Being a kind hearted soul who seeks common ground with everyone, my friend Bill Maloni reached out to to somebody on the other side of the ideological chasm. He wrote a brief email to Peter Wallison of the American Enterprise Institute, and suggested that Peter modify his vitriol against the GSEs by also including Wall Street players as some of the blameworthy culprits.
Sparks flew. Bill shared his correspondence, and, with his permission, I share it with you for your holiday
amusement.
(The messages are verbatim, though the
sequence was reversed for easier reading.)
From: Bill Maloni
Date: November
16, 2015 at 1:39:01 PM EST
To: Peter
Wallison
Subject: You
Peter--
We both are sounding like very old
records (and you've given Ed a whole new career).
In your indictments, which I don't
expect will change, I suggest for intellectual honesty you at least mention the
2006-2008 $2.7 Trillion bank/investment bank PLS folly and its impact on the
financial markets.
Those scumbags thought they were
cloning a GSE money machine and could reap endless profits and not share any
with the genuine items but did it so haphazardly they more than doubled the
negative impact of whatever wrong you claim the GSEs did.
Go cathartic for the holidays and at
least mention what the non-GSEs did!!
Who knows, Santa coudl bring you more than coal in your stocking this
year!
_________________
From: Peter J. Wallison
To: Bill Maloni
Sent: Tue, Nov 17, 2015 7:12 pm
Subject: RE: You
Bill: I’ve
heard claims like this from you and others before, but they’re mostly straight
out of the left’s echochamber. I’d be interested where you get your numbers,
and whether you recognize that your beloved GSEs were by far the largest buyers
of the PLS created by Wall Street. In fact, there probably wouldn’t have been a
Wall Street business in PLS if Fannie hadn’t succeeded in getting approval from
HUD to count the underlying mortgages in the PLS toward the affordable housing
goals. That made finding, aggregating and selling subprime loans to the GSEs a
big and profitable business, not only for Wall Street but for Countrywide and
other subprime lenders. By 2008, there
were 31 million subprime and Alt-A loans outstanding in the US, of which 76%
were on the books of government agencies, primarily Fannie and Freddie. That
shows, without question, where the demand for these loans actually came from.
Do you have different numbers, and if so where are they?
Peter J. Wallison
Arthur F. Burns Fellow in Financial
Policy Studies
American Enterprise Institute
_____________________
From: BillMaloni
Sent: Wednesday, November 18, 2015
3:42 PM
To: Peter J. Wallison
Subject: Some Answers
"31 million subprime and Alt-A
loans outstanding in the US"?
Sorry Peter, I may have come to DC in
the back of a potato wagon, but not last night.
More than five years ago FCIC staffers
asked your mortgage guru, Ed Pinto, one simple question: "How do you
reconcile your risk categories with loan performance?"
He had no answer then and he refuses
to give an answer to this day. So I don't care if you and Pinto call them
Islamofascist mortgages, because in the real world, what matters is whether
loans pay back with interest.
And since Pinto had no answer, you
turned to falsehoods--you didn't claim the FCIC gave Pinto's work short shrift,
or misinterpreted it, or failed to appreciate its genius--you wrote that
EP's work was never disseminated, even though
you personally circulated his "research."
I'm surprised people still are dumb
enough to fall for the "AEI Twins" device to conflate the trash
mortgages in PLS with those financed by the GSEs.
When it comes to paying back principal
with interest and fees, no company anywhere has come close to matching the
standards of excellence of my former employer, Fannie Mae. Freddie is a close
second. Mark Zandi confirms how the GSEs
compare here.
Mark Zandi confirmed my point at your
AEI book launch. GSE losses = 3%, bank losses = 6%, PLS losses = 23%. If you
need me to forward his work, let me know. So you dissembled in response to
Zandi, saying that the GSEs non-cash loan loss provisions, WHICH WERE REVERSED
in 2012, 2013 onward, represented real cash losses.
BTW, UI's Laurie Goodman produced
almost the same numbers as Zandi.
She advised your good friends at the
FCIC that the loss rate on $2.9 trillion in 1st lien RMBS issued during
2005-2007 was 24% ($714 billion). See page 6.
As for the GSEs, she does something
everyone in the world does, with the apparent exception of Ed Pinto. She
calculated a break even analysis. Hence
she writes, "Our empirical results demonstrate that 4-5 percent capital
would have covered Fannie Mae and Freddie Mac (the GSEs), during the 2007
experience. With the GSE's current book of business, that is too high..."
[In your retort to Zandi] You also referred to a chart by your
Mercatus buddy, Dwight Jaffee, as if it proved your point. (Part of
your/Jaffee's sleight of hand was to show subprime delinquencies--AS DEFINED BY
MBA, NOT PINTO'S DEFINITION--which had nothing to do with credit losses and
obscured the vastly superior delinquency rates of the GSEs.)
Yeah, the GSEs were big buyers, of the
most senior triple-A tranches of PLS. And eighteen lawsuits against the banks
confirm that they were victims of fraud. In a written ruling for a case with
one bank silly enough to go to trial, the judge said the evidence of fraud was
overwhelming.
In any event, the people who tallied
the numbers at FCIC showed that the GSEs bought maybe 15% of the total bonds issued. It's all covered in a piece that was cited in Bethany McLean's book,
which I recommend highly. The piece is by a friend of mine, David Fiderer, who
reports he would be happy to debate you or your colleagues any time. But, be
careful Fiderer gets his numbers from FHFA, M.B.A., the OCC, and Moody's....as
opposed to Ed Pinto.
Sorry, Peter, but you can't con most
people if they have access to the numbers.
____________________________
-----Original Message-----
From: Peter J. Wallison
To: BillMaloni
Sent: Wed, Nov 18, 2015 8:24 pm
Subject: RE: Some Answers
Happy to respond to your points below.
They have no substance, and never have, even though you and the left repeat
them over and over.
Peter J. Wallison
Arthur F. Burns Fellow in Financial
Policy Studies
American Enterprise Institute
"31 million subprime and Alt-A
loans outstanding in the US"?
Sorry Peter, I may have come to DC in
the back of a potato wagon, but not last night.
More than five years ago FCIC staffers
asked your mortgage guru, Ed Pinto, one simple question: "How do you
reconcile your risk categories with loan performance?"
He had no answer then and he refuses
to give an answer to this day. So I don't care if you and Pinto call them
Islamofascist mortgages, because in the real world, what matters is whether
loans pay back with interest.
Are you suggesting
here that subprime and Alt-A mortgages have the same performance results as
prime mortgages? If so, your Fannie background is still showing.
Fiderer's RETORT: So Wallison and Pinto still refuse to answer the FCIC's question. Which is why money talks and BS walks.
As early as 1996,
the Fed did a study showing that credit scores were excellent predictors of
mortgage performance. In 2001, the bank regulators declared that any mortgage
with a credit score below 660 was subprime loan, no matter what its other
characteristics, and had to be so treated by the banks. That was the dividing
line that Pinto used, and that’s where my numbers come from. The FCIC ,
apparently unaware of the bank regulators’ characterization, took issue with
Pinto’s characterization of subprime loans. In my book, if you ever get around
to reading it, you will see the tables that show the performance of the 15
million “good” loans Freddie disclosed in 2014 (they did not release data on
their affordable housing loans), and how low credit scores, low downpayments,
high DTIs, etc. affected performance. And then, finally, my Fannie Mae alum, in
2009, after being taken over by the government, Fannie published a table showing
that in 2008 it had $878 billion in subprime and Alt-A loans, defined exactly
as Pinto defined them, and that 81% of Fannie’s losses came from those loans.
The Fannie table, which is on pp 212-3 of my book, was published in 2009, but
does not appear in the FCIC report, published in 2011. I wonder why.
Fiderer's RETORT:
The Fannie table on pp. 212-213 of Wallison's book was simply lifted from a quarterly filing by Fannie. It shows that, close to the nadir of the housing crash, Fannie's serious delinquency rate was 5.38%, 1/2 the nationwide average per MBA, 1/7 the rate for subprime ARMs at the time.
And since Pinto had no answer, you
turned to falsehoods--you didn't claim the FCIC gave Pinto's work short shrift,
or misinterpreted it, or failed to appreciate its genius--you wrote that
EP's work was never disseminated, even
though you personally circulated his "research."
I love this “falsehood”
stuff. Your friend Fiderer is a pro in calling people who disagree with him
liars, and you seem to fall in his category. Joe Nocera called my and Pinto’s
views The Big Lie. It’s the usual trick on the left—tell your readers that the
other side is lying so they won’t bother to learn about those views. As to what happened at the FCIC, it’s
recorded accurately in my book.
Fiderer's RETORT: Wallison can call me whatever he likes, but he wrote that the FCIC
never reviewed Pinto's work, even though the FCIC review is a matter of public
record. Any kid out of law school could indict and convict Wallison for lying
to Congress. A slam dunk case.
I'm surprised people still are dumb
enough to fall for the "AEI Twins" device to conflate the trash
mortgages in PLS with those financed by the GSEs.
When it comes to paying back principal
with interest and fees, no company anywhere has come close to matching the
standards of excellence of my former employer, Fannie Mae. Freddie is a close
second.
I can’t imagine
what you’re talking about here.
Are you actually
taking credit for the fact that the taxpayers bailed out Fannie and Freddie?
Headline: Fannie and Freddie became insolvent. That’s because the mortgages
they bought were low quality. With all the advantages Fannie had, one might
wonder why it had to be taken over by the government, and why the taxpayers
have had to support it with about $186 billion.
There are two answers—my answer is that HUD forced them to do what they
did through the affordable housing goals.
Fiderer RETORT: Fannie's serious delinquency rates
only began to rise in the second half of 2007, a year after the bubble began to
deflate and only began to exceed historic levels in late 2008, after there was
a huge foreclosure crisis among mortgages financed by PLS.
Your answer is that
they were incompetent (but perhaps less incompetent than others). When I read
your answers in this message, I begin to agree; if you are an example of their “excellence”
then maybe HUD wasn’t responsible after all
Mark Zandi confirmed my point at your
AEI book launch. GSE losses = 3%, bank losses = 6%, PLS losses = 23%. If you
need me to forward his work, let me know.
Zandi and the left
generally have never tried to understand the argument Pinto and I have been
making. I can understand that; you are all wedded to the idea that
well-intentioned government programs should never be criticized. It’s in your
DNA. The privates sector, capitalism, greed, even racism etc., ares always responsible
when disasters occur. The point we have made from the beginning and in dozens
of articles and in my book is that the government housing policies caused the
financial crisis, principally through the affordable housing goals. As the GSEs
were forced to lower their underwriting standards in order to meet the goals,
all market standards declined. This built an enormous bubble and when that
collapsed, the financial crisis occurred. That’s why the fact that the
government created the demand for the subprime and Alt-A loans is a key fact.
The FCIC staff was never willing to look at this issue, and so produced a
worthless report. It’s a much more complicated story, also involving accounting
regulations and incredible blunders by Paulson and Bernanke, but you’ll find it
all in my book.
Fiderer RETORT: In other words, he cannot say "I dispute those numbers,
and here's why...."
In any event, the
actual amount of losses were not so great, and the crisis was far out of
proportion to the actual losses. A large percentage of the PLS that the private
sector sold recovered their value because the underlying mortgage losses were
not what were anticipated by a panicked market. The people who bought these PLS
at distress prices eventually made fortunes. The actual losses were never the
point of my argument. Even the idea of citing 23% for PLS losses is absurd on
its face. Yes, the PLS losses were greater than bank losses or GSE losses, but
that’s irrelevant.
What caused the
crisis was not the losses, per se, which did not turn out to be terribly large
in terms of dollars, but the deterioration in the mortgage underwriting
standards and the resulting bubble. And that was the result of the housing
policies that created the demand for these mortgages.
Fiderer RETORT: The evidence tying the deterioration
of underwriting standards to the GSEs is zero.
So you dissembled in response to
Zandi, saying that the GSEs non-cash loan loss provisions, WHICH WERE REVERSED
in 2012, 2013 onward, represented real cash losses.
This is exactly
what I said above. That was the point I was making with Zandi, perhaps not as
clearly as I should have. The actual losses that the GSEs or the private sector
suffered were not relevant. (?!!!)
They weren’t even
relevant in the crisis, which was a panic caused by the sudden fall in housing
prices as investors began to realize that the bubble was over. If you want to
know where the real losses were, it was in the CDOs that the banks created to
help them sell the PLS. About 60% of those were losses, and that about matches
the total losses suffered by the banks. But that was not enough to cause the
crisis. Ironically, they didn’t sell those CDOs, but kept them because they
thought they were super-senior.
What was relevant
was the decline in underwriting standards that spread beyond the low income
borrowers the GSEs were supposed to help, into the middle class--to people who
could have afforded prime loans, but had an opportunity to buy a bigger house
with no downpayment. This is shown very clearly in the 15 million “good” mortgages
for which Freddie released data (all in my book) but I don’t suppose you’re
really interested in data—just in name calling.
BTW, UI's Laurie Goodman produced
almost the same numbers as Zandi.
She advised your good friends at the
FCIC that the loss rate on $2.9 trillion in 1st lien RMBS issued during
2005-2007 was 24% ($714 billion). See page 6.
As for the GSEs, she does something
everyone in the world does, with the apparent exception of Ed Pinto. She
calculated a break even analysis. Hence
she writes, "Our empirical results demonstrate that 4-5 percent capital
would have covered Fannie Mae and Freddie Mac (the GSEs), during the 2007
experience. With the GSE's current book of business, that is too high..."
You also referred to a chart by your
Mercatus buddy, Dwight Jaffee, as if it proved your point. (Part of
your/Jaffee's sleight of hand was to show subprime delinquencies--AS DEFINED BY
MBA, NOT PINTO'S DEFINITION--which had nothing to do with credit losses and
obscured the vastly superior delinquency rates of the GSEs.)
As to Laurie
Goodman’s point: Of course the PLS were worse than what the GSEs bought. The
GSEs could outbid everyone for what they wanted, and they bought the best of
the worst in order to meet the goals.
Fiderer RETORT:The GSEs don't bid for loans. Borrowers who want 30-year FRMs
are financed by the GSEs because other lenders don't want to finance them.
But what I said in
my last message was also true. If the GSEs had not started buying MBS in order
to meet the goals, and insisted that the MBS be goals-rich, the private sector
would never have been induced to start a business in acquiring subprime loans.
But with the GSEs as huge buyers it was worth setting up a whole business to
meet their demands. The sharply rising prices in the bubble (caused by
declining underwriting standards) made private investors eager to have subprime
mortgages, which looked like great investments, and this allowed the issuers of
PLS to sell to private investors what they couldn’t sell to the GSEs because
the loans did not meet the goals. While it lasted, it was a great business,
supported by government-backed buyers.
Yeah, the GSEs were big buyers, of the
most senior triple-A tranches of PLS. And eighteen lawsuits against the banks
confirm that they were victims of fraud. In a written ruling for a case with
one bank silly enough to go to trial, the judge said the evidence of fraud was
overwhelming.
This goes to my
point about the GSEs. Were they simply incompetent as you seem to suggest, or
were they required to buy those loans because of the goals? Now you’re arguing
both sides--they were competent, but they were defrauded.
They actually didn’t
know as much about the market they dominated as everyone though they did. Poor
chumps. It gets a little hard to explain, though, when they took credit under
the goals for the mortgages in the PLS they bought. In order to do that, they
had to know all about those mortgages, and they got tapes that included the
necessary information. But the effort to blame the banks for defrauding the
market experts is a loser.
Fiderer RETORT:The GSEs relied on the SEC 1933 Act,
which requires issuers and underwriters to guarantee the accuracy and
completeness of the info in the SEC filings. Modern capital markets could not
operate unless investors relied on SEC filings. Wallison has always been an
apologist for fraudsters. (His FCIC dissent blamed the "predatory
borrowers.")
I’m not saying that
the banks were innocent, but Fannie and Freddie were desperate for loans that
met the goals. If you ever took the time to look at the government’s lawsuits
against the banks, you’d realize what happened there. What they sold to the
GSEs were securities. In securities law, the issuer and the underwriter are
absolutely liable for material misstatements of facts. The court wouldn’t allow
the banks to present evidence that Fannie and Freddie asked for and knew what
they were buying. The state of mind of the buyer is not relevant in the case of
a false statement in the sale of a security.
In any event, the people who tallied
the numbers at FCIC showed that the GSEs bought maybe 15% of the total bonds
issued. It's all covered in a piece that was cited in Bethany McLean's book,
which I recommend highly. The piece is by a friend of mine, David Fiderer, who
reports he would be happy to debate you or your colleagues any time. But, be
careful Fiderer gets his numbers from FHFA, M.B.A., the OCC, and Moody's....as
opposed to Ed Pinto.
I’m not worried
about Fiderer’s numbers. Anyone who calls those who disagree with him liars is
not a person I respect or would deal with.
Fiderer RETORT:He may not respect me, but neither he nor anyone said Fiderer's numbers are wrong and here's why.
I would not believe his numbers, no matter where he got them.
Fiderer RETORT: It's not a matter of "belief," and
it doesn't matter if I or somebody else presents them. What matters is, are
they accurate or misleading? He can't discuss the issue on that level.
As to Bethany
McLean, she asked me for my views on a number of questions before writing her
book. She presented herself as a journalist. I wrote her an extensive memo,
including a lot of the material above. She ignored it all and quoted Phil
Angelides, of all people, who accused me of “fabrications.” A real journalist
would at least have cited my views accurately.
I won’t deal with her anymore, either.
Fiderer RETORT: Bethany is Joe Nocera's friend and writing partner. It's not
every day that a NY Times columnist calls somebody like Wallison a liar. Did he
really think he was going to persuade her?
Sorry, Peter, but you can't con most
people if they have access to the numbers.
_________________________________
From:
BillMaloni
Sent: Wednesday, November 18, 2015
8:51 PM
To: Peter J. Wallison
Subject: Re: Some Answers
So, you, Ed, and the AEI are right and
everyone else is wrong about what happened. And, their (the PE opponents)
perspectives all are about protecting the GSEs and not wanting to criticize
government programs?
It will take me a moment to recover
from this reading and get back to you. But, I don't know whether to laugh or
cry.
I have a feeling that whatever source
I cite, you'll have difficulty because they are too "left" or too
"pro-GSE."
But, that won't delay me too much.
For a moment, forget the sour FHFA MBS
lawsuits the banks paid up over (which are different from their outrageous PLS
actions), do you think thebillions of dollars in other fines. i.e. for
laundering Mexican drug money, financially cooperating with Middle Eastern
terrorists, screwing vets over their mortgage payments, manipulating LIBOR, and
a host of other admitted serious violations,
are the behaviors which should be rewarded by ceding the nation's big banks the primary and secondary mortgage
markets??
Or, are the banks innocent and the
(mainly sissy) regulators too zealous?
______________
-----Original Message-----
From: Peter J. Wallison
To: BillMaloni
Sent: Wed, Nov 18, 2015 9:17 pm
Subject: RE: Some Answers
C’mon. Give it up. Now you want me to
defend the banks? Not a chance. You don’t know anything about what happened
before the financial crisis, except what you’ve been told by apologists for the
government. You have my views about your ideas and those who have told you what
you want to hear. You could also read my book and tell me where you think I’m
wrong. If you have something new to say, I’ll respond, but if the same old,
same old I’m not going to respond.
Peter J. Wallison
Arthur F. Burns Fellow in Financial
Policy Studies
American Enterprise Institute
______________
On Nov 18, 2015, at 9:29 PM,
BillMaloni wrote:
Peter, I don't want/expect you to do anything--and I am sure the feeling
is mutual--I merely asked if you think the logical beneficiaries of what you
are selling are worthy?
Actions have consequences. If you are
successful in doing away with the GSEs, which I don't think will happen even
with an R in the WH in 2017, the option is some sort of major structural
upheaval which banks then dominate, which I think is bad.
When I was at the Fed and you were at
Treasury (different times), banks always cut corners and tried to get around
regulation; they still do and always will. It's in their cultural DNA.
So, really stay where you are because
it makes it easier to pigeon hole you as anti-GSE and pro-bank.
___________
Love it! Poor Peter is delusional. He did everything but call GSE supporters pinko Commies.
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