Let me start by recalling that this is the third version of a quasi-automatic market mechanism for limiting bank losses and facilitating bank resolution that has been proposed in the US. The first two both failed.
The first, which had some considerable success for many decades up until the 1930s, was the imposition of double liability on shareholders. Quite why this was rejected in the 1930s, and why academics have not proposed its reintroduction, (rather than the more complex CoCo scheme), are not entirely clear.
no one -- not investors, not regulators, not even bankers themselves -- knows exactly which banks are sitting on the biggest stockpiles of rotting loans within that pile. And doubt, as it always does during economic crises, has made Europe's already vulnerable financial system occasionally appear to seize up. Early last month, in an indication of just how dangerous the situation had become, European banks -- which appear to hold more than half of that $2.6 trillion in debt -- nearly stopped lending money to one another.
Sounds like more plumbing problems (remember the clogged financial system of two years ago, that Paulson was going to fix by buying up mortgage assets?).
It's true that Fannie and Freddie jumped into the muck with born-again enthusiasm. Here is an excellent account of that by David Hilzenrath in the Washington Post in 2008. But as Hilzenrath vividly documented, the quasi-government behemoths weren't pushing their private sector rivals to roll the dice. They were late to the craps table and desperately trying to make up for lost time.
One could take these same facts and describe them as the private sector bailing out of subprime before it started to go bad, with Freddie and Fannie jumping in at that point. Note that the real hockey stick of home prices took off in 2006, as Fannie and Freddie were "trying to make up for lost time."
But it is pointless to try to make such an interpretation. There is no questioning His Holiness, the infallible one. As Andrews explains, you're a racist if you think that government housing policy had anything to do with bad mortgages. And that's the clinching argument.
All pointers from Mark Thoma. I am still working through my Thoma backlog.