Comments and observations on social and political trends and events.

Thursday, October 16, 2008

What Caused the Loan Crisis

The following condensation of a series from the Investor's Business Daily explaining "What Caused the Loan Crisis" has been circulated via e-mail. (Hat tip to Frank for sending this to me.)

1977: Pres. Jimmy Carter signs into Law the Community Reinvestment Act the foundation and cornerstone for the impending disaster.. The law pressured financial institutions to extend home loans to those who would otherwise not qualify.

The publicized premise: Home ownership would improve poor and crime-ridden communities and neighborhoods in terms of crime, investment, jobs, etc.

The Results: Statistics bear out that it did not help.

How did the government get so deeply involved in the housing market?

Answer: Bill Clinton wanted it that way.

1992: Republican representative Jim Leach (IO) warned of the danger that Fannie and Freddie were changing from being agencies of the public at large to money machines for the principals and the stock-holding few.

1993: Clinton extensively rewrote Fannie Mae and Freddie Mac's rules turning the quasi-private mortgage-funding firms into semi-nationalized monopolies dispensing cash and loans to large Democratic voting blocks and handing favors, jobs and contributions to political allies. This potent mix led inevitably to corruption and now the collapse of Freddie and Fannie.

1994: Despite warnings, Clinton unveiled his National Home-Ownership Strategy, which broadened the CRA in ways congress never intended.

1995: Congress, about to change from a Democrat majority to Republican. Clinton orders Robert Rubin's Treasury Dept to rewrite the rules. Robt. Rubin's Treasury reworked rules, forcing banks to satisfy quotas for sub-prime and minority loans to get a satisfactory CRA rating. The rating was key to expansion or mergers for banks. Loans began to be made on the basis of race and little else.

1997 - 1999: Clinton, bypassing Republicans in Congress, enlisted Andrew Cuomo, then Secretary of Housing and Urban Dev elopement, allowing Freddie and Fannie to get into the sub-prime market in a BIG way. Led by Rep. Barney Frank and Sen. Chris Dodd, congress doubled down on the risk by easing capital limits and allowing them to hold just 2.5% of capital to back their investments vs. 10% for banks. Since they could borrow at lower rates than banks their enterprises boomed.

With incentives in place, banks poured billions in loans into poor communities, often "no doc", "no income", requiring no money down and no verification of income. Worse still was the cronyism: Fannie and Freddie became home to out-of work-politicians, mostly Clinton Democrats. 384 politicians got big campaign donations from Fannie and Freddie. Over $200 million had been spent on lobbying and political activities. During the 1990's Fannie and Freddie enjoyed a subsidy of as much as $182 Billion, most of it going to principals and shareholders, not poor borrowers as claimed.

Did it work? Minorities made up 49% of the 12.5 million new homeowners but many of those loans have gone bad and the minority homeownership rates are shrinking fast.

1999: New Treasury Secretary, Lawrence Summers, became alarmed at Fannie and Freddie's excesses. Congress held hearings the ensuing year but nothing was done because Fannie and Freddie had donated millions to key congressmen and radical groups, ensuring no meaningful changes would take place. "We manage our political risk with the same intensity that we manage our credit and interest rate risks," Fannie CEO Franklin Raines, a former Clinton official and current Barack Obama advisor, bragged to investors in 1999.

2000: Secretary Summers sent Undersecretary Gary Gensler to Congress seeking an end to the "special status". Democrats raised a ruckus as did Fannie and Freddie, headed by politically connected CEO's who knew how to reward and punish. "We think that the statements evidence a contempt for the nation's housing and mortgage markets" Freddie spokesperson Sharon McHale said. It was the last chance during the Clinton era for reform.

2001: Republicans try repeatedly to bring fiscal sanity to Fannie and Freddie but Democrats blocked any attempt at reform; especially Rep. Barney Frank and Sen.Chris Dodd who now run key banking committees and were huge beneficiaries of campaign contributions from the mortgage giants.

2003: Bush proposes what the NY Times called "the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago". Even after discovering a scheme by Fannie and Freddie to overstate earnings by $10.6 billion to boost their bonuses, the Democrats killed reform.

2005: Then Fed chairman Alan Greenspan warns Congress: "We are placing the total financial system at substantial risk". Sen. McCain, with two others, sponsored a Fannie/Freddie reform bill and said, "If congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system and the economy as a whole". Sen. Harry Reid accused the GOP ;of trying to "cripple the ability of Fannie and Freddie to carry out their mission of expanding homeownership" The bill went nowhere.

2007: By now Fannie and Freddie own or guarantee over HALF of the $12 trillion US mortgage market. The mortgage giants, whose executive suites were top-heavy with former Democratic officials, had been working with Wall St. to repackage the bad loans and sell them to investors. As the housing market fell in '07, sub prime mortgage portfolios suffered major losses. The crisis was on, though it was 15 years in the making.

2008: McCain has repeatedly called for reforming the behemoths, Bush urged reform 17 times. Still the media have repeated Democrats' talking points about this being a "Republican" disaster. A few Republicans are complicit but Fannie and Freddie were created by Democrats, regulated by Democrats, largely run by Democrats and protected by Democrats. That's why taxpayers are now being asked for $700 billion!!

Postscript: ACORN is one of the principal beneficiaries of Fannie/ Freddie's slush funds. They are currently under indictment or investigation in many states. Barack Obama served as their legal counsel, defending their activities for several years.


ScarletWarrior said...

I found this really interesting, thanks. I have previously read vague statements about Clinton's involvement but have not seen it spelled out as clearly as this. Food for thought

Sean Schulte said...

Nice title for your blog, but I should point out that there's nothing "objective" about this.

You're really grasping at straws here.

Anonymous said...

This idea that somehow CRA loans created the financial crisis is all the rage on the Right. The problem is it doesn't appear to be true. CRA only applied to banks, not private mortgage companies like Countrywide. A banking law firm recently did a study showing that CRA-originated loans were less likely to default than average.

Anonymous said...

Leaving out the influence of the Gramm-Leach-Bliley Act of 1999 makes it stunningly obvious that the title of your blog is a total joke.

Henry Scuoteguazza said...

Just for clarification quoting Wikipedia, "the Gramm-Leach-Bliley Act (GLBA) allowed commercial and investment banks to consolidate." (Source:

Further down the same entry is the following. "Economists Robert Ekelund and Mark Thornton have criticized the Act as contributing to the 2007 subprime mortgage financial crisis, arguing that while "in a world regulated by a gold standard, 100% reserve banking, and no FDIC deposit insurance" the Financial Services Modernization Act would have made "perfect sense" as a legitimate act of deregulation, under the present fiat monetary system it "amounts to corporate welfare for financial institutions and a moral hazard that will make taxpayers pay dearly". [15]

In response to criticism, President Clinton himself stated:

"I don't see that signing that bill had anything to do with the current crisis. Indeed, one of the things that has helped stabilize the current situation as much as it has is the purchase of Merrill Lynch by Bank of America, which was much smoother than it would have been if I hadn't signed that bill ... On the Glass-Steagall thing, like I said, if you could demonstrate to me that it was a mistake, I'd be glad to look at the evidence."

So I would agree that this bill probably helped exacerbate the impact of the Community Reinvestment Act but this act by itself does not explain the wide spread affects that we have witnessed in the financial market.

Again, I'm not saying the Republicans are blameless. But I am saying that the seeds were sown by the CRA, the creation of Fannie Mae and Freddie Mac and the uncontrolled anctics of their management.

As for the report by Traiger & Hinckley here is how they describe themselves on their web page: "We have considerable experience counseling financial services entities throughout the United States on all facets of fair lending and Community Reinvestment Act compliance." Hmm, I wonder how objective their study is.

Anonymous said...

This is completely ridiculous and does not justify a response. What it comes down to is this. Republicans put a man in the White House who has completely destroyed our country. The United States today is unrecognizable from the nation we all lived in eight years ago.... the entire world sees this, except for Republicans who can take no responsibility for their own flaws or their leaders foibles. Shame on all of you.

Henry Scuoteguazza said...

Note to the latest Anonymous comment: actually I agree with you up to a point. Bush has been a disaster and I make no excuses for him. The country indeed is different after his tenure although I don't agree with your hyperbolic claim that he destroyed this country. I covered this in my posts titled "The cause of our problems: the perils of a liberal Republican administration" and its addendum.

This is one of the problems I see in the political debate: either-or thinking. Bush himself said at one point shortly after 9/11 that you're either for us or against us. Comments such as the ones above are saying in essence that I must be an unapologetic Republican/Bush lover simply because I dare to question the Annointed One and anyone who supports him. While I certainly am right of center if you carefully read all of my posts you'll see that I have reservations about McCain and believe he is a lesser of two evils. I don't believe he or Bush walk on water, unlike the attitude of many of Obama's supporters toward their candidate.

Anonymous said...

Well when you put it like makes sense.