Fannie/Freddie at the Heart of Financial Crisis

Financial Crisis: The SEC is suing top officers at Fannie Mae and Freddie Mac for not disclosing their true exposure to subprime loans. Maybe now the left's tired canard that Fannie and Freddie were blameless can be laid to rest.

The left's preferred narrative of the financial meltdown goes something like this: Greedy banks, encouraged by reckless Bush-era deregulation and lusting after ever-higher profits regardless of the risk, caused the financial crisis.

Fannie Mae and Freddie Mac, the two government-sponsored mortgage companies, were mere victims.

Well, the left has it exactly backward: It is a well-documented fact that government regulators twisted the arms of private banks to make subprime and other risky loans to people who couldn't pay them back.

And it imposed "goals" on Fannie and Freddie - with an implicit guarantee of taxpayer backing - to buy huge blocks of those loans and, ultimately, to resell them to gullible investors as mortgage-backed securities.

When the market fell apart, the banks were left with rotten loan portfolios, and Fannie and Freddie stuck the taxpayers with billions of dollars in losses.

To date, taxpayers have spent $169 billion on Fannie and Freddie's mistakes. But some analysts believe the losses could ultimately reach as much as $1 trillion.

Even so, the left refuses to face reality.

As recently as 2008, New York Times columnist Paul Krugman stated: "Fannie and Freddie buy only mortgages issued to borrowers who made substantial down payments and carefully documented their income."

Now, the government's own market watchdog, the Securities and Exchange Commission, says that's false. They're going after former Fannie CEO Daniel Mudd and former Freddie CEO Richard Syron to prove it.

"Fannie Mae and Freddie Mac executives told the world that their subprime exposure was substantially smaller than it really was," was how Robert Khuzami, director of SEC enforcement, described it Friday.

But that's an understatement.

From 2007 to 2008, according to SEC documents, executives at Freddie and Fannie together estimated their total exposure to subprime loans at about $10 billion.

The real amount? Nearly $300 billion total.

In short, Fannie and Freddie are frauds. They systematically hid their exposure to potential losses from investors, taxpayers and regulators.

Nor was this their first financial shenanigans.

In the early 2000s, both companies grossly overstated their earnings - which led to fat bonuses that enriched a long line of cronies of President Clinton and President Obama who used Fannie and Freddie to get rich at the public's expense.

Unfortunately, the SEC's actions on Friday don't go nearly far enough. Because while it will sue top executives, it also signed "nonprosecution agreements" with Fannie and Freddie. So no matter how guilty their executives turn out to be, they won't be punished.

Let it be said that the government covering up for these criminal enterprises at the heart of our financial crisis is getting a bit old. It's time we closed them down or privatized them, before they create another crisis.