One of the more ridiculous complaints about the Federal Housing Finance Agency’s lawsuits against 17 banks is that Fannie Mae and Freddie Mac were “sophisticated investors” who knew or should have known about the quality of the mortgages underlying the securities they were buying.
Fannie and Freddie were not sophisticated purchasers under any reasonable definition of the term. And there’s no way they could have known that the mortgage securities they bought from Wall Street were stuffed with low-quality mortgages.
The lack of sophistication of Fannie and Freddie was on display throughout the last decade. They consistently showed that they couldn’t handle even basic accounting for their own balance sheets. If not for the imprimatur of the government and the protection of their pet politicians, they would have been de-listed from major exchanges. They probably should have been shut down altogether.
It all comes down to the fact that Fannie and Freddie relied on the banks and were legally entitled to rely on the banks. Fannie and Freddie paid enormous fees to the banks for this right to rely on them. If the mortgage securities they purchased did not meet the standards that the banks vouched for, it’s the banks who should take the losses.
Read the whole thing.