\nhttps:\/\/www.mixermuse.com\/blog\/2012\/01\/11\/the-great-recession-how-the-free-market-got-rigged\/<\/a><\/p>\n
Even Alan Greenspan, a Republican, admitted in his interview with Brian Naylor:<\/p>\n
BRIAN NAYLOR: The man once known as the maestro for his direction of the nation\u2019s economy as Fed chairman sat for four long hours yesterday, watching lawmakers who once cheered his performances turn into harsh critics. Testifying before the House Oversight Committee, Greenspan didn\u2019t down play the severity of the crisis in the nation\u2019s markets. In September 2002, Greenspan, Treasury Secretary Paul O\u2019Neill, Securities and Exchange Commission chairman Harvey Pitt, and Commodity Futures Trading Commission chairman James Newsome wrote a letter to members of Congress to note their opposition to legislation that would regulate derivatives. <\/p>\n They wrote:<\/p>\n \u201cWe believe that the [over-the-counter] derivatives markets in question have been a major contributor to our economy\u2019s ability to respond to the stresses and challenges of the last two years. This proposal would limit this contribution, thereby increasing the vulnerability of our economy to potential future stresses\u2026. Proof:<\/p>\n Certainly, a significant event that started the collapse happened during the last few years of the Clinton administration. The Gramm\u2013Leach\u2013Bliley Act of 1999, known as financial services deregulation,<\/p>\n \u201cIt repealed part of the Glass-Steagall Act of 1933, opening up the market among banking companies, securities companies and insurance companies. The Glass-Steagall Act prohibited any one institution from acting as any combination of an investment bank, a commercial bank, and an insurance company.\u201d<\/p>\n http:\/\/en.wikipedia.org\/wiki\/Gramm-Leach-Bliley_Act<\/a> <\/p>\n The bill was a compromise between the Clinton Administration and the House Republicans:<\/p>\n \u201cThe bill then moved to a joint conference committee to work out the differences between the Senate and House versions. Democrats agreed to support the bill after Republicans agreed to strengthen provisions of the anti-redlining Community Reinvestment Act and address certain privacy concerns; the conference committee then finished its work by the beginning of November. On November 4, the final bill resolving the differences was passed by the Senate 90-8, and by the House 362-57. This legislation was signed into law by Democratic President William Jefferson \u201cBill\u201d Clinton on November 12, 1999.\u201d \u201cIn 2003, the two [GSEs, Fannie and Freddie] bought $81 billion in subprime securities. In 2004, they purchased $175 billion \u2014 44 percent of the market. In 2005, they bought $169 billion, or 33 percent. In 2006, they cut back to $90 billion, or 20 percent. Generally, Freddie purchased more than Fannie and relied more heavily on the securities to meet goals. Conclusion: Even though Fannie, Freddie and FHA had much less to do with new loans in the Bush administration they bought huge amounts of MBS in those years to meet President Bush\u2019s 56% housing requirement. <\/p>\n Additionally, the President encouraged the GSEs to \u201cfocus\u201d their \u201ccore housing mission\u201d \u201cwith respect to low-income Americans and first-time homebuyers\u201d in the following statement from the White House,<\/p>\n \u201cThe Administration strongly believes that the housing GSEs should be focused on their core housing mission, particularly with respect to low-income Americans and first-time homebuyers. Instead, provisions of H.R. 1461 that expand mortgage purchasing authority would lessen the housing GSEs\u2019 commitment to low-income homebuyers.\u201d Conclusion: President Bush had directed HUD to require the GSEs to meet the 56% low income housing requirement. This pressured the GSEs to buy massive MBS. This created a massive market for junk mortgages.<\/p>\n Credit Default Swaps are insurance policies on mortgages, sort of like the futures market for commodities for MBS. Credit Default Swaps are not regulated. The government did not own credit default swaps. This was purely a private market commodity.<\/p>\n Between 2000 and 2008, the market for such swaps ballooned from $900 billion to more than $30 trillion. This is what brought AIG down.<\/p>\n Goldman Sachs played both sides MBS and Credit Default Swaps.<\/p>\n When the Fannie and Freddie bought huge amounts of MBS, pressured by the Bush administration, the market for credit default swaps went astronomical. This is ultimately what broke them and resulted in tax payers having to bail them out. If you do not believe me what about Greenspan, Treasury Secretary Paul O\u2019Neill, Securities and Exchange Commission chairman Harvey Pitt, and Commodity Futures Trading Commission chairman James Newsome (quoted above)?<\/p>\n Here are the numbers that show: http:\/\/www.mortgagebankers.org\/files\/News\/InternalResource\/57640_GAOReportInformationonRecentDefaultandForeclosureTrends.pdf<\/a><\/p>\n the percent of the total market of GSE and FHA, sub-prime loans (Col 1) This data clearly shows that:<\/p>\n The increase of low income, sub-prime loans and the low overall default rate of all loan originations (1.5% in 2005 was the highest tracked in this data, through 2007). This dispels that myth that the crisis was caused by loan defaults of low-income folks.<\/p>\n
\nMr. ALAN GREENSPAN (Former Chairman, Federal Reserve): We are in the midst of a once-in-a-century credit tsunami. Central banks and governments are being required to take unprecedented measures.
\nNAYLOR: Under questioning from Democrats on the panel, Greenspan conceded he might have been, as he put it, partially wrong in not moving to regulate trading of some derivatives that are among the root causes of the credit crisis. He also admitted his free market ideology may be flawed. This exchange with committee chairman, Democrat Henry Waxman of California, verged on the metaphysical.
\nRepresentative HENRY WAXMAN (Committee Chairman, Democrat, 30th District of California): You found a flaw in the reality\u2026
\nMr. GREENSPAN: Flaw in the model that I perceived is a critical functioning structure that defines how the world works, so to speak.
\nRep. WAXMAN: In other words, you found that your view of the world, your ideology was not right. It was not working.
\nMr. GREENSPAN: How it \u2013 precisely. That\u2019s precisely the reason I was shocked, because I\u2019ve been going for 40 years or more with very considerable evidence that it was working exceptionally well.
\nhttp:\/\/www.npr.org\/templates\/story\/story.php?storyId=96070766<\/a><\/p>\n
\nWe do not believe a public policy case exists to justify this governmental intervention. The OTC (over the counter) markets trade a wide variety of instruments. Many of these are idiosyncratic in nature\u2026.
\nWhile the derivatives markets may seem far removed from the interests and concerns of consumers, the efficiency gains that these markets have fostered are enormously important to consumers and to our economy.
\nGreenspan and the others urged Congress \u201cto be aware of the potential unintended consequences\u201d of legislation to regulate derivatives.
\nThey got it exactly wrong. Swaps and derivatives ended up undermining, not bolstering, the economy.
\nhttp:\/\/www.motherjones.com\/politics\/2008\/10\/alan-shrugged<\/a><\/p>\n
\nhttp:\/\/en.wikipedia.org\/wiki\/Gramm-Leach-Bliley_Act<\/a><\/p>\n
\nIn 1997 the GSEs owned about 12% of the total market share of these securities. In 2001 the GSEs owned about 15% of the total market share of these securities. In 2008 this percentage had grown dramatically to 40%.
\nIn intervening years it was much more. President Bush directed his HUD director to pressure the GSEs into buying massive amounts these MBS [Mortgage Backed Securities] on the open market. This created huge market for these securities and encouraged more and more risky private sector mortgages so they could be bought, bundled and sold on the open market largely to Fannie and Freddie.
\nBut by 2004, when HUD next revised the goals, Freddie and Fannie\u2019s purchases of subprime-backed securities had risen tenfold. Foreclosure rates also were rising.
\nThat year, President Bush\u2019s HUD ratcheted up the main affordable-housing goal over the next four years, from 50 percent to 56 percent. John C. Weicher, then an assistant HUD secretary, said the institutions lagged behind even the private market and \u201cmust do more.\u201d
\nFor Wall Street, high profits could be made from securities backed by subprime loans. Fannie and Freddie targeted the least-risky loans. Still, their purchases provided more cash for a larger subprime market.
\n\u201cThat was a huge, huge mistake,\u201d said Patricia McCoy, who teaches securities law at the University of Connecticut. \u201cThat just pumped more capital into a very unregulated market that has turned out to be a disaster.\u201d\u201d
\n \u201cIn 2003, the two bought $81 billion in subprime securities. In 2004, they purchased $175 billion \u2014 44 percent of the market. In 2005, they bought $169 billion, or 33 percent. In 2006, they cut back to $90 billion, or 20 percent. Generally, Freddie purchased more than Fannie and relied more heavily on the securities to meet goals.
\n\u201cThe market knew we needed those loans,\u201d said Sharon McHale, a spokeswoman for Freddie Mac. The higher goals \u201cforced us to go into that market to serve the targeted populations that HUD wanted us to serve,\u201d she said.\u201d
\nBut because Fannie and Freddie were buying mortgage-backed securities rather than the actual subprime loans, their involvement came too late to require stiffer standards from lenders.
\nFannie and Freddie \u201cmade no progress in civilizing the market,\u201d said Sandra Fostek, a senior regulator at HUD.
\nWilliam C. Apgar Jr., who was an assistant HUD secretary under Clinton, said he regrets allowing the companies to count subprime securities as affordable.
\n\u201cIt was a mistake,\u201d he said. \u201cIn hindsight, I would have done it differently.\u201d\u201d
\nhttp:\/\/www.washingtonpost.com\/wp-dyn\/content\/article\/2008\/06\/09\/AR2008060902626.html<\/a><\/p>\n
\nhttp:\/\/georgewbush-whitehouse.archives.gov\/omb\/legislative\/sap\/109-1\/hr1461sap-h.pdf<\/a><\/p>\n
\nhttp:\/\/topics.nytimes.com\/top\/reference\/timestopics\/subjects\/c\/credit_default_swaps\/index.html?inline=nyt-classifier<\/a><\/p>\n
\nhttp:\/\/money.cnn.com\/magazines\/fortune\/fortune_archive\/2005\/01\/24\/8234040\/index.htm<\/a><\/p>\n
\n1) the percent of subprime lending to total mortgage originations
\n2) the percent of Alt-A lending to total mortgage originations – An Alt-A mortgage, short for Alternative A-paper, is a type of U.S. mortgage that, for various reasons, is considered riskier than A-paper, or “prime”, and less risky than “subprime,” the riskiest category. Alt-A interest rates, which are determined by credit risk, therefore tend to be between those of prime and subprime home loans. Typically Alt-A mortgages are characterized by borrowers with less than full documentation, lower credit scores, higher loan-to-values, and more investment properties. A-minus is related to Alt-A, with some lenders categorizing them the same, but A-minus is traditionally defined as mortgage borrowers with a FICO score of below 680 while Alt-A is traditionally defined as loans lacking full documentation. Alt-A mortgages may have excellent credit but may not meet underwriting criteria for other reasons – http:\/\/en.wikipedia.org\/wiki\/Alt-A<\/a>
\n3) GSE backed loans<\/p>\n![\"\"](\"https:\/\/www.mixermuse.com\/blog\/wp-content\/uploads\/2012\/01\/subprime.jpg\" "\\"subprime\\"")
<\/a><\/p>\n
\nthe default percentage of the total market (Col 2)
\nthe amount in billions of the total market defaults (Col 3 )
\nNote: All currency amounts in billions
\nYear Col 1 Col 2 Col 3
\n1997 10% 0.9% $8
\n1999 13% 0.9% $12
\n2001 12% 0.7% $17
\n2003 11% 0.6% $21
\n2005 11% 1.5% $9
\n2007 13% 0.5% $28
\nDetail for Subprime Loans \u2013 see endnotes for sources (page 10 pdf)
\nhttp:\/\/www.aei.org\/docLib\/Pinto-High-LTV-Subprime-Alt-A.pdf<\/a>
\nGSE Investment Portfolio and MBS ($ Billions, Left Axis)
\nGSE % of Total Outstanding Single Family Mortgages (Right Axis)
\nhttp:\/\/www.fcic.gov\/hearings\/pdfs\/2010-0227-Jaffee.pdf<\/a>
\nGAO report (page 18 for sub-prime data and page 21 for default rates data in pdf):
\nhttp:\/\/www.mortgagebankers.org\/files\/News\/InternalResource\/57640_GAOReportInformationonRecentDefaultandForeclosureTrends.pdf<\/a>
\nhttp:\/\/www.aei.org\/docLib\/Pinto-High-LTV-Subprime-Alt-A.pdf<\/a> (page 12 pdf)<\/p>\n