The Role of FannieMae and FreddieMac in the Financial Crisis

The new conservative line* is that the financial meltdown is basically due to greed on the part of FannieMae and FreddieMac selling bad mortgages-- and that this is the Democrats fault because they supported these companies, who have made large contributions to Democrats. The more racist version of this argument is that it was anti-discrimination laws pushed by the Democrats that caused this crisis because it forced companies to sell mortgages to unqualified minorities, who were likely to default.

OK-- I think it is clear that the Democrats are somewhat to blame for looking the other way (getting paid off) while FannieMae and FreddieMac made questionable loans. But to say that it was only the Democrats who ignored the problem is ridiculous, as clearly FannieMae and FreddieMac gave contributions to both parties and McCain certainly had his own ties to FannieMae. Further, the Republicans have been in power for the last eight years-- and they certainly could have done more regulation of FannieMae and FreddieMac if they wished.

Of course everyone knows that Republicans are the party of deregulation-- so this is no surprise.

But while the bad mortgages are part of the story-- the reason this became an overwhelming financial crisis is because 1) all the investment banks repackaged FannieMae and FreddieMac loans as investment funds that lots of other banks bought, and 2) all the investment banks massively over-leveraged themselves centered around these bad assets. That means they were borrowing and lending FAR more than they actually had in capital-- and part of the capital was these questionable mortgages. Many of these financial institutions were leveraged by 30:1 to 100:1. Then when some of the bad mortgages actually went bad-- people started foreclosing, the house-of-over-leveraged cards started collapsing.

Basically, all these financial institutions were making incredibly risky transactions when they should have known better.

I suppose we could say it is all because of greed, but the bankers really should have known better about the risks. Whether this was all simply greed, or part of some larger evil plan to wreck the economy is hard to know. The problem for all of us is that these investment bankers get to go to Washington and ask for taxpayer money to cover their butts, because they are so centrally located in the money flow of the country.

But to sum up, FannieMae and FreddieMac certainly contributed to this mess, but no one forced the investment banks to repackage all these questionable loans and to massively over-leverage their transactions. In terms of politics, it is a bipartisan problem to be sure, but the deregulatory wing of the Republican party deserves blame for much of this mess-- and they were the ones who ran the government for the last eight years. If the Republicans saw the warnings signs, they did nothing about them.

*McCain brought it up in the debate last night and it has been echoing around the right-wing blogosphere for a couple of weeks. My right-wing office neighbor posted some articles on his door to this effect. More here.

And a nice article article refuting the right-wing nonsense here.