TechPulse 360

James Anderson, President, SVB Analytics

So who’s really to blame for the subprime mess?

Well, for Silicon Valley Bank Analytics President, speaking at the AAMA Connect conference on Friday in Santa Clara, Calif., there’s only one culprit and it’s… the U.S. Government!

“The largest player in the subprime market has been the U.S. Government. It’s interesting to read the hysteria about the $700 billion potential investment in mortgage type assets. Well the Government already has $5 trillion in mortgage type assets. So it’s only a 14% increase. And in Washington this is just a rounding error!”, said James Anderson.

But the worse about this, is that just a few years ago subprimes were not that big. And according to Anderson, the momentum in subprime deals came as a result of recent bad decisions made by the Federal Reserve Bank and at the Government sponsored mortgage lenders Freddie Mac and Fannie Mae.

“In the year 2000, it [subprime loans] was a $138 billion business and it was declining! And it was declining because default rates were going up at a rapid pace related to the recession in that year [...] After the Fed came off with 1% loans, default rates once again started to climb much more quickly than even at the 2000 recession. Yet the market kept expanding”.

Fannie Mae and Freddie Mac really drove the market for subprime mortgages

And why was the market expanding?

“Because Fannie Mae and Freddie Mac were buying any piece of paper that anyone could originate. So there’s huge demand there. The Street didn’t care, they weren’t holding the assets, they just kept feeding the beast if you will”.

This crazy spiral ended when the U.S. Government finally took control last September of Fannie Mae and Freddie Mac and their $5 trillion worth of mortgages, mostly subprimes. But it was too late!

“The popular wisdom seems to be clean up Wall Street, seems to be a lack of regulation. The reality of the situation we’re in today is because of a massive government intervention in this market where credit risks were not properly evaluated and not properly priced. Because if you have always got a buyer, and by the way it’s a government guaranty buyer, who cares about the credit risks?”.

Here’s an excerpt of Anderson’s comments at AAMA about the subprime crisis:

This entry was posted on Saturday, October 4th, 2008 at 6:48 pm and is filed under news. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.