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Occupy DC’s next target: Freddie Mac

Associated Press Published: February 25, 2012

Occupy DC activists are finally criticizing one of the key players in the sub-prime mortgage meltdown. On Monday, the group best known for its standoff with police in New York City and Oakland (and in D.C., for ruining the newly renovated McPherson Square) is planning to launch “its first major rally and action, bringing the struggle to the doors of a financial institution [Freddie Mac] that continues to fail the public it was chartered to serve,” according to an Occupy DC press release.

So far, so good. In 2008, government-sponsored enterprises Freddie Mac and Fannie Mae dominated mortgage underwriting in the U.S. They owned about $5.1 trillion in residential mortgages, or 40 percent of all outstanding mortgage debt. Fannie and Freddie, which bundled and securitized morgages, began underwriting subprime mortgages in the late 1990s in an effort to expand homeownership. As creators of mortgage-backed securities, they also eventually became dumping grounds for many banks looking to reduce risk and sell off risky mortgages.

In September 2008, when the mortgage crisis they helped create exploded, both highly leveraged government-sponsored enterprises were forced into conservatorships at taxpayers’ expense.

Fannie and Freddie would not have purchased all that subprime paper without the federal government’s implicit promise to bail them out if things went south.  Gerald O'Driscoll, former vice president at the Federal Reserve Bank of Dallas, cited this cozy arrangement as a classic example of moral hazard: “The essential problem: Fannie and Freddie were private firms, with stockholders who garnered billions in profits over the years. Yet the government was understood to guarantee their debt. That is, it bore the risk if they failed, as they now have.”

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