Dissent in the MSM on Edwards.

A mostly political Weblog.
Aug. 4 2008 3:31 PM

MSM Rebels on Edwards

Oddly, some journalists want to know the truth.

(Continued from Page 18)

Asymptotically approa ching ... damage control: Calculated Risk has what seems like a judicious assessment of Krugman's Fannie Mae column.

Fannie and Freddie had about as much to with the "explosion of high-risk lending" as they could get away with. We are all fortunate that they couldn't get away with all that much of it. ... [snip]

But they didn't like losing their market share, and they pushed the envelope on credit quality as far as they could inside the constraints of their charter: they got into "near prime" programs (Fannie's "Expanded Approval," Freddie's "A Minus") that, at the bottom tier, were hard to distinguish from regular old "subprime" except--again--that they were overwhelmingly fixed-rate "non-toxic" loan structures. ...

Furthermore, both GSEs [Government Sponsored Enterprises--e.g. Fannie Mae and Freddie Mac] were major culprits in the growth of the mega-lenders. Over the years they were struggling so hard to maintain market share, they were allowing themselves to experience huge concentration risks. As they catered more and more to their "major partners"--Countrywide, Wells Fargo, WaMu, the usual suspects--they helped sustain and worsen the "aggregator" model in which smaller lenders sold loans not to the GSEs but to CFC or WFC, who then sold the loans to the GSEs. ...

I think we can give Fannie and Freddie their due share of responsibility for the mess we're in, while acknowledging that they were nowhere near the biggest culprits in the recent credit bubble. [E.A.]

In a post-column mop up operation, Krugman cites Calculated Risk's analysis and glibly says, "That's not really in contradiction to what I said  ..." Really? What Krugman said was:

Fannie and Freddie had nothing to do with the explosion of high-risk lending a few years ago ....

My turn: But didn't I say that "Fannie Mae was a huge buyer of subprime mortgages"? I did. How does this jibe with Calculated Risk's assertion that Fannie Mae and Freddie Mac pushed the envelope but that the envelope still constrained them at least somewhat?  I don't know the answer ... at least not yet... but at least part of it seems   to be  that Fannie Mae mainly purchased subprime mortgage securities--i.e. mortgages that had been aggregated and repackaged as bonds--but that it didn't buy actual subrime mortgages directly. In theory buying the bonds backed by lousy mortgages might have been safer than buying the mortgages, although this 2007 Fortune article seems to argue that the protection was largely illusory, and that through the bond purchases

over the past five years [Fannie Mae] became exposed to mortgages that were made to people with poor credit - subprime mortgages.

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Is there any doubt that by purchasing bonds backed by subprime mortgages Fannie Mae helped enable the "explosion of high-risk lending"? I wouldn't think so. Indeed, expanding subprime lending seems to have been the goal.  But then why doesn't Calculated Risk emphasize that aspect of Fannie's culpability? If anyone wants to explain this to me, I'll repackage it and sell it to my readers. ...

Answers! a) Yes, the explanation seems to be that Fannie Mae bought securities backed by subprime loans, not the loans themselves; b) Even Tantu says  these securities purchases were "supposed to be about supplying some 'needed' capital to the subprime market." If you're providing "needed" capital aren't you thereby enabling the "explosion of high risk lending," as Conn Carroll charges? Doesn't that leave Krugman--"Fannie and Freddie had nothing to do with the explosion"--looking like he's drunk some kind of Fannie Mae Kool Aid?  ...[Thanks to readers R and S11:57 P.M. link

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Curious passage in Paul Krugman's half-defense of Fannie Mae today:

But here's the thing: Fannie and Freddie had nothing to do with the explosion of high-risk lending a few years ago, an explosion that dwarfed the S.& L. fiasco. In fact, Fannie and Freddie, after growing rapidly in the 1990s, largely faded from the scene during the height of the housing bubble.

Partly that's because regulators, responding to accounting scandals at the companies, placed temporary restraints on both Fannie and Freddie that curtailed their lending just as housing prices were really taking off. Also, they didn't do any subprime lending, because they can't.

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