What about Fannie and Freddie?

In a bid to fix blame for the meltdown in financial markets, the lead House oversight panel this week launched into the bailout of insurance giant American International Group (AIG) – and the non-bailout of Lehman Brothers investment bank.

Next week, it's the turn of high-flying hedge fund managers, once earning $1 billion a year, plus; then, the rating agencies who assured investors that all was well and the federal regulators who let it all happen.

But conspicuous for their absence – at least before November elections – are former executives of mortgage giants Fannie Mae and Freddie Mac, now in federal conservatorship.

Together, Fannie and Freddie owned or guaranteed some $5 trillion in home mortgages. Critics say they enabled the spike in exotic financial products, or "toxic" assets, now clogging US credit markets – an argument now emerging as a major GOP theme in the last weeks of the 2008 campaign.

"Fannie and Freddie were the catalysts, the match that started this forest fire," said Republican nominee John McCain at Tuesday night's presidential debate.

"There were some of us that stood up two years ago and said, we've got to enact legislation to fix this," he added. "Meanwhile the Democrats in the Senate ... and some members of Congress defended what Fannie and Freddie were doing. They resisted any change."

In response, Democratic candidate Barack Obama charged that Republicans were obscuring their own record of promoting deregulation across all sectors of the economy – a leading cause of meltdown in the financial services industry.

"Let's first of all understand that the biggest problem in this whole process was the deregulation of the financial system. Senator McCain, as recently as March, bragged about the fact that he is a deregulator," he responded in the debate. "I never promoted Fannie Mae. In fact, Senator McCain's campaign chairman's firm was a lobbyist on behalf of Fannie Mae, not me."

But GOP strategists are convinced that pointing fingers is, in fact, exactly what the public wants to see, and that Fannie and Freddie may be the best argument they have in the current electoral season.

On Wednesday, the National Republican Congressional Committee launched an ad targeting former Kansas City mayor Kay Barnes, who is challenging Rep. Sam Graves (R) of Missouri and who served on Fannie Mae's national advisory board.

"Kay Barnes was so anxious to push unsound policies at Fannie Mae with her own disastrous plans that she failed to account for the long-term consequences that these policies would eventually sow," said NRCC spokesman Ken Spain in a statement.

Republicans at this week's hearings of the House Committee on Government Oversight and Reform challenged chairman Henry Waxman (D) of California for not scheduling an investigation of the role of Fannie and Freddie in the current crisis.

"As Fannie and Freddie went, so went AIG, so went Lehman, and so went the entire American financial market," said Rep. Tom Davis of Virginia, the ranking Republican on the oversight panel.

Republicans blame the Clinton administration and Fannie Mae director Franklin Raines for lowering policy standards and increasing subprime loans to new, dangerous levels in 1999. They cite GOP initiatives going back to 2002 to rein in these activities, thwarted by Democrats.

"Given that the housing market is what brought down everyone else, why wouldn't we start with Fannie Mae and Freddie Mac," who worked their will in Congress, said Rep. Christopher Shays (R) of Connecticut at Monday's hearing. "Why are we looking at everyone else but Congress?"

Chairman Waxman responded that the majority staff is looking into Fannie and Freddie. "Freddie and Fannie had people in charge when Clinton was president that got excessive salaries and bonuses, but so did [appointees] by President Bush," he said. For many Democrats, the expansion of home ownership to families long shut out of the housing market was a values issue, but it's put them on the defensive.

"You have to take a look at what happened with regulation over the last eight years," says Rep. Rosa DeLauro (D) of Connecticut. "Fannie and Freddie have been the institutions that have been counted on for that American dream of home ownership. It may be there were some unintended consequences."

Until last month, Fannie Mae and Freddie Mac were government-sponsored enterprises that dominated the US home mortgage business. In 2008, they purchased about 80 percent of all new home mortgages in the US, and repackaged them as mortgage-backed securities, aka "troubled assets" in the Treasury Department's new $700 billion financial rescue package.

They were also powerful players in the Washington lobby scene. Since 1990, Fannie Mae and Freddie Mac have contributed more than $9.7 million to federal campaigns, according to the Center for Responsive Politics in Washington. They spent some $7.4 million in lobbying in the first six months of 2008 alone.

Fannie and Freddie also managed vast charitable operations that covered nearly every congressional district.