December 17, 2011
In an article on addressing global warming would a serious newspaper throw in a comment to the effect that “many Americans consider it a hoax,” without pointing out that it is not? It did the equivalent in an article on the Security and Exchange Commission’s charges against the top executives at Fannie Mae and Freddie Mac for inaccurately representing their exposure to subprime debt.
The Post article at one point commented that:
“Fannie Mae and Freddie Mac, which came to symbolize the housing bubble and its painful aftermath.”
In fact, the charges described in the article describe a situation in which the top executives at these institutions bought up stakes in non-prime loans and subprime backed securities just as the market was collapsing. The purchases began in late 2006 and accelerated in 2007 and 2008.
The housing bubble had peaked in the middle of 2006 and subprime issuance plummeted in the second half of the year. It had virtually ceased altogether by 2007. In other words, Fannie and Freddie purchases at this point could have played no role in the splurge of subprime junk loans because the splurge had already stopped.
The purchases of securities backed by subprime and Alt-A loans was simply reducing the explosure of the private investment banks that had issued these securities (e.g. Goldman Sachs and Lehman) or issuers that still had some loans on their books (e.g. Countrywide or Ameriquest). This would have transferred bad debt from the private sector to the government sponsored enterprises, but the economic damage caused by the issuance of these loans had already been done.
[Addendum: This comment should not at all be taken as a defense of Fannie and Freddie. Unlike the right-wing buffoons who now criticize them for causing the housing bubble, I was critical at the time. I was trying to call attention to the bubble since 2002. Fannie and Freddie financed close to half of the housing in the country at the time. They could have taken steps to stop the bubble (e.g. require appraisals of rental values and refuse to make loans at purchase prices that exceeded a ratio of 18 to 1). Housing is all they do. They should have seen the bubble. Nonetheless, the worst loans were securitized by Citigroup, Merrill Lynch and other private lenders. That is really not a debatable point. Angelo Mozilo and Robert Rubin should be the symbols of the housing bubble, not Fannie and Freddie.]
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