Marketplace Scratch Pad

The blame game never ends

Scott Jagow Jan 5, 2010

Our interview yesterday with former FDIC Chairman William Isaac prompted strong reactions for one particular remark he made. I’d like to follow up on it.

Read or listen to Kai Ryssdal’s entire interview here, but this was the controversial moment:

Ryssdal: Do you agree with Fed Chairman Bernanke and the speech he gave this weekend about the cause of the crisis really being lax regulation?

ISAAC: Ineffective regulation I think is an important contributor to the crisis. I think the government bears a large responsibility for the crisis. Fannie Mae and Freddie Mac were out of control for about the past 20 years — wild growth rates, decreasing their lending standards, under a great deal of pressure from the Congress to do that. The Congress wanted them to loan more, and to lower their standards, so more people could borrow more money, and it had to come home to roost and it has.

Here’s the reaction at Daily Kos:

Where was the follow up to that outright lie!!?? Journalistic ethics require a challenge to this or it becomes accepted fact to the general public. Kai Ryssdal has done a major disservice in today’s interview. This former FDIC chairman was peddling a conservative meme blaming poor people and indirectly, the Community Reinvestment Act.

I didn’t hear Isaac blaming poor people. He did blame the government for throwing the home ownership lending doors far too wide open. And that’s a lie, how? Let’s go back to September 29, 1999. From the New York Times:

Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers…

”Fannie Mae has expanded home ownership for millions of families in the 1990’s by reducing down payment requirements,” said Franklin D. Raines, Fannie Mae’s chairman and chief executive officer. ”Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.”

Don’t worry, Fannie Mae and the banks figured out a way to get those people in homes, too. Yes, Fannie Mae and the banks. I’m assuming the ire over Isaac’s interview is all about what he didn’t say. He didn’t say what this Daniel Gross Newsweek column says:

There was a culture of stupid, reckless lending, of which Fannie Mae and Freddie Mac and the subprime lenders were an integral part. But the dumb lending virus originated in Greenwich, Ct., midtown Manhattan, and Southern California, not Eastchester, Brownsville, and Washington. Investment banks created a demand for subprime loans because they saw it as a new asset class that they could dominate…

Lending money to poor people doesn’t make you poor. Lending money poorly to rich people does.

Here’s my point. Isn’t it likely that both things were going on??? I know it’s hard to believe that could possibly be the case in the finger-pointing black and white political system in which we are seemingly trapped, but the government and the banks are at fault. It is impossible to argue with a straight face that the government’s aggressive home buyer programs didn’t lead to reckless lending to both rich and poor. It’s equally impossible to argue that the banks and the rating agencies didn’t seize on this opportunity with the motives of a jewel thief and the negligence of a drunk.

But the Wall Street Journal paints it this way:

New research by Edward Pinto, a former chief credit officer for Fannie Mae and a housing expert, has found that from the time Fannie and Freddie began buying risky loans as early as 1993, they routinely misrepresented the mortgages they were acquiring, reporting them as prime when they had characteristics that made them clearly subprime or Alt-A…

It is easy to see how this misrepresentation was a principal cause of the financial crisis.

It’s laughable not to point out how the investment banks were representing these mortgage bundles or selling them to their clients while they were shorting the hell out of them. It seems that very few people are able to acknowledge the shortcomings of “their side” because they’re too busy pointing fingers at others. It’s one reason we’ve made little progress on issues like financial regulation.

I’ll rest my case with the words of Matt Taibbi at True/Slant. Finally, some common sense:

Both sides are right and both sides are wrong. I know that sounds like pox-on-both-their-houses pundit sophistry. But the point is that if you focus on one side and not the other, you miss the entire point… It was plain to most everyone in the financial services industry that there was a bubble going on last decade, that something deeply fucked up was going on with the mortgage markets — just as it was plain to everyone in the late nineties that something was wrong with the stock markets…

Everyone was involved in the mortgage scam. At the lender level the deceptions were myriad; liar’s loans, fraudulent income documentation, negative amortization loans, HELOCs, etc. The rush to get as many loans written as possible and then get those hot potatoes moved to the next sucker in the line was furious and extended from coast to coast, sinking one lender after another in Ponzoid debt and indictments…

Everyone had a hand in the bubble, from the congressmen who killed regulatory initiatives to the regulators who snoozed at the wheel to the GSEs (Fannie and Freddie) to the Fed to the banks to the ratings agencies to the lenders… the diversionary notion that one side or the other is wholly to blame is part of what makes the whole scam possible.

And the result:

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