Friday, December 23, 2011

SEC Sues Fannie Mae and Freddie Mac

Two interesting recent Opinion pieces in the Wall Street Journal focus on the role that Governmental Sponsored Entities Fannie Mae and Freddie Mac played in the financial market crisis of 2008. The Securities and Exchange Commission has filed a lawsuit against several Fannie and Freddie executives alleging that these executives engaged in securities fraud by significantly understating the GSE's exposure to subprime loans it held and/or securitized in the run-up to the mortgage meltdown.

What Fannie and Freddie Knew

The Financial Crisis on Trial

While both articles are editorial/opinion pieces, each uses the SEC's lawsuit against Fannie and Freddie executives to make intriguing arguments about the role of government policy in the market crisis. The articles argue that Fannie and Freddie downgraded lending standards in an effort to meet HUD guidelines in connection with making housing affordable to Americans with sketchy credit and then served as the buying agent of many of these recklessly written loans. That the GSE's played a role in the crisis is now buttressed by the SEC's lawsuit.

One problem however, that I identified in my recent Utah Law Review piece Racial Coding and the Financial Market Crisis, is that both Democrats and Republicans strain desperately to place the blame for the financial market crisis on one single cause. Here, the Op-Ed pieces in the Wall Street Journal continue, now three years later, to attempt to pin single causation blame for the market crisis on one factor, namely Fannie Mae and Freddie Mac. While the SEC's lawsuit seems to indicate that Fannie and Freddie played a larger role in the crisis, due in part to its fraudulent reporting of subprime exposure, there are at least a dozen additional factors and causes that led to a near global meltdown, including predatory lending, credit rating agency complicity, predatory borrowing, deregulation, derivatives shadow trading, credit default swaps, collateralized debt obligations, etc. It disserves the public interest to attempt to blame the market crisis on one single factor, like the Op-Ed pieces attempt to do.

Switching gears: Professor Paul Butler has written a very interesting Op-Ed in the New York Times in connection with Jury Nullification and the nation's wayward War on Drugs and sentencing policies.

Jurors Need to Know They Can Say No

Therein, Butler argues: "Jury nullification is not new; its proponents have included John Hancock and John Adams. The doctrine is premised on the idea that ordinary citizens, not government officials, should have the final say as to whether a person should be punished. As Adams put it, it is each juror’s 'duty' to vote based on his or her 'own best understanding, judgment and conscience, though in direct opposition to the direction of the court. . . .'

Nullification has been credited with helping to end alcohol prohibition and laws that criminalized gay sex. Last year, Montana prosecutors were forced to offer a defendant in a marijuana case a favorable plea bargain after so many potential jurors said they would nullify that the judge didn’t think he could find enough jurors to hear the case. (Prosecutors now say they will remember the actions of those jurors when they consider whether to charge other people with marijuana crimes.) . . .

How one feels about jury nullification ultimately depends on how much confidence one has in the jury system. Based on my experience, I trust jurors a lot. I first became interested in nullification when I prosecuted low-level drug crimes in Washington in 1990. Jurors here, who were predominantly African-American, nullified regularly because they were concerned about racially selective enforcement of the law. Across the country, crime has fallen, but incarceration rates remain at near record levels. Last year, the New York City police made 50,000 arrests just for marijuana possession."

3 comments:

  1. "... there are at least a dozen additional factors and causes that led to a near global meltdown, including predatory lending, credit rating agency complicity, predatory borrowing, deregulation, derivatives shadow trading, credit default swaps, collateralized debt obligations, etc. It disserves the public interest to attempt to blame the market crisis on one single factor, like the Op-Ed pieces attempt to do." -- Dre Cummings

    Everything that you list here, with the exception of deregulation and credit rating agency complicity, as contributing causes to the financial crisis were the direct result of the governments attempts to engineer specific outcomes in the housing market using Fannie and Freddie as the catalyst. All of it - predatory borrowing, derivatives shadow trading, credit default swaps, collateralized debt obligations - was ancillary to the housing bubble created by policies put in place by successive Democrat administrations and congresses in a effort to engineering an economic outcome that both comported with to their twisted view of "social justice" and their desire to use taxpayer dollars to secure political loyalty and support.

    The authority of the credit ratings agencies was and is a creation of government. Without the governments imprimatur, granted in 1975 by the SEC, the opinion of the three credit agencies in question would have carried no special weight and their opinions would have been more carefully considered and scrutinized.

    There was no major financial deregulation during Bush's tenure. In fact, financial regulations that preceded his presidency were a major contributing cause. And if you are referring to the repeal of the Glass-Steagall Act under Gramm-Leach-Bliley, well, there's no evidence that that contributed to the crisis. Besides the fact that such an appeal will not get your Democrat friends off the hook either:

    "Gramm-Leach-Bliley, the 1999 law Clinton signed repealing the Depression-era Glass-Steagall Act, which had strictly separated traditional commercial banking from investment banking. Obama's supporters, claiming that getting rid of Glass-Steagall led to the credit blowup, have seized on the first name on the law, that of former Sen. Gramm, to bash it as a piece of Republican deregulation. Never mind that the Senate passed the legislation by a vote of 90-8, with many Democrats voting for the final bill, including Obama running mate Joe Biden."

    "Obama specifically bashed this bipartisan achievement in a March speech on the economy in New York. There he said, "By the time the Glass-Steagall Act was repealed in 1999, the $300 million lobbying effort that drove deregulation was more about facilitating mergers than creating an efficient regulatory framework."

    "But then-Clinton Treasury Secretary and now-Obama adviser Larry Summers had a different view. Summers told the Wall Street Journal in 1999 that the new law would spur economic growth "by promoting financial innovation, lower capital costs and greater international competitiveness."

    "What's more, Clinton himself defends the law to this day. In a recent Business Week interview with CNBC personality Maria Bartiromo, Clinton said plainly, "I don't see that signing that bill had anything to do with the current crisis." He even added that its lifting of barriers to financial service mergers may have lessened the crisis' impact, pointing out, "Indeed, one of the things that has helped stabilize the current situation as much as it has is the purchase of Merrill Lynch by Bank of America, which was much smoother than it would have been if I hadn't signed that bill."

    -- Reason

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  2. ... continued

    It must be hard when a narrative that this site, more than most, has pushed comes crashing down. The Democrats have, for the time being, escaped the disapprobation they are due for having played the central role leading to this severe economic crisis. And their apologists in the media and academia may succeed, in the short run, at creating confusion as to who was responsible, but history takes a much longer view and the American people will eventually come to the truth.

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    Replies
    1. Hi

      Tks very much for post:

      I like it and hope that you continue posting.

      Let me show other source that may be good for community.

      Source: Fannie Mae interview questions

      Best rgs
      David

      Delete