How Fannie, Freddie, And The Government Contributed To The Mortgage Crisis

When Charles Ferguson accepted the academy award for Best Documentary for Inside Job he lamented in his acceptance speech about the fact “that three years after our horrific financial crisis caused by massive fraud, not a single financial executive has gone to jail, and that’s wrong”. Well, it looks like Charles Ferguson may soon get his wish…sorta. The indictment of six former Fannie Mae and Freddie Mac executives may very well result in someone going to jail – it’s just not who Mr. Ferguson thought should go to jail.
As time goes on it becomes clearer and clearer that the government and their government sponsored entities played a huge role in creating this mortgage mess. In last week’s Barrons Gene Epstein lays out the details gleaned from the SEC lawsuit and other financial documents about Fannie and Freddie’s role in the mortgage crisis. His analysis seems hard to argue with and he comes to some interesting conclusions:

  • Fannie and Freddie held $1.7 trillion worth of high risk mortgages vs. the $10 billion originally disclosed.
  • Fannie and Freddie got into high risk mortgages back in the 90s, much, much earlier than apologists claim
  • Fannie Mae was in bed with Angelo Mozilo, the demon of Inside Job, back in the late 90s in creating high risk mortgage programs

Gene’s article makes for some pretty interesting reading and the facts make for a pretty strong case for dismantling these bad boys before they do any more damage in the future. As I like to remind people the government is likely to recoup all their bailout funds from the banks but the losses from Fannie and Freddie already amount to $241 billion and counting and they will never be recovered unless they raise their guarantee fees.

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