fresh voices from the front lines of change







In the six months since the Financial Crisis Inquiry Commission’s report was released, a small band of critics—with many congressional Republicans in tow—has labored mightily to undermine the credibility of the FCIC’s work. They have attacked the report, even as its accuracy has withstood the scrutiny of the financial industry, the media and others.

So why the assault? Part of the motivation undoubtedly is to divert attention from the report’s stark account of Wall Street recklessness and the failures of regulators and policy makers. But another reason is that nine of the 10 commissioners—including five Democrats, three Republicans and one independent—didn’t concur with the detractors’ view that the crisis was primarily caused by Fannie Mae and Freddie Mac, and the government’s housing policies to which the two companies were subject.

Let’s set the record straight. The FCIC thoroughly examined these two entities and their role in the crisis. The report cites the government-sponsored enterprises (GSEs) 759 times on 92 pages and the commission released more than 140 documents that reference the GSEs. Despite false claims to the contrary, the FCIC fully analyzed information submitted by proponents of the theory that government housing policies, Fannie Mae and Freddie Mac drove the crisis. The analysis was included in the report and on the commission’s website.

Specifically, the commission examined the claim that more than two-thirds of all subprime and other risky mortgages were held or guaranteed by the GSEs, government agencies and banks subject to federal community lending requirements. The FCIC found that view misleading, in no small part because a commission staff analysis demonstrated that the assertion was based on a deeply flawed definition of subprime and risky loans.

The faulty definition indiscriminately lumped together mortgages securitized by Wall Street and those purchased or backed by the GSEs, even though the loans of the government-sponsored enterprises performed dramatically better than mortgages packaged by Wall Street. In other words, the detractors included in their definition millions of home loans that don’t belong there.

The FCIC also looked in detail at the impact of affordable housing goals set by the Department of Housing and Urban Development for the GSEs’ mortgage business. The commission found that, based on dozens of interviews and documentary evidence, those goals contributed only marginally to the GSEs’ participation in risky mortgages.

It’s clear from the FCIC report that these companies were disasters. They had a defective business model, in which profits were privatized and losses socialized—just like what ultimately happened with most big Wall Street firms. The government-sponsored enterprises used their political power to ward off effective regulation, spending $164 million on lobbying from 1999 to 2008. They ramped up purchases and guarantees of risky mortgages starting in 2005—just as the housing market was peaking—to regain market share, meet investors’ and analysts’ expectations for growth, and ensure lavish compensation for their executives. And their failure has cost taxpayers more than $138 billion to date.

Disasters? Yes. The primary cause of the crisis? No. And here’s why. First of all, the GSEs participated in the expansion of subprime and other hazardous loans, but they followed, rather than led, Wall Street in the rush for fool’s gold. Their market share shrank to 37 percent in 2006 from 57 percent in 2003, as increasingly perilous lending permeated the market. In search of profits, they also purchased the highest-rated portions of “private label” mortgage securities produced by Wall Street. While such purchases added helium to the housing balloon, they represented just 10.5 percent of “private label” subprime mortgage-backed securities in 2001, then rose to 40 percent in 2004, and fell back to 28 percent in 2008. Private investors gobbled up the lion’s share of those securities, including the riskier portions.

Second, the FCIC analyzed the performance of roughly 25 million mortgages outstanding at the end of each year from 2006 to 2009, and found that delinquency rates for the loans that Fannie Mae and Freddie Mac purchased or guaranteed were substantially lower than for mortgages securitized by other financial firms. This holds true even for loans to borrowers with similar credit scores or down payments. For example, data compiled by the FCIC for a subset of borrowers with scores below 660 shows that by the end of 2008, far fewer GSE mortgages were seriously delinquent than non-GSE securitized mortgages: 6.2 percent versus 28.3 percent.

Finally, there is this simple fact: Fannie Mae and Freddie Mac mortgage securities didn’t cause the losses that cascaded through the financial system in 2007 and 2008, and that brought down firms such as Merrill Lynch, Bear Stearns Cos., American International Group Inc. and Lehman Brothers Holdings Inc. It just didn’t happen. GSE mortgage securities essentially maintained their value throughout the crisis largely due to the implicit government backstop, while those created by other financial firms crashed. Taxpayers have had to bear significant costs, but GSE securities didn’t cause the big bank losses that shook the system.

It has been almost three years since the near-collapse of the financial markets. Every moment spent indulging false arguments about the causes of the crisis is a moment diverted from the urgent tasks still in front of us: prosecuting violations of law to deter future wrongdoing, enforcing new financial reforms, and remaking the financial system from one of rampant speculation to one that helps create jobs and genuine prosperity for the U.S. Enough is enough.

Phil Angelides served as chairman of the Financial Crisis Inquiry Commission, which conducted the official investigation into the nation’s financial and economic crisis. A version of this article originally appeared in Bloomberg View.

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