(Article changed on February 26, 2013 at 11:13)
"There was never any significant debate about the causes of the 2008 financial crisis," argues Peter Wallison, who must believe that his stint on the Financial Crisis Inquiry Commission was a complete waste of time. Two years ago, he blamed the other nine FCIC commissioners, for "ignoring" the research of Edward Pinto, who proclaimed that the crisis was caused by Fannie, Freddie and affordable housing goals.
Now Wallison blames the media. "Although there were two narratives about why it happened, only one of them was accepted and propagated by the media," he says. "And in effect the necessary competition in ideas never occurred." For $72 you can read all about it in his new book, Bad History, Worse Policy: How a False Narrative about the Financial Crisis Led to the Dodd-Frank Act.
The irony could not be more rich. Neither Peter Wallison nor Edward Pinto would ever subject themselves to a free and open competition of ideas, because their "research" cannot withstand a modicum of scrutiny. FCIC staffers carefully reviewed Pinto's work, but neither they nor Pinto were ever able to reconcile his risk categories with actual loan performance, which seemed to nullify Pinto's thesis. So Wallison simply lied to Congress, when he testified that the FCIC never reviewed Pinto's work.
The schism described by Wallison is not between left and right, between Democrats and Republicans, or between regulation and laissez-faire. It is the divide between capitalists and crackpots. In the world of capitalism, everyone takes risks. Some pay off; some do not. Capitalists study the results in order to ascertain who was lucky and who was smart. Not crackpots like Wallison and Pinto. They declare that, "28 million mortgages, were subprime or otherwise low-quality," of which, "three quarters were on the books of government agencies." But they refuse to examine loan performance over time.
Wallison and Pinto maintain their media platforms because they are protected by a vast conspiracy of silence--an informal agreement among conservative think tanks, Republican politicians, academic shills, and friendly media outlets--which insulates the words of Wallison and Pinto to any kind of fact checking.
Consequently, there has never been an adequate takedown of the multifarious lies and deceptions embedded within the Wallison/Pinto "narrative." So, what follows is a description of the elephant in the room, a brief explainer of some of Wallison's more egregious whoppers. The list is by no means comprehensive. And it merely touches upon Pinto's new disinformation campaign against FHA, which deserves a separate debunking. (Spoiler Alert: If you believe Pinto's claim that, "FHA's Estimated GAAP Net Worth Equals --$26.27 Billion," you don't know much about GAAP or finance.)
A Few Basic Metrics
But first, a few basic metrics.
Best Loan Performance: Over the past few decades, Fannie and Freddie's loan performance has always been exponentially superior to that of any other segment in the mortgage market. The first chart covers the period of 1998 - 2010, the second from the beginning of the 2008 crisis until now.
Laurie Goodman of Amherst Securities estimated that losses on private label securitizations issued between 2005 - 2007 total about $714 billion, a number fairly close to Moody's current estimates. Add in another $133 billion in losses from synthetic subprime CDOs, which never financed a single mortgage, plus another $41 billion from CDOs issued before 2005, and the total approaches $888 billion.
The total credit losses on the GSEs' entire $4.5 trillion mortgage book, since the beginning of 2008, is about $216 billion.
A Blueprint of The Big Lie
"For those not familiar with the argument that the financial crisis was caused by government policy," said Wallison at an AEI luncheon last week, "let me state it as succinctly as I can." And with 500 words he mapped out the genetic code of The Big Lie. Below is his verbatim text, interrupted by my identifiers (e.g. Whopper 1:) and Notes to decipher his mendacity. Here goes:
Before 1992 the vast majority of mortgages and United States were prime mortgages, With down payments of 10-20%, and made to people with good credit records. Fannie Mae and Freddie Mac were the principal enforcers of these rules. Delinquencies and defaults were a few.In 1992 Congress adopted legislation that required Fannie and Freddie to meet what were called, "Affordable Housing Goals." The legislation initially required that at least 30% of the mortgages that Fannie and Freddie made, had to be made to people who were at or below the median Income in the places where they lived. HUD was given the authority to increase that quota and it did so, raising the quota to 50% by the end of the Clinton administration, and to 55% in the Bush administration.
Whopper 1: Statements by HUD throughout this period made clear that the agency's intention was to reduce the underwriting standards that were then prevailing in the market in order to make mortgage credit available to a larger number of borrowers. There is no ambiguity about this issue.
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