<P> Economist Russell Roberts cited a June 2008 Washington Post article which stated that "(f) rom 2004 to 2006, the two (GSEs) purchased $434 billion in securities backed by subprime loans, creating a market for more such lending ." Furthermore, a 2004 HUD report admitted that while trading securities that were backed by subprime mortgages was something that the GSEs officially disavowed, they nevertheless participated in the market . Both Fannie and Freddie reported some of their subprime purchases in their annual reports for 2004, 2005, 2006, and 2007 . However, the full extent of GSE subprime purchases was not known until after the financial crisis of 2007 / 08 . In December 2011 the Securities and Exchange Commission charged 6 ex-executives of Fannie and Freddie with Securities Fraud, and the SEC alleged that their companies held, in reality, over $2 trillion in subprime loans as of June 2008 (a month before Krugman made his exonerating statement). </P> <P> Critics claim that the amount of subprime loans reported by the two GSEs are wildly understated . In an early estimate of GSE subprime purchases, Peter J. Wallison of the American Enterprise Institute and Calomiris estimated that the two GSEs held about $1 trillion of subprime as of August 2008 . A subsequent estimate by Edward Pinto, a former Fannie Mae Executive, was about $1.8 trillion, spread among 12 million mortgages . That would be, by number, nearly half of all subprime loans outstanding in the United States . The highest estimate was produced by Wallison and Edward Pinto, based on amounts reported by the Securities and Exchange Commission in conjunction with its securities fraud case against former executives of Fannie and Freddie . Using the SEC information, Wallison and Pinto estimated that the two GSEs held over $2 trillion in substandard loans in 2008 . </P> <P> The discrepancies can be attributed to the estimate sources and methods . The lowest estimate (Krugman's) is simply based on what is legally allowable, without regard to what was actually done . Other low estimates are simply based on the amounts reported by Fannie and Freddie in their financial statements and other reporting . As noted by Alan Greenspan, the subprime reporting by the GSEs was understated, and this fact was not widely known until 2009: "The enormous size of purchases by the GSEs (Fannie and Freddie) in 2003--2004 was not revealed until Fannie Mae in September 2009 reclassified a large part of its securities portfolio of prime mortgages as subprime ." </P> <P> The estimates of Wallison, Calomiris, and Pinto are based upon analysis of the specific characteristics of the loans . For example, Wallison and Calomiris used 5 factors which, they believe, indicate subprime lending . Those factors are negative loan amortization, interest - only payments, down - payments under 10 percent, low - documentation, and low FICO (credit) scores . </P>

C. government and federal reserve emergency loans create moral hazard because there is a tendency