealth, you reduce it, by destroying some houses to make the value of others go up.

True — but we’re in a situation today where responsible homeowners will pay one way or another for the acts of irresponsible lenders and buyers. The cheapest bailout would be one that weeds out enough surplus housing to stop the free fall in a handful of overbuilt markets, whose foreclosure epidemic is dragging down the entire securitized mortgage market. We’re talking about buying thousands of houses, not millions of mortgages. And yet the resulting higher mortgage debt prices automatically would help to recapitalize the banks, while (knock wood) leaving some Paulson powder dry for future contingencies.

Deroy Murdock has another interesting suggestion:

First, declare that Fannie and Freddie are dead. Make this painfully clear to everyone by using crowbars to pry the brass nameplates off of their respective headquarters buildings.

Second, pour their assets into a new, temporary agency whose legal authority expires within 90 days. The Asset Breakup Corporation will supervise Fannie and Freddie’s orderly dismemberment and sale in much smaller pieces.

Third, use Fannie’s and Freddie’s databases to create a list of their customers ranked alphabetically according to the individual homeowners’ surnames.

The first set will contain people whose surnames begin with the letter “A.” Americans named Aaronson, Adams, Alvarado, and Antonucci. The second will consist of those whose surnames begin with “B.” People named Baca, Benson, Berkowitz, and Brooks will compose this category. Next, people surnamed Caruso, Charles, Chavez, and Chung will populate the “C” group.

This simple method soon would divide Fannie’s and Freddie’s assets easily, fairly, and transparently into 26 distinct slices.

Then, sell them off. I’m sure we will see plenty of suggestions over the next few days but I don’t think the present Paulson Plan is going to be adopted. At least, it won’t be adopted in this form.

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Posted in financial, politics | 6 Comments »

A primer on the mortgage crisis

Thursday, September 18th, 2008

I am no finance expert, but I was explaining to my wife how this mortgage meltdown occurred and I thought a few others might be interested. I bought my first home in 1969. It was in South Pasadena and I paid $35,000 for it, with a $3500 down payment and a $3500 second trust deed taken back by the seller who had already moved into a new home and was motivated. Thus, I paid 20% down and Home Savings and Loan took the mortgage at 6% interest. For the next four years, I paid $204 per month on my mortgage and $35 per month to the second trust deed holder until I paid the second off two years later. In those days, Savings and Loan institutions, like the one in “It’s a Wonderful Life,” took in deposits at 4% interest paid and loaned money at 6% to home buyers. They kept their own loans in-house and collected the payments as their income. Like the S&L in the movie, they had borrowed “short” and loaned “long” so they were susceptible to runs.

The Savings and Loan debacle of the 1980s ended that era. A summary by someone who knows a lot more about this than I do is here. That, however, does not explain the mortgage mess.

The S&Ls were destroyed by inflation in the 1970s and 80s. By 1979, interest rates on houses were as high as 21% and savers had abandoned the S&Ls to invest in trust deeds (as I did) or in high interest bonds. I had US Treasury bonds that carried a coupon rate of 16% and, when bought at a discount, carried an interest rate of 18%. That was US Treasury paper ! The S&Ls depositors fled to higher yields and the action by Congress in freeing the interest rates they could pay was too late. Worse, it raised the total deposit cap that was insured by the Federal Savings and Loan Insurance Corporation, or FSLIC, to $100,000 from $20,000. There was no reason to do that and it was not debated. It was just added by the House Banking Committee chairman, Fernand St Germain. The result was the savings and loan scandal of the 1980s. After that, a new model was necessary for home loans. It was not an improvement.

As I explained the current mortgage process this morning, I tried to use simple examples for clarity. In my example of the 1969 purchase of my first home, the mortgage company serviced the loan, collecting my payments. It was in their interest to verify my creditworthiness as, if I defaulted, they would have to foreclose and take possession of my house. In the 1960s, houses kept their value but, in 1973 when I sold that house after moving to Orange County, I sold it for what I had paid. There was no appreciation. Considering that I had made improvements, I lost money. Why I didn’t keep it and rent it to someone else is another story? I should have but I was starting a new medical practice and didn’t want to manage a rental property 60 miles away. That was a bad decision as it was sold for $595,000 15 years later.

When I bought my house in 1991, the one I still own, the loan was handled by a mortgage broker. This was an innovation since 1969 and was at the root of the present crisis. Loans were no longer carried by the origination lender but were quickly sold to other investors. The broker made his money from the origination fees and the “points” paid by the borrower. This was just as true of banks, like Washington Mutual, as brokers. I refinanced my house a couple of years ago and made payments to WaMu for about six months. Then I received a notice that the loan was now owned by Wells Fargo. This resale market for mortgages had one bad feature and one good one. The bad feature was that the originating lender did not have to live with the decision to loan me money forever. Once they sold the loan, the problems that arose in the future, if any, were not their problems.

The good feature, and the bad, were a result of the Federal National Mortgage Association, Fannie Mae, and its sister organization, Federal Home Loan Mortgage Corporation, Freddie Mac, which buy residential mortgages from banks and brokers. They have criteria for those loans, and those that meet them are called “conforming.” Because Fannie Mae and Freddie Mac have been perceived as guaranteed by the government, the interest rates were lower for conforming loans.

The resulting mess is a consequence of moral hazard. The classic example of moral hazard is in insurance where the existence of insurance may cause the insured to behave in a less careful manner. That is exactly what happened here. If the lender was loaning his own, or his company’s, money, he had an awareness of the risk of default and an interest in minimizing that risk. The result was good judgment in lending. Once that risk was reduced or removed, by selling the mortgage to someone else, it became the problem of the buyer to assess risk. Fannie Mae and Freddie Mac were responsible for the risk in the loans they bought.

Then another factor entered the equation, the Congressional mandate. Congress, and especially the Democratic party, decided that lending standards were too restrictive toward minorities and the poor.

The Clinton administration has turned the Community Reinvestment Act, a once-obscure and lightly enforced banking regulation law, into one of the most powerful mandates shaping American cities—and, as Senate Banking Committee chairman Phil Gramm memorably put it, a vast extortion scheme against the nation’s banks. Under its provisions, U.S. banks have committed nearly $1 trillion for inner-city and low-income mortgages and real estate development projects, most of it funneled through a nationwide network of left-wing community groups, intent, in some cases, on teaching their low-income clients that the financial system is their enemy and, implicitly, that government, rather than their own striving, is the key to their well-being.

That was the lead paragraph from the article, in 2000. This was all predictable. Moral hazard plus Congressional mandates. If I were a Democrat, I might say that the Congress was in Republican hands from 2000 to 2006. Very true. There is blame enough for both parties. Real estate developers and construction interests loved the new rules. They tend to be Republican. There were a few who tried to stem the tide.

From David Frum today:

By JOHN D. MCKINNON The Wall Street Journal; July 12, 2008; Page A8

WASHINGTON — Peter Wallison saw Fannie Mae’s troubles coming 25 years ago.

In the early 1980s, he was a top official in the Reagan Treasury Department. And Fannie Mae, at least by some measures, was insolvent, thanks to the economic storms that were then roaring through the savings-and-loan industry.

But getting anyone to do anything about the congressionally chartered mortgage company and its unusual vulnerabilities proved futile, even after Mr. Wallison began writing books warning that it and sister company Freddie Mac could take advantage of their government ties and relative lack of regulation to grow too large.

Fannie and Freddie applied pressure to try to silence Peter.

Almost immediately, he said, he experienced political pressure of the sort that—until now—has made Fannie Mae largely invulnerable to new legislative oversight and left it under the supervision of a weak financial regulator.

At the time, he sat on the board of a mortgage-insurance company that did extensive business with Fannie Mae. When the company’s officials noticed that they weren’t being chosen to insure some mortgage pools, Fannie officials told them it was because of Mr. Wallison’s new project at AEI, he said.

John McCain tried pass legislation.

For a decade reformers have tried to persuade Congress that they were allowing a serious risk to the government’s credit to develop in Fannie Mae and Freddie Mac, but few lawmakers would take action.

One of the reasons for this was the extraordinary power of Fannie and Freddie. They not only spent close to $150 million in lobbying over the last decade, but they also got their constituents—the securities industry, the homebuilders and the realtors—all powerful industries that depend on Fannie and Freddie’s largesse—to support their sole legislative objective: the defeat of any attempt to control their growth. Congress, as usual knuckled under to the special interest.

However, a very small number of lawmakers saw this problem for what it was, and were willing to stand up to the power of Fannie and Freddie—and I am proud to say that John McCain was one of them. In 2005, he joined a small group of Republican Senators to cosponsor the Federal Housing Enterprise Regulatory Reform Act, the strongest legislation introduced up to that time to control Fannie and Freddie. In a statement, he noted that “For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac…and the sheer magnitude of these companies and the role they play in the housing market…If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie and Freddie pose to the housing market, the overall financial system, and the economy as a whole.”

These were prophetic words, given what we know now, but they did not spring from a sudden conversion in that year. Three years earlier, McCain had introduced legislation—co-sponsored with the House Democratic leader Dick Gephardt—to create a Corporate Subsidy Reform Commission. The purpose of this group was to eliminate what McCain called “corporate welfare.” In a statement at the time, he noted that “There are more than 100 corporate subsidy programs in the federal budget today, requiring the federal government to spend approximately $65 billion a year…These programs provide special benefits or advantages to specific companies or industries at the expense of hard-working taxpayers. In years past, Congress has insisted that it would eliminate the existence of this corporate welfare, but virtually no such program has been eliminated…This bill aims to remove the special treatment given to politically powerful industries…”

In other words, as far back as 2002, John McCain realized that underlying what would ultimately become the Fannie and Freddie crisis was the willingness of Congress to provide financial support to private corporations. And he was willing to take on powerful interests to stop this process. If his bill had resulted in action at that time, the unprecedented steps that the Secretary of the Treasury and Congress had to take in the last two weeks would not have been necessary.

What do we do now ? The leaders of the financial world don’t know what to do. Harry Reid says no legislation is planned because they don’t know what to do.

I guess we will just have to elect McCain.

As usual, Herr Olbermann is wrong in his comments about one of McCain’s suggestions about how to deal with the crisis.

UPDATE: This comment from another blog on the subject of the AIG collapse is interesting. It ties the thread from Fannie Mae to all the other turmoil.

Question: What started this mess?

Answer: The housing “bubble” burst.

Question: How did that cause this problem?

Answer: Most mortgages are bundled and sold as fixed income securities (bonds). Once default rates went through the roof and housing values fell, the value of these bonds could not be determined.

Question: Why is that a problem?

Answer: When the value of a bond is unknown, no one wants to buy it.

Question: Why is that a problem?

Answer: Because a bond that you can’t get a bid on is pretty much worthless as an asset.

Question: And why is that a problem?

Answer: Because most financial firms are required to “mark to market” what they own. And a security that you can’t get other people to buy is valued at zero.

Question: Can’t you take an educated guess?

Answer: That’s what most firms are doing, but a guess is just a guess, not anything more precise. And if you are dealing with a firm that could be worth billions or could be billions in the hole, would you give them a loan? No. I didn’t think so. Ergo, there goes Lehman Brothers and Bear Stearns.

Question: And who began this mess?

Answer: Who are the world’s biggest bundlers and sellers of mortgage backed securities? Fannie Mae and Freddie Mac. They set the standards for mortgages. They relaxed lending standards to help the “poor” obtain home ownership. They hired lobbyists and gave millions to every politico who would take it to prevent a crackdown on their lending practices and the amount of leverage they were using. They went to incredible leverage levels to make their earnings numbers so that their politically appointed leaders could collect millions and hundreds of millions in salary and bonus.

Fannie and Freddy were the underwater earthquake that’s now creating this financial tsunami because the mortgage backed securities market involves trillions of dollars spread throughout the globe. History will show that a relatively few Democrat political hacks looking to line their own pockets may have cause the most massive financial panic in history.
9.19.2008 7:24am

UPDATE #2 This post on the Global Labor blog strikes me as wise and somber. It should be read. That link is now updated.

UPDATE #3: This Bloomberg piece has blown the lid off this story. The author is already getting threats. Guess from who ?

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Obama’s economic policy

Wednesday, September 17th, 2008

Today we see the culmination of the wild speculation in the credit markets that has gone on the past ten years. A summary is here. A few highlights.

Last June, Obama vice-presidential selection co-chair Jim Johnson had to resign after his links to the Fannie Mae collapse became public. Who was Jim Johnson?

Johnson created the Fannie Mae Foundation where he served with distinction as its chairman and CEO from 1991 to 1998. In 1999, he became CEO of Fannie Mae.

As of 2006, Johnson is a vice chairman of the private banking firm Perseus LLC, a position he has held since 2001. He is also a member of the American Friends of Bilderberg, the Council on Foreign Relations, and the Trilateral Commission.

Johnson earned the Master’s degree in Public Affairs from Princeton University’s Woodrow Wilson School in 1968, and the Bachelor of Arts degree from the University of Minnesota in 1965.

What was his finance background ?

Well, he has worked for Democrat politicians.

Johnson began his career as a faculty member at Princeton University, later moving on to the United States Senate as a staff member and to the Dayton-Hudson Corporation (now Target Corp.) as director of public affairs. He was executive assistant to Vice President Walter Mondale during the entire Carter Administration (1977-1981). Later, he founded and headed Public Strategies, a private consulting firm, from 1981 to 1985 before leaving for Lehman Brothers.

Does that sound like finance ?

How about Franklin Raines ? Well, he at least has some background in finance, although his chief claim to fame is working for Democrat politicians again.

A statement issued by Raines said of the consent order, “is consistent with my acceptance of accountability as the leader of Fannie Mae and with my strong denial of the allegations made against me by OFHEO.”[4]
In a settlement with OFHEO and the Securities and Exchange Commission, Fannie paid a record $400 million civil fine. Fannie, which is the largest American financier and guarantor of home mortgages, also agreed to make changes in its corporate culture and accounting procedures and ways of managing risk.

In June 2008 Wall Street Journal reported that Franklin Raines was one of several politicians who received below market rates loans at Countrywide Financial because the corporation considered the officeholders “FOA’s”–“Friends of Angelo” (Countrywide Chief Executive Angelo Mozilo). He received loans for over $3 million while CEO of Fannie Mae. Franklin Raines is currently one of Barack Obama’s economic advisers.

What about Jamie Gorelick ? Well she works for Democrat politicians. What is her finance background ?

Well, she worked for Clinton. Isn’t that enough ?

But it was the Clinton administration, obsessed with multiculturalism, that dictated where mortgage lenders could lend, and originally helped create the market for the high-risk subprime loans now infecting like a retrovirus the balance sheets of many of Wall Street’s most revered institutions.

Tough new regulations forced lenders into high-risk areas where they had no choice but to lower lending standards to make the loans that sound business practices had previously guarded against making. It was either that or face stiff government penalties.

The untold story in this whole national crisis is that President Clinton put on steroids the Community Redevelopment Act, a well-intended Carter-era law designed to encourage minority homeownership. And in so doing, he helped create the market for the risky subprime loans that he and Democrats now decry as not only greedy but “predatory.”

Yes, the market was fueled by greed and overleveraging in the secondary market for subprimes, vis-a-vis mortgaged-backed securities traded on Wall Street. But the seed was planted in the ’90s by Clinton and his social engineers. They were the political catalyst behind this slow-motion financial train wreck.

And it was the Clinton administration that mismanaged the quasi-governmental agencies that over the decades have come to manage the real estate market in America.
As soon as Clinton crony Franklin Delano Raines took the helm in 1999 at Fannie Mae, for example, he used it as his personal piggy bank, looting it for a total of almost $100 million in compensation by the time he left in early 2005 under an ethical cloud.

Other Clinton cronies, including Janet Reno aide Jamie Gorelick, padded their pockets to the tune of another $75 million.

Raines was accused of overstating earnings and shifting losses so he and other senior executives could earn big bonuses.

In the end, Fannie had to pay a record $400 million civil fine for SEC and other violations, while also agreeing as part of a settlement to make changes in its accounting procedures and ways of managing risk.

But it was too little, too late. Raines had reportedly steered Fannie Mae business to subprime giant Countrywide Financial, which was saved from bankruptcy by Bank of America.

Well, there must have been a Republican somewhere in there. Well, McCain tried to get legislation passed in 2005 that would have reined in the out-of-control mortgage giants.

Mr. President, this week Fannie Mae’s regulator reported that the company’s quarterly reports of profit growth over the past few years were “illusions deliberately and systematically created” by the company’s senior management, which resulted in a $10.6 billion accounting scandal.

The Office of Federal Housing Enterprise Oversight’s report goes on to say that Fannie Mae employees deliberately and intentionally manipulated financial reports to hit earnings targets in order to trigger bonuses for senior executives. In the case of Franklin Raines, Fannie Mae’s former chief executive officer, OFHEO’s report shows that over half of Mr. Raines’ compensation for the 6 years through 2003 was directly tied to meeting earnings targets. The report of financial misconduct at Fannie Mae echoes the deeply troubling $5 billion profit restatement at Freddie Mac.

The OFHEO report also states that Fannie Mae used its political power to lobby Congress in an effort to interfere with the regulator’s examination of the company’s accounting problems. This report comes some weeks after Freddie Mac paid a record $3.8 million fine in a settlement with the Federal Election Commission and restated lobbying disclosure reports from 2004 to 2005. These are entities that have demonstrated over and over again that they are deeply in need of reform.

For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac–known as Government-sponsored entities or GSEs–and the sheer magnitude of these companies and the role they play in the housing market. OFHEO’s report this week does nothing to ease these concerns. In fact, the report does quite the contrary. OFHEO’s report solidifies my view that the GSEs need to be reformed without delay.

It didn’t work and Obama, who took over 120,000 dollars from Fannie Mae is now trying to blame McCain for the debacle. Take a look at the chart.

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What Corruption in detail looks like

Wednesday, July 23rd, 2008

UPDATE: John McCain has come out with a good op-ed on the topic that should be reprinted widely. Unfortunately, it looks as though Bush has given up and will sign the pork fest bailout bill. I guess he is ready for next January and President Obama.

That’s not a very good headline but the Paul Gigot article today in the Wall Street Journal tells the story of Freddie Mac and Fannie Mae with the names named. It can’t be any clearer how the Washington insiders kept the ball rolling.

Angelo Mozilo was in one of his Napoleonic moods. It was October 2003, and the CEO of Countrywide Financial was berating me for The Wall Street Journal’s editorials raising doubts about the accounting of Fannie Mae. I had just been introduced to him by Franklin Raines, then the CEO of Fannie, whom I had run into by chance at a reception hosted by the Business Council, the CEO group that had invited me to moderate a couple of panels.

Mr. Mozilo loudly declared that I didn’t know what I was talking about, that I didn’t understand accounting or the mortgage markets, and that I was in the pocket of Fannie’s competitors, among other insults. Mr. Raines, always smoother than Mr. Mozilo, politely intervened to avoid an extended argument, and Countrywide’s bantam rooster strutted off.

I remember reading those editorial page pieces and wondering why nothing happened. Now we know.

In late 2001, I got a tip that Fannie’s derivatives accounting might be suspect. I asked Susan Lee to investigate, and the editorial she wrote in February 2002, “Fannie Mae Enron?”, sent Fannie’s shares down nearly 4% in a day. In retrospect, my only regret is the question mark.

Mr. Raines reacted with immediate fury, denouncing us in a letter to the editor as “glib, disingenuous, contorted, even irresponsible,” and that was the subtle part. He turned up on CNBC to say, in essence, that we had made it all up because we didn’t want poor people to own houses, while Freddie issued its own denunciation.

The insiders turned up the pressure by complaining to Dow-Jones executives, Mr. Gigot’s bosses.

At the time, Wall Street’s Fannie apologists outdid themselves with their counterattack. One of the most slavish was Jonathan Gray, of Sanford C. Bernstein, who wrote to clients that the editorial was “unfounded and unsubstantiated” and “discredits the paper.” My favorite point in his Feb. 20, 2002, Bernstein Research Call was this rebuttal to our point that “Taxpayers Are on The Hook: This is incorrect. The agencies’ debt is not guaranteed by the U.S. Treasury or any agency of the Federal Government.” Oops.

Mr. Gray’s memo made its way to Wall Street Journal management via Michael Ellmann, a research analyst who had covered Dow Jones and was then at Grantham, Mayo, Van Otterloo & Co. “I think Gray is far more accurate than your editorial writer. Your subscribers deserve better,”

Paul Gigot, who was not then the editor of the op-ed page, is not deterred although Congress is busy feeding at the trough and does not want to hear any bad news.

I also received several interventions from friends and even Dow Jones colleagues on behalf of the companies. But I was especially startled one day to find in my mail a personal letter from George Gould, an acquaintance about whom I’d written a favorable column when he was Treasury undersecretary for finance in 1988.

Mr. Gould’s letter assailed our editorials and me in nasty personal terms, and I quickly discovered the root of his vitriol: Though his letter didn’t say so, he had become a director of Freddie Mac. He was still on the board when Freddie’s accounting lapses finally exploded into a scandal some months later.

The companies eased their assaults when they concluded we weren’t about to stop, and in any case they soon had bigger problems. Freddie’s accounting fiasco became public in 2003, while Fannie’s accounting blew up in 2004. Mr. Raines was forced to resign, and a report by regulator James Lockhart discovered that Fannie had rigged its earnings in a way that allowed it to pay huge bonuses to Mr. Raines and other executives.

Remember that Raines was a Bill Clinton appointee, even though this was now the Bush administration. They still had enough politicians in their entourage to stave off the final reckoning, though. Republicans were every bit as complicit in the fiasco.

Such a debacle after so much denial would have sunk any normal financial company, but once again Fan and Fred could fall back on their political protection. In the wake of Freddie’s implosion, Republican Rep. Cliff Stearns of Florida held one hearing on its accounting practices and scheduled more in early 2004.

He was soon told that not only could he hold no more hearings, but House Speaker Dennis Hastert was stripping his subcommittee of jurisdiction over Fan and Fred’s accounting and giving it to Mike Oxley’s Financial Services Committee. “It was because of all their lobbying work,” explains Mr. Stearns today, in epic understatement. Mr. Oxley proceeded to let Barney Frank (D., Mass.), then in the minority, roll all over him and protect the companies from stronger regulatory oversight. Mr. Oxley, who has since retired, was the featured guest at no fewer than 19 Fannie-sponsored fund-raisers.

Bipartisan financial malpractice. And the taxpayers will be bailing them out.

Or consider the experience of Wisconsin Rep. Paul Ryan, one of the GOP’s bright young lights who decided in the 1990s that Fan and Fred needed more supervision. As he held town hall meetings in his district, he soon noticed a man in a well-tailored suit hanging out amid the John Deere caps and street clothes. Mr. Ryan was being stalked by a Fannie lobbyist monitoring his every word.

On another occasion, he was invited to a meeting with the Democratic mayor of Racine, which is in his district, though he wasn’t sure why. When he arrived, Mr. Ryan discovered that both he and the mayor had been invited separately — not by each other, but by a Fannie lobbyist who proceeded to tell them about the great things Fannie did for home ownership in Racine.

When none of that deterred Mr. Ryan, Fannie played rougher. It called every mortgage holder in his district, claiming (falsely) that Mr. Ryan wanted to raise the cost of their mortgage and asking if Fannie could tell the congressman to stop on their behalf. He received some 6,000 telegrams. When Mr. Ryan finally left Financial Services for a seat on Ways and Means, which doesn’t oversee Fannie, he received a personal note from Mr. Raines congratulating him. “He meant good riddance,” says Mr. Ryan.

That wasn’t enough.

about half of the implicit taxpayer subsidy for Fan and Fred is pocketed by shareholders and management. According to the Federal Reserve, the half that goes to homeowners adds up to a mere seven basis points on mortgages. In return for this, Fannie was able to pay no fewer than 21 of its executives more than $1 million in 2002, and in 2003 Mr. Raines pocketed more than $20 million. Fannie’s left-wing defenders are underwriters of crony capitalism, not affordable housing.

And we will bail them out because “they are too big too fail.” Why did a Republican Speaker cooperate in this debacle ? The GOP paid the price in 2006 but the rest of us will be paying for years.

Apologies to the WSJ but I was afraid that piece was behind the subscription wall and it is too important to hide. Everyone should read it.

Here’s what they were saying a year ago. Pretty funny, eh ?

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What does the Fannie Mae collapse have to do with 9/11 ?

Monday, July 14th, 2008

UPDATE #2: The Wall Street Journal also offers a suggestion on what to do now. Place them in receivership and restructure the management. That is another way of saying to get the politicians out of the boardroom and executive suite. Run them like businesses. Combined with the energy crisis, and considering who has been controlling them, this could be another issue for the GOP in the fall. If they can work up the right narrative. And that’s a big if.

UPDATE: The Wall Street Journal comments on Why Fannie Mae and Freddie Mac were immune to critics even back in the Reagan Administration.

Mr. Wallison, who went on to become White House counsel, decided to devote himself to exposing the potential risks posed by the mortgage giants after he retired from law practice and joined the conservative American Enterprise Institute in 1999.

Almost immediately, he said, he experienced political pressure of the sort that—until now—has made Fannie Mae largely invulnerable to new legislative oversight and left it under the supervision of a weak financial regulator.

At the time, he sat on the board of a mortgage-insurance company that did extensive business with Fannie Mae. When the company’s officials noticed that they weren’t being chosen to insure some mortgage pools, Fannie officials told them it was because of Mr. Wallison’s new project at AEI, he said.

The original WSJ article is behind the subscription wall.

We are seeing a meltdown in the mortgage market as it was reconstituted after the S&L crisis of the 1980s. One of the two huge “market makers” for home mortgages is Fannie Mae or Federal National Mortgage Association. It was originally founded in the Depression to assist in increasing home ownership and decreasing foreclosures, many of which involved people who had little debt on their homes but no income to pay the interest. In 1968, it was rechartered and began to buy “conforming” mortgages from originating banks and S&Ls, then bundle them into bonds containing many mortgages, and sell them in a secondary market that gradually grew.

In 1969, when I bought my first home for $36,000. The minimum down payment was 20%. The loan was made by Home Savings and Loan at an interest rate of 4% and my house payment was $204/ month. The seller, who had already bought another house, was willing to take back a 10% second TD of $3500, on which I paid $35/month until I paid it off two years later. The primary trust deed was held by Home S&L in their own portfolio so they had an interest in determining that I was a good risk. In those days, the S&Ls loaned money at 4% or so and borrowed it from depositors at 2.5 to 3%. It was considered a safe, although rather dull, business. The profit was the difference and they were bared from riskier investments.

Then came Jimmy Carter and interest rates of 18%. At first, inflation took off as spending was high and the economy was stuck in what was called “stagflation.” The bear market of 1974 halved the value of the stock market. The 1960s bull market was over. People who had their savings in S&L accounts watched as inflation ate them up. They were collecting interest of 3% and inflation was 12%. They did the rational thing and withdrew their savings. They found unusual investments for them. My partner and I invested our pension account funds in second trust deeds that were steered to us by a real estate broker we knew and who made sure that we only bought good loans. These paid as much as 18% for two or three years. I also bought Treasury bonds that paid 16% coupon rate and I bought them at a discount so the real return was 18%. That was good money.

Others bought gold although it was still illegal until 1974. The inflation led to a flurry of decisions to avoid the dollar including buying antiques and crystal art pieces. It also led to the first inflation of home prices. The S&Ls were in serious trouble but it all came to a head when, in 1980, Fernand St. Germain, chairman of the House Banking Committee, lit the match that burned the S&Ls down.

One night in 1980, Representative Fernand St Germain (D-Rhode Island), whose $10,000-to-$20,000-a-year restaurant and bar tab was paid for by the S&L industry’s chief lobbyist, proposed raising federal insurance on S&L savings accounts from $40,000 to $100,000- even though the average size of an S&L account was $6,000. He waited until after midnight, when only eleven representatives were still on the floor of the House; they approved his proposal unanimously.


But St Germain was just getting warmed up. In 1982, he cosponsored a bill that removed all controls on what S&Ls could charge for interest and released them from their century-old reliance on home mortgages.
Around the same time, the Reagan administration ended the requirement that S&Ls lend money only in their own communities, allowed them to offer 100% financing (i.e. no down payments), let real estate developers own their own S&Ls, and permitted S&L owners to lend money to themselves.


These changes were like taping a sign to the S&Ls’ backs that read, “Defraud me.” In fact, it’s widely rumored that Mafia lawyers and accountants carefully monitored the progress of this bill as it worked its way through Congress, ready to pounce the moment it became law.

I don’t agree with the conspiracy theory here but the facts are correct and the reader can draw his or her own conclusion.

The result was disaster by 1985. My ex-wife worked for the Resolution Trust Commission managing bankrupt S&Ls and selling off their assets. She had a background in mortgage banking and told me some amazing stories. The self dealing and criminal behavior was astonishing.

The recovery of the housing market was nursed by Fannie Mae and Freddie Mac, both of which restructured the entire mortgage industry. No longer did local banks and S&Ls loan their own money to worthy borrowers, collecting the payments and amortizing the loan over 20 or 30 years. They “packaged” the loan and resold it to one of the big national bundlers like Fannie Mae. Sometimes the loans were sold to private investors.

Things did not begin to heat up again until the end of the Clinton Administration. The internet stock bubble left a lot of people with money to invest but few good opportunities. Many had taken their money out of the stock market after making plenty of money. Secondly, after 9/11, the Bush Administration was determined to avoid a recession brought on by the huge capital loss of the WTC collapse. The Panic of 1907 was precipitated by the San Francisco Earthquake and the huge losses to insurance companies. The Great Depression was partly a reaction to the default of war loans from World War I and the reparations demanded of Germany. There was fear that another severe financial panic would follow 9/11. In fact, that may have been a large part of the plan by Osama bin Laden. As a result, the banks had a lot of money to lend and they soon ran out of worthy borrowers. What to do ? Lend it to people with less than sterling credit. After all, houses were going to keep going up in price, weren’t they ?

Enter the chislers and scammers. Some of whom were former Clinton Administration members who got themselves appointed to the boards of the two big mortgage lenders. Did they have a broad background in mortgage banking ? No. They were politicians, like Jim Johnson who recently left the Obama campaign where he had been serving as the co-chair to vet potential VP nominees. What was his background ? Politics, not finance.

James A. Johnson is a United States Democratic Party political figure. He was the campaign manager for Walter Mondale’s failed 1984 presidential bid and chaired the vice presidential selection process for the presidential campaign of John Kerry. In the 2008 election, he is a member of the vice-presidential selection process for the presumptive Democratic nominee, Senator Barack Obama.

From 1991 to 1998, he served as chairman and chief executive officer of the Federal National Mortgage Association (Fannie Mae), the quasi-public organization that guarantees mortgages for millions of American homeowners. Previously, he was vice chairman of Fannie Mae (1990-1991) and a managing director with Lehman Brothers (1985-1990).

Franklin Raines at least had some financial background. His tenure at Fannie Mae, however, did not inspire confidence. For a while it looked like he might be indicted. Then the Democrats took over Congress and all was forgiven.

Jamie Gorelick, former Clinton Deputy Attorney General, however, had no background in finance. She is a lawyer. She did very well for herself, though. Now we are at the next big crisis and Fannie Mae is in trouble. Where is Gorelick ? Back at her law firm. What is the connection between Fannie Mae and 9/11 ? The link is Jamie Gorelick. What a career !

She helped bring the attack on 9/11 by blinding the intelligence agencies, then she profits from the easy money that follows the attack. She still has a few fingers in the pot, as you will seen in the Volkh piece. You can tell it’s all politics because the defenders are out already. Thank God for Mickey Kaus.

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