The Corner

RE: Fannie Mae v. Enron

I have to agree with Jonah — I’m also baffled why the Fannie/Freddie situation isn’t a bigger deal politically. Aside from the lack of media coverage, there’s been some pretty prominent media voices trying to defend the failing GSEs. In Paul Krugman’s column yesterday he actually wrote, “Fannie and Freddie had nothing to do with the explosion of high-risk lending a few years ago” and “they didn’t do any subprime lending.”

Which immediately set off alarm bells. I’m no GSE expert, but once upon a time I worked for a financial wire service and my understanding of it is that GSEs don’t do any direct lending, period. They do, however, buy mortgage securities in great quantities, and much of the current meltdown is tied to financial institutions holding on to too many subprime securities. 

Over at the Heritage Foundation’s Foundry blog, Conn Carroll noticed the same thing and tracked down the stats

In 2003, the two [Fannie and Freddie] bought $81 billion in subprime securities. In 2004, they purchased $175 billion — 44 percent of the market. In 2005, they bought $169 billion, or 33 percent. In 2006, they cut back to $90 billion, or 20 percent. Generally, Freddie purchased more than Fannie and relied more heavily on the securities to meet goals.

Let’s review that last paragraph again. Krugman is trying to convince his readers that Freddie and Fannie are only innocent bystanders in the housing bubble. Fannie and Freddie purchased 44 percent of the subprime securities in 2004. Does that sound like the behavior of an innocent bystander to you?

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