Bill Black Takes on the "Fannie and Freddie Did It" Meme

I really enjoyed this piece for its knowledgeable, historical analysis. Black doesn't exactly side with the "It Wasn't Fannie and Freddie" crowd, but he's more unsparing in his criticism of ideologue Peter Wallison, whose position "It Was All Fannie and Freddie" is laughable (and Black shows us even more reasons why).

I'm willing to move up Fannie and Freddie on my list of causes of the crisis to, say, number 6 or 7 from number 11. ;)

Black frames the problem well, I think. What caused problems wasn't Fannie and Freddie's mandate to help the poor -- in other words, all those do-good liberals trying to put welfare Moms in houses they couldn't afford. It was, plain and simple, accounting fraud to lavish bonuses on the top echelon of executives -- the same problem found at investment banks that were more direct causes of the crisis.

Joe Nocera Takes on the Big Lie

I've often thought you could make a case for Fannie Mae's and Freddie Mac's culpability in the financial crisis: a very, very small case.

So, if you started listing reasons for the crisis, they might come in, say, number 11 or thereabouts.

What amazes me is the persistence of the simple-minded Republican narrative that they were the cause of the financial crisis. Not a cause. But the cause. (And the hard-core faithful don't want any other causes entered into the record, as when the four Republicans on the FCIC voted to ban the words "shadow banking" and "deregulation" from the final report!)

This viewpoint is so ignorant and ill-informed, so contrary to "the truth on the ground" that we know from how this crisis developed and what it looked like as it unfolded, that it strains credulity. Is Peter Wallison so ideologically blinkered that he can't even process a set of historical facts in a logical way?

Joe Nocera had a good recent column about this, The Big Lie.

What I enjoyed best though was the second comment that appeared afterward. Excerpts:

I was a mortgage broker during the housing bubble. I can tell you that a "conforming" loan -- one that was run through Fannie or Freddie's "desktop underwriting" software -- always made us nervous. We got rejected for approval regularly whereas if we sold a subprime loan with a higher interest rate we got approved more easily and made much more on the loan ... rather than blame what was in essence a good government program for the housing collapse I say a lot of it deserves to go to the lenders and brokers who hustled these loans.

Once mortgages became securitized and the lenders had no skin in the game the whole system went to hell.

Exactly, and a flaw I noted in the securitization model (and I'm far from the first person to make the observation) almost two years ago.

Earth to Peter Wallison: Are you listening?

Keep an Eye on That Shadow Banking, Folks

Because it's starting to rear its ugly head again.

Turns out that what may be at the heart of MF Global's gaping hole on its (off) balance sheet: collateral that may have been shifted over to its U.K. unit to permit rehypothecation.

"Rehypothecation" is one of those mouth-filling words that basically says you can repledge the same piece of collateral (a useful trick in the shadow banking world of repo).

In the U.K., the collateral can be endlessly rehypothecated, again and again and again, creating long, unstable, dangerous chains -- and the interesting concomitant, lots of liquidity (which tends to act like a stimulant -- call it cocaine for the financial system -- and we know how hard it is to break a drug habit). Reuter's Christopher Elias:

This churning of collateral means that re-hypothecation transactions have been creating enormous amounts of liquidity, much of which has no real asset backing.

Ladies and gentlemen, this is h-u-g-e. Too few people have wrapped their brains around this. We have central banks that greatly influence money supply/liquidity through their open market operations. Then we have a massive, off-balance sheet system of shadow banking that does the same with no oversight, in complex ways we barely comprehend.

This is a powder keg waiting for a spark.

For more, check out Alphaville's "Shadow Banking and the Seven Collateral Miners."