Book Review by Former Staffer to Richard Shelby

Peter Wallison’s new book, Hidden in Plain Sight: What Really Caused the World’s Worst Financial Crisis and Why It Could Happen Again has gained quick attention within our FnF network.

There is a review of the book on Amazon that is written by someone claiming to be Mark Calabria, former aide to Senator Shelby.

I also believe handing out special privileges to select companies is both bad economics and immoral

January 15, 2015
By Mark Calabria
This review is from: Hidden in Plain Sight: What Really Caused the World’s Worst Financial Crisis and Why It Could Happen Again
First some disclosure, I handled mortgage finance (among other issues) as staff for Senate Banking Committee between 2001 and 2009. Also worked at HUD in the office that oversees mortgage market regulation, as well as spending a number of years working at real estate related trade associations. Been researching financial and mortgage markets for 20 years. So sure a little baggage.

In terms of my “policy preferences” – I’m offended by “private gains, social losses” and just as offended when its Citibank as I am when its Fannie Mae (never understood some people’s “either/or” approach). I also believe our financial system is plagued by extensive moral hazard, both by TBTF banks and Fannie/Freddie. I also believe handing out special privileges to select companies is both bad economics and immoral. Reckless companies should be allowed to fail, whether its Lehman or Fannie.

All that said, anyone interested in the financial crisis should read this book. It is extensively documented and well-written. While the narrative is similar to other of Wallison’s writings, he musters far more evidence for his case here. The amount of contemporaneous material from advocates, HUD and the GSEs (Fannie and Freddie) is impressive. Its great history (even if sometimes painful to re-live).

I’ve generally been on the fence about the housing goals, as I have felt that GSE leverage was a far greater issue. The book leaves me more sympathetic to Wallison’s argument. For the best counter-argument regarding the goals, see former FHA Commissioner John Weicher’s paper on the issue written for the St. Louis Fed..

I do think Wallison too easily dismisses other drivers of the crisis, such as easy monetary policy, but his general points are well proven. Those points are: 1) there were a lot more toxic loans in the system than generally believed; 2) government entities (FHA, GSEs) held far greater amounts of those toxic loans than generally believed; and 3) Fannie/Freddie purchased much of those toxic loans due to their housing goals, not as a drive for greater market share.

Having been closely involved in or monitoring GSE oversight since about 2001, here are some of my own recollections. As a staffer on the Senate Banking Committee when HUD proposed to increase the housing goals in 2004, I was extensively lobbied by Fannie and Freddie on the goals. Whether they can be believed or not, at the time, both claimed that the proposed goals would endanger their business and result in substantial losses. I would characterize the GSE attitude toward the goals in 2004 as one of near-panic (not that the GSEs were immune to exaggeration). I also recall a meeting with Freddie CEO Dick Syron (either in 2006 or 2007) in which he claimed the goals were killing the company and that he needed political cover to improve lending standards.

I also recall countless meetings with housing advocates beginning in at least 2001 in which the argument was presented that the GSEs should be pushed into subprime in order to “clean up” that market.

I made a phone call to the GSEs’ then-regulator OFEHO in 2003 asking what all the “other” was in the reports of GSE purchase of mortgage-related securities. Imagine my surprise when told “other” was subprime private label securities. Perhaps more shocking was when this senior OFHEO executive told me what a great thing it was, as it was providing liquidity to the subprime market. Not only was the GSEs’ safety and soundness regulator aware the GSEs were driving subprime, this same regulator thought it was “great.” So yes private label securities were a big part of crisis, but fact is that Fannie/Freddie were driving that market; their own regulator confirmed such to me and expressed support for such.

There were a lot of contributors to the financial crisis. One of those was the role Fannie Mae and Freddie Mac. While the extent of that role can be debated, what I saw first hand before the crisis was 1) a broad Washington consensus that the GSEs should drive the subprime market and 2) the GSEs were not trying to drive that market but rather policymakers were nudging them in that direction.

Perhaps that experience made me more open to Wallison’s arguments, you can and should judge for yourself (after actually reading the book). Again placing appropriate blame on Fannie and Freddie (and reckless federal mortgage policy) doesn’t let other players off the hook. Anyone with an interest in actual facts and history surrounding the crisis would learn a lot from this book. Should note I was sent an advance copy of the book and have actually read it (couldn’t imagine writing a review of something I hadn’t read), so don’t understand strong negative reviews of a book that was just released.”

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