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AIG Stock Sale Pays Back US Government in Full


AIG's successful repayment of its federal bailout funds contrasts sharply with the hopeless bailout of Fannie Mae and Freddie Mac.


It just goes to show that government is the problem, not the solution. Although the final report of the Financial Crisis Inquiry Commission (FCIC) (page xxvi) refused for political reasons to put the primary blame for the financial crisis on the GSEs, it did concede that Fannie and Freddie had a "deeply flawed business model" and they "used their political power for decades to ward off effective regulation and oversight." Furthermore, the FCIC report criticized the GSEs for their decision in 2005 and 2006 "to ramp up their purchase and guarantee of risky mortgages, just as the housing market was peaking." In conclusion, the report stated that the GSEs "contributed to the crisis" and "their participation in the subprime mortgage market added helium to the housing balloon." In other words, greed caused Fannie and Freddie to fail and brought down US taxpayers with them.

I think the primary role of Fannie and Freddie in the financial crisis was best described by FCIC board member Peter Wallison of the American Enterprise Institute in his dissenting opinion (page 444 in the FCIC report):

...the sine qua non of the financial crisis was US government housing policy, which led to the creation of 27 million subprime and other risky loans-half of all mortgages in the United States-which were ready to default as soon as the massive 1997-2007 housing bubble began to deflate. If the US government had not chosen this policy path-fostering the growth of a bubble of unprecedented size and an equally unprecedented number of weak and high risk residential mortgages-the great financial crisis of 2008 would never have occurred.

Initiated by Congress in 1992 and pressed by HUD in both the Clinton and George W. Bush Administrations, the US government's housing policy sought to increase home ownership in the United States through an intensive effort to reduce mortgage underwriting standards.
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