Fannie, Freddie and the Financial Panic of 2008

Much has been written and millions of words expended on the current financial panic, most of it utterly wrong because it's made by people who don't have a clue about the workings of the financial markets. And, yes, that especially includes people in the media.

Todd Zywicki, at Volokh posts: Did Eliot Spitzer Contribute to AIG's Demise?

to which we get the predictable response for the invincibly ignorant:
[Responding to a comment made by someone who works for an AIG insurance subsidiary]

Poor you. Maybe if your industry had a few less greedy crooks, you wouldn't have to be so put upon with these questions.

The problem with this answer is not that it's totally BS, but that the writer has a point, but he doesn't know who the "greedy crooks" who started this are.

To help educate a few people about what is happening here's a brief explanation:

Question: What started this mess?

Answer: The housing “bubble” burst.

Question: How did that cause this problem?

Answer: Most mortgages are bundled and sold as fixed income securities (bonds). Once default rates went through the roof and housing values fell, the value of these bonds could not be determined.

Question: Why is that a problem?

Answer: When the value of a bond is unknown, no one wants to buy it.

Question: Why is that a problem?

Answer: Because a bond that you can’t get a bid on is pretty much worthless as an asset.

Question: And why is that a problem?

Answer: Because most financial firms are required to “mark to market” what they own. And a security that you can’t get other people to buy is valued at zero.

Question: Can’t you take an educated guess?

Answer: That’s what most firms are doing, but a guess is just a guess, not anything more precise. And if you are dealing with a firm that could be worth billions or could be billions in the hole, would you give them a loan? No. I didn’t think so. Ergo, there goes Lehman Brothers and Bear Stearns.

Question: And who began this mess?

Answer: Who are the world’s biggest bundlers and sellers of mortgage backed securities? Fannie Mae and Freddie Mac. They set the standards for mortgages. They relaxed lending standards to help the “poor” obtain home ownership. They hired lobbyists and gave millions to every politico who would take it to prevent a crackdown on their lending practices and the amount of leverage they were using. They went to incredible leverage levels to make their earnings numbers so that their politically appointed leaders could collect millions and hundreds of millions in salary and bonus.

Fannie and Freddy were the underwater earthquake that’s now creating this financial tsunami because the mortgage backed securities market involves trillions of dollars spread throughout the globe. History will show that a relatively few Democrat political hacks looking to line their own pockets may have cause the most massive financial panic in history.

I'm very angry about the mess we have to work out. People have lost lots of money if they own stocks or bonds or mutual funds that had nothing to do with banks and insurance companies because of the devastation in the world financial markets. General Electric stock has declined over 30% this year, mostly because they lend money. Companies that are hundreds of years old have had to close their doors and fire their employees just so a few Clinton Administration hacks could line their pockets. Read HERE for more detail.

I want investigations. I want to see these crooks do perp walks and get at least the jail time that Enron and Worldcom execs got. I want to see justice done. That is the least that the public deserves for the damage they have caused.

It looks like McCain is connecting the dots.