My fiance received an email from a relative with a link to this YouTube clip that claims the melt down on Wall Street is really the fault of a 30-year-old housing program called the Community Reinvestment Act.
Ooh, ooh! Republican racist propaganda! The exploding economy is the fault of poor minority people!
I was going to let this go, but I lost sleep Sunday night because I was so angry over this offensively stupid YouTube clip, so I'm going to set the record straight. There are so many things factually wrong about it I hardly know where to start (which is what the Republican bullshit machine does best -- spit out so much nonsense one feels overwhelmed and thinks, "They can't really lie about all of that, can they?" Surprise! Yes, they can! And they have! And they will continue to do so!).
Time for a little education. Yes, this is long. Yes, I hope you will read it and follow the links to the supporting documentation.
First of all, I've worked in banking for the past sixteen years, and I spent five years working closely with my old bank's CRA officer and the woman in Marketing who analyzed the data for our government reporting. So I have a little first-hand knowledge about this topic.
CRA has been around for 31 years, with nary a problem with the "subprime" mortgages lent during all that time until the last few years. Now why would that be? Is it because of a flaw within the CRA law itself, which was substantially changed by Clinton in the late '90s and again by Bush in 2005? Why weren't banks melting down before then?
Here’s a hint: Because CRA isn't the problem! Neither were the minority borrowers who have been taking out mortgages and small business loans these past 31 years.
The problem was that many of the more recent subprime loans -- loans given out by unregulated mortgage companies with no requirements to follow CRA regulations -- were packaged into "credit default securities" (more on these later) and sold on the secondary market to investment banks, who made a killing off the returns until borrowers actually started to default.
And what made these kinds of securities possible? A law famous in the banking world called "Gramm-Leach-Bliley." This law gutted the Glass-Steagal Act that was passed after the Great Depression to regulate banks, prohibit too much consolidation of various businesses (banking and insurance and securities, for example) and prevent another massive collapse of the financial system like the one in 1929. Gramm-Leach-Bliley (GLB) paved the way for the waves of massive bank mergers we've seen for most of the past decade as the barriers preventing such mergers were stripped away.
Seems to have worked out great so far! I mean, the markets today have…oh. Oops.
Guess who the "Gramm" is of GLB? None other than Phil Gramm, ex-senator, master deregulator, and John McCain's economic advisor! (At least until he was shuttled off into a back room after publicly stating we are in a "mental recession" and Americans have become a "nation of whiners." Thanks, Phil! I guess things look pretty good when you're a multimillionaire retired senator sitting on the board of international banking giant UBS and helping your BFF McCain run for President.)
Slight digression: I also love how Republicans are always telling us, "Let the market work things out. You want government sponsored health care? Screw that! Let the free markets compete to get the best price! Who cares if 40 million Americans are uninsured? Wait, they're really not uninsured because they can all go to the emergency room if they're sick! Problem solved!"
And here's another Republican on health care:
[John Goodman, president of the National Center for Policy Analysis, a right-leaning Dallas-based think tank] who helped craft Sen. John McCain's health care policy, said anyone with access to an emergency room effectively has insurance, albeit the government acts as the payer of last resort. (Hospital emergency rooms by law cannot turn away a patient in need of immediate care.)
"So I have a solution. And it will cost not one thin dime," Mr. Goodman said. "The next president of the United States should sign an executive order requiring the Census Bureau to cease and desist from describing any American -- even illegal aliens -- as uninsured. Instead, the bureau should categorize people according to the likely source of payment should they need care.
"So, there you have it. Voila! Problem solved."
Genius! Health care crisis solved with the waive of a pen! Just go to the emergency room! Except if you need a mammogram, or cancer treatments, or medications, or...whoops.
Digression over. Back to the financial meltdown!
Let's look at little more closely at the financial sector meltdown and what really caused it, shall we? Phil Gramm, back in 1999-2000, got GLB passed with some bi-partisan support, and yes, Clinton signed it into law. But guess what? Crafty old Phil wasn't done yet!
Here is some background on Gramm's role in GLB, but I'll excerpt the salient point:
"Shortly after George W. Bush was elected president, Congress and President Clinton were trying to pass a $384 billion omnibus spending bill, and while the debates swirled around the passage of this bill, Senator Phil Gramm clandestinely slipped a 262-page amendment into the omnibus appropriations bill titled: Commodity Futures Modernization Act. It is likely that few senators read this bill, if any. The essence of the act was the deregulation of derivatives trading (financial instruments whose value changes in response to the changes in underlying variables; the main use of derivatives is to reduce risk for one party). The legislation contained a provision -- lobbied for by Enron, a major campaign contributor to Gramm -- that exempted energy trading from regulatory oversight. Basically, it gave way to the Enron debacle and ushered in the new era of unregulated securities. Interestingly enough, Gramm's wife, Wendy, had been part of the Enron board, and her salary and stock income brought in between $900,000 and $1.8 million to the Gramm household, prior to the passage of the Commodity Futures Modernization Act."
I don't even give a shit about Enron and Phil's near-criminal conflict-of-interest at this point. The big deal is the Commodity Futures Modernization Act.
You want to know what caused the mortgage meltdown and the crisis on Wall Street? The Commodity Futures Modernization Act.
So what did this act do? It deregulated certain banking securities -- "futures contracts" -- so that there was no oversight or control from any regulatory body in regard to the buying and selling of futures.
Why did the so-called geniuses on Wall Street think buying these things by the bucket load (and by bucket load I mean hundreds of billions of dollars worth) was a good thing? They're supposed to be smart, right?
Here's what they thought would happen, and what really did happen.
Smart Wall Street Dude: "Hey, housing values always go up! Up up and up! We can wrap up all of these no-money-down, 110% loan-to-value and adjustable-rate mortgages into securities and buy and sell them! Who cares if they're shitty loans? We'll make a profit at some point because even if the homebuyers default, the value of their homes will still increase and can be sold to pay off the debt we'll owe! We can't lose!"
These futures contracts were the "credit default securities" I mentioned earlier. Note the word "default" in the name. These clowns fully expected a majority of these loans to default. They knew they were risky, but they thought the value of the collateral – people’s houses – would always rise and be greater than the loss on the loan if the borrower defaulted. And because these things were risky, they paid big returns.
Then the housing boom crashed, home values plummeted, and suddenly homes were valued at less -- sometimes far less -- than what the homeowner owed. All at once, people were stuck in homes they couldn't afford as their adjustable rates mortgages skyrocketed, and they couldn't sell or refinance to a fixed rate because no one would lend them the money because they owed more than the house was worth. Hello, foreclosures!
So how did this melt down Wall Street?
Because not only were those securities now worthless -- there was no way to recoup the losses, because even when the banks foreclosed, they couldn't recover enough to pay back the loans -- the Wall Street firms were obligated to pay them off. That was part of the contract.
Now, these Wall Street guys aren't entirely stupid. They could buy insurance to cover them in case of these defaults, so that, in return for their premiums, the insurance company would cover their loses. Not everyone bought insurance, but a lot did.
Guess who they bought insurance through? AIG! Oops! Now the world's largest insurer suddenly owes hundreds of billions of dollars to investment banks to pay off their bad debts. Hundreds of billions of dollars that if they had to pay out, would bankrupt the company.
So the Fed -- in the form of Republican appointees, those who value a free market above all else -- ride in to rescue AIG and nationalize it. Surprise! All of us taxpaying Americans now own an insurance company!
So where did all of these bad loans come from to begin with? The Republican bullshit machine would like you to believe they came from CRA loans, because, well, you know you can't trust minorities with money. Which is why all of the Republican tax breaks are for rich white people.
But that's simply not the case, A majority of the defaulted loan were made since the year 2000, and many since 2004. That's when the mortgage business cycle really heated up. Third-party mortgage companies -- not CRA lenders, please note! -- were awash with cheap money to lend and loosened credit so that pretty much anyone who wanted a mortgage could get one. That's why you had people who made $50,000 buying $500,000 homes. Could they afford it? Hell no. But the lender got his fees, shoved the borrower into a low-rate ARM that he could afford now, and when the rate adjusted up in a couple of years he could just refinance or sell the house. By then, the loan would have long-since been sold in the secondary market, mostly to Fannie Mae and Freddie Mac.
Oops again! Now Freddie and Fannie were stuck with hundreds of billions in bad mortgage backed securities! What to do, what to do? I know! Feds to the rescue again! Hey, American taxpayer! Now we all own two enormous mortgage companies! Thank you Republican free market gurus! You just presided over the largest socialization endeavor in the history of the country!
Back to the question: Where did all of these bad mortgages come from? Who do you think was funding the speculative real estate growth of places like Miami and Las Vegas? Not CRA borrowers! These were speculators and flippers who bought homes and condos they couldn't afford, but since real estate values were zooming through the stratosphere, they could turn around and sell them for a tidy profit, sometimes before new construction one some of them was even finished. Sometimes before they made their first payment, at least when times were booming.
But when everything went south, they got stuck. No way to pay, no way to sell. Now we're paying for it.
I won't even get into John McCain's Trickle-Down Economics nonsense, or how he was against Bush's tax cuts for the rich ("You don't cut taxes in a time of war," he said) before he flip-flopped and said he was for them. And now, if he becomes president, he wants to make them permanent.
Lessons learned: CRA has very little, if anything, to do with the Wall Street bust. It was the fault of both Republicans and Democrats to some degree, but mostly it was a result of the Republican conservative idea of deregulation. And that we can lay firmly on the shoulders of Phil Gramm and John McCain, who just a few months ago said, "I'm mostly a deregulator.”
I know this is long, but there is some BS I'm just not going to tolerate. Blaming government and Wall Street greed and short-sightedness on the poor is one of those things.
I'm David Forbes and I approved this message.