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The report of the Democratic staff of the House Committee on Oversight and Government Reform–although it attempts to call my conduct into question as a member of the Financial Crisis Inquiry Commission–actually indicts the Commission. The facts are these. From the outset of its “investigation” the Commission’s chair, Phil Angelides, was intent on reporting that the financial crisis was caused by greed, misconduct and lack of regulation of the private sector, exculpating government housing policy from any significant responsibility. Evidence of this can be seen in the fact that in December 2009–before any investigation had been done–Angelides handed the commission members a list of hearings that the Commission would hold over the succeeding 8 months. Those hearings focused on the private sector’s role in the financial crisis, and paid scant attention to the government’s role. This was fully in accord with the interests of the House and Senate Democrats, who were intent on establishing this narrative as a basis for enacting the Dodd-Frank Act, which sought to impose substantial new regulation on the U.S. financial system.
However, in March 2010, Edward Pinto, a former chief credit officer of Fannie Mae and now a resident fellow at AEI, provided the Commission with a 70 page memorandum containing data that challenged this position. His data, fully sourced, showed that in 2008, before the financial crisis, there were 27 million subprime and Alt-A mortgages in the financial system–half of all mortgages outstanding–of which two-thirds were on the books of Fannie Mae, Freddie Mac, FHA and other entities that were controlled by the government. Since there is no question that the mortgage meltdown triggered the financial crisis, the Pinto data indicated that the government itself–by imposing affordable housing requirements on Fannie and Freddie, and the Community Reinvestment Act on insured banks and S&Ls–had created the demand for those subprime and other risky loans. Pinto also showed that Fannie and Freddie were the largest buyers of private mortgage backed securities from Wall Street and subprime mortgages from Countrywide.
Later, Pinto furnished another memo showing that HUD in both the Clinton and George W. Bush administrations had been pressing for a decline in mortgage underwriting standards in order to increase the home ownership in the U.S.
After the Commission received Pinto’s data , it began a concerted effort to suppress it. He was interviewed by the Commission staff four times, but no report on the interviews was ever given to the commissioners. For many other witnesses and interviewees, a transcript or a memo was available, but not for Pinto. All the commissioners had a chance to have private or public meetings with academics and government officials, seeking to get their views, but there were no meetings set up for the commissioners with Pinto. I asked on several occasions that Pinto (and many other scholars with views different from those of the chairman and his staff) be given an opportunity to testify in one of the open hearings. No response and no testimony. The Commission asserted that Pinto’s data was “flawed,” but no member of the Commission, other than I, ever had an opportunity to hear from Pinto or challenge him on his data. In any fair and objective investigation, that would have been the minimum, but it was never done. In other words, the commissioners–the ones who were purportedly to make the decisions about the causes of the financial crisis–were kept from a full understanding of Pinto’s views or the quality of his data.
In August 2010, I received a memo from the staff, circulated to all the Commissioners, challenging Pinto’s data. It was based on information the Commission had bought from the Federal Reserve, apparently for the purpose of challenging Pinto’s data. The memo argued that some of the 27 million subprime loans that Pinto cited were worse than others. The challenge was irrelevant because this had never been denied, and in fact my dissent contains a table (Table 3) that shows the differing delinquency rates on different kinds of low quality mortgages. The fact is, as my dissent notes, that the delinquency rate on prime mortgages acquired by Fannie and Freddie was about 2.9 percent, but the delinquency rates on the subprime and other risky loans that the GSEs had acquired was over 13 percent for Freddie and 17 percent for Fannie. In other words, whatever standards Pinto had used to identify subprime loans, he had identified a real difference between these loans and prime loans.
When I received this memo, my first thought was that it should have been sent to Pinto before being circulated to the Commissioners. The other commissioners had no idea what Pinto’s work involved, and now they were being presented with a memo that criticized his work without their ever having had an opportunity to understand why Pinto drew the conclusions he did. The memo did not say it was confidential, so I did what any fair person would do in the circumstances: I sent it to Pinto for his comments. This is presented in the committee staff report as “leaking” the memo. But leaking has the connotation of a surreptitious or sneaky action, which is far from what I did. I asked for Pinto’s comments, and when I got them I circulated the memo to the other commissioners. This obviously was not a “leak,” although it was characterized by the Commission’s General Counsel as a violation of the Commission’s confidentiality requirements. I do not question this; it’s a matter of interpretation, but it seems peculiar to me that the Commission would circulate a memorandum to the commissioners critical of Pinto’s data without giving him an opportunity to respond. If that’s what the chairman and the staff expected–that they could tell the commissioners that something was wrong with Pinto’s data without ever allowing them to actually interview Pinto, or allowing him to respond–it would be yet another example of the Commission’s thoroughgoing effort to suppress Pinto’s findings.
Another aspect of this suppression was the decision by the Commission majority to limit dissents in the commercially-distributed Commission report to nine pages. My dissent, which can be downloaded from the AEI website with the link above, was 100 pages and was thus excluded almost in its entirety from the copy of the report that was made available for purchase in bookstores. My full dissent was included in the official version of the report, printed by the Government Printing Office, but this is not what most people got to see when they went to bookstores. Since my dissent contained much of Pinto’s data, I believe that the majority-imposed limitation on the size of dissents was another effort by the majority to deny the facts to the American people. This suppression of contrary views by the Commission was a disgrace, and the fact that it was done with a report paid for by government funds is a blemish on the FCIC that can never be erased. I hope this never happens again with a government-sponsored report.
The Democratic staff report raises further questions about my communications with the other Republicans on the Commission. These occurred in November 2010, as the Commission majority’s position was coming into focus, and after the Republicans had taken control of the House. With a handful of exceptions, every Republican in the House and Senate had voted against the Dodd-Frank Act. After the election, many who would be in positions of authority indicated that they wanted to repeal the legislation. I have long been an ardent opponent of the Dodd-Frank Act, and have written extensively on the subject. I believe the act is one of the most destructive pieces of legislation ever adopted by Congress. I was hopeful at the time that my dissent–which showed that government policy and not lack of regulation caused the financial crisis–provided a basis for repeal. After all, if government housing policy caused the financial crisis, what basis could there be for imposing costly and destructive regulation on the whole financial system?
My Republican colleagues did not seem to understand the connection between the Commission’s report and the case for repeal. Although my dissent made a strong case for repeal, I thought, I was concerned that if we wrote separate and different dissents the divisions between us would weaken the position of the House and Senate Republicans on Dodd-Frank repeal. My hope was that we could come to a common view, but for reasons that are still not clear to me we could not. I believe my concerns in this respect were justified; the idea that government housing policy was the cause of the financial crisis received very little attention after the FCIC report was published, primarily I think because the Republicans on the panel were divided.
The committee staff report tried to suggest that my communications with my Republican colleagues were done for the purpose of getting them to dissent. Obviously, that was not the case; they had already decided for their own reasons that they wanted to dissent. What we all saw in the drafts of the Commission’s report at that point was so shallow and lacking in value that a dissent was warranted simply to protect one’s reputation. However, my communications were based on my strong conviction, buttressed by the facts about the causes of the financial crisis outlined in my dissent, that the Dodd-Frank Act was an illegitimate response to the financial crisis and would ultimately cause serious problems for the U.S. financial system. I was hoping that my dissent would provide support for Dodd-Frank repeal. The inability to bring along my Republican colleagues undoubtedly weakened this effort.
Finally, Reckless Endangerment, a recently published book by Gretchen Morgenson of the New York Times and Josh Rosner, a financial analyst, goes a considerable distance in support the position I took in my dissent. The book identifies Fannie Mae as a principal cause of the financial crisis (the Commission called Fannie’s role “marginal”). If this book gets the attention it deserves–and that seems to be happening–the false narrative of the FCIC majority will begin to unravel.
Peter Wallison is the Arthur F. Burns Fellow in Financial Policy Studies at AEI.
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