On the Fannie/Freddie/CRA Myth
by tgirschOctober 10th, 2008
Slate has a good rundown of why Fannie and Freddie are symptoms of the current financial meltdown, not the cause.
To borrow from publius’ summation: essentially, “it’s not risky to lend to minority families, it’s risky to lend to rich white people.”
Taste the snark:
I await the Krauthammer column in which he points out the specific provision of the Community Reinvestment Act that forced Bear Stearns to run with an absurd leverage ratio of 33 to 1, which instructed Bear Stearns hedge-fund managers to blow up hundreds of millions of their clients’ money, and that required its septuagenarian CEO to play bridge while his company ran into trouble. Perhaps Neil Cavuto knows which CRA clause required Lehman Bros. to borrow hundreds of billions of dollars in short-term debt in the capital markets and then buy tens of billions of dollars of commercial real estate at the top of the market. I can’t find it. Did AIG plunge into the credit-default-swaps business with abandon because Association of Community Organizations for Reform Now members picketed its offices? Please. How about the hundreds of billions of dollars of leveraged loans—loans banks committed to private-equity firms that wanted to conduct leveraged buyouts of retailers, restaurant companies, and industrial firms? Many of those are going bad now, too. Is that Bill Clinton’s fault?
Crossed everywhere.
Categories: Economics, News & Current Events |
Perfect.
While he’s at it he can find the clause that required community lenders to “securitise” their mortgage loans and sell them as investments to third parties who had no knowledge of or interest in the properties backing them, thereby creating a rising market in ever-riskier mortgages at higher interest rates, which they aggressively marketed to customers who couldn’t afford them while knowing that they wouldn’t bear the risk on the mortgage because they were going to sell it, and wash their hands of their own so-called customers, the instant they got the papers signed.
Following up on KTK: He can also find the clause that required the buyers of those mortgages sold as investments to assume, as they essentially did, that the housing market would go up forever.
or, any of the following representing by this little quiz, courtesy of Dean Starkman in the Sept/Oct issue of Columbia Journalism Review:
Allegation
1. Handed out copies of the movie Boiler Room as a training tape
2. Partnered to sell its “PayOption Arms” with a brokerage owned by a five-time felon, whose convictions included gun-related charges
3. Forbade loan officers to check borrower income on certain loans
4. Ran an “art department” in its Tampa office, where documents were altered
5. Settled allegations of institutionalized marketing deception that covered two million customers
6. Developed “FastQual,” a program designed to approve borrowers in twelve seconds
7. Incentivized brokers and loan officers through “yield spread premiums” and other compensation schemes to put borrowers into more expensive loans
8. Tapped two kegs of beer at weekly staff meetings
Institution
A. Citigroup
B. Countrywide
C. Ameriquest
D. IndyMac
E. Merit Financial
F. New Century
G. All of the above
Quiz Answers: 1C, 2B, 3D, 4C, 5A, 6F, 7G, 8E. Quiz index: 1. ‘Workers Say Lender Ran ‘Boiler Rooms,’ Los Angeles Times, 2/4/05; 2. Illinois v. Countrywide, Cook County Circuit Court, 6/25/08; 3. Ferguson v. IndyMac Bank, Brooklyn federal court, 2/14/08, cited in “IndyMac: What Went Wrong?”; Doubt is Cast on Loan Papers, Los Angeles Times, 3/28/05; “Citigroup Settles FTC Charges,” Federal Trade Commission press release, 9/19/02; Chain of Blame, Muolo and Padilla, Wiley, 2008; Deceptive Ads at Bottom of Sub-prime Mortgage Crisis, McClatchy Newspapers, 8/31/07; ‘The Party’s Over at Kirkland [Washington] Mortgage Company, Seattle Times, 12/3/06)d
Maybe Bear Stearns, et al, believed Franklin Raines assertions that risky mortgages were AAA investments.