Wall Street Journal Online ~ DECEMBER 27, 2011 OPINION
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.2Watch 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 ]Footnotes: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.pdf2. 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.htmand 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-2010043. see, FAS #157 at: http://en.wikipedia.org/wiki/Mark-to-market_accounting4. 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 ).