Wed 8 Oct 2008
The credit mess: And so it began
Posted by Prieur du Plessis under Investment, Markets, Money
The following excerpt comes from The New York Times of September 30, 1999:
“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.
“In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the saving and loan industry in the 1980’s.
“‘From the perspective of many people, including me, this is another thrift industry growing up around us,’ said Peter Wallison a resident fellow at the American Enterprise Institute. ‘If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.’”
Please click here or on the image below for the full story.
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October 8th, 2008 at 8:29 am
Here’s the archived article:
http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F958260&sec=&spon=&pagewanted=1
Here’s some other articles you might enjoy:
How A Clinton-Era Rule Rewrite Made Subprime Crisis Inevitable
http://www.investors.com/editorial/IBDArticles.asp?artsec=16&artnum=1&issue=20080924
Anatomy of a Train Wreck
http://www.independent.org/pdf/policy_reports/2008-10-03-trainwreck.pdf
October 8th, 2008 at 1:01 pm
Wow! So in September 1999, 3 months before the end of his term, lame-duck Clinton forced FNMA into something that GWBush didn’t want? Was Clinton also telling Greenspan to keep rates low? This is a nice try at pushing the source back out (barely) of the current administration, but regardless of who dropped the seed, the plant was tended with great enthusiasm by the administration whose economic record was “benefiting” from it.
October 8th, 2008 at 2:42 pm
To: Peter Van Dusen
Actually the rewrite occurred in the middle of Clinton’s presidency. Also, FNMA was well stocked with Dems and didn’t really need any forcing. The original lenders were the ones who needed forcing, and they were basically forced to either make poor loans or stop mortgage lending all together.
Read the referenced material from Mia above:
From:http://www.investors.com/editorial/IBDArticles.asp?artsec=16&artnum=1&issue=20080924
“Though well-intended, the problem was that Congress was about to change hands, from the Democrats to the Republicans. Rather than submit legislation that the GOP-led Congress was almost sure to reject, Clinton ordered Robert Rubin’s Treasury Department to rewrite the rules in 1995.”
also: http://www.independent.org/pdf/policy_reports/2008-10-03-trainwreck.pdf
October 8th, 2008 at 5:37 pm
Fannie and Freddie had lots of others problems besides this. They were vastly overleveraged. They paid their executives exorbitant salaries and bonuses.
Fannie and Freddie are sideshows to the collapse of Wall Street and the insane default swaps market. Fannie and Freddie were not responsible for investment banks leveraging 30 to 1. Nor were they responsible for the financial chicanery that turned subprime mortgages into AAA rated derivative securities. It looks like foolish deregulation and deceptive practices (at least to those who didn’t read the fine print) by ratings agencies had more to do with the big mess than Fannie and Freddie lending to some folks who were being ignored by banks up until then.
October 8th, 2008 at 6:03 pm
While this article is correct, it doesnt address that the republicans had conrol of congress for ten years, and the presidency for 5 years before the problem was seen by many marke watchers. You didnt mention that Alan Greenspan, did nothin tho stop the tech bubble of the late 90’s, and kept interest rates exceedingly low for an extended period in 2002-2004. He also encouraged people to switch to ARM’s in a 2004 speech. I’m surprised that you didnt mention The CRA. Most of the mortgages issued were by banks not covered by that ACT. The fact that the SEC lifted the capital requirements in 2004 that introduced the casino mentality. The CEO at Fannie was conflicted by dealing with his mission and his shareholders.
There is plenty of blame to go around, but these kinds of inflamatory comments are not helpful at this point. We have plenty of time to have a post mortem.
October 9th, 2008 at 1:38 am
Anyone who thinks poor people caused this financial mess needs to have their head examined!
October 10th, 2008 at 4:11 am
Great post. I think it is important for everyone to realize and admit both parties are to blame. A couple of examples include the Dem’s pushing easy lending policies and the GOP’s repeal of the glass-steagall act. I wish both parries would stop pointing fingers at the other and focus on what to do from here. We truly lack leadership!