The SEC Doing Wall Street’s Bidding Robert Kuttner
In the right-wing revisionism of what caused the financial collapse, Fannie Mae and Freddie Mac are leading villains with the federal Community Reinvestment Act in a supporting role. Supposedly, Fannie and Freddie lowered their standards, purchased lots of subprime mortgages, and were major contributors to the housing bubble and crash. In this fable, government pressured banks to make unsound mortgage loans to meet the goals of CRA.
Just about everything in this story is wrong. For starters, subprime was invented on Wall Street, by private investment bankers. Fannie and Freddie did buy some of the paper, but only very late in the game in 2005 and 2006, when the bubble was already about to burst. As for CRA, most of the lenders that originated sub-prime loans were unregulated mortgage companies, not subject to CRA.
But the fable is very useful to the right, on three counts. It shifts the blame from Wall Street banks and the culture of deregulation to federally sponsored players in the secondary mortgage market (Fannie and Freddie) and to federal social legislation.
Gretchen Morgenson of The New York Times bought part of the Fannie-as-culprit story in a co-authored book with Joshua Rosner. Their argument was demolished both by Jeff Madrick and Frank Partnoy in the New York Review of Booksand by me here at the Prospect.
Peter Wallison of the American Enterprise Institute has repeatedly scapegoated Fannie, most recently in a dissenting opinion as a member of the Federal Crisis Inquiry Commission.
Last week, the Securities and Exchange Commission filed a civil suit against the former presidents of Fannie and Freddie for failing to disclose to investors the risky holdings in the two mortgage giants’ portfolios. This is the same SEC that keeps wanting to settle far more serious complaints on willful private-sector fraudsters with slaps on the wrist.
If Fannie and Freddie deceived investors, how would you describe Goldman Sachs and Citigroup, which deliberately created securities in order to bet against them, or the credit agencies (which have gotten off unscathed) who took money from the sub-prime villains for instructing them how to get triple-A ratings on financial garbage?
As it happens, the chair of the SEC is one Mary Schapiro, formerly head of Wall Street’s self-regulatory organization that missed every aspect of the gathering scandal. And the SEC’s director of enforcement, who has made a huge deal of his suit against the SEC, is Robert Khuzami, a former federal prosecutor who served as general counsel of Deutche Bank between 2002 and 2009. The trademark of the Schapiro-Khuzami regime at the SEC is bringing civil cases and having the Justice Department pass on criminal prosecutions. Khuzami was a donor to the presidential campaign of John McCain.
One financial writer who is not buying the SEC’s strategy of recycling the rightwing story on Fannie and Freddie as principal culprits is the New York Times’ Joe Nocera. For your Christmas amusement, have a look at the dueling columns between Nocera and Wallison writing a rejoinder in the Wall Street Journal. For my money, Nocera wins the argument hands down. But notice how the SEC lends credibility to the Wall Street-is-Innocent storyline. Shame.