This is the Cato Daily Podcast for Tuesday, September 6, 2011.

I'm Caleb Brown.

The federal legal challenge against big banks for selling toxic assets to Fannie Mae and Freddie Mac might lead you to think that

Fannie and Freddie were victims in all of this or that big banks didn't have an idea

what they were doing. Those claims need scrutiny. Mark Calabria, Director of Financial

Regulation Studies at the Cato Institute, comments.

What was Fannie and Freddie's role in securing these assets that by all accounts now were terrible?

Well, to give a little background and for starters, the Fannie and Freddie's

regulator, the Federal Housing Finance Administration, fondly known as FHFA, is the entity

instituting the suit.

And while we've put about $160 billion into bailing out Fannie and Freddie.

A part of that, about $40 to $50 billion in losses,

have come from Fannie and Freddie's purchase

of private label mortgage-backed securities. Now these are securities

that somebody else originated, bought the mortgage, packaged them together, and sold

Freddie and Fannie the underlying securities. So they never bought the individual mortgage, they bought the security.

And again, that's not the bulk of their losses, but it's a significant portion of their losses.

And that has been losses both on the value of the underlying securities and the defaults for the loans underline their securities.

So why does it matter that they bought the security and not the mortgage?

Well, when you buy a security that has been sold on the security market, you open up a whole

Pandora of securities laws.

You can be sued for securities fraud, for instance, if you as the Packager, so let's say,

...