My paraphrasing and re-casting of the excellent article (a must-read):
Our current mess can be tied directly to the Rats in Washington and the greed of Obama’s campaign bigwigs (Jim Johnson, former chairman of Fannie Mae and Franklin Raines, former Fannie Mae CEO). The Rats propped up these two government-sponsored enterprises (GSEs) so their CEOs could reap multiple millions while lining the pockets of Obama and Dodd through massive campaign contributions and perks.
Fannie and Freddie as GSEs were viewed in the capital markets as government-backed buyers, thus they were able to borrow as much as they wanted at below market rates to buy junk mortgages and mortgage-backed securities.
Economists at the Federal Reserve and Congressional Budget Office had studied them in detail, and found that they did not significantly reduce mortgage interest rates despite their subsidized borrowing rates. If they were not making mortgages cheaper and were creating risks for the taxpayers and the economy, what value were they providing?
Fed Chairman Alan Greenspan became a powerful opponent and began to call for stricter regulation and limitations on the growth of their risky portfolios.
Fannie Mae and Freddie Mac had accounting scandals in 2003 and 2004, so to avoid regulation and retain their government sponsored low-cost financing advantage, they re-committed to increased financing of “affordable housing.” They became the largest buyers of subprime (garbage) and Alt-A (mostly garbage) mortgages between 2004 and 2007, supercharging growth of junk mortgages, exposing taxpayer’s to $1 trillion, and substantially magnifying the costs of this collapse.
Beginning in 2004, their portfolios of subprime and Alt-A loans and securities began to explode from less than 8% of all mortgages in 2003 to over 20% in 2006. During this period it was clear that originators were scraping the bottom of the home-buyer barrel to pump-up Fannie and Freddie profits (i.e. CEO compensation and campaign contributions to Rats) since loan quality declined with low or no down payments and low adjustable initial rates.
Fannie and Freddie bought the support of Rats and were allowed to continue unrestrained. Barney Frank (Rat., Mass), the chair of the House Financial Services Committee, (wrongly, ignorantly, stupidly) described the arrangement with “Fannie Mae and Freddie Mac have played a very useful role in helping to make housing more affordable . . . a mission that this Congress has given them in return for some of the arrangements which are of some benefit to them to focus on affordable housing.”
Obama now criticizes Republicans and deregulation, but along with Rats Frank and Dodd, blocked the only reform proposed - causing and increasing the size of current crisis. Sen. McCain has been pointing to systemic risks and trying to do something about them for years. In contrast, Sen. Obama lined his pocket with their money and helped to block Republican and Fed regulation that would have stopped the insanity. Obama likes Fannie and Freddie so much, he hired their former CEOs who cooked the books and left us taxpayers with the bill while keeping their millions in compensation.
In 2005, the Senate Banking Committee, then under Republican control, adopted a strong reform bill. The bill was the most important piece of financial regulation before Congress in 2005 and 2006. All the Republicans on the Committee supported the bill, and all the Rats voted against it. Mr. McCain endorsed the legislation in a speech on the Senate floor. Mr. Obama, like all other Rats, remained silent.
Rats are blaming the financial crisis on “deregulation.” This is a canard. There has been deregulation in our economy that has produced innovation and lowered consumer prices. The primary “deregulation” in the financial world permitted banks to diversify their risks, which has kept banks relatively stable in this storm.
As a result, U.S. commercial banks have been able to attract more than $100 billion of new capital in the past year to replace most of their subprime-related write-downs.
Deregulation also made possible bank acquisition of Bear Stearns and Merrill Lynch, saving billions in likely resolution costs for taxpayers.
If the Rats hadn’t blocked the 2005 legislation, the huge growth in junk loans from Fannie and Freddie could not have occurred, and the scale of the meltdown would have been substantially less. The Rats who today blame Republicans on the lack of regulations were the ones who blocked the only legislative effort that could have stopped it. And the deregulation that did occur mitigated bank risk and positioned them to reduce the cost to taxpayers of this mess - caused by Rats.
I would only add a bit more of an explanation for Barney Frank of how none of what Fannie Mae, Freddy Mac, or the Feds have done has helped make housing more affordable. In fact we can see a self-evident demonstration of how the market maintains it's equilibrium by how the price of housing went up as the cost and the availability of mortgages were tinkered with by the Feds.