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Replies to post #170236 on Fannie Mae-No Politics (FNMA)
Despite the expressed view of many on Wall Street and in Washington that the
crisis could not have been foreseen or avoided, there were warning signs. The tragedy
was that they were ignored or discounted. There was an explosion in risky subprime
lending and securitization, an unsustainable rise in housing prices, widespread reports
of egregious and predatory lending practices, dramatic increases in household
mortgage debt, and exponential growth in financial firms’ trading activities, unregulated
derivatives, and short-term “repo” lending markets, among many other red
flags. Yet there was pervasive permissiveness; little meaningful action was taken to
quell the threats in a timely manner.
The prime example is the Federal Reserve’s pivotal failure to stem the flow of toxic
mortgages, which it could have done by setting prudent mortgage-lending standards.
The Federal Reserve was the one entity empowered to do so and it did not. The
record of our examination is replete with evidence of other failures: financial institutions
made, bought, and sold mortgage securities they never examined, did not care
to examine, or knew to be defective; firms depended on tens of billions of dollars of
borrowing that had to be renewed each and every night, secured by subprime mortgage
securities; and major firms and investors blindly relied on credit rating agencies
as their arbiters of risk. What else could one expect on a highway where there were
neither speed limits nor neatly painted lines?
As irresponsible lending, including predatory and
fraudulent practices, became more prevalent, the Federal Reserve and other regulators
and authorities heard warnings from many quarters. Yet the Federal Reserve
neglected its mission “to ensure the safety and soundness of the nation’s banking and
financial system and to protect the credit rights of consumers.” It failed to build the
retaining wall before it was too late. And the Office of the Comptroller of the Currency
and the Office of Thrift Supervision, caught up in turf wars, preempted state
regulators from reining in abuses.
• We conclude the failures of credit rating agencies were essential cogs in the
wheel of financial destruction. The three credit rating agencies were key enablers of
the financial meltdown. The mortgage-related securities at the heart of the crisis
could not have been marketed and sold without their seal of approval. Investors relied
on them, often blindly. In some cases, they were obligated to use them, or regulatory
capital standards were hinged on them. This crisis could not have happened
without the rating agencies. Their ratings helped the market soar and their downgrades
through 2007 and 2008 wreaked havoc across markets and firms.
In our report, you will read about the breakdowns at Moody’s, examined by the
Commission as a case study. From 2000 to 2007, Moody’s rated nearly 45,000
mortgage-related securities as triple-A. This compares with six private-sector companies
in the United States that carried this coveted rating in early 2010. In 2006
alone, Moody’s put its triple-A stamp of approval on 30 mortgage-related securities
every working day. The results were disastrous: 83% of the mortgage securities rated
triple-A that year ultimately were downgraded.
You will also read about the forces at work behind the breakdowns at Moody’s, including
the flawed computer models, the pressure from financial firms that paid for
the ratings, the relentless drive for market share, the lack of resources to do the job
despite record profits, and the absence of meaningful public oversight. And you will
see that without the active participation of the rating agencies, the market for mortgage-
related securities could not have been what it became.
We conclude that these two entities [F&F] contributed to the crisis, but were not a primary
cause. Importantly, GSE mortgage securities essentially maintained their value
throughout the crisis and did not contribute to the significant financial firm losses
that were central to the financial crisis.
The GSEs participated in the expansion of subprime and other risky mortgages,
but they followed rather than led Wall Street and other lenders in the rush for fool’s
gold.
Finally, as to the matter of whether government housing policies were a primary
cause of the crisis: for decades, government policy has encouraged homeownership
through a set of incentives, assistance programs, and mandates. These policies were
put in place and promoted by several administrations and Congresses—indeed, both
Presidents Bill Clinton and George W. Bush set aggressive goals to increase homeownership.
Nonetheless, we make the following observation about government housing policies—
they failed in this respect: As a nation, we set aggressive homeownership goals
with the desire to extend credit to families previously denied access to the financial
markets. Yet the government failed to ensure that the philosophy of opportunity was
being matched by the practical realities on the ground. Witness again the failure of
the Federal Reserve and other regulators to rein in irresponsible lending. Homeownership
peaked in the spring of 2004 and then began to decline. From that point on,
the talk of opportunity was tragically at odds with the reality of a financial disaster in
the making.
AI
