You’re correct except for the Fannie and Freddie part. OTC derivatives were the province of investment banks and similar firms that had created a huge market in their own securitized debt paper. This is all described by Gillian Tett.
“You’re correct except for the Fannie and Freddie part. OTC derivatives were the province of investment banks and similar firms that had created a huge market in their own securitized debt paper. This is all described by Gillian Tett.”
That’s right. They purchased the potentially bad loans from Fannie and Freddie. The issue is that government oversite over government sponsored programs and mandates made the choice to allow it to happen. They were hot potatoes. When full mortgages were chopped up into parts in order to minimize risk they didn’t bother to remember that markets like real estate go up and down rapidly. They were used to buying and selling paper and turning it over like day traders. The paper took on a life of its own. The only thing that went wrong was that people would default on the loans in mass. That was warned about back in the 1990’s. That is why the Brooksley Born story is so important here now. The government sponsored worthless paper.