Financial Crisis Smackdown: Wallison vs Nocera, Round II
Back in December, New York Times business writer Joe Nocera took a shot at Peter Wallison, one of the Republican commissioners on the Financial Crisis Inquiry Commission, describing Wallison's take on the financial crisis as not, as they say, reality-based.
Wallison argues that the government's housing policy played a large role in the financial crisis, and particularly in the destruction of Fannie Mae and Freddie Mac.
Nocera thinks this is just malarkey. He argues that Fannie and Freddie didn't get into trouble by following government mandates. They got into trouble by following the market.
When Fannie and Freddie finally did get into the business, it was very late in the game. But the motivation wasn't pressure from the government; it was pressure from the marketplace. You see, the subprime companies and Wall Street had long used subprime loans as a way to do an end-run around Fannie and Freddie. By the mid-2000s, subprime underwriting and securitization had become so profitable and such a large part of the overall mortgage business that Fannie and Freddie felt they had no choice but to dive in. In other words, the G.S.E.s were reacting to the realities of the market, not to the government. They were worried about losing market share.
Mr. Wallison said he had seen documents, not yet made public, as part of his work with the financial crisis commission that would prove that he's right and I'm wrong. Well, well see.
Nocera really took the gloves offafter the FCIC's report and Wallison's dissent were released.
Peter Wallison, the American Enterprise Institute scholar and the fourth Republican F.C.I.C. commissioner, had already released his own, one-man dissent a lonely, loony, cri de coeur that placed the blame for the financial crisis entirely on Fannie Mae, Freddie Mac and federal home ownership policies, a position so contrary to the facts that even his fellow Republican commissioners did not agree with him.
Now Wallison is back with the documents, one of which turns out to be the 2006 10-K report from Fannie Mae.
After the report and my dissent were published last week, Nocera sent me an email asking for the pages in the dissent that supported my position and I told him which pages to look at. I can't tell whether he actually read what I directed him to, but if he did he had trouble assimilating the information. There is a lot of material there, showing beyond question that Fannie and Freddie were driven into insolvency by the loans they were required to buy because of the government's affordable housing policies, and that their motive was not to gain market-share or profit. Included in this information are statements by Fannie itself that say the firm bought risky loans because of the affordable housing requirements. Here, for example, is a statement from Fannies 2006 10-K report, filed with the SEC:
We have made, and continue to make, significant adjustments to our mortgage loan sourcing and purchase strategies in an effort to meet HUD's increased housing goals and new subgoals. These strategies include entering into some purchase and securitization transactions with lower expected economic returns than our typical transactions. We have also relaxed some of our underwriting criteria to obtain goals-qualifying mortgage loans and increased our investments in higher-risk mortgage loan products that are more likely to serve the borrowers targeted by HUDs goals and subgoals, which could increase our credit losses.
This paragraph by itself destroys the long-standing narrative of the Left that Fannie and Freddie bought subprime and other high-risk loans in order to gain market share or profit. Other than wishful thinking or dogma-induced blindness, it is difficult to understand how Nocera could have read this statement and the associated material and still repeated in his column that the two government-sponsored entities followed Wall Street and the subprime companies off the cliff. Go figure.
Nocera, as far as I can tell, hasn't responded.
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