Sunday, September 28, 2008


During the Carter administration, Congress passed the Community Reinvestment Act of 1977. It was intended to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods, consistent with safe and sound operations. The CRA requires that each depository institution's record in helping meet the credit needs of its entire community be evaluated periodically. That record is taken into account in considering an institution's application for deposit facilities.
Neither the CRA nor its implementing regulation gives specific criteria for rating the performance of depository institutions. Rather, the law indicates that the evaluation process should accommodate an institution's individual circumstances. Nor does the law require institutions to make high-risk loans that jeopardize their safety. To the contrary, the law makes it clear that an institution's CRA activities should be undertaken in a safe and sound manner.
This act was given more teeth under the Clinton administration in order to insure that financial institutions were not targeting affluent communities alone in their credit funding considerations (redlining). During this time, institutions like Fannie Mae and Freddie Mac were allowed to hold only 2.5% in capital to back their investments, as opposed to 10% for banks.
The Wall Street Journal has criticized the CRA "requirements" for minority credit offerings, saying in part that "the law compels banks to make loans to poorer borrowers who often could not repay them. This was also stated by the executive board member of Countrywide (one the nations largest loan providers), who said that lenders have had to "stretch the rules a bit...."
Under George Bush, the CRA was brought under the supervision of the Department of the Treasury, and in 2005, the CRA review was not required for institutions with loans portfolios less than $1 billion, as opposed to the previous $250 million previously. This significantly reduced the amount of oversight upon the financial institutions operating in the U.S., especially the smaller institutions.
Now that you know the history of this act, let me give you some sobering facts...
  • Over half of the loans currently in default, were made by smaller, independent financial institutions, who had no obligations to make loans to the poorer communities, and basically had little or no CRA oversight whatsoever.

  • For every one sub-prime loan made by a CRA institution, two were made by a non-CRA overseen institution.
Obviously, this act must be reviewed carefully in examining our current mortgage crisis, however, if you are looking for a scapegoat, you need to look further. While there is a current fever pitch to blame less affluent borrowers, and the CRA which encouraged it, or the President who reached out to these communities with the act, we must remember that this act has survived over thirty years, through congressional, and Presidential terms controlled by both parties.
Factually, it did play a part in this current crisis. However small its effect, whether we should point blame on Carter for signing it, Clinton for giving it teeth, or Bush for reducing oversight over it, is a call that needed be made. This financial crisis is to large and extensive for any one piece of legislation to be the sole cause.
However, I personally place a ton of blame on the deregulation of the banks, investment houses and financial institutions. And having said that, you have to look at this guy....

Yes, it's Phil Gramm, of "a nation of whiners" fame. The man who introduced the Gramm-Leach-Bliley Act to the Republican-dominated US Senate, and enabled its passage in the Senate, on the 6th of May, 1999. I guess you already know what his buddy voted, he publically boasts as being "The De-regulator." Senate majority leader Harry Reid expressed it this way....."Phil Gramm, financial advisor to John McCain....The same Phil Gramm who, as a senator, was responsible for deregulation in the financial services industries that paved the way for much of this crisis to occur," Reid said. "It was Phil Gramm who pushed legislation through a Republican Senate that allowed firms like Enron to avoid regulation and destroy the life savings of its employees, and it was Phil Gramm’s legislation that now allows Wall Street traders to bid up the price of oil, leaving us to pay the bill."

So, the next time you hear talk about "big government," and deregulation, picture in your minds what will be the inevitable result of a completely free, open and unfettered financial industry upon the American citizens.


Papa Giorgio said...


A source close to House Republicans has put out a Myth vs Fact rundown of the bailout compromise, announced early this morning. This may answer some questions that have come up in the comments over the last few days:

Myth: Windfall for ACORN.

Fact: The Frank-Dodd proposal created an affordable housing slush fund and directed 20 percent of net benefits from the program to be directed to ACORN-type organizations. The proposed compromise does not include any affordable housing slush fund and directs all net benefits back to the Treasury to pay down the national debt.

Myth: Tax increase on financial industry.

Fact: The proposed compromise imposes NO tax on the financial services industry. The proposed compromise simply requires a proposal from the Administration to recoup any losses after five years.

Fact: The proposed compromise includes tax cuts for struggling community banks.

Myth: Blank check for $700 billion with little accountability.

Fact: In general, the Treasury Secretary is limited to purchasing up to $250 billion outstanding at any one time. If the Treasury needs to use another $100 billion, the President must certify this action and report to Congress. Further spending requires Congressional action.

Myth: Treasury plan is the only option available.

Fact: Treasury is given multiple options to deal with the current economic crisis, including insurance, public/private auctions, loan guarantees, and direct support to financial institutions.

Fact: Further, Treasury is MANDATED to create an insurance program (Section 102) that protects the taxpayers and requires companies that wish to participate in this program to have some skin in the game by paying risk-based premiums.

Myth: The taxpayer is not adequately protected.

Fact: The proposed compromise includes strong taxpayer protections. Treasury’s proposal had minimal oversight to protect taxpayer dollars. The proposed compromise enhanced the oversight structure by creating a Financial Stability Oversight Board, a Special Inspector General, and a Congressional Oversight Panel.

All AIG-type deals require mandatory equity interest in order to provide taxpayers with potential future benefits. All auctions require a percentage of equity interest based on participation in the program.

Requires the Secretary to develop regulations/guidelines necessary to prohibit or, in specific cases, manage any conflicts of interest with respect to contractors, advisors, and asset managers.

Myth: The taxpayer does not benefit from Treasury bailouts.

Fact: The proposed compromise (Section 113) requires mandatory equity interest in scenarios like AIG. The proposed compromise also allows Treasury to take an equity interest in the program generally.

Myth: Treasury will never use the insurance option.

Fact: Treasury is mandated (Section 102) to establish an insurance program and set risk-based premiums. This will protect taxpayers by requiring the beneficiaries of the insurance program to pay risk-based premiums. Treasury further shall collect premiums mandatory equity interest in scenarios like AIG. The proposed compromise also allows Treasury to take an equity interest in the program generally.

Will this resolve all of the concerns conservatives have in this plan? No, but it does address some of the most contentious issues. It also shows how much influence that the House Republicans had on the final draft, and for that they can thank John McCain for his intervention.

Anonymous said...

"Over half of the loans currently in default, were made by smaller, independent financial institutions, who had no obligations to make loans to the poorer communities, and basically had little or no CRA oversight whatsoever.

For every one sub-prime loan made by a CRA institution, two were made by a non-CRA overseen institution."

What is your source of information? I'd be interested in that. There is no debate that the current economic crisis was triggered by the failure of the subprime market. No one disagrees with that. If not for the failure of the Subprime Mkt, the financial sector would not have hit the skids like it did. It collapsed because these people sought the cheap ARM money. ARMs were cheap because the Fed had reduced interest rates to near zero. It was the FED that started upping the discount rate and that caused the ARMs to spiral upward and triggered massive foreclosures. This is not disagreed with in any sector. Nobody has proposed otherwise. The discount rate was near zero to help a limping economy. The economy was limping because of 9/11 which was on the heals of a receding economy at the end of 1999 and 2000. You really have to go back to that and ask the question why did 9/11 happen? Was it becaue clinton decimated foreign intelligence? Was it because of Jamie Gorelick's wall of separation between CIA and FBI? Two FBI agents in Minneapolis and Phoenix sought desperately to get the laptop of Zacharias Massaoui. In their effort to obtain a warrant, and in their own words they were "stonewalled". The laptop contained all of the details of the 9/11 attack meaning it would have been prevented. Had Gorelick not written that rediculous policy, 9/11 wouldn't have happened. The economy wouldn't have collapsed in 2001, probably the war in Afghanistan and Iraq would not have occured, the discount rate would not have had to lower to near zero that had to be raised later which put all those subprime unmanageable by the subprime borrowers. Also, the interest rates would not have dropped to the floor to keep the economy up. It was lowering the interest rates to the floor combined with the CRA mandating (and encouraging) loans to people who didn't qualify and then raising it up again that caused the collapse. Deregulation had nothing to do with the collapse. I see the clinton Admin not taking the terrorist threat seriously which lead inevitably to 9/11 and the ensuing economic difficulties that had to be dealt with over the course of 5 years. Regulation and the CRA is what got the subprime loans going out there. Mark to market made an essential contribution too without which the value of portfolios wouldn't have been so rapidly and deeply discounted. But it was the CRA and ACORN that inflated the number of CRA loans that should never have been made. It was a problem and the politicians KNEW it. They knew it in 2005 when McCain warned the Senate to "fix this while times are good". They didn't listen to him, in fact they played the race card on his warning so here we are today. There's your analysis of what happened. There is no denying it though there is much covering it up. Deregulation had nothing to do with the economic collapse. Greed had nothing to do with it. The ARM rates went way down, snared a boat load of unqualified borrowers and then the interest rates went up. It'll work every time. As an atty and CPA I warned people not to get into an ARM when those rates were soooo attractive. Anyone could see what would happen. But subprimers just don't have many choices and they did what anyone would do. They took a chance at wealth and hoped for the best. I don't blame them at all. I DO blame Obama, Dodd, and Frank. They should be tarred and feathered for what they have done to our country. Now they have the excuse to exert even more control over everything and they are annointed by re-election to accomplish it. They were, of course, elected out of sheer ignorance. We deserve our fate for not turning off the football games and turning on the talk shows. Regulation is nothing less than socialism. Socialism doesn't work. E vs W Germany proved it. N vs S Korea proved it. USA vs USSR proved it. Taiwan vs PRC proved it. Pre-Mkt economy PRC vs Post Mkt Economy PRC proved it. Sweden, Holland, Spain, France, Canada, all the socialist countries prove this over and over and over again. But this information seems to be spun, obfuscated, buried, misrepresented, and ignored. Every time people experiment with whole populations, a LOT of people are hurt. They are then lied to about causes and false promises are made. No matter how many failures the same people produce, the free lunch promises still sell to every new generation. They still sell to the dependent. They still sell to the ignorant. We used to learn in school about the failures of socialism (regulation). That isn't taught any more. Why? Some regulation helps but every time we reach into the market and manipulate some portion of it, 10 other portions begin spiralling out of control. This, of course, leads to more regulation to address the new problems and the problems compound geometrically. This is where the lies and promises come in. Ignorant people eat it up again and again. Tyrants down through the ages have sneered their amazement at how easy it is to sell the same lies over and over no matter how many times it fails. It is my opinion that your essay is part of the free lunch deception. We are fools if we think socialism will save this country. It will prevent the recovery, slow it, burden it, etc. Socialism prevailed here in the late 30s. Only now is new information coming to light that the New Deal saved nothing but it took all the credit and created dependency upon the SS system. It was an excuse not to save for retirement. World wars, coups, and murders are what happens when socialism gives control of nations to a few in power. Shame on Obama voters who bought the free lunch "workers paradise" happy meal promises. Regulation has never worked in practice and it can't as a matter of theory. Prof. Alexander Tyler's cycle of democracies isn't a prophecy, its a calculated outcome. Socialism is the final stage luring populations into dependency upon the govt. It is a 100 year old false promise that has an unsurpassed track record of failure but it still works. That's our shame, I suppose. It also helps dictators gain control over a country. Artificial meddling in the economy causes uncoutable other factors to fly out of control requiring more and more control and the spiral leads inevitably to Politbureau type control and loss of freedom for the benefit of all. Ben Franklin said he who is willing to give up liberty to obtain security shall have neither. He also said a government big enough to give you everything is big enough to take everything. More prophecy? Nonsense. It's the logical outcome on a theoretical basis and has been demonstrated in practice time and again. But I guess Obama can save us. Well, congratulations. You have won. You have swept all but a remnant of the free marketers from power. First goes capitalism. Then goes democracy (replaced by a sham). You now have the workers paradise of free lunch promises that will never be fulfilled and will only collapse financially as it has always done before, and which leads to centralized control over human lives. The last best experiment in freedom has been conquered. You helped. You succeeded. Wonderful. Anyone remember Che Guevara? Your reward awaits you and me like mice fighting their way to D-con. "D" "Con"? Never mind.

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