Saturday, March 14, 2009

The Bank's Mistake was Trusting the Government

Their Mistake Was Trusting the Government
03/13/09 - ChicagoBoyz by Shannon Love

Rep. Maxine Waters was a major investor in OneUnited Bank, which lost heavily on its investment in Fannie Mae and Freddie Mac shares when they were taken over by the Treasury.

Ironically, she fully supported Fannie and Freddie in her congressional role on the House Financial Services Committee. That committee had oversight and detailed knowledge of what Fannie and Freddie were doing. They were lending to risky borrowers without verifying their loan applications.

Her experience is an example of what happened to banks worldwide because of Fannie and Freddie and their government supported actions in the housing market.

[edited] For leftists, OneUnited should represent the perfect small, minority owned bank. The “socially responsible” Maxine Water’s invested in the bank and sat on its board. There’s no evidence it made predatory loans. Yet, it failed.

It failed not due to any short-sighted greedy decisions of the bank’s management, but because the bank’s management and board members, like Waters, trusted that the mortgage-backed securities issued by the government sponsored enterprises (GSEs) Fanny Mae and Freddie Mac were worth the paper they were written on.

OneUnited is a microcosm of the entire financial collapse. Over the past 40 years the GSEs have piled up a vast store of toxic assets created by the attempt to get something for nothing by fooling the market about the risk of residential mortgages. Ratings firms gave the GSEs top ratings because of their implied government guarantee and oversight. Banks like OneUnited bought into the political myth and now they and everyone else are paying for it.

A comment posed that the housing crisis is a failure of the free market under lax regulation. Shannon Love replied:

[edited] The commercial real estate market has no government intervention at all, it has some securitization, and it was fine until the entire financial system tanked. You argued that private individuals cannot price risk without the guiding hand of the State. If so, then why didn’t the commercial real estate market bubble and burst before the heavily regulated residential market?

The residential market couldn’t price risk properly because the government set out specifically to blind the market to the risk of residential mortgages. The entire point of the creation of Freddie Mac and other GSEs was to hide the risk of residential mortgage lending!

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