From a mighty ACORN an even mightier crisis did grow

[Xavier_Onassis]

That doesn't sound right , what was the tipical intrest rate for such a loan?

Look this up.

Rates were over 10% on some subprime loans, when they were 4% on secured mortgages where the buyer had paid 20% down.

A friend of mine got an interest-only ARM on a condo he decided to rent at 7%, and in two years it was scheduled to jump to 11%.
What do you suppose he'd do if he owed $200,000 on a condo now worth $140,000 if he could not find a tenant to rent it at a profit? He was bitching to me that he was turned down for a credit card because his credit score had fallen into the 300's. And he had a tenant who was paying $1200 a month regularly and had never missed a payment. Or so he said. But he still owed the same amount on this mortgage that he owed two years ago, when he bought the place. Real estate salesmen were touting these interest-only loans all over the place. This guy is a bit of a greedhead, but he is no sucker. He has a PhD in business.

.
The bigger the risk, the higher the rate. With the credit swaps and the bundling of mortgage derivatives and sticking insurance companies like AIG with the risk, the banks figured it was free money.

Look on your credit cards: they charge up to 22%. More if you figure in late payment fees and crap like that.

Banks had one principle reason to lend money on these terms: greed. NOT the government, greed.

[Universe Prince]

<< . . . these two mortgage lending institutions [Fannie and Freddie] are at the center of the crisis. >>

Centre of the crisis, left field of the crisis, third base of the crisis - - BFD.&nbsp; This collapse is not even close to being limited to Fannie and Freddie.

No one said it was limited to that, least of all me. In point of fact, I said just the opposite. So this criticism is irrelevant.

Blaming this all on two federal entities is like picking out two locusts in a swarm and claiming "THERE'S the problem, them two in the 2,398th and 2,399th positions in the 10,832rd line of the swarm."

Indeed. Good thing no one did that.

<<The government implicitly promised these institutions that it would make good on their debts, so Fannie and Freddie took on huge amounts of excessive risk.>>

Which Fannie was apparently able to hide for about 70 years and Freddie for only about half as long.&nbsp; Anyone with half a brain has to be able to figure out that their problems are of much more recent origin.&nbsp; Moreover this absurd theory completely ignores the identical fates of similar lenders and investors whose debts were NOT implicitly or explicitly guaranteed by the Federal Government.

So because it's been around for 70 years there must not be any inherent problem with it? Don't be ridiculous. No one said their part in the crisis doesn't stem from more recent events. You're again criticizing something no one argued. And no, this theory does not ignore similar fates by other lenders. And all this is made clear by the next part of the quote. So what you've done is ignored the context of three sentences and made bogus criticisms about them.

<<Worse, beginning in 1977 and even more in the 1990s and the early part of this century, Congress pushed mortgage lenders and Fannie/Freddie to expand subprime lending. The industry was happy to oblige, given the implicit promise of federal backing, and subprime lending soared.>>

Congress PUSHED to have the restrictions loosened on sub-prime lending?&nbsp; Seems to me there was some lobbying going on by the lenders themselves to be free of irksome Federal government restraints on their lending practices.&nbsp; Besides, the absence of restraints does not shift the blame for the foolish decisions made by the lenders once their restraints were loosened.&nbsp; Corporations remain profit-making institutions and their officers and directors remain responsible only to their shareholders for maximising corporate profits.&nbsp; While some blame for the failure of tightly-regulated private corporations can be assigned both to the corporate management AND the regulators, in a loosely regulated business environment, blame for failure becomes obviously more concentrated on management than on the Federal regulators.&nbsp; The failure of the credit-granting institutions in America today is a failure of the capitalist system, not a failure of government regulation.

Not at all. You make up the most marvelously generalized nonsense. This is hardly a failure of the capitalist system. This is, in point of fact, the capitalist system doing what it should do to correct for bad choices made by government and those in the lending institutions themselves. I am constantly astounded that people think capitalism and/or the economy is supposed to forever exist in some ideal state where nothing bad ever happens. Anytime something bad does happen, suddenly it's a failure of capitalism and a need for more regulation. Which is complete nonsense.

And just to be clear, saying that government intervention is part of the problem is not the same as saying everyone else is blameless. No one is arguing that there were not serious mistakes made in the private sector. But we're not going to solve this by ignoring the effects of the efforts of government. Claiming that this is a crisis of too little government intervention in the market is a fraud. If you believe this is a crisis of too little government intervention in the market, I'd like to get you in on the ground floor of buying up all the stone in the Brooklyn Bridge because they're going to tear it down next year.

<<http://online.wsj.com/article/SB122204078161261183.html?mod=special_page_campaign2008_mostpop
&nbsp; &nbsp; &nbsp; &nbsp; &nbsp;   - The Federal Reserve. The original sin of this crisis was easy money. For too long this decade, especially from 2003 to 2005, the Fed held interest rates below the level of expected inflation, thus creating a vast subsidy for debt that both households and financial firms exploited. The housing bubble was a result, along with its financial counterparts, the subprime loan and the mortgage SIV.>>

WRONG!&nbsp; Wrongwrongwrongwrongwrong.&nbsp; The loosening of credit-granting restrictions gives more freedom&nbsp; of action to the lenders' managers, but it does not excuse faulty judgment on their part.&nbsp; Failure to evaluate risk competently is the root cause of the crisis.&nbsp; Because I CAN spend all my discretionary food budget on crystal meth does not mean I SHOULD spend all of my discretionary food budget on crystal meth.

No one said it excused faulty judgment on their part. That doesn't alter the effect of the Federal Reserve on the economy. People make choices within the economy as it is, not as it might be.

<<Meanwhile, the least regulated firms -- hedge funds and private-equity companies -- have had the fewest problems, or have folded up their mistakes with the least amount of trauma. >>

Oh no!&nbsp; What a huge surprise!!&nbsp; and who do you think are the primary investors in hedge funds?&nbsp; What do you think a hedge fund does, anyway?&nbsp; It bets both ways, so it's always covered.&nbsp; It doesn't make spectacular profits, but it's safe and meant to be safe.&nbsp; Hedge funds are for folks who don't NEED spectacular profits anyway because they are already wealthy.

You seem to be missing the point. You seem to be claiming hedge funds to be inherently safe because they're hedge funds. This is not true. Hedge funds can be risky, and, as I understand it, part of Bear Sterns' problem was a result of hedge funds.

<<All of this reaffirms the historical truth that regulators almost always discover financial excesses only after the fact.>>

LMFAO.&nbsp; All it reaffirms is that when regulators don't regulate, businessmen will steal the farm and the whole fucking country if left alone long enough.

Not really. Imo, what it reaffirms is that corporatism is a bad idea. When businesses and government partner up, it leads to abuses, bad policy, poor judgment, and the average taxpayer gets screwed.

<<The Community Reinvestment Act. This 1977 law compels banks to make loans to poor borrowers who often cannot repay them. Banks that failed to make enough of these loans were often held hostage by activists when they next sought some regulatory approval.

[...]

That is just total bullshit.&nbsp; The act itself can be found here:http://www.fdic.gov/regulations/community/community/12c30.html

There is no requirement anywhere in the act that it make loans to subprime borrowers; in fact, "subprime borrowers" are not even mentioned in the act.&nbsp; The key requirement of the act is that banks be assessed by federal regulators on a periodic basis:

"&nbsp; the appropriate Federal financial supervisory agency shall - (1) assess the institution's record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of such institution"

Subprime as a word for lending practices probably did not exist when the act was passed. Do you understand what subprime lending is? Subprime lending is basically lending to people who pose a higher lending risk, which means people with bad or little credit history and/or people with low-incomes. So you have, in point of fact, shown exactly where the act talks about subprime lending. Also, I have discovered, the Financial Institutions Reform, Recovery and Enforcement Act of 1989 made an adjustment to the Community Reinvestment Act. Essentially, it established a rating system that put more pressure on financial institutions to provide subprime loans.

<<Robert Litan, an economist at the Brookings Institution, told the Washington Post this year that banks "had to show they were making a conscious effort to make loans to subprime borrowers." The much-maligned Phil Gramm fought to limit these CRA requirements in the 1990s, albeit to little effect and much political jeering...>>

[...]

Robert Litan, who is associated with the Kauffman Foundation, a so-called "think tank" associated with two primary objectives, the promotion of education and of entrepreneurship, obviously comes to the problems of the financial crisis with the POV of an entrepreneur and represents nothing more than the entrepreneurial reaction to increased government regulation.  Most of the crooks, thieves and liars who have been ripping off the American people since the days of the Keating Five are entrepreneurs, and as such are a part of the problem and not a part of the solution.

Entrepreneurs? You want to criticize entrepreneurs as part of the problem? This is why I have a problem taking you seriously sometimes, Michael.

<<This is not a crisis of too little government. Any one who says it is, is ignorant, a liar or a fool.>>

More fucking bullshit.&nbsp; This is an obvious consequence of deregulation and almost every responsible commentator recognizes it as such.

No, this is not an obvious consequence of deregulation, and you have said nothing to prove that it is. Any commentator that "recognizes" it as such is, as I said before, ignorant, a liar or a fool.

[sirs]

And what's even more egregious, back in 2004, CSPAN ran actually broadcast a live committee house investigation on this, when it was brought to their attention BY THE REGULATORS, of inappropriate, unethical, and potentially illegal conduct being run by Fanny Mae & Freddy Mac.  So, now we have Democrats railing on the need for more regulators, when it was the Democrats in 2004 that circled the wagons around the 2 and the current fella filling in as Obama's Economic adviser, citing no problems here, the picture of economic health & stability, and blasting the regulators.

Which doesn't get Bush or the GOP off the hook in the least.  GOP did have the majority, but Bush fell in line with the non-conservative democrat-lite mantra that the Fed needs to help in some apparent right to home ownership, even going so far as to claim, those that didn't have enough for a down payment, should receive Federal aide for it.  News Flash Mr. President, IF a person/family doesn't have enough money for a down payment on a house, it's probably too expensive for them in the 1st place. 

So again, it's EVERYONE's fault, especially the Government in their overreaching efffort into manipulating lending institutions into extending mortgages to those that really couldn't afford it, then stick the American Tax payer with the bill, if anything went south

[Michael Tee]

<<News Flash Mr. President, IF a person/family doesn't have enough money for a down payment on a house, it's probably too expensive for them in the 1st place. >>

Fidel Castro doesn't help 'em with mortgage money, he helps them by providing help, land and low-cost building materials and plans so that deserving families can build their own homes.

Once again proving the superiority of the Communist system.

[Amianthus]

Fidel Castro doesn't help 'em with mortgage money, he helps them by providing help, land and low-cost building materials and plans so that deserving families can build their own homes.

Once again proving the superiority of the Communist system.

http://www.habitat.org/

[Michael Tee]

We observed the Cuban community home-building program first-hand in early 1986 when we were visiting Cuba (as tourists) at the time of the Third Party Congress of the Communist Party of Cuba.  AT that time, we had not heard of Habitat for Humanity but it became pretty well-known a few years later because of Jimmy and Rosalind Carter's involvement in it.  I wasn't aware, till I checked out your link, that Habitat's origins go back to the 1940s, which I guess rules out any involvement of the Cuban Communist Party, which at that time was only an underground movement.  I actually had believed that Habitat was just a cheap knock-off of the Cuban project.  What remains to be seen is whether Habitat itself had any Soviet predecessors and was inspired by them.

One clear advantage that the Cuban system has over Habitat is that the state, as the owner of all the land in the nation, has a unique opportunity to provide low-cost land to each project.  Another clear advantage is that in Cuba the families must first build something under the program for the people, such as a community clinic or a school, which emphasizes the principle of "giving back" and also provides much-needed construction experience.

[Universe Prince]

Fidel Castro doesn't help 'em with mortgage money, he helps them by providing help, land and low-cost building materials and plans so that deserving families can build their own homes.

Once again proving the superiority of the Communist system.

Best joke I've seen all day.

[Michael Tee]

Getting back to Prince's contention that overregulation was the cause of the current crisis, this is apparently the latest conservative effort to shift the blame for the entire debacle onto the Democrats.

See this article, from which two paragraphs are provided:
Conservatives Seek To Shift Blame For Crisis Onto Minority Housing Law
http://www.huffingtonpost.com/2008/10/01/conservatives-seek-to-shi_n_131020.html

<<University of Michigan Law Professor Michael Barr, a specialist in banking and finance law, flatly rejected
claims that the CRA was "a significant factor in the current crisis. CRA was enacted more than 30 years ago. It would be quite odd if this 30-year old law suddenly caused an explosion in bad subprime loans from 2002-2007....Subprime mortgages were mostly made by mortgage brokers and lenders and securitized by investment banks -- institutions not covered by CRA," he told the Huffington Post, adding, "CRA only covers banks and thrifts, and these institutions mostly have not suffered to the same extent or kind from bad lending as the non-CRA-covered institutions at the core of the current crisis. The problem here is not CRA. It is what the late former Fed Governor Ned Gramlich called 'the giant hole in the supervisory safety net' -- bad lending by firms outside the banking sector's rules for prudential supervision, capital requirements, consumer protection and yes, the CRA."

<<Along similar lines, University of Oregon economist Marc Thoma also cited for the Huffington Post the long delay between enactment of CRA and the current crisis and the fact that only 20 percent of subprime loans were made by CRA-regulated lenders, adding two other points: that "subprime loans grew twice as fast in institutions that did not have to meet the conditions of the CRA" and that the scope of coverage of CRA was reduced in 2004 under the Bush administration, "but even though fewer banks were subject to CRA restrictions, the growth of the subprime market continued unabated."

[Universe Prince]

Getting back to Prince's contention that overregulation was the cause of the current crisis, this is apparently the latest conservative effort to shift the blame for the entire debacle onto the Democrats.

Except I'm not conservative and not trying to place the blame for the entire debacle onto the Democrats, and the criticism of government regulations and the credit problems has been going on in libertarian circles for a while.

CRA was enacted more than 30 years ago.

No duh. And if it had never been in any way changed, that might be a valid point. But we both know that it isn't. In addition, no one is blaming solely the CRA. There are a number of factors involved, which has been acknowledged, and to talk as if somehow only the CRA is being blamed is just flat-out dishonest. Equally dishonest is to suggest that the CRA is somehow wholly unrelated to the crisis. The belief that there are no long-term bad consequences to things like the CRA might be comforting, but that is a wholly false belief.

I suppose next you're going to argue that World War II was in no way related to World War I because so much time passed between them. This argument that so much time has passed that this or that cannot possibly be a factor in the current crisis is adult male bovine excrement.

Quite frankly, I find the arguments that the current crisis is wholly a result of unregulated capitalism to be generally ignorant or dishonest.

I've been told that liberals do nuance. If the arguments made in this crisis are any indication, liberals apparently not only do not do nuance, they run from it like little children from a loud noise. Or perhaps more appropriately, like Chicken Little from a fallen acorn.

[Universe Prince]

http://www.businessweek.com/magazine/content/08_40/b4102000409948.htm

MARIA BARTIROMO Mr. President, in 1999 you signed a bill essentially rolling back Glass-Steagall and deregulating banking. In light of what has gone on, do you regret that decision? FORMER PRESIDENT BILL CLINTON No, because it wasn't a complete deregulation at all. We still have heavy regulations and insurance on bank deposits, requirements on banks for capital and for disclosure. I thought at the time that it might lead to more stable investments and a reduced pressure on Wall Street to produce quarterly profits that were always bigger than the previous quarter. But I have really thought about this a lot. I don't see that signing that bill had anything to do with the current crisis. Indeed, one of the things that has helped stabilize the current situation as much as it has is the purchase of Merrill Lynch (MER) by Bank of America (BAC), which was much smoother than it would have been if I hadn't signed that bill. Phil Gramm, who was then the head of the Senate Banking Committee and until recently a close economic adviser of Senator McCain, was a fierce proponent of banking deregulation. Did he sell you a bill of goods? Not on this bill I don't think he did. You know, Phil Gramm and I disagreed on a lot of things, but he can't possibly be wrong about everything. On the Glass-Steagall thing, like I said, if you could demonstrate to me that it was a mistake, I'd be glad to look at the evidence. But I can't blame [the Republicans]. This wasn't something they forced me into. I really believed that given the level of oversight of banks and their ability to have more patient capital, if you made it possible for [commercial banks] to go into the investment banking business as Continental European investment banks could always do, that it might give us a more stable source of long-term investment.

http://online.wsj.com/article/SB122282635048992995.html

We agree that Mr. Clinton isn't wrong about everything. The Gramm-Leach-Bliley Act passed the Senate on a 90-8 vote, including 38 Democrats and such notable Obama supporters as Chuck Schumer, John Kerry, Chris Dodd, John Edwards, Dick Durbin, Tom Daschle -- oh, and Joe Biden. Mr. Schumer was especially fulsome in his endorsement. As for the sins of "deregulation" more broadly, this is a political fairy tale. The least regulated of our financial institutions -- hedge funds -- have posed the least systemic risks in the current panic. The big investment banks that got into the most trouble could have made the same mortgage investments before 1999 as they did afterwards. One of their problems was that Lehman Brothers and Bear Stearns weren't diversified enough. They prospered for years through direct lending and high leverage via the likes of asset-backed securities without accepting commercial deposits. But when the panic hit, this meant they lacked an adequate capital cushion to absorb losses.

[Michael Tee]

Call it a fairy tale all you like, bring on the false analogies by the ton and at the end of the day you've still got nothing of substance.  Clinton is going to protect his reputation, and if that means propping up the execrable Phil Gramm, then so be it.  The arguments are childish in the extreme - - abolition of the "excessive" Glass-Steagal regulations wasn't responsible for the current mess because they didn't abolish ALL of the regulations (kind of like arguing that abolishing 1,000 existing border crossing watch posts wouldn't result in increased illegal immigration if twenty existing posts would still be left in place.)

<<As for the sins of "deregulation" more broadly, this is a political fairy tale. The least regulated of our financial institutions -- hedge funds -- have posed the least systemic risks in the current panic.>>

This is one of the most infuriating and deliberately deceptive arguments the Republicans can make to excuse themselves.  Hedge funds are by nature, and as is apparent in their very name, RISK-AVERSE; they cover both sides of any bet.  They are for the extremely wealthy investor who values stability over high profit.  You have tried in the past to pretend that "some" hedge funds are high-yield and risky.  That may be true for a very small percentage of them, but most hedge funds DO bet both sides, ARE very risk-averse and DO NOT produce high yields.  To argue the exception, as if the exceptions account for the fact that "the least regulated of our financial institutions" have "posed the least systemic risks" is flagrantly deceptive.

Similarly to blame this on the undercapitalization of some of the brokerage firms rather than deregulation is also misleading, because proper regulation would have prevented credit-granting by insufficiently capitalized lenders.   In any event there is no cap level in the world that will prevent an imprudent lender from going bust - - undercapitalization might have accelerated the collapse of some lending institutions but the primary cause has to be poor or reckless risk evaluation stimulated by greed.  PRECISELY what regulation is designed to prevent.  As well as the prevention of credit-granting by undercapitalized lenders.

[Plane]

What would a regulation say , which was designed to prevent the present problem?

[Xavier_Onassis]

Banks should have liquid assets on hand to cover 10% or more of their outstanding mortgages.

Bundling derivatives from various mortgages together separated from th mortgages themselves and selling them should be banned.

No more interest only loans, and only the most creditworthy should be able to get a loan without putting 10% down.

Ban ARM loans altogether for house flippers, defined as anyone who has sold more than one house in the past year.

I bet that would be a good start.

[Plane]

Banks should have liquid assets on hand to cover 10% or more of their outstanding mortgages.

Bundling derivatives from various mortgages together separated from th mortgages themselves and selling them should be banned.

No more interest only loans, and only the most creditworthy should be able to get a loan without putting 10% down.

Ban ARM loans altogether for house flippers, defined as anyone who has sold more than one house in the past year.

I bet that would be a good start.

Hmmm...

Are these the sort of rules you expect to see enacted in the future?

Have we had some of them on the books in the past?

[Xavier_Onassis]

Are these the sort of rules you expect to see enacted in the future?

Yes, definitely

Have we had some of them on the books in the past?

Yes, some of them.