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Jan. 4 2010 - 11:52 am | 28,087 views | 10 recommendations | 173 comments

Fannie, Freddie, and the New Red and Blue

It has become conventional wisdom, perhaps even cliche, to pin the origins of the credit crisis on the big banks or, AIG or even the practice of financial modeling. Certainly, these actors have received the most play in the media, and have now endured the focus of populist ire for more than a year. We now think that the analysis leading commentators to focus blame on these entities is fatally flawed.

via Origins of an American Kleptocracy | zero hedge.

Over the Christmas holiday a nasty thing happened: Tim Geithner’s Treasury Department decided to lift the cap on aid to the Government-Sponsored Entities, Fannie Mae and Freddie Mac, apparently in response to Obama administration fears that the two agencies would become insolvent. The cap was raised from $200 billion on each and government backstopping of the mortgage market will apparently now extend into infinity for at least three years, through 2012.

The move has already inspired a mini-firestorm, with several outlets delving deeply into the recent history of the GSEs and uncovering some disturbing new facts. Chief among those were an analysis of the GSEs by a former chief credit officer of Fannie named Edward Pinto, who found that Fannie and Freddie routinely mismarked subprime or Alt-A (a sort of purgatory class of nonprime risky mortgage, resting between subprime and prime) mortgages as prime. The Wall Street Journal explains:

In general, a subprime mortgage refers to the credit of the borrower. A FICO score of less than 660 is the dividing line between prime and subprime, but Fannie and Freddie were reporting these mortgages as prime, according to Mr. Pinto. Fannie has admitted this in a third-quarter 10-Q report in 2008.

This is a damning fact and if true certainly supports the Journal claim that the GSE actions were a “principal cause of the financial crisis.” But having established this, the Journal then goes in this direction:

Market observers, rating agencies and investors were unaware of the number of subprime and Alt-A mortgages infecting the financial system in late 2006 and early 2007. Of the 26 million subprime and Alt-A loans outstanding in 2008, 10 million were held or guaranteed by Fannie and Freddie, 5.2 million by other government agencies, and 1.4 million were on the books of the four largest U.S. banks.

Sometimes I’m amazed at the speed with which highly provocative information like this GSE business can be converted into distracting propaganda in this country. In the right hands Pinto’s analysis of the GSEs — just like the revelations in the past few years about practices at AIG, Moody’s, Countrywide, Goldman Sachs, the Fed, and, hell, let’s add the offices of Senator Chris Dodd — would have been a starting point for a deeper investigation into a financial system that is clearly a complex and intimate symbiosis of state and private corruption.

For what we’ve learned in the last few years as one scandal after another spilled onto the front pages is that the bubble economies of the last two decades were not merely monstrous Ponzi schemes that destroyed trillions in wealth while making a small handful of people rich. They were also a profound expression of the fundamentally criminal nature of our political system, in which state power/largess and the private pursuit of (mostly short-term) profit were brilliantly fused in a kind of ongoing theft scheme that sought to instant-cannibalize all the wealth America had stored up during its postwar glory, in the process keeping politicians in office and bankers in beach homes while continually moving the increasingly inevitable disaster to the future.

That is a terrible story and it is also sort of a taboo story, since we don’t really have a system of media now that is willing or even able to digest that dark and complicated truth. Instead, our media — which has always been at best an inadvertent accomplice to these messes — is basically set up to take every revelation about the underlying truth and split it down the middle, feeding half to one side of the political spectrum and one half to the other, where the actual point is then burned up in the useless smoke of a blame game.

The essentially complicit nature of the two ruling political parties was in this way covered up for decades, as the crimes of the Democrats were greedily consumed as entertainment by the Limbaugh crowd while the crimes of the Bushies became hot-selling t-shirts and bumper stickers for the Air America listenership. The abiding mutual hatred the red/blue groups shared consistently prevented any kind of collective realization about the structure of the overall scheme.

What worries me is that we’re now reverting to the same old pattern with the financial crisis story. We’re starting to see fault lines develop, where one side blames the government while another side blames Wall Street for the messes of the last two decades. The side blaming the government tends to belong to the free-marketeer class and divines in safety-net purveyors like the GSEs and in the Fed’s money-printing fundamental corruptions of the capitalist ideal, while the side blaming the bankers tends to belong to the left-liberal tradition that focuses on greed and seeming absence of community conscience among the CEO class as primary corruptors of the social contract.

In the former view the government is to blame for punting on its oversight responsibilities and for corrupting the financial bloodstream with market-altering guarantees, while in the latter view the bankers are at fault for lobbying the politicians to make exactly the same moves. The antigovernment folks like to focus on the irresponsible (and typically low-income or minority) home-borrower and their political allies in Washington as chief villains, while the anti-banker crowd looks at the massive personal profits and outsized influence of the executive class and waves the Cui bono? stick in that direction.

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. That’s why I get freaked out when I see an important story like this GSE thing come out, and have it be immediately accompanied by arguments that “market observers, rating agencies and investors were unaware of the number of subprime and Alt-A mortgages infecting the financial system,” as though the irresponsibility of the government agency precluded similar (and, I might add, intimately related) abuses on the private side.

I mean, really — market observers were unaware of the number of subprime mortgages infecting the system? Are we to understand that nobody caught on when outstanding mortgage debt grew by $3.7 trillion between 2003 and 2005, nearly equaling the entire value of all American real estate in the year 1990? They didn’t notice when subprime mortgages went from 3% of all mortgage lending in 1997 to 20% of the market in 2003? They didn’t notice when the volume of Alt-A loans and home equity loans surged through the early part of last decade?

Now I know that that’s not what Peter Wallison of the Journal is saying here; he’s saying that even if the market saw that increase in subprime loans, even those numbers were understated thanks to Fannie and Freddie’s deceptions. But the inference that the market was hoodwinked by the GSEs is absurd. 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, when companies like Theglobe.com with annual sales under $5 million could have a $5 billion stock valuation.

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.

Then there were the countless deceptions that emerged from the securitization process, the bad math that allowed banks like Goldman to do $474 million mortgage deals where the average equity in the home was just 0.71 percent, and sell 93% of that deal as investment grade paper.

Are we really to believe that the people who did those deals didn’t know what total crap they were selling? That the people who used CDO-squareds to magically turn BBB investments into AAA investments didn’t know how nuts that was?

There were the ratings agencies, who accepted all that bad math and slapped AAA ratings on crap mortgage-backed securities in exchange for the continued largess of the banks upon whom they were financially dependent — the same ratings agencies that later sputtered and coughed up bullshit my-dog-ate-my-homework excuses for mismarking mortgages, with the Moody’s revelation that a computer error caused them to misapply AAA ratings to billions’ worth of MBS being the comic low point.

Then further along in the chain you had crooks like the folks at AIG, who took advantage of the basic nonexistence of derivatives regulation to issue billions in guarantees for these mortgage investments that they had never had any intention of paying off, to say nothing of actually having the ability to do so. And of course underwriting the entire enterprise was the implicit guarantee of Alan Greenspan’s Fed, which made it known time and time again that its modus operandi was to refuse to recognize the existence of bubbles until after they blew up, at which point it would rush in and clean up the mess, bailing out all the chief actors out with easy money.

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 to the Fed to the banks to the ratings agencies to the lenders. I don’t think it’s really controversial to say that, but it does seem like there’s an argument brewing about what that across-the-board complicity means.

My own personal feeling is that our recent bubbles weren’t much different than pyramid scams and lotteries; they’re the handiwork of an essentially regressive and deeply cynical political organization that systematically hoovers up taxes and investment money mainly from middle-class suckers, where it eventually gets eaten in short-term cashouts and mostly blown on sports cars and tropical vacations and eye jobs for the trophy wives of Wall Street executives. Crackonomics: take literally all the spare money from four square city blocks and turn it into one tricked-out Escalade.

For me the basic dynamic of the mortgage bubble is some Ivy League dickwad hawking a billion dollars of securitized subprime mortgages to a pension fund, and then Hobie-sailing off into the sunset with a bonus after they all blow up. Of course my seeing it that way might have a lot to do with my own personal psychological prejudices, and I get that some other person with different hangups might choose to focus on Barney Frank deciding to “roll the dice on home ownership” with the GSEs.

But what I don’t see is how anybody can say that all of this happened because Fannie and Freddie rigged the game to get Mexicans in homes, and then the banks and the ratings agencies just reacted organically to the corrupted market and helped the bubble along through no fault of their own. That’s just another (albeit more convincing) version of the early attempt to pin the disaster on the Community Reinvestment Act, which in turn is just another way of playing the red-blue blame game, which in turn is missing the point.

This GSE story is a big one, but if it gets used as a path back to a “The Market Reacted Rationally” version of history, we’re screwed. It has to be looked at as an important part of a diabolical whole, a symbiotic scheme in which the banks and the state were irreversibly intertwined in an enterprise that on both sides was never about market economics, but crime. Because otherwise… the diversionary notion that one side or the other is wholly to blame is part of what makes the whole scam possible.

p.s. Just to get this out of the way, I love Zero Hedge, and Marla Singer has been really nice to me personally. I just don’t completely agree with this particular thing. I don’t see any reason why focusing blame on the banks and the ratings agencies and AIG was “fundamentally flawed,” because, well, shit, they were to blame. The fact that Fannie and Freddie now get to jump in the pigpen with them doesn’t change that for me.

I think in the end what we’re going to find is that all the relevant actors had their own motivations for getting involved in the bubble. Two and now three presidential administrations let the Fed overheat the economy for political reasons that should be obvious. Alan Greenspan, hell, he did it because he loves seeing himself on magazine covers and wanted to keep getting invited to the right Manhattan parties. There were congressmen that converted the expansion of cheap credit into low-income votes. The bankers and lenders went along because the system of compensation on Wall Street is fucked and rewards short-term thinking while ignoring long-term consequences.

To me all of these people were equally guilty of making bad decisions to benefit themselves in the here and now at the expense of the whole in the future. When it comes to bubbles, It Takes a Village, and blaming the whole mess on the “socialist” aims of a pair of government agencies seems off base — particularly since the Randian protocapitalists running the banks benefited every bit as much from this socialism as actual homeowners, and perhaps even more, when one considers that homeowners get foreclosed upon, while bonuses are forever.


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  1. collapse expand

    Good stuff, Taibbi.

    You’re the only guy on the left who gets this.

    Love your Goldman and Obama articles too.

  2. collapse expand

    Ron Paul is not one of the bad guys.

  3. collapse expand

    Dude, you’ve got the story in your teeth. Now please, please, please, rip the fucker to shreds.

    “the fundamentally criminal nature of our political system, in which state power/largess and the private pursuit of (mostly short-term) profit keeps politicians in office and bankers in beach homes while continually moving the increasingly inevitable disaster to the future.”

    “…we don’t really have a system of media now that is willing or even able to digest that dark and complicated truth. Instead, our media — which has always been at best an inadvertent accomplice to these messes — is basically set up to take every revelation about the underlying truth and split it down the middle, feeding half to one side of the political spectrum and one half to the other, where the actual point is then burned up in the useless smoke of a blame game.”

  4. collapse expand

    excellent writing.. my sentiments exactly!!. i sent this to a right wing colleague of mine and as he started reading it I could see the smile on his face since you were calling out the GSE’s for the mess they created. Then, as he read on he didn’t seem too happy that you were moving focus to the rich banksters and the congressmen!! typical partisan fool I thought to myself.

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      I’m I completely biased, or do Conservatives and Libertarians have a much harder time seeing wrong from their side of the aisle…I see tons of progressives railing on what Clinton did, railing on Geitner, Summers, Dodd etc, but I have seen little of the flip of this from Repubs, Tea Partiers etc…Is there any hope?

      In response to another comment. See in context »
  5. collapse expand

    It’s also important to note that there was no shortage of people who called the crisis, the housing bubble and the ponzi nature of our economy. These arguments have been out there since the dotcom crash. (and if it weren’t for blogs we never would have heard them at all.)

    And all those people without exception were viewed as whackos, deviants and just plain wrong by the press, economists and analysts.

    The amazing thing is that there was no redemption for these guys after they were proven right. They’re still viewed as embarrassments. They’re treated like the guy who farts at a dinner party. Barely tolerated, ignored, completely outcast.

    Any point of view that doesn’t conform to the Red/Blue story-line is discarded.

    My version of the future is that you nail this story completely to the wall in your magnum opus, light finally dawns on the american people, we finally give up the ghost and have the crash we so desperately need – and frigging move on already.

  6. collapse expand

    Isn’t it true that while Fannie/Freddie did not actually make the bad loans, they did lower their standards for the loans that they would purchase from the banks? By doing so, they basically gave the green light to mortgage originators to lower their underwriting standards.

  7. collapse expand

    Mr. Taibbi,
    Seems to me that all the political bickering and blaming is just subterfuge to cover the simple truth. As currently reformulated, Freddie and Fannie can be forced to “buy” the toxic assets from the Wall St. banks, thus cleaning the balance sheets of those entities and having to carry them on their own books. In order to swap out real taxpayer cash for the bad assets, Fannie and Freddie need unlimited amounts of actual cash. Hence the need for no-limit bail-out funds. It’s just a way to trade more of our money for the meaningless crap on Wall Street’s books. And that is a very big pile of crap; the toxic assets come to something like 500 Trillion bucks and they would love to trade all that pixie dust for real money.
    The whole Republican-Democrat bickering over whose fault it all is and whether or not Fannie and Freddie are to blame is mere posturing to cover up what they are doing here.
    You may want to get in touch with Dennis Kucinich’s office; he seems to be the only one in Congress who has not only glommed onto what the Fed, the Treasury and Wall St. are doing, he is the only one with the courage to stand up and say it out loud. He is currently investigating the Fannie/Freddie issue and said the following regarding the situation:
    “Many questions remain unanswered regarding this move by the Treasury. Why suddenly remove the cap? Indications are that Freddie and Fannie, even as millions of Americans lose their homes, have used just $111 billion of the $400 billion previously available to them. Is lifting the cap on assistance a back-door TARP?
    “Additionally, I want to determine whether Fannie and Freddie have a cohesive plan to buy up the under-performing mortgages that remain on the books of the big banks, at appropriate prices, and undertake a massive reworking of the terms of the mortgages so as to stem the foreclosure crisis that continues to plague our country. This new authority must be used responsibly and for the benefit of American families. This cannot be used simply to purchase toxic assets at inflated prices, thus transferring the losses to the U. S. taxpayers and acting as a back-door TARP.”

  8. collapse expand


    The key to it all is investors investing in junk (being suckers). If they don’t buy this junk there is no scam to be had. Why are they suckers? There’s a lot to this, but there are two things I want to focus on.

    1) We don’t live in a free market. We live in what can best be described as a corporatist market where government works in tandem with favored corporations to give them a special edge either through subsidy (like corn farmers) or barriers to entry (like regulations that hurt small business more then big companies).

    What is the best way to invest in a corporatist state? You find the companies with the right connections to government and invest in them. Why should someone extend credit to someones small business when they can buy Goldmen Sachs bonds with an FDIC guarantee? Even people good at real investing do this. Do you think Buffet invested in Goldmen because of the wealth it creates for society, or because he shrewdly understood that when push came to shove the government would rescue Goldmen?

    Investing in ponzi schemes and ponzi companies is a rational response to the government supporting ponzi schemes and ponzi companies.

    2) Constant swings in money supply by the Fed make rational investing in real goods hard to do. It’s much easier to determine the value of something when prices and interest rates are stable. When they are flying all over the place then speculating is a rational response to government monetary policy. Investing is hard to do. You need to understand industries, technology, etc. Speculating based on monetary expansion and contraction is a lot easier.

    • collapse expand

      Bottom Line

      1) If you guarantee investors will be made whole if they invest in junk, then investors won’t bother trying to invest well and will just chase yield.

      2) If investors won’t do the work of investing because the government took away their incentive to do so, then the government has to do the work of investing.

      3) However, governments have a very difficult time figuring out how to invest. Bother because of regulatory capture and plain old government incompetence.

      4) Whether the government or private markets do the investing unstable prices and interest rates make rational investing decisions difficult.

      In response to another comment. See in context »
  9. collapse expand

    Great article.

    How far is it from this recognition of our current dismal state of affairs to the idea that the whole thing has been engineered since 1913 by a handful of profoundly wealthy interests, orchestrating a series of bubbles and bursts that have very nearly allowed them to consolidate much of the world’s wealth and resources?

    Or do you attribute it all to chance, the ineptitude/complicity of the fourth estate and the growing apathy of the American people?

    I can’t decide which is more depressing…not sure that it matters, at this point.

  10. collapse expand

    Matt and the True Happiness Show…sure, that’s what you should call it! Listen, big investors won’t comment here as they are too happy pulling in bucks. But for those with no moola, this is the best outburst/crying wall yet devised. Happiness is being on air! Holy Smokes, Matt, start a show cum Oprah and you can be another Economic maven/hooligan on air. Ah, that would be something to behold…you have the following…give them wings (so to speak, eh?).
    And a lot of this sounds like the “Waiting for the Revolution” talk in the early 70s. Yup, waiting…talking….

  11. collapse expand

    You said, “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 to the Fed to the banks to the ratings agencies to the lenders.”

    Let’s not forget the folks who bought homes that they couldn’t possibly afford, enjoyed their use for a couple of years, sometimes without paying a dime, and then cried “poor me, I’m a victim!”

    Do others share my shock at how many people borrow without any means or expectation to pay back what they borrowed, and without any moral or ethical qualms about doing so?

  12. collapse expand

    I only had time to read the called-out comments and some of the others, so forgive me if someone already said this, which applies directly to the taojonesing comment and seems to be a misapprehension of many.

    While it is true that F&F were in the secondary market, it was their congressionally-mandated responsibility to go out and work actively, taking the initiative if necessary, with banks to make the loans, then work with the underwriters to get the mortgages up to a saleable grade so that it could be bundled into a security.

    I was one of the consultants involved in this, and F&F personnel–and us, of course–were under tremendous pressure to make this happen. From at least 1999 on, when I was brought aboard, the whole focus of Fannie and Freddie were to make the qualifying %’s (those that otherwise could not have made as prime) mandated by congress. The banks were under pressure to make their quotas to0. The whole game was to get an underwriter to grant Prime status to a mortgage so it could be bundled.

    Don’t get me wrong; everyone was in on it, and made a ton of money, but it was congress that forced it.

    Finally, there never was ANY question that the government was going to cover ALL these mortgages. The “privatization” of Fannie and Freddie was de jure but not de facto. If you doubt me, go to your local library, get any Series 6 or 7 exam prep book printed more than 18 months ago (and current ones too, for all I know), and you will see in the GSE section that Fannie and Freddie securities are considered by the financial community and the US government as US-guaranteed securities. I checked my old one when all this started happening, and it was as I remembered it.

  13. collapse expand

    Thank you, Mr. Taibbi, for such stimulating clarity. It begs the question, “So now what?” and here is my answer.

    It may be that everyone is to blame, but there is one group that must be called to task and reformed first above them all: The elected representatives of the American people. And no matter what happened under Clinton or under Bush, what counts are the actions of who is in power NOW.

    My alarm has been growing this whole year, as I have witnessed those who are currently empowered (all Blue) as they disregard promises of transparency and restraints on lobbyists, and instead flaunt their membership in and allegiance to the Oligopoly.

    It is terribly disappointing to see this Congress refuse to police itself, continue to empower people like Dodd, Murtha and Rangel, and operate in back rooms with undisclosed power-brokers. It is depressing to see this historic administration doing the same, and adorning itself with such henchmen for big money interests as Emmanuel, Geithner and Summers.

    We need nothing less than to reform the federal government. My solution is a citizens’ Constitutional Convention that forces deep reforms for Congress. The possibility seems to be germinating even now through Tea Party activism. One can only hope (and work) towards that. It certainly won’t come from the sanctimonious, Spin-tastic Blues currently pigging out with power in DC.

  14. collapse expand

    I think a big (unacknowledged) contributor to this looting was the switchover from ownership capitalism to manager capitalism.When the investment banks were partnership they were risking their own assets, when the partners were recast as managers the priority became looting as much and as quickly as possible because the security of the partnership had gone. Just as democratic societies have politicians with very short-term outlooks so do managers.

    • collapse expand

      Really excellent point, the former Vanguard leader wrote a book about this I believe how management class was enriching themselves at owners expense.

      I think there is a larger point, in that we allowed all sorts of obviously perverse incentives and conflicts of interest to occur that a fifth grader could figure would not end well. We had companies hire and pay for their auditers and rating agencies, hmmm wonder how that would end, hard to predict. We let mortgage guys sell a product that’ value was almost soley based on the reliability of the information provided by said broker and broker had no risk or worry if mortgage went bad, hmmm wonder how that will end, we let management class of business control all the non-voters votes by proxy and get to decide everything for company rather than owners…hmmm wonder how that will end. We let insurance companies pick their regulator, hmmm wonder how that will end, and so on. We are just plain stupid.

      In response to another comment. See in context »
  15. collapse expand


    THANK YOU so much. I have making this point much less articulately on many blog sites for this past year. We are screwed if we think it was govt/Dem fault or all Wall Steet/Repub fault. Doing that just gets a president of a different party overy 8 years, and a Congress/POTUS sliding from excessive deregulation that allowed cronyism and fraud of regular folks to a Congress/POTUS that interfers with market efficiencies and wastefully spends to make things affordable, if that makes sense.

    And what about the FED? What party are they, are they govt or private hands, and who did more to mess us up than them?

    Libertarians are right about many things, but the answer is not anarchy. If we find our street cops are corrupt do close the local police force, or do remake it?

    The problem is parasites. Corrupt goverment, captured regulators, feral immoral corporations beholden to no law enforcement. Socialism can be corrupt. “Capitalist” banana republics can be corrupt.

    Our problem are elite insiders of any stripe, govt or monied private hand that feed off our sweat and tears, and use their muscle and power to thug and bully the rest of us into serving them.

  16. collapse expand


    Brilliant analysis as we have come to expect.

    Very much tracks the meme that first appeared in your book. The debate is not red/blue, liberal/conservative, or even free market randian versus regulation. THE ISSUE IS FAIRNESS AND RULE OF LAW.

    The system is so badly broken that it will collapse and a new one will emerge. That is the good news. The bad news is there will be pain in the transition period. However, the new system will be much fairer. Of that I am sure.

    The Fourth Turning by Howe and Strauss outlines this process well. We are already well on our way. Also, there is plenty of blame to go around. But, the system is corrupted and corrupts. See Zimbardo, The Lucifer Effect, understanding how good people turn evil.

    The problem actually begins with the issue of what we use for money. This is the heart of the matter. Man is fallen. He cannot be trusted to create money. The human race is about to learn this lesson once and for all. All of the dishonesty and corruption you speak of comes in part because of the way we have defined money. This will change because we have reached the end of the rope on the fiat money lie. The signs are everywhere.

    Send me an email if you want more information.


  17. collapse expand

    Here it is, the truth in the nutshell: “It has to be looked at as an important part of a diabolical whole, a symbiotic scheme in which the banks and the state were irreversibly intertwined in an enterprise that on both sides was never about market economics, but crime.” What does that tell about all of the “economists”, and “market watchers” and “commentators” and “analysts” and the galore of other “ert”s and “ist”s? And about us all nodding now in unison at this naked truth? Seriously, did we not see this happening? or did we not believe this was real? All the money we spent on macro-economics textbooks… Anyone secretly hoping that there is the end to this nightmare, and some very powerful good daddy “upstairs” will protect us, kids, from being eaten alive? Anyone?

  18. collapse expand

    Finally, someone is framing the crisis story pitch perfectly. Well done!

    I especially like:

    For me the basic dynamic of the mortgage bubble is some Ivy League dickwad hawking a billion dollars of securitized subprime mortgages to a pension fund, and then Hobie-sailing off into the sunset with a bonus after they all blow up.

    I’d like to point out an angle that deserves more attention and that reinforces your key dynamic.

    The GSEs are being bailed out of the NON GSE guaranteed portfolios of RMBS that they put on when they were “investor owned” (albeit publicly guaranteed)and presumably dickwad managed an (and compensated), institutions. Your article doesn’t highlight, and your commenters miss, that the GSEs (over)fed the subprime lending monster.
    The contemporary red/blue ideological spats about the impact of CRA (pre AIG) distracted folks from the significance of the fact that the GSEs were competing with the IBs for mortgage product. Many forget that the GSE program exacerbated the decline in lending standards by fueling gov’t backed demand for more mortgage product.The fact that the GSEs were buying also reinforced the delusion that the ratings agencies had some legitimacy.

    In addition to doing an inept job with their main mission, underwriting above sub prime RMBS, (which seems to be what most people in your comments are focused on, and which the article highlights), they REALLY botched their side line of buying private RMBS securities . The secondary business is really primary and is underemphasised. It had a huge spillover effect on the rest of the RMBS market and then a more devestating effect on the CDS market..

    Maybe Taibbi is doing God’s work. Thanks for your reporting. You are doing us all a great service.

  19. collapse expand

    If this is a sleazebag contest– government wins-Carter (passed CRA Act) & Clinton(Treas. regs.) forcing banks to make social justice loans (non p.c.-loans to minorities who couldn’t afford loans)while ACORN & NACA held banks hostage who wouldn’t. HUD (Clinton) pressured GSEs (FM & FM) to purchase egalitarian loans (non p.c -loans to minorities who couldn’t afford loans) from banks to make room for more collectivist loans (non p.c-loans to minorities who should never been given a loan because they had no job). Congress (FHEFSS Act)weighed in mandating 45% of loans purchased from banks be liberal utopian loans (non p.c.-loans to minorities who had poor credit and no income). Treasury(Clinton) provided banks with taxpayer $ to make more social justice loans (pc-minority loans to those with no income no jobs). Dems-Dodd, Frank, Schumer etc. and FM Execs(mostly Dems)resisted oversight (the former) and cooked the books to enrich themselves (the later)-knowing that when their liberal scam collapsed-the taxpayer would be billed. And the Fed. and Wall Street run a close second.

  20. collapse expand

    Cali real estate got so expensive hardly any of it was backed by govt, it was all commercial paper, MBS, Countrywide so on. Once house mania got going, no need for any govt intervention. Bubbles can happen without govt, such as Tulip bubble etc…To the Ron Paulites, bubbles even happened before the Fed existed.

    And what about commercial real estate…no govt programs there, and yet many CRE loans are essentially the quality of subprime house mortgages but for MUCH bigger amounts, and CRE is sinking faster than housing.

  21. collapse expand

    Don’t forget CRE, govt did almost no programs to get businesses to buy property, but now CRE bubble worse than housing, lending practices just as bad as subprime mortgages. What govt program of the poor can you blame those no money down loans on?

  22. collapse expand

    Thanks for another great article, Matt. You are one of the few people who are aware of the age-old divide and conquer strategy being constantly used on the American public by propagandists. Also known as the game of “Let’s You and Him Fight While We Make off with the Loot.” “You and Him” are Red vs. Blue. And those making off with the loot are the Special Interest Groups that finance political campaigns. These groups get everything they have paid for, while the American public gets nothing. We vote for Congress people, and whoever we vote for takes the money out of our wallets and gives it to the Special Interest Groups that financed their campaigns. We Americans need to get together and decide to vote ONLY for candidates who have a solid reputation in our communities for honesty and true public service, candidates who pledge to accept NO campaigns donations from Special Interst Groups. Until that time, Special Interest Groups will continue to screw up the country in order to make short-term profits.

    What are folks doing while all this is happening? Watching their TV, which is either a distraction, or a carrier of propaganda itself. If we could get rid of TV’s, do you think people would wake up and notice what is going on in our country?

  23. collapse expand

    Hmm, seems your article has brought the truth seekers out…like some types who want a Mr. Big, a Mr. Correction with an Iron Fist to make the bank rules rock hard. Uh huh, we’ve seen that before…get all the trains on time. Yup…that’ll make it all better. Anyway, it has occurred to me that you could use a spot of time in a really different place to get new ideas. Listen, Mike Daisey went out onto a former cannibal island and came back with an economic treatise. (The natives think we are nuts…plus they don’t want to eat us…just yet.) Maybe you should try time in an Eskimo village going on subsistence hunts. Why not get back to basics? It might bring out something…I mean you did do that relgio finagling. And this would not require the fake name.
    Let me know if interested…

  24. collapse expand

    I’m sorry, dismiss me as a free-market fundamentalist, but faulting market actors for what happened, though they may deserve some blame in a small sense, misses the point entirely. The government in the end is wholly responsible here, and none of this mess would have been possible without it. Had the same market actors operated without the conditions created by government intervention and distortion, this mess would not have happened, period. Blaming market players is like blaming an ex-con who, despite impulses to relive his life of crime, makes a conscious effort to reform himself and be a good citizen, until the government comes along and not only does nothing to stop him from robbing a bunch of people, but gives him a gun and ammo, names and addresses of particularly vulnerable people, and a detailed escape route, and then pats him on the back and encourages him to get started! Claiming that any particular government intervention doesn’t paint the whole picture is misleading, because it’s the complex web of government interventions that do indeed color the whole canvas! Fannie/Freddie didn’t originate the loans? No, well, they sure got securitization going, and many of the loans were forced down the throats of lending institutions via neo-liberal social-engineering legislation and cheap credit by the Fed. The ratings agencies were a market failure? That conclusion seems bullet-proof until we remember that the ratings agencies enjoy a government-granted cartel. And, sure, some people understood what was happening, but plenty of people didn’t, and ever-rising home values made a lot of these loans and financial instruments profitable and duped many people into believing the good times would just keep coming; as long as the Fed kept pumping in credit and as long as home values kept rising, of course the bubble was profitable and, in a sense, “rational”! And the rising home values would not have been possible without Fed monetary policy, nor would irrational bubble behavior have occurred, else the behavior would not have immediately reversed upon Fed tightening of credit. Indeed, how can we even have a discussion about market failures when by far the biggest market actor, the Federal Reserve, is a central-planning agency with a monopoly on money and interest rates? I don’t care if Greenspan calls himself a “Randian protocapitalist;” it is a contradiction in terms. And claiming that the bankers are “free marketeers” is simply silly when we consider all their prostitution with Washington and the Treasury and the Fed. The bubble simply would not have existed without the government, and certainly not without cheap credit and an expanding money supply engineered by the Fed. Oh, let’s not forget explicit and implicit bailout guarantees, which by the way panned out! And whatever one thinks about Glass-Steagall, without FDIC and cheap Fed money the repeal would have been irrelevant. I mean, who can seriously and in his right mind talk about “market failure” or the “flaws” of the free market (all of which seem to amount only to empty rhetoric and nothing actually thoroughly argued) when there IS NO free market? Come on! This is not about “left” or “right” or “Republican” or “Democrat” (they’re both corporatist statists anyway) or considering “both sides.” There is only one side, the truth, and the truth is the government has been the culprit every step of the way. But I’m just a “fundamentalist” jabbering about my voodoo of voluntary mutual exchange.

  25. collapse expand

    Seems what we have in this mess is the political equivalent of the Crips and Bloods. It’s a classic turf war with the middle-class getting shaken down by both sides. The sad thing is, there are no honest ‘cops’ coming to the rescue. So the middle-class pays it’s protection money in the vain hope they will be left alone with barely enough to live a quiet life. This isn’t the ‘Magnificent Seven’ where Chris and Vin and company ride in and deliver the middle-class from the evil predator Calvera. When the final crash comes it won’t be pretty.

  26. collapse expand

    This article is right on. The finger-pointing between the two major parties is just a DIVERSION for public consumption. It is designed to keep left and right fighting while these crooked elitist looters go about their business (and governmental malfeasance ) as usual.

    These slick fast-talking characters in government and industry lambast each other publicly and laugh about it together at cocktail parties. Political favors are handed out through the tax code and through government spending initiatives and then repaid to politicians with campaign contributions. The government is bought and paid for, but essentially both parties and perhaps the entire political system itself, is grossly corrupt.

    Any legislation that starts out to actually help the middle class is torpedoed or eviscerated (see actual results of credit card reform joke).

    Both of these irredeemably corrupt political parties have been tag-teaming the middle class for more than a generation by selling favors through legislation that benefits their benefactors (banks, unions, defense contractors, etc.).

    But when you sort through all the complexity and subtrefuge, this mess is primarily the result of an unholy union between big non-governmental organizations getting in bed with government. Wasn’t this called facism 50 or so years ago?

    Whatever you want to call it, it is just a nationalized pay-to-play scheme between government and big organizations strip-mining the middle class while thinking the public is too stupid to notice.

    This article reminds me what Bush said during one of his first statements on the financial crises late 2008. When asked to what he attributed the problem, he said “There’s plenty of blame to go around.” which struck me as a little odd and vague. After spending a lot more time looking at it since then, I would have to say that actually it was a pretty accurate statement.

    There is no one big bad party, or one big bad business. We are a country with a government by the special interests, for the special interests. It matters little whether Democrats or Republicans are leading the plunder. They have some of the same co-conspirators and some different one’s, but the result is still corruption and self-enrichment at public cost.

    I am baffled as to how we can’t seem to find a few hundred honest people to put in power with a population the size that we have. But, apparently the deck is stacked so that you can only obtain office if you are willing to be a crook. We need 12 year max term limits and a totally new congress. Going on a vain search for an honest man…

  27. collapse expand

    I relish your original and seer/oracle quality essays. your analogies are as vivid as they are street smart-ass accurate. I wonder then why you have to intrude the veritable “turd in the punchbowl” poorly turned and seemingly obligatory “f” word or phrase into the heady feast your writing provides.
    We can deduce that you are with it, perhaps even deeming to wear your ball cap visor back. But so what? Does one need to wear logger boots to a white tie affair just to show that he does’nt really abide with SOP dress codes? Does the writer have to ascribe to the motley polyglot “f” word profusion of the faux journalistic rogues and mavericks becoming ever more common?
    Don’t confuse visceral profundity with porta-john scribblings and assignations. You are way too good for that. Let other word jugglers appeal to the tainted mores of the societal malcontents and the jaded be-ringed, pierced and nuevo Maori tattooed.

  28. collapse expand

    Sardonic Postscript:

    In the aftermath, Lady Lynn Rothschild and friends are now living MUCH more comfortably than EVER, EVAH before, dahling!

  29. collapse expand

    You have made claims that stocks have been naked shorted and now your subject is Freddie Mac and Fannie Mae.These are two stocks the criminals at the U.S.SEC or Securities Exchange Commission have among their ‘poster children stocks’ as victims of naked short selling,a term made up by Beltway criminal money launderer James Dale Davidson founder of Steve Forbes’ National Taxpayers Union a few blocks from main SEC office in beautiful downtown Alexandria,Virginia to distract from his illegal and SEC protected pumps and dumps of the penny stocks Endovasc and Genemax in 2002 using LOM or Lines Overseaes Management of Bermuda(also SEC PROTECTED FOR WHAT I CALL ‘SHARE MONEY-LAUNDERING OPS) through his now disappeared website nakedshortselling.com and his scam criminal organization since with
    the acronym NAANSS for National Association Against Naked Short Selling that was replaced by Patrick Byrne’s NCANS or National COALITION Against Naked Short Selling.
    So why can’t you take the time and tell me and your readers whether you also think Fannie Mae and Freddie Mac were ‘naked shgorted’ which is to say according to the Beltway connected mafia that use the term
    ‘counterfeited’ – or not ? I have explained (and even the corrupt and dishonest Dallas Mavericks Yahoo! billionaire Mark Cuban backs me up and said the same thing after I did)- that Fannie Mae and Freddie Mac shares COULDN’T have been -naked shorted’ or ‘counterfeited’ otherwise shareholders would have complained of buying shares that paid no dividend ! Get it !? Duh…..We expect more from you than being either Patreick Byrne-s and Bud Burrell’s dupe(whose therat to my life remains on thesanitychrck.com for denying CMKX Diamonds and USXP and Overstock.com and Novastar Financial(that was a dividend paying ponzi scheme with Lanny Davis and NCANS connections)or the dupe of Gary Weiss and his Crazy Eddie pal Sam Antar – both of those groups being corrupt and involved in stock fraud ! Don’t be the dupe of either – Fannie Mae and Freddie Mac and according to the SEC (WHO WANT YOU TO BE CONFUSED OR ADD TO THE CONFUSION)REPRESENT THE LOOTING AND METHODIC SHORTING OR DUMPING OF SHARES ON AMERICANS AND I BELIEVE THE CASH IS IN OFFSHORE ACCOUNTS !
    The SEC or Securities Exchange Commission of Mary Schapiro(who apparently had a major role in selling our NASDAQ to Sheikh Mohamed Al Rashid bin Maktoum of Dubai in her role at NASD or now Finra(before becoming head of Barck Osama’s SEC)AND PARTICULARLY THE DTCC COULD TELL JUST WHERE THOSE SHARES WERE LOCATED IN 2008 BEFORE THEY WERE DUMPED AND THE SEC AND EX CHAIR CHRIS WMDS COX LIED ABOUT THEM BEING -NAKED SHORTED’ ON THE OFFICIAL SEC.GOV WBSITE ! Why can track the shares ?
    For the exact reason that we can clearly state they WERE NOT ‘NAKED SHORTED’! The reason again is that if they were shareholders who bought the supposed naked shorted or counterfeited Fannie Mae and Freddie Mac or according to the SEC – GOLDMAN SACHS SHARES ! -
    WOULD NOT HAVE RECEIVED DIVIDENDS ON COUNTERFEIT SHARES ! The DTCC would have seen to that as well as Fannie Mae,etc. management who would not have had money allocated to pay dividends on counterfeit shares ! Naked shorting of Fannie Mae and Freddie Mac and all those myriad penny stocks – even Bernick Kerick’s Tser stun gun shares – WERE NOT -NAKED SHORTED’ ! CAPISCHE ?
    So here again is the SEC’S official lie that they and you favorite company Goldman Sachs were victims of ‘naked short selling’. It’s all a lie Matt. Even those who have made fun of you guffaw know what is going on they are just on the other side – usually the hedge fund shorting side that shorted shares of Fannie Mae and Freddie Mac and Goldman Sachs and it was probably Goldman Sachs insiders who shorted their own shares so they are glad for the lies of Patty Byrne and Gary Weiss and they are glad and thankful you took their toxic bait to destroy any credibility you once had! Hey I believed Endovasc was ‘naked shorted- myself in 2002 thanks to Davidson and D.C. banker David P Summers and deceased Houston attorney John O’Quinn until I saw how many shares they had dumped while lieing abouut being ‘naked shorted’ before,months later,in SEC filings when it was too late !
    So once again Matt Taibbi is the big SEC and Davidson and Byrne lie.In many ways it is the big Gary Weiss and Sam ‘Crazy Eddie’Antar lue as well because they say-lie that naked shorting- is happening but it doesn’t hurt companies ! If it were happening to any extent it would – but it isn’t !
    So take a look at the link where the SEC LIES ABOUT GOLDMAN SACHS,FANNIE MAE AND fREDDIE CAC SHARS BEING -NAKED SHORTED !Please redeem yourself and take on the SEC for aiding money launderers who the SEC aids and abets to defraud and send retired Americans’ money to offshore accounts ! So far you are responsible as well as Byne and Davidson for spreading !
    misinformation,but you have the chance to bring the naked short liars to justice and maybe Congressman Dennis Kucinich the 10th district in Ohio will catch on if you do….
    Furthermore LOM of Bermuda,Isle of Man,etc. as well as money laundering Israeli bank Leumi Bank of Israel(that refuses to reimburse holocaust survivors),were among major offshore holders and dividend receivers of Fannie Mae and Freddie Mac before the 2008 dumping began.
    Note ICTS International who ‘protected’ Logan Boston Airport on 911 and whose stock frauds I have warned about for years and who also let Richard Reid ’shoe bomber’ board at De Gualle Airport Paris,France 6 months after 911 just let the Nigerian board that plane from Amsterdam to Dtroit.Do a google of ‘icts international securacom’ to see how many times I have warned and begged the W Bush regime and now the Barack Osama regime to do something !


    SEC Enhances Investor Protections Against Naked Short Selling
    Washington, D.C., July 15, 2008 – The Securities and Exchange Commission today issued an emergency order to enhance investor protections against “naked” short selling in the securities of Fannie Mae, Freddie Mac, and primary dealers at commercial and investment banks……

    The SEC’s mission to protect investors, maintain orderly markets, and promote capital formation is more important now than it has ever been,” said SEC Chairman Christopher Cox. “Today’s Commission action aims to stop unlawful manipulation through ‘naked’ short selling that threatens the stability of financial institutions. We will continue our vigorous commitment to investors by working within the SEC and in close cooperation with our regulatory counterparts to promote the continued health and vibrancy of our markets.”

    The securities identified in the Commission’s order:

    Company Ticker Symbol(s)
    BNP Paribas Securities Corp. BNPQF or BNPQY
    Bank of America Corporation BAC
    Barclays PLC BCS
    Citigroup Inc. C
    Credit Suisse Group CS

    Daiwa Securities Group Inc. DSECY
    Deutsche Bank Group AG DB
    Allianz SE AZ
    Goldman, Sachs Group Inc GS
    Royal Bank ADS RBS
    HSBC Holdings PLC ADS HBC and HSI
    J. P. Morgan Chase & Co. JPM
    Lehman Brothers Holdings Inc. LEH
    Merrill Lynch & Co., Inc. MER
    Mizuho Financial Group, Inc. MFG
    Morgan Stanley MS
    Freddie Mac FRE
    Fannie Mae FNM

  30. collapse expand

    Take more heart, Matt, and dig deeper. It is very hard to see from the outside what exactly is going on in there at the moment. The portfolios are too big, and the Congressional Mission Statement imposed on them, i.e. the mandate they accepted as Government Sponsored (but privately held) Entities, is too important to simply dissolve. They are the backbone of the entire residential mortgage industry, providing essential secondary market functions and effecting reduced pricing levels and broadened availability. The quality of their portfolios are far better than that of the Wall Street crew, and they have a much lower percentage of subprime. By placing them under conservatorship, Treasury gets to run them in such manner as they wish, and propagandize the situation without argument. Originally, it was clear to me that Paulson intended to haul these whales up on the beach in order to swap out hunks of their good portfolio in exchange for the toxic crap held by his buddies at GS, JPM, et. al. Fannie had been a target of Wall Street and Republicans in particular since they were privatized in 1968 (to help fund our fave’ of all time, the Vietnam War, and it has consistently until now been headed by Cabinet level Democrat minds enjoying, according to its Wall Street competitors, unencumbered by its mission mandates, of enjoying an unfair bond pricing advantage. And even now, it is more than likely, I am afraid, that this administration also uses them in a fashion intended to “serve” Wall Street rather than the citizenry. We cannot take the recent “news” with less than a grain of salt!

  31. collapse expand

    Matt: here’s a nice preview from 77 years ago:
    Bernanke, advertised as the greatest expert on 1929 etc, seems not to have read much history. I was looking up something in Chernow’s big book on Morgan and found on pp.354-55 this great exchange in the summer of 1932 (before the election) between Leffingwell of Morgan and FDR: “…You and I know,” (wrote Leffingwell,) “that we cannot cure the present deflation and depression by punishing the villains, real or imaginary, of the first post war decade, and that when it comes down to the day of reckoning nobody gets very far with all this prohibition and regulation stuff.” To which FDR replied: “I wish we could get from the bankers themselves an admission that in the 1927 to 1929 period there were grave abuses and that the bankers themselves now support wholeheartedly methods to prevent recurrence thereof. Can’t bankers see their own advantage in such a course?” And then Leffingwell again: “The bankers were not in fact responsible for 1927-29 and the politicians were. Why then should the bankers make a false confession?”
    - Michael M. Thomas

    • collapse expand

      great clip…i love seeing this old stuff…if nothing else, when you are in a minority, it makes you realize some people in the past got it in great numbers

      also interesting reading is description of the ag land fever in midwest just before depression, dust bowl.

      In response to another comment. See in context »
  32. collapse expand

    I love this post and I think you hit the nail on the head, however it is hillariously ironic that the ads up in the corner are:

    Obama Urges for Refinance
    $180,000 Refinance under $939/mo. See Rates- No Credit Check Req.
    Refinance at 4.1% FIXED
    $160,000 mortgage for $633/mo. No SSN req. Get 4 Free Quotes Now!
    Mortgage Rate 4.00% FIXED
    $200,000 home mortgage for $771/mo. See New Payment. No SSN Required.

  33. collapse expand


    You’re smart, and a great guy, but come out of Plato’s Cave already. We’ve discovered his Forms in the financial modeling world and they transcend Kant’s Categories AND Sartre’s Existence.

    The mathematics of String Theory and Quantum Mechanics strained through the Fractals of Chaos Theory and Convolutions of Actuarial Science show the path to global financial understanidng and prosperity.

    Even Frank Saunders, Joe Kennedy Sr.’s chauffer, could solve the problems of AIG and Dubai if he had access to these paradigms.


  34. collapse expand

    Matt –
    You make a lot of good points but I think the basic premise is worth examining.

    The Journal article asserts: “Fannie has admitted [misreported subprime mortgages as prime] in a third-quarter 10-Q report in 2008.” You write that this is a damning fact and if true supports their claim that the GSEs were a principal cause of the financial crisis.

    So, is it true? After reading this I read the MD&A section of Fannie’s 10-K for that quarter. I didn’t find anything that looked like such an admission. I may have missed it. Or, it’s possible that regular GSE critics like Wallison and Pinto misconstrued something.

    Maybe someone will ask them to identify the specific admission that they are referring to.

  35. collapse expand

    Excellent – thoughtful article.

    Spent 15yrs in mortgage banking, much of it subprime. In the mid 90’s we were trained to wholly respect risk (stated income done as max 80% ltv self employed only + part of the verification was 6mos bank statement cash flow to evidence the borrower had access to reasonable income, but was legally able to write off expenses, etc. and therefore couldn’t qualify as a prime loan).

    Then in roughly late 2002 and early 2003,
    we were told in our underwriting meetings that stated could be done to 100% ltv or cltv (1st/2nd)as a wage earner if their income appeared “reasonable” which became utterly subjective.

    When we asked why the risk model was basically thrown out the window, we were told “Wall St. loves this paper”. at our level, we had zero exposure to the credit default market, etc that was voraciously chewing up our payment streams.

    Ultimately, this is a great article in that it speaks to a higher purpose. We were collectively all at fault and corrupted to some extent. It is less important to assign blame, and more important to fix the inherent problems of a system where everyone profits to some extent and is too motivated to look the other way than to address the potential for another series of bailouts today or down the road.

  36. collapse expand

    Amen; you get it. The powers that be – “be” being whomever you feel most comfortable blaming – use division as a screen for their own felonies. Turn the guard dogs on themselves, and the fox is free to pillage the hen house.

    Stay divided at your, an our, own peril.

  37. collapse expand

    Off topic, but Mangini is keeping his job next season.

    I guess Holmgren wants to focus on the offensive side of ball.

    Does this mean the world is going to end?

  38. collapse expand

    Amen brother. The puppeteers had a field day with the rest of us fools. They lined their pockets and feathered their nests and got us to look the other way by creating the ultimate blame game that split us right down the middle.

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    About Me

    I'm a political reporter for Rolling Stone magazine, a sports columnist for Men's Journal, and I also write books for a Random House imprint called Spiegel and Grau.

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