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Days of Slaughter: Inside the Fall of Freddie Mac and Why It Could Happen Again
In September 2008, beset by mounting losses on high-risk mortgages and mortgage securities, the Federal Home Loan Mortgage Corporation teetered on the brink of insolvency. Fearing that confidence in the housing market would collapse completely if Freddie Mac and its competitor Fannie Mae failed, the US government made the difficult decision to place the two firms into conservatorship, taking control away from shareholders. Although the taxpayer commitment of hundreds of billions was meant to stabilize the housing finance system, Freddie’s fall at the start of the financial crisis set off shockwaves around the world.
In Days of Slaughter, Susan Wharton Gates, a former 19-year Freddie Mac employee and vice president of public policy, provides a vivid eyewitness account of the competing economic and political forces that led to massive losses for shareholders, investors, homeowners—and taxpayers. With a keen eye to the policy landscape, Gates relates the fateful decisions that led to Freddie Mac’s downfall and desperate rescue. She also examines today’s worrisome headlines about potential future bailouts, the uneven housing recovery, and stymied congressional reform efforts. Throughout the book, Gates argues convincingly that policymakers will be unable to safely reform the massive housing finance system that currently rests squarely on taxpayer shoulders without addressing deeper issues of ideology, moral hazard, and interest group politics.
The first book to tell the story of Freddie Mac from an insider perspective—while casting a prophetic eye to the future—this first-hand account of housing policies, complex financial transactions, and the crazy quilt of federal and state actors involved in the Great Recession is a must-read. A cautionary tale of failed policies and corporate mismanagement that compellingly addresses previously unexplored issues of political ideology, organizational dynamics, and ethics, Days of Slaughter will appeal to readers everywhere who want a fuller explanation of what went awry in the US housing market.
304 pages, Kindle Edition
Published April 2, 2017
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Displaying 1 - 7 of 7 reviews
April 16, 2017
The most recent crop of books about the 2008 financial crisis have focused on the now infamous government-sponsored mortgages behemoths, Fannie Mae and Freddie Mac. Publishers have recently printed feisty and defensive memoirs about life inside these giants as they stumbled towards their collapse and bail-out in September 2008. Susan Wharton Gates, an almost 20 year veteran of Freddie Mac, gives the latest addition to this literature, and although her book doesn't provide any major revelations, it's full of little insights into the strange world of a pseudo-public, pseudo-private corporation.
Gates moved from the federal Office of Management and Budget to Freddie Mac in 1990, and was immediately shocked at the lavish party celebrating the introduction of their "Gold Participation Certificate" investment product (it shortened the time it took investors to get mortgage payments to 45 days from 75 - the market didn't much care). At the party, everything was decked in the color gold and champagne sparkled amidst overpriced hors d'oeuvres. After just a few months at Freddie she received a $2,5000 "performance bonus" even though she had mainly been on maternity leave. Gates began to realize there was a stark division between what people in the company called "the Wall Street types" or "greed-heads," who focused on such trappings, and the "housers," or people who believed in Freddie's public mission to provide cheap housing.
Yet, surprisingly for such a memoir, Gates spreads blame for the company's collapse among both groups. The Wall Streeters were willing to buy bad subprime or "Alt-A" (low documentation) loans to increase profits, but the housers inside and outside the agency (especially Congressman Barney Frank) kept upping the company's mandates to buy such loans, even at the cost of the company's solvency. Presidents Clinton and Bush raised the company's "affordable housing goals," and required it to do everything from providing 28% of all its loans to very low income borrowers (or low income borrowers in low income areas), to providing housing on Indian reservations. Richard Syron, the CEO from 2004 to 2008, came from the Boston Federal Reserve Bank, where he had helped publish a famous report on discrimination in housing. At Freddie, he promised to "beat the HMDA," or Home Mortgage Disclosure Act, by buying even more minority loans than the rest of the market. This led him and the company further down the path of Alt-A and subprime loans. In the end, Gates thinks that the "muddled" mission of Freddie Mac doomed it to failure. There was no single rule or principle to appeal to in order to say whether the company in some situation should act publicly or privately, so in practice it did both badly.
Most intriguingly, Gates provides a view of the strange lobbying house at Freddie, where she worked for many years. The head lobbyist in the early 2000s, Mitchell Delk, would sit in on top executive meetings and argue about the political benefits or costs of any decision. Both Delk and the company were eventually fined for making direct corporate contributions to Congress members. (The company soon formed a Political Action Company and "encouraged" employees to donate, including by matching their political contributions to their favorite charity). Any congressional testimony by the Freddie CEO would involve countless drafts and "murder board" preparations to perfect every jot and tittle of the public presentation. Every attempt by Congress to remove a minor Freddie and Fannie benefit (such as the exemption from registering their stocks and bonds with the SEC), would inspire a furious lobbying response. In the end, such lobbying prevented a Freddie and Fannie reform bill from becoming law until June 2008, and that was watered down and far too late.
Although there is a lot of familiar ground in this story, Gates's memoir is a welcome and thoughtful addition to the literature on the housing crisis. At times she too seems to waver between defending the company and excoriating it, but she always explains her reasoning clearly. I'm very glad she decided to add it to the every growing pile.
Gates moved from the federal Office of Management and Budget to Freddie Mac in 1990, and was immediately shocked at the lavish party celebrating the introduction of their "Gold Participation Certificate" investment product (it shortened the time it took investors to get mortgage payments to 45 days from 75 - the market didn't much care). At the party, everything was decked in the color gold and champagne sparkled amidst overpriced hors d'oeuvres. After just a few months at Freddie she received a $2,5000 "performance bonus" even though she had mainly been on maternity leave. Gates began to realize there was a stark division between what people in the company called "the Wall Street types" or "greed-heads," who focused on such trappings, and the "housers," or people who believed in Freddie's public mission to provide cheap housing.
Yet, surprisingly for such a memoir, Gates spreads blame for the company's collapse among both groups. The Wall Streeters were willing to buy bad subprime or "Alt-A" (low documentation) loans to increase profits, but the housers inside and outside the agency (especially Congressman Barney Frank) kept upping the company's mandates to buy such loans, even at the cost of the company's solvency. Presidents Clinton and Bush raised the company's "affordable housing goals," and required it to do everything from providing 28% of all its loans to very low income borrowers (or low income borrowers in low income areas), to providing housing on Indian reservations. Richard Syron, the CEO from 2004 to 2008, came from the Boston Federal Reserve Bank, where he had helped publish a famous report on discrimination in housing. At Freddie, he promised to "beat the HMDA," or Home Mortgage Disclosure Act, by buying even more minority loans than the rest of the market. This led him and the company further down the path of Alt-A and subprime loans. In the end, Gates thinks that the "muddled" mission of Freddie Mac doomed it to failure. There was no single rule or principle to appeal to in order to say whether the company in some situation should act publicly or privately, so in practice it did both badly.
Most intriguingly, Gates provides a view of the strange lobbying house at Freddie, where she worked for many years. The head lobbyist in the early 2000s, Mitchell Delk, would sit in on top executive meetings and argue about the political benefits or costs of any decision. Both Delk and the company were eventually fined for making direct corporate contributions to Congress members. (The company soon formed a Political Action Company and "encouraged" employees to donate, including by matching their political contributions to their favorite charity). Any congressional testimony by the Freddie CEO would involve countless drafts and "murder board" preparations to perfect every jot and tittle of the public presentation. Every attempt by Congress to remove a minor Freddie and Fannie benefit (such as the exemption from registering their stocks and bonds with the SEC), would inspire a furious lobbying response. In the end, such lobbying prevented a Freddie and Fannie reform bill from becoming law until June 2008, and that was watered down and far too late.
Although there is a lot of familiar ground in this story, Gates's memoir is a welcome and thoughtful addition to the literature on the housing crisis. At times she too seems to waver between defending the company and excoriating it, but she always explains her reasoning clearly. I'm very glad she decided to add it to the every growing pile.
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February 6, 2017Susan Wharton Gates, a veteran of almost two decades with Freddie Mac in addition to her academic career in public policy, offers an insider's perspective on the sub-prime mortgage crisis that nearly shattered the global economy. Gates' book is a dry defense of the roles played by Freddie Mac and Fannie Mae, two quasi-governmental entities who contributed to the crisis but - in Gates' telling - has been unfairly attacked by other bad actors in an effort to shift blame.
To say that the subprime mortgage crisis defies easy description is a masterful understatement. Metric tons of blame can be spread around, and indeed that is one of the reasons that so few institutions have paid any meaningful price despite bringing the global economy to its knees. Gates attempts to provide the reader a brief but comprehensive review of the crisis and the role of the different actors. She is less successful than other entries in the field, such as Michael Lewis's brilliant "The Big Short," primarily in terms of style (in a word, dull) rather than substance.
For the uninitiated, Fannie Mae and Freddie Mac are designed to grease the skids of the mortgage lending industry by buying certain mortgages from the originating banks and serving as the guarantor for the underlying mortgage. This puts more cash in the hands of the lending banks, allowing them to originate more mortgages. The idea is that both Fannie and Freddie would only buy and guarantee low-risk mortgages - effectively, if there is more than one mortgage default out of every 50 loans that are guaranteed, the system doesn't work. So, Fannie and Freddie only bought and guaranteed low-risk mortgages from borrowers that were terrific credit risks.
Like seemingly everyone else in the American mortgage system in the last decade, Fannie and Freddie started pursuing higher risk mortgages, increasing their exposure to the massive mortgage default bomb that had been worked into the system thanks to adjustable rate mortgages, NINJA mortgages (mortgages offered to borrowers with no income and no job), etc. Gates writes about the various reasons Fannie and Freddie used to abandon their established practices of carefully managing risk, and once again, there is a lot of blame to go around. Politicians waxed poetic about the need to promote the American dream of home ownership while joining the chorus of American banks and other power players who wanted the money train from subprime lending to continue.
The strongest part of Gates' book - and the most terrifying - is her explanation of the various ways that our leaders are gaming the system and appear to be setting us up for another similar crisis. The government is quietly stripping all the earnings out of Fannie and Freddie in an effort to balance the budget (and setting up a massive fight with litigious hedge funds) while also quietly easing the various restrictions in the system that are designed to prevent a future overheating of the market.
Ultimately, Gates' book reads more like a PhD dissertation, intended to be read by insiders than the general public. There are fits and starts of narrative and human interest aspects designed to make this book more accessible to the general reader, but overall it is a dry work that really takes a lot to get through even though Gates writes clearly and thoroughly.
I can't say it's the defining "must read" of the very good library of books that have been written about the subprime crisis, but it is a worthy entry into the club. I just wouldn't start here.
To say that the subprime mortgage crisis defies easy description is a masterful understatement. Metric tons of blame can be spread around, and indeed that is one of the reasons that so few institutions have paid any meaningful price despite bringing the global economy to its knees. Gates attempts to provide the reader a brief but comprehensive review of the crisis and the role of the different actors. She is less successful than other entries in the field, such as Michael Lewis's brilliant "The Big Short," primarily in terms of style (in a word, dull) rather than substance.
For the uninitiated, Fannie Mae and Freddie Mac are designed to grease the skids of the mortgage lending industry by buying certain mortgages from the originating banks and serving as the guarantor for the underlying mortgage. This puts more cash in the hands of the lending banks, allowing them to originate more mortgages. The idea is that both Fannie and Freddie would only buy and guarantee low-risk mortgages - effectively, if there is more than one mortgage default out of every 50 loans that are guaranteed, the system doesn't work. So, Fannie and Freddie only bought and guaranteed low-risk mortgages from borrowers that were terrific credit risks.
Like seemingly everyone else in the American mortgage system in the last decade, Fannie and Freddie started pursuing higher risk mortgages, increasing their exposure to the massive mortgage default bomb that had been worked into the system thanks to adjustable rate mortgages, NINJA mortgages (mortgages offered to borrowers with no income and no job), etc. Gates writes about the various reasons Fannie and Freddie used to abandon their established practices of carefully managing risk, and once again, there is a lot of blame to go around. Politicians waxed poetic about the need to promote the American dream of home ownership while joining the chorus of American banks and other power players who wanted the money train from subprime lending to continue.
The strongest part of Gates' book - and the most terrifying - is her explanation of the various ways that our leaders are gaming the system and appear to be setting us up for another similar crisis. The government is quietly stripping all the earnings out of Fannie and Freddie in an effort to balance the budget (and setting up a massive fight with litigious hedge funds) while also quietly easing the various restrictions in the system that are designed to prevent a future overheating of the market.
Ultimately, Gates' book reads more like a PhD dissertation, intended to be read by insiders than the general public. There are fits and starts of narrative and human interest aspects designed to make this book more accessible to the general reader, but overall it is a dry work that really takes a lot to get through even though Gates writes clearly and thoroughly.
I can't say it's the defining "must read" of the very good library of books that have been written about the subprime crisis, but it is a worthy entry into the club. I just wouldn't start here.
January 27, 2022
Insider look at why Freddie failed. Some of the narration could be improved (or just removed) but that is common with these types of books. But the substance is good. Uniquely among the books I've read on the financial crisis, she mentions Aristotle and frequently hits home the need for people to be ethical.
April 25, 2019
The author makes a complicated series of events relatively easy to understand. Well written, and well documented account. Her link to ethics (lack thereof) in the financial industry is most important.
July 29, 2017
3.5 stars. Gates' “Days of Slaughter” is an interesting and thought-provoking account of how the bursting bubble of the housing market played out at Freddie Mac (The Federal Home Loan Mortgage Corporation.) There is a thoughtful discussion of housing policy and how that has influenced consumer behavior. There are trenchant observations about the politics of housing, involving builders, bankers, mortgage originators, and elected officials.
Gates explores the history of how home ownership became so important socially and politically, and how that in turn led to government actions supporting home owership and specifically Freddie Mac. There were, and are a number of inherent conflicts in such a Government Sponsored Enterprise (GSE.) One is that simply by being, such an enterprise is assumed to have government backing. Being able to borrow money at essentially Treasury rates allowed the GSE to make lots of money for its shareholders, but when things went sideways, the costs went to the public. The GSE was given a dual mission to make a financially sound secondary market and to promote home ownership. There was frequent tension between these goals. As a GSE, Freddie Mac had mulitiple overseers, both formal and informal, and was subject to the vagaries of shifting political direction, depending on which party and legislators were ascendent. As business, Freddie Mac was driven to maximize its profit, yet it needed to insure that the mortgages it acquired were of high quality; these were not always compatible. And finally, but not insignificant, institutional imperatives, group-think, and greed all played their part.
The writing style is a bit different from a straight narrative. Each chapter addresses a different aspect, almost as if it were a policy analysis. While this results in some redundancy, it also makes for great clarity.
Gates explores the history of how home ownership became so important socially and politically, and how that in turn led to government actions supporting home owership and specifically Freddie Mac. There were, and are a number of inherent conflicts in such a Government Sponsored Enterprise (GSE.) One is that simply by being, such an enterprise is assumed to have government backing. Being able to borrow money at essentially Treasury rates allowed the GSE to make lots of money for its shareholders, but when things went sideways, the costs went to the public. The GSE was given a dual mission to make a financially sound secondary market and to promote home ownership. There was frequent tension between these goals. As a GSE, Freddie Mac had mulitiple overseers, both formal and informal, and was subject to the vagaries of shifting political direction, depending on which party and legislators were ascendent. As business, Freddie Mac was driven to maximize its profit, yet it needed to insure that the mortgages it acquired were of high quality; these were not always compatible. And finally, but not insignificant, institutional imperatives, group-think, and greed all played their part.
The writing style is a bit different from a straight narrative. Each chapter addresses a different aspect, almost as if it were a policy analysis. While this results in some redundancy, it also makes for great clarity.
September 18, 2023
A complete study of Freddie Mac-the multifamily mortgage gurus.
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February 23, 2018332.722 G2595 2017
Displaying 1 - 7 of 7 reviews