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Saturday, December 31, 2011

Peddling a False Narrative on the Financial Crisis

Richard Green:

Choice words from William Black: He writes:

If one had to pick one person in the private sector most responsible for causing the global financial crisis it would be Wallison. ... He complained during the build-up to the crisis that Fannie and Freddie weren’t purchasing more affordable housing loans. He now claims that it was Fannie and Freddie’s purchase of affordable housing loans that caused the crisis. He ignores the massive accounting control fraud epidemics and resulting crises that his policies generate. Upon reading that Fannie and Freddie’s controlling officers purchased the loans as part of a fraud, he asserts that the suit (which refutes his claims) proves his claims.

The piece is long, but worth reading in its entirely. 

Here's more on Black from Adam Levitin at Credit Slips:

A New Theory of the Role of the GSEs in the Housing Bubble, by Adam Levitin: Bill Black has an interesting new take on the role of Fannie and Freddie in the housing bubble. He sees their investment in non-prime mortgages as being driven by executive compensation, rather than a fight for market share against investment bank securitization conduits or govt affordable housing policy. The government affordable housing policy point has been repeatedly debunked (and Susan Wachter and I have a new paper that adds to this debunking via an examination of the commercial real estate bubble, where there was no government involvement whatsoever). Black is not, however, able to disprove the market share theory. What he does point to is that the GSE's involvement with nonprime mortgages was as whole loans kept in portfolio, rather than securitized (and also via purchases of MBS), which he says was a move to increase the short-term yield for the GSEs and thus maximize short-term executive compensation.
I think this is an interesting theory, but there are a few data points necessary to make it work, and I'm skeptical that they all support Black. ...

Let me note one other thing. The attempt by many on the right of the political spectrum to blame the financial crisis on government attempts to help the disadvantaged despite an abundance of evidence debunking this view annoys me, and annoys me a lot, but that shouldn't be confused with support for Fannie and Freddie. As I've argued in the past, it's very difficult to find a justification for their existence (the best I can do is conditional lukewarm support). Saying Fannie and Freddie didn't do it -- and they didn't -- is not the same as saying that Fannie and Freddie have, on net, been beneficial. I don't think that's clear.

    Posted by on Saturday, December 31, 2011 at 09:20 AM Permalink  Comments (32)



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