“That’s right. They purchased the potentially bad loans from Fannie and Freddie.”
No, this was entirely independent of Fannie and Freddie, whose conforming loans offered a paltry rate of return and was of no interest to investors looking for yield. This market was created by the investment banks and it was generating high risk, high yield paper. At its peak it dwarfed Fannie and Freddie.
The investment banks were providing warehouse loans to the storefront subprime brokers who wrote the loans. The IBs then securitized these loans, tranched them, and sold them to investors all over the world as CDOs, CMOs, CDOs squared and so on. This market was essentially entirely unregulated and in many ways invisible to everyone except the immediate actors. It measured in the trillions of dollars. Many of the investors involved believed that they had protected themselves from risk by employing credit default swaps but they were very badly mistaken. In fact the credit default swap market was operating more like a rigged casino than an insurance operation.
Fannie and Freddie played too: “What are Freddie Mac’s principal businesses?”
“Freddie Mac supports liquidity and stability in the secondary mortgage market through two principal lines of business. Our credit guarantee business purchases residential mortgages and mortgage-related securities in the secondary mortgage market, securitizes these mortgages and subsequently sells them to investors as mortgage-backed securities. We also have a portfolio investment business that purchases mortgages for our mortgage-related investments portfolio.”
The government guaranteed that the market was kept in the dark and they got on board too. But they made sure that the market was unregulated. The cats out of the bag. The government gave the green light to this potentially dangerous market. It allowed these frivolous loans to happen. In fact it mandated it to these independent bankers. It was a bunch of liberal social engineering programs, the independent banking scheme, the potentially dangerous financial instruments, the credit default swaps, Barney Frank saying that everything is just fine, and nobody looking at the history of the housing market. Politicians were getting their money too. So why not just go along with Greenspan. They all gambled and they all lost. Only they put the tax payer on the hook for everything. There is no way it was just the banks.
“This market was essentially entirely unregulated and in many ways invisible to everyone except the immediate actors. It measured in the trillions of dollars.”
My gut tells me this — the international banking forces that are able to bypass regulation, those are not run by nitwits. They need a sucker to work over, such as a corrupt government that can work out some angle for them.