Mad as Hell

Joe Nocera had one of those excellent moments last week — what I call an “I’m as mad as hell, and I’m not going to take this anymore” moments.

While not as universally applicable as the disgust and anger the 1976 cult classic movie portrayed, Nocera was pointing out how outright propaganda machines masquerading as tax-exempt and subsidized think tanks can create an alternate reality out of whole cloth, and how our main stream media and Congress adopt and spread that propaganda.  In this case, his target was one of the more dishonest Resident Scholars at the American Enterprise Institute, and his widely repeated lies.

As I mentioned at the time the Financial Crisis Inquiry Commission made its initial report to Congress, this campaign of disinformation about the root cause of the financial crisis is unfortunately repeated as “truth,” that Federal government community reinvestment policy and government sponsored enterprises Fannie Mae and Freddie Mac were the main reasons we went into a financial tailspin.

The reality, that subprime and alt-A mortgage securitization madness was the cause — that reality is being swept under the rug. 

Those two previously quite small mortgage market subsectors were terribly abused by Wall Street and the real estate industry, and they were completely the creation of the free-market capitalists that the AEI owes allegiance to.

It’s something to behold when a significant fraction of our citizens and our lawmakers are so invested in protecting their fundamental (almost religious) beliefs that they end up giving a free pass to the crooks and their methods.  Along the way, “true believers” like Peter Wallison actually invent facts and re-write history rather than face the truth that their ideology needs examination and maybe a fix or two.

As the main proponent of this baldfaced lie, Wallison knows the untruth of his positions.  If he had any doubts, he could ask his fellow AEI employee (Fellow of AEI) and real housing finance expert Alex Pollock, who gave us this excellent warning about the coming crisis in late 2007.

That said, here’s Nocera’s withering broadside.

A few choice paragraphs for those who don’t follow the links:

“You begin with a hypothesis that has a certain surface plausibility. You find an ally whose background suggests that he’s an “expert”; out of thin air, he devises “data.” You write articles in sympathetic publications, repeating the data endlessly; in time, some of these publications make your cause their own. Like-minded congressmen pick up your mantra and invite you to testify at hearings.

You’re chosen for an investigative panel related to your topic. When other panel members, after inspecting your evidence, reject your thesis, you claim that they did so for ideological reasons. This, too, is repeated by your allies. Soon, the echo chamber you created drowns out dissenting views; even presidential candidates begin repeating the Big Lie.

Thus has Peter Wallison, a resident scholar at the American Enterprise Institute, and a former member of the Financial Crisis Inquiry Commission, almost single-handedly created the myth that Fannie Mae and Freddie Mac caused the financial crisis.”

Now, back to effort of correcting the record and telling the inside story.



14 Responses to Mad as Hell

  1. Mel Helfand says:

    Isn’t is fair to ask whether the securitization madness would have occurred if there hadn’t been a community reinvestment policy?

    • hhill51 says:

      On the face of it that idea sounds sensible (a key part of Nocera’s first sentence in my quote from his article), but the facts are that CRA caused no problems for the first twenty years, years in which securitization was running full tilt for mortgages. Add to that the fact that nearly every CRA loan was held in portfolio and never securitized, and you have some pretty thin gruel to try to feed the anti-gubmint trolls.
      More importantly, the real problem was the rise of huge demand from CDO’s that were structured, marketed and sold using subprime and alt-A mezz bonds, all controlled by Wall Street from beginning, through warehousing, right through to “sale”…. all to captive customers Wall Street essentially created. If that wasn’t enough to guarantee an eventual collapse, there were as much as 100 times the face amount of subprime CDS as there were bonds. Don’t you wonder why residential markets that were more overpriced than the US (practically every other G-20 economy at the time) didn’t collapse into disaster the way ours did? They didn’t have over-the-counter levered and hidden bets against them like we did.

  2. Dan J. says:

    The crisis was already here by 12/07. Where was Alex Pollock’s warning in the first half of 2007?? Where was anyone’s warning prior to July 2007. This was not a 2008 crisis it began mid 2007.

    I will say that the politicians part I DO agree with. They are ALL crooks. They ALL “invent facts and re-write history rather than face the truth…” That is on both sides of the isle. FNMA and FHLMC are run by these same ideological crooks and therefore one would not expect anything but untruth. That was most eveident when they, in the face of large losses continue to write themeselves huge “bonus” checks. Then state that without those types of “bonuses” entities like FNMA and FHLMC would not be able to get such “high calibre” “professionals” to work there.

    Ha! Who needs them….anywhere??!!!

    I’m Mad as Hell too HH. But this…poop…ain’t never gonna stop.

    Merry Christmas and Happy New Year to you friend!!

    • Bryan says:

      I agree Dan J, on when the crisis first hinted at its magnitude. As an alta trader, structurer at the time, I would say the Bear Sterns fund collapse in the spring of 07 was the first material market repricing. Up until that point it seemed like EMC was setting the trend in risk appetite on 1st lien business because simultaneous 2nds were underwritten on most loans, including neg-am, etc.. When the BS funds collapsed more color was revealed on where those 2nd lien bonds had ended up and how those rate sheets were priced, stimulating the 1st lien business. For me, it all unraveled at that point as that was when the lending stopped. Just my opinion.

      • hhill51 says:

        I date the first re-pricing to Peleton Partners and Carlyle (Jan/Feb 2007) in my book, and then point to the Bear funds as the second leg down (summer 2007). The silent seconds were certainly a huge issue, but the invisible leverage of the CDS market is what crashed it, IMO. The UK had tons of “self-certified”, or liar loans being taken out for buy-to-let, or investor properties, also at sky-high LTVs. The price-to-household income ratio was higher in just about every G20 country, and many of them had uncapped floating rate mortgages, just to make it more exciting. Only our market melted down in an TEOTWAWKI manner (the end of the world as we know it). The standard accepted reasons for the US collapse just don’t cut it when we look at all those other markets.

  3. Conscience of a Conservative says:

    Howard, I take a slightly different view.
    While i hold Wall Street, Regulators and the Rating agencies highly accountable for the creation , peddling and intentional and obvious mis-pricing of tons of dodgy loans, I think it’s very important to look back to the 1990’s to see how the system got primed for the abuses.
    We needed a class of investors looking toward real estate as a sure fire way to get rich and the system fundamentally changed with regards to this back in 1997 when Clinton along with Democratic and Republican support changed the taxing of real estate gains with the introduction of the every two year 250k/500k capital gains exclusion.
    Then we have Fannie Mae and Freddie Mac introducing Wall Street to MERS back in 1995-1997 without which the mass selling of securitized loans would not be possible. By the way, great quote in Harper’s on this{“What’s happened,” said Christopher Peterson, a law professor at the University of Utah who has written
    extensively about MERS, “is that, almost overnight, we’ve switched from democracy in real-property recording to oligarchy in real-property recording.”}
    Third, and this is controversial, but let’s be honest, the categorizing of sub-prime, alt-a, and prime is an art not a science, and many strictly use a sniff test, based on FICO & LTV. Bear Stearns learned their securitization skills and the public educated on subprime back in the 1990’s when the CRA securitized market first took off. And with the GSE’s bringing out desk top/automated under-writing the calling of a loan alt-a or prime was just a tweak in the software. Lastly to this point the GSE’s were a major source of funding in subprime conduits buying tons of AAA paper which helped drive the economics of this market. In many deals Fannie & Freddie tranches were the deal drivers.
    The argument from the right that Fannie caused the housing melt-down is clearly mis-guided and the argument from the left that everything started in 2000 with George Bush equally so. The housing market was primed with looser credit and tax inducements that drove the home ownership rate from the 1997 on. I really wish this argument could be handled a-politically so we could actually fix this mess.

    • Conscience of a Conservative says:

      One more point, it was really the job of regulators to say no and set the ground rules on what’s legal and proper. Wall Street tends to look at things not in terms of right and wrong, but what their counsel will sign off on. Again, Wall Street guys are a lot like a 5 year old with a bag of candy, who left unsupervised will eat it all up and throw up all over themselves. We saw this with CDO’s, or more importantly CDS, MF Global and much to often since we deregulated Wall Street and the Banks.

      • Conscience of a conservative says:

        Howard, you really got me going on this topic. When speaking about the enablers, BASEL also gets high marks. The risk based weighting for agency and AAA mbs , combine this with Greenspan ulta low interest rates and there was a huge disincentive for banks to invest in anything other tha dodgy mortgage bonds.

      • hhill51 says:

        Your whole series of comments is right on target, “Conscience”… Though I do think all of us in the business tend to get focused on trees and allow the forest arguments (however false) win the day in the court of public opinion.

  4. Bryan says:

    Howard, your comment, “but the invisible leverage of the CDS market is what crashed it, IMO.”…I couldnt agree more. In addition, trading desks turned to ABX spreads as an indicative for marking bonds in inventory or collateral in the pipeline to be securitized. The problem was although the ABX conceptually made sense as a source of bond spread pricing, the ABX assets did not depict better quality non-agency underwriting. For lack of a better price indication at the time, prime/jumbo assets were being marked to ABX without enough consideration for the difference in credit IMO. Although subprime delinquencies rose quickly and ABX spreads widened, the prime/jumbo underwriting that maintained performance a few years beyond was not securitizeable due to a poor bid for bonds driven by a mark lumped in with the general non-agency space. I often think that if a prime ABX existed in the spring of 07, market pricing could have segregated the bad from the good non-agency underwriting, preserving an exit strategy for clean new issue collateral. Just my opinion from what I was seeing as a trader at the time.

    I appreciate your blog Howard, I was brought here looking for opinions on non-agency lending REITs like RWT and the effects of the SEC request for comment, etc. Thanks for maintaining this blog and I look forward to reading your book.

  5. Bryan says:

    Thanks for the welcome aboard and the link Howard. I think I had overlooked the importance of the point you make about CDS winnings residing offshore in many cases.

    • Conscience of a Conservative says:

      We tried using CDS to price the physical bonds at my firm, it didn’t work, as there are too many market dynamics in CDS that get in the way of marking the actual bonds off them, so have to disagree on that, although it is additional information.

      By the way, on Ritholtz/s site today there’s a great William Black piece on Fannie & Freddie. He places much of the demise of Fannie on excessive leverage and executive compensation practices.

      • hhill51 says:

        The real problem with using CDS pricing was the fact that most “natural longs” (insurance and pension accounts) had outright bans on derivatives after Orange County, and/or 100% capital charges and months of set-up hassles to create the ability to even take a position. If you have only sellers and no buyers, what happens to prices?

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