That's what readers of the paper's Review and Outlook column would discover today. The basic point is that a large part of the $13 billion settlement that JP Morgan reached with the Justice Department involves payments to Fannie Mae and Freddie Mac over misrepresentations about the quality of mortgages in mortgage backed securities sold at the peak of the bubble. The WSJ rightly points out that Fannie Mae and Freddie Mac are really big actors, who should have known what they were doing.

Unfortunately, if recent history has taught us anything it is that highly paid big businesspeople often don't have a clue what they are doing. For example, Gerald Levin, who was CEO of Time-Warner in 2000, essentially gave the company away for almost nothing when he agreed to a merger in which Time-Warner was sold for shares of AOL stock. Hewlett-Packard made a big investment to get into the tablet computer business, which it then abandoned almost immediately after its product came on the market. And, it seems almost no one on Wall Street saw the housing crash coming.

In short, big actors like Fannie Mae and Freddie Mac should know what they are doing, but often don't. This lack of competence on the part of people being paid tens of millions of dollars a year (yes, there is a serious skills shortage), does not excuse acts of fraud by others. JP Morgan is accused of making deliberate misrepresentations in its selling of mortgage backed securities. (In many cases, the misrepresentations were made by banks it acquired.)

If the charges of misrepresentation were not true then presumably Jamie Dimon, JP Morgan's CEO, would have been prepared to go to trial and show that the Justice Department was wrong. It seems unlikely that he would have given away $13 billion of the bank's money if he did not think there was a serious case.

It is also worth noting that Fannie Mae and Freddie Mac were buying these subprime MBS because they hoped to make money. They were losing market share and were getting pressure from the markets to get into a market that at the time was dominated by private investment banks like Citigroup and Goldman Sachs.

This assessment by Moody's of Freddie Mac in December of 2006 tells the story very clearly. Moody's indicated that it would have been concerned about Freddie's future prospects had it not made the decision to get more deeply involved in the subprime market. The idea that that Fannie and Freddie got into subprime to help poor people get homes is nonsense.

One final point which I should not miss an opportunity to belittle is the idea that Barney Frank was in anyway responsible for Fannie and Freddie's behavior. Barney Frank was a minority member of Congress until January of 2007. At that point, almost all the bad loans already had gone out the door. Minority members of Congress have as much influence over the actions of Fannie and Freddie as the average shoe salesperson. The folks who want to blame Barney Frank for the housing bubble obviously have no clue of what they are talking about or are making up stories to push an agenda.

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