The FCIC Investigation, Wallison on the GSEs and the Conservative Echo Chamber

There’s been a lot of discussion of this report released by the House’s Committee on Oversight and Government Reform, titled An Examination of Attacks Against the Financial Crisis Inquiry Commission.  The report discusses questionable conduct by the Republicans who served on the FCIC, especially in regards to leaking documents.  A reader at Barry Ritholtz’s site said: “Based on this report, I would think that a broader investigation is certainly warranted. There were certainly major ethics violations here, and potentially some criminal ones as well.”

I want to comment on two of the things brought up, both related to a member of the FCIC named Peter Wallison, who is also a fellow dealing with financial regulation for the American Enterprise Institute.  He, along with another person named Ed Pinto, have been at the center of the campaign to blame the GSEs for the crisis.

First off, let’s remember what this document is. The FCIC report was designed to be our age’s Pecora Commission, a collection and investigation of original documents and primary sources along with summary document that scholars, historians, economists and reporters will use for generations. It is designed for our government’s investigative powers to get to the bottom of what went wrong in the bubble and the subsequent crash. It was important that honest conservatives and libertarians were on this to provide balance and insight. The panel required serious scholars and investigators, those whose ultimate agenda and requirements were to the truth and the public.

What did we get with AEI’s Peter Wallison? From the documents:

…on November 3, 2010, the day after the mid-term congressional elections in
which Republicans took control of the House, Republican Commissioner Peter Wallison emailed Republican Commissioner Douglas Holtz-Eakin: “It’s very important, I think, that what we say in our separate statements not undermine the ability of the new House GOP to modify or repeal Dodd-Frank.”

The next day, he sent a similar e-mail to Vice Chairman Thomas, attaching an article
entitled “GOP Pledges Major Changes to Dodd-Frank, Fannie and Freddie, CFPB.” He wrote:

“Garrett [Rep. Scott Garrett] has also suggested in the past a complete repeal of Dodd-Frank. This effort should not be undermined. That law will suppress economic growth because it was based on the idea that more regulation was necessary. Boehner also said yesterday that changing this law was a priority.”

Think about this. Wallison is putting pressure on his fellow Republican members to write their FCIC report to serve the political ends of the Republican party and its backers in their legislative quests.  Not goals of the public, which we as taxpayers were paying him at the level of a level IV of the Executive Schedule to do, a pretty nice pro-rated six-figure salary, and not the goals of disinterested research.  This is the person who leads the financial reform team at the American Enterprise Institute.

It seems silly to say now, but in the aftermath of the financial crisis I had expected more from movement conservatives on dealing with this nightmare.  It’s been very disappointing.

Echo Chamber

What interests me the most are how the other members of the GOP reacted to Wallison and Pinto’s thesis that the GSEs caused the financial crisis.  I wrote a post that pointed out that the numbers don’t work, based on David Min’s (and many, many others) research into the matter.  They do a three-card monte thing where they say “subprime and other high-risk mortgages,” bundling the well known category of subprime alongside their new definition of “high-risk”, and then play on the confusion.  Push-comes-to-shove I’m a numbers guy, and I can tell when someone is creating a definition not to make something clearer but instead to make it harder to understand and compare while juking the aggregate statistics.  For pointing that out I got two responses referring to me as deceptive and ignorant from that crew.

This “and other high risk mortgages” trick forms the basis of the entire right-wing movement analysis of the housing crisis.  Other studies come out that argue the same thing, making the literature look deeper than it is.  Mark Calabria at Cato has a study this year, Fannie, Freddie, and the Subprime Mortgage Market, arguing that the GSEs “direct purchases of loans that can only be characterized as subprime. Under reasonable definitions of subprime, almost 30 percent of Fannie and Freddie….”

Reasonable definitions of subprime, can only be characterized as subprime, etc.  The same logic – I want to refer to everything as subprime even though it isn’t.  David Min put those Wallison/Pinto definitions under the microscope yet again here in an update to his previous report:

But the echo chamber marches on:  The American Spectator runs stories on this, communication budgets go towards getting these arguments into editorials, TV appearances, conferences, the radio shows, etc.

But that’s the public sphere.  What do conservatives think in private?  Specifically, what do the other conservative Republicans on the FCIC think of this argument when they are talking about it? Luckily we now have some emails on the topic:

On March 31, 2010, Vice Chairman Thomas’ special assistant at the Commission sent an e-mail to Mr. Brill, who works at Vice Chairman Thomas’ law firm. In the e-mail, the Vice Chairman’s special assistant explained problems Commissioners and staff were having with Commissioner Wallison. He wrote:

Bill spoke to Phil [Angelides] and Wendy [Edelberg, Executive Director] and gave them his thoughts. Doug [Holtz-Eakin, Commissioner] was around the office today, so Bill looped him in and I explained to Doug what was going on. Doug said that he has some experience dealing with an intractable Peter before. Everyone agrees that there is simply no way to make Peter happy re: these staff reports. However, hopefully, we can keep him engaged enough so that when the time comes, we can sit down and have a reasonable conversation about the most effective way to describe the mortgage market. Wendy is going to reach out to Ed Pinto, and, hopefully, if we can get Ed to sign on, then Peter will really be sitting alone on this one.

My guess is that the best we are going to do is to get Peter to agree that he really can’t say anything until we get all of the data in front of us and that the data is coming. At that point, this debate over what kinds of mortgages are out there will be a little more public, since the FHFA is coming out with a report that discusses the loan performance of their loans in the next two weeks (apparently, they are trying to beat us to the punch). And, this conversation really doesn’t need to happen until September, so we can all cool off from these hysterics and worry about other things for a little while. Then, Peter is going to have to sit in a room and tell everyone why his way is the best way to describe the universe.

In response, Mr. Brill wrote back:

Re: peter, it seems that if you get pinto on your side, peter can’t complain. But is peter thinking idependently [sic] or is he just a parrot for pinto?

The Vice Chairman’s special assistant responded:

I can’t tell re: who is the leader and who is the follower. If Peter is really a parrot for Pinto, he’s putting a lot of faith in the guy. Pinto called tonight, and Wendy scheduled call with him for tomorrow morning. I am going to sit in on the call (quietly). I want to get a sense of whether this is a strategy that we really can use, or whether Pinto is just like Peter.

Two days later, Mr. Brill followed up with another e-mail to the Vice Chairman’s special assistant relaying a conversation in which Vice Chairman Thomas expressed concern that Mr. Pinto might be receiving outside funds for his efforts to influence the Commission. Mr. Brill wrote:

Maybe this email is reaching you too late but I think wmt [William M. Thomas] is going to push to find out if pinto is being paid by anyone.

Wallison’s argument is the argument for the conservative right on the crisis, echoing through their networks.  Yet behind closed door the Republicans on the FCIC are in damage control mode.  They can’t find a way to deal with Wallison and this argument and they are actively working to play him and his research partner against each other.  They are even so confused as how someone could buy the entirety of this argument that they are worried that it was planted by a paid interest and that their fellow member is a “parrot” for those interests.  The Republican Vice-Chair might even have done some quiet snooping to get a sense of what is going on.

The Republicans in the main dissent throw the argument under the bus in a subtle way, but never mention the Pinto/Wallison thesis by name (the majority report does).  That way the echo chamber can keep on spinning with this argument.  And spin it does.  That’s a pretty serious disinformation operation.

More on this here.