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Once and for all, it wasn't the CRA

June 2, 2013 - Harry Eagar
The diabolically devious socialist Obama has dished the Tories by nominating a particularly repulsive finance capitalist to his Cabinet, paying off a campaign debt and -- here's the sweet part -- trashing the desperately held belief of the rightwingers that it was the Community Reinvestment Act that crashed the economy in 2008 and not unsupervised financial markets.

Bloomberg has the story.

Let's set the stage. In 1999, the intellectual father of the crash, Sen. Gramm, buffaloed Congress into dismantling the safety device set up by the New Deal to divide banks into safe and prudent places to sequester money and risky places to gamble with one's own or (usually) other people's money. From then on, all banks were hot money banks. If they didn't take big risks, they couldn't attract money and would wither away.

Meantime in Chicago, the Pritzkers had feasted on the juicy corpse of another Reaganite experiment in look-the-other-way regulation by buying a busted S&L. Over the next years, they sucked the life out of that bank (to the tune of $200 mil) and by about 2000 it was broke.

They could either put in more capital or:

"In a May 2001 letter to the bank’s management and employees -- just two months before its closure -- Pritzker detailed a plan to revive the institution with an expansion into subprime lending. She wrote that her family was devising a $351 million recapitalization plan for the bank.

“ 'Your resolve and dedication is a primary reason for the past successes of the bank and will once again restore Superior’s leadership position in subprime lending,' she wrote. 'Our commitment to subprime lending has never been stronger and we are fully expecting to participate in restoring the bank’s presence through strong product lines and continued growth.' ”

Note this move into liar loans was purely voluntary on the bankers' part. They were not fulfilling any requirements under the CRA.

Later, surveying the wreckage, regulators concluded:

"Subprime loans typically are given to people with the weakest credit, charging higher interest to cover the bigger risk of default, and Superior’s collapse turned out to be a preview of the financial crisis that came later in the decade.

"With $1.9 billion in assets as of March 2001, Superior became undercapitalized because it overstated its holdings and used shoddy accounting, the Office of Thrift Supervision said in a July 2001 statement.

"Superior 'also suffered from poor lending practices, improper record-keeping and accounting, and ineffective board and management supervision,' the OTS said."

None of that was required by the CRA. But it sounds a lot like the S&L adventure under Reagan.

 
 

Article Comments

(24)

HarryEagar

Jun-06-13 9:31 PM

johngault, you have yet to tell us what you think happened, just that you disbelieve my version.

Who participated in this mania?

There was a bubble in real estate (not only residential, although the rightwingers are careful to ignore the commercial side), but that was not what almost brought the financial system to earth.

The failure of Lehmann did not do it. Only the immiment collapse of AIG forced the government to act, and then not because of AIG's core businesses.

Without anyone's noticing, AIG had taken control of the nation's commercial paper trade. This was solvent, but AIG was not.

And AIG was insolvent not because of any mania but because of one foolish and unsupervised executive who had put AIG in wildly over its head on insurance for derivatives.

Like a pyramid of apples that rolls on the floor when you take out one from the bottom row, AIG was just about to crash the entire financial structure, the prudent and the wild, the solvent and the hollow shells.

OneAikea

Jun-04-13 10:31 PM

"Hey dude, I doubt that you read Mackay before I was I was born, but that is neither here or there." Seems one speaks in circles and stutters. "I was I was"?

What is neither here or there? Loopholes? For two cents I find this very entertaining. Seems johngault is like those Presidential candidates who LOST and now with my tax dollars get to appear on fox news. I don't remember having such conservatives on my payroll. IRS scandal is caused by conservatives who work in the IRS. Conservatives like duddly gault believe in: If you cannot dazzle them with brilliance, baffle them with Bureaucratic Standards.

Seems the Tea party is not drinking Tea from China but Long Island Tea. Spiked. seems cratemam is hiding from backing his lunatic fringe up. I may sound like a conservative now and very liberal with what I mean.

OneAikea

Jun-04-13 10:31 PM

"Hey dude, I doubt that you read Mackay before I was I was born, but that is neither here or there." Seems one speaks in circles and stutters. "I was I was"?

What is neither here or there? Loopholes? For two cents I find this very entertaining. Seems johngault is like those Presidential candidates who LOST and now with my tax dollars get to appear on fox news. I don't remember having such conservatives on my payroll. IRS scandal is caused by conservatives who work in the IRS. Conservatives like duddly gault believe in: If you cannot dazzle them with brilliance, baffle them with Bureaucratic Standards.

Seems the Tea party is not drinking Tea from China but Long Island Tea. Spiked. seems cratemam is hiding from backing his lunatic fringe up. I may sound like a conservative now and very liberal with what I mean.

johngault

Jun-04-13 10:21 PM

Hey dude until you can get a grasp on the mania of men and markets you will continue to be clueless. Now with that I expect that you will come up with an essay on the velocity of money supply, or better yet a sharp comment on Maiden Lane. Keep trying to change the narrative only tells me that your experience has been strictly books. It's kind of like the old saying dude "all hat and no cattle". By the way credit facilities are easy to come by if you are creditworthy.

johngault

Jun-04-13 10:21 PM

Hey dude until you can get a grasp on the mania of men and markets you will continue to be clueless. Now with that I expect that you will come up with an essay on the velocity of money supply, or better yet a sharp comment on Maiden Lane. Keep trying to change the narrative only tells me that your experience has been strictly books. It's kind of like the old saying dude "all hat and no cattle". By the way credit facilities are easy to come by if you are creditworthy.

HarryEagar

Jun-04-13 8:50 PM

You mean reality-based economics. We have history to study.

The crashes of '29 and '08 had nothing in common with the Tulip Mania, and the subsequent business contractions were the result of, primarily, a deflationary debt crisis.

That '08 was not as severe as '29 was due to intervention of the government as lender of last resort. In the '30s, many solvent businesses failed because they could not collect their receivables because lenders froze.

Private lenders froze after '08, too (as you'll know if you tried to borrow recently), but the contraction was arrested because the Fed and the Congress pumped liquidity into the system (and the Chinese kept buying our bonds).

Same situation, different outcomes, that's how reality-based economics works.

I have zero interest in considering Teaconomics. Been there, done that. Bad idea.

johngault

Jun-04-13 7:58 PM

Hey dude, I doubt that you read Mackay before I was I was born, but that is neither here or there. You still stick to your stubborn belief that all the economic woes are right inflected. It is this mindset that will never produce any consensus or participation by all classes in the marketplace . It is pure lunacy. Be proud and stubborn dude.

OneAikea

Jun-04-13 6:20 PM

Too bad the Tea party cannot do anything else but waste my tax dollars that pay them. Next time I file taxes I want an exempt from paying wages to conservative 1% and pay mostly to my kind or 99%. We the 99% should not pay for the 1% who can afford and should pay more taxes. Instead of offshore accounts or savings in a Chinese bank and not being taxed on that.

HarryEagar

Jun-04-13 6:11 PM

I read Mackay before you were born, jpohngault.

RtO is delighted with discussion, not so much with name-calling.

The difference between New Deal capitalism and, say, the Austrian School is that in the New Deal throwing people into breadlines was regarded as a bug, while the Austrians (and today's Republicans) consider it a feature.

johngault

Jun-04-13 2:44 PM

Hey dudes chill out. Go get a copy of "Popular Delusions and Madness of Crowds" by Mackay 1859? This classic book should be mandatory in Eco 101, but that would be too easy for our colleges. Read the essay on the Tulip Mania, and maybe you will begin to understand how crazy men and markets come to life. It isn't the right or left that bears shame, but all of the players. Until you broaden your sources of info, put aside political speaking points,and hear out other viewpoints you will never be able to pull that tarnished spoon from where the sun doesn't shine. Happy tulips dudes !

OneAikea

Jun-04-13 2:49 AM

seems that crateman is a voice only with someone pulling its strings to talk. A puppet. Facts? I see no facts but talk copied off a comic book. Now I have to deal with another breathless wonder with no breath. Talk, talk talk but saying nothing. crateman go back in your hole.

craterman

Jun-04-13 12:46 AM

Go johngault go! It is telling, on this blog, that one particular side of the debate always resorts to name calling and demonizing, rather than discussing the facts at hand. People need to hear a civil debate, unfortunately the chances for that become slimmer everyday in this Country.

OneAikea

Jun-03-13 11:55 PM

Define ignorance and if you do, than you are the pothead calling the kettle black.

So entertaining for my two cents. I rather comment and get to yank its chains. Out of a dollar I still have 98 cents left. Maybe next time I will make a 1% comment and save 99%.

Duddly keep holding your breath since you are already one without. Lack of air makes one think only one way.

johngault

Jun-03-13 10:58 PM

Hey dudes, it now appears that I have two to deal with at the same time. Dud or Gaulty suits me fine, but your knowledge of economic affairs is both shallow and dishonest at best. Once you quote some syndicated reporter or other hacks you quickly run out of anything else to say other than the same old talking points of the left.

Maybe someday you will get it in your head that economic affairs were caused by side both sides. Unfortunately, you are too shallow and ignorant to figure out the situation.

Try to think for yourself if it is possible. Party on dudes!

johngault

Jun-03-13 10:58 PM

Hey dudes, it now appears that I have two to deal with at the same time. Dud or Gaulty suits me fine, but your knowledge of economic affairs is both shallow and dishonest at best. Once you quote some syndicated reporter or other hacks you quickly run out of anything else to say other than the same old talking points of the left.

Maybe someday you will get it in your head that economic affairs were caused by side both sides. Unfortunately, you are too shallow and ignorant to figure out the situation.

Try to think for yourself if it is possible. Party on dudes!

johngault

Jun-03-13 10:58 PM

Hey dudes, it now appears that I have two to deal with at the same time. Dud or Gaulty suits me fine, but your knowledge of economic affairs is both shallow and dishonest at best. Once you quote some syndicated reporter or other hacks you quickly run out of anything else to say other than the same old talking points of the left.

Maybe someday you will get it in your head that economic affairs were caused by side both sides. Unfortunately, you are too shallow and ignorant to figure out the situation.

Try to think for yourself if it is possible. Party on dudes!

OneAikea

Jun-03-13 9:28 PM

Wondered why it is so windy outside. Will the gaulty party please*****it in. Raising cain about facts is just another conservative right nut. Move on dude. Your hindsight is that of a pampered silver spoon fed baby. Got that dud that calls others dude?

Discussion in true nature is away from the computer and on knowledge known, dud. Debate civilly and if in need, back to back, walk ten paces turn and shoot. Gentlemen's fight.

Party on dud!

johngault

Jun-03-13 2:44 PM

Hey dude, you are actually beginning to soften, or have you just realized that your historical narrative involved capitalists on both sides of the street. Yet your Bloomberg quote is wrong & misleading because you infer that the 18,000,000 housing units were homes. I do not think that rentals would involve mortgages, but that is exactly what you narrative states. Why don't you go back to your trusted Bloomberg and see what the home/apartment numbers were in fact the real picture. The number 18mm of vacant home is very wrong.

Party on dude!

HarryEagar

Jun-03-13 1:46 AM

It would have been prudent to have strengthened the act. The Republicans demanded that it be killed. They promised that would unleash the power of the markets.

So it did.

The Democrats stupidly adopted a rightwing Republican policy, but it was a Republican policy.

HarryEagar

Jun-03-13 1:44 AM

The argument, vehemently maintained in the face of evidence, is that the banks failed because Democrats forced them to make loans to impoverished Democrats.

This is not true. The banks failed because they were managed by incompetents who did ot understand risk. Most of the bsd loans did not go to unqualified low-income home buyers. Most went to developers.

At the time of the crash, there were (according to Bloomberg News) 18,000,000 VACANT housing units. That is, spec dwellings. Not sold, so no mortgages, CRA or otherwise, had been written.

It could have been predicted. RtO DID predict it, and you can go back and read the posts.

There was plenty of chicanery, but the fundamental cause was (ultimate) 1) unsupervised markets fail; and (immediate) 2) dismantling of the New Deal protections.

(The repeal of Glass-Steagall in 1999 was not in itself an important action. The development of financial methods over 6 decades had put the important centers of funds out of reach of th

johngault

Jun-02-13 8:46 PM

Hey dude, please enlighten us on the CRA; who supported the bill and what was the intention of the legislation. Now let's follow the money- how much did your friends at the GSEs pay themselves. And to follow the money even further- tell us about the mega multimillion dollar bonuses they were rewarded. By the way how many hundreds of billions did they take taxpayer money. Lastly, you never enlightened us on their Democratic Party positions as well as their federal government jobs. Bottom line CRA, Fannie, et al.was just one of the many culprits. So man up,the failure of the mortgage markets took the actions from both right and left. Anything else is pure political and economic dishonesty.

johngault

Jun-02-13 8:46 PM

Hey dude, please enlighten us on the CRA; who supported the bill and what was the intention of the legislation. Now let's follow the money- how much did your friends at the GSEs pay themselves. And to follow the money even further- tell us about the mega multimillion dollar bonuses they were rewarded. By the way how many hundreds of billions did they take taxpayer money. Lastly, you never enlightened us on their Democratic Party positions as well as their federal government jobs. Bottom line CRA, Fannie, et al.was just one of the many culprits. So man up,the failure of the mortgage markets took the actions from both right and left. Anything else is pure political and economic dishonesty.

HarryEagar

Jun-02-13 7:52 PM

Arm-waving. No doubt the regulators failed to regulate. That's what Reaganism is all about.

But the claim that CRA or Fannie/Freddie were to blame is shibai. We know that because 1) biggest offenders were not under CRA (Countrywide, Greentree); same mistakes were made by foreign lenders.

It was a market failure, pure and simple.

johngault

Jun-02-13 6:18 PM

Hey dude, lay off all that rum on your shaved ice. You conveniently leave out details that should be included in any narrative of the great banking recession.What you don't tell is that the subprime loan and Alt-A loan schemes came from Fannie and Freddie. That's just a minor detail that you obviously overlooked. By the way how big were the bonuses of the CEOs of these GSEs,and did you know most of them came from the Democratic Party or even migrated to party positions afterwards.Even more important was that the regulators were in the banks up till critical mass was reached asking why loans were not being made in sufficient numbers to certain zip codes. Yeah, the CRA had nothing to do with any of the financial mess, just ask ex Treasury Sec. Rubin if he comes out from hiding why he pushed the end of Glass-Steagall along with Clinton. The bottom line is that the collapse began over 25 years ago from bad policy from both parties.Dude, let's tell the truth and nothing but the truth.

 
 

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