Ol Badger wrote:

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badgering wrote:

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I have no idea why you are laughing!

Because this is just a bunch of talking points. Fannie/Freddie were small-time players here. Did you read the AIG article I posted last week? Long story about how some MIT grads working on Wall Street came up with the slice-n-dice machine that fed this disaster, sold it to AIG, and eventually helped bring down the whole economy. At no point do any of the principals--quoted at length--even mention Fannie and Freddie. Keep getting your "information" form the WSJ editorial page and this is what happens; you just become part of the all noise all the time echo chamber.

Ol Badger, you can't be that dense. While GSEs were small time players in derivatives, they were big time players in the underlying securities. Derivative pricing (and trading) models don't work well unless there is a highly liquid, efficient market. Anyone who has studied Black-Scholes, one of the oldest and simplest examples of an option (simple derivative) pricing model, understands this. A highly liquid market is made possible, in part, by large capital inflows. GSEs were large and important (perhaps the most important) factors behind capital inflows. Their large investments in prime loans indirectly provided liquidity to the subprime and AAA market by "freeing up" private capital to invest in subprime and AAA mortgages - money which would have otherwise gone to prime paper. GSEs directly provided liquidity to the subprime and AAA market by becoming over a third of the market for those loans. In addition to liquidity, they also provided a stable buyer and enhanced efficiency. When these ingredients are mixed together, it gives the MIT dudes the market necessary to make derivatives and trading models work, or in this case, not work when the fundamentals change, stability and efficiency are lost and liquidity is wanting.

Oh, and BTW, none of my data was from the WSJ. But they clearly understand the market better than you, if your view is informed solely by the AIG article.

Ol Badger wrote:

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Right, so it's all Fannie and Freddie at fault because they provided the liquidity. You left out the Fed, which provided lower interest rates. You failed to mention that old standby, the Community Reinvestment Act. Every federal agency under the sun was at fault.

But the bankers, investment community, Masters of the Universe? Nah! They just did what nature requires: go after the loot! If only the feds hadn't allowed them to do it. Oh, wait! That might have meant meaningful federal regulation of derivatives. Didn't Wall St. fight tooth and nail to prevent that?

This is roughly the argument that the delinquent would't have mugged that little old lady if only the bank hadn't stupidly put temptation in his way with the ATM the old gal was using.

Gotta go to bed, 'ring, but I appreciate the amusing conversation.

I never said it was all the GSE's fault. Nor was it all the Fed or the CRA (but I did not leave them out; I mentioned both in a previous post in this thread). But it is undeniable to all but the most partisan government apologists that each agency contributed their fair share to the toxic brew. Just as the investment bankers and investors involved contributed their fair share to the toxic brew with lax and irresponsible credit standards and trading models. It took a village to screw up as badly as this debacle. Now I gotta go to bed. Amusing conversation indeed. Are you sure you shouldn't have worked at the State Department?

Ol Badger wrote:

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badgering wrote:

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Are you sure you shouldn't have worked at the State Department?

I'm thinking about it, 'ring, I am.

Nah, you'd not fit - I just learned from some guy on another thread that State is inhabited largely by graduates of schools without D1 football programs.

While Ol Badger's statement "Most of the sub-prime MBOs came from private firms, not Fannie and Freddie" is true, it obfuscates the fact that GSE's were the largest buyers in the subprime market. They were the market makers and formed the solid base upon which the market grew. That is not to say that bankers and bundlers and originators don't share much of the blame due to lax credit standards and greed, but the chart below illustrates just how much of the market was made up of Fannie and Freddie. The liquidity provided by those two firms was enormous. Typically, when a market is overheated, the first place to look in determining why it's overheated is at the biggest buyers of paper in said market.


From the Washington Post:

Buying Subprime Securities

The Department of Housing and Urban Development allowed housing finance institutions Fannie Mae and Freddie Mac to count billions of dollars they purchased in subprime securities as fulfilling their government mandate to help make buying a home more affordable. Here's how the mortgage giants' purchases of securities backed by subprime mortgages grew in recent years.

You guys are a hoot.

The GSE's were the biggest buyers of subprime paper during the period when the market bubble inflated. They also accounted for a huge (between 20% and 49% of the market, depending on the year) portion of the market. They were, obviously, part of the problem. A big part of the problem. Just as mortgage originators (to whom do you think they were selling their paper) and IBs and other private firms were a big part of the problem.

I can look at the facts and fairly deduce that all these market participants bear responsibility in the fiasco. Whereas you two look at the facts and somehow absolve all government entities of any blame. You guys are ignoring facts that get in the way of your weak set of talking points here. Oh, and CP4, the graph in your post is a non-sequiter on a number of different levels.