Blog on the Run: Reloaded

Friday, May 14, 2010 8:43 pm

Before you try to rewrite history …


… you’ve got to get past the historian:

When writing Bailout Nation, I tried to steer clear of partisan finger pointing. I kept the focus on what actually occurred, what could be proven mathematically. I blamed Democrats and Republicans — not equally, but in proportion to their what they did. Unsupported theories, tenuous connection, loose affiliations were not part of the analysis. Every legislative change, each regulatory failure, all corporate actions, to be blameworthy, had to manifest themselves in actual mathematical proof.

This led me to ascertain the following 30 year sequence:

-Free market absolutism becomes the dominant intellectual thought.
-Deregulation of markets, investment houses, and banks becomes a broad goal: This led to Glass Steagall repeal, Derivative exemptions, Investing house leverage exemptions, and a new breed of unregulated non bank lenders.
-Legislative actions reduce or eliminate much of the regulatory oversight; SEC funding is weakened.
-Rates come down to absurd levels.
-Bond managers madly scramble for yield.
-Derivatives, non-bank lending, leverage, bank size, compensation levels all run away from prior levels.
-Wall Street securitizes whatever it can to satisfy the demand for higher yields.
-”Lend to securitize” nonbank mortgage writers sell enormous amounts of subprime loans to Wall Street for this purpose.
-To meet this demand, non bank lenders collapse lending standards, leading to a credit bubble.
-The Fed approves of this innovation.
-Housing booms, then busts
-Credit freeze, market collapse recession.

You will note that the CRA [Community Reinvestment Act] is not part of this sequence. I could find no evidence that they were a cause or even a minor factor. If they were, the housing bubbles would not have been in California or S. Florida or Las Vegas or Arizona — Harlem and South Philly and parts of Chicago and Washington DC would have been the focus.

Nor do I blame Fannie and Freddie. Now understand, there is no love lost between myself and the GSEs. For years, I have called them “Phoney and Fraudy.”  Since George Bush and Hank Paulson nationalized them, I have accused the government of using these two as a backdoor bailout for banks — a hidden PPIP/TARP used to buy all the garbage mortgages that banks are desperate to get off their balance sheets. Longtime readers will recall we very publicly shorted Fannie based upon their fraudulent practices and horrific balance sheet.

But even I cannot reconcile the movement to place all of the world’s troubles at the feet of the GSEs. Not, at least, according to the data.

So, unfortunately for some banksters and their Republican political allies, the facts surrounding the housing bubble have a liberal bias.

Over the past 2 years, I have repeatedly asked the people who push this narrative to provide some evidence for their positions. I have offered a $100,000 if they could prove their case.

Specifically, I have requested some data or evidence that DISPROVED the following facts:

-The origination of subprime loans came primarily from non bank lenders not covered by the CRA;

-The majority of the underwriting, at leats fro the first few years of the boom, were by these same non-bank lenders

-When the big banks began chasing subprime, it was due to the profit motive, not any mandate from the President (a Republican) or the the Congress (Republican controlled) or the GSEs they oversaw.

-Prior to 2005, nearly all of these sub-prime loans were bought by Wall Street — NOT Fannie & Freddie

-In fact, prior to 2005, the GSEs were not permitted to purchase non-conforming mortgages.

-After 2005, Fannie & Freddie changed their own rules to start buying these non-conforming mortgages — in order to maintain market share and compete with Wall Street for profits.

-The change in FNM/FRE conforming mortgage purchases in 2005 was not due to any legislation or marching orders from the President (a Republican) or the the Congress (Republican controlled). It was the profit motive that led them to this action.

These are data supported facts I pounded on in BN.

Of course, folks [who blame Fannie/Freddie] hate this factual history, as it conflicts with their goals and politics. Rather than produce evidence, they create story lines unsupported by facts.  …

However, as an investor, I demand evidence, data and facts. The blame Fannie & Freddie crowd have managed to remain blissfully data free. They have steadfastly ignored all calls for proof.

Its way past the time to call out their intellectual dishonesty. If you cannot show any data, if you cannot prove what you are alleging with actual facts, you need to be called out for what it is you actually are: Proponents of a failed philosophy.

Or, you know, liars.

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1 Comment

  1. […] and Freddie weren’t the ones who broke the economy: So said Barry Ritholtz a while back; so says the FHFA […]

    Pingback by Playing catch-up « Blog on the Run: Reloaded — Saturday, September 25, 2010 5:56 pm @ 5:56 pm


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