Re: Republicans Back Off Opposition to Financial Regulation Bill

El Castor wrote:
On Fri, 23 Apr 2010 10:30:26 +0200, Earl Evleth <evleth@xxxxxxxxxx>
wrote:

On 23/04/10 9:44, in article nnh2t59iip0t9covpkhg1rcsbiakj56oak@xxxxxxx, "El
Castor" <No_One@xxxxxxxx> wrote:

Rita, the real estate collapse we experienced in 2008/2009 was
sub-prime at it's core. Surely we can agree on that. The history of
sub-prime lending can be traced back to the racial politics of the
60's and 70's.

You go on and dodge a number of things and listen to the song in your head.

First Greenspan's policy of ever lower interest rates drove bowering costs
down. Since those having money to invest in the fix income area suffered
from less that zero real interest rates. Therefore investors seeking
proper returns on their money ventured into risky investment, the sub-prime
were sold as sort of "risk without real risk" in spreading the risk
around. The movement of the financial industry towards less risky
risky grouped investment is general, I know because we have some.

More over those taking the risk were not the original lender, as in
the days when I borrowed from a local bank (of America) who kept the
loan in their own loan portfolio. The agents for the banks, the loan
officers, had a number of loan restrictions (% down payment, salary
etc). The subprime revolution brought in loan
brokers, who were not responsible for a loan gone bad. They were
awarded commissions not salaries. They did not care if the borrower
was economically weak, the older criteria for obtaining a loan
were thrown away. The error of Federal Loan guarantees and
the associated "agency issued bonds" was in not imposting rigorous
standards on laans. A simple change of making the original lender
and institution which kept the bonds in their portfolios would
have solved much of the problem. Greenspan originally thought
the subprime a great institution since he felt it spread the
risk. And that market forces would handle the situation with
its usual efficiency. The fewer the controls the better.

Next easy loan practices and low interest fed the real estate bubble.
They were couple events.

Greenspan refuses to admit that. If the bubble had not occurred,
if prices had remained normal, the subprime scam might have worked.
Why? Because the collapse of the market would not have produced
"under the water" situations, and most people would still be
ahead, their equity still being positive.

No Jeff, you can't play the game honestly in the direction you
attempted. As with the global warming issue, you look a small
part of the whole picture and delude yourself into believing
it is the whole part.

I completely agree regarding Greenspan. Please note, I said (which you
clipped), "So is that the only reason for the financial collapse?
Absolutely not, but it was an important element". As a matter of fact,
I was thinking Fed interest rate policy when I wrote that.
Derivatives, AIG, rating agencies that dropped the ball, other
packagers of sub-prime loans, the Goldman Sachs scandal, etc. They all
played their part. But the fact remains that the roots of the
sub-prime melt down can be traced back to racial politics and left
wing pressure on banks -- lawsuits and legislation that forced lenders
to create loan products they didn't like, and make loans they never
would have made if Fannie and Freddie, prodded by the politicians, had
not given banks a place to lay off bets that they knew they could not
afford to lose.

I was there. I spent 35 years in the banking industry. I knew what red
lining was before you ever heard the term. I watched the pressure on
banks to make minority loans, and I sold FNMA and FHLMC bonds to
investors. The Left had an important role to play in this fiasco, but
as usual, refuses to accept responsibility for it's actions.

Let's see if I understand Jeff's point. There is a long history. Derivatives were used by FDR as a way to bring private money into the mortgage market by creating Fannie Mae. It worked. LBJ moved Fannie Mae off the federal budget, eliminating the federal guarantee that FDR had used to stimulate investment and created Freddie Mac to give Fannie Mae some competition. The two of them provided a continuing flow of private money into the mortgage market while mortgage derivatives in the private sector remained small. Most of the expansion of private home ownership through the mid seventies was made possible because Fannie Mae and Freddie Mac existed.

But, there was still a problem. Banks were discriminating against minorities by redlining neighborhoods based on their belief that these were high risk. Congress passed the Community Reinvestment Act in 1977 which did nothing more than *reveal* which banks were redlining. Faced with adverse public opinion, banks reluctantly began considering loans to neighborhoods that they had redlined previously. Fannie Mae and Freddie Mac were indeed there to purchase these loans, but only subject to strict requirements set on the borrower by HUD to assure that risk was minimized. It worked.

The CRA was modified over the years to increase the number of loans that could be made and to correct problems. Overall, the default rate on CRA mortgages proved to have default rates that compared favorably with the rest of the mortgage market. The banker's fears regarding the risk of investing in redlined neighborhoods proved to be unfounded. The CRA worked and investors were paying attention.

In 1999, Phil Gramm (R-TX) succeeded in repealing the provision of the Glass-Steagal Act that had kept banks from becoming too large since the Great Depression and in 2000, he was successful in passing legislation that exempted hedge funds from federal regulation. At this point we had decades of successful secondary mortgage market investment at Fannie Mae and Freddie Mac to demonstrate that these specific derivatives, along with the safeguards imposed on CRA mortgages worked. HUD, cautious as ever, increased the requirements on CRA mortgages because they foresaw the danger in too-rapid growth of the market.

So far, so good.

Now, the Bush administration thought that the private sector could produce his Ownership Society and looked favorably at the "creativity" in the financial sector as the large banks, now freed from the firewalls that had existed since the Great Depression and the hedge funds, now operating under a cloak of secrecy, started pumping private money into the mortgage market. They were encouraged by the data that had been accumulated over the previous three decades with the CRA loans, but they removed the safeguards thinking that the free market would serve instead. The banks bought everything in sight and begged for more. There were no constraints on mortgage brokers and they created ever more lenient lending practices including the so called ninja mortgages. What the hell, they had a ready market in the hungry private derivatives marketplace.

Greenspan was suffering from self-delusion as well and continued to reduce interest rates. Bush eliminated the safeguards on CRA loans instituted in 2000 and the private sector expanded rapidly from being a negligible part of the market in 2000 to a 60% share in 2005/6. The Republican administration, helped with a Republican Congress and free market enthusiasts in the financial sector built a massive bubble.

Greenspan, not realizing the impact of his actions on adjustable rate mortgages or perhaps not having many options, started raising interest rates to slow things down, doubling the prime rate by 2006. It was like pricking a balloon with a pin. The whole thing collapsed in a little over a year starting with Bear Stearns.

The Republicans want to conceal the failure of the private sector by blaming the CRA, Fannie Mae and Freddie Mac, Barnie Frank, Chris Dodd, .... anyone but themselves. But, it won't work. For once, truth is emerging and the Republican lies are ringing hollow, no matter how many times they repeat them. The financial crisis was caused by a private sector financial community that was acting like a casino. They proved that an unregulated free market does not work.
.

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