Comments on: "Seven habits finance regulators must acquire" http://www.nakedcapitalism.com/2008/05/seven-habits-finance-regulators-must.html Sun, 22 Nov 2009 15:18:28 -0500 http://wordpress.org/?v=2.8.4 hourly 1 By: Anonymous http://www.nakedcapitalism.com/2008/05/seven-habits-finance-regulators-must.html#comment-7685 Anonymous Wed, 07 May 2008 17:07:00 +0000 http://www.nakedcapitalism.com/2008/05/seven-habits-finance-regulators-must-acquire/#comment-7685 In actual fact, the originate to distribute model worked well as long as we allowed Fannie and Freddie their duopoly. Fannie and Freddie ran a great deal of mortgage experience through their computers and develped a set of rules (15-20% down, debt service less than a reasonable percentage of verified income) that truly worked. While these principles were the rule, one could buy MBS without fear or doing credit analysis on individual securities.<br/><br/>Then the investment banks lobbied for a piece of the action, claiming that the GSEs had an unfair advantage and that purely private institutions were somehow purer than anything connected with government. I seem to recall Alan Greenspan supported the private institutions on this one rather than the GSEs. In any event, once the private institutions got their foot in the door and started issuing private RMBS, a race to the bottom in MBS credit quality ensued. We'll never know, but I don't think this would have happened if we had simply let well enough alone. In actual fact, the originate to distribute model worked well as long as we allowed Fannie and Freddie their duopoly. Fannie and Freddie ran a great deal of mortgage experience through their computers and develped a set of rules (15-20% down, debt service less than a reasonable percentage of verified income) that truly worked. While these principles were the rule, one could buy MBS without fear or doing credit analysis on individual securities.

Then the investment banks lobbied for a piece of the action, claiming that the GSEs had an unfair advantage and that purely private institutions were somehow purer than anything connected with government. I seem to recall Alan Greenspan supported the private institutions on this one rather than the GSEs. In any event, once the private institutions got their foot in the door and started issuing private RMBS, a race to the bottom in MBS credit quality ensued. We’ll never know, but I don’t think this would have happened if we had simply let well enough alone.

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