Sunday, March 14, 2010

Parsing the Categories of Necessary and Accidental By Means of Mortgages

In the past three years, I have looked high and I have looked low, but never – not once – have I seen even a hint of a reference to the conscious, premeditated and deliberate destruction of Fannie Mae and Freddie Mac that set the stage for the ongoing crisis.

Everyone was involved in the conspiracy: The Wall Street Journal, The New York Times, Alan Greenspan and his Fed machinery, Wall Street, chief executives of financial conglomerates. I chronicled the destruction in a two-part series on this blog, here and here and in a subsequent epilogue. If you have not read them, I urge you to do so. In light of what has transpired, they read even better today. And more evidence keeps coming in.

Look at this admission from today’s New York Times. It comes from the paper’s real-estate section:
But many of guidelines that New York City apartment buildings don't meet have been in place for years. Fannie and Freddie guidelines have long held, for example, that no single person or entity can own more than 10 percent of the units in an established condo or co-op building. During the boom, that didn’t matter much. Investors were hungry to buy bundled residential mortgages, and banks could bypass Fannie and Freddie and sell the loans elsewhere. Now, Fannie and Freddie are by far the biggest games in town, so on conforming loans, their rules are gospel.

During the boom years, that didn’t matter much.

“That” is the defenestration of the rules and conditions for mortgage qualification, so that a Mexican strawberry picker in California who did not speak English and had made all of $14,000 the year before, would not get a $700,000 mortgage – which he did, courtesy Countrywide.

But more important is the phrase "during the boom years". How did the boom years come about in the first place?

The answer is: by banks and mortgages companies getting together to deliberately and consciously destroy Fannie Mae and Freddie Mac whose strict, “gospel-like” borrower qualification conditions stood in the way of unqualified borrowers getting a mortgage.

Here is the seed of the conspiracy, as reported by The Wall Street Journal. I do not provide a link because the paper requires subscription, but it is from March 9, 2001, page A2.
A coalition of chief executives from more than a dozen large financial institutions has decided to press for reform of Fannie Mae and Freddie Mac, even as another company joined in accusing Fannie Mae of threatening to take business from critics.

The decision to seek a review of the way the government-sponsored mortgage giants conduct their business was made two months ago at a meeting in Amelia Island, Fla., of the Financial Services Forum… The group, an intentionally low-profile organization of chief executives from the country’s biggest financial companies, backed the successful effort to repeal laws separating the banking and securities industries, and has also endorsed an overhaul of the federal bankruptcy code that now appears imminent.

Tensions have risen in recent years between the mortgage companies and other financial-service concerns amid fears that rapidly growing Fannie and Freddie would diversify and take business away from other companies.
Now, place yourself, if you will, in early 2001 in Amelia Island, Florida. George Bush is at the White House. You are the big shot executive of an important financial institution: a Sandy Weill, a Hank Paulson, a Richard Fuld. You have just arrived by your private jet to Amelia Island. The world is your oyster. Everything is yours for the taking – money, women, favorable press coverage, sycophant journalists.

Your institution needs to generate even better and steadier profits. Borrowing at the commercial paper rate of about 2 percent and buying mortgages that yield 6% is the best game in town. That is 4% profit margin without doing anything and God Bless America.

Your borrowing power has virtually no limits. But you need mortgages to buy with the borrowed money. And Fannie and Freddie rules stand in the way. So, what would you do?

As an individual with free will, you could certainly walk away. You know by training, by instinct, and by logic – however arrested the three might be – that ultimately no good could come out of weakening and then breaking the lending standards. You are a financial executive, for God’s sake. All you have to do, then, is walk away and let Fannie and Freddie be.

But could you, realistically speaking, walk away, just say No? Would you be there, in the first place, if you were the type or person who would/could say No?

Now you see in what sense the developments in the world of finance can be said to have a direction and an “outcome”. It is precisely the free will of individuals, which, through being capable of being shaped, acts as the medium and agent for the manifestation of the laws of economics and finance. Which is why I often repeat that the subject of finance is studying the laws of movement of capital in circulation – and nothing else.