Quote:
Originally Posted by UnderseaLcpl
If there had been no Fannie Mae or Freddie Mac there would be no significant subprime mortgage market and there would have been no house of cards to topple.
|
This is absolutely false. Suprime lending didn't exist until the early 1990s.
Fannie and Freddie were actually
losing market share to non-bank lenders in the subprime market during the runup to the crisis (2003-2007). And remember, the credit bubble extended to more than just home mortgages - commercial real estate, student loans, credit card receivables and other forms of debt that Wall Street had an insatiable appetite for. None of which involved Fannie and Freddie (hereafter referred to as government sponsored entities or GSEs).
The primary sources of the credit bubble and resulting economic collapse were the abandonment of traditional lending standards - banks didn't care if loans were going to pay, as they were moving them off their books to Wall Street within 30, 60, 90 days after closing anyways - and a Federal Reserve that brought rates to historic lows and kept them there for an extended period of time, all the while ignoring the bad behavior of the loan originators. Again, none of this is directly a fault of the GSEs. They did purchase loans from banks, and they did lower their requirements for the loans that they would purchase, but the majority of the garbage loans were securitized by private label issuers, and not the GSEs. Indeed, by the time that the GSEs had relaxed their rules, the die had already been cast and the housing boom was in full swing.
The GSEs were not the first to fall. They were not even government agencies - they were government SPONSORED entities. The important difference being that they could borrow from the Treasury at more attractive rates than others. They were private sector, publicly traded firms.
According to
http://www.nytimes.com/2008/10/05/bu.../05fannie.html
From 2001 to 2004, the subprime loan market grew from $160 to $540 billion. And also, by 2004 FNMA had lost 56% of its business to Wall Street firms. the GSEs relaxed their loan buying standards in attempt to play catchup to the greed of the private label securitizers who cared not about the quality of the loans they securitized, just so long as they could get them into a mortgage backed security and out the door.
The "blame Freddie and Fannie" argument even fails in terms of time and space....FNMA's been around for 70-odd years and just
now they cause a collapse of the financial system? It makes no sense - especially given that the entire
world experienced a housing boom during the early to mid 2000s. UK, France, Spain, Australia, Ireland - if the entire cause of the crisis could be laid at the GSEs doorstep, then how did they cause the runup internationally?
As I said before - blame the GSEs for taking part in the whole mess, but to say they were the cause and start of it is just not true.
Stealth Hunter - I agree with your list! I would add a couple culprits:
The credit rating agencies - rating junk paper as "AAA" and thus giving the green light for asset managers to purchase it based on their investment policy was a huge cause of the crisis.
The repeal of Glass Steagall - allowing depository banks, who are by definition supposed to be risk averse, to be co-mingled with investment banks who by definition take on risk is a recipe for disaster.
The 2004 SEC leverage exemption - in 2004, the SEC allowed just 5 firms - Goldman Sachs, Merrill Lynch, Morgan Stanley, Bear Stearns and Lehman Brothers - to boost their debt-to-net-capital ratio from 12-1 up to 30 or 40 to 1. This allowed for the losses to be magnified. For a testament to how destructive this decision was - look at the names on that list and see which ones still exist today.