BLAME FANNIE AND CONGRESS FOR THE CREDIT MESS

The vast accumulation of toxic mortgage debt that poisoned the global financial system was driven by the aggressive buying of subprime and Alt-A mortgages, and mortgage-backed securities, by Fannie Mae and Freddie Mac. The poor choices of these two government sponsored enterprises (GSEs) -- and their sponsors in Washington -- are largely to blame for our current mess, says the Wall Street Journal. [snip]

Moreover, Fannie and Freddie were viewed in the capital market as government-backed buyers; thus, they were able to borrow as much as they wanted for the purpose of buying mortgages and mortgage-backed securities, says the Journal.

Their strategy of presenting themselves to Congress as the champions of affordable housing appears to have worked. They retained the support of many in Congress, particularly Democrats, and were allowed to continue unrestrained. In fact, Congress basically told them that if they concentrate on affordable housing, despite their problems, congressional support is secure.

But Democrats are now criticizing the risk-tolerant regulatory regime, blaming the current crisis on deregulation.

However, deregulation in the financial world in the last 30 years has permitted banks to diversify their risks geographically and across different products, which is one of the things that has kept banks relatively stable.

It's the concentration of risk in Fannie and Freddie - brought about by their governmental backing - which has led us to where we are today with institutions 'too big to fail'...

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