The lending policies of Fannie Mae and Freddie Mac contributed to, but were not the ultimate cause, the recent financial crisis that devastated the U.S. economy, the official government investigation of the causes of the crisis has concluded.

While the two mega-lenders played a contributing role in the events leading up to the economic collapse, they were largely following the lead of Wall Street and other lenders that invested in subprime mortgages and other risky home loans. That's among the conclusions of the Fiscal Crisis Inquiry Commission, which released its report on the causes of the financial crisis yesterday.

Crisis "could have been avoided"

The Commission concluded that the financial crisis could have been avoided, blaming it on a combination of government and corporate mismanagement. It blamed widespread failures in financial regulation, including the Federal Reserve's failure to rein in toxic mortgages, as well as reckless behavior by corporations in taking on too much risk.

It also singled out what it called "an explosive mix of excessive borrowing and risk" by both households and Wall Street, as well as a poor understanding of the financial system by key policy makers, leaving them ill prepared to deal with the crisis as it unfolded.

"Despite the expressed view of many on Wall Street and in Washington that the crisis could not have been foreseen or avoided, there were warning signs," said Phil Angelides, commission chair. "The greatest tragedy would be to accept the refrain that no one could have seen this coming and thus nothing could have been done. If we accept this notion, it will happen again."

Business model called "deeply flawed"

The report found that while Fannie Mae and Freddie Mac had a "deeply flawed business model" and made many of the same errors as other large financial firms, they were latecomers to the subprime mortgage market, rather than instigators in establishing the market for risky home loans that eventually imploded and dragged the economy down with it.

To be sure, one member of the 10-person commission took exception to the findings, issuing a caustic dissent specifically laying blame for the crisis on government housing policy and Fannie Mae and Freddie Mac's roles, along with that of HUD, in carrying it out. Peter Wallison, of the American Enterprise Institute, wrote that affordable housing guidelines imposed on Fannie and Freddie by Congress in 1992 led to deteriorating mortgage underwriting standards and growth in subprime mortgage lending, and contributed to the growth of the housing bubble from 1997-2007.

Dissent says lack of regulation not to blame

Three other commissioners, including Vice Chair Bill Thomas, issued a separate dissent, in which they accepted many of the report findings but rejected as overly simplistic claims that too little or two much government regulation were to blame.

They refused to attribute the causes of the housing bubble and economic collapse to purely domestic factors, noting that similar bubbles occurred in other nations as well, and that the expansion of loose credit went beyond the residential mortgage market.

Fannie Mae and Freddie Mac, which prior to the crisis operated as private entities with a government charter, suffered extensive losses in the collapse of the subprime mortgage market prior to being taken into government recievership. The eventual cost to taxpayers for covering their losses range from $150 billion officially to private estimates as high as $1 trillion.

The 10-member commission is an independent body composed of private citizens with experience in areas such as housing, economics, finance, market regulation, banking and consumer protection. It was established through legislation enacted by Congress in May 2009 and signed into law by President Obama.

Published on January 28, 2011