I'm sure you would have an interesting discussion with Peter Wallison. Weren't JPMorgan Chase, Citibank and Bank of America depository institutions?
Now I wouldn't say Fannie & Freddie did it all by themselves, but they led the way with subprimes, and the Fed couldn't appreciate that buy keeping interest rates so low that they were also fueling a huge real estate bubble in housing and commercial real estate. The real estate and construction industries have yet to recover, and everybody who supported or supplied them are barely surviving, if that much.
“Weren’t JPMorgan Chase, Citibank and Bank of America depository institutions?”
They are. In comparison the non-depository shadow banking firms were investment banks like Goldman Sachs, Merrill Lynch, Lehman, some pure mortgage lenders like Argent and Ameriquest, and hedge funds. The Implode-O-Meter has a list of former mortgage lenders who didn’t survive the bubble, you can get an idea of the ratio of shadow banks to real ones:
The shadow bankers rolled their own CDOs, CMOs, CDOs Squared, and sold that stuff all over the world. The paper they cranked out, including derivatives, was in the trillions. I can assure you that every gov’t mandated CRA loan ever written didn’t come close to that volume of paper.
“the GSEs had bought over a trillion”
It’s not peculiar that Fannie and Freddie had such an enormous amount of mortgage paper- for many decades they had a monopoly on the business.
Fannie was formed by the government in the 1930s to create the secondary mortgage market. No private firm had developed the business. Fannie had it all to themselves until they were sold off to the private sector around 1968. A couple of years later the government created Freddie in order to give Fannie a competitor and it, too, was sold to the private sector.
“Now I wouldn’t say Fannie & Freddie did it all by themselves, but they led the way with subprimes,”
The GSEs didn’t exactly lead subprime. In fact they were late to the party. In the late 1990s one Wall Street firm had been eyeing the hard-money household finance market- the province of Aames Home Loans and Household Finance. They were attracted by the very high returns that these loans produced, but the size of these loans was very small, maybe only a few hundred dollars.
They liked the high returns but needed loans that would be much larger. Eventually they realized that there was a whole universe of people with less than stellar credit who were being rejected for home loans. But maybe they would want a home bad enough to pay a high interest rate if the money was offered to them.... and that would be a market big enough to suit them.
This background is found in the book ‘Chain of Blame’, a good history of the development of the subprime industry. Oddly enough the Wall Street firm that pioneered it didn’t follow up on subprime lending, but everyone else did.
As the bubble progressed into the 2000’s the private market rivals to Fannie & Freddie began eating their lunch, growing market share at a much faster rate than the GSEs. One reason is that the private market firms offered the really exotic loans, the OptionARMs, the NINJAs (no income, no job, no assets), the 120% loans. All that F&F could deal in was conforming paper, even if the loan was subprime.
The big problem with F&F, IIRC, and what attracted the attention of the Bush administration, was the leverage that they were involved in. They had far too many loans versus their capital. Add in their sheer size and there was the potential for disaster. But the GSEs were private, stockholder owned firms, and there was no legal obligation for the taxpayer to save them.
Of course it turned out that every other lender was doing the same thing, so the entire banking and shadow banking systems were disasters waiting to happen.
“The real estate and construction industries have yet to recover, and everybody who supported or supplied them are barely surviving, if that much.”
It will take a decade or more to undo the damage that the bubble generated. Japan had its property bubble in what, 1990, and its still limping along as a result of that bubble popping. The ‘equity’ vanishes, but the debt people owe doesn’t.