<p>soccerguy, I don’t know if you’re just confused about the subprime crisis and the economy, or are trying to backpedal from what you’ve written. Lets me refresh your memory about what you wrote
See where he writes “the government would help them out if things went bad (read: fannie/freddie would buy the dangerous loans)”? This clearly means that if things don’t go bad the banks would hold onto their loans and make money, but if the loans went bad they could turn them around and sell them to Fannie/Freddie. This is not how the mortgage market works; when a bank makes a loan they may turn around and sell it Fannie/Freddie and (good or bad) it is gone and the bank has money to make another loan. The distinction is important because Soccerguy wants you to believe Fannie/Freddie were just waiting to take bad loans like an insurance company, and its that bad policy that tempted banks to make subprime loans. As you see above, he plainly claims that without this guarantee the subprime crisis wouldn’t not have occured. The right-wing explanation Soccerguy gives counts on you not understanding the mortgage market. Not only does he misrepresent Fannie/Freddie as insurance, most subprime loans were not even eligible to be sold to Fannie/Freddie! Many mortgages originated by banks such as Countrywide were packaged into securities which in turn were sold to banks, investors, hedge funds, and investment banks. Freddie/Fannie does not buy these securities back, they only purchase home loans from the originating bank. In fact 75% of subprime loans were turned into securities. Soccerguy’s right-wing claim that banks were “pushed and pushed” to make bad loans because Fannie/Freddie would buy them if they went bad is inherently false because 75% were not eligible to be bought!</p>
<p>I’ll go on, but let me comment for other readers of the thread that I realize this is a bit technical and not fun to slog thru. And that’s what those that push the right-wing stories count on. They figure you don’t want to dig into messy details, so they give you sound-bites like "the gov’t pushed banks to make bad loans and promised a bailout if things went bad " and count on enough people falling for it.</p>
<p>
Soccerguy knows he has been caught out so he’s trying a bit of sleigh-of-hand here to make you believe his account of why banks made bad loans in the first place. In explanation #1 banks were happy to make bad loans because they know they’ll be bailed out by Fannie/Freddie. We already have seen that is false, banks either sell them right away to Fannie/Freddie or they don’t, but Soccerguy still wants you to believe that banks were promised they could sell bad loans to Fannie/Freddie and that’s just what happened. Congress passed a bailout bill and the Fed acted after the crisis began; it’s the Fed and Treasury that are behind the bailout. Soccerguy is hoping you won’t notice he’s substituted “government” for “Fannie/Freddie” so that you’ll think his original account is correct. The right-wing account of the origins of the subprime debacle is obviously wrong once you catch the trick of replacing “Fannie/Freddie” with “goverment”.</p>
<p>In an earlier reply I had pointed out that Former Fed Chairman Alan Greenspan, a godlike figure to the free-market believers, did not mention a word about the gov’t pushing banks to make bad loans or Fannie/Freddie being at the root. Surely if these had been at the heart of the problem he would have mentioned it; the pristine free-market didn’t work because of these corrupting forces. In fact he said that a securitization system that stimulated appetite for loans made to borrowers with spotty credit histories, was at the heart of the breakdown of credit markets. I posted “Nothing there about Freddie/Fannie being at the heart of the problem.” To which Soccerguy tries to confuse you by mixing apples and oranges. He writes
Do you see the trick here? Ignoring the fact that Soccerguy is able to identify Fannie + Freddie at the heart of the problem even though Fed Charimain was not, what matters is where the subprime loans came from, not the overall quantity of loans. The “50% of mortgages” are the apples; what Soccerguy doesn’t tell you is that most of those loans are so-called conforming loans, made to to borrowers that can document their income, put a down-payment, meet loan ratios to show they can repay, etc. These loans are doing just fine. The subprime loans are the oranges; and while Fannie + Freddie hold some of them the vast majority were made via investment banks packaging them into securities. Tha is what Greenspan identified as the heart of the problem.</p>
<p>As a side note, why did the subprime crisis cause such problems to so many large institutions? Many mortgages originated by banks such as Countrywide were packaged into securities which in turn were sold to banks, investors, hedge funds, and investment banks. The latter 2 bought them with borrowed money so they were leveraged; If you put up $100 million of your own money and borrowed $900 million, you can buy $1 billion worth of securities. If the return is 1% on your deal, since you only put up 1/10 of the money you are earning 10%! During the boom years investment banks were earning 15-20% on their equity, and they did this by leveraging themselves 20-30x!!! The problem is that when you’re highly leveraged, a slight dip in overall value of your investment is magnified in effect on the money you put up. If the bonds you bought drop in value 1% and you’re leveraged 30x, you just lost about 30% of your investment. In a nutshell this is how so much money was lost, bankrupting firms and causing a need for a bailout.</p>