Hidden in Plain Sight: What Really Caused the World’s Worst Financial Crisis and Why It Could Happen Again
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A competing narrative about what caused the financial crisis has received little attention. This view, which is accepted by almost all Republicans in Congress and most conservatives, contends that the crisis was caused by government housing policies. This book extensively documents this view. For example, it shows that in June 2008, before the crisis, 56 percent of all US mortgages were subprime or otherwise low-quality. Of these, 76 percent were on the books of government agencies such as Fannie Mae and Freddie Mac. When these mortgages defaulted in 2007 and 2008, they drove down housing prices and weakened banks and other mortgage holders, causing the crisis.
After this book is published, no one will be able to claim that the financial crisis was caused by insufficient regulation, or defend Dodd-Frank, without coming to terms with the data this book contains.
“distress” sales to be valued? Further clarification was necessary. In 2006, the FASB issued FAS 157, in which it attempted to resolve how fair value would be determined even if there was no active market. The rule began with a definition of fair value as “the price that would be received to sell an asset . . . in an orderly transaction between market participants at the measurement date.”11 The target—the value of a specific asset—was obviously important because net earnings or the size of
and later. Relevant market evidence like that would not have provided much useful data for determining the value of a security, but would have prevented firms from using unobservable inputs such as cash flows. But there was a more difficult question. Even if observable inputs such as the prices for the top AAA tranches of the ACE 2005-HE7 were available, should they be trusted? FAS 157 had described a fair-value measurement as involving an “orderly transaction between market participants on the
least gotten past the blocking and tackling of the New York Times and into the informed opinion of Michael Bloomberg. No wonder Ritholtz is worried. This leakage is a very bad sign for his side. Up to now, almost everyone with a media megaphone has been kept safely within the consensus view: that the financial crisis was caused by something other than government housing policy. Indeed, one reason for the deranged reaction to Bloomberg’s anodyne statement may be the fear that people may actually
weakness and disruption of the financial system that has become known as the mortgage meltdown and the financial crisis. THE AFFORDABLE-HOUSING GOALS: NEVER GOOD ENOUGH The initial goal in the GSE Act—ensuring that 30 percent of loans acquired by Fannie and Freddie be made to low- and moderate-income (LMI) borrowers—was not difficult for the GSEs to meet; they were already at 34 percent, including multifamily housing, when the goals were established in 1992, and the original special affordable
did not have the data to verify this. The FHFA drew essentially the same conclusion in its reports for 2008 and 2009 but apparently did not attempt to stop the practice. TABLE 6.1. Fannie and Freddie’s acquisition of loans with LTV ratios higher than 95 percent Source: HUD Office of Policy Development and Research. Adapted from: Edward J. Pinto, “Government Housing Policies in the Lead-Up to the Financial Crisis: A Forensic Study,” draft manuscript, February 5, 2011, Chart 29,