October 23, 2013

Pot v. Kettle, Greenspan v. Fannie Mae

Alan Greenspan has a new book out, and he puts part of the blame for the Recent Unpleasantness on Fannie Mae. Of course, this outrages Democratic pundits like Brad DeLong.  

It's depressing that more than a half decade later, few seemed to have learned anything to help them move beyond the tired talking points. How can it not be important to develop a non-partisan, non-ideological history of the Housing Bubble and how that contributed to the great crash?

The usual liberal v. conservative categories don't work well to explain what happened. We need a new understanding that in the 21st Century, the Top Dogs, like Angelo Mozilo and Kerry Killinger of WaMu, regularly use the moral symbolism of oppressed minorities to bend traditional restraints to enrich themselves at the expense of the public.

Below is some documentation on Fannie Mae's role at the key moment in late December 2004-early January 2005 when the Bubble metastasized, to allow you to judge for yourself the culpability of the various players.

Fannie Mae was hamstrung by an accounting scandal for a few years that kept it from participating fervently in the nascent Housing Bubble of 2002-2004. But late in 2004 Daniel Mudd became interim CEO and quickly made a deal with Angelo Mozilo to buy up Countrywide's crummy mortgages. You can see a major inflection point in the Housing Bubble following this. 2004 was a bubble year, but the bubble went wild in 2005 when Fannie came back in aggressively and financed Mozilo's wildest ambitions. So Bush and Mozilo and the like launched the bubble in 2002-2004, claiming to be loosening downpayment and documentation requirements it in the name of home ownership equality for Hispanics and blacks. With regulators told to stand down, private enterprise got the party rolling. But then Fannie jumped in just when we needed some adult supervision to take away the punch bowl.

From the New York Times on October 4, 2008:
"Shortly after he became chief executive [in December 2004], Mr. Mudd traveled to the California offices of Angelo R. Mozilo, the head of Countrywide Financial, then the nation’s largest mortgage lender. Fannie had a longstanding and lucrative relationship with Countrywide, which sold more loans to Fannie than anyone else. 
But at that meeting, Mr. Mozilo, a butcher’s son who had almost single-handedly built Countrywide into a financial powerhouse, threatened to upend their partnership unless Fannie started buying Countrywide’s riskier loans. 
Mr. Mozilo, who did not return telephone calls seeking comment, told Mr. Mudd that Countrywide had other options. For example, Wall Street had recently jumped into the market for risky mortgages. Firms like Bear Stearns, Lehman Brothers and Goldman Sachs had started bundling home loans and selling them to investors — bypassing Fannie and dealing with Countrywide directly. 
“You’re becoming irrelevant,” Mr. Mozilo told Mr. Mudd, according to two people with knowledge of the meeting who requested anonymity because the talks were confidential. In the previous year, Fannie had already lost 56 percent of its loan-reselling business to Wall Street and other competitors. 
“You need us more than we need you,” Mr. Mozilo said, “and if you don’t take these loans, you’ll find you can lose much more.” 
Then Mr. Mozilo offered everyone a breath mint.

Apparently, quickly after this historically catastrophic meeting between Countrywide and Fannie Mae, Mozilo issued a pledge to lend a trillion dollars to minorities and lower income borrowers:
"ORLANDO, Fla., Jan. 14 [2005] /PRNewswire/ -- Countrywide Home Loans, Inc., a national leader in expanding homeownership across America, today announced an extension of its We House America(R) initiative to fund $1 trillion in home loans to minorities and lower-income borrowers and communities through 2010. 
"The $1 Trillion We House America Challenge, expanded from $600 billion announced in 2003, embodies Countrywide's long-standing commitment to lead the mortgage industry in closing the homeownership gap for minority and lower-income families and communities," said Countrywide Financial Corporation Chairman and CEO Angelo Mozilo, who announced the initiative at the International Builders' Show in Orlando.
"For several years now, Countrywide has been a leading lender to minorities and lower-income households," Mozilo said. "I am proud of our lending record and pleased to announce the expansion of our lending commitment to $1 trillion. ... 
The company will continue to develop innovative programs emphasizing non-traditional lending criteria, thus helping to address challenges Mozilo has made to the industry, such as calling for improved underwriting systems that eliminate the over-reliance on traditional credit scores that can mask a borrower's true credit-worthiness. Countrywide is already responding to this challenge with the launch last year of its successful Optimum Loan program. That program addresses major obstacles for hard-to-qualify borrowers, such as allowing for non-occupant co-borrowers, other secondary income, and pooled funds for down payments. 
Mozilo said. "We have also called upon one of our esteemed directors, the Honorable Henry Cisneros, former Secretary of Housing and Urban Development and a former mayor of San Antonio. Henry will put to use his long and respected experience as an advocate for affordable housing who understands the benefits to communities of homeownership. He has graciously agreed to lend his support and expertise to this effort with the goal of assuring Countrywide's continued leadership in innovative, responsible and flexible mortgage products." 
Secretary Cisneros said of the initiative, "Countrywide's $1 trillion commitment is very tangible proof of this company's commitment to fair, affordable and responsible lending. This company is leading the industry in closing the homeownership gap ...

25 comments:

Shouting Thomas said...

If you think Dodd/Frank was a "regulatory" law that fixed the situation, you are really confused.

I was contracted by one of the big securities firms to implement the training for Dodd/Frank. And, of course, an incompetent black manager was hired at the top of the heap of the purported "training" effort. What did it matter? Everybody knew she was just window dressing for another gulp at the cup of the government trough.

The atmosphere at this firm was so poisonous... everybody knew that the scam had just been edged up another notch. The Dodd/Frank con was to drive the small guys out of biz by ratcheting up the cost of biz to a level only the big guys could afford.

I lasted six weeks. My job was so clearly useless featherbedding that everybody but my incompetent boss found it laughable. She was, of course, a fierce tyrant, a black woman with a chip on her shoulder. The only time in my contracting career where the corruption was so obvious and vicious that I gave my employer the finger and left.

What a nightmare! The scam continues big time.

countenance said...

Steve Sailer asks:

How can it not be important to develop a non-partisan, non-ideological history of the Housing Bubble and how that contributed to the great crash?

I respond:

Because they don't want us to see the racial treachery behind the curtain. They don't want us to see the pincher movement of plutocrats plus lumpenproles to squeeze out the working/middle class of white people. It's much better for TPTB that red team and blue team bickers with each other over which half of the problem to solve and which half to make worse.

Steve Johnson said...

We need a new understanding that in the 21st Century, the Top Dogs, like Angelo Mozilo and Kerry Killinger of WaMu, regularly use the moral symbolism of oppressed minorities to bend traditional restraints to enrich themselves at the expense of the public.

You think that can be non-partisan?

The Democratic party exists to "use the moral symbolism of oppressed minorities ... to enrich themselves at the expense of the public".

The Republican party exists to enrich the high ranking Republicans in pretending to oppose part of that agenda (without ever disputing the premise).

You're asking for the elite to delegitimatize their entire claim to power as the alternative to blaming the Republicans or Democrats.

The Republicans and Democrats exist specifically so that the elite's claim to power is never questioned and instead questions only get asked about the Rs or Ds.

Anonymous said...

"It's depressing that more than a half decade later, few seemed to have learned anything to help them move beyond the tired talking points. "

Steve, it's been 70 years since WWII and yet our history of the period is still basically pure progressive propaganda. Nevermind the US embargo on Japan to get into the war or allying with the Soviet Union and handing them half of Europe. Or even the likes of high ranking Treasury official Harry D White, main figure behind IMF, World Bank, etc., being a proven commie spy (Venona).

If we can't get an objective history of 20th century, you're hopelessly naive in thinking we'll get one of something as recent as 5 years ago. We're only now, very slowly, getting the truth about the Great Depression and catastrophic New Deal.

My guess? It will take at 50-80 years before we see a remotely accurate depiction of Great Recession of 2008.

peterike said...

You have to love the weasel words.

The company will continue to develop innovative programs emphasizing non-traditional lending criteria

Ohhh, non-traditional lending criteria! Yeah, because those old fashioned criteria like "ability to make payments" are so, you know, traditional! The head nod to "other secondary income" is also very telling. You mean, all that off-the-books yard work? Fencing stolen goods? Welfare and Medicare scam money? Or that little side job that involves hanging out on street corners?

And let's not entirely forget the Countrywide VIP loan program -- that is, sweetheart loans to connected people, like Chris Dodd and Barbara Boxer.

Mozilo should be in prison. Instead, he's rich.

Institute of Economic Understanding said...


August 7: Democratic presidential front-runner Hillary Clinton proposes a $1 billion bailout fund to help homeowners at risk for foreclosure.[51]

That's the problem right there. As bad as the republicans are, The dems are probably worse.

Anonymous said...

offtopic on the 10,000 hours nonsense, looks like Scott Adams (Dilbert creator) has come around on the issue in less than a year:

http://dilbert.com/strips/comic/2013-02-07/

http://www.dilbert.com/strips/comic/2013-10-15/

The Guild said...

Of course none of De Long's attacks on Greenspan mentions Clinton and Bush II gutting credit standards for years before Fannie and Freddie got involved or the fact that Congressional Dems thought Bush wasn't going far enough. All of this: Down the memory hole, what a surprise.

Dutch Boy said...

All lending based on usury is a bubble waiting to pop.

WMarkW said...

There are THREE primary economic political alignments: government dependents (those paid by taxes), business (paid by investments), and workers (those paid by wages). The latter does not have a political party focused on their needs, which are not always in the middle of the other two.

Subprime mortgages, illegal immigration, and the WalMart-ization of our economy, are all issues on which left and right agree to screw the wage earner.

Anonymous said...

>> like Angelo Mozilo and Kerry Killinger

wait.... doesn't SOUND LIKE Frankfurt/YKW names.


must be a mis-print. The goyim are all victims.

Dave Pinsen said...

It was pretty much the opposite of usury: low rates and few consequences for failing to pay. Maybe after a year or so the sheriffs finally show up and make you leave the house you'd been living in rent-free. Ordinarily, you'd be out your down payment, but if you didn't have to make a down payment....

Anonymous said...

Here's what I don't understand about the Steve Sailer "diversity" theory of the crash.

First, why, if minority lending was the cause, was the housing bubble global, not just American? There was no pressure to expand minority home ownership in Europe, but many countries there went batty, too. (Australia's still going batty, as is Hong Kong.)

Second, what indication is there than any of the financiers in question were at heart unwilling to lend to these riskier borrowers? "Everyone knew" that housing prices would rise, after all.

Third, do you really think that if the poor people whom we were trying to entice into the market had been white, the bubble wouldn't have inflated? Do you really think that the Mozillo types would not have spoken just as enthusiastically of some other reason for bringing home ownership to lower-income Americans? Greenspan himself was encouraging buyers to take advantage of the the low-teaser-rate subprime garbage, and it wasn't because of idealism.

Yes, low-income Americans are disproportionately Black or Latino, but, in the context of the housing market, so what? Surely, the motivation of brokers was to profit by expanding the pool of buyers by any means possible. The rhetoric was tailored to that end. If it hadn't been racial-justice rhetoric it surely would have been another kind of rhetoric.

Anonymous said...

This is a very nice and fair post. It shouldn't be that hard for everyone to see that Fannie deserves tremendous blame, but that it was a follower rather than a leader of Wall Street in taking the economy down the hole.

Anonymous said...

"How can it not be important to develop a non-partisan, non-ideological history of the Housing Bubble and how that contributed to the great crash?"

If that happened the bankstas wouldn't be able to do it again.

Grey said...

"It was pretty much the opposite of usury: low rates and few consequences for failing to pay."

It was usury based on a belief they had figured out a way to insure against default - hence the very low rates and low consequences for default.

After the crash the bailouts put all that risk on the taxpayers after the fact.

So it was usury - just a weird kind of time-delayed version.

Grey said...

"First, why, if minority lending was the cause, was the housing bubble global, not just American?"

Minority lending wasn't the direct cause.

The direct cause was the usual one of the bankstas wanting to create a credit boom.

The *form* this took in the USA was minority lending. This was because after the last time the bankstas wrecked the global economy in the 1920s (with the resulting depression, world war and scores of millions dead) the US put a lot of legal obstacles in the way of it happening again.

Using accusations of racism to help break down those obstacles just made sense politically because of PC hegemony.

Minority lending was the Trojan horse used to set the bankstas free to trash the world economy again.

Anonymous said...

Exactly the whole right vs. left shadow boxing exists to hide what's really going on.

Clinton/Obama/Bush were/are like peas in a pod when it comes to TARP, Globalization, out-sourcing, special deals for hedge fund managers, illegal immigration, etc. etc. etc.

All the Left knows they can always gain power and destroy 'AmeriKKKa' along as they throw big business and the (R)'s a few $$$.

Auntie Analogue said...


"How can it not be important to develop a non-partisan, non-ideological history of the Housing Bubble and how that contributed to the great crash?"

Because to TPTB it is not just important, but vital not - repeat: not - to develop a non-partisan, non-ideological history of the Bubblle and crash. Not developing that objective history is what protects our Dear Rulers and their globalist capitalist campagn donor-puppeteers from the righteous wrath of us, the people.

Our Dear Rulers and their donor-puppeteers find it convenient and profitable to harp on the narrative that the Big Bailout of the bankstas was necessary - ostensibly to protect the millions of little people from worse harm, instead of the narrative that the Big Bailout should have directly helped the little people and screwed the crooked mercenary politicians and their crooked globalist-capitalist campaign donor-puppeteers. The narrative that bailing out the bansktas was necessary is the 21st century version of the pre-Enlightenment dogma of the divine right of kings.

Anonymous said...

>> All lending based on usury is a bubble waiting to pop

You don't mind if I pay to rent a cement mixer - but you're upset if I pay to rent money?



All lending not based on the time value of money, is either charity - or is lending based on the time value of money - with smoke and mirrors to disguise it.

"Islamic Finance" specializes in the appropriate forms of smoke and shape of mirrors to hide the fact that a lender needs to incentivized to not spend his own money on his own utility, and even further incentivized to carry the risk that the money will never be re-paid.

Quite entertaining to study it.

Anonymous said...

I rather think that no, lending to unqualified poor whites would not have burst the bubble. At least not as spectacularly. Everybody having an easy loan bid up the prices, and then when it becme obvious that the neighborhood had been ruined, prices tanked. Block busting on a gigantic scale. And of course, you know who was waiting to buy back the property for pennies and now rent it back out. Poor whites don't ruin property values the same way as blacks do.

Anonymous said...

The most depressing part is that the establishment is actually pushing for new a new housing scheme . Listen to Peter Schiff(who predicted the bubble) talking about his testimony at in Congress where he was with 6 other witnesses who were speaking for extending loan guarantees to multi family homes.

http://www.youtube.com/watch?v=UvMGHzB37lo

And here is Ezra Klein literally calling for a new housing bubble. Hilarious take down here by Bob Murphy of this insane idea
http://www.youtube.com/watch?v=cIrbGwi_2Bg

This is but another of the century long disasters where progressives, activists and special interest groups collaborate with politicians. Bootleggers and Baptists
http://www.lewrockwell.com/1970/01/murray-n-rothbard/the-government-business-alliance/

David said...

>the time value of money<

The trouble lies in what one regards as a productive use of money. (The productive use of a cement mixer is clearer.) Rent-seeking is often tangled up in the scam of compound interest. Compound interest is generally thought to operate as a geometric sequence. Production of goods and services cannot keep up with it. (Someone pointed out that investing one dollar at the time of Christ, compounded annually at 5% interest, would by now give you more dollars than there are atoms in the known universe.) The result is "too many dollars chasing too few goods" (the classic definition of inflation) and thus a game of musical chairs ensues: the chairs being the actually existing goods, and the losers who end up on their butts often being the people who built the chairs (created the goods) in the first place, and were done out of them by the scam. Business cycle busts are usually masked write-downs of debt, i.e., they occur when compounded "the time value of money" has gotten too out-of-sync with what has been going on on the factory floor or in the fields.

By contrast, in Islamic banking, as I understand it, an accepted practice is to charge a flat fee for the use of money. Maybe someone can weigh in on this.

Ezra Pound had the bankers' number but got put in the bug house because he took it all too seriously.

Grey said...

"All lending not based on the time value of money, is either charity - or is lending based on the time value of money - with smoke and mirrors to disguise it."

The profit from money lent for production (investment) e.g. buying stock in a company, derives from greater economic efficiency i.e. successful investment creates more stuff which the lender (investor) gets a share of. So not the time-value of money but a share in the value of increasing the amount of stuff.

Lending for consumption on the other hand simply involves getting someone to pay more for some stuff than it is worth e.g. a borrower agreeing to pay $8000 over a long time for a car currently worth $4000, with the lender pocketing the difference while at the same time insulating themselves from any risk. It doesn't increase anything. It creates the illusion of increased prosperity in the short term while in reality reducing it over the long-term.

Lending for consumption is inherently parasitic.

If lending for consumption is taken to its limit i.e. consumers spending all their discretionary income on paying back past loans, it must neccessarily lead to debt saturation and economic stagnation.

(That's assuming the maximum limit wasn't overshot in the process creating a credit boom followed by a deflationary bust instead.)

So lending for consumption taken to its logical limit = stagnation (or deflation).

So personally although i would say that the fractional reserve banking version of usury is always a bubble waiting to pop i wouldn't say all usury was a bubble waiting to pop depending on how you define usury with lending for investment being fundamentally different from lending for consumption.

(As your example of a cement mixer illustrates.)

Anonymous said...

Come on - Greenspan belongs in a cultural JAIL - if not an actual one! How does he get off putting the blame on others for what he set in motion.

Bobbles Greenspan fed money to the junk bond/saving and loan bobble, to the internet bobble, and to the housing bobble.

When Bobbles was appointed to the Fed, America was strong - look at us now.

Bobbles is responsible for putting America in our horrendous financial troubles - end of story!

Hmm! Who was he working for all that time - who got fabulously rich in these last decades?