Financial Crisis Smackdown: Nocera vs. Wallison, Round 2

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The battle between New York Times business writer Joe Nocera and Peter Wallison, one of the Republican commissioners on the Financial Crisis Inquiry Commission, rages on.

The story begins with a conversation between Nocera and Wallison back in December. The FCIC was required by statute to produce its report in December but delayed publication for a month.

Wallison thought this delay breached the FCIC's obligations under the law, so he published a preliminary dissenting paper, a month in advance of the official FCIC findings and his own lengthier dissent. Wallison's dissent placed the blame for the housing bubble and subsequent financial crisis squarely on the government's homeownership policies.

Nocera wrote a column about the original, pre-emptive dissent, mocking Wallison's view as "not, as they say, reality based." According to Nocera, one of the key points of Wallison's argument was off the mark. Wallison had said that government policy had pushed Fannie Mae and Freddie Mac into lowering their lending standards in pursuit of lending to riskier borrowers. Nocera argued that it wasn't government policy that pushed Fannie and Freddie into the subprime market, it was the market:

Anyone who has looked at the role of Fannie and Freddie will discover they spent most of the housing bubble avoiding subprime loans, because those loans didn’t meet their underwriting standards. (Indeed, for most of their existence, Fannie and Freddie didn’t so much meet their affordable housing goals as gamed them.)

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.

Nocera went on to relate a conversation he had with Wallison, in which Wallison announced that more evidence supporting his case would be forthcoming.

"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," Nocera wrote. "Well, we’ll see."

This prompted a spirited response from Wallison.

But in our conversation as he was writing this article, he told me that his reporting “has shown that Fannie Mae and Freddie Mac simply followed Wall Street” into buying subprime and other risky loans. I told him this was wrong—that as part of the Commission’s work I have seen internal documents from Fannie and Freddie that show this particular mantra of the left to be a myth. For a reporter, that would have been a signal to hold his fire—a warning that there were facts out there of which he was unaware. I was telling him he should wait and see what I might write in connection with the Commission’s report. But he repeated his own dogma immediately thereafter. In buying all those subprime mortgages, he said, “Fannie and Freddie were reacting to the realities of the market, not to the government.”

All this brings me to the one fact which formed the heart of his attack on me. He notes that I have long been a critic of Fannie Mae and Freddie Mac, and praises me for that. Then he quotes from something I wrote six years ago to the effect that Fannie and Freddie, despite the benefits they received from the government “have failed to lead the private market in assisting the development and financing of affordable housing.” This is true. At the time, I, like virtually all the other critics of Fannie and Freddie, thought that their major risk was interest rate risk, resulting from their holding portfolios of mortgages with a value of more than $1.5 trillion. I could not imagine that as a result of their affordable housing requirements they would actually be taking the enormous credit risks that finally drove them into insolvency.

I discovered this in financial data that Fannie and Freddie began to publish for the first time after they were taken over by the government, and it was confirmed in documents that the Commission sought and received from Fannie Mae. Under these circumstances, I can only respond to Nocera with a riposte attributed to John Maynard Keynes: “When the facts change, sir, I change my opinion. What do you do?” Well, we’ll see.

When the reports came out, neither Nocera nor Wallison budged. Wallison shot back with a blog post on the fight:

Joe Nocera’s New York Times article on the report of the Financial Crisis Inquiry Commission this past week is a wonderful example of the blindness to facts that can result from dogma. It has become a mantra of the Left that Fannie and Freddie followed Wall Street into subprime lending in order to gain market share and profit, not because of any government requirements. In a conversation in December, Nocera repeated this idea to me. I told him that my dissent, when it came out, would contain facts that showed this idea was incorrect.

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 Fannie’s 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 HUD’s 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 did not respond at the New York Times. But he did respond to Wallison's charges in an email exchange.

"When a guy tells you he's seen secret, subpoenaed documents that will prove that I'm wrong—and then it turns out that all he's got is a paragraph from the annual report—from 2006! AFTER Fannie and Freddie had followed Wall Street off the cliff—all I can do is shrug and move on," Nocera said.

On to Round 3?


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