The GOP’s ‘pre-buttal’ of the Financial Crisis Commission doesn’t ring true.

Michael Hirsch, National Journal

Many on the right still contend that Fannie Mae and Freddie Mac, the giant, quasi-governmental lending institutions, were the real cause of the 2008 financial crash. They insist that most of what went wrong can be laid to government housing policies, in other words. During the subprime mania, Fannie and Freddie ended up buying more subprime mortgage-backed securities than any other institution, abetted by the Bush administration, which gave them low-income credits to do so. This is what really drove the mania, many Republicans say. Indeed, the Financial Crisis Inquiry Commission appears to be headed into a raucous final few weeks of disagreement over this issue, with Republican members pledging not to support a final report that lays most of the blame on reckless deregulation and Wall Street.

Unfortunately for the blame-the-government crowd, the facts don’t bear out their conclusions. Yes, Fannie and Freddie are government sponsored, but they’re run by shareholders looking for a substantial return. And the prime force that was driving them and just about everyone else in the world to take risks was Wall Street, which kept looking for higher returns. Indeed, Fannie and Freddie didn’t go nearly as far out on a limb as other lenders, and they hadn’t actually created derivative products themselves.

Beyond that, the seeds of the financial crash of 2008 were planted decades before the subprime securitization market took off. Some of the books that came out after the financial disaster would encourage another myth — that the super-complex subprime securities known as “collateralized debt obligations,” or CDOs, were unique. And that therefore the subprime mortgage crisis was also a unique disaster. “The collateralized debt obligation may well go down in history as the worst thing anyone on Wall Street has ever thought up,” wrote David Faber of CNBC in one quickie book, And Then the Roof Caved In.

But Faber’s description slighted a long lineage of such complex derivatives and structured finance products going back to the early 1990s. Such problems were so prevalent that Brooksley Born, then head of the Commodity Futures Trading Commission, called them “the hippopotamus under the rug.” The key to many successful derivatives trades was just as much deception back then as it later became during the subprime craze. “Quants” on the street — many of them former physicists or other math geniuses — were always finding complex new ways to repackage assets. The schemes usually followed the same theme: The key was to take junk or crap — risky but very high-yielding bonds or securities denominated in pesos or Thai baht or Malaysian ringgits — and disguise them well enough so that pension investors or insurance companies or others thought they were buying investment-grade stuff denominated in dollars. This was merely an augury of what these same firms later did by euphemizing poor credit risks as “subprime borrowers.”

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