With all genuflection implied, That's what I've been saying. If Freddie & Fannie were so squeaky clean then why did they fail? Why did they need bailing out? This is kind of funny. Brooksley Born took that into account and warned that something needed to be done more than 10 years earlier. In fact, it was her job. She was the person appointed by President Clinton. The OTC market was her responsibility. I don't get this. Some of you people have all the answers yet you have no intention of watching the Frontline exposé. Wiki_Wonky_Wacky media.
“That’s what I’ve been saying. If Freddie & Fannie were so squeaky clean then why did they fail? Why did they need bailing out? “
They failed for the same reason that Downey S&L in Socal did. Downey was a conservatively run firm that made conforming loans. They insisted on down payments. They didn’t engage in the high risk loans that mortgage brokers were engaged in. They operated with the same sort of rules that Fannie and Freddie followed.
What they didn’t realize is that the entire mortgage market had become unstable due to an asset bubble in housing. All real estate had become too high relative to incomes and at some point there was going to be a generalized collapse in prices. Downey and Fannie and Freddie were hardly alone in failing to recognize the bubble. They had Greenspan and most of the financial community for company. The mainstream consensus was that housing prices might correct as much as 5-15%. And when the collapsing bubble crashed through 15% on its way down to 50% it took down Downey despite their conservative lending practices. They didn’t have a way to protect themselves from a system wide collapse. The S&L failed and was taken over US Bank.
What Downey and Fannie and Freddie would have needed to do is to stop lending sometime before 2005. Kind of a hard thing to do when lending is your business. But that is about the only thing that would have prevented them from being caught by the eventual collapse of the bubble, an asset bubble that most of the financial world didn’t even recognize.
“Some of you people have all the answers yet you have no intention of watching the Frontline exposé.”
I watched the Frontline piece on Brooksley Born and there is nothing in the program that I disagree with. Born was one of the few people who spotted the potential danger in the OTC derivatives market and she tried to do something about it. But that has nothing to do with Fannie and Freddie, who weren’t in the OTC derivatives market in any fashion. Outside firms were free to take out swaps on Fannie and Freddie paper, either to protect their own position or to simply gamble. The swaps market was totally unregulated, it was opaque to regulators, and it was being run like a casino.