Tag: Subprime lending

FM and FM Reloaded

A couple off weeks ago, the SEC indicted a number of executives from Fannie Mae and Freddie Mac for fraud. A detailed look at the indictment is here. Money quote is a long one, but I think you have to read it:

The SEC’s complaint against the former Fannie Mae executives alleges that, when Fannie Mae began reporting its exposure to subprime loans in 2007, it broadly described the loans as those “made to borrowers with weaker credit histories,” and then reported — with the knowledge, support, and approval of Mudd, Dallavecchia, and Lund — less than one-tenth of its loans that met that description. Fannie Mae reported that its 2006 year-end Single Family exposure to subprime loans was just 0.2 percent, or approximately $4.8 billion, of its Single Family loan portfolio. Investors were not told that in calculating the Company’s reported exposure to subprime loans, Fannie Mae did not include loan products specifically targeted by Fannie Mae towards borrowers with weaker credit histories, including more than $43 billion of Expanded Approval, or “EA” loans.

Fannie Mae’s executives also knew and approved of the decision to underreport Fannie Mae’s Alt-A loan exposure, the SEC alleged. Fannie Mae disclosed that its March 31, 2007 exposure to Alt-A loans was 11 percent of its portfolio of Single Family loans. In reality, Fannie Mae’s Alt-A exposure at that time was approximately 18 percent of its Single Family loan holdings.

The misleading disclosures were made as Fannie Mae’s executives were seeking to increase the Company’s market share through increased purchases of subprime and Alt-A loans, and gave false comfort to investors about the extent of Fannie Mae’s exposure to high-risk loans, the SEC alleged.

In the complaint against the former Freddie Mac executives, the SEC alleged that they and Freddie Mac led investors to believe that the firm used a broad definition of subprime loans and was disclosing all of its Single-Family subprime loan exposure. Syron and Cook reinforced the misleading perception when they each publicly proclaimed that the Single Family business had “basically no subprime exposure.” Unbeknown to investors, as of December 31, 2006, Freddie Mac’s Single Family business was exposed to approximately $141 billion of loans internally referred to as “subprime” or “subprime like,” accounting for 10 percent of the portfolio, and grew to approximately $244 billion, or 14 percent of the portfolio, as of June 30, 2008.

There’s a handy-dandy chart included. The two GSE’s claimed they had about $14 billion in subprime exposure. The SEC is alleging that the actual exposure was $360 billion. I know this must be shocking to the Left. We all know that government and its supported enterprises only lie when Republicans want to start a war. But there it is in black and white.

It has become an article of faith that Fannie and Freddie did not cause the financial crisis and the allegation they did is all part of a big Republican government hating lie (read here, here and here). And, to some extent, I agree. They didn’t “cause” the problem. But those analyses were based on numbers from FM-squared that turned out to be complete and total fabrications. Now, I agree that the financial crisis had multiple and complex causes. But even Krugman will have to admit that, at the absolute minimum, the GSE’s throwing hundreds of billions into subprime mortgages was adding serious fuel to the fire. FM2 may not have caused the crisis, but they made it a hell of a lot worse. And, seriously, what planet do you have to live on to have claimed, even before this came out, that the agencies guaranteeing half of the mortgages in the country had no culpability for the bubble?

But here’s the thing: let’s allow that FM2 were more of a “me-too” player, coming late to the subprime party. When you think about it, that’s almost worse. They couldn’t even time a bubble properly. They were the last sucker in the ponzi pyramid that was our national housing market. They gambled hundreds of billions — a bet the taxpayers ended up having to stand for — at the worst possible time. And saps like Krugman think they’re a model for healthcare?

And even if you don’t blame FM2 for the financial crisis, we can blame them for over a hundred billion in bailouts. We can blame them for paying for $100 million in executive salaries. We can blame them for lying their asses off by a factor of 25 in how exposed they were.

This isn’t a little deal. As Joe Biden would say, this is a Big Fucking Deal. But do you see the media screaming about it? Do you see a tenth of the outrage we see when some Wall Street asshole gets a $10 million golden parachute? Do you see all the FM2 defenders acknowledging that they were lied to? FM2 lost tens of billion of our money trying to buy into housing right before it collapsed. Shouldn’t that piss off someone on the Left?