Among my fellow conservatives it’s popular to blame Fannie Mae and Freddie Mac for the financial meltdown, but that doesn’t square with the facts.

Fannie and Freddie were bit players at best. Here’s what really happened:

The mortgage industry changed its business model from one of servicing loans to one of collecting large closing fees, then selling the mortgages. This meant they benefited every time a house came on the market, even if it arrived via foreclosure. Hence the sudden ease with which “liar loans” could be obtained.

The mortgage industry dumped these potentially toxic mortgages on Wall Street. They did it like an unscrupulous butcher unloading a tub of anthrax-laced hamburger: They disguised the rotten mortgages by mixing them in with chunks of good mortgages, macerating them into a hash of mortgage-backed securities and collateralized debt obligations that they aggressively pushed onto their customers.

Then they scurried to the derivatives market to bet against the same tainted securities they’d just foisted on the public, like the butcher taking out life insurance policies on the customers he sold the anthrax hamburger to.

This scheme worked as long as housing prices kept going up and the percentage of toxic loans was kept to a minimum, but neither happened for long. When the economy burped, the market found itself waist-deep in overpriced foreclosures, and the trusting holders of the MBSs and CDOs lost big.

It wasn’t the billions of dollars in liar loans gone bad that crashed the economy, however, it was the almost trillion dollars that Wall Street bet against its own creations that sent the economy into freefall.

I hate regulation, but we can’t have a financial system that rewards sociopathic behavior. Wall Street has proved unwilling to police itself; the government has to step in.

Keith Vallencourt


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