The Republicans want to blame the Democrats and the Democrats want to blame the Republicans.
And the Presidential candidates would like to you to believe that the other guy and his party is at fault for this mess—if we had only listened to McCain or Obama then we would have avoided this entire situation.
But these are outrageous claims. Neither guy could have prevented this, mainly because they had no clue this was going to happen. In fact, in some cases Congress even encouraged this behavior—most infamously Fannie Mae and Freddie Mac.
The New York Times story this weekend does a wonderful job looking at what caused, Fannie in this case, the down fall of these two huge companies/institutions. And there is some amazing stuff in here:
Between 2001 and 2004, the overall subprime mortgage market — loans to the riskiest borrowers — grew from $160 billion to $540 billion, according to Inside Mortgage Finance, a trade publication.That is a 337% increase.
Why? Why did everyone start handing out subprime mortgages in the early 2000s? That's a book someone is writing at the moment, however if you want a really good break down of the subprime disaster—This American Life did a fantastic job back in May. But 337% increase... that's just mind boggeling.
Back to the article, it goes on to talk about Angelo Mozilo, the head of Countrywide Fiancial, which was around this time the countries largest mortgage lender. It's this part that might be the most amazing:
Mr. Mozilo, who did not return telephone calls seeking comment, told Mr. Mudd [head of Fannie] that Countrywide had other options. For example, Wall Street had recently jumped into the market for risky mortgages. Firms like Bear Stearns, Lehman Brothers and Goldman Sachs had started bundling home loans and selling them to investors — bypassing Fannie and dealing with Countrywide directly.
“You’re becoming irrelevant,” Mr. Mozilo told Mr. Mudd, according to two people with knowledge of the meeting who requested anonymity because the talks were confidential. In the previous year, Fannie had already lost 56 percent of its loan-reselling business to Wall Street and other competitors.
So what happened it this: Greenspan kept interest rates low (another day), investors looked to other finacial products for their money, they found these mortgages to invest in, in the process Fannie was pushed aside as the investment banks got involved... which under pressure from both investors and the government then started taking on the same subprime loans as everyone else. And they knew it.
“Everybody understood that we were now buying loans that we would have previously rejected, and that the models were telling us that we were charging way too little,” said a former senior Fannie executive. “But our mandate was to stay relevant and to serve low-income borrowers. So that’s what we did.”
And with that Fannie and Freddie went down. Now, the advantage that Fannie and Freddie had over everyone else is that the government all but said that they were going to bail them out. Creating a moral hazard problem from way before this crisis even began.
So who is to blame?