Fannie, Freddie are frauds

Here, from The Orange county Register, is a quick read on why the two GSEs were THE major cause of the banking crisis. Not only directly but also as enablers. Thank you US Congress!

At the root of the complex financial crisis America continues to endure are two giant GSEs, Fannie Mae and Freddie Mac. In 1993, both Fannie and Freddie – under pressure from Democrats, such as Rep. Barney Frank, D-Mass., and Sen. Chris Dodd, D-Conn., started buying risky mortgages so that people could have “affordable housing” – meaning affordable to them, not the taxpayers, of course.

During the period from 2005-07, under the aegis of Frank, in particular, these GSEs were buying all the risky business they could lay their paws on.

By buying all this dicey paper, Freddie and Fannie created what economists call “moral hazard”: they made it rational for mortgage buyers and brokers to engage in economically bad behavior, namely, getting people into inappropriate loans. The banks, which normally wouldn’t buy much of such paper, bought a lot, knowing that the GSEs, in turn, would buy that trash.

Between the 10 million risky loans, and the other 5.2 million such loans held by other government entities, the federal government owned almost 60 percent of subprime and Alt-A loans in the country.

Since 1993, the two GSEs presented these loans as prime loans. That is fraud – but the executives got big bonuses – upward of $6 million each this year.

Under the Bush administration, the cap for taxpayer liability was set at $200 billion – outrageous enough. In February, this administration doubled it to $400 billion. Now, it is saying the sky is the limit.

And people think it would be good to edit the FED. Forget that. Edit Fannie and Freddie along with the US Congress!

Originally, GSE meant Government Sponsored Enterprise and NOT Government Insured Enterprise. There was no explicit government guarantee. In fact, they could have been just allowed to crumble or go into bankruptcy because they are privately owned. And Congress was warned many many times.

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