| | I read another book about the financial boom and bust, And Then the Roof Caved In (link). The subtitle -- How Wall Street's Greed and Stupidity Brought Capitalism to Its Knees -- and book give a slanted/partial view since they downplay the roles of the federal government, Fannie Mae and Freddie Mac in the boom and bust. The author is David Faber of CNBC. There is a 90-minute video companion entitled House of Cards with much the same content. There is a link to the video, which can be seen online, at the above site. The book is about the mortgage originators of subprime loans, the borrowers, the Wall Street folks -- like Bear Stearns, Lehman Brothers and Merrill Lynch -- that packaged the mortgages into securities and sold them to investors, some investors, the rating agencies, and one hedge fund manager who foresaw the bust and took advantage of it.
Until around the year 2003 Fannie Mae and Freddie Mac -- henceforth GSEs (government sponsored enterprises) -- were the dominate players in mortgage securitization. They set pretty tight rules -- like downpayment amount and maximum loan-to-value -- for mortgages they would buy from the originators and the originators followed the rules. The GSEs have always had dollar limits on the size of the mortgage they will buy. Mortgages greater than said limit are called "jumbo mortgages". These have long been securitized, too. In the wake of the GSE's accounting scandals that came to light in 2004, investment banks greatly increased their market share of securitization. They sought the originators and with very loose lending rules. Their main concern was volume, so they could package and repackage the mortgages and sell them to investors all over the world. It was a lucrative quick buck operation. That is, until the "house of cards" started crumbling. Mortgage defaults and foreclosures rose sharply and house values fell sharply. The investors stopped buying and the mortgage packagers were stuck with huge amounts of "toxic assets" on their balance sheets.
Faber deflects criticism of the GSEs. "One such myth that has been bruited about in 2008 and 2009 is that the lax lending standards of Fannie and Freddie promulgated the current crisis. It is not true. Wall Street rushed into the vacuum created by the absence of Fannie and Freddie in 2003-2005. It was Wall Street that took their market share and became the leader. It was Wall Street that encouraged mortgage originators of every kind to lower their standards by providing an endless supply of new capital to fund their mortgages."
Faber did not tell the whole truth either. The GSEs did lower their standards in 2003 or earlier. See here from the Village Voice. Faber is silent about all the government efforts to extend home ownership to less credit-worthy buyers, except a little political rhetoric by G.W. Bush, and the pressures put on banks to make mortgage loans to less credit-worthy borrowers. Think Citibank, Wachovia, Countrywide, Washington Mutual, which are barely mentioned in the book, and IndyMac, which is not mentioned at all. Financial Fiasco presents that side of the story, with the Village Voice article as a resource.
(Edited by Merlin Jetton on 5/28, 11:47am)
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