Your Opinion: Flawed argument on financial crisis

Dear Editor:

In his letter of Oct. 8 Steve Sampson urges the old and discredited argument that the financial crisis of 2008 was caused by Fannie Mae (not "May") and Freddie Mac which were allegedly controlled by Democrats.

This argument is wrong on both counts. In the first place the regulator for the two national mortgage associations was the Office of Federal Housing Enterprise Oversight (OFHEO), an agency within the Department of Housing and Urban Development. The director of OFHEO from 2006 through 2008 was James B. Lockhart. "He was nominated to that position by President George W. Bush, a friend of his from prep school, college and business school ...." (Wikipedia.org)

In the second place Fannie and Freddie played a part in the financial crisis but were not the major cause. Here is a brief outline of what led to the financial crisis of 2008.

From roughly 1998 to July 2006 there was a boom in the housing market. Prices nearly doubled. Millions of new mortgages were created and sold by the originators to third parties. Fannie and Freddie bought nearly half of the mortgages. The others were bought by private investors like the big investment banks.

Fannie and Freddie securitized and resold mortgages. They created large pools of mortgages that would back the issuance of MBSs (mortgage-backed securities) or bonds. The bondholders each owned a share of the payments made on the mortgages.

It was the private investment banks (Merrill Lynch, Morgan Stanley, et al.) that took it a step further. They (not Fannie and Freddie) packaged MBSs into collateralized debt obligations (CDOs), got AAA ratings on parts of these and sold them to pension funds and many others.

Then the investment banks created and sold insurance on the CDOs. The insurance came in the form of credit default swaps (CDSs). Trillions of dollars worth of these were sold. Then going another step new CDOs were created by packaging a lot of existing CDOs into a single security, and new CDSs were sold.

It was a house of cards. When mortgages started defaulting it all came tumbling down. The financial crisis was the result. Yes, Mr. Sampson, Fannie and Freddie had a part in it, but they were not the main cause.

(Sources: David Faber, And Then The Roof Caved In; Simon Johnson and James Kwak, 13 Bankers; Andrew Ross Sorkin, Too Big To Fail; Wikipedia, "Subprime Mortgage Crisis".)