Commentary: Bankruptcy, not bailout, is the right answer

[cute fuzzy bunny]

Community Reinvestment Act had nothing to do with subprime crisis - BusinessWeek

It's Still Not CRA | New America Blogs

[ls99]

While not expressly noting CRE (community reinvestment) this article excerpt shows, from a long and detailed article of the Village Voice of all places, community reinvestment rules were the mechanism by which the deeds were done.
Andrew Cuomo And Fannie And Freddie; How The Youngest Housing And Urban Development Secretary In History Gave Birth To The Mortgage Crisis

Andrew Cuomo And Fannie And Freddie; How The Youngest Housing And Urban Development Secretary In History Gave Birth To The Mortgage Crisis



August 12, 2008 9:40 AM Age: 51 days
BY: THE VILLAGE VOICE (NEW YORK)
WAYNE BARRETT


Cuomo's predecessor, Henry Cisneros, did that for the first time in December 1995, taking a cautious approach and moving the GSEs toward a requirement that 42 percent of their mortgages serve low- and moderate-income families. Cuomo raised that number to 50 percent and dramatically hiked GSE mandates to buy mortgages in underserved neighborhoods and for the "very-low-income." Part of the pitch was racial, with Cuomo contending that Fannie and Freddie weren't granting mortgages to minorities at the same rate as the private market. William Apgar, Cuomo's top aide, told The Washington Post: "We believe that there are a lot of loans to black Americans that could be safely purchased by Fannie Mae and Freddie Mac if these companies were more flexible."
While many saw this demand for increasingly "flexible" loan terms and standards as a positive step for low-income and minority families, others warned that they could have potentially dangerous consequences. Franklin Raines, the Fannie chairman and first black CEO of a Fortune 500 company, warned that Cuomo's rules were moving Fannie into risky territory: "We have not been a major presence in the subprime market," he said, "but you can bet that under these goals, we will be." Fannie's chief financial officer, Timothy Howard, said that "making loans to people with less-than-perfect credit" is "something we should do." Cuomo wasn't shy about embracing subprime mortgages as a possible consequence of his goals. "GSE presence in the subprime market could be of significant benefit to lower-income families, minorities, and families living in underserved areas," his report on the new goals noted.

[Kwirk]

We already own the GSE loans. I don't think these loans are what the bail out is intending to buy.

[harley]

Quote:

Originally Posted by MasterBlaster I couldn't help but notice that about $ 1.4 Trillion was lost in the equity markets on Monday (and that's just in the US). How low do we have to go ? How many businesses need to go under ? And how many people need to lose their livelihood before we (collectively) think that their problem is our problem ? So we can either teach Wall Street a lesson here and feel smug, or we can do what is in our own best interest. One or the other but not both.

I keep hearing this opinion, and every time it causes me to remember a quote from Ben Franklin. I usually use it in regards to the Patriot Act and other post 9/11 activities, but it seems to apply here too - "They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety."

I'm not trying to be a hardass, and I believe in charity and helping your neighbor. However, just like I have to do with my daughter, keeping people from feeling the consequences of their actions also keeps them from learning not to repeat them. There's plenty of blame to go around, and we all need to feel it, learn from it, and DON'T DO IT AGAIN.!

I just can't justify having my daughter and granddaughter pay for their entire lives for the actions of the gov't and social and financial systems we allowed to happen.

[Sevo]

The biggest danger from the bailout it that it instantly removes the negative effects from the people who set this all up. There will be NO learning from this debacle. 2 hours after this abortion is passed the same smiling bunch that made fortunes off the subprime mess will be back in the trough feeding feverishly, this time with the sure knowledge that if they cause a big enough catastrophe the tax payers will be forced to pick up the bill again.

The next disaster awaiting the economy is run away inflation. We can't just keep making up money as a bankrupt country and giving it away. Sooner or later the inflation genie will get out of the bottle. When it does with will not be a little at a time . It will be just like this mess. One day there will be a collective "OH MY GOD" what now. There just aren't any free economic lunches out there. The only real pool of value left is going to be the Stocks, bonds, real estate etc that the members of this board have worked for and saved.

In the long run we will be a lot better off to let this fall where it will and get it over with as soon as possible rather than prolong the imbalances by borrowing more money and giving it to people who are either dishonest or are soooo stupid that they believe that housing prices will never go down.

[Kwirk]

If we want to find a government role in the current problems this may be better place to look (registration required):

http://www.nytimes.com/2008/10/03/bu.../03sec.html?hp

Low reserves have helped flood the financial markets with liquidity in good times. Now they intensify the contraction.

[audreyh1]

The US Govt let Lehman fail because they thought it could fail "cleanly". Unfortunately, it turned out otherwise. Before that event, Bernanke and Paulson was reassuring congress and the nation that our financial system was stressed but sound. After the event, things fell apart incredibly quickly and they completely changed their tune.

The credit crisis and the need for this "rescue" package are the direct result of the Lehman bankruptcy.

Unfortunately, these institutions have become so intertwined with each other that they easily bring each other down. That is what "too big to fail" truly means. There have to be some controls in place to prevent the use of complex risky financial instruments and excessive leverage that threaten global financial stability when one company is allowed to fail. In other words, we need to clean up the financial system so that bankruptcy is an option in the future!

Audrey

P.S. In 2004 the SEC gave the major investment banks an exemption from the regulations that limited the amount of leverage they could use. I believe the rest is history!
How SEC Regulatory Exemptions Helped Lead to Collapse: http://bigpicture.typepad.com/commen...tory-exem.html
Agency’s ’04 Rule Let Banks Pile Up New Debt, and Risk: http://www.nytimes.com/2008/10/03/bu...bevTinN4I1qN2g

[Independent]

Quote:

Originally Posted by audreyh1 The US Govt let Lehman fail because they thought it could fail "cleanly". Unfortunately, it turned out otherwise. Before that event, Bernanke and Paulson was reassuring congress and the nation that our financial system was stressed but sound. After the event, things fell apart incredibly quickly and they completely changed their tune. The credit crisis and the need for this "rescue" package are the direct result of the Lehman bankruptcy. Unfortunately, these institutions have become so intertwined with each other that they easily bring each other down. That is what "too big to fail" truly means. There have to be some controls in place to prevent the use of complex risky financial instruments and excessive leverage that threaten global financial stability when one company is allowed to fail. In other words, we need to clean up the financial system so that bankruptcy is an option in the future! Audrey P.S. In 2004 the SEC gave the major investment banks an exemption from the regulations that limited the amount of leverage they could use. I believe the rest is history! How SEC Regulatory Exemptions Helped Lead to Collapse: The Big Picture | How SEC Regulatory Exemptions Helped Lead to Collapse Agency’s ’04 Rule Let Banks Pile Up New Debt, and Risk: http://www.nytimes.com/2008/10/03/bu...bevTinN4I1qN2g

Thanks for the links. The NYT piece is particularly good.

[Hobo]

Martha -- two really good points. This crisis was caused by many things, but not by the 1977 CRA. The other point you made earlier was excellent also. Let people restructure their loan in bankruptcy. They should be able to restructure their credit card debt in bankruptcy as well. This is what bankruptcy was for - to allow someone who is deep in debt to crawl his way back out. Taking the house, throwing people on the streets and leaving the bank with a collection of wood, wires, and pipes is no good for anybody.

You can rely 100% on the information provided--my posts have been inspired by divine influence from God. Needless to say you cannot consult with a higher authority. Feel free to sue me - I reside in Indonesia and your chances of extradition is zero.

[al_bundy]

a lot of it is fear

Lehman had hundreds of billions of $$ of bonds that are now almost worthless and thousands around the world are out a lot of money. if you just lost money in Lehman bonds are you going to continue lending or wait and see what else happens? if you work for a bank you don't want to be the guy that OK's a $20 million loan to another bank that then goes belly up and you lose your money and your job.

after a little while these things build up on fear where a lack of lending causes companies to fail and results in less lending and so on.

[Independent]

Quote:

Originally Posted by . . . Yrs to Go The problem was/is, "bad" financial institutions were/are threatening "good" financial institutions. Both Goldman Sachs and Morgan Stanley have been profitable throughout this whole mess but I'm convinced they would have filed for bankruptcy last week had the government not floated the "bailout" idea. How many other institution, both "good" and "bad" would Goldman and Morgan have taken down?

This is the important part of the article to me:

Quote:

Thoughtful advocates of the bailout might concede this perspective [that the bailout creates a moral hazard], but they argue that a bailout is necessary to prevent economic collapse. According to this view, lenders are not making loans, even for worthy projects, because they cannot get capital. This view has a grain of truth; if the bailout does not occur, more bankruptcies are possible and credit conditions may worsen for a time. Talk of Armageddon, however, is ridiculous scare-mongering. If financial institutions cannot make productive loans, a profit opportunity exists for someone else. This might not happen instantly, but it will happen. Further, the current credit freeze is likely due to Wall Street's hope of a bailout; bankers will not sell their lousy assets for 20 cents on the dollar if the government might pay 30, 50, or 80 cents.

I think both sides agree that the bailout trades short term gains against long term losses. The short term gain is that we keep more people working with the bailout. The long term loss is that we reinforce the idea that if you are big enough you can make risky bets and privatize the profits and socialize the losses.

The question for me is "How many average people lose their jobs, and for how long?" When people talk about "complete meltdown", I don't know what they mean. We certainly aren't going to go to 100% unemployment.

What does "complete meltdown" mean? 10% unemployment? I've lived through that, and most economists would say it was a necessary evil that allowed us to break the stagflation of the 70's.

Maybe a severe recession is the cost of chasing excess leverage, and the notion that the gov't will always step in and save your hide, out of the system. If it really worked out that way, I might be willing to make the trade.

[al_bundy]

one of the blogs i read says that this is similar to the Asian Crisis in 1997. They said back then we told them to do a free market fix and they went half way with us. They did a lot of things free marketers said and the governments also bought a lot of bad loans from the banks like the US Government will probably do. And it seems to have worked.

[Kwirk]

Here's another article addressing CRA:

washingtonpost.com

Registration required.

[Marquette]

Can someone clue me in on the 1995 changes?

Quote:

Clinton Administration Changes of 1995 In early 1993 President Clinton proposed new regulations for the CRA which would increase access to mortgage credit for inner city and distressed rural communities.[7] The new rules went into effect on January 31, 1995 and featured: requiring numerical assessments to get a satisfactory CRA rating; using federal home-loan data broken down by neighborhood, income group, and race; encouraging community groups to complain when banks were not loaning enough to specified neighborhood, income group, and race; allowing community groups that marketed loans to targeted groups to collect a fee from the banks.[5] In a 1995 congressional hearing on proposed changes to regulation of the Community Reinvestment Act William A. Niskanen, chair of the Cato Institute, criticized the proposals for political favoritism in allocating credit, micromanagement by regulators and concerns about bank losses and soundness. He said it would be very costly to the economy and the banking system and that the primary long term effect would be to contract the banking system. He recommended congress repeal the Act.[8] Responding to concerns that CRA would lower bank profitability, a 1997 research paper by economists at the Federal Reserve found that "[CRA] lenders active in lower-income neighborhoods and with lower-income borrowers appear to be as profitable as other mortgage-oriented commercial banks".[9] According to a United States Department of the Treasury study of lending trends in 305 U.S. cities between 1993 and 1998, 467 billion dollars in mortgage credit flowed from CRA-covered lenders to CRA-eligible borrowers. The number of CRA mortgage loans increased by 39 percent. Other loans increased by only 17 percent.[10]

Community Reinvestment Act - Wikipedia, the free encyclopedia

It sounds like it was primarily around requiring reporting, but were there also changes that caused an overt push to market to people that couldn't afford the loans in the first place? Or, was the increase primarily as a result of better marketing to people to make them aware of their options? Grey area in the middle?

[al_bundy]

in those days there was a lot of redlining. if you were black and went to buy a house a realtor would never show you a house in a white area most times in a lot of towns. in NYC in the 1980's a lot of people moved out to the burbs and the media nicknamed it "white flight" for obvious reasons. and banks wouldn't lend to you if you wanted to buy in a certain area.

by 1997 everyone wanted the subprime business because it was profitable. everyone knew the default rates and could charge high interest rates. by 2003 homes were expensive and wall street wanted in on the deals so they started doing the same things as fannie did for years except they didn't follow the same standards and we got a housing bubble.

Fannie got into ARM lending later and only because it was losing a lot of business to the wall street banks. their market share fell to around 30% and now is back up there again after all the wall street supported subprime lenders went belly up

[AzDreamer]

I guarantee you if a Republican could be blamed for this he would be, and he would be frog-marched down the streets in chains.

The Democrats prevented regulators from tightening the lending standards that Fannie and Freddie would accept. Home lenders were forced to play along or the politicians would make their lives miserable. Letting low-income folks buy homes they couldn't afford was good policy if all you cared about was getting re-elected.

These quasi-government agencies were gigantic piggy banks for rewarding Democrat party loyalists. Execs were caught overstating profits which gave them huge bonuses for meeting earnings targets. None of these crooks have been charged with any crimes. They were forced to leave but they took 100s of millions in pay and bonuses. They left Fannie and Freddie with a portfolio of sub-prime loans that turned out to be worthless once home prices stopped rising.

The Sub-prime loans got bundled into pools of mortgage backed securities and were assigned AAA ratings. These securities were insured against default at rates that would apply to AAA rated debt. The decline in value triggered a flood of insurance claims and a crash among the financial companies providing that insurance.

[cute fuzzy bunny]

Ah, once again its all the democrats fault.

I could have sworn that the republicans were in charge of congress for most of the last 30 years, and that we'd had a republican president for 18 out of the last 30.

But hey, finger pointing beats the heck out of just solving the problem and if possible, jailing the perpetrators.

[Marquette]

Quote:

Originally Posted by AzDreamer I guarantee you if a Republican could be blamed for this he would be, and he would be frog-marched down the streets in chains. The Democrats prevented regulators from tightening the lending standards that Fannie and Freddie would accept. Home lenders were forced to play along or the politicians would make their lives miserable. Letting low-income folks buy homes they couldn't afford was good policy if all you cared about was getting re-elected.

That's an interesting theory, but doesn't jive with the fact that, if it was such a big deal, why wasn't it fixed under a Republican president with a Republican congress?

Additionally, I can't reconcile that with the fact that I could get, if I wanted, in 2003, an $800k loan with 0% down and 100% LTV. (and household income was hovering around $200k at the time). It never would have gone near Fannie or Freddie and I'm neither low income nor a minority.

In other words, it smells more like greed to me.

[Notmuchlonger]

Quote:

Originally Posted by riskadverse Bernanke is for it. Paulson is for it. Bush is for it. My Senators are for it. My congressman is for it. CNBC is for it. Wall Street is for it. Bend over and take your medicine.

Right everyone we elected as a people is for it. It either works or we suffer more pain and point fingers at each other

[Gone4Good]

Quote:

Originally Posted by Independent What does "complete meltdown" mean? 10% unemployment? I've lived through that, and most economists would say it was a necessary evil that allowed us to break the stagflation of the 70's. Maybe a severe recession is the cost of chasing excess leverage, and the notion that the gov't will always step in and save your hide, out of the system. If it really worked out that way, I might be willing to make the trade.

I think the problem is that we don't know. If we were certain that 10% unemployment would be the limit, maybe we might go that route to cleanse the system. But I don't think most people really grasp the magnitude of what is going on.

It started in housing. Financial institutions that binged on housing related investments got singed (Bear Stearns, Countrywide, WaMu, Fannie & Freddie, etc) and people said "Let them burn". And maybe there is some rough justice in that. But then other investment banks who managed their finances well (Goldman, MS) started to teeter, and the cry went out "Let the greedy Wall Street bankers burn."

But this week brand name insurance companies, Met Life, Prudential, etc. who have deminimus exposure to housing were attacked. Their credit instruments were trading as if default was imminent. These are companies that form the foundation of the investor base that buys corporate debt. If a couple of these big insurance companies go down, the ability of companies to finance themsleves will pretty much disapear.

Then we had news out of California that it was having trouble refinancing its short-term obligations. CA is asking for a government loan to bolster its liquidity. Now we're talking about entire states facing collapse. NY and NJ short-term muni yields are nearly as elevated as those of CA . . . are they next?

Does this not sound a little like "A complete meltdown"?