Party like it’s 1999 redux: The New York Times predicted Fannie Mae failure

posted at 12:15 pm on September 29, 2008 by Ed Morrissey

Last Thursday, I posted a celebratory 1999 Los Angeles Times analysis of the mechanisms that created the financial collapse nine years later.  Interestingly, the New York Times took a much different perspective when looking at the liberal lending policies promoted by Fannie Mae under Franklin Raines in that same year.  In fact, Steven Holmes predicted that an economic downturn would create the same kind of failure seen just ten years earlier in the savings-and-loan sector:

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets — including the New York metropolitan region — will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

Holmes noted that this appeared to be a solution in search of a problem.  While lending to minority applicants still lagged behind that of white applicants, the economic boom of the 1990s had closed that gap.  In the previous five years, mortgages awards to Hispanics jumped 87%, to African-Americans by 71%, and Asians 46%.  Mortgages to white applicants also increased by 31%, which proved that a rising tide indeed lifted all boats, without government intervention to impose “fairness”.

Raines’ move to further incentivize subprime lending troubled Holmes, and noted that any economic turbulence could quickly lead to disaster:

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980′s.

”From the perspective of many people, including me, this is another thrift industry growing up around us,” said Peter Wallison a resident fellow at the American Enterprise Institute. ”If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”

Now we know that Holmes and Wallison had this dead right.  As long as Fannie Mae and Freddie Mac bought subprime paper, lenders continued to profit from them, pushing them to make more and more loans to unqualified borrowers with no risk to themselves.  Meanwhile, rather than manage the GSEs with fiscal discipline as first priority, Raines and his executives ran it as a political organization, looking to distort the market for political ends.  When critics tried to point this out, Raines’ defenders — mostly Capitol Hill flacks raking in contributions from Fannie/Freddie sources — called critics and regulators bigots.

Holmes had it right in 1999.  One might expect the New York Times to point this out a little more often. Instead, they continue to echo Barack Obama and blame “greed” for the failure.  There may have been greed at the bottom of this — but it was greed for political power.  (via Power Line)


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Wow! You mean once upon a time, the New York Times actually printed things that were true?

Right_of_Attila on September 29, 2008 at 12:21 PM

When will some bright and hungry lawyer test the Constitutionality of these hand/bail-outs? I’ll kick in a C-note or two.

Tom

marinetbryant on September 29, 2008 at 12:22 PM

“First, let’s hang all the securities brokers.”

Akzed on September 29, 2008 at 12:22 PM

Party like it’s 1999 redux: The New York Times predicted Fannie Mae failure

Terrific. Let’s put the NYT editorial board in charge of the economy.

/sarc

Y-not on September 29, 2008 at 12:23 PM

Oh, it was financial greed too. A lot of people got very rich investing in Fannie Mae and in its virtually wholly-owned subsidiary, Countrywide. It was the easiest buck in town for a long time.

rockmom on September 29, 2008 at 12:23 PM

but it was greed for political power.

Which is exactly correct, and exactly what went down this last week over “how to fix it”. The Donks don’t give a rip about “fixing it” – just fixin’ta give themselves a political leg up… nothing more, nothing less.

SkinnerVic on September 29, 2008 at 12:23 PM

Because in the 90′s it was Reagan and Bush who caused the problem…now it is Bush and the Republicans this time that caused the problem.
See, according to the MSM, it is kind of like “generation skip”, a disease that skips generations.
Will the poor economy is like that, it “skips over” democrats, and is only caused by Republicans.
It is called the “economy skip”.
Clinton had to push for this, since he “inherited” a “bad economy stupid”.

right2bright on September 29, 2008 at 12:24 PM

For informed voters, this issue has quickly moved beyond about what actually happened; rather, it’s all about exposing the general electorate to the truth.

FR, HA, Rush, H&C, et al. can’t get us there – they’re merely preaching to the choir. This election is going to come down to one thing: the ability of McC and/or 527s to pull off a 15/30 second advert that strikes at the heart of the matter in a dramatic & emotional way.

kuhio on September 29, 2008 at 12:26 PM

I guess I’m not only my brother’s keeper, but I’m his mortgage broker, too.

Lousy deal. If the bailout was such a no-brainer, good for the economy, good for the country, Democrats would have passed it without a single Republican vote last week. That they didn’t means that the bailout is as bad or likely, far worse than it sounds.

Angry Dumbo on September 29, 2008 at 12:28 PM

Why do I feel like I am living in the early pages of Atlas Shrugged?

HawaiiLwyr on September 29, 2008 at 12:28 PM

This election is going to come down to one thing: the ability of McC and/or 527s to pull off a 15/30 second advert that strikes at the heart of the matter in a dramatic & emotional way.

kuhio on September 29, 2008 at 12:26 PM

They need to interlace that with the comment from Boehner about how McCain saved the day. It would be most powerful.

SkinnerVic on September 29, 2008 at 12:30 PM

This blog is remarkably good, add it to you list of daily reads:
 
http://mjperry.blogspot.com/
 
You cite those jumps in mortgages for minorities, but the important numbers are those that show just how many of those mortgages were sub-prime.
 
The Federal Reserve had an interesting study in 2006

55% of all loans made to blacks were sub-prime. 45% of all loans made to Hispanics were sub-prime. 17% of loans made to whites were sub-prime.
 
Is it any wonder that the largest home-price collapses have occured in heavily Hispanic cities (Las Vegas, Miami, Pheonix, Los Angeles)?

Medicated on September 29, 2008 at 12:30 PM

i thought we didn’t trust this paper… I guess we just call them a rag when it’s expedient.

Trent1289 on September 29, 2008 at 12:31 PM

Trent1289 on September 29, 2008 at 12:31 PM

I think the point is, that even “the rag” could see this coming.

brtex on September 29, 2008 at 12:35 PM

I hope the McCain campaign is listening to Rush’s first hour today. The sound bites of Democrats standing up for Raines while trashing the regulators who were raising the red flag on Freddie and Fannie before the collapse are astonishing.

Straight from the mouths of Maxine Waters and Barney Frank.

fogw on September 29, 2008 at 12:36 PM

i thought we didn’t trust this paper… I guess we just call them a rag when it’s expedient.

Trent1289 on September 29, 2008 at 12:31 PM

What’s this “we” stuff. Clearly you think the NYT is a fine upstanding paper that would never ever make stuff up or color the reporting to fit an agenda. Thinking people know better than that.

highhopes on September 29, 2008 at 12:38 PM

i thought we didn’t trust this paper… I guess we just call them a rag when it’s expedient.

Trent1289 on September 29, 2008 at 12:31 PM

I think you’re missing a key piece of data like THE DATE – September 30, 1999of the story.

TheBigOldDog on September 29, 2008 at 12:39 PM

i thought we didn’t trust this paper… I guess we just call them a rag when it’s expedient.

That article was in 1999, before BDS struck the New York Times. When they were, you know, journalists.
Financial analysts could see this coming, it was just a matter of time. Now we must pay the piper for terrible terrible policies.

mjk on September 29, 2008 at 12:39 PM

Straight from the mouths of Maxine Waters and Barney Frank.

fogw on September 29, 2008 at 12:36 PM

Personally I am disgusted that the same Democrats who begrudge our troops the funding for basic equipment to protect them in combat are in the forefront of bailing out greedy homeowners and irresponsible companies.

highhopes on September 29, 2008 at 12:40 PM

C’mon now, folks. Give our astroturfer a chance to spin this thread into being about how bid Palin is.

Y-not on September 29, 2008 at 12:40 PM

bad, not bid

Y-not on September 29, 2008 at 12:40 PM

I have been circulating and commenting on these facts for the past several days. Imagine my surprise when my libtard ‘friends’ chose to either ignore this reality or shoot the messengers as ‘right wing nut jobs’. At some point during this election cycle I hope and (yes)pray that enough people get their heads out of the sand.

stu.b.con on September 29, 2008 at 12:41 PM

The Republican party better get off their fat arses and start setting the record straight or they are going to find themselves alone. Right now I am starting to get more angry at them than the Dems. The Dems are what they are. They are acting in accordance with who they are. The Republicans are acting like cowards allowing themselves to be beaten to a pulp to avoid an honest fight.

TheBigOldDog on September 29, 2008 at 12:45 PM

So after Marxist community organizer activists set up a dangerous financial pyramid, and it was becoming obvious as early as 1999, former Marxist/KGB/terror sponsors in charge of Russia warned in July 2001 of an attack on the U.S. which would trigger our financial collapse in Fall 2001.

Koryagina: It is possible to do anything to the U.S. … whose total debt has reached $26 trillion. Generally, the Western economy is at the boiling point now. Shadow financial actives of $300 trillion are hanging over the planet. At any moment, they could fall on any stock exchange and cause panic and crash. The recent crisis in Southeast Asia, which touched Russia, was a rehearsal.

Pravda: What is the sense of smashing just America?

Koryagina: The U.S. has been chosen as the object of financial attack because the financial center of the planet is located there. The effect will be maximal. The strike waves of economic crisis will spread over the planet instantly and will remind us of the blast of a huge nuclear bomb.

Pravda: Did Russia’s crisis of 1998 have this religious-mystical component?

Koryagina: … The Russian crisis of 1998 was preconditioned by internal factors. Yeltsin’s policy enlarged its consequences. Now we have President Putin, and this is a good choice.

Pravda: What do we have to do now?

Koryagina: Recommendations, compiled by the Duma Commission of Economic Politics after the recent Duma hearings, offer instruction on what should be done to escape the consequences of a world crisis inspired by a financial catastrophe in the U.S. This document will be sent – or has already been sent – to President Putin.

Pravda: What should Russian citizens do?

Koryagina: They should start changing their dollars for rubles. President Putin and the Russian Central Bank are already taking the necessary healthy measures. There are high chances that after 19 August the ruble will become a very good currency.

Pravda: Why 19 August, say, and not the 21st?

Koryagina: Some fluctuation in this date is possible. Serious forces are acting against THOSE WHO ARE NOW PREPARING THE ATTACK ON THE UNITED STATES [emphasis added]. August, with very high probability, will bring the financial catastrophe to the U.S. … The last 10 days of August have especial importance from a religious-sensible point of view.

[End of excerpt]

Our response to attack was to flood the system with cash to build the subprime pyramid even bigger. That we now can see was an ebola contaminated band-aid. Damn, the Russians play some killer chess, don’t they? Somebody tell John McCain they’re inside our/his OODA loop.

econavenger on September 29, 2008 at 1:04 PM

Wow! You mean once upon a time, the New York Times actually printed things that were true?

Right_of_Attila

That they did. For decades, in fact, the NYT on their front page even printed stories where they called the bad guys from the Middle East “terrorists”.

Now they’re called “militants”.

Del Dolemonte on September 29, 2008 at 1:05 PM

Thanks! Now I’ve got that song in my head.

shick on September 29, 2008 at 1:10 PM

It doesn’t make any difference. That’s sad, but true. Truth isn’t relevant in an election; perception is. McCain should have shoved this down the Democrats’ throats, but he didn’t, and now, it’s too late (have you seen today’s Rasmussen polls?) And he’s at a roundtable. What’s he thinking?

I hope he’s got something up his sleeve, because I don’t see how we can win this election. Not now.

rightwingprof on September 29, 2008 at 1:16 PM

I refuse to believe that McCain and the GOP are going to meekly sit around and let the crats pin it all on them. There is SO MUCH evidence pointing directly at democrats and Obama in particular with his ACORN ties.

One of the biggest failures of the Bush admin is the failure to push back and defend the decision to start the Iraq war. At some point they decided it wasnt worth the effort and now it’s generally accepted to be stupid and based on lies. McCain barely pushes back on that because it’s so ingrained that it’s better to just change the subject and talk about the surge. They MUST have learned this lesson. I don’t profess to know what the strategy is, I just refuse to believe there isn’t one. Maybe that’s wishful thinking, I don’t know.

Personally I’m going to be sending out the CSPAN video, the other youtube video about how we got here and stanley kurtz’s new column to as many people as I can. I’m on a mailing list with a bunch of members, I figure that’s not a bad place to start even though I’ll get some blowback.

hump1201 on September 29, 2008 at 2:22 PM

There may have been greed at the bottom of this — but it was greed for political power. (via Power Line)

It was for money greed, too. But unlike the usual stereotype of greed held by the left, the money was coming indirectly from the government.

In fact, isn’t this a lot like money laundering? Sure, the money for the loan comes from a regular bank, but then the loan is sold, and the bank now has money directly from a quasi-nongovernment institution like Fannie Mae for a loan they don’t necessarily intend to collect on, and is free to loan the same money from the first loan to someone else.

Lather, rinse, repeat. For about 10 years. Then wait for the bubble to burst, and call for a bailout.

A good example of capitalism being corrupted by the government.

tom on September 29, 2008 at 3:11 PM