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Privatized profits, socialized losses
Is it the government’s job to bail out financial institutions that enter into irresponsible business transactions? There is nothing wrong with allowing a business in the real world to experience the natural consequences of making a series of bad decisions, many economists argue. The market correction witnessed this week by the tumbling of Lehman Brothers and Merrill Lynch’s $50 billion buyout by Bank of America will actually be good for the economy in the long-run.
Nouriel Roubini, chairman of RGE Monitor, describes America’s current corporate welfare maze by noting what we have a system where “profits are privatized and losses are socialized.” The news that the Fed is going to use taxpayer funds to offer a loan to AIG is no less than appalling. The Associated Press reports:
In the most far-reaching intervention into the private sector ever for the Federal Reserve, the government stepped in Tuesday to rescue American International Group Inc. with an $85 billion injection of taxpayer money. Under the deal, the government will get a 79.9 percent stake in one of the world’s largest insurers and the right to remove senior management. …
The Fed said it determined that a disorderly failure of AIG could hurt the already delicate financial markets and the economy.
This will not be a popular position, but let AIG file for bankruptcy and open the company up to liquidation over time. Let the company fold. Roubini reminds us that the current crisis is not simply a result of the subprime market but the “subprime mortgages, near-prime mortgages, prime mortgages, credit cards, auto loans, student loans, commercial real estate, municipal bonds, leverage loans that finance deals that should have never occurred.”
The key phrase in Roubini’s comment is “should have never occurred.” These financial institutions made silly mistakes, like giving mortgages to people with pathetic credit histories and offering ridiculous credit card limits to people who cannot afford them. Then the consequences are socialized to tax payers to foot the bill. Why are taxpayers held responsible for the irresponsibility of business leaders who leveraged debt with more debt?
The socialization of corporate losses does not create a climate of fiscal discipline desperately needed in global financial markets today. Additionally, why would a company like AIG want the federal government to have an 80 percent stake in its company? The government is ill-equipped to run itself, so why would one entrust billions of dollars of assets to the tentacles of government bureaucrats with a bridge loan?
No company lasts forever and it is not the government’s job to interfere with natural processes, especially when we are in the throws of corporate irresponsibility among private parties. Of course, the worse part of this current crisis is that it will result in more regulation because Americans have been conditioned to look to government to clean up everyone’s spilled milk.
The important question is why do we have a regulatory system that does not encourage more competition so that when massive companies like AIG fold, the results are not as potentially disruptive? We need more companies not less.
back to top37 Comments to “Privatized profits, socialized losses”
A mini poll: Who do prefer bail out Freddie, Fannie, AIG, WaMu, and so forth?
1. USA
2. China
3. Dubai
4. Nobody
5. Multinational Group of Some Sort
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4. Nobody
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I know you’re right, Mark Roth, but if I had a vote, it would have been for bankruptcy like Lehman.
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Any thoughts on new anti-trust legislation?
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Wow, does this mean the CEOs who bungled up the bail-outees will have to settle for drasticly reduced compensation packages?
Somehow, I’m doubting that.
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Read it and weep, folks!
“[Barack] Obama… blamed the shocking new round of subprime-relatedbankruptcies on the free-market system, and specifically the ‘trickle-down’economics of the Bush administration, which he tried to gig opponent JohnMcCain for wanting to extend. But it was the Clinton administration, obsessedwith multiculturalism, that dictated where mortgage lenders could lend,and originally helped create the market for the high-risk subprime loans nowinfecting like a retrovirus the balance sheets of many of Wall Street’s mostrevered institutions. Tough new regulations forced lenders into high-riskareas where they had no choice but to lower lending standards to make theloans that sound business practices had previously guarded against making. Itwas either that or face stiff government penalties. The untold story in thiswhole national crisis is that President Clinton put on steroids the CommunityRedevelopment Act, a well-intended Carter-era law designed to encourageminority homeownership. And in so doing, he helped create the market forthe risky subprime loans that he and Democrats now decry as not only greedybut ‘predatory.’ Yes, the market was fueled by greed and overleveraging inthe secondary market for subprimes, vis-a-vis mortgaged-backed securitiestraded on Wall Street. But the seed was planted in the ’90s by Clinton andhis social engineers.” —Investor’s Business Daily
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There is only one answer to this problem. Let the businesses fail and the owners take the loss. Letting it go on without full punishment leads to worse things down the road.
I am constantly reminded of bad citizens. They start off by shop lifting from the local convenience store, but nothing happens to them. Then they go on to vandalizing property in their neighborhoods. Next thing you know they are mugging old people for their SS checks and burglarizing homes. But still nothing or little happens to them. They become emboldened and start robbing banks and selling drugs but still nothing of consequence ever happens to them. Next thing you know they are killing people for sport. Then a lefty finally stands up stands up and says, Its all Bush’s fault and Bush should have stopped them. Now we need to regulate these victimized citizens by finally putting them in prison – but they only put them there for a few years and let them out early for good behavior while in Jail.
Next thing these victimized bad citizens are mass murderers but someone says no – you can’t execute them just because they killed your momma – that would be cruel to them, lets put them in jail with no hope for parole – and then they parole them anyway because they are rehabilitated enough to nuke the local mall next.
Now we have the left nationalizing every business they can get their hands on as fast as they can. What do they want? To teach their hero Hugo Chavez how to do it right by blaming someone else for the catastrophe and forcing them to steal an industry?
You have to love these thieves on the left.
But I am worried about your sanity.
Personally, I prefer Chavez.
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The dualistic fallacy is so alive here it stinks. Either it’s godly (aka biblical) or it’s socialism. Baloney!
What about the commandments against greed, and stealing? Why should the rest of us have to suffer while a white collar (often a “born again christian”) thief mismanages a business and walks away with a 6 figure bonus?
Our whole notion of “CEO” is neither biblical, democratic, just nor ethical. We need a shift of paradigm to delete the uber-capitalist elite who not only escape their crimes but get an obscene bonus as the company goes down the tubes. And then they thank the Lord as if God blessed their thievery. Whose God is this they serve?
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Great points Anthony.
Not sure where you are going with that RevTJ. Who here supports greed and stealing? Conservatives are saying let AIG and Lehman and the rest reap what they sow. Let the market deal with them like it deals with us.
Socialistic policies forced lenders to provide loans specifically to minority groups whether they could pay or not. And now socialistic policies will use taxpayer money to reward that CEO and his company for driving the company into the ground. Explain how this makes sense.
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#8REVTj
Yeah I know you wantto balme it on capitalists adn that you would prefer Stalin to rise from the dead an all but you will have to talk to Obama and see if he can make that happen for ya. He’s been tryin toi get this done all day but lefties just can’t ever seem to do anything no matter how hard they try. But they will tell you all about haow hard they tried, yap, yap, yap. It is better to watch what they do instead.
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Tell me about “golden parachutes.”
Not quite “golden showers” of gold, I guess.
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The captains of industry and banking have gone cap in hand to that needless institution for money. From loudly proclaiming self interest is necessary they have reached the point where that very self interest led them to bankruptcy. As the deregulated edifice of neo-19thC economies comes tumbling down, some people still attempt to defend the free market and somehow blame an ideology that believes in strict regulation of competitive markets. Even more amusing is the former head cheerleader of deregulation now championing a reform of Wall Street especially with Phil Gramm on his side
http://tinyurl.com/3qhm2b
The irony is complete when said reformer has 83 Wall Street lobbyists working on his campaign. I imagine they have develop a sudden appreciation for the welfare state and taxpayer money.
http://tinyurl.com/4xb92n
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HRW, you should try reading Xion’s last paragraph in NO. 9. That makes more sense than your nonsense.
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Not really.
At the moment, primitive third world countries (India, China, & Brazil) are replacing the great U S of A as greed stars.
The Random News Service, ever-ahead of the curve of breaking news (as we make it up) has learned that the banks of these three countries, combined in a consortium called “Ch-in-braz” has opened a “Payday Loans” office on Wall Street.
For companies (such as Lehman and AIG that just can’t quite make it to the next “Payday,” can get a loan of a few billion dollars to tide them over.
They will have to show that they are gainfully employed to qualify.
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NJL
He mentions socialist policies — show me where that exists in America. All I see is corporate welfare for the mutual backscratching society ie conservative politicians and Wall Street. A socialist would have never allowed unfettered capitalism — as Marx pointed out capitalism will eventually kill the middle class hence to maintain the American dream of the white picket fences proper regulatory agencies are needed to rein in capitalism.
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What the Republicans say to all this mess is “Let the corporations be as corrupt as they want to be. We don’t care! Yes it will cause tremendous suffering throughout the country. We don’t care! Let the economy go to hell. We don’t care!”
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Where have they said that, Anlir? I haven’t seen it.
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Well, look at Obama’s national service program. See the Wall Street Journal article or go to the Volokh Conspiracy and read all about it. Now that’s controlling the workforce, and with a foot in the door like that, the future is not only socialist, but it could even get worse. I’ll be dead in 30 years, but you people have kids.
No one wants corporations to be corrupt, but regulating how lenders lend isn’t as bad as bailing out these big banks. And while you guys want to deny it, it was the Clinton Administration that forced lenders to do what they did. It should be a dollars and cents decision whether or not to lend money on a mortgage. That’s not racism. What they did was social engineering, and it has failed, and now we are ALL paying for it. That and greed.
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What the Republicans say to all this mess is “Let the corporations be as corrupt as they want to be. We don’t care!”
Actually, I think it’s more accurate to say “Let the corporations be free to make as many bad business decisions as they want, and let them pay the consequences.”
Nobody is suggesting that corporations should get away with illegal activity.
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Xion: Socialistic policies forced lenders to provide loans specifically to minority groups whether they could pay or not. And now socialistic policies will use taxpayer money to reward that CEO and his company for driving the company into the ground. Explain how this makes sense.
Well, it’s not true. So whether it makes sense or not is largely moot.
As Harold Myerson ably describes, the roots of this crisis — and there have been bumps along the road before, just not this painful — go all the way back to the time when Wall Street decided that investing in America was less attractive than sending our money overseas.
He writes: It was not ever thus on Wall Street. In the late 19th and early 20th centuries, bankers such as August Belmont and J.P. Morgan invested European capital in American railroads and steel. Moreover, by the 1830s, a major political party, the Whigs, had arisen on a platform of “internal improvements” — fast-forwarding the nation’s development through a public commitment to building roads, rails and canals. Their successor party, the Republicans, continued these commitments, as Lincoln’s support for the transcontinental railroad and land-grant colleges makes clear.
By the mid-20th century, the behemoths of American manufacturing reinvested their own resources to meet most of their capital needs, while New Deal-era and subsequent administrations (including that of Republican Dwight Eisenhower) invested heavily in the nation’s infrastructure. Wall Street played a diminished role during the golden years of mass American prosperity but came roaring back beginning with the financial deregulation of the Reagan era.
Finance set the terms of corporate behavior over the past quarter-century, and not in ways that bolstered the economy. By its actions — elevating shareholder value over the interests of other corporate stakeholders, focusing on short-term investments rather than patient capital, pressuring corporations to offshore jobs and cut wages and benefits — Wall Street plainly preferred to fund production abroad and consumption at home. The internal investment strategy of 100 years ago was turned on its head. Where Morgan once funneled European capital into American production, for the past decade Morgan’s successors have directed Asian capital into devices to enable Americans to take on more debt to buy Asian products.
The mortgage crisis is just the precipitating event, the lighting of the fuse. This has been building for decades. Let’s just hope it doesn’t take decades to unwind.
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Graceland: Actually, I think it’s more accurate to say “Let the corporations be free to make as many bad business decisions as they want, and let them pay the consequences.”
Anyone who has investments — which means, anyone who has a 401(k), an IRA, mutual funds, really any kind of funds beyond a simple checking account — stands to be hurt by those bad business decisions.
If it only affected the companies that made the bad decisions, I’d agree with you. But when I lose a third of the value in my retirement savings overnight because of those bad decisions, a bailout is in my best interests.
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Anybody who thinks Obama, or Democrats in general, are “socialist” has no understanding of socialism. It’s just a scary-sounding word you folks like to toss out because you think it makes them sound bad.
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IBD has an incisive article today, Congress Tries To Fix What It Broke on the roots of this mortgage credit fiasco which have more to do with Congres than private finance companies.
Congress, mostly during the Carter and Clinton administrations, changed the banking rules to favor irresponsible lending practices. The whole article needs to be read but the guts of it are:
The mortgage lenders didn’t care, because they were going to sell the loans to other banks. The banks didn’t care, because they were going to repackage the loans as MBSs. The investors and traders didn’t care, because the MBSs were backed by Fannie and Freddie and their implicit government guarantees.
In other words, nobody up and down the line — from the branch office on main street to the high-rise on Wall Street — analyzed the risk of such ill-advised loans. But why should they? Everybody was just doing what the regulators in Washington wanted them to do.
So everybody won until everybody lost, including the minorities the government originally mandated the banks to serve.
The original culprits in all this were the social engineers who compelled banks to make the bad loans. The private sector has no business conducting social experiments on behalf of government. Its business is making profit. Period. So it did what it naturally does and turned the subprime social mandate into a lucrative industry.
Messrs. Paulson and Bernanke are just resolutely and wisely trying to clean up a mess caused by Congress.
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Peter Leavitt: The Reagan administration put in place the deregulation that made all this possible.
There’s blame enough to go around.
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Well, except, nobody “compelled banks to make the bad loans,” least of all mythical “social engineers.” Investors started investing in debt (and the expected long-term revenue stream as it was paid back) and using those investments to leverage more debt, because in the short term it was highly profitable.
Greed, it turns out, is not so good after all.
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SteveG, you have that quite wrong. The roots of this crisis can be traced back to the Carter administration Community Reinvestment Act [CRA] that the Clinton administration greatly expanded. Its actually a complex subject best explicated by a 2000 City Journal article, The Trillion-Dollar Bank Shakedown That Bodes Ill for Cities , that begns:
The Clinton administration has turned the Community Reinvestment Act, a once-obscure and lightly enforced banking regulation law, into one of the most powerful mandates shaping American cities—and, as Senate Banking Committee chairman Phil Gramm memorably put it, a vast extortion scheme against the nation’s banks. Under its provisions, U.S. banks have committed nearly $1 trillion for inner-city and low-income mortgages and real estate development projects, most of it funneled through a nationwide network of left-wing community groups, intent, in some cases, on teaching their low-income clients that the financial system is their enemy and, implicitly, that government, rather than their own striving, is the key to their well-being.
I inderstand that the left in promoting Obama is desparately trying to hang the mortgage credit debacle on the perfidy of Wall Street, though the truth is that the taproot is clearly the efforts of mainly the Carter and Clinton administration to social engineer home ownership through a thoroughgoing loosening of the banking laws and regulations.
Many Republicans including McCain were aware of what was going on; in 2004 Bush with strong support from McCain pushed for a major reform of Fan and Fred but they were defeated by a combination of a Democratic phalanx and and a few spineless Republicans.
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Peter: The CRA is not even mentioned in any article I’ve read on this, so if it is part of the problem, I doubt it’s more than a small part.
What CRA mostly does is give you an excuse to blame Democrats and use “socialist” and related words a few more times.
I think this is a much more accurate account.
The reason housing is wreaking havoc even on insurers like AIG and big investment banks, who do not make mortgage loans, is that during the boom, trillions of dollars of mortgages were packaged together into securities that promised to pay investors with the proceeds of those loan payments.
Those securities paid better rates than other types of assets during the boom years. So many investors from around the globe poured as much money as they could into those securities.
Faced with this demand, lenders starting making more loans to riskier borrowers, including people who might not be able to afford their mortgage payments in the future and even many with no proof of income.
When prices were rising, this wasn’t a problem. The risk of loan foreclosure or default was limited because many homeowners were able to sell their house for more than they owed and make a profit.
But once prices topped out and began falling, loan defaults and foreclosures started shooting higher as homeowners found it more difficult to sell their house. This created problems not just for subprime borrowers but even for those with good credit and income.
When foreclosures rose, the value of the various types of securities tied to mortgages started to fall, causing huge losses up and down Wall Street. It also made banks less eager to extend credit because of the risks involved.
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Steve, the CNN article doesn’t talk about the root of the problem which was primarily the Congress’s loosening of banking rules to accomodate sub-prinme lending that was accomplished through CRA. The reason you haven’t read about the CRA is that the liberal media won’t touch the subject.
A good summary of what happened at the ground level comes from the IBD article that I linked to above including:
Only, the risk-taking was her[Pelosi's] idea — and the idea of all the other Democrats, along with a handful of Republicans, who over the past 30 years have demonized lenders as racist and passed regulation after regulation pressuring them to make more loans to unqualified borrowers in the name of diversity.
They were the ones who screamed — “REDLINING!” — and sent banks scurrying for cover in low-income neighborhoods, where they have been forced to lower long-held industry standards for judging creditworthiness to make the subprime loans.
If they don’t comply, they are threatened with stiff penalties under the Community Reinvestment Act, or CRA, a law that forces banks to make home loans to people with poor credit risks.
No fewer than four federal banking regulatory agencies are responsible for enforcing the law. They subject lenders to racial litmus tests and issue regular report cards, the industry’s dreaded “CRA rating.”
The more branches that lenders put in poor neighborhoods, and the more loans they make there, the better their rating. Those lenders with low ratings can not only be fined, but also blocked from mergers and other business transactions needed to expand.
The regulation grew to monstrous proportions during the Clinton administration, obsessed as it was with multiculturalism. Amendments to the CRA in the mid-1990s dramatically raised the amount of home loans to otherwise unqualified low-income borrowers.
The revisions also allowed for the first time the securitization of CRA-regulated loans containing subprime mortgages. The changes came as radical “housing rights” groups led by ACORN lobbied for such loans. ACORN at the time was represented by a young public-interest lawyer in Chicago by the name of Barack Obama.
HUD, in turn, pressured Fannie Mae and Freddie Mac to purchase more subprime mortgages, and Fannie and Freddie, in turn, donated to the campaigns of leading Democrats like Barney Frank and Pelosi who throttled investigations into fraud at the agencies.
Soon, investment banks such as Bear Stearns were aggressively hawking the securities as “guaranteed.” Wall Street’s pitch was that MBSs were as safe as Treasuries, but with a higher yield.
But they weren’t safe. Everyone in the subprime business — from brokers to lenders to banks to investment houses — absolved themselves of responsibility for ensuring the high-risk loans were good.
Frankly, yesterdau I purposely didn’t get into the blame game on this, following Paulson’s and Bernanke’s lead; however the media and politiical rhetoric has become so fierce in its blame of the corporations, today I decided to state the investment banker’s side of the issue.
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I don’t buy the “liberal media” myth, Peter. I do realize that subprime mortgages are a component of the crisis. So are things like the Gramm-Leach-Bliley bill, written by the named Republican legislators and signed by President George H.W. Bush in 1999, which repealed regulations that prevented investment banks and consumer banks from co-mingling … which means that crashes in investment banks can hurt consumers who have no involvement in the investments.
This is not a simplistic problem. The Bush administration championed sub-prime mortgages just as much as the Clinton administration did (Republicans controlled Congress and the White House for the first six years of Bush’s time in office … if your party wanted to end the practice, they had the power to do it. But Bush’s “ownership society” theme benefited from it. And if Bush had had his way, part of our Social Security funds would be at Wall Street’s mercy too.)
I’m not going to have any patience for the Blame Clinton First approach to this. It’s been building since at least the 70s, and presidents and members of Congress of both parties have had a role in making it worse along the way.
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This is not true, by the way: If they don’t comply, they are threatened with stiff penalties under the Community Reinvestment Act, or CRA, a law that forces banks to make home loans to people with poor credit risks.
The CRA encourages banks to make loans within the communities they serve, even if they’re low-income, but it explicitly states –both the legislation and the regulations that implement it — that the loans are to be consistent with sound banking practices.
Nothing in the CRA requires banks to lend to people who are not good risks. It certainly doesn’t “force” them to. It encourages them to find people who are good risks within less affluent communities.
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And to put the end to it: http://www.prospect.org/cs/articles?article=did_liberals_cause_the_subprime_crisis“>This
irst, consider timing. CRA was enacted in 1977. The sub-prime lending at the heart of the current crisis exploded a full quarter century later. In the mid-1990s, new CRA regulations and a wave of mergers led to a flurry of CRA activity, but, as noted by the New America Foundation’s Ellen Seidman (and by Harvard’s Joint Center), that activity “largely came to an end by 2001.” In late 2004, the Bush administration announced plans to sharply weaken CRA regulations, pulling small and mid-sized banks out from under the law’s toughest standards. Yet sub-prime lending continued, and even intensified — at the very time when activity under CRA had slowed and the law had weakened.
Second, it is hard to blame CRA for the mortgage meltdown when CRA doesn’t even apply to most of the loans that are behind it. As the University of Michigan’s Michael Barr points out, half of sub-prime loans came from those mortgage companies beyond the reach of CRA. A further 25 to 30 percent came from bank subsidiaries and affiliates, which come under CRA to varying degrees but not as fully as banks themselves. (With affiliates, banks can choose whether to count the loans.) Perhaps one in four sub-prime loans were made by the institutions fully governed by CRA.
Most important, the lenders subject to CRA have engaged in less, not more, of the most dangerous lending. Janet Yellen, president of the San Francisco Federal Reserve, offers the killer statistic: Independent mortgage companies, which are not covered by CRA, made high-priced loans at more than twice the rate of the banks and thrifts. With this in mind, Yellen specifically rejects the “tendency to conflate the current problems in the sub-prime market with CRA-motivated lending.? CRA, Yellen says, “has increased the volume of responsible lending to low- and moderate-income households.”
Yellen is hardly alone in concluding that the real problems came from the institutions beyond the reach of CRA. One of the only regulators who long ago saw the current crisis coming was the late Ned Gramlich, a former Fed governor. While Alan Greenspan was cheering the sub-prime boom, Gramlich warned of its risks and unsuccessfully pushed for greater supervision of bank affiliates. But Gramlich praised CRA, saying last year, “banks have made many low- and moderate-income mortgages to fulfill their CRA obligations, they have found default rates pleasantly low, and they generally charge low mortgages rates. Thirty years later, CRA has become very good business.”
It’s telling that, amid all the recent recriminations, even lenders have not fingered CRA. That’s because CRA didn’t bring about the reckless lending at the heart of the crisis. Just as sub-prime lending was exploding, CRA was losing force and relevance. And the worst offenders, the independent mortgage companies, were never subject to CRA — or any federal regulator. Law didn’t make them lend. The profit motive did.
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As simply as I can put it, SteveG is quite right, and Peter Leavitt is wrong with regards to CRA.
I work in banking, and for many years specifically in mortgage banking. For most of the time in mortgage banking, I reported to our Risk Manager, and was responsible for gathering data for our HMDA-LAR submission, and CRA compliance data. We went above and beyond the requirements of the law, creating pattern-shift reports to detect geographic trends and trending for our originations offices and even down to the level of individual loan officers. We did this not just to ensure compliance with CRA, which is a minimal standard, but because it is both prudent and the right thing to do.
CRA does nothing to force you to make loans. It merely says you actually have to do business and provide services to the neighborhoods (cities, census tracts, etc) where you are located.
You are never required to loan to a less-than-credit-worthy borrower. What you are required to do is demonstrate that you do not discriminate based on race, neighborhood, etc. A way to do this is to put side by side two similar loans – same type of credit history and scores, same characteristics – one that you’ve rejected for a minority, and one that you’ve approved for a majority applicant. You then need to show what the difference between the loans is – why you approved one but rejected the other.
You can tighten your standards across the board, but you had better do so uniformly.
We also later were impacted by sub-prime loans years before the current crisis became apparent. We were very proactive in working with the regulators helping to identify the bad apples among correspondent lenders with whom we had relationships.
Throughout, we have had a very conservative stance, excellent CRA ratings, and are doing very well lately.
But hey, if you want to cling to your mythical “liberal media” explanation, you go right ahead.
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Thomas, your bank might be doing well with the CRA albatross, though many others have had serious difficulty with it. The best understanding of this comes from a 2000 City Journal article, The Trillion-Dollar Bank Shakedown That Bodes Ill for Cities. You need to read the full article though the following gives a good flavor:
The Clinton administration’s get-tough regulatory regime mattered so crucially because bank deregulation had set off a wave of mega-mergers, including the acquisition of the Bank of America by NationsBank, BankBoston by Fleet Financial, and Bankers Trust by Deutsche Bank. Regulatory approval of such mergers depended, in part, on positive CRA ratings. “To avoid the possibility of a denied or delayed application,” advises the NCRC in its deadpan tone, “lending institutions have an incentive to make formal agreements with community organizations.” By intervening—even just threatening to intervene—in the CRA review process, left-wing nonprofit groups have been able to gain control over eye-popping pools of bank capital, which they in turn parcel out to individual low-income mortgage seekers. A radical group called ACORN Housing has a $760 million commitment from the Bank of New York; the Boston-based Neighborhood Assistance Corporation of America has a $3-billion agreement with the Bank of America; a coalition of groups headed by New Jersey Citizen Action has a five-year, $13-billion agreement with First Union Corporation. Similar deals operate in almost every major U.S. city. Observes Tom Callahan, executive director of the Massachusetts Affordable Housing Alliance, which has $220 million in bank mortgage money to parcel out, “CRA is the backbone of everything we do.”
My guess is that yours is relatively speaking a small bank that doesn’t have to deal with the pressures of large city banks. I have been a businessman in investing banking and know quite a few savvy bankers who regard the CRA regime as a nightmare.
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Sorry, the link for the above is:
http://www.city-journal.org/html/10_1_the_trillion_dollar.html
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Peter: However, that article is hogwash for reasons Thomas and I have both pointed out to you.
1. If CRA is to blame, why did the crisis take almost 30 years after its initial passage to emerge?
2. If CRA is to blame, why is it that most of the institutions involved in the mess are those not covered by CRA provisions?
3. If CRA is to blame, why is that those banks that are covered by it have been making fewer, not more, of the riskier loans?
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1. If CRA is to blame, why did the crisis take almost 30 years after its initial passage to emerge?
You need to read the City Journal article linked to above that was written in 2000. It often takes decades for faulty legislation to lay a flawed foundation and slowly over time prove to be deeply problematic. Another example would be the laws governing welfare that started in the thirties and were finally and drastically amended in the 90’s. My guess id that the outfit that will be created to mitigate this crisis will find a way to majorly amend the CRA and other regulations that have brought on this crisis.
If CRA is to blame, why is it that most of the institutions involved in the mess are those not covered by CRA provisions?
In fact the institutions involved, especially Fan and Fred, were covered by the CRA provisions. From the IBD article The revisions also allowed for the first time the securitization of CRA-regulated loans containing subprime mortgages. The changes came as radical “housing rights” groups led by ACORN lobbied for such loans. ACORN at the time was represented by a young public-interest lawyer in Chicago by the name of Barack Obama
If CRA is to blame, why is that those banks that are covered by it have been making fewer, not more, of the riskier loans?
Huh, most urban banks, following the pressure of CRA regs were making these subprime and alt A loans right up until the housing market started tanking in 2006.
By the way, while the CRA is the taproot of this crisis, the easy money policy that the Fed established in the 2001-4 greatly exacerbated it.
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Peter #33
Far from being a small bank, this was at one of the top 20 commercial banks in the country .
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