James Freeman, a former staffer for then-Rep. Chris Cox (R-Newport Beach) is today an editorial writer for the Wall Street Journal. In a book review in the paper’s "bookshelf" column, he has managed to succinctly summarize the root cause of financial turmoil impacting the government sponsored enterprises (Fannie Mae, Freddie Mac, Ginnie Mae et al) and the financial institutions that bet on their investments. This summary comes in the form of a review of a new book, "The Sellout" by CNBC correspondent Charles Gasparino.
Here’s the gist, in terms of market turmoil triggers: "For another, the government had made a series of horrendous policy decisions that, as Mr. Gasparino shows, encouraged financial firms to go long on housing in ways that would have once been unimaginable.
"In 1995, Henry Cisneros, the secretary of housing and urban development, directed Fannie Mae and Freddie Mac…to buy and guarantee mortgages of low- and moderate-income borrowers amounting to 42% of their annual business volume. His successor, Andrew Cuomo, moved the number up to 50% and directed Fannie and Freddie to buy the mortgages of borrowers with ‘very low income.’ The effect was a flood of government-subsidized lending.
"At the same time, government-anointed credit raters were assigning Triple-A ratings to mortgage-backed securities that in no way deserved them. The Federal Reserve’s so-called Basel capital standards gave banks more credit for owning mortgage-backed securities than many other assets, and in 2004, the SEC applied those standards to investment banks, with dramatic results. In 2003, Lehman Brothers held roughly equal amounts of U.S. Treasury bonds and mortgage- and other asset-backed securities. By 2006, the firm’s Treasury holdings had barely budged while it’s mortgage- and asset-backed holdings had almost tripled. Meanwhile, the Fed’s easy money policies of the early 2000s subsidized credit and sent the banks looking for higher yields…."
So there it is.
Freeman notes those aren’t the only causes, but they’re certainly compelling and substantial.
He closes by quoting one of Gasparino’s great lines in the book, heard from a Citigroup trader who "responded to a co-worker upon hearing about a correction in the housing market. ‘What’s the worst that could happen? We make $200 million and then we get fired?’"
The traders and betters may have moved on but the people behind the policies that allowed the market to cataclysmically explode are still watching corrections, recessions and recoveries from the comfort of the U.S. Congress.
You can bet I’ll buy the book to learn more on that account.
[Disclosure: several years ago, I handled PR on this issue for a non-government client]