Michael Bloomberg, "Congress Caused the Mortgage Crisis, Not the Big Banks"

November 1, 2011 Michael Bloomberg - The Good Democrat

Speaking at a business breakfast in midtown featuring Bloomberg and two former New York City mayors, Bloomberg was asked what he thought of the Occupy Wall Street protesters."I hear your complaints," Bloomberg said. "Some of them are totally unfounded. It was not the banks that created the mortgage crisis. It was, plain and simple, Congress who forced everybody to go and give mortgages to people who were on the cusp. Now, I'm not saying I'm sure that was terrible policy, because a lot of those people who got homes still have them and they wouldn't have gotten them without that.
"But they were the ones who pushed Fannie and Freddie to make a bunch of loans that were imprudent, if you will. They were the ones that pushed the banks to loan to everybody. And now we want to go vilify the banks because it's one target, it's easy to blame them and congress certainly isn't going to blame themselves. At the same time, Congress is trying to pressure banks to loosen their lending standards to make more loans. This is exactly the same speech they criticized them for."Bloomberg went on to say it's "cathartic" and "entertaining" to blame people, but the important thing now is to fix the problem.  
A Few Questions: Was it only 'Congress' that created and allowed pressures motivating banks to abandon due diligence banking? Or, did pressure from, and policies supported by, the executive branch play an even greater role, than Congress’s role, in the creation of the housing and mortgage bubble - which led to the financial crisis? Who in Congress supported the policies that created the problem? Which players in the executive branch and its bureaucracy enforced and expanded the Community Reinvestment Act and the Affordable Housing Act?

He Who Pays The Piper Calls the Tune

A reminder that, in real life: “He who pays the piper calls the tune”.

The mandatory implementation of fully-negotiated brokerage commissions [May Day 1975] and shortly thereafter, The U.S. Congressional approval of Section 28(e)* created an environment in which institutional ‘order flow’ became a vastly more important component in the profitability of full-service brokerage firms. [‘order flow’ = code words for undisclosed institutional soft dollar commissions]

Given the implications of fully-negotiated (retail client) commissions and 37 years of serial interpretations and uneven enforcement of Section 28(e), should anyone expect the brokerage industry to look any different than it does today?

* Section 28(e) of the Securities Exchange Act of 1934 [Also, go to linked letter requesting substantial revision or repeal of section 28(e). The letter is from past SEC Chairman Christopher Cox to former Chairman of the Senate Banking Committee, Senator Christopher Dodd, a similar letter was sent to then Chairman of the House Financial Services Committee, Barney Frank > http://www.scribd.com/doc/13752510/Cox-Requests-Legislative-Action 

Links to two related New York Times newspaper articles of interest follow:


Not All Investors Are Equal

Published: July 17, 2012

* http://www.nytimes.com/2012/07/18/opinion/not-all-investors-are-equal.html?_r=1&nl=todaysheadlines&emc=edit_th_20120719


Surveys Give Big Investors an Early View From Analysts

Published: July 15, 2012
* http://www.nytimes.com/2012/07/16/business/in-surveys-hedge-funds-see-early-views-of-stock-analysts.html


· Fair Disclosure, Regulation FD - SEC

http://www.sec.gov/answers/regfd.htm - 5k - similar pages

Aug 30, 2004 ... On August 15, 2000, the SEC adopted Regulation FD to address the selective disclosure of information by publicly traded companies and other ...

A Mortgage Tornado Warning, Unheeded

BUSINESS DAY | February 05, 2012
A Mortgage Tornado Warning, Unheeded
Inspired by a personal experience, a businessman began delving into the practices of the mortgage industry, including Fannie Mae. His findings have been prescient.
Ms. Morgenson:

Regarding MERS, a few months ago I read that MERS was actually conceived by Fannie Mae and the concept was described in a presentation given at a Mortgage Bankers Association convention in 1993 or 1994. The article claimed Fannie got positive feedback on the MERS concept from the mortgage bankers. The article claimed that Fannie Mae and Freddie Mac then funded the development of MERS with contributions of 2 million dollars each. After MERS was 'brought live' Fannie and Freddie invited large mortgage industry members to join MERS on a subscription basis.

I've searched again for the article(s) recently, but I haven't been able to find the articles that described the actual creation of MERS. Perhaps the articles have been "scrubbed".

What I read seems to confirm the leadership role that Fannie and Freddie had, and the ways these two GSE's influenced and led the industry, and how they shaped practices in the industry. You might find the two articles referenced below interesting:

Is FM Watch a Crusader With an Agenda? By Louis Sichelman – RealtyTimes, pub. 7/5/1999 at: http://realtytimes.com/rtpages/19990705_fmwatch.htm

New Alliance Confronts FM Watch, Champions Existing Housing Finance System By Broderick Perkins RealtyTimes, pub. 10/5/2000>  http://realtytimes.com/rtpages/20001005_fmwatch.htm

The Fannie and Freddie Hate Storm

Wall Street Journal Online ~ DECEMBER 27, 2011 OPINION


The Fannie and Freddie Hate Storm*

A dubious prosecution but it helps set the record straight.

By Holman W. Jenkins, Jr.

As I read Mr. Jenkins’ article I was impressed by many of his points, but not his conclusion. Then, after some thought, I remembered the article is published in the OPINION section, not in the FACT section.

Q. What does CMO stand for? A. Collateralized Mortgage Obligation. What caused the COLLATERAL in CMO to become price inflated?

In my opinion, The Housing Bubble and the ensuing financial crisis were caused by several factors which played-out in concert. Political pressure for every person to receive a home loan was one principle cause. The Greenspan Federal Reserve's manipulation of interest rates, and the Fed’s long low interest rate policies, in order to avoid any-and-every anticipated economic slowdown was another. The irrational levels of leverage used by large financial institutions (including Fannie and Freddie) was another factor in the formation of the bubble. The unregulated and irrational use of mortgage derivatives was another contributor (adding another layer of leverage). Serial reductions in mortgage loan qualification standards, the move to low-down payment or no down payment mortgages, and exotic mortgages with deferred payment options, also contributed.1 These were just a few of the ‘moving parts’ which contributed to the home price bubble.

Then, when a few people began to look at the home price inflation - late in the bubble - those few people began to analyze the economics of home prices - it became clear to them that the 'house-of-cards' was dependent on infinitely increasing home prices and infinitely available financing for those infinitely higher home prices. That's when the music began to slow-down, and all the dancers began to head for that small exit.2

Watch this video-clip in which Warren Buffett tries to explain the dynamics of bubble formation and bubble bursting to the Financial Crisis Inquiry Committee (FCIC) at:

Note: Late in the bubble the impending implementation-date for the requirement that banks and other investors use mark-to-market3accounting for valuing ‘infrequently traded assets’ (way back in history mortgage backed securities were infrequently traded) might have also created a more sober attitude toward the volatility and risks involved in holding, leveraging and trading CMO’s 4

* On December 16, 2011 The SEC filed lawsuits - charging fraud- against former senior executives of Fannie Mae and Freddie Mac. The filings provide interesting information and evidence which might force retraction and republication of past financial disclosures made by Fannie and Freddie, and which might also force significant revisions to volumes of analysis and statements about the safety and soundness of the two Government Sponsored Enterprises. [See SEC Filings at:  http://www.sec.gov/news/press/2011/2011-267.htm ]

1. See, SEC filing against former executives of Fannie Mae: page 9 para. 32 “Desktop Underwriter” and page 10 para. 35 “Fast and Easy” and “Clues” at: http://www.sec.gov/litigation/complaints/2011/comp-pr2011-267-fanniemae.pdf
2. From, Inside Trillionaires’ Club of BlackRock By Shawn Tulley - Fortune Magazine - pub. August 18, 2009: In late 2006 the company developed a model that put a lower, more realistic number on the incomes subprime borrowers were claiming on their "no doc" loans. The projections were shocking: BlackRock figured that when the loans reset to their new, higher rates in a couple of years, most borrowers would be spending more than half their real incomes on mortgage payments. Foreseeing an avalanche of defaults, BlackRock dumped subprime bonds in early 2007 when the prices were still lofty.” see complete article at: http://money.cnn.com/2009/08/12/news/companies/blackrock_trillionaires_club.fortune/index.htm
and see, Former Countrywide #2 Sees Opportunities in Troubled Mortgages By Matthew Padilla - Orange County Register pub. June 10, 2008 at: http://mortgage.ocregister.com/2008/06/10/former-countrywide-no-2-sees-opportunities-in-troubled-mortgages/ and see, Betting on The Blind Side By Michael Lewis - Vanity Fair – pub. April 10, 2011 at: http://www.vanityfair.com/business/features/2010/04/wall-street-excerpt-201004
4. see, Congress Helped Banks Defang Key Rule By Susan Pulliam and Tom McGinty – WSJ, June 3, 2009 at: http://online.wsj.com/article/SB124396078596677535.html ).