The Old "That Thing You Didn't Say Isn't True" Trick

Marc Danzinger writes at Winds of Change under the name "Armed Liberal." In my scattered meetings with him, I've found him to be neither armed nor liberal, but maybe I caught him on a bad day. A few weeks ago, we appeared on a radio show together, and we got into a discussion over whether or not Fannie Mae and Freddie Mac could be blamed for the financial meltdown, which is a tautological discussion at the outset, because the idea that there's one simplistic answer for something so complex isn't an argument worth having. But I made my points, and he made his, and then a week or so later he wrote this long piece on his website that I imagine he considered the definitive takedown of moi.

Now, I was fully prepared to let this go, but this "Fannie and Freddie did it!" meme has shown no sign of letting up, with House Republicans calling for a special counsel to investigate the GSE's role in the crisis, and in particular the conduct of former Clinton Administration officials (Man, that old Whitewater magic has some kind of pull). They desperately want to push this off onto any organization that has ties to Democrats to absolve themselves. So I'm compelled to respond.

In his post, Armed Liberal cites the conversation we had on the radio.

Dave and Marcy Wheeler were taking the "Fannie had nothing to do with this" position. I countered with "I've got this 92-page Powerpoint from the Milken Institute that says otherwise..."

Dave immediate dismissed it, saying "Did Fannie or Freddie make subprime loans?" And while I went to get the appropriate slide from the deck to show him, we moved the conversation along - because according to Brad, no one cares.

But I do, and I'll suggest that we all should. because they did, and further because of who they were and their position in the financial ecology, what they did was dramatically more important than what any other single institution chose to do.

Well, let's stop right there, because that's a misstatement of what I actually said. I never said "Did Fannie or Freddie make subprime loans?" I said "Did Fannie or Freddie guarantee or securitize subprime loans?" And I know that's what I said for two reasons. One, he has the damn mp3 on the site. And two, I was quoting a post I had written that very day which contained that very specific language:

• Fannie and Freddie did not guarantee and securitize subprime loans. Such loans didn’t meet their conforming loan standards. In fact, as the subprime market was building, Fannie and Freddie lost market share because they were under stricter standards. Thus, their participation in the secondary market did not assist in the creation of the subprime market.

• It’s true, however, that Fannie and Freddie were damaged by the subprime crisis because everyone in the housing sector was damaged by falling home prices and, more significantly, the two companies branched out into a broader investment portfolio. In that portfolio were included mortgage-backed securities that hurt all of those who purchased them. Fannie and Freddie weren’t the biggest players in this and, most importantly, started this practice very late in the game. In fact, the subprime market had already started to go bad when they started their purchases (which speaks poorly for Fannie and Freddie’s decision making, but precludes them from responsibility for the crisis).

• Fannie and Freddie were supposed to be more closely supervised than other lenders—with their own regulator, which was supposed to keep a special eye on them because they are important institutions. Those regulators, who were part of the Bush administration, failed along with the rest of the Bush regulatory apparatus to stop the problem.

In the first paragraph, you see that Fannie and Freddie were losing market share, and were basically forced into a subprime market that was already created and well underway. In fact, it was their foot in the free market that forced them into that. This weird hybrid of a "government-sponsored entity," still responsible to shareholders, demanded that Fannie and Freddie chase the market.

Now, Armed Liberal uses the quote of mine he fabricated to "prove me wrong." But there is a major difference between what I said and what he thinks I said. Fannie and Freddie "made" subprime loans, after the market was in place and the bubble was set (Armed Liberal even quotes a WaPo piece saying that they didn't get into the market until 2006), but they didn't guarantee and securitize them. They bought mortgage-backed securities as part of a broader investment portfolio. That was stupid, as they were under-capitalized. But they wanted to show their shareholders that they were going where the mortgage market was going and finding a way, despite their loan conforming standards, to be a part of it.

The problem with the mortgage market was that these shaky loans were sliced and diced into securities that were sold off to others. Fannie and Freddie did not and could not perform that. They got involved when the market was already collapsing. There's a difference between dumb and responsible. If they didn't purchase MBS's, there was a giant pile of money (Big Shitpile) ready to do the same.

When Armed Liberal pulls out the main slide that proves all this (here's an excerpt of his text):

Now if you'll recall, this all started when I suggested, arguing with Marcy Wheeler, that Fannie and Freddie did have something to do with the meltdown. Dave Dayen countered with "do Fannie and Freddie make subprime loans?" And I was flipping through the deck, looking for this slide:

You'll note that 61% of the loans Freddie had in its retained portfolio in 2006 were subprime, and a further 25% were Alt-A.

It's the kind of thing you wish you'd had at your fingertips when you're arguing in public...

As to Fannie, in 2006 the ratios were 46% subprime and 35% Alt-A.

I'll send this link over to Marcy and Dave (as well as Brad) and see what they have to say.

What I'll say is that you're looking at their stock protfolio. This lists the percentages in the mortgage-backed securities they purchased, and that has been ably spun by the Milken Institute (where this guy's "proof" comes from) into Fannie and Freddie being solely responsible for them. That's just silly, for reasons described above.

You don't really have to believe me on this one. You can go ahead and look at the reporting:

Federal housing data reveal that the charges aren't true, and that the private sector, not the government or government-backed companies, was behind the soaring subprime lending at the core of the crisis.

Subprime lending offered high-cost loans to the weakest borrowers during the housing boom that lasted from 2001 to 2007. Subprime lending was at its height from 2004 to 2006.

Federal Reserve Board data show that:

More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.

Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.

Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that's being lambasted by conservative critics.

Or the United States Treasury Department:

The PWG found that the principal underlying causes of the turmoil in financial markets
were:

• a breakdown in underwriting standards for subprime mortgages;
• a significant erosion of market discipline by those involved in the securitization process, including originators, underwriters, credit rating agencies, and global investors, related in part to failures to provide or obtain adequate risk disclosures;
• flaws in credit rating agencies’ assessments of subprime residential mortgage-backed securities (RMBS) and other complex structured credit products, especially collateralized debt obligations (CDOs) that held RMBS and other asset-backed securities (CDOs of ABS);
• risk management weaknesses at some large U.S. and European financial institutions; and
• regulatory policies, including capital and disclosure requirements, that failed to mitigate risk management weaknesses.

(You won't see Fannie and Freddie referenced in there, with the possible exception of the regulatory policies that failed to mitigate risk management, where I completely agree. But of course this is because they were forced by their quasi-private status to operate like everyone else in the market. My remedy for that comes later.)

... or former Treasury Secretary John Snow, SEC Chair Chris Cox, and former Fed chairman Alan Greenspan, and believe me, if there was a scapegoat to be had, they would have no problem using it.

Today in a House Oversight Committee hearing with former Fed chairman Alan Greenspan, SEC chairman Christopher Cox, and former Treasury secretary John Snow, Rep. John Mica (R-FL) revived that argument. He also tried to tie the crisis to Sen. Barack Obama (D-IL), holding up a chart called “Follow the Money Trail.” He pointed that Obama has been the largest recipient of donations from Freddie and Fannie. (Actually, he’s the second highest.)

Committee chairman Henry Waxman (D-CA) chastised Mica for trying to turn the financial crisis into a political issue. He noted that Freddie and Fannie “certainly played a role” in the current situation, but then asked the witnesses, “Do any of you believe that they were the cause of this financial crisis?” All three men said no. Watch it:

I don't know why Armed Liberal has such a hard-on to blame Fannie and Freddie, and I'm not going to go all Matt Taibbi on him and ridicule him for not knowing what the hell he's talking about. Instead I'll try to find some common ground. This was a private sector problem, a failure of regulation and a failure of overwatch on the runaway securitization of loans and the insurance and bets made behind the loans. To the extent that Fannie and Freddie were a part of that, late in the game, it was because they were part of the private sector. I see absolutely no reason to have government-sponsored entities that are partially public and partially private. I imagine this makes it easier to perform poor risk management because the risk is taken away from you. So I would take them permanently off the private market so they could stick to their core function instead of chasing wealth. If this were the case, no lobby shop would be available to press Republicans and Democrats alike to back off any meaningful regulation.

So we need to re-regulate the market and make Fannie and Freddie what they always should have been - backstops. As for Armed Liberal, the next time he wants to argue with me, it'd be nice if he quoted me accurately.

...just to elaborate on this a bit, I'm always skeptical of anyone who leads this off with "subprime loans." The problem of them was not their existence but the securitization. There are also regular loans in those MBS's, and there are loans to people who qualified above subprime but were given one of the more exotic loans. The securitization made everyone generally feel confident, that even if a bunch of loans failed they were a small subset of the total market and so lending standards could be acceptably thrown out. Fannie and Freddie were on the other side of that transaction. They shouldn't have bought them in 2006 and beyond, but they simply weren't responsible for creating the instruments, and their absence from the market wouldn't have collapsed it at all - the dot-com bubble flowed very naturally into the housing bubble, and all the global money went nicely with it.

Also, I associate myself with Ezra Klein's remarks about how we can actually find blame in all of this and use that evidence to create new solutions, essentially a new oversight structure that treats banks for what they do and not who they say they are, and treats insurance like insurance (I'm talking about CDS's here). Do read them.