[samclem]

Quote:

Originally Posted by . . . Yrs to Go . . . CDS really has nothing directly to do with the whole housing mess (Fannie, Freddie, and all).

I'm not sure why you say this. The CDSs were key to keeping the whole game, at least on the private side, in operation. The CDS's facilitated the bundling of very risky mortgages into more marketable securities by allowing the risk of default to be sold (often to buyers who knew little about what they were getting)
The link to the GSEs is not direct, but it is present. While the private side was bundling and selling this junk (for high profit--as long as home prices kept going up), Fannie and Freddie were also engaged in the subprime business (encouraging and buying loans that had no busines being written). This was a conscious decison pushed by (mostly liberal) legislators. Maybe they did it for the "social good." Or maybe they did it for other reasons (the top recipients of GSE campaign contributions werre Chris Dodd, John Kerry, Barrack Obama, and Hilary Clinton). (link to source)
There was a "race to the bottom", with the private lenders in competiton with the GSEs for clients--regardless of abilty to actually repay the loans.
The difference: At least on paper, the private players (banks, mortgage lenders, brokers for the resulting securities, those who bought the contracts) were gambling with their own money, and there's no real argument against people doing dumb things with their own money (unless they later go to the taxpayer and ask for a bailout. Who knew they'd have the gaul to ask? Who knew our government would be foolish enough to actually do it?).
On the other hand, the GSEs were gambling with at least an implicit backing of our tax dollars. That's a horse of a different color. Moreover, the involvement of US-government-linked entities in the subprime mortgage business provided a veneer of respectabilty to the enterprise that it had lacked before. Private subprime lenders had always been there in the past, but the business was vaguelly disreputable, ranking only one notch above payday lenders and pawn shops. Once the government-linked entities started writing loans to the same clients, it became much easier to sell the private products backed by the same "quality" loans.

Just my take. I didn't sleep in a Holiday Inn Express last night.