Wharton Prof. Reminds Us Of The Power Of Social Stereotypes
December 27, 2016 at 10:00 am,
7 comments
"I wanted to start with this cartoon," said Richard J. Herring, Jacob Safra Professor of International Banking at The Wharton School. Indeed, the slide set the tone for his remarks about Fannie Mae and Freddie Mac.
Herring was on hand at the Brookings Institution conference, "Restructuring the US Residential Mortgage Market," to critique a paper written by two Brookings economists, Ted Gayer and Karen Dynan. The paper says that the GSEs were placed in conservatorship to forestall a liquidity crisis, but Herring found the story of a bank run on the GSEs to be more appealing, so that was the story he used.
Herring didn't need to read any comparative loan performance data that might undermine his certitude that affordable housing goals translated into reckless and imprudent mortgage underwriting. His fictitious story about a GSE run leads him to conclude that the companies, "led to the whole destabilization of the financial system. Surely this is a model that is fatally flawed."
Watch him yourself. Then read pages 27 - 30 of this, which touches on Herring's disregard for fact checking. Or check out these 15 facts here.
And then think about whether academic standards at elite business schools are under assault.
7 comments - Wharton Prof. Reminds Us Of The Power Of Social Stereotypes
anon - December 27, 2016 at 7:45 pm
Prior to 2008, the GSEs were pricing credit risk based on volume -- not the likelihood of default. And those who thought that policy grand were being paid millions of dollars in salaries and bonuses.
I believe that is the classic definition of moral hazard.
And the bond markets recognized that fact. And, more importantly, the U. S. Treasury realized that the bond markets recognized that fact.
Are you seriously suggesting that we should applaud entities that priced credit risk on volume?
I believe that is the classic definition of moral hazard.
And the bond markets recognized that fact. And, more importantly, the U. S. Treasury realized that the bond markets recognized that fact.
Are you seriously suggesting that we should applaud entities that priced credit risk on volume?
Bill Maloni - December 27, 2016 at 8:31 pm
Anon--Before you criticize Mr. Fiderer's excellent work, what's your explanation for that significant causal event, the 2005-2007 PLS debacle, which had nothing to do with the GSEs and was conducted outside of the GSE systems to improve profits for the originators, issuers, and guarantors, i.e. large commercial banks and investment banks??
Oh and how much were those mainly Wall Street folks paid and, what if anything did they suffer institutionally and personally which compares to what was perpetrated against Fannie Mae and Freddie Mac, their executives, employees, and shareholders?
Oh and how much were those mainly Wall Street folks paid and, what if anything did they suffer institutionally and personally which compares to what was perpetrated against Fannie Mae and Freddie Mac, their executives, employees, and shareholders?
David Fiderer - December 27, 2016 at 9:16 pm
Anon
I don't know who told you "Prior to 2008, the GSEs were pricing credit risk based on volume -- not the likelihood of default," but it's not true.
The point of the post was that virtually nothing said by Prof. Herring was true. He's one in a small army of so-called experts who dissemble and lie ad nauseam about the GSEs.
No one has ever come closes to matching the GSEs stellar loan performance, or their reliable profitability, since the deregulation of interest rates in the early 1970s. Credit looses spiked in the wake of the housing crash (from 5 bps p.a. in 2007 to 52 bps p.a. in 2009) because of contagion from an epidemic of fraud in Wall Street's private securitizations.
Read Part 1 on the paper, which will soon be republished with typos cleaned up.
https://www.scribd.com/document/334826631/GSE-Reform-and-a-Conspiracy-of-Silence-Draft-1-4
I don't know who told you "Prior to 2008, the GSEs were pricing credit risk based on volume -- not the likelihood of default," but it's not true.
The point of the post was that virtually nothing said by Prof. Herring was true. He's one in a small army of so-called experts who dissemble and lie ad nauseam about the GSEs.
No one has ever come closes to matching the GSEs stellar loan performance, or their reliable profitability, since the deregulation of interest rates in the early 1970s. Credit looses spiked in the wake of the housing crash (from 5 bps p.a. in 2007 to 52 bps p.a. in 2009) because of contagion from an epidemic of fraud in Wall Street's private securitizations.
Read Part 1 on the paper, which will soon be republished with typos cleaned up.
https://www.scribd.com/document/334826631/GSE-Reform-and-a-Conspiracy-of-Silence-Draft-1-4
anon - December 27, 2016 at 10:00 pm
Mr. Maloni
The record shows that in the summer of 2008, the GSEs were paying record spreads over Treasury securities on their debt. And they had over $1.5 trillion in debt.
On the Fannie Mae website, you can find the history of 3 month rates compared to 3 month T bill rates. These rates breached 100 basis points starting in late 2007.
And the TBA markets were also showing signs of stress. The bid offer spread approached 50 basis points. The GNMA-FNMA price spread breached 2 points for the first time,
The Treasury needed an entity to stabilize TBA markets through outright purchases of MBS and mortgages. As long as the GSEs could borrow close to Treasury rates, they could fulfill that role. Borrowing 100 bp over Treasury meant they couldn't.
Not sure if you are familiar with GSE history, but Fannie Mae's initial role was to buy mortgages to provide liquidity to the mortgage system. And they were unable to do that in the summer of 2008.
.
The record shows that in the summer of 2008, the GSEs were paying record spreads over Treasury securities on their debt. And they had over $1.5 trillion in debt.
On the Fannie Mae website, you can find the history of 3 month rates compared to 3 month T bill rates. These rates breached 100 basis points starting in late 2007.
And the TBA markets were also showing signs of stress. The bid offer spread approached 50 basis points. The GNMA-FNMA price spread breached 2 points for the first time,
The Treasury needed an entity to stabilize TBA markets through outright purchases of MBS and mortgages. As long as the GSEs could borrow close to Treasury rates, they could fulfill that role. Borrowing 100 bp over Treasury meant they couldn't.
Not sure if you are familiar with GSE history, but Fannie Mae's initial role was to buy mortgages to provide liquidity to the mortgage system. And they were unable to do that in the summer of 2008.
.
David Fiderer - December 27, 2016 at 10:52 pm
Anon at 10:00 pm
Thanks for illustrating the point of an earlier piece, "GSE Critics Ignore Credit Market Data," http://www.fidererongses.com/params/post/1043010/gse-critics-ignore-credit-market-data.
Yes, during 2008 GSE credit spreads did spike, though not nearly as much as, they did for other too big to fail institutions.
But the GSEs never lacked liquidity or the ability to fund mortgages in the summer of 2008. Whoever told you otherwise is either ignorant or a liar.
Also see, The old "implicit-guarantee-of-GSEs-didn't-work-so-make-the-government-guarantee-private-mortgage-securitizations" routine
http://www.fidererongses.com/params/post/1035246/the-old-implicit-gse-guarantee-didnt-work-so-make-the-government-guarantee-
Thanks for illustrating the point of an earlier piece, "GSE Critics Ignore Credit Market Data," http://www.fidererongses.com/params/post/1043010/gse-critics-ignore-credit-market-data.
Yes, during 2008 GSE credit spreads did spike, though not nearly as much as, they did for other too big to fail institutions.
But the GSEs never lacked liquidity or the ability to fund mortgages in the summer of 2008. Whoever told you otherwise is either ignorant or a liar.
Also see, The old "implicit-guarantee-of-GSEs-didn't-work-so-make-the-government-guarantee-private-mortgage-securitizations" routine
http://www.fidererongses.com/params/post/1035246/the-old-implicit-gse-guarantee-didnt-work-so-make-the-government-guarantee-
Bill Maloni - December 28, 2016 at 1:06 am
Anon--I am a wee bit familiar with Fannie's history, since I was its chief lobbyist for over 20 years before retiring in December 2004.
But, my initial comment was aimed at your reluctance or avoidance to discuss--or even mention--what I consider the real cause of the 2008 financial Armageddon and that was the $2.7 Trillion in poorly underwritten, falsely rated, thinly guaranteed, and soon to bleed red ink "Private Label Securities," or PLS" (non-GSE), mortgage backed bonds, thrown into the market not by Fannie and Freddie but the nation's major banks and investments banks which sold those securities worldwide.
The rapidly defaulting PLS bond losses made the US real estate softening an international debacle.
Check out the $187 Billion GSE forced capital infusion in 2008 to the nearly $450 Billion in TARP funds lavished on the banks with no reciprocal lending obligations required, just same-o, same-o.
How can you ignore Wall Street's financial perfidy, but indict the government's efforts through Fannie and Freddie, which--if you haven't noticed--since 2008 have mainatined the nation's secondary mortgage market functioning smoothly?
Be very careful for what you wish.
Having written about these matters extensively, the Fannie Mae of 2005 and beyond, can't be compared to the corporation of my time because I am confident CEO Frank Raines and CFO Tim Howard--who had been hounded out of their jobs owing to a partisan "drive by"--wouldn't have made the errors of those Fannie officials who followed them in 2005.
BTW, I suggest you Google "David Fiderer" and read his several credible articles and histories of this era and get much better educated. (Pay special attention to his commentary about the high quality and marginal losses and defaults Fannie produced pre-2005 and even for a year or two afterwards.)
But, my initial comment was aimed at your reluctance or avoidance to discuss--or even mention--what I consider the real cause of the 2008 financial Armageddon and that was the $2.7 Trillion in poorly underwritten, falsely rated, thinly guaranteed, and soon to bleed red ink "Private Label Securities," or PLS" (non-GSE), mortgage backed bonds, thrown into the market not by Fannie and Freddie but the nation's major banks and investments banks which sold those securities worldwide.
The rapidly defaulting PLS bond losses made the US real estate softening an international debacle.
Check out the $187 Billion GSE forced capital infusion in 2008 to the nearly $450 Billion in TARP funds lavished on the banks with no reciprocal lending obligations required, just same-o, same-o.
How can you ignore Wall Street's financial perfidy, but indict the government's efforts through Fannie and Freddie, which--if you haven't noticed--since 2008 have mainatined the nation's secondary mortgage market functioning smoothly?
Be very careful for what you wish.
Having written about these matters extensively, the Fannie Mae of 2005 and beyond, can't be compared to the corporation of my time because I am confident CEO Frank Raines and CFO Tim Howard--who had been hounded out of their jobs owing to a partisan "drive by"--wouldn't have made the errors of those Fannie officials who followed them in 2005.
BTW, I suggest you Google "David Fiderer" and read his several credible articles and histories of this era and get much better educated. (Pay special attention to his commentary about the high quality and marginal losses and defaults Fannie produced pre-2005 and even for a year or two afterwards.)
They all come from elite schools. May be 2008 crisis was casualty of reckless corporate games played by these people.