Last refuge of Housing Cause Denial scoundrels, refuted

By Mark A. Calabria--to whom we've previously referred in regard to his review of Peter Wallison's Hidden In Plain Sight. From the Cato At Liberty blog, he attacks the argument that the GSEs couldn't have been the problem for the financial crisis that followed the popping of the housing bubble, because it was the banks that took the biggest hits;

Yes, the GSEs’ losses on mortgages were less than that for depositories [banks], but the differences in capital were far greater. The GSEs had far less shareholder money to fall back on if mortgages started to sour. Again bear in mind that total losses were similar between the GSEs and the depositories. In the 4th quarter of 2007, Fannie and Freddie held about $70 billion in shareholder equity, behind $1.7 trillion in assets and around $5 trillion in debt and guaranteed mortgage-backed securities. By contrast, depositories held $1.3 trillion in shareholder equity, or about 19 times the equity of the GSEs. Mortgage losses were not enough to sink the entire banking system, even if some banks did sink, whereas the GSEs were toast because of their low levels of capital.

Why does that matter? Because it takes insolvencies to drive a financial crisis. The banking system, as a whole, was not driven to insolvency, but the GSEs where. Losses (and loss rates) only make sense relative to the capital ready to absorb those losses. And of course the failure of the GSEs was magnified through the system in a uniquely harmful manner.

That's our bold in the above, because it is the reason the GSEs were so dangerous; the very high leverage allowed thanks to congress. Even though the FMs had taken the better quality--thanks to their borrowing at lower interest rates due to their perceived government backing--loans in the subprime universe, leaving the banks to lend to lower quality borrowers, the higher leverage meant the FMs were the more dangerous institutions.

Without which government action interfering in the home lending industry, there never would have been a financial crisis.