Whose to blame: Fannie and Freddie?

Was our economic crisis caused by the GSEs (Government Sponsored Enterprises)? Stuart Taylor, in the National Journal, thinks so. He writes that “Powerful Democratic (and some Republican) advocates of affordable housing”, including Senate Banking Chair Chris Dodd, Sen. Chuck Schumer, and House Finance Chair Barney Frank have been the GSEs' “most potent and ardent champions”. Taylor adds, “the agencies and their employees have orchestrated a gigantic lobbying effort [of] more than $174 million . . . made campaign contributions of more than $14.6 million . . . the largest going to Dodd and Barack Obama.”

Taylor reports that:

• Because Freddie and then Fannie had been ravaged by accounting scandals that led to the departure of Fannie CEO Franklin Raines [picture], a Clinton administration official who had collected $90 million from 1998 through 2004, Alan Greenspan warned government to restrain the GSEs.

• When Daniel Mudd succeeded Raines in 2004, according to the New York Times, "his company was under siege. Competitors were snatching lucrative parts of its business. Congress was demanding . . . more loans to low-income borrowers. Lenders were threatening to sell directly to Wall Street unless Fannie bought . . . their riskiest loans. So Mudd . . . steered Fannie into [the darkest] corners of the mortgage market.”

• In summer 2005, the Senate Banking Committee adopted a bill to impose tighter regulation on Fannie and Freddie, with all Republicans voting for, all Democrats voted against in committee and Democrats killing it on the floor.

• In 2005, Fannie and Freddie began buying subprime and "alt-A" mortgages with virtually no down payments taken out by people with low credit scores and low incomes relative to their monthly payments. To finance more and more affordable housing, the GSEs dramatically lowered their traditional underwriting standards.

• Between 2005 and 2007, Fannie and Freddie "sold out the taxpayers" by financing almost $1 trillion in highly risky mortgages. . .their special privileges as GSEs enabling them to lend at high rates and reap enormous profits for their stockholders and executives while borrowing at low rates based on the government's implicit promise to rescue them from failure, as in the end it did.