Our guest blogger is Ed Paisley, Vice President for Editorial at the Center for American Progress Action Fund.
Sen. John McCain (R-AZ) this morning attempted to blame the entirety of today’s runaway global financial crisis on…Sen. Barack Obama (D-IL). The reason: the failure of U.S. home mortgage giants Fannie Mae and Freddie Mac due to their investments in subprime mortgages.
Problem is, Fan and Fred’s chief regulator — the Office of Federal Housing Enterprise Oversight (OFHEO) — is responsible for the government bailout of these two institutions because it failed to prevent them from investing in these toxic mortgages, despite its clear mandate to ensure “the safety and soundness” of the two institutions.
What’s worse, OFHEO (a unit of the Department of Housing and Urban Development) allowed Fannie and Freddie to invest in these mortgages when it was clear that abusive lending practices had created this toxic mess — practices that the Federal Reserve failed to prevent. If the Bush administration and a conservative Congress (including Sen. McCain) had not appointed or nominated and approved federal supervisors who made clear they planned to deliver less supervision over the financial services industry, the U.S. financial markets and economy might not be in such dire straits today.
The collapse of Fannie and Freddie, however, was patently not the beginning of the latest leg of this crisis, as McCain would have Americans believe. That moment in history is the collapse of U.S. insurance giant American International Group Inc., which issued over $40 billion in credit default swaps — a form of insurance on subprime mortgage-backed securities that turbocharged the sale of these securities because they seemed “safe and sound” — that it couldn’t honor, forcing the Federal Reserve earlier this week to buy control of the failing company for $85 billion. And who is the most responsible for the completely unregulated credit fault swap marketplace? Well, that would be Sen. McCain’s likely Treasury Secretary, former Sen. Phil Gramm of Texas, who made sure in one of his last legislative victories in 2000 that the now $60 trillion (yes, trillion) market for credit default swaps would remain unregulated.