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Fannie Mae and Freddie Mac were victims, not culprits

Posted by: Aaron Pressman on September 26, 2008

There’s a dangerous — and misleading — argument making the rounds about the causes of our current credit crisis. It’s emanating from Washington where politicians are engaging in the usual blame game but this time the stakes are so high that we can’t afford to fall victim to political doublespeak. In this fact-free zone, government sponsored mortgage giants Fannie Mae and Freddie Mac caused the real estate bubble and subprime meltdown. It’s completely false. Fannie Mae and Freddie Mac were victims of the credit crisis, not culprits.

Start with the most basic fact of all: virtually none of the $1.5 trillion of cratering subprime mortgages were backed by Fannie or Freddie. That’s right — most subprime mortgages did not meet Fannie or Freddie’s strict lending standards. All those no money down, no interest for a year, low teaser rate loans? All the loans made without checking a borrower’s income or employment history? All made in the private sector, without any support from Fannie and Freddie.

Look at the numbers. While the credit bubble was peaking from 2003 to 2006, the amount of loans originated by Fannie and Freddie dropped from $2.7 trillion to $1 trillion. Meanwhile, in the private sector, the amount of subprime loans originated jumped to $600 billion from $335 billion and Alt-A loans hit $400 billion from $85 billion in 2003. Fannie and Freddie, which wouldn’t accept crazy floating rate loans, which required income verification and minimum down payments, were left out of the insanity.

There’s a must-read study by staff members of the Federal Reserve Bank of New York analyzing the roots of the subprime crisis that came out in March. I don’t think it got much attention then as the conclusions seemed uncontroversial at the time. But now that Washington politicians are trying to rewrite history, it should be mandatory reading for every American interested in knowing how we got here.

The study identifies five causes of the subprime meltdown:
-Convoluted loan products that consumers didn’t understand.
-Credit ratings that didn’t do a good job highlighting the risks contained in subprime-backed securities.
-Lack of incentives for institutional investors to do their own research (they just relied on the credit ratings).
-Predatory lending and borrowing (which I think means fraud perpetrated by borrowers).
-Significant errors in the models used by credit rating agencies to assess subprime-backed securities.

You’ll note in the Fed’s five causes that there’s some culpability for lenders, borrowers, investors and credit raters. There’s no blame for Freddie Mac or Fannie Mae which had little or nothing to do with the entire situation.

It’s certainly fair to criticize Fannie and Freddie over real issues that contributed to their downfall. The companies had numerous accounting problems and inadequate safeguards covering their own investment portfolios. Those weaknesses came home to roost when the real estate market cratered. Fannie and Freddie purchased billions of dollars of subprime-backed securities for their own investment portfolios and got hit just like every other investor. But it’s some kind of crazy, politically inspired CYA to blame for the mess we’re in.

(For a more fair and balanced — and detailed — recounting of Fannie and Freddie’s subprime investing forays, see this post from the excellent Calculated Risk blog.)

Reader Comments

Robert M

September 26, 2008 3:41 PM

Thanks for shining a little light in an area that darkness seems to prevail.


September 26, 2008 7:29 PM

This is & was a "deliberate scam" by JP MORGAN & CO., and all "eight (8) owners of the FED SCAM SYSTEM to "cause the bringing down - nationalisation - of Freddie Mac & Gennie Mae, since, "they had grown "too big", and they were providing "stability" to the market, which is "anathema" to these monsters who "want instability"..the "plan & strategy" to "bring down Freddie Mac & Gennie Mae is a five plus year plan, and it was "announced", that they "wanted Freddie Mac & Gennie Mae to be, not more than $200 - $300 billion dollar entities so as "they control them", since a $TRILLION dollar "Pillar" is more difficult to control..AND, together with "plan & strategy" to gain "Full, Total Control of the US Money System by declaring an absolute control, a "TOTAL Dictatorship" over the money of the USA - which Hank Paulson tried last week, and it blew in his face, and the faces of all the other monsters, and, naturally, to do this...(remember what Warren Buffett said..."this is a financial Pearl Harbour"...a Financial 9/11 Terror Plot....)...and, naturally, as in 9/11 2001, when Bush & Co., and the other monsters, terrorised the Good People of the USA that, "unless he had a "carte blanche", to chance and capture, "his friend, Osama Bin Laden, who, with a "pack of camels and donkeys" was threatening the USA, all hell would break loose"..and cowed the Good People of the USA to allow all sorts of terrible "dictatorial powers" over them...THEREFORE, since it works once, chances are "it will work again".. but..this time it blew in their faces, since, people know, and as time passes, more and more people know, that they have been scammed...THESE monsters have been trying to declare dictatorship over the Good People of the USA for 100 and "totally control" the money system and supply...and yes, they killed a few good Americans on the way, like John F. Kennedy, who on June 4, 1963 signed Executive Order 11,100, (which is still active, and has not been repealled to this day), and who, until the day he was executed, had canceled 10's of billions of phoney debt from the backs of the Good People of the USA, and had brought "the money supply of the USA in the control of the government of the USA, and these monsters executed him in November 1963, "to tech him a lesson, not to touch "their" money"...BUT OTHER good American legislators, have been resisting the giving of the "total and dictatorial & absolute control over the the money of the USA to these monsters, and they continue to resist, and they continue to demand, that the money supply of the USA be "turned over to the government of the USA", and "away from the Private hands of the FED and its "private owners", ie., JP Morgan & Co., Warburg & Co., Rothschild & Co., and the other monsters who have enslaved the Good People of the USA, and who cause these calamities, killing Good Americans with a stroke of a pen.. WHICH IS WHY IT IS NOT a co-incident that "the child of JP Morgan (Morgan Stalney survived, and the other monster, owner of the Fed, Goldman Sachs also survived, with "just about" the "only" unaffected bank & institution in this mess, is, guessed it..."JP Morgan", even though it has "more" than $90 trillion in derivatives, and credit derivatives in its books, and "received" more than $138 billion, from Lehman, "after it made an assignment for bankruptcy protection..and these "hidden in plain view" facts, are the root causes of the fiasco before us...MEANING SIMPLY...they are and were designed by theser monsters to kill Good Americans, and more than 3 million homes will be affected, more than 10 million Good Americans will be killed, affected, devastated, and loaded and saddled with hundreds of billions of debt, which they cannot pay, and, even after their homes are foreclosed and sold, they will be still saddled "with the difference" to the face value of the mortgage loan that they could not pay in the first place, ....WHICH IS WHY these monsters refused the "REVERSE UNWIND STRATEGY" proposed to them in May 2007, which called for, basically, all these CDO's which were marked down to less than par value, and were trading @ a % to face value, that these monsters go back to the very debtors, and hack off 30/40/50/60% of the debt that "was in default", and rewrite the loans to a smaller amount they could pay, which would save the borrowers, and "recapitalise" the institutions - banks, which had all these defaulted CDO's on their books...BUT, FOR ONE PROBLEM...this "simple" strategy, would have saved Good Americans, and would have saved American Institutions, and would have saved "most all the institutions that have failed so far"..MEANING, this simple plan, ran "counter" to the plans and destruction strategy of these monsters.. BUT THIS TIME.. the gig is up..."People know, and as time passes, more and more people"...the "fire that these monsters set this time, will consume them"...!!


September 26, 2008 10:04 PM

There’s a dangerous — and misleading — argument making the rounds from Aaron Pressman, he still believes this is only a subprime problem.


September 27, 2008 4:13 AM

There’s a dangerous — and misleading — argument making the rounds about the causes of our current credit crisis. It’s emanating from Washington where politicians are engaging in the usual blame game but this time the stakes are so high that we can’t afford to fall victim to political doublespeak. In this fact-free zone, government sponsored mortgage giants Fannie Mae and Freddie Mac caused the real estate bubble and subprime meltdown. It’s completely false. Fannie Mae and Freddie Mac were victims of the credit crisis, not culprits.





September 27, 2008 1:22 PM

What's your point? The "too close" relationship between Frannie and Freddie's management and their outrageous compensation and their near criminal or criminal accounting standards to loot the company year after year. Who cares about the sub prime. THEIR LENDING STANDARDS WERE TO HIGH? PLEASE! Supposedly 40 percent of their loans were under political mandates from their stooges in Congress which issued loans to unqualified persons, is that not true? What a puff piece. They all should go to jail

Jay Jay

September 27, 2008 11:09 PM

Fannie and Freddie represent private profit and public risk. They are an unholy, un-natural hybrid of private business and government. Their inherent conflict of interest allowed them to exclude private companies from the safest lending because of their special status and implied government backing that no other banks had. They purchased huge amounts of risky, but profitable mortgage securities for their infamous "retained portfolios" generated huge profits for the owners and management of the 2 GSE's. This money allowed them to corrupt their regulator and bosses (congress) and buy support such as from the author of this puff piece.

When Fannie stopped filing its financial statements, they should have been delisted from the NYSE, but played chicken and won. The reason given was that to delist them would cause panic. If we'd had that panic back then, we wouldn't be in the sorry state we are now be forced to back hundreds of billions of their dubious obligations.

They did what any private business would do when told that their losses would be covered- the levered their risk to the gills in search of profit.

eddie spaghetti

September 28, 2008 12:07 AM

Thank goodness someone wrote this. It's been bothering me ever since the talking points came out...

Chris Toher

September 28, 2008 8:38 AM

1.The CEO's & other bigwigs cashing in millions of dollars because of these closings should be ordered to share their golden balloon & bonuses with the workers who got them the big bucks in the first place; ei, Enron.

2.Congressmen & Senators are PUBLIC SERVANTS. Therefore, they should NOT be receiving the exhorbitant salaries & retirement packages. Main Street has to rely on their investments :-( and Social Security; why not the politicians. The majority of Americans are lucky to get a 3-4% increase in annual salary; the same should hold true for PUBLIC SERVANTS and CEO's and their fat-cat board room members.

3. Finally, I want to thank all the greedy people of the "Me" world for botching up the entire government. Major cleanup (re audits) needs to be done and as quickly as possible. The web of deceit has gotten way too thick. Even the "experienced" John McCain said Washington itself needs to be cleaned up - hmm.


October 2, 2008 5:02 PM

You are a LIAR!
From August's ChiTribune:
"Fannie Mae's stock lost half its value in seven weeks and the glut of unsold properties may weigh on it further, Orenbuch said. .
Fannie Mae and Freddie Mac, the country's second-biggest mortgage finance company, together owned a record $6.9 billion of foreclosed homes on March 31, compared with $8.56 billion held by all 8,500 U.S. commercial banks and savings and loans."


October 2, 2008 5:42 PM

For another view that shows Freddie and Fannie's culpability see
by Peter Willison. Seems quite damning to me.


October 3, 2008 9:42 AM

Source: Barrons Online

THIS MEMO PROVIDES A BRIEF HISTORY OF your actions that helped create this crisis.

1997: Federal Reserve Chairman Alan Greenspan's famous "irrational exuberance" speech in 1996 was somehow ignored by, um, Fed Chairman Greenspan. The Fed missed the opportunity to change margin requirements. Had the Fed acted, the bubble would not have inflated as much, and the subsequent crash would not have been as severe.

1998: Long Term Capital Management was undercapitalized, used enormous amounts of leverage to purchase all manner of thinly traded, hard-to-value paper. It failed, and under the authority of the Federal Reserve a "private-sector" rescue plan was cobbled together. Had these bankers suffered big losses from LTCM, they might have thought twice before jumping into the exact same business model of undercapitalized, overleveraged, thinly traded, hard-to-value paper. Instead, they reaffirmed Benjamin Disraeli's famous aphorism: "What we learn from history is that we do not learn from history."

1999: The Financial Services Modernization Act repealed Glass-Steagall, a law that had separated the commercial-banking industry from Wall Street, and the two industries, plus insurance, came together again. Banks became bigger, clumsier, and hard to manage. Apparently, risk-management became all but impossible, even as banks had greater access to larger pools of capital.

2000: The Commodities Futures Modernization Act defined financial commodities such as "interest rates, currency prices, and stock indexes" as "excluded commodities." They could trade off the futures exchanges, with minimal oversight by the Commodity Futures Trading Commission. Neither the Securities and Exchange Commission, nor the Federal Reserve, nor any state insurance regulators had the ability to supervise or regulate the writing of credit-default swaps by hedge funds, investment banks or insurance companies.

2001-'03: Alan Greenspan's Fed dropped federal-fund rates to 1%. Lulled into a false belief that inflation was not a problem, the Fed then kept rates at 1% for more than a year. This set off an inflationary spiral in housing, and a desperate hunt for yield by fixed-income managers.

2003-'07: The Federal Reserve failed to use its supervisory and regulatory authority over banks, mortgage underwriters and other lenders, who abandoned such standards as employment history, income, down payments, credit rating, assets, property loan-to-value ratio and debt-servicing ability. The borrower's ability to repay these mortgages was replaced with the lender's ability to securitize and repackage them.

2004: The SEC waived its leverage rules. Previously, broker/dealer net-capital rules limited firms to a maximum debt-to-net-capital ratio of 12 to 1. This 2004 exemption allowed them to exceed this leverage rule. Only five firms -- Goldman Sachs, Merrill Lynch, Lehman Brothers, Bear Stearns and Morgan Stanley -- were granted this exemption; they promptly levered up 20, 30 and even 40 to 1.

2005-'07: Unscrupulous home appraisers found that they could attract more business by inflating appraisals. Intrinsic value was ignored, so referrals kept coming in. This helped borrowers obtain financing at prices that were increasingly unsupportable. When honest appraisers petitioned both Congress and the bureaucracy to intervene in the widespread fraud, neither branch of government acted.

THERE'S ACTUALLY A LOT MORE we could add to these items


October 3, 2008 9:55 AM

More evidence of your blatant spreading of falsities. From NYTimes 1999:
Fannie Mae Eases Credit To Aid Mortgage Lending
"In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits."

Sir Antony

October 3, 2008 12:49 PM

Spin, baby, spin...


October 7, 2008 6:11 AM

Google a new york times article dated september 30 1999....thats right its clintons fault


October 7, 2008 3:12 PM

It is their HIGH RISK INVESTMENT PORTFOLIO which brought down Freddie and Fannie-not making loans. It was NOT operating losses ( which were still in black) but their investments (in what should be illegal) in derivatives, credit default swaps, and subprime mortgage-backed securities....and for THAT Freddie and Fannie ARE INDEED TO BLAME for their demise. DERIVATIVES are the same ultra-high-risk gambling "investment" vehicle which brought wealthy Orange County California to bankruptcy last decade. The Orange County Treasurer had put public monies into unacceptably high-risk investments for public monies and he lost$1.5 billion..he aand Merrill and other brokers were now are Fannie and Freddie culpable..I question whether their charters allow Frannie and Freddie to go to Las Vegas with their investment funds-but that is what they did. Some reports say the held/hold $TRILLION of credit default swaps/derivatives..the shaddow market and UNREGULATED securities which are behind the current financial collapse.. See 60 minutes report in "Shadow Market" in these risk tools concocted by Wall Street..the Shadow Market is guestimated to be $50TRILLION in size!!Dwarfing the USA economy..And UNREGULATED...and sold to banks,brokers,insurance companies....everywhere.......see google search on "credit default swaps and derivatives" and you will want to hang Freddie and Fannie execs as well as Wall Street-for they CHOSE to put their/our funds at this ridiculous high risk....they are NOT victims.


October 11, 2008 6:37 PM

Yes. Interesting how Fannie, Freddie, and the poor have gotten caught in the blame game this past week.

Well, how about the Federal Reserve?

The Fed's making headlines of late for putting out the wildfires that it, along with President Bush-appointed financial regulators, actually helped to create.

But in its February 18, 2007, article,"Fed Shrugged as Subprime Crisis Spread," the New York Times was right on point. The Times explained that "...the few people who tried to warn federal banking officials might as well have been talking to themselves." Moreover, when community activists from the Greenlining Institute warned Mr. Greenspan in 2004 that "deception was increasing and unscrupulous practices were spreading" and "implored him to use his bully pulpit and press for a voluntary code of conduct ... he just wasn’t interested.”

But then again, why should the Fed or its Chicago school economists be interested -- when they espouse Schumpeter's economic theory of "creative destruction"?

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