To sum it up simply, home buyers bought a lot of homes they should not have been buying. Lenders pushed terrible loans that later jumped much higher in monthly payments owed. Lending companies kept this up to keep profits up vis a vis their peers. Fannie and Freddie bought these loans from the lenders. Fannie and Freddie vastly over-extended themselves to do this, at our expense. U.S. and foreign investors bought baskets of these loans by the zillions.
Suddenly, those who couldn't ever afford the house they bought started to show it by not making payments and then by getting foreclosed on. All of a sudden, trillions of dollars of loan baskets (CDO's, etc.) were of unkown value, because they couldn't be sold due to their terrible credit profiles and non-payments by the home owners.
Now, banks, investment banks, and invisble funds spun off and operated invisibly as off-balance companies to larger, big-name companies - all of them had hundreds of billions of losses, at least on paper. Enron-scandal accounting rules now force these companies to "mark to market" the value of their loans. But, as dicussed here, there was no market for these things, and thus no real value for the time being. But since the companies had to mark them down anyway, this terminally damaged their credit status and ability to get financing, not to mention in some cases causing a run on the bank in question by the customers of that bank. Stocks of these companies then crashed, making credit matters even worse for them.
At risk of the whole credit and financial system freezing up, the feds have stepped in, and here we are.
Jonah Goldberg has a piece that nicely sums up what just happened in the financial meltdown, and who is to blame. From the NY Post, WASHINGTON BREWED THE POISON.
Franklin Raines, the Clinton-appointed head of Fannie Mae from 1998 to 2004, made it his top priority to make mortgages easier to get for people with poor credit, few assets and little money for a down payment.
The Clinton administration re- interpreted the Community Reinvestment Act to politicize lending practices. Under the CRA, the feds forced banks to prove they weren't "redlining" (i.e., discriminating against minorities) by approving loans to minorities and various left-wing "community groups," bad risks or not.
Sen. Phil Gramm called it a vast extortion scheme against America's banks. Still, the banks were perfectly happy to pass the risky loans to Raines' Fannie Mae, which was happy to buy them up.
That's because Raines was transforming Fannie from a boring but stable institution dedicated to making homes more affordable into a risky venture that abused its special status as a "government sponsored enterprise." Fannie bought the bad loans and bundled them together with good ones. Wall Street was glad to buy up these mortgage securities because Fannie was deemed a government-insured behemoth "too big to fail." And others followed Fannie's lead.
In 2005, John McCain sponsored legislation to thwart what he later called "the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system and the economy as a whole."
Barack Obama, the Senate's second-greatest recipient of donations from Fannie and Freddie after Dodd, did nothing.
Meanwhile, Raines made $52 million of his $90 million compensation package thanks in part to fraudulent earnings statements.
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