Category Archives: subprime mortgages

The Not-So-Stealthy Attack on Americans

During this something less than merry Month of May the United States Senate is scheduled to take up the Regulatory Accountability Act which will make it all but impossible for our own government to protect citizens (and citizen consumers) from corporate depredation.  We have a warning:

“Among its most egregious provisions, the RAA sets an impossibly high burden of proof that agencies would have to meet before finalizing and implementing a new rule, such as a new air quality or food safety standard. The bill also requires agencies to conduct several rounds of cost-benefit analyses that give more weight to the compliance costs to industry than the benefits to Americans. Taken together, these provisions and others in the bill could lead to total gridlock in the agencies charged with protecting the food we eat, the water we drink, and the air we breathe; ensuring that products are safe before they enter the market; and reining in the worst financial market abuses.”

Interestingly enough the Big Corporate Interests don’t even bother to mention “small businesses” in their push — read shove — for this anti-consumer, anti-worker, anti-Main Street bit of legislation.

A better label would be the Unaccountability Act of 2017 — in that corporations would be protected from citizens who like drinking clean water and breathing clean air, eating healthy and uncontaminated food, driving safe cars, and being reasonably assured that Wall Street investment interests aren’t pulling a “de-regulation” extravaganza that could make the debacle of 2007-2008 seem mild by comparison.

If you enjoyed the scandals of Enron, the predatory behavior of Wells Fargo, the Great Recession brought on by Wall Street Casino operations — then you’ll love this draft to deregulate the major corporations.

On the other hand if one is appalled by the “Screw Grandma Milly” antics of the Enron crowd, if one isn’t concerned that the bank isn’t surreptitiously opening accounts (and charging fees) like Wells Fargo, or if one isn’t concerned that mortgages might be oversold, and fed into another giant bubble of derivative trading — then a phone call to the Solons of the Senate is required.

As the machinations of the Russians, the squirming of the administration, and the daily deluge of tweets from Dear Leader, suck the air out of the room, beware that major corporate interests are working through the halls of Congress.

This is the time to contact our Senators, Senator Dean Heller (who has made no secret of his affinity for deregulation) and Senator Catherine Cortez-Masto who is more likely to be amenable to the concerns of ordinary citizens.  The so-called “Regulatory Accountability” is nothing more than a not-so-stealthy attack on ordinary Americans by extraordinarily powerful corporate interests.

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Filed under conservatism, consumers, Economy, Enron, financial regulation, Heller, Nevada politics, Politics, public safety, secondary mortgage market, subprime mortgages

Heller’s Write Offs

Really?  Senator By Appointment Only  Dean Heller on Governor Romney’s remarks to the infamous fundraising dinner: “Keep in mind, I have five brothers and sisters. My father was an auto mechanic. My mother was a school cook. I have a very different view of the world,” Heller said. “And as United States Senator, I think I represent everyone, and every vote’s important. Every vote’s important in this race. I don’t write off anybody.” [HuffPo]

Senator Heller’s not written off anyone?  Ever? His voting record implies another perspective — one much closer to Governor Romney’s than Senator Heller would be enthusiastic about admitting.

Remember S-CHIP?  The SCHIP program provides health insurance coverage to middle class families who do not meet requirements for programs depending on poverty designations, and  who have seriously ill or injured children.  In short, it was designed to prevent lower middle income families from going bankrupt trying to provide health care for their children.

However, in the interest of “fiscal responsibility,” Representative Heller voted against any expansion of the program — paid for in the legislation by an increase in cigarette taxes: “But there is little expectation Heller will change his mind. He said he thinks he will be lobbied in the coming weeks but won’t support the legislation unless the program is pared to its existing level. Heller said in August, ” This Congress is seeking to create a massive and unnecessary federally funded health program.” [LVSun Oct 2007]

Representative Heller continued to vote against the expansion of the children’s health insurance program in 2009.   On January 14, 2009 he voted against the CHIP reauthorization. [roll call 16]  As he had voted to sustain the Bush Administration veto of the bill in 2008. [DB]   Not to put too fine a point to it, but then-Representative Dean Heller was perfectly happy to write off middle income Nevada families  in favor of so-called ‘fiscal responsibility’ and the interests of the tobacco lobby.

Remember the Pell Grants?  Senator Heller hasn’t been supportive of middle income families whose children need financial assistance to go to college.  Perhaps he believes along with Governor Romney that a person should get all the education he can afford — and no more?

“In February 2011, Heller voted for a Republican spending bill that would have drastically lowered the amount of aid that 9.4 million college students receive. Under the bill, students would see their Pell Grants fall by an average of $845 (from the current maximum of $5,550 to $4,705).  [CBPP, 3/1/11; HR 1,  Vote 147, 2/19/11]” [link]

Remember the Student Loan Rate?  The one that was set to double last Summer for middle income students or those who were trying to secure the middle income status by getting a degree…

May 24, 2012: “In a Senate vote today, Dean Heller voted against a measure to prevent student loan interest rates from doubling in July.  Heller’s vote today would force over 26,000 Nevada students to pay an average of $1,000 more next year in interest for student loans, putting an extra burden on the budgets of millions of middle-class families across the country.  While Heller voted today to double interest rates for Nevadans trying to obtain an education…” [link] [vote 113]

Voting to tack on another $1000 to the student loan bills for millions of middle class families sounds like a write off from this perspective.

Remember the HAMP vote?  The underfunded HAMP program sought to allow homeowners who were not unemployed to get assistance with mortgage modification.  On March 29, 2011, Representative Heller voted in favor of eliminating the program (H.R. 839). [VoteSmart]

Remember Wall Street Reform?  The middle class in America took the brunt of the Housing Bubble collapse, for the logical reason that the wealth of most middle income Americans  is tied up in the value of their homes.  The Dodd Frank Act sought to (1) prevent regulator shopping by financial institutions, (2) prevent abuse in the trade of derivatives, (3) provide oversight of banking institutions to prevent the need for bail outs, (4) separate commercial and investment banking to prevent conflicts of interest, and (5) prevent unscrupulous mortgage generators from preying on middle income home-buyers — and on June 30, 2010 Representative Dean Heller voted against it.  [Vote No. 413]  His rationale was particularly specious.  [DB]

It’s also instructive to look at those groups Senator Heller has NOT written off —

Big Oil: Heller Has Voted At Least NINE Times To Protect Tax Credits For Big Oil Companies. [Vote 63, 3/29/12; Vote 72, 5/17/11; Vote #153, 3/01/11; Vote 649, 9/26/08Vote 78, 2/27/08; Vote 80, 2/27/08; Vote 1140, 12/06/07; Vote 835, 8/4/07; Vote 40, 1/18/07]

Health Insurance Corporations, Drug Companies:  Senator Heller has proven himself to be the health insurance corporations BFF, and he proved his loyalty to the pharmaceutical industry by voting against H.R. 4, on January 12, 2007,  to allow the Department of Health and Human Services to negotiate with drug manufacturers for lower prices.  [VoteSmart]

Big Banks

The Bigger the Better [ExaminerLV]

Pious recitals of family history and protestations of concern are insufficient in Senator Heller’s case to offset the voting record he has compiled in Washington, D.C.   Paying lip service to the concerns of middle income Nevadans in regard to health care, education, financial reform, mortgage modification, and promoting alternative energy investment and jobs in Nevada, while voting against measures designed to promote those interests says far more about Senator Heller’s allegiances than his flight from the candidacy of Governor Romney.

These issues are further explored in “It’s not about the candidate…” which is well worth the click ‘n read.

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Filed under 2012 election, Economy, financial regulation, Health Care, Heller, Nevada economy, Nevada politics, Politics, Republicans, SCHIP, subprime mortgages

Bogus, or How To Make Excuses For Corporate Amorality

If corporations are “people,” as the U.S. Supreme Court and the Republican Party would have us believe, then perhaps they should be held to account for their lack of human propensities?   As former President Bill Clinton observed in the video linked in the previous post, the American public has been treated to an interesting combination of corporate amorality and corporate public relations for the last three decades.

While corporations have made it abundantly clear that stock prices and short term profitability are the twin gods of industry at the moment, corporate public relations campaigns seek to mollify our discomfort with notions that energy giants are seeking new technologies.  The uncomfortable truth is that energy giants have been reducing the percentage they spend on research and development.   See the research and graphs here.*

Banks are now “friendly” again.   One even changed its retail banking division’s name to “Main” as in Main Street.  One became “Ally,” what could be friendlier than an ally?  This goes nowhere toward explaining why such practices as Robo-signing, and deceptive foreclosure practices are common knowledge in our law enforcement communities.  The advertising campaigns are a thin papering covering economic sectors the control of which is held by those who have little interest in corporate citizenship and a great deal more interest in corporate image.

When Image becomes more important than Identity we can reasonably assume that the divide between public relations and public interests has increased, along with the distance between the reality of public perception about corporate behavior and the actuality.   If a positive image is the goal then we can also assume much of what we’re seeing and hearing is Bogus.

Examples from the Bogus Hall of Shame

#1.Corporations aren’t expanding because of burdensome regulations.”   Bogus.  The energy corporations have trumpeted their claim that regulations “kill jobs,” but the facts don’t fit their portrayal:

“…at the macro level, existing research does not support the claim that regulation impairs the job market or job growth. According to John Irons and Isaac Shapiro, the paper’s authors, regulation generally has no significant impact on the labor market as a whole. If anything, regulations, particularly environmental regulations, hold the potential to create jobs. (Pollution control standards create work for the pollution abatement industry, for example.”  [OMBWatch]

House Leadership has gotten into the act, with such repetitions of the corporate line as this from Representative Eric Cantor (R-VA):

“House Majority Leader Eric Cantor has characterized many of these new EPA rules as “regulatory burdens to job creators” and has scheduled a series of votes, beginning this week, aimed at halting them. This latest research from EPI explains that Cantor’s characterization of these rules is inaccurate.  EPI’s research finds that the dollar value of the benefits of the major rules finalized or proposed by the EPA so far during the Obama administration exceeds the rules’ costs by an exceptionally wide margin. Health benefits in terms of lives saved and illnesses avoided will be enormous.  EPI also finds that the costs of all finalized and proposed rules total to a tiny sliver of the overall economy, suggesting that fears that these rules together will deter economic progress are unjustified.”  [EPI] (emphasis added)

#2. “Banks aren’t lending because of federal regulations, or ‘uncertainty’ over federal intrusion into the financial sector.”  Bogus.   It is true that banks are wary of leveraging themselves as they did during the Housing Bubble and the Derivative Creation Spree in which they indulged before their houses of asset backed securities collapsed on them in the Fall of 2008.  However, that doesn’t fully explain their reluctance to make retail and small business lines of credit more available.

One problem for the commercial or retail borrower is that banks are still trying to squirm free of the excesses of their Housing Bubble and its consequences.  As of February 2009, Forbes reported that banks were hoarding cash (with excess reserves of $1.7 billion) while toting up their toxic assets.  “Banks are trying to unload troubled assets, for starters, while at the same time, they are being forced to hold loans on their balance sheets they normally would have sold off as packaged securities, and they have had to pick up the slack in the commercial paper market when borrowers were frozen out.”

A GAO study of the proprietary trading conducted by 6 large banks and hedge funds reported:

“In 13 quarters during this period, stand-alone proprietary trading produced revenues of $15.6 billion–3.1 percent or less of the firms’ combined quarterly revenues from all activities. But in five quarters during the financial crisis, these firms lost a combined $15.8 billion from stand-alone proprietary trading–resulting in an overall loss from such activities over the 4.5 year period of about $221 million. However, one of the six firms was responsible for both the largest quarterly revenue at any single firm of $1.2 billion and two of the largest single-firm quarterly losses of $8.7 billion and $1.9 billion.”

The GAO report highlights the fact that there is much profit to be gained from proprietary trading — but also much to be lost, and if the banks and hedge funds are still trying to recoup in the wake of the Housing Bubble collapse it may be a while before lending opens up again.

There’s also the matter of clearing those toxic mortgages to be considered, especially by Bank of America.   BofA’s ReconTrust lost a round in a Utah court concerning fraudulent non-judicial foreclosures, [KCSG] and the Nevada Attorney General put BofA on notice that action may be taken in regard to foreclosure practices in Nevada.  [Vegas, Inc]

What appears to be uncertain is not anything included in the Dodd-Frank Act, but whether banks will be able to (1) clear toxic assets off their own books; and, (2) figure out what to do with questionable Level 3 securities that are still looming in the bankers’ vision:

“…the top 10 U.S.-owned banks had $13.8 billion in “unrealized losses” that have lasted at least a year in their investment portfolios as of Sept. 30, according to a Wall Street Journal analysis. Such losses are baked into banks’ book value, but don’t get counted against earnings as long as the banks believe the investments will later rebound. If those losses were assessed against earnings, it would have reduced the banks’ pretax income for the first nine months of 2010 by 21%, according to the Journal analysis.”  [WSJ]

Those pesky “Level 3” securities have declined by 24% recently but they are still on the books, still difficult to value, and still part of the problem.

“One problem centers largely on “Level 3” securities, illiquid investments that can’t be easily valued using market prices. According to the Journal analysis, as of Sept. 30, the top 10 banks had $360.7 billion in “Level 3″ securities. That amounts to 42.6% of the banks’ shareholder equity, a pile of assets whose value is hard to verify.” [WSJ]

There is another issue for bankers — demandStandard & Poor reported lagging demand for commercial loans and “muted” interest from banks in the subject as of May 2011.  Lending for “spec” housing and real estate development is still dormant as of September 2011.  [BizJournal] No surprise therein.   There are a couple of pink clouds in this otherwise gray panorama — small and medium sized businesses are increasingly interested in upgrading infrastructure and this bodes well for commercial lending, which was up 6.2% in August 2011.  [MarketWatch]

This brings us to a question of priorities, would a banker be more uncomfortable making more loans because of some nebulous anxiety over the application of the provisions of financial reform legislation — or more likely to be uncomfortable because there are approximately $360.7 billion (42% of equity) still on the books as “Level 3” securities?   Which would make a banker more anxious: Statutory limitations on proprietary trading or limitations on demand in the housing sector?

There are explanations enough to illustrate the tenuous financial status of banking and corporate expansion in the United States at the moment, but sound-bite expressions of ideological tenets aren’t the answers — they don’t even address the right questions.  In short, they are bogus.

References and Resources:  *Kammen and Nemet “The Incredible Shrinking R&D Budget,” Access Almanac, Fall 2005.  (pdf)  U.S. Banks Offered Deal on Robo-Signing, CNBC, September 5, 2011.   “60 Minutes Exposes Major Lenders’ Deceptive Foreclosure Practices,” CBS News, April 7, 2011.   Shapiro and Irons, “Regulation, Employment, and the Economy: Fears of Job Loss Are Overblown, EPI  (pdf) April 12, 2011.   OMBWatch, “Regulations Benefit Job Market,” April 12, 2011.   NREL, “Alternative Energy: Solar, Wind, Geothermal,” (pdf) October 23, 2007.   Shapiro, “Tallying up the impact of new EPA Rules,” EPI,  May 31, 2010.

Moyer, “Banks Promise Loans But Hoard Cash,” Forbes, February 3, 2009.   GAO: “Proprietary Trading: Regulators Will Need More Comprehensive Information…” July 13, 2011.   Wall Street Journal, “Risky Assets Still Lurk At Banks,” February 2, 2011.  Seeking Alpha, “U.S. Commercial Lending Lags,”  June 2011.

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Filed under banking, financial regulation, Foreclosures, oil companies, recession, subprime mortgages

>Senator Ensign’s Moment in the Sun Eclipsed by Real Earth: The Mortgage Twins Amendment

>I’ve labored under the delusion for some time now that one of the purposes a state’s senator could perform was to make the state look good. After Senator John Ensign’s (R-NV) performance on the Senate floor this evening, I’m not so sure. Evidently, someone in the GOP caucus must be called upon to deliver the Luntz Talking Points about Fannie Mae and Freddie Mac (hereinafter The Mortgage Twins), and the junior Senator from Nevada would serve as well as any — or as well as any other GOP Senator unwilling to embarrass himself with a secondary amendment to the Brown-Kaufmann Amdt on the financial reform legislation.

The amendment in question called for the breaking up (a la trust busting) of the major banks in this country which hold assets approximately equal to 63% of our gross domestic product because such a conglomeration has an automatic 80 basis points advantage over regional and community banking operations. (a basis point is 1/100th of a percent) That’s a pretty tidy advantage over one’s smaller competitors in the banking business. There’s a legitimate argument as to whether (1) capitalization/equity requirements and/or dissolution schemes, or (2) trust busting is the way to address the uncompetitive advantage (and the potential for economic catastrophe) is the way to produce reform. Be that as it may for the moment: Senator Ensign’s secondary amendment didn’t have anything to do with either.

His secondary amendment was to include the Mortgage Twins in the Brown-Kaufmann Amendment, as in “break them up because they’ve gotten too big to fail.” There are a couple of things wrong with this picture. First, the Mortgage Twins aren’t banks. Secondly, the Mortgage Twins are chartered to purchase and securitize mortgages to ensure that LENDERS have enough funds to continue offering mortgages to potential homebuyers. Third, as much as Senator Ensign may have intoned “GSEs” and “government sponsored entities” in regard to the Mortgage Twins, they are not really government programs.

True, when Fannie Mae (the Federal National Mortgage Association) was established in 1938 it’s purpose was to make funds available for middle income Americans by buying mortgages that would otherwise have sat on Thrift or Banks books. 1938, during the Depression, wasn’t a good year for Thrifts or Banks to have large amounts of debt on their books. In 1968 Fannie was re-chartered as a shareholder owned enterprise.

The Federal Home Loan Mortgage Corporation, which somehow got to be called Freddie, was established in 1970 in order to expand the secondary market for mortgages. This action, like that of Fannie, makes more money available for lending by buying mortgages in the secondary market and pooling the mortgages into mortgage based securities.

Fannie and Freddie operated as corporations until September 7, 2008 when they both became insolvent and were placed under conservatorship. There is a persistent myth that somehow these corporations are “government guaranteed,” and the following may come as something of a shock to Senator Ensign, BUT “The FHLMC and FHLMC securities are not funded or protected by the US Government. FHLMC securities carry no government guarantee of being repaid. This is explicitly stated in the law that authorizes GSEs, on the securities themselves, and in public communications issued by the FHLMC. [link] And, now, what of Fannie Mae?

Fannie Mae receives no direct government funding or backing; Fannie Mae securities carry no government guarantee of being repaid. This is explicitly stated in the law that authorizes GSEs, on the securities themselves, and in many public communications issued by Fannie Mae. Neither the certificates nor payments of principal and interest on the certificates are guaranteed by the United States government. The certificates do not constitute a debt or obligation of the United States or any of its agencies or instrumentalities other than Fannie Mae.” [link]

So, what happened? All anecdotal evidence to the contrary, the bottom line is that neither of the Mortgage Twins actually guarantees anything. The shortest version of why the U.S. Treasury put the Mortgage Twins into conservatorship is that combined they had sold some 97% of all the mortgages in this country into the Great American Securitization Sausage Machine of Lehman, Bear Stearns, Citigroup, Bank of America, JPMorganChase, Goldman Sachs, etc. etc. Consider what might have happened to the securities markets had some 97% of all residential based mortgage securities been downgraded because the originator of the secondary financial products was Belly Up? The answer doesn’t take much, if indeed any, imagination.

Do the Mortgage Twins have problems? Yes. Did they ill-advisedly reduce their standards for conforming loans in order to satisfy the appetites of the Great American Securitization Sausage Machine? Yes. Did they ill-advisedly reduce their standards to accommodate calls from both sides of the political spectrum to create the Ownership Society? Yes. Do they need to be re-evaluated and reformed in light of these issues. Yes. But, as Senator Chris Dodd (D-CT) tried to explain to Senator Ensign, unless another vehicle is created by which (1) there are conforming standards for loans; (2) there is a facility for purchasing mortgages from Thrifts and Banks; and (3) there is a facility for pooling mortgages into securities — you will wipe out the housing market.

Indeed, this would save problems “in” our housing markets, because we wouldn’t have any housing markets. Senator Ensign’s response indicated that this isn’t a concept with which he is familiar, “See,” he said, “That’s why they are too big.” (Face meets Palm)

Happily, 59 members of the U.S. Senate DID understand the problem with Senator Ensign’s amendment which garnered only 35 votes this evening. [vote 135] There is much to be done to restore the credibility of the Mortgage Twins in the financial markets, and there is much to be done to insert more stability (as opposed to playable “efficiencies”) in the housing market. Grandstanding for a Luntz Talking Point isn’t productive. And, now that Senator Ensign’s made the obligatory anti-Fannie speech, perhaps we can get back to the business of how to reform the system which engendered a push from the investment banks for ever more raw meat (pooled loans for the Securitization Sausage Machines) and the push for an “Ownership Society,” and brought the Mortgage Twins into conservatorship in the first place.

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Filed under Ensign, financial regulation, subprime mortgages

>Berkley, Titus vote in favor of H.R. 1728 – Reforming Mortgage Loan Practices Bill

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The House of Representatives passed H.R. 1728, amending the Truth in Lending Act to reform consumer mortgage practices and provide accountability for mortgage loan practices, and to provide minimum standards for consumer mortgage loans. The measure passed the house on a 300-114 vote with Nevada Representatives Berkley (D-NV) and Titus (D-NV3) voting in favor; Congressman Heller is listed as not voting. [roll call 242] (Once again, the three Representatives from our neighbor to the south in Arizona, Shadegg, Franks, and Flake all voted No. To our north, Idaho Representatives Minnick (D-ID) and Simpson (R-ID) both voted in favor of the bill.)

Among the provisions in the House bill: The specification of “duty of care” standards for originators of residential mortgages; the prohibition of steering incentives in connection with mortgage originations; the prohibition of abusive, unfair, deceptive, predatory practices relating the residential mortgages and against practices inconsistent with reasonable underwriting standards, or practices not in the interest of the borrower.

The bill also calls for minimum standards for residential mortgage loans, including a mandatory net tangible benefit to the consumer for refinancing a residential mortgage loan. The measure also subjects a creditor to civil actions for rescission of a residential mortgage in the case of certain abuses, and limits the liability of good faith assignees or securitizers to loan rescission and some other obligor costs. The bill permits the consumer to assert a right to a mortgage rescission as a defense against foreclosure.

Certain types of pre-payment penalties, single premium credit insurance, mandatory arbitration, mortgage loan provisions that waive a statutory cause of action by the consumer, and mortgages with negative amortization are prohibited. In addition, some protections for tenants are included. The bill requires a six month notice before a hybrid adjustable rate mortgage is reset, and prescribes mandatory disclosures in monthly statements for residential mortgage loans.

Creditors are prohibited from lending without due regard for the consumer’s ability to pay, recommending or encouraging default on an existing loan before refinancing all or a portion of the existing loan, taking action in connection with a high cost mortgage to structure a loan as an open end credit plan, or engaging in the unfair practice of flipping in connection with a high cost mortgage. [Full CRS summary]

Good, but perhaps not really good enough? The Center for Responsible Lending commended the House action but added a cautionary note, “Unfortunately, despite its excellent substantive standards, H.R. 1728 does not sufficiently fix the misalignment of incentives throughout the mortgage market that led to the current crisis. Consequences for lenders who violate the new law need to be strengthened. Moreover, in some very important ways, the bill exempts from its scope those loans that have been bundled into mortgage-backed securities—the very loans that are proving most problematic as we try to address the foreclosure crisis.”

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Filed under Berkley, fraud, Heller, housing, subprime mortgages, Titus

>The Sunday Deck Bass: The GOP’s Stinky CRA-fish

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Our northern Nevada Sunday Deck Bass award is once again a small fish compared to the GOP attempts to explain its way out of its incumbency. That thrashing and splashing noise we’re hearing in the wake of the negotiations on the Wail Street Bailout bill give every appearance of coming from a Republican party that doesn’t wish to celebrate the fact that they’ve held the Presidency for the past eight years, and controlled Congress from ’94 to ’06. If the Chicken of De-Regulation hadn’t just laid an extra large egg, the clucking from Representative Dean Heller (R-NV2) and other House Republicans might not be so dissonant. At one point in time, not so very long ago, the GOP was pleased to be the Party of De-Regulation; “let’s get government out of people’s lives,” “you know better what to do with your money than some bureaucrat.”

When the compliant GOP controlled Congress passed the bill six years ago insuring that credit default swaps would not be regulated, Senator Phil Gramm (McCain economic adviser, now “informal” after calling us “a nation of whiners,” and “economic illiterates”) told the nation: “The work of this Congress will be seen as a watershed, where we turned away from the outmoded, Depression-era approach to financial regulation and adopted a framework that will position our financial services industries to be world leaders into the new century.” [LV Sun] Gramm also sponsored and secured passage of the 1999 bill that destroyed the “wall” between commercial banks and investment houses that was supposed to protect bank deposits from the vagaries of the stock market. [LV Sun]

The CRA Canard: Anxious to deflect the blame for the mess created by Republican de-regulation schemes the GOP has returned to an old target, the 1977 Community Reinvestment Act that conservatives have attacked as “compelling banks to make loans to unqualified people.” [TB] The GOP is simply playing the race card, [TP] the National Review claiming the legislation was the result of “racially inflammatory campaigns that forced banks to make mortgages available to people without much in the way of income, assets, or credit.” [AJC] The act did no such thing.

What the CRA did was to stop banks from “Red-Lining,” withholding loans from entire neighborhoods along racial or ethnic lines. The fact, which GOP members conveniently omit, is that “federal law requires that CRA lending activities must be done consistent with safe and sound banking practices. In reality, most high-cost loans were originated by lenders that did not have a CRA obligation and lacked federal oversight.” [MST] (emphasis added) The bottom line is that the Community Reinvestment Act does NOT require any bank to make any loan to any unqualified home buyer – just the opposite; and most of the problem loans were made by institutions not subject to federal oversight.

A September 26th letter from the Congressional Black Caucus [link to document] to GOP Minority Leader John Boehner (R-OH) challenging comments made by Rep. Michele Bachman (R-MN) [TP] that the CRA caused the mortgage meltdown seems not to have stopped Republican efforts to maintain this canard in the face of facts to the contrary. Rep. Eric “Signature’s Sandwich” Cantor (R-VA) was on MSNBC this morning launching the self-same lie, and was in his turn challenged by Rep. Barney Frank (D-MA).

Just how far from the facts the racially tinged charge made by Bachman and Cantor are is illustrated by the testimony of Sandra F. Braunstein, Director of the Division of Consumer and Community Affairs of the Federal Reserve to the House Financial Services Committee on Feb. 13, 2008. Braunstein provided some important historical context for her report on the CRA:

The debate surrounding the passage of the CRA was contentious, with critics charging that the law would distort credit markets, create unnecessary regulatory burden, lead to unsound lending, and cause the governmental agencies charged with implementing the law to allocate credit. Partly in response to these concerns, the act adopted by Congress included little prescriptive detail. Instead, the CRA simply requires the Federal Reserve and the other federal financial supervisory agencies:

  • to encourage federally insured depository institutions to help meet the credit needs of their entire communities, including low- and moderate-income areas, consistent with safe and sound operations;

  • to assess their records of performance under the CRA during examinations; and

  • to take those CRA records into account when evaluating proposals for expansion.

The law gives the agencies considerable discretion and flexibility to fashion programs and procedures to carry out the purposes of the law, to issue implementing regulations that include measures of performance, and to modify those regulations in response to changing markets. This flexibility has contributed to CRA’s relevance and adaptability through times of rapid economic and financial change, and widely differing economic circumstances among neighborhoods.

So, why would Republicans attempt to tie this act to the present mortgage meltdown? – simply because it was passed during a Democratic administration. The Republicans appear to be casting about for any finance bill passed during any Democratic administration to play the “they did it too” game, thus diminishing their culpability for the de-regulation fiasco that precipitated the current financial problems. It’s instructive to note that one of the major GOP objections to the CRA at the outset was that it would “create unnecessary regulatory burdens” on financial institutions.

No, requiring regulated banks to provide loans to qualified and credit worthy members of underserved racial and ethnic groups did not cause the systemic failure created by unregulated financial institutions who made predatory loans to unqualified and uncredit-worthy people in the interest of promoting the Bush administration’s Ownership Society.

The GOP “fishing expedition” to find some other excuse for the impact of their de-regulation binge, is peculiarly stinky.

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Filed under Economy, subprime mortgages

>Congrats GOP, the Bush Administration is presiding over the biggest bailout in history

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According to Senator McCain’s economic adviser Phil Gramm, I am an “economic illiterate,” but even a layperson can discern that the closure of Nevada’s Silver State Bank, which failed because of losses on real estate and development loans [WaPo] is just the tip of the iceberg. The Titanic Sinking is heralded in The New York Times which published an article today that ought to make every taxpayer from Denio, NV to Detroit, MI cringe, the headline says mildly: “U.S. rescue seen at hand for 2 mortgage giants.” The two giants? Fannie Mae and Freddie Mac. The taxpayers liability for the mess? Fannie and Freddie guarantee $5 Trillion in mortgage backed securities.

Bush Administration and Federal Reserve officials informed the top executives at Fannie and Freddie that the U.S. government was implementing a plan to put both companies in conservatorship. The executives will go, and their board of directors will be replaced, but “the companies would be able to continue functioning with the government standing behind their debt.” [NYT] Emphasis added: That would be the $5 Trillion liability. “It is not possible to calculate the cost of any government bailout, but the huge potential liabilities of the companies could cost taxpayers tens of billions of dollars and make any rescue among the largest in the nation’s history.”

So, eight years of Republican de-regulation, lax oversight, over-compensation of ineffective management, and pronouncements that the “fundamentals of our economy are sound” have yielded a Treasury Department trying desperately to tip toe through a fiscal mine field of financial market concerns, mortgage lending interests, all while attempting to shield taxpayers from the fall out. Obviously, it hasn’t worked.

The “mortgage crisis/credit crunch” is no longer the preserve of mortgage holders and bankers; nor is it something to be associated with certain regions of the country – like southern California, Nevada, and Florida; with the federal government promising to back-stop losses to pension plans, mutual funds, major corporations, and foreign governments, the “conservatorship” (read Bankruptcy) of Freddie Mac and Fannie Mae puts every American taxpayer in the vortex of the problem.

The “plan” will be in place when Asian markets open on Monday. In short, the Bush Administration and the Fed will be burning midnight oil over this weekend to iron out who will take care of what, when, and how. Shareholders in Fannie and Freddie will take a beating, and taxpayers who are “back-stopping” this bail out will be cringing. However, the last thing the Bush Administration wanted appears to be the functional collapse of the two mortgage giants right before the election in November. Frankly, and bluntly, there is actually no “good” time for this to happen.

No wonder the GOP didn’t care to discuss the economy during its recent convention. What could they say? The national unemployment rate has climbed to 6.1% with employers dropping 84,000 jobs in August, and the misery index (unemployment + inflation) reached 11.7%, the highest level since 1991. [Bloomberg] The rate of U.S. home mortgages either overdue or in some stage of foreclosure increased to 9.16% from 6.52% a year ago, the highest level since the Mortgage Bankers Associated started keeping records 39 years ago. [WSJ]

Did the Republicans mention the part where “Hedge funds get rattled as investors seek exits?” [WSJ] Did anyone hear much about Merrill Lynch getting cut down to a “sell” recommendation at Goldman because of write-downs? [Bloomberg] Or, in addition to the tribulations at Silver State, did anyone hear of the Office of Thrift Supervision telling Downey Financial Corporation to come up with a plan to shore up its finances? [NYT] Did anyone mention that Dell Computers is now trying to sell off entire factories? [NYT]

This Republican Administration, the one Senator John S. McCain III (R-AZ) would like to continue, with tax cuts for the wealthiest among us, and with its ideological adherence to long debunked trickle down economics and manic de-regulation, has not only managed to screw up the housing market – and the credit market – and international investments – and financial institutions – and job creation – it has now created a felt need to bail out not only Bear Stearns, but the $5 Trillion Giants Freddie Mac and Fannie Mae. The next time someone mouths the aphorism “Republicans are good for business” all that might need to be said is “Freddie and Fannie?” To paraphrase the GOP Hero: Are we better off than we were 8 years ago?

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Filed under Bush Administration, Economy, McCain, Republicans, subprime mortgages