The financial crisis inquiry report

The government has investigated the “2008” financial crisis and released a detailed report.   (Actually it was the 2005 crisis, in that the panic set in towards the end of 2005 , but the government successfully covered things up and managed to get all the major players to pretend that everything was normal until 2008.)

The summary and conclusions are of course, piles of lies, intended to divert attention from those actually guilty.

Overall, it sticks to the cover story that hardly anyone noticed anything out of the ordinary until 2007.  It correctly observes that regulators failed to use the authority that they had, and to the extent that they used their authority, used it corruptly in ways that worsened the crisis – from which it concludes that the regulators need more power and to exercise that power more forcefully.

It correctly observes that

The kings of leverage were Fannie Mae and Freddie Mac, the two behemoth government-sponsored enterprises (GSEs). For example, by the end of 2007, Fannie’s and Freddie’s combined leverage ratio, including loans they owned and guaranteed, stood at 75 to 1.

So the next time you hear someone say that leverage caused the crisis, that is actually a euphemism for saying that government-sponsored enterprises were the major players causing the crisis, not an explanation of the crisis. After all, as the Republicans on the committee point out, leverage only produces bad results if you lose money, and the question therefore is how such large amounts of money were lost. So what, then, did Fannie and Freddie do to piss away large amounts of money?

It also tells us that

As early as September 2004, Countrywide executives recognized that many of the loans they were originating
could result in “catastrophic consequences.”

Yet fails to quote that testimony or document in full.   Surely those who saw the crisis coming, knew what was causing the crisis, yet we don’t hear what they said back then.

The report is overcooked, presenting conclusions without the data from which those conclusions were drawn.

Crabtree testifies to large numbers of abandoned houses in 2006, of entire neighborhoods collapsing, of the lawns unmowed, the houses empty except for homeless people squatting. If the mortgages were busted in 2006, surely the crisis was in full swing in 2006? Why then is every commissioner telling a story that has the crisis suddenly manifesting in 2007/2008?

In November 2005 I said “Now is the time to panic”, and it appeared to me that everyone did panic, within a few days of me saying it. People gave the commission the same testimony.

Warren Peterson, a home builder in Bakersfield, felt that he could pinpoint when the world changed to the day. Peterson built homes in an upscale neighborhood, and each Monday morning, he would arrive at the office to find a bevy of real estate agents, sales contracts in hand, vying to be the ones chosen to purchase the new homes he was building. The stream of traffic was constant. On one Saturday in November 2005, he was at the sales office and noticed that not a single purchaser had entered the building. He called a friend, also in the home-building business, who said he had noticed the same thing, and asked him what he thought about it. “It’s over,” his friend told Peterson.

Why then does the commission stick to the story that this crisis happened in 2008?

Bad loans were made. The money was lost in bad loans. Why were those bad loans made?

The Democrats on the commission conclude that bad loans were made for profit:

We find that the risky practices of Fannie Mae—the Commission’s case study in this area—particularly from 2005 on, led to its fall: practices undertaken to meet Wall Street’s expectations for growth, to regain market share, and to ensure generous compensation for its employees. Affordable housing goals imposed by the Department of Housing and Urban Development (HUD) did contribute marginally to these practices.

Peter J. Wallison argues that affirmative action and affordable housing contributed massively to these practices, in particular the HUD “Best practices initiative”

If a financial entity was failed to follow HUD “best practices” it was likely to be sued for racism, redlining, and any number of vague crimes that can never be disproven, so everyone had to follow “best practices” and if a company followed HUD “best practices” it was bound to make huge numbers of bad loans.

“Best practices” required that the lender accept “non traditional” evidence of ability to pay – and the reason such evidence was non traditional is that it is not evidence.  If a mortgage business followed HUD “best practices”, as in practice it had to do, best practices meant in practice that they were allowing borrowers or their loan officers to make $#!% up.