Peter J. Wallison

The Last Trillion-Dollar Commitment: The Destruction of Fannie Mae and Freddie Mac

The government takeover of Fannie Mae and Freddie Mac was necessary because of their massive losses on more than

CAUSE AND EFFECT: GOVERNMENT POLICIES AND THE FINANCIAL CRISIS

1.6 trillion of subprime and Alt-A investments, almost all of which were added to their single-family book of business between 2005 and 2007. The most plausible explanation for the sudden adoption of this disastrous course-disastrous for them and for the U.S. financial markets—is their desire to retain the support of Congress after their accounting scandals in 2003 and 2004 and the challenges to their business model that ensued. Although the strategy worked-Congress did not adopt strong government-sponsored enterprise (GSE) reform legislation until the Republicans demanded it as the price for Senate passage of a housing bill in July 2008—it led inevitably to the government takeover and the enormous junk loan losses still to come. Now that the federal government has been required to take effective control of Fannie and Freddie and to decide their fate, it is important to understand the reasons for their financial collapse—what went wrong and why. That is the purpose of this article.

Everything You Wanted to Know about Credit Default Swaps: But Were Never Told

ABSTRACT The underlying cause of the financial meltdown was much more mundane than a “crisis of capitalism”: The real origins lay in mostly obscure housing, tax, and regulatory policies of the U.S. government. The Community Reinvestment Act, the affordable‐housing “mission” of Fannie Mae and Freddie Mac, penalty‐free refinancing of home loans, penalty‐free defaults on home loans, tax preferences for home‐equity borrowing, and reduced capital requirements for banks that held mortgages and mortgage‐backed securities combined with each other to create the incentives for both subprime lending and the housing bubble that eventually led to the financial collapse.

CREDIT‐DEFAULT SWAPS ARE NOT TO BLAME

Credit default swaps (CDSs) have been identified in media accounts and by various commentators as sources of risk for the institutions that use them, as potential contributors to systemic risk, and as the underlying reason for the bailouts of Bear Stearns and AIG. These assessments are seriously wide of the mark.They seem to reflect a misunderstanding of how CDSs work and how they contribute to risk management by banks and other intermediaries. In addition, the vigorous market that currently exists for CDSs is a significant source of market-based judgments on the credit conditions of large numbers of companies—information that is not publicly available anywhere else. Although the CDS market can be improved, excessive restrictions on it would create considerably more risk than it would eliminate.

The Future of U.S. Housing Finance: Five Points of View

ABSTRACT Though accused by critics of helping to cause the current financial crisis, credit‐default swaps are blameless. The accusation is understandable, however, given misunderstandings about how a credit‐default swap actually works. A careful look into its mechanism shows that it is not only simpler than thought, but that it is also vital to keeping the financial system strong by enabling financial institutions to better manage their risks. The risk taken on in a credit‐default swap (CDS) is no different from the risk of making the underlying loan. CDSs allow risks to be spread more widely instead of being concentrated at vulnerable points, but they do not add to the total amount of risk.

The Lost Cause: The Failure of the Financial Crisis Inquiry Commission

Recently, the federal government, industry associations, and research and policy organizations have been analyzing strengths and weaknesses of the previous U.S. housing finance system, the housing-related causes of the financial crisis, the failure of Fannie Mae and Freddie Mac, and the current market structure so as to recommend ways the housing finance system might be changed in the future. This article presents five points of view on the future structure of housing finance from leading experts. Two of the co-author teams recommend a private model, and three recommend a public–private model. Two of those recommending a public– private model recommend private mortgage insurers with a government backstop to guarantee mortgage-backed securities but not the insurers; the third envisions private mortgage insurers backed up by contracts similar to credit default swaps for mortgage credit risk, managed by a government-owned clearing house. Four would essentially eliminate the GSEs as we know them today, while one would retain a lot of the GSEs’ infrastructure for the securitization process. All five, explicitly or by implication, would place low-income home ownership programs on the government budget in the FHA or another government entity; one of the five would fund some of those programs through a market access fund.

The GAAP Gap: Corporate Disclosure in the Internet Age

, I summarize my dissent and the logic on whichit rested, offer a brief description of the deficienciesof the five-hundred-page majority report, andexplain why I could not join in the dissent of thethree other Republicans. Since the commission’s mandate was to explainwhat caused the financial crisis, my dissent focusesalmost entirely on that question. George Santayanais often quoted for the aphorism that “those who cannot remember the past are condemned torepeat it.” Attempting to identify the causes of the