TCS Daily

The Bowyer Bailout Alternative

By Jerry Bowyer - September 25, 2008 12:00 AM

I just got off the phone with Ed Lazear (Chairman of the President's Council of Economic Advisors), and he made a good case for the severity of the crisis, especially negative interest rate on T-Bills. It got bad last week. The sun turned to sackcloth, the moon ran blood red, burning hailstone, etc...crazy stuff. Something had to be done.

The problem is that they are just beginning to understand what a few of us (including Larry Kudlow and Steve Forbes) have seen all along:

Over-regulation brought us to this crisis, not under-regulation. If we get the diagnosis wrong, then the prescription will be wrong too.

Think of the analogy of a 'bail out': someone knocks a hole in a boat and the water rushes in. The crew bails water out of the boat to keep it from sinking. If things are really bad, another boat comes and helps. This analogy points to the real problem: the hole! If you patch the hole early, no bailing is needed. If you patch it very late, the whole ship needs to go into dry dock. But the bailing out only makes sense in the context of patching the original problem. The worst thing to do would be to allow the ship to sink to make some kind of populist political point. No, revise that:

The worst thing to do would be to take the left's view and say "too much water in the boat, let's knock more holes into it so the water can get out."

That's what more regulations would mean. Place salary ceilings on "every company that benefits in any way whatsoever from the bailout" as Barney Frank said today on CNBC, and you'll get a talent exodus. Give judges the power to obviate existing mortgage contracts with investors around the world - the dollar will plunge. Every one of those proposals is another hole in the boat.

The best thing to do is to patch the holes. Here they are:

Some are talking about putting a hold on the mark to market regulations. That's a start but not enough. Don't suspend mark to market, abolish it. It's part of the whole Sarbox, Spitzer, FAS 157 wave of punitive regulation after Enron. It makes no sense to impose and universalize temporary downturns, especially during panics.

Abolish the Bank Holding Company Act. It's a remnant of the 1920s before branch banking. Its only current effect is to keep private equity from buying majority stakes in troubled banks. Goldman's decision yesterday just illustrates the problem. They had to change structure in order to buy up other banks. This is nuts. Get rid of this dinosaur and private equity will start the capital infusions.

Abolish the Community Reinvestment Act. Forcing banks to make minority loans is the original sin out of which came the Subprime mortgage industry. Let banks decide where to loan; that's their job. Leave identity politics out of our credit system.

Do all of the above and I'm not at all sure that any bailout would still be needed. Before we subsidize these institutions, let's stop the things we are already doing to collapse them. Back to Hippocrates: First of all, do no harm.



Still won't happen
Especially repeal of liberal sacred cows like the CRA or limiting compensation. The Dems want the government to not bail out the industry but to permanently NATIONALIZE it.

Some truth to that
Be careful about over-characterization though. The socialist liberal Dems want that, I know a lot of more centerist Dems that do not ahd a few socialist Republicians who would, at least, go along for the ride.

I am personally for ending the "Golden Parachute", it is nothing but cronyism and does not reward the best and brightest. Better compensation would be through annual bonuses that give CEOs the opportunity to make bigger money while they run the company; or less if they run it into the ground. But I do not believe Government can or should regulate this, at least not directly.

Perhaps a law making it a federal felony to take such compensation if a business goes bankrupt or out of business? Perhaps felony fraud laws for boards of directors who do not direct? If the laws are already on the books (and with the FBI investigation underway I believe they are) then enforce them!!

I get pissed when a company I own stock in suddenly goes south and the CEO bails with a $50 million severence package. Personally I want to skin the SOB!! It is part of my dividends that are paying for that boondoggle!!

On principal I don't like this particular type of compensation, but i really don't care too much what a CEO makes; as long as the base salary is in line with the companies gross sales and net profit figures. If that profit goes up, he deserves a bonus based on a percentage of the raise in profit.

" at least not directly."
"Perhaps a law making it a federal felony to take such compensation if a business goes bankrupt or out of business? Perhaps felony fraud laws for boards of directors who do not direct? If the laws are already on the books (and with the FBI investigation underway I believe they are) then enforce them!!"

Then you support socialism.

"but i really don't care too much what a CEO makes;"

Obviously you do.

If you don't want to support ending all the laws which create corporations in the first place, then you need to live with the socialism it produces.

should have kept that muttering to myself, sorry
I got to writing while I was mulling pros and cons.

I don't care what a particular CEO makes. I do hope the board is smart enough to keep it in line with the companies sales and profits. I don't have millions in investments, a few thousand is all.

Those references were worded as questions for a reason. The reason was curiousity as to whether such laws exist and whether they should be put on the books if they don't. I don't support doing so if they do not already exist; on the other hand, I think they should be enforced if they do.

I care the a company I invest in is playing straight. To me, what the CEO is making and any "Golden Parachute" is a good indication of that. Over compensation of the CEO and a large "Golden Parachute" is a pretty good sign that the Board is in "profit taking" mode and wants this CEO to artificially run up the stock price and dividend, then "bail out" when the company falters.

You said - "If you don't want to support ending all the laws which create corporations in the first place, then you need to live with the socialism it produces."

Hmmm… I did not think corporations were a creation of socialism. I would also hate losing investment options for people's 401(k).

"socialist liberal Dems" control the Dem party
...both in and out of Washington. Obama is one of them, as well.

The 'Golden Parachute' is to get talented people to take career risks they otherwise wouldn't. Remember: The 'Big Cheese' Job is not like any other. It can't be compared to other 'employees'.

It's like comparing kings and presidents to everyone else while, in fact, they are only equal to each other.

To treat them otherwise means they won't be able to do the job they need to do.

Does it look 'unfair' to us peons down below? Sure does! Does it invoke envy and jealousy and class warfare? You bet.

But, its all about incentives.

And, I worked for WorldComm. Lost my 401(k) and ESPP money -- about $20k worth. Still, logic is logic.

Corporations are created by the government
Don't people have to file papers with some state agency to create a corporation?

And what does 401(k) mean? It is the paragraph of a government tax code.

Bailout for automakers?
If the US government is going to mandate what auto companies produce with CAFE and such, I think they deserve the support of the government.

If you disagree, then support removing government regulations on the auto industry.

If I ever returned to Saudi Arabia to work, I would demand a full year's salary up front.

It is not a golden parachute but it does remove some of the risk.

The Law of Unintended Consequences
The last time Congress tried to crack down on CEO pay was in 1993, when it amended the tax code (section 162(m), in case you care) so that pay above $1 million was not tax deductible to the employer if it wasn't performance-based. No problem, said companies - we'll just cap salary at $1 million and ladle on stock options, which by definition are performance-based, in staggering amounts. There followed the greatest bull market in history, and because of all those options CEOs made far more money than they ever would have if 162(m) hadn't happened.

How will CEOs turn the new pay restrictions to their advantage? I don't know. But you just watch.


there is no trust when ideology rules
Two points I think are incorrect in this article (if not more).

The whole point about mark to market regulations is a scapegoat, an excuse. It amounts to: The players didn't screw up or do anything wrong, its the rules that made them screw up. I'm not saying I don't support taking a hard look at mark to market and maybe making some changes. But it was created in response to market corruption, its extremely short-sighted to argue we need to go back to those conditions. Its ideological, which in its nature is short-sighted. Despite regulation, the key players in this debacle found a way to take advantage of the markets to enrich themselves, it makes absolutely no sense to think if we removed regulations that these corrupt people would no longer try to use the system to their own benefit. It would be easier to screw everyone else with no rules. Forget the boat, you'd be in the water with no lifejacket.

Don't take this to mean I want a bunch of new regulation. I want smart regulation, applied and enforced. I want it to be as minimal as possible, but the most important thing is that is created for and with a purpose. The worst thing to do is create it because one believes more, or less, or no, regulation is where we start the analysis from. Answers come from thinking first, not thinking comes from answers first. Thats a key lesson of our experience the last 8 years.

The second point I think is bogus is about the CRA. CRA has nothing to do with suburb dwellers getting loans they can't afford. That is where the beef resides in this morgage meltdown. Borrowers taking too much and banks giving too much, both at fault. CRA is peanuts in this mess. And I don't care much for CRA, but again, if some banks weren't openly racist about how they determine lending it wouldn't have been created in the first place.

And to you Zyndryl: I'm closer to your view about the bailout than I used to be. I still think its a valid argument that the bailout is good to minimize the damage to everyone else, but if I had a vote on it, I would vote to not bail them out. Let them fail, let the world burn, and we'll sort it out from there. The banks knew when they took these risks that the government would bail them out.

No doubt you are right
Which is one reason I don't like government restrictions on things like this. I just don't like the Golden Parachute either.

Yeah, it is something I occasionally catch myself doing
I'm sitting here looking at a post and trying to weight to pros and cons of the situation and what has been said. Every once-in-a-while I do it while I'm posting and some of those random thoughts get into the computer.

Depends on your ideology
If your ideology supports taking my property, then I don't trust your ideology.

If your ideology respects private property rights, why not trust that?

The ideology that started this mess was that the state decided it wanted a certain outcome and 'encouraged' the economic tools they could control to obtain that outcome. Markets responded to the distortion to what we have now.

Markets always respond to external forces. I prefer those external forces be individuals free to decide what is in their best interest, not a coercive state deciding what outcome it wants for political gain.

" if some banks weren't openly racist about how they determine lending it wouldn't have been created in the first place."

So what if some banks were openly racist? It is 'their' money to lend. If the depositors didn't like their bank discriminating and turning away good business, they can put their money in a bank that doesn't discriminate.

That is how the free market regulates itself.

Pretty good post Bob
I can only really take issue with CRA. It was the dumbest thing the government ever did and it is coming back to bite them in the rear-end.

Banks were not "openly racist" they were openly low-risk. If someone in those zones came to them with the same backing as others they were giving loans to the loans would have been made. But, with property values in those high-risk zones sitting at 1/2 to 2/3rds of what they were in other areas, there is no why they would make loans on property at the same level.

Enter CRA!

To meet CRA mandates, banks were giving loans in situations that made the old guard's spinchters flutter.

But you are right, CRA is a comparative drop int he bucket.

Mark-to-market was another regulation that helped create this mess.

All that aside, the real culprit was greed and passing bad paper. Sub-prime VIR loans were the biggie. Way too much of this was being traded as if it was a share of Microsoft stock. The originator knew many of these loans would go into default. But they felt that, with the housing bubble rising, they could re-coup the forecloser cost by selling the property again as a higher price.

Oops! Foreclosers meant more houses on the market and less money to loan, the bubble burst and the market dropped quickly. All thouse traded loans were now worth less then their written paper value.

The worst thing about this is that any fool with some insight should have been able to see it coming. Overextended loans, sudden jumps in interest rates and payments, loanee could barely afford the original payment and is now in trouble, forecloser. Too much cash tied into bad loans and too many houses on the market creates lower market prices, banks (or whoever held the mortgage paper) has lost 15%-30% in value on the property. Panic insues, all exchange market make wild fluctuations, all economic indicators begin to shift to the negative. Recession, and possibly depression, looms. Government gets involved and begins taking steps to fix the problem (with massive infusions of cash). Initial doom staved off but economy goes flat for next 2 to 10 years. Mild recession or sluggish economic growth will be the rule for a while.

This seems to be the history, we will see what happens this time around.

Outright fraud
A Realtor did a title search on a foreclosed property. She found in the past few years it had been 'sold' to members of the same family three or four times. Each time for significantly more money.
They were illegal aliens from Brazil so when they skipped town they left with a couple of hundred thousand.

I"m sure
There is little doubt there as been more than a little fraud as well. This problem begins at the lowest levels, with realtors and banks. Everybody seemd to be trying to squeeze their share out of the real estate bubble; then it burst. Now everyone is trying to blame someone else.

Fools and their money are soon parted.

The CRA & Racism
"The second point I think is bogus is about the CRA. CRA has nothing to do with suburb dwellers getting loans they can't afford."

The CRA is where all this stems. The subprime mortgage was BORN because of aggressive enforcement of the CRA by Janet Reno. This is all well documented.

But it was only the 'stick'. The 'carrot' was Fannie Mae and Freddie Mac buying up all that crap.

And a point of convergence of our two respective differences of opinion...both Fannie and Freddie were GSAs whom everyone EXPECTED would be bailed out by the Feds if something should go wrong. And that is just what is happening/going to happen.

"And I don't care much for CRA, but again, if some banks weren't openly racist about how they determine lending it wouldn't have been created in the first place."

The banks were NEVER 'racist' (openly or otherwise), unless your definition of 'racist' is: (a) can't cough up a 20% down payment (SOP at that time) (b) can't meet documented income requirements and (c) can't meet the credit history requirements necessary to make a sound mortgage loan -- AS WE ALL KNOW FOR SURE AFTER ALL OF THIS MESS.

In other words, they were being prudent and responsible with their depositor's money and the taxpayer's risk.

Oh, but that was the Dems' definition of 'racism', Bob. And they were the ones pushing it. The CRA needs to be abolished as do both Freddie and Fannie. The government needs to stay out of the housing biz, no matter what the good intentions were. Period.

You know, the 30 year mortgage has only been around since the late 40s or so? Prior to that, mortgages like -- mostl all debt during that time -- had a maximum term of 7 years. Then it sneaked up to 10-15 years. Then 30. We are not a nation of homeowners but one of debt-serfs tied to the bank's property. How does that help the poor minority and why isn't that basic cause of their plight and most other Americans not being addressed? Instead, we bot the CRA and Freddie and Fannie and now this mess -- ALL predictable.

But question that and you're RACIST! If you are WHITE and question that, why YOU WANT TO BRING BACK SLAVERY (as Whoopie Goldberg point-blank accused McCain of wanting to do on that stupid show, The View).

Boy, I wonder how many 'white folk' are going to be able to resist inflicting a a lot of payback in the privacy of the voting booth this election for all the political correctness and affirmative action quotas and everything else heaped on them during their lifetimes because of 'racism'. Note: That isn't the same as hating blacks, either. It is just simple payback for being beaten with sticks like the CRA and guilt trips for slavery over and over again. There are a lot more white folks who hold such resentments than there are outright bigots of the more primitive nature.

But such distinctions won't be made when Obama loses. All whites will be declared RACISTS of the South African Apartheid variety instead. Nobody learns.

It's been a while since I've been able to thrash at Bob directly.

Professing a belief in absurdities
The collapse of our no-rules financial markets, and impending loss of investors' trillions without a bailout from their enabling Mommy State, appears to have revitalized the nearly moribund TCS website. After six weeks of utter silence, all of a sudden I find seven new articles, all telling us the sky is not blue but fuchsia.

The Bowyer article is the dumbest of the lot. Miserably lacking in specifics until the final paragraphs, it then tells us the problem is the federal government telling lenders where to place their loans.

I doubt even any of you, the faithful, actually believe this. Once lenders had placed all the strong loans they could close, they still had a trillion bucks left over. So they proceeded to place the money in bad loans and then sell them with some fancy razzle dazzle called mortgage backed securities. And, since the repeal of effective regulation allowed the bundlers to also act as the rating agents, they were all certified AAA.

That was the big problem and everyone knows it.

The government would guarantee ALL loans, good or bad.
What an oxymoron: Government sponsored enterprise

If the government was going to guarantee ALL loans it had an obligation to be damn sure they were made to people who could pay them back.

That stopped happening when Freddie and Fannie began to 'securitize' the loans and sell them, with an implicit guarantee as the oxymoronic government sponsored enterprise'.

The government bears ALL responsibility for the current mess, NOT any FREE market.

"In its new budget proposal, the Bush White House is sticking to its guns in regard to shrinking the size of Fannie Mae and Freddie Mac. The White House says it favors a new, strong regulator for the housing government-sponsored enterprises, one that would require the two "over time" to "dispose of certain assets." The only assets the Bush administration wants Fannie and Freddie to hold are "those that provide a specific public benefit such as a pipeline for mortgage securitization and affordable housing mortgages not suitable for securitization." The 2007 budget released by the White House Feb. 6 offers no specific limits on the size of their portfolios, which together total $1.4 trillion. In the budget, the White House reiterates its concern that the two GSEs pose a "systemic risk" to the nation's financial system if something should go financially awry at the companies. Fannie Mae, Freddie Mac, and their backers oppose portfolio limits. "


"A U.S. District Court jury found Weiss, of Englewood, guilty late Wednesday in a complicated mortgage fraud scheme that primarily targeted Hispanics. Many of the people involved were in the U.S. illegally, Eid said, and did not understand the mortgage loan process. "

""Traditional power centers in Washington, like organized labor and the government-sponsored enterprises (Fannie Mae and Freddie Mac), will now have important political allies back in positions of leadership in the Senate after coming under heavy assault by the Republicans." "

""On Sept. 10, 2003, Treasury Secretary John Snow and then-HUD head Mel Martinez outlined the administration's thinking on reforming Fannie and Freddie. Testifying before the House Financial Services Committee, Snow called for a new regulatory regime, one key element of which would be a receivership provision. Amazingly, there is no real procedure in place for reorganizing Fannie or Freddie in the event of a bankruptcy. By setting up a receivership mechanism, the government would be sending an unmistakable message: It would not stand behind Fannie and Freddie's debt."

Who kept preventing the regulation of GSE's?

CRA and loan 'securitization'
October 20, 1997

"First Union Capital Markets Corp. and Bear, Stearns & Co. Inc. have priced a $384.6 million offering of securities backed by Community Reinvestment Act (CRA) loans - marking the industry's first public securitization of CRA loans."

""The securitization of these affordable mortgages allows us to redeploy capital back into our communities and to expand our ability to provide credit to low and moderate income individuals," said Jane Henderson, managing director of First Union's Community Reinvestment and Fair Lending Programs. "First Union is committed to promoting home ownership in traditionally underserved markets through a comprehensive line of competitive and flexible affordable mortgage products. This transaction enables us to continue to aggressively serve those markets.""

"The $384.6 million in senior certificates are guaranteed by Freddie Mac and have an implied "AAA" rating. "

"First Union's community reinvestment activity averages $3.5 billion per year. First Union offers a broad range of financial products and services to low and moderate income communities, including affordable housing mortgages, home improvement loans, consumer loans, secured credit cards, small business loans, small farm loans, micro-lending and Low Income Housing Tax Credits.",,134_307%5E306,00.html

Why are they promoting how well they 'serve' low and moderate income customers?

Who caused the problem and why?
These are critical questions in order to prevent a recurrence.

Evidences is quite clear the the government is to blame and more specifically, the socialist democrats like Frank and Dodd.

Government sponsored enterprises
Re Fannie and Freddie, the government sponsored their inception-- and by so doing enabled a generation of prospective homeowners to buy their dream and boost the conomy as a whole. But they did not continue to manage them. And bad management was what brought these two giants down.

So now they've been nationalized. And since we have to have something like Fannie and Freddie, and wayward private managers have brought them to ruin, that's not such a bad outcome. They certainly couldn't do the job any worse, could they?

When you think about it, top-dollar CEOs have an incentive to indulge in high-risk activities for short-term gain. Their buddies on the boards reward them for such behavior... this we see lots of large companies being hollowed out from within, and not just the financial giants.

GS-17s, laboring at a tiny fraction of the management cost, can't benefit from such behavior. Their salaries stay the same. So they have a far greater incentive just to do a conscientious job of retaining value for their principals-- in this case, the American public. One could only hope the new managers turn out to be lowly actuarial drones, not political appointees.

Serving the poor credit risks
"Why are they promoting how well they 'serve' low and moderate income customers?"

Didn't I just answer this question? After they placed all the good loans, they still had a lot of money left unlent. It was burning a hole in their pockets.

The whole scam was permitted by a poorly crafted act of Congress. Loan originators were allowed to use a stack of their unlent cash on the creation of shoddy loans. And then, since no one in their right mind would hold these turkeys, they were allowed to unload them on the bond market, with unrealistic ratings.

A useful first step toward preventing any recurrence would be either to forbid the bundling and repackaging of consumer loans, or to have government create an incorruptible rating agency that could properly evaluate them. I know, I know... theory would seem to indicate that private firms could do this job as well or better.

But they didn't.

Sensible new rules
You ask "Who caused these problems, and why? These are critical questions in order to prevent a recurrence."

Necessary questions to ask, certainly. But not sufficient. This is a new situation. And the correction involves pitfalls unforeseen by anyone in the past.

But for openers, it never would have happened had Glass-Stegall remained in place. Bundled securities could never have been assembled and sold under faulty descriptions of their contents.

One piece of new legislation we could use right now would be the outlawing of ALL variable-rate mortgages. This is a scam for the unwary, and that was my opinion when I first heard of them, back in the mid-seventies. They're a trap for the mortgage-holders on both ends, those paying on them and those getting paid from them.

"Socialism will work if only the right people are charge."
That's what you say and you are wrong.

Socialism will never succeed in creating prosperity because of the systemic flaw of not respecting property rights.

This is the ulitmate result of government meddling in the market.
" sold under faulty descriptions of their contents."

It was a 'government sponsored enterprise' that described them.

Socialism fails again.

Wrong answer
They were sucking up the government so they could get permission to expand.

Recall also that in '95-'96 Clinton and Gore were trying to attract the illegal immigrant vote. Using government coercive tactics to force banks to lend illegals money is just one way.

The birth of the 'declared income', 0% down sub-prime loans was caused by CRA bullying, pure and simple.

Even the Boston Globe acknowledges this:

Who needs banks?
Virgin Money:

"Virgin Money manages business loans between relatives and friends. Using us means that the business of your loan—legal documents, transfer of payments, year-end reporting—will be taken care of. (Which we think will come in handy, because, really, you’ve got enough on your plate.)

Virgin Money business loans are flexible, fast and fit your financial needs. When you use us, grace periods and deferred payments are easy. It’s up to you and your partner. You pick the terms, we create the documents and manage repayment. Not sure about lending? Need advice on how to ask for a loan? We can help. Request a guide. Call one of our specialists. We try to please."

Need to sell your house? Carry the mortgage yourself.

Oh, I forgot, the government can't control this.

What good are rules if they are not enforced?
Illegal immigrants are not supposed to be able to work legally or take out a mortgage, yet, they do with the full knowledge and assistance of various government agencies.

When the government ignores its own rules, what good are new ones, or the old ones for that matter?

I know! Right? White people suffer from racism SO much, don't they?
The racism I'm referring to is from my memory of documentation: maps with red line borders showing geographies where bankers X wouldn't even consider loaning and transcripts of said bankers referring to those areas as black areas and joking about the fact they won't even give a loan a thought to those people.

I understand your need Zyndryl to blow this up to conspiratorial dimensions. Indeed, thats your SOP. I also don't doubt banks were being prudent and responsible with the money, maybe they met a), b) and c) factors you offered - which is the way it should be. (although I'd argue 20% down isn't needed. People with good credit and income are left out just because they don't have a chunk of money to put down) The fact remains, assuming my memory is accurate, there was documented evidence of racism taking place, as such CRA was created.

And maybe the sub-prime debacle stems from CRA, but that doesn't excuse banks and borrowers of their responsibility either.

I even agree with a position to abolish CRA and Fannie and Freddie. Isn't that crazy?!

"How does that help the poor minority and why isn't that basic cause of their plight and most other Americans not being addressed?"

Wow! Are you becoming a populist? Since when do you care about most other Americans? Are you planning to vote for Obama too? Its very hard to believe you've come to your senses THAT much.

"Instead, we bot the CRA and Freddie and Fannie and now this mess -- ALL predictable."

This mess is a direct result of the W Bush culture my friend. Bush's policies, Bush's Fed, it was even Bush's Congress when Republicans controlled both houses. Congressional Republicans did whatever Bush or Cheney wanted in those days. The second go-round of trickle-down economics has resulted the same as the first - failure. Even worse failure this time because Bush isn't nearly as smart as Reagan, and twice as stubborn. Its not what Bush knows that scares me, its what he thinks he knows but is wrong about.

I'm not sure how much Justic has an influence in this subject, but I won't leave out the fact its been Bush's Justice too.

"Boy, I wonder how many 'white folk' are going to be able to resist inflicting a a lot of payback in the privacy of the voting booth this election for all the political correctness and affirmative action quotas and everything else heaped on them during their lifetimes because of 'racism'."

Hey, thats some good political messaging right there. Seriously. In one stroke of the brush you paint yourself (and all other whites) as a victim AND you use that to tap into hillbilly emotions. If you cared about morality and reputation you wouldn't share it, but its perfect for Republican SOP. Its scum-bag style, but its proven to be effective, so why wouldn't you use it? Poor American white people, suffer such horrors of racism. Too funny.

You should share it with McCain, he isn't above using it either.

You must have a bad memory.
"The roots of today's mortgage-based financial crisis can be traced back to the Community Reinvestment Act (CRA), which Jimmy Carter signed in 1977. Seeking to address complaints from anti-poverty activists and housing advocates about banks allegedly discriminating against minority borrowers and "redlining" inner-city neighborhoods, the CRA decreed that banks had "an affirmative obligation" to meet the credit needs of victims of discrimination in borrowing.

To add a government stick to the process, the CRA decreed that federal banking regulators would consider how well banks were doing in meeting the goal of more multiculturalism in loaning when considering requests by banks to open new branches or to merge.

A good "CRA rating" was earned by way of increasing loans in poor neighborhoods. Conversely, lenders with low ratings could be fined."

"Led by Congressional Democrats, this policy of replacing private and decentralized decision-making with a system of centrally-delivered rewards and punishments was basically a one-party effort. Republicans, it seems, were more aware of the unintended consequences that flow from government interference in the market."

"As Investor's Business Daily recently put it, succinctly and correctly: "Over the past 30 years, Democrats, along with a handful of Republicans, have demonized lenders as racist and passed regulation after regulation pressuring them to make more loans to unqualified borrowers in the name of diversity.""

""The changes came as radical 'housing rights' groups led by ACORN lobbied for such loans," reports Investor's Business Daily, regarding the Clinton era. "ACORN at the time was represented by a young public-interest lawyer in Chicago by the name of Barack Obama.""

Of course you will discount this piece as it is from a state whose people are bitter and cling to religion and guns.

Would you lend your own money to just anyone?
But you would force ME lend MY money to anyone?

at least there is one thing useful about your post marjon
I didn't realize CRA was made law in 1977. That kind of blows apart Zyndryl's point that CRA led to the current crisis. It was on the books since 1977, its hard to argue a newer type of lending in the mid to late 90's and moreso in the 2000's, sub-prime lending, stems from a law that started over 20 years earlier. It makes sense CRA was re-energized by Janet Reno but that doesn't explain why it would take 20 years for sub-prime lending to suddenly become a huge problem. And Reno was long gone by 2005 when sub-prime loans were at an all time high.

"Of course you will discount this piece as it is from a state whose people are bitter and cling to religion and guns."

Don't tell me why I discount your idiotic quoting. I discount it because its opinion. Right there in the URL:
Its obviously the opinion of a right-winger, its full of emotional language and questionable inferences.

I feel sorry for anyone who clings to religion and guns. Sounds pretty unstable, a need to cling to mysticism and tools of violence. No wonder morality is at an all time low for America.

Did you read my post marjon? I said I agree we should abolish CRA. Do you understand what the word "abolish" means?

From Wachovia
"First Union Capital Markets Corp. and Bear, Stearns & Co. Inc. have priced a $384.6 million offering of securities backed by Community Reinvestment Act (CRA) loans - marking the industry's first public securitization of CRA loans.

" Customers will experience no impact - they will continue to make payments to and be serviced by First Union Mortgage Corp. CRA loans are loans targeted to low and moderate income borrowers and neighborhoods under the Community Reinvestment Act of 1977."

"The $384.6 million in senior certificates are guaranteed by Freddie Mac and have an implied "AAA" rating. "

"First Union's community reinvestment activity averages $3.5 billion per year. First Union offers a broad range of financial products and services to low and moderate income communities, including affordable housing mortgages, home improvement loans, consumer loans, secured credit cards, small business loans, small farm loans, micro-lending and Low Income Housing Tax Credits.",,134_307%5E306,00.html

Note they are bragging about how their sub-prime loans are in support of CRA.

Also, note the date is 20 OCT 1997.

The housing bubble peaked in 2005 so where is this 20 years you are talking about?

No comment about how BHO was 'in bed' with ACORN?

Gee Marjon!
I had that exact link ready to go for Bob Jones. It is a good thing I read ahead and noticed you beat me to the punch.

No, the 1977 CRA does NOT disprove Zyndryl's point
As I stated previously and as the article states even better, the CRA wasn't just the problem but rather ultra-aggressive enforcement (started really in the Clinton Administration by Janet Reno) that GAVE BIRTH to the 'sub-prime' mortgage.

It makes more than enough sense that they only grew in lending activity since then. Once they became 'acceptable' and since ACORN and other race-baiting groups had grown in power and money from the de facto shakedowns that occurred because of CRA and its aggressive enforcement, the process became quite self-feeding.

Or, where were YOU Bob during all of this? Hiding under some rock? It was pretty obvious to those who merely opened their eyes what was going on.

white people and racism
Given how there is (a) more whites than any other ethnic group still and (b) affirmative action and political correctness are blatant forms of racism then (c) YES, whites are not only suffer from INSTITUTIONALIZED and TAXPAYER FUNDED racism, but in the aggregate they thus suffer from MORE racism than anyone else.

Only Asians on a per capita basis suffer more institutionalized racism (because of college entrance policies that discriminate against them).

But none of the above actual reality matters in politics. In politics, it is PERCEPTION that is the only meaningful reality. And since white people do hold those resentments and -- according to their PERCEPTIONS -- feel more than justified in holding them, that is all that matters to sink Obama.

Furthermore, polling and studies that have actually delved into such forbidden territory overwhelmingly show that the type of whites who will most likely harbor such resentments are DEMOCRAT whites -- not Republicans. While Reps may be ideological 'bigots' -- in that they won't vote for a liberal, inexperienced Democrat no matter if he's as white as John Kerry or black or brown -- most don't have the lifetime experiences like fire fighters who have been passed up for promotion because they are white or autoworkers who can't get their relatives' foot in the door at the plant because the union and management colluded to create a 'more diversified' workplace.

Those are typical white working class voting democrats, Bob.

McCain doesn't have to waste a dime on ads or a breath of speech to bring this up. Its all there and would be a factor no matter WHAT white person was running against Obama.

Oh, and I am not white, BTW. Notice how you 'assume' so just because of my observations? That is what these are -- observations. Pretty undeniable ones at that.

"Bush's policies, Bush's Fed, it was even Bush's Congress when Republicans controlled both houses. Congressional Republicans did whatever Bush or Cheney wanted in those days." Because the CRA and its enforcement were not creatures of Bush or ANY Republicans. As for overhauling oversight of Freddie and Fannie, the Reps pushed for that and the Dems always shot it down. The Dems even stood there in Congress DEFENDING that crook, Franklin Raines (now on Obama's staff). Before Bush was in office, the Republicans tried to stop this nonsense as BILL CLINTON VERIFIED ON TV LAST WEEK.
So, get off your usual Bush-bashing kick, Bob.

The reason why 'they didn't'
" I know, I know... theory would seem to indicate that private firms could do this job as well or better. But they didn't."

Why should they? Freddie and Fannie kept buying the crap from them. They were basically 'flipping' loans like real estate investors flipped condos.

And they were also given the expectation that Freddie and Fannie would be bailed out by Uncle Sam if something went wrong.

They were right about that, of course. That only justifies what they did, then.

And now, Joe Taxpayer will bailout more than just Freddie and Fannie, thus fueling the moral hazard problem even further into the future.

Thus bringing up the point for the REAL reason why conservatives promote the 'starve the beast' (deny the government money in the first place) philosophy. If the government can't get its hands on the money, then this musical chairs fiasco will finally stop.

But I guess we'll have to wait for one of the Ultra Biggies like Medicare to go belly up before we'll be able to finally see that happen.

The Constitution exists to 'promote' the General Welfare, not to 'ensure' it.

They can run...
but they can't hide from the net.

Bob said he was relying on memory.

Have you noticed how people tend to forget what they did and said when under oath on a witness stand?

Yeah, that irks me too
"What really bothers me about this entire misadventure are the people whose greed caused them to take out mortgages for homes they couldn't afford and who will walk away from this none the wiser for their experience because the government has chosen to save them from themselves"

Yeah, that really, really bugs me as well. And Chris Dodd and Barney Frank are getting away with not being held accountable for their participation in this mess either. That ACORN isn't being prosecuted under the RICO laws. The list goes on and on.

The bailout bugs me also. I am now convinced that this isn't a true crisis as we have been spun it is, since there would not be all this politicking going on about it -- if it was a true criss the Dems would have just passed the thing on their own votes and be quiet about it. The Bushies would be quiet as well. Paulson would not be running around screaming that "The DOW will drop 4,000 pts if you don't pass this!" and other Chicken Little garbage.

Bend over and bring your own vaseline, folks. Roy's 'Wise Men' are doing their thing -- to Y-O-U.

CRA - Seed of the Disaster
"but again, if some banks weren't openly racist about how they determine lending it wouldn't have been created in the first place."

Having actually spent some time examining mortgage loans files as a part of the adit staff of one of the largest accounting firms, I find that an amusing comment. The only black and white in a bank mortgage file is paper and ink.

Banks are like any other business, the color they care about is green. Any merit there was to racist banks was rapidly fading by 1977 when the CRA was passed and when it was "reinvigorated" under watchful eye of Henry Cisneros in the mid 1990's, by which time lending decisions were being made by computers, rather than loan officers.

Banks didn't actually really bother to collect racial information until it was mandated by the federal government in something like 1979.

The whole "subprime" market was created when banks stopped asking questions that were correlated with race (income, collateral,etc) in direct response to federal pressure and mandates to ensure mortgages were made available in proportions fitting politicians racial preferences, rather than reasonable estimates on the ability to pay.

Of course, when you stop asking questions about things like income & collateral, there's the ability to use mortgages as instruments of speculation, that is buying homes as inventory, rather than residences, betting on repayment through sale proceeds, rather than income.

you're onto something
I never thought I could see an argument that whites are the most victimized by racism, but there it is, as offered by Zyndryl. Proof you can rationalize anything.

I would agree to an extent that affirmative action is a racist policy. Its also a response to racism. It has done some good, but also some bad. I support its repeal. It served its purpose. I also feel its the wrong way to go about regulation, quotas are not the best answer. I'd like to see it replaced by punitive punishment and enforcement when college admissions are found to be using racist qualifications.

I don't think political correctness is racist. It can be applied to race, but its not in its essence an idea based on race. SOP for Zyndryl again, make it a conspiracy.

Perception matters a lot in politics, I agree with you there Zyndryl. You're chipping away at the edges, you have yet to make a convincing argument that racism will hand the election to McCain. But you might be right, I'm not prepared to make a counter-argument. I simply have more faith in Americans than that, but I know Americans are stupid and selfish too, so it could go either way. And McCain is a pretty bad campaigner, so thats not helping him, racism a factor or not.

I don't care if you're white or not. Its interesting though, I did assume you're a white male. Isn't everyone? Especially people with crazy views like you have.

Before, you said CRA was the stem to allow the sub-prime fiasco, now you're talking like its the sole cause. The Republicans could have stopped it in 2003. Why didn't they? It wasn't the culture. Bush didn't want them to, so they didn't. We're both right. Clinton and dems failed in the 90's, Bush and Republicans failed in the 2000's.

The Community Reinvestment Act
The Community Reinvestment Act is a red herring, and far from being a precipitating event in either the subprime mortgage crisis or the housing bubble collapse.

The Act does not require that lenders loosen their standards in poorer neighborhoods, or those less than white. It merely states that loans must be made available in all neighborhoods served by the lending entity. And that is an easy mark to hit.

Anyone in the business, to avoid running afoul of this Act or other equal opportunity legislation must be scrupulous in evaluating every prospective customer by the same criteria. If his rule is 30 percent, he is safe from lawsuit only when NO customer, black or white, poor or rich, is allowed to bend the rule. There is NO requirement to make shaky loans anywhere.

Other useful insights may be gathered from this article, which says in part

"Congressman and 2008 Republican presidential candidate Ron Paul has partially attributed the ongoing subprime mortgage crisis to legislation such as the Community Reinvestment Act. A Wall Street Journal editorial argued that the law compelled banks to make loans to poor borrowers who often could not repay them and that this contributed in part to the subprime crisis. Federal Reserve chairman Ben Bernanke admitted that an underlying assumption of the CRA – that more lending is always better for local communities – is questionable. A Luci Ellis working paper has concluded that "Contrary to some media commentary, there is no evidence that the Community Reinvestment Act was responsible for encouraging the subprime lending boom and subsequent housing bust." Center for American Progress fellow Robert Gordon noted that approximately half of the subprime loans were made by independent mortgage companies that were not regulated by the CRA and thus had no government obligation to offer credit to minorities. In the later part of the crisis, these mortgage companies made subprime loans at twice the rate of CRA banks. Another third of the major subprime lenders were regulated but had very little CRA involvement. Gordon also makes the argument that the weakening of the CRA in 2004 was followed by intensified subprime lending. Austrian economist Thomas DiLorenzo counters Gordon's statistic by arguing that even if half of the subprime loans were made by non-CRA companies, the CRA had still caused tens of billions in defaults on mortgages by unqualified borrowers. He further states that Gordon's statistic ignores that independent mortgage companies are middlemen who sell subprime loans to banks that are in turn regulated by the CRA. Ellen Seidman, former director of the US Office of Thrift Supervision during the Clinton administration, who also works at the New America Foundation has stated her belief that the CRA did not have an effect on the United States housing bubble. She observes that CRA banks were particularly warned to make responsible investments, citing one of her own speeches as an example. She noted that if unregulated independent mortgage companies make subprime loans, affiliated CRA banks should not be able to count them for CRA purposes although she did not indicate whether this practice currently occurs. An analysis by the law firm of Traiger & Hinckley, LLP, which counsels financial services entities on fair lending and Community Reinvestment Act compliance, concluded that CRA banks were less likely than other lenders to make high cost loans or to foreclose in certain metropolitan areas; they also were more likely to retain their original loans."

So how did this all get started?
I'm doing fine, Joanie... dabbling in a little community activism.

You recommend we go back to basics. I agree. "This is what I'd like to see happen. I'd like to see us go back to a time when decisions concerning loans were based upon the applicant's ability to pay. The lending of money should be based upon sound business practices...not wishful thinking upon the part of the government, lenders or applicants. I'm sure that there is some kind of table available that says that if you make "X" amount of money, then you can/can't afford a mortgage for a specified amount."

Guidelines are certainly inherent in the lending business, and always have been. When a loan originator (a.k.a. "street hustler") places a loan, the first thing he tells an applicant is what the criteria are that his principals are looking for. That is, he represents one or more stacks of available investment money. And each pile comes with a note, saying something like "We only want loans with ten percent down payment and a credit rating of XXX, with a PITI limit of 30% of the purchaser's net annual income".

Things these blocs of lenders are NOT permitted to say are "we only want to place loans in zip codes with average tax assessments in the $300,000 range", or "we only want to place loans with white people". These no-nos, in my mind, are very fair and only make good sense. Plus, they were in place long before the CRA was drafted... and there was never a problem.

So where did it all go wrong? That's pretty easy to see. Over the years, there has been a radical redistribution of money from the wage earners to the investors. There is so much obvious evidence of this that I'll only give one example: during the past thirty years American workers have contributed in very large part to a 19% increase in industrial productivity. Of that amount, they got one percent in pay increases; the other 18% went to the stockholders.

So, as you can see, quite a lot of money piled up in the pipeline. And the holders of that money, having already bought everything they could possibly think of to buy, needed some place to put the rest of their money.

This mass of money served to push stock prices up above their natural resting place (that is, one determined by their P/E ratio). Then they dumped a huge pile of money into the credit industry. Their customers, of course, were people who couldn't earn enough at their job to get by, so had to borrow money to pay the bills.

And the credit hole these unfortunates have dug is only getting deeper and deeper. The average American family has a burden of $15,000 in consumer debt now, when only a handful of years ago it was $8,000.

And the investor class still had a few trillion left over. So they told the loan originators they just wanted loans. The only criteria they required now was a pulse.

Naturally they weren't total fools. Once they had put together a bundle of loans they sold them to agencies who repackaged them and sold them off to someone else. The Germans took a bunch... which is why they and the rest of the world are in so much trouble now. Too many people plunged without looking closely, trusting to the assurances of knaves in an unregulated marketplace.

Let the buyer beware. A fool and his money are soon parted. And so forth.

Not a true crisis
As a matter of fact, I don't like the push to bail the world of fifth dimensional finance out any more than you do. 700 billion-- plus very likely that much again in interest-- is a hell of an obligation to put on the backs of 300 million Americans. It's the little guys having to bail out the big fish.

So now we're in a new mode, with all the skeptics in Congress calling their bluff. Let's see how low the Dow can go before someone blinks.

" Bush didn't want them to, so they didn't."
Another BDS statement.

" The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.

Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry.

The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios.

The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac -- which together have issued more than $1.5 trillion in outstanding debt -- is broken. A report by outside investigators in July concluded that Freddie Mac manipulated its accounting to mislead investors, and critics have said Fannie Mae does not adequately hedge against rising interest rates. "

"Significant details must still be worked out before Congress can approve a bill. Among the groups denouncing the proposal today were the National Association of Home Builders and Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing.

''These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.'' "

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