Were banks pressured into making sub-prime loans? The pressure banks have been subjected to evidently stems from the long-standing principle that insured depository institutions must serve “the convenience and needs” of the communities in which they are chartered to do business. This includes meeting the credit needs of that community. The Bank Holding Company Act (1956) required the FRB, when reaching decisions on proposed acquisitions by banks or bank holding companies, to evaluate how well they were involved in meeting community needs, consistent with the requirements of safety and soundness. This is the basis for the arguments of some critics that the CRA obligation is the quid pro quo for privileged access to federal deposit insurance and access to the Fed’s discount window.

Re the 1977 CRA: doesn’t matter. The effect was to increase the risk while forbidding banks to modify interest rates.

Re the 1995 amendments: I don’t recall noticing that there was a constitutional amendment allowing the Congress to pass things over Clinton’s objections. In any case, check the legislative history: it was proposed by Clinton.

Re cronies: there is plenty of other information on this if you care to look around. Some names you might start with are Gorelick, Raines, Emanuel, Rubin — the people who got rich in the private sector having left the Clinton administration.

Re lobbying: nope, but it’s well documented who received by far the *most* lobbying money on banking issues: Schumer, Kerry, Clinton, and Obama are four of the top five.

On mark to market: the “true net worth” issue is the problem. In the middle of a panic, when some companies have been forced to sell at fire sale prices, FAS 157 fores their on-paper net worth down, very probably artificially. Why is that more the true net worth than any other?

If I sounded protective of the rating agencies, it wasn’t my intention: they clearly didn’t do a good job either of understanding the securitized stuff or of evaluating the risk.

As far as the losses that killed AIG, nope, wasn’t the taxpayers fault at all. But one of the things I learned in first aid class was they you stop the bleeding first, and then inquire into the cause of the accident.

If you want to convince me that Phil Gramm had much to do with it, you’re going to need to tell me what regulation was removed; it’s unclear Glass-Steagall changes had much to do with it.

On Cox, look at the date again; in September it wasn’t much less clear what happened and how much the SEC had to do with it.

And on the eighteen times issue, the names you’re looking for are “Barney Frank” and “Chris Dodd.” Contrary to what a lot of people apparently think, having a small majority in Congress doesn’t lead to the ability to force Congress to pass anything you want. Hell, as Obama is finding out, even a large majority doesn’t always mean you get what you want.

The 1977 CRA was designed to prevent financial institutions from totally ignoring applicants from certain “red lined” areas. It was an effort to eliminate blanket racial discrimination.

The 1995 amendments to CRA were passed after the Newt Gingrich take-over of Congress and after the Republican Congress shut the government down. The writer of the “Concise Explanatsion” comment may have misplaced that bit of information.

Political cronies footnote — Who are those people? Are we supposed to guess?

Lobbying — Are we to believe that only Democrats received lobby money. Ever heard of Abramoff? Randy Cunningham? What about Bob Ney, Republican-Ohio doing 30 month prison time for Abramoff. What about Tom Delay’s forced resignation for ethics violations. Ted Stevens, Republican-Alaska. Heard of him?

Mark-to-Market accounting only requires securities to be recorded at their current value. A lot of people think that assets should maintain their “book” values until the market comes back in a few years, but any professional financial examiner could see through that. Example: If your house has lost $50,000 in value, but you keep your job and hold on, it will probably come back and maybe exceed that. But financial institutions are not like that. They have to meet their reserve requirements, and their portfolio of securities as simply marked to their market value. Otherwise their true net worth would be misstated.

Don’t be protective of credit rating agencies — Fitch, S&P, Moody’s. First of all, they decline to answer my inquiries regarding their connection to investment firms . They are, after all, compensated by Wall Street for their servicies. Their is some possibility they were pressured into giving AAA ratings to securitized debt obligations when they knew the risk was much higher.

Sure, very many firms found themselves strapped when they became liable on the derivatives (credit default swaps). AIG, the big insurer, certainly ought to have known better. All of them were greedily raking in the profits before the bubble went pop. Whoes fault was that? Not the taxpayers?

Some people like to say that even the higher-ups in investment banking and hedge firms didn’t really understand the complexities of these newly invented financial instruments. Heck with that. They’re the ones who invented those things. They were making money, and either assumed the bubble would never bust, or that they would get out with their fortune/reputation before the disaster.

The writer of “Concise Explanation” obviously has an ax to grind with nothing but hot air to back up his arguments. If you are looking to place the blame, you have to mention Robert Rubin, Clinton’s Secretary of Treasury, Clinton, George W. If W warned of the problem 18 times as “C.Ex” claims, why didn’t he do something? He had a Republican Congress for 6 years that ate out of his hand. You can also put former Senator Phil Gramm (Mr. Deregulation), Alan Greenspan, and Christopher Cox (Bush’s SEC chief) on the blame list.

Here’s another interesting article this morning:

http://online.wsj.com/article/SB122291076983796813.html#

Hubbard and Mayer have actual research credentials in academic economics. This is the first extensive proposal for stabilizing the housing market that I’ve seen offered by such people.

It also has some numbers. They claim that the Feds now control 90% of the mortgage market. Does that mean that the GSEs were holding 90% of U.S. mortgage paper when they went into conservatorship? Or that they back 90% of all outstanding mortgages?

I’m just asking. I would really like to know what the relevant numbers are. Without that, it is hard to know how to assign responsibility between the private and public sectors here.

True, but then I didn’t say that, either. You really need to be careful with those straw men. What I said was that, starting with the CRA in 1977, we started to force banks to make higher risk loans at the same interest rates as lower-risk loans. As NTW points out, changes in 1995 increased the problem; some, um, aggressive accounting at Fannie and Freddie, plus political pressure to increase the number and proportion of those loans, increased it even more.

…blame of the recession on the CRA

Sheli, if you think I’m blaming a recession on the CRA, you’ve misread. But this more limited notion — that the CRA and other market distortions led to the issue of higher risk mortgages — isn’t even controversial. In fact that was a stated purpose of the law: to ensure that people who were a greater credit risk, didn’t have a large downpayment, or were buying in high risk areas got loans anyway. These are, almost by definition, higher risk loans.

The structure of things built up to share the risk of these higher risk mortgages, along with the fairly draconian mark-to-market instantly rules from FAS 157, together set up the dominoes for this current issue, which may lead to a recession.

NTW, there’s nothing magic about 20 percent down. It does mean that someone has more skin in the game and more to lose in a default. But the trade of risk and cost doesn’t have some magic special value at 20 percent down; if a zero-down loan is at an appropriate interest rate, and it fits your level of risk tolerance, there’s no reason not to write one.

http://www.realclearmarkets.com/articles/2008/10/the_long_road_to_slack_lending.html