housing crisis

Government Promoted the Risky Non-Traditional Mortgages that Triggered the Financial Crisis

by Hans Bader on July 26, 2011 · 1 comment

in Bailout Watch, Economy, Politics as Usual, Regulation, Zeitgeist

Ed Pinto, who was an executive at Fannie Mae long before it went into the toilet and nearly took the financial system down with it, notes that “the financial crisis resulted from an unprecedented accumulation of weak and risky Non-Traditional Mortgages (NTMs)” promoted by both the government and the government-sponsored mortgage giant Fannie Mae. “Each type of NTM featured increased borrower leverage and risk.”

In Government Housing Policy: The Sine Qua Non of the Financial Crisis, he describes in detail how government housing policy explicitly promoted massive increases in leverage and moral hazard by both borrowers and investors and chronicles the central role played by Fannie Mae and Freddie Mac as the clearly-acknowledged kings of moral hazard and leverage. As he points out, government involvement included the facts that (1) Congress, at the behest of community advocacy groups, forced Fannie and Freddie to replace conservative underwriting with flexible underwriting knowing that banks would follow suit; (2) Fannie vowed to transform the housing finance system using flexible underwriting, in an effort to protect its charter privileges bestowed by Congress; and (3) HUD, after a decade of effort, proudly took credit for a revolution in affordable lending. This revolution then led directly to the 2008 financial crisis, which precipitated a $160 billion bailout of Fannie Mae and Freddie Mac, the nation’s two government-sponsored mortgage giants.

(Unlike the private banks, which repaid their bailouts with interest, Fannie Mae and Freddie Mac are not expected to repay taxpayers, and their bailout tab may rise to $1 trillion, according to Bloomberg News. The Obama administration earlier lifted the $400 billion limit on bailouts for Fannie Mae and Freddie Mac, so that they could continue to buy up junky mortgages at taxpayer expense, and showered their executives with $42 million in compensation. In May 2010, the administration and its congressional allies blocked efforts to reform Fannie Mae and Freddie Mac.)

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Government Role in Causing Financial Crisis Much Bigger than Thought

by Hans Bader on May 20, 2011 · 1 comment

in Deregulate to Stimulate, Economy, Legal, Regulation

Analysts who once downplayed the government’s role in causing the financial crisis now have changed their tune, concluding that government regulations that promoted risky loans played a major role in spawning the crisis. In a May 3 note to clients, Michael Cembalest, the Chief Investment Officer of JP Morgan Private Bank, revised his 2009 account of what caused the financial crisis.  Under the heading, “Retractions – the primary catalyst for the US housing crisis,” he wrote:

“US Agencies played a larger role in the housing crisis than we first reported. In January 2009, I wrote that the housing crisis was mostly a consequence of the private sector… However, over the last 2 years, analysts have dissected the housing crisis in greater detail. What emerges from new research is something quite different: government agencies now look to have guaranteed, originated or underwritten 60% of all “non-traditional” mortgages, which totaled $4.6 trillion in June 2008. What’s more, this research asserts that housing policies instituted in the early 1990s were explicitly designed to require US Agencies to make much riskier loans, with the ultimate goal of pushing private sector banks to adopt the same standards.”  (emphasis in original)

Clinton-era affordable housing mandates were also a key reason for the risky lending. The Washington Examiner cited a recent study by Peter Wallison, who had prophetically warned about risky financial practices for years, finding that two-thirds of all bad mortgages were either “bought by government agencies or required to be bought by private companies under government pressure.”

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lolprez Strikes Again

by Gary Howard on February 26, 2009 · 1 comment

in Economy, Odds & Ends, Personal Liberty, Politics as Usual

lolprez and the “do-something-anything” Congress is at it again

That $800 Billion

by Julie Walsh on October 22, 2008 · 10 comments

in Bailout Watch, Economy

So what has Paulson done so far with your $800 billion? He’s rewarded his friends, of course. $70 BILLION has gone to executives and staff. The Guardian reports:

Financial workers at Wall Street’s top banks are to receive pay deals worth more than $70bn (£40bn), a substantial proportion of which is expected to be paid in discretionary bonuses, for their work so far this year – despite plunging the global financial system into its worst crisis since the 1929 stock market crash, the Guardian has learned.

Staff at six banks including Goldman Sachs and Citigroup are in line to pick up the payouts despite being the beneficiaries of a $700bn bail-out from the US government that has already prompted criticism. The government’s cash has been poured in on the condition that excessive executive pay would be curbed.

Yes, Paulson’s Goldman Sachs – which didn’t even get bailed out – will get a $11.4 billion gift from the government. Congress is investigating.

Further, as colleague Iain Murray unveiled, “Jamie Dimon, the CEO of JP Morgan Chase, has agreed in principle to be Obama’s Treasury Secretary. Dimon worked hand-in-glove with Hank Paulson over the Bear Stearns bailout.”

So it appears Mr Spread-the-Wealth will continue Paulson’s legacy.