The Credit Crunch - Tilted Forum Project Discussion Community

Strange Famous · 05-31-2008, 02:31 PM

It strikes me that the credit crunch and the collapse of the housing market in the US is a far more important national and global issue than Iraq or whether homosexuals can get married, or really anything else that faces America right now.

I am not close enough to it, but what are the fiscal policies which Obama and McCain propose? What do the Democrats and Republicans offer as solutions to the credit crunch?

SecretMethod70 · 05-31-2008, 03:24 PM

Please don't take the brevity of this post as ignoring your questions, I just don't have the time right now to compile a fully informative and thoughtful post. Hopefully someone else will come and do that.

What I came here to point out, though, is that the Iraq war is closely tied to our economy, and it's difficult to separate the two issues. The amount of money we've spent and are continuing to spend in Iraq could have gone to countless other programs which would have more directly benefitted the country.

http://www.washingtonpost.com/wp-dyn...111600865.html

http://www.timesonline.co.uk/tol/com...cle3419840.ece

host · 05-31-2008, 06:57 PM

It seems to me that the fiscal problems in the US, and they will, for a time, affect demand in the rest of world....are insurmountable, now.

There is increasing evidence that our system of rating the quality of credit and debt issuance has broken down, to the point of this example of absurdity:

Quote:

http://www.bloomberg.com/apps/news?p...gu8&refer=home

Moody's Implied Ratings Lab Reveals Ambac, MBIA Turning to Junk
By David Evans

May 30 (Bloomberg) -- Moody's Investors Service has created a new unit that surprises even its own director.

The team from Moody's Analytics, which operates separately from Moody's ratings division, uses credit-default swap prices as an alternative system of grading debt. These so-called implied ratings often differ significantly from Moody's official grades.
The implied ratings frequently show that swap traders think debt is in more danger of defaulting than Moody's credit ratings signify. And here's the kicker: The swaps traders are usually right.

``When I first saw this product, my reaction was, `Goodness gracious, Moody's has got a product that is basically publicizing where the market disagrees with Moody's,''' says David Munves, managing director for credit strategy research at Moody's Analytics. The implied-ratings unit works in a corner of Moody's new world headquarters in lower Manhattan, across the street from Ground Zero.

``But these differences are out there,'' Munves says. ``We might as well capture and learn from it what we can.''....

The translation of the above "news", is that Moody's credit ratings have become unreliably optimistic, so Moody's doesn't change their ratings or the process they use to determine them, they simply offer a new product that copies the opinions of outsiders who are "usually right", so that Moody's can capture profits by selling information that contradicts their own ratings, further calling the justification for their entire core business of issuing ratings that lenders in the past relied on to make lending and investment decsions, into question.

On top of that, MBIA and Ambac are insurers of credit. If Moody's were to downgrade MBIA and Ambac any further, a large number of credit instruments that are rated investment quality by Moody's precisely because they are insured against losses from default, by MBIA or Ambac, would have to be downgraded, and then sold, in the event Moody's lowered the ratings on them to below investment quality. This teetering scheme could collpase before the november presidential election, and it is too precarious a situation to discuss in a campaign platform.

The private banking system is insolvent, the dependency on, and cost of foreign petroleum is solved only with the coming slack demand of a deflationary depression, which will increase the burden, of shouldering a $9-1/2 trillion national debt demoninated in dollars increasing in value. All dollar denominated debt will increase in value, making it more difficult to pay back, the "worst nightmare" scenario for the "inflation fighting", US Federal Reserve.
The memory of the experience of the last deflationary depression of the 1930's influences the Fed to claim that inflation is it's greatest concern, when in fact, it is it's opposite, deflation, that the Fed's inflation worry posturing is all about.

FWIW, here are links to the economic platforms of the 3 major presidential candidates, and, IMHO, it ain't worth much. Gasoline will be cheaper, but consumer mortgage and credit card debt will have to be paid back with harder to come by dollars. Deflation makes cash worth more, as good are worth less.

http://useconomy.about.com/od/fiscal...ry_Economy.htm

http://useconomy.about.com/od/fiscal...ma_economy.htm

http://useconomy.about.com/od/fiscal...ohn_McCain.htm

If any of them attempted to respond to the actual crisis, the eyes of their intended audience would glaze over, much like mine does, and conveniently, there are no solutions, we are so past that opportunity.

These banks have no money to lend, and no business model to make money lending, and there will be much less interest in borrowing, anyway, if the expectation is that everything will cost less, this time next year:

<h3>Whoops !!!:</h3>

Quote:

http://research.stlouisfed.org/fred2/series/BOGNONBR

Series: BOGNONBR, Non-Borrowed Reserves of Depository Institutions

<img src="http://research.stlouisfed.org/fred2/data/BOGNONBR_Max_630_378.png">

Latest Observations:
Date 2007-12-01 - 2008-01-01 - 2008-02-01 - 2008-03-01 - 2008-04-01
Value 27.169 ......... -3.874 .......-17.578 ..... -50.490 ..... -91.935

Quote:

http://www.rgemonitor.com/blog/roubini/252638/
Nouriel Roubini's Global EconoMonitor
How will financial institutions make money now that the securitization food chain is broken?
Nouriel Roubini | May 19, 2008

The most severe financial crisis in decades has not only damaged the balance sheet of financial institutions. It has also severely affected their P&L, i.e. the process of generating revenues and profits.

In the old “originate & hold” model (before securitization) financial institutions made money from the investment income of holding the credit risk of loans and mortgages. But in the brave new world of securitization where you “originate & distribute” the credit risk rather than hold it on balance sheet an increasing fraction of the income of financial institutions was coming from the fees and commissions involved in this securitization process. This food chain of fees on top of fees is now broken: securitization of mortgages, that was running at the annual rate of $1,000 billion in January of 2007, was down 95% to an annual rate of $50 billion by January of 2008. So the process of generating fees and commissions is broken.....

...In the case of leveraged buyouts (LBOs) the process started with LBOs that should have never occurred in the first place as the last vintage of LBOs had reckless debt to earnings ratios of 8-10 as opposed to the historical average of 3-4. Thus highly leveraged buyouts with tons of debt and little equity took private borderline profitable corporations that should have never been loaded with such massive amounts of debt. And since credit was cheap – junk bond yield spreads bottomed at 250bps relative to Treasuries in June of 2007 - and investors were searching for yield hundreds of billions of dollars of LBO deals were generated with terms that did not make any sense (including covenant lite terms and PIK toggles). Then these LBOs were financed with leveraged loans and bridge loans; and then further sliced and diced into CLOs that were then stuffed into SIVs and conduits when they could not be sold to investors. Too bad that eventually - by early 2008 when this LBO and private equity bubble went bust - hundreds of billions of dollars of frozen leveraged loans and bridge loans were still sitting on the balance sheets of financial institutions being valued at 70 or 80 cents on the dollar.

So how will all these financial institutions generate revenues and profits now that this effective scam has mostly collapsed? Origination of new subprime and near prime (Alt A) mortgages is effectively dead; origination of new commercial real estate mortgages is nearly frozen; securitization of mortgages has collapsed by 95%; the entire CDO, CMO and CLO market is frozen with almost no new issuance; while the SIVs and conduits have collapsed with the rolloff of the ABCP paper that was financing these scams.

So how will mortgage brokers, banks, broker dealers, monoline insurers, rating agencies generate revenues and profits now that this slice & dice scheme has unraveled? The current market delusion that the worst is behind us for financial institutions is based on the view that most of the writedowns of the toxic assets have already been done. But this is not just a balance sheet problem. Now financial institutions have a more severe P&L problem, i.e. how to generate income and earnings from now on when they cannot originate junk any more. The entire income generating model of financial institutions – make income out of securitization fees rather than by holding the credit risk - is broken now that the generalized credit bubble (not just subprime mortgages) has burst; thus, how will these financial institutions generate earnings over time? Capital losses are one-time problems; but destruction of the income generation process is a more severe and persistent problem that will require banks and other financial institutions to rethink their overall business model of credit risk transfer. But there is no clear and sound new business model for them: going back to the old days of “originate and hold” is not fully possible while the new “originate and distribute” model has shown all of its wrong and distorted incentives, risks and systemic failures. So banks and other financial institutions will have to seriously rethink their business model and how they are going to make money: the model of slice and dice and pile fees upon fees and transfer the credit risk is broken. It is not clear if banks and other financial institutions have a better model. May they will have to go back to old fashioned banking: carefully assess the creditworthiness of their borrowers, lend on sensible terms and hold a good part of the credit risk now that the easy fee/profit generating machine of securitization is terminally broken.

Seaver · 05-31-2008, 07:48 PM

One large aspect which McCain will try to do is drag our over-inflated government kicking and screaming to stop christmas tree'ing.

It was the ONE promise Dem's talked about in '06 which I wanted to see, where they can't tack-on $150mil to pig farmers on a military body-armor bill. Of course they forgot about that promise when they had the power to tack on the bills, but McCain is making it a large part of his fiscal policy. Hopefully he can get it done.

Obama openly admits he wants to raise taxes. This, combined with the credit/mortgage/oil problems would only cause more problems.

dc_dux · 05-31-2008, 08:01 PM

Quote:

Originally Posted by Seaver

Obama openly admits he wants to raise taxes. This, combined with the credit/mortgage/oil problems would only cause more problems.

seaver...when did Obama admit he wants to raise taxes? You should really fact-check once in a while.

Obama is in favor of making Bush's 2001 and 2003 "temporary" tax cuts (yes, they were proposed by Republicans and enacted as temporary rate reductions) permanent for about 94 percent of tax payers and finance it by allowing those temporary cuts for taxpayers over $200k to expire at the end of 2010.

An alternative Obama proposal is a yearly tax credit of $500 for individuals/$1000 for families (in the bottom 2-3 brackets) as well as making seniors exempt from income taxes if they make less than $65k.

Quote:

One large aspect which McCain will try to do is drag our over-inflated government kicking and screaming to stop christmas tree'ing.

It was the ONE promise Dem's talked about in '06 which I wanted to see, where they can't tack-on $150mil to pig farmers on a military body-armor bill. Of course they forgot about that promise when they had the power to tack on the bills, but McCain is making it a large part of his fiscal policy.

More of the earmarks in the last supplemental bill came from Republicans in Congress (and the White House) than from Democrats.

I wonder how he will explain his so-called anti-lobbyist/anti-special interest "fiscal policy" to the more than 100 lobbyists either in his campaign or bundling fund raising for his campaign.

Seaver · 06-01-2008, 07:30 AM

Quote:

I wonder how he will explain his so-called anti-lobbyist/anti-special interest "fiscal policy" to the more than 100 lobbyists either in his campaign or bundling fund raising for his campaign.

If he gets the earmark bill through, I could care less how he explains it to the lobbyists who gave him money.

dc_dux · 06-01-2008, 07:37 AM

Quote:

Originally Posted by Seaver

If he gets the earmark bill through, I could care less how he explains it to the lobbyists who gave him money.

What earmarks bill?

He was one of the 14 Republicans who voted against the lobbying and earmark disclosure bill last year, the first in more than 10 years and even though it was far from perfect and not strong enough, was better than anything the Republicans proposed when they were in control.

If he was the big earmark reformer, he had six years, when his party controlled both houses of Congress and the White House, to propose strong earmarks reform...and he did nothing. This year, he proposed banning all earmarks for one year...his own party thought it was so transparently an election year gimmick, they rejected it w/o any debate at all.

BTW, McCain has already reversed his pledge that as president, he would veto any bill with earmarks....which was a stupid pledge to begin with and only demonstrated his lack of understanding of the budget process..since all earmarks are not bad.

Seaver....more fact-checking please!

host · 06-01-2008, 12:08 PM

McCain on his own economic expertise, (begins at 1:40)

YouTube - McCain's YouTube Problem Just Became a Nightmare

Quote:

http://abcnews.go.com/Blotter/story?id=4210251

McCain's Lobbyist Friends Rally 'Round Their Man
Group: Campaign Finance Reformer Has the Most Lobbyists Raising Campaign Money
By AVNI PATEL and JOANNA JENNINGS
Jan. 29, 2008

.....While McCain did not attend the event, a <a href="http://abcnews.go.com/images/Blotter/080122_mccaindcfundraiser_1.pdf">copy of the invitation obtained by ABCNews.com</a> shows that donors who paid between $1,000 and $2,300 were invited to rub elbows with some of the 32 members of Congress supporting McCain for a reception at the Charlie Palmer Steakhouse. Donors who raised at least $10,000 were designated co-chairmen for the event and were treated to a "VIP Roundtable" before the main reception. The invitation lists 24 lobbyists as "co-chairman" for the event. The lobbyists represent a range of industries, including the finance, telecommunications, technology and healthcare sectors.

<h3>McCain has 59 lobbyists raising money for his campaign, more than any of the other presidential candidates</h3>, according to the latest finding from government watchdog group <a href="http://www.whitehouseforsale.org/">Public Citizen</a>. The group, which advocates for public financing of elections, has identified more than 2,300 well-connected individuals, known as "bundlers," who have solicited contributions from friends and associates on behalf of a presidential candidate.

McCain is known as a champion of campaign finance reform. His <a href="http://www.johnmccain.com/Informing/Issues/cb15a056-ac87-485d-a64d-82989bdc948c.htm">campaign Web site</a> touts the senator's credentials as a reformer, stating that he has fought for "greater transparency regarding the official activities of lobbyists" and the "disclosure of how candidates and campaigns are funded."

When it comes to disclosing how much lobbyists are raising for his presidential campaign, however, the group found that McCain has fallen short, even by standards set by the Bush/Cheney 2004 campaign which voluntarily disclosed on its Web site the names of bundlers who raised at least $100,000 and $200,000.

Quote:

http://www.azcentral.com/news/articl...yists0526.html
Lobbyists on John McCain's team facing some new rules
Several exit as campaign tackles influence issue

by Jerry Kammer - May. 26, 2008 12:00 AM
Republic Washington Bureau

......In late 2006, as McCain pondered a bid for the presidency, he proudly announced that eight prominent Republicans had joined his exploratory committee as national finance co-chairmen.

"Their dedication to the Republican Party and their renowned financial savvy are essential to any successful campaign," McCain said at the time. "And I am so grateful that they have chosen to bring their talents and wisdom to our team."

One of those men was Tom Loeffler, a former Texas congressman turned lobbyist who founded a Washington lobbying firm that bears his name. Loeffler resigned May 18 as the McCain campaign confronted the gap between the idealism of the senator's longstanding fight against special interests and the necessity of raising the money it takes to run a national campaign.

Four other lobbyists also have departed, and the McCain campaign has instituted a series of rules intended to eliminate conflicts of interest. Those rules prohibit campaign workers from working as lobbyists or participating in the independent groups that conduct advertising campaigns intended to influence federal elections.

One rule, formalizing a previous McCain commitment, attempts to nail shut one of Washington's revolving doors between the White House and K Street, Washington's lobbyist corridor. It declares that "anyone serving in a McCain administration must commit not to lobby the administration during his presidency."

Those rules were laid down by campaign manager Rick Davis, who - like many campaign operatives both Republican and Democrat - has made his off-the-campaign-trail living as a lobbyist. For the past 10 years, Davis has been on leave from the lobbying firm that bears his name, Davis Manafort.

Locobot · 06-02-2008, 03:51 PM

This radio show helped me understand the issue quite a bit better:
http://www.thisamericanlife.org/Radi...spx?sched=1242

One thing that has become clear to me is that the credit crunch/mortgage crisis IS a part of the current Republican fiscal policy. They want the local property tax base to disappear so that local governments and schools are bankrupted. Notice that the only measures they're willing to take are to help out the banks, not property owners.

One of the fascinating parts in the show linked above is when they talk about how peoples mortgages have been sold and split so many times that even figuring out who is owns them can be daunting.

Cynthetiq · 06-02-2008, 05:01 PM

Quote:

Originally Posted by Locobot

This radio show helped me understand the issue quite a bit better:
http://www.thisamericanlife.org/Radi...spx?sched=1242

One thing that has become clear to me is that the credit crunch/mortgage crisis IS a part of the current Republican fiscal policy. They want the local property tax base to disappear so that local governments and schools are bankrupted. Notice that the only measures they're willing to take are to help out the banks, not property owners.

One of the fascinating parts in the show linked above is when they talk about how peoples mortgages have been sold and split so many times that even figuring out who is owns them can be daunting.

I beleive they are trying to help out the banks because in doing so they save the entire sector which is thousands of jobs versus saving individual homes which is just for the individuals.

Personally they shouldn't be bailing out anyone.

dc_dux · 06-02-2008, 07:57 PM

Quote:

Originally Posted by Cynthetiq

I beleive they are trying to help out the banks because in doing so they save the entire sector which is thousands of jobs versus saving individual homes which is just for the individuals.

Personally they shouldn't be bailing out anyone.

Or perhaps the problem can be traced back to "helping banks" through banking deregulation in the 1980s and 90s.

The Depository Institutions Act of 1982 , a major Reagan deregulation initiative, was supposed to “revitalize” the housing industry by freeing up the S&Ls to make more loans. Instead, the regulation rollback led to what economist John Kenneth Galbraith called “the largest and costliest venture in public misfeasance, malfeasance and larceny of all time” as they engaged in a fury of high-risk lending. (remember the S&L fiasco? little did he know what was ahead with further deregulation 17 years after that fiasco!)

Following tighter regs in the early 90s as a result of the S&L crisis, Clinton and his Treasury Sec. Rubin (a Wall St, insider) ultimately caved in 1999 to pressure from the Repub Congress, led by Sen. Phill Gramm, and enacted the Financial Services Modernization Act of 1999 which was described in a WSJ editorial as an end to "unfair restrictions imposed on banks during the Great Depression." Many other economists dubbed the legislation the "finance industry's deregulation wish list."

And we know the rest of the story.

BTW, former Sen. Phill Gramm is currently one of McCain's principle economic advisors and a banking lobbyist with questionable ethical conflicts of interest.

edit....Gramm recently stepped down as chief Washington lobbyist for the Swiss-based investment bank UBS (which was recently under investigation for a financial scam in Texas and sub-prime irregularities in Mass) and turned the position over to his former chief of staff.

Cynthetiq · 06-03-2008, 05:29 AM

Yes, I was young when that happened and I didn't agree with it then. I still disagree with it now.

Banks should not have become these huge profit centers. Nothing good was to come of it I believed at the time, and am seeing now.

The restrictions were put in place to make sure that something bad didn't happen, then again now that I consider it, Sarbanes Oxley is in place to make sure bad things don't happen, and I can't tell you what a pain in the ass that regulation is and how it is styming getting things done in Corp Businesses.

I guess that's why I'm not a banker or politician.

aceventura3 · 06-03-2008, 08:08 AM

Banking deregulation is probably not the most proximate cause of banks assuming more risks in their loans. The Community Reinvestment Act of 1977, amended in 1995 probably had a bigger impact, and on the sub-prime mess in particular. In the interest of addressing "redlining" problems the legislation requires banks to make loans they would not ordinarily make.

Here is a quick reference.

Quote:

The CRA mandates that each banking institution be evaluated to determine if it has met the credit needs of its entire community. That record is taken into account when the federal government considers an institution's application for deposit facilities, including mergers and acquisitions. The CRA is enforced by the financial regulators (FDIC, OCC, OTS, and FRB). In 1995, as a result of interest from President Clinton's administration, the implementing regulations for the CRA were strengthened by focusing the financial regulators' attention on institutions' performance in helping to meet community credit needs. These changes were very controversial and as a result, the regulators agreed to revisit the rule after it had been fully implemented for five years. Thus in 2002, the regulators opened up the regulation for review and potential revision.

The 1995 revisions were credited with helping to substantially increase the amount of loans to small businesses and to low- and moderate-income borrowers for home loans. Part of the increase in the latter type of lending was no doubt due to increased efficiency in the secondary market for mortgage loans. The revisions allowed the securitization of CRA loans containing subprime mortgages. The first public securitization of CRA loans started in 1997.

Criticism

Critics claim that government policy actually encouraged the development of the subprime debacle through legislation like the CRA, which they say forces banks to lend to otherwise uncreditworthy consumers.[2] [3] Defenders of CRA disagree, pointing out that half of all subprime loans were made by institutions that are not subject to CRA and another substantial share of subprime loans were made by subsidiaries of banks that do not fully come under CRA. Additionally, subprime lending intensified as enforcement of CRA was abating.

http://en.wikipedia.org/wiki/Community_Reinvestment_Act

So we have the "securititazation" and we have Fannie Mae and Freddie Mac two government sponsored entities. It was the secondary loan market that allowed banks to package and resell loans. In many cases because of this ability to package and sell loans banks were able to assume more risk than they would have ordinarily.

Quote:

THE FEDERAL NATIONAL MORTGAGE ASSOCIATION (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) dominate the U.S. secondary market for conforming single-family residential mortgages as both investors in and securitizers of these loans. (1) As of year-end 2003, these government-sponsored enterprises (GSEs) together held about $1.8 trillion in mostly mortgage-related assets and had another $2.1 trillion in net off-balance mortgage guarantees outstanding. (2) Indeed, these two portfolios accounted for almost 50% of the credit risk and over 20% of the market risk associated with all U.S. residential mortgages outstanding at that time (Frame and White 2005). Further, both Fannie Mae and Freddie Mac are highly leveraged, with ratios of total book equity capital to total assets consistently below 4%. Taken together, the large absolute sizes, portfolio concentrations, and comparatively thin capital ratios of Fannie Mae and Freddie Mac have led the Federal Reserve to conclude that the companies pose a systemic risk to the U.S. economy (Greenspan 2005). (3)

In the wake of recent revelations of significant interest-rate risk exposure (at Fannie Mae) and accounting misstatements (at both Fannie Mae and Freddie Mac), Congress is considering material changes to the companies' federal safety-and-soundness oversight. Among the new legal authorities being considered is the ability of the safety-and-soundness regulator to set minimum capital requirements; the current standards are embedded in statute and can be modified only by an Act of Congress. Such capital requirements are central to any safety-and-soundness structure and should be set commensurate with the risks being undertaken by the regulated firms. In addition to minimum capital requirements (and any direct limits on risk-taking), a positive differential between the market value of a regulated firm's equity and its book value can also serve as a disincentive to risk-taking. This differential is related to the expected future profitability of the firm, which reflects expectations about future competition. During the 1990s and the early part of the current decade, Fannie Mae and Freddie Mac did enjoy a substantial positive differential between the market values and book values of their common equity. Arguably, this partly reflected their special GSE charters, which limited their competition in the secondary conforming mortgage market.

http://goliath.ecnext.com/coms2/gi_0...ncentives.html

It is the use of government authority to control and manipulate the market that created arbitrage opportunities that would not have ordinarily existed. The market exploited these opportunities to the greatest degree until it all collapsed. Less government involvement not more is the key to avoiding these types of events in the future.

dc_dux · 06-03-2008, 08:15 AM

Quote:

Originally Posted by Cynthetiq

...The restrictions were put in place to make sure that something bad didn't happen, then again now that I consider, Sarbanes Oxley is in place to make sure bad things don't happen, and I can't tell you what a pain in the ass that regulation is and how it is styming getting things done in Corp Businesses.

'
Cynthetiq.....I have no direct experience with Sarbanes Oxley.

I can draw conclusions in the same manner as ace (re: no terrorist incidents since 9/11...)

there have been no enron/tyco/worldcom type corporate scandals or major corporate financial abuses since the implementation of SOX...so it must be working

But on a more serious note, I understand the complaints about the cost of regulatory compliance....I would suggest the cost of not regulating corporate accounting/financial practices could have proven to be more expensive to stockholders (more Enrons, etc).

Others see the hidden benefits of SOX.

Quote:

....In the view of a few open-minded firms, however, the second year of compliance turned out to be not only less costly and less difficult (as doing something for the second time often turns out to be), but a source of valuable insights into operations, which management has translated into improved efficiencies and cost savings.

The areas of improvement go well beyond technical statutory compliance. They include:

a strengthened control environment;

more reliable documentation;

increased audit committee involvement;

better, less burdensome compliance with other statutory regimes;

more standardized processes for IT and other functions;

reduced complexity of organizational processes; better internal controls over business relationships with other entities;

and more effective use of both automated and manual controls.

The result they are seeking to achieve is not only shareholder protection, the principal purpose of the act, but also enhanced shareholder value....

http://www.deloitte.com/dtt/article/...114561,00.html

I would be all for a middle ground between no regs and over regulated (if that is the case) if it can accomplish the same objectives. But until such a proposal, I surely wouldnt want SOX to be repealed.

Cynthetiq · 06-03-2008, 08:25 AM

LOL deloitte is making money hand over fist on SOX compliance audits.

There are usually extra work arounds and extra things to do that don't make sense. Here's an example: When new coding gets inserted into my application, I have to send an email stating: “I have reviewed the test results and I authorize the turnover to Production.” I look at the test results, I don't look at the code, someone else I guess does. I don't know if the code has any backdoors, hidden time bombs, locks, etc.

Also for access... there's 3 other people that have to funnel ID creation requests, so what, it's just more people to email and say, "Please give access to:" No one knows who the people are, you just do it because it showed up in your inbox and you it's our job to do these things.

and when someone goes on vacation or fired/leaves forget about it... people still use old logons because the process takes too long to get for a new hire/temp.

back to the credit crunch...

ace: that's also a problem as well. There was a guy who stopped the chase/citibank merger with a few well placed letters stating that they didn't reinvest in his community enough here in NYC.

dc_dux · 06-03-2008, 08:32 AM

Cynthetiq....to me it comes down to a simple question:

would effective and comprehensive safeguards to protect stockholders aganst future enrons/tycos/worldcoms been implemented voluntarily w/o government regulation?

Aside from Deloit's personal gains, the benefits cited make sense to me, particularly....

increased audit committee involvement and better internal controls over business relationships with other entities

OR....just back to the credit crunch.

More on the Community Reinvestment Act and its impact on the mortgage crisis.

Quote:

Originally Posted by aceventura3

... The Community Reinvestment Act of 1977, amended in 1995 probably had a bigger impact, and on the sub-prime mess in particular. In the interest of addressing "redlining" problems the legislation requires banks to make loans they would not ordinarily make.

Or probably not.

A recent study suggest otherwise:

Quote:

Community Reinvestment Act May Have Deterred Risky Mortgage Lending

A Traiger & Hinckley LLP study of 2006 mortgage loan data suggests that the Community Reinvestment Act, a federal law that requires banks to help serve the credit needs of their local communities, including low- and moderate-income neighborhoods, deterred banks from engaging in the kinds of risky lending practices that are provoking the foreclosure crisis.

Compared to other lenders in their communities, banks making loans in their CRA assessment areas (CRA Banks) were less likely to make a high cost loan, charged less for the high cost loans they did make, and were substantially more likely to eschew the secondary market and retain high cost and other loans in portfolio. Foreclosure rates were also lower in metropolitan areas with proportionately greater numbers of bank branches.

"Without the CRA, the foreclosure crisis might have negatively impacted even more borrowers and neighborhoods," stated law firm partner Warren Traiger. "Apparently, the CRA's mandate that banks help serve the credit needs of their local communities consistent with safe and sound banking practices has resulted in CRA Banks making a greater proportion of safe and sound loans than other lenders."

Specifically, the Traiger & Hinckley LLP study found that:

-- CRA Banks were 66 percent less likely than other lenders to originate a high cost loan;

-- The average high cost loan made by CRA Banks was priced 68 basis points lower than the average high cost loan originated by other lenders;

-- CRA Banks were more than twice as likely as other lenders to hold originated loans in their portfolio; and

-- The higher a metropolitan area's concentration of bank branches, the lower its foreclosure rate.

Conclusion

To a much greater extent than other lenders, CRA Banks avoided making the types of home purchase mortgage loans that provoked the foreclosure crisis. Unfortunately, the law's impact on the subprime crisis was limited because in the 15 metropolitan areas analyzed, the CRA Banks' share of the mortgage market was less than 25 percent.

Cynthetiq · 06-03-2008, 11:17 AM

Quote:

Originally Posted by dc_dux

Cynthetiq....to me it comes down to a simple question:

would effective and comprehensive safeguards to protect stockholders aganst future enrons/tycos/worldcoms been implemented voluntarily w/o government regulation?

I don't think so. Criminals are tricky bastards and will exploit whatever they can where ever, and whenever they see an opportunity, regardless of the laws that confront them.

Private investors invest in private companies... with the same kinds of risk.

Caveat Emptor.

When friends asked me to invest in Enron and the rest of those companies, I looked at the information in front of me and thought to myself, "This is too good to be true..." Spectaular profits each and every quarter in emerging markets that have little to no value but potetial of showing income???? I thought the same thing about people investing and flipping real estate. Yes, some people did make some money, but those infomercials of the McCorkle and Calton Sheets buy a home for no money down are just crap. Again, Buyer beware, if it's too good to be true, it's probably not.

back to the credit:

I just read this

Quote:

View: Fed Auctions More Funds for Banks
Source: Time
posted with the TFP thread generator

Fed Auctions More Funds for Banks
Tuesday, Jun. 03, 2008
Fed Auctions More Funds for Banks
By AP/JEANNINE AVERSA

(WASHINGTON) — The Federal Reserve has auctioned another $75 billion in loans to squeezed banks to help them overcome credit problems.

The central bank on Tuesday announced the results of its most recent auction — the 13th since the program started in December. It's part of an ongoing effort to ease financial turmoil and credit stresses.

In the latest auction, commercial banks paid an interest rate of 2.26 percent for the short-term loans. There were 73 bidders for the slice of the $75 billion in 28-day loans. The Fed received bids for $95.9 billion worth of the loans. The auction was conducted on Monday with the results released on Tuesday.

In mid-December the Fed announced it was creating an auction program that would give banks a new way to get short-term loans from the central bank and to help them over the credit hump. A global credit crunch has made banks reluctant to lend to each other, which has crimped lending to individuals and businesses.

The smooth flow of credit is the economy's lifeblood. It permits people to finance big-ticket purchases, such as homes and cars, and help businesses expand operations and hire workers.

Wanting to avert a broader panic that could endanger the entire U.S. financial system, the Fed has taken a number of extraordinary actions to provide relief. In its broadest extension of lending authority since the 1930s, the central bank agreed to temporarily let investment firms obtain emergency loans directly from the Fed, a privilege that only commercial banks had been granted.

The central bank is expected to focus more on these and other efforts to help banks and investment firms overcome any credit problems as it winds down an aggressive rate-cutting campaign that started last September.

To help bolster the economy, the Fed in late April lowered a key interest rate by one-quarter percentage point to 2 percent. However, it signaled that may be the last reduction for some time. The Fed is hoping that its powerful rate cuts along with the government stimulus package of tax rebates will help lift the economy out of its funk in the second half of this year.

At what point do we pay the toll to cross the bridge? or is this just made up as we go along and keep passing it on to the next person or generation like a venerable game of musical chairs, so long as I have a seat, it's a fun game to play.

aceventura3 · 06-03-2008, 03:46 PM

Quote:

Originally Posted by dc_dux

Cynthetiq....to me it comes down to a simple question:

would effective and comprehensive safeguards to protect stockholders aganst future enrons/tycos/worldcoms been implemented voluntarily w/o government regulation?

Aside from Deloit's personal gains, the benefits cited make sense to me, particularly....

increased audit committee involvement and better internal controls over business relationships with other entities

OR....just back to the credit crunch.

More on the Community Reinvestment Act and its impact on the mortgage crisis.

Or probably not.

A recent study suggest otherwise:

I know there are opposing views on the causes of the crisis, however, I don't know many who disagree that the "securitization" of mortgage loans lead to excesses. I also pointed to the arbitrage opportunities created by regulators due to their attempts to manage the market and the economy. The Community Reinvestment Act serves as an example of Washington's folly in the area of regulating and trying to manage the market. And as I said this act probably had a "bigger" impact than banking deregulation not that this act was the sole cause. Your data does not contradict my post.

For those interested, here is a summary of what happened.

People with limited resources were enticed to borrow too much money to buy or re-finance real estate at a low initial rate and in some cases with a low or no down payment. Hence the subprime borrower.

Cheap money was readily available. After 9/11 the Fed aggressively lowered interest rates and made more credit available , on a real basis to unprecedented low levels.

With cheap money and raising home prices, lending standards were lowered.

Lenders relied on loan origination fees to make money rather than loan fundamentals. The initial lenders repackaged these loans and sold them to another who took a fee and repackaged the loans and sold them again, the loans were further sliced, diced and combined leading to a very active CDO market (collateralized debt obligations).

Debt rating agencies often gave these CDO's investment grade ratings. Buyer's assumed they were safer than they were. No one had "skin" in the game and everything was fee driven.

Then banks, investment banks, hedge funds, etc., actually started borrowing money to purchase CDO's. They would borrow at a lower rate than what the CDO's paid. Hence the arbitrage opportunity. The market followed the lead of Freddie and Fannie, these entities are highly leveraged. So they would borrow at let's say 5% and would receive 5.25%, net of fees of course. If you think this transaction has no risk, you do it really, really, really big. Wise people did not fall into this trap.

Then the market developed other derivatives, like CDS's (credit default swaps) of form of insurance for the debt holder, only without reserves. Again, fee driven. So today we have trillions of dollars in these CDO's, CMO's, CDS's, and probably a few others I can't think of right now. And we have Freddie and Fannie with trillions also.

So with all this leverage (the loan is leveraged in some cases 100% or more, the CDO's are leveraged and you have hedge funds and others using leverage to arbitrage and you have insurance that is not really insurance on a loan with no equity and a weak borrower) and then housing prices start to fall. So then you have everything start to collapse.

In my view, it is the "securitization" of loans that lead to all of this. If banking deregulation was the thing that allowed banks to "securitize" these loans and allowed for the arbitrage opportunity, I will accept that as the root cause. However, arbitrage opportunities are usually created when the market is not free to respond fast enough to changing conditions, this is usually the fault of excessive regulation not less.

Derwood · 06-03-2008, 03:47 PM

ha ha ha, is there anything Reagan DIDN'T deregulate? christ!

dc_dux · 06-03-2008, 03:48 PM

Quote:

Originally Posted by aceventura3

The Community Reinvestment Act serves as an example of Washington's folly in the area of regulating and trying to manage the market. And as I said this act probably had a "bigger" impact than banking deregulation not that this act was the sole cause. Your data does not contradict my post.

OK....ace, if you say so

Who am I to point out facts from a study on the CRA and its impact on the mortgage crisis over your opinion.

Cynthetiq · 06-03-2008, 03:53 PM

ah yes, I was reading this earlier on MotherJones.com today....

Quote:

View: Foreclosure Phil
Source: Motherjones
posted with the TFP thread generator

Foreclosure Phil
Foreclosure Phil

Years before Phil Gramm was a McCain campaign adviser and a lobbyist for a Swiss bank at the center of the housing credit crisis, he pulled a sly maneuver in the Senate that helped create today's subprime meltdown.

David Corn
May 28, 2008

Who's to blame for the biggest financial catastrophe of our time? There are plenty of culprits, but one candidate for lead perp is former Sen. Phil Gramm. Eight years ago, as part of a decades-long anti-regulatory crusade, Gramm pulled a sly legislative maneuver that greased the way to the multibillion-dollar subprime meltdown. Yet has Gramm been banished from the corridors of power? Reviled as the villain who bankrupted Middle America? Hardly. Now a well-paid executive at a Swiss bank, Gramm cochairs Sen. John McCain's presidential campaign and advises the Republican candidate on economic matters. He's been mentioned as a possible Treasury secretary should McCain win. That's right: A guy who helped screw up the global financial system could end up in charge of US economic policy. Talk about a market failure.

Gramm's long been a handmaiden to Big Finance. In the 1990s, as chairman of the Senate banking committee, he routinely turned down Securities and Exchange Commission chairman Arthur Levitt's requests for more money to police Wall Street; during this period, the sec's workload shot up 80 percent, but its staff grew only 20 percent. Gramm also opposed an sec rule that would have prohibited accounting firms from getting too close to the companies they audited—at one point, according to Levitt's memoir, he warned the sec chairman that if the commission adopted the rule, its funding would be cut. And in 1999, Gramm pushed through a historic banking deregulation bill that decimated Depression-era firewalls between commercial banks, investment banks, insurance companies, and securities firms—setting off a wave of merger mania.

But Gramm's most cunning coup on behalf of his friends in the financial services industry—friends who gave him millions over his 24-year congressional career—came on December 15, 2000. It was an especially tense time in Washington. Only two days earlier, the Supreme Court had issued its decision on Bush v. Gore. President Bill Clinton and the Republican-controlled Congress were locked in a budget showdown. It was the perfect moment for a wily senator to game the system. As Congress and the White House were hurriedly hammering out a $384-billion omnibus spending bill, Gramm slipped in a 262-page measure called the Commodity Futures Modernization Act. Written with the help of financial industry lobbyists and cosponsored by Senator Richard Lugar (R-Ind.), the chairman of the agriculture committee, the measure had been considered dead—even by Gramm. Few lawmakers had either the opportunity or inclination to read the version of the bill Gramm inserted. "Nobody in either chamber had any knowledge of what was going on or what was in it," says a congressional aide familiar with the bill's history.

It's not exactly like Gramm hid his handiwork—far from it. The balding and bespectacled Texan strode onto the Senate floor to hail the act's inclusion into the must-pass budget package. But only an expert, or a lobbyist, could have followed what Gramm was saying. The act, he declared, would ensure that neither the sec nor the Commodity Futures Trading Commission (cftc) got into the business of regulating newfangled financial products called swaps—and would thus "protect financial institutions from overregulation" and "position our financial services industries to be world leaders into the new century."

Subprime 1-2-3
Don't understand credit default swaps? Don't worry—neither does Congress. Herewith, a step-by-step outline of the subprime risk betting game. —Casey Miner

Subprime borrower: Has a few overdue credit card bills; goes to a storefront lender owned by major bank; takes out a $100,000 home-equity loan at 11 percent interest

Lending bank: Assuming housing prices will only go up, and that investors will want to buy mortgage loan packages, makes as many subprime loans as it can

Investment bank: Packages subprime mortgages into bundles called collateralized debt obligations, or cdos, then sells those cdos to eager investors. Goes to insurer to get protection for those investors, thus passing the default risk to the insurer through a "credit default swap."

Insurer: Thinking that default risk is low, agrees to cover more money than it can pay out, in exchange for a premium

Rating agency: On basis of original quality of loans and insurance policy they are "wrapped" in, issues a rating signaling certain slices of the cdo are low risk (aaa), medium risk (bbb), or high risk (ccc)

Investor: Borrows more money from investment bank to load up on cdo slices; makes money from interest payments made to the "pool" of loans. No one loses—as long as no one tries to cash in on the insurance.
It didn't quite work out that way. For starters, the legislation contained a provision—lobbied for by Enron, a generous contributor to Gramm—that exempted energy trading from regulatory oversight, allowing Enron to run rampant, wreck the California electricity market, and cost consumers billions before it collapsed. (For Gramm, Enron was a family affair. Eight years earlier, his wife, Wendy Gramm, as cftc chairwoman, had pushed through a rule excluding Enron's energy futures contracts from government oversight. Wendy later joined the Houston-based company's board, and in the following years her Enron salary and stock income brought between $915,000 and $1.8 million into the Gramm household.)

But the Enron loophole was small potatoes compared to the devastation that unregulated swaps would unleash. Credit default swaps are essentially insurance policies covering the losses on securities in the event of a default. Financial institutions buy them to protect themselves if an investment they hold goes south. It's like bookies trading bets, with banks and hedge funds gambling on whether an investment (say, a pile of subprime mortgages bundled into a security) will succeed or fail. Because of the swap-related provisions of Gramm's bill—which were supported by Fed chairman Alan Greenspan and Treasury secretary Larry Summers—a $62 trillion market (nearly four times the size of the entire US stock market) remained utterly unregulated, meaning no one made sure the banks and hedge funds had the assets to cover the losses they guaranteed.

In essence, Wall Street's biggest players (which, thanks to Gramm's earlier banking deregulation efforts, now incorporated everything from your checking account to your pension fund) ran a secret casino. "Tens of trillions of dollars of transactions were done in the dark," says University of San Diego law professor Frank Partnoy, an expert on financial markets and derivatives. "No one had a picture of where the risks were flowing." Betting on the risk of any given transaction became more important—and more lucrative—than the transactions themselves, Partnoy notes: "So there was more betting on the riskiest subprime mortgages than there were actual mortgages." Banks and hedge funds, notes Michael Greenberger, who directed the cftc's division of trading and markets in the late 1990s, "were betting the subprimes would pay off and they would not need the capital to support their bets."

These unregulated swaps have been at "the heart of the subprime meltdown," says Greenberger. "I happen to think Gramm did not know what he was doing. I don't think a member in Congress had read the 262-page bill or had thought of the cataclysm it would cause." In 1998, Greenberger's division at the cftc proposed applying regulations to the burgeoning derivatives market. But, he says, "all hell broke loose. The lobbyists for major commercial banks and investment banks and hedge funds went wild. They all wanted to be trading without the government looking over their shoulder."

Now, belatedly, the feds are swooping in—but not to regulate the industry, only to bail it out, as they did in engineering the March takeover of investment banking giant Bear Stearns by JPMorgan Chase, fearing the firm's collapse could trigger a dominoes-like crash of the entire credit derivatives market.

No one in Washington apologizes for anything, so it's no surprise that Gramm has failed to issue any mea culpa. Post-Enron, says Greenberger, the senator even called him to say, "You're going around saying this was my fault—and it's not my fault. I didn't intend this."

Whether or not Gramm had bothered to ponder the potential downsides of his commodities legislation, having helped set off an industry free-for-all, he reaped the rewards. In 2003, he left the Senate to take a highly lucrative job at ubs, Switzerland's largest bank, which had been able to acquire investment house PaineWebber due to his banking deregulation bill. He would soon be lobbying Congress, the Fed, and the Treasury Department for ubs on banking and mortgage matters. There was a moment of poetic justice when ubs became one of the subprime crisis' top losers, writing down $37 billion as of this spring—an amount equal to its previous four years of profits combined. In a report explaining how it had managed to mess up so grandly, ubs noted that two-thirds of its losses were the fault of collateralized debt obligations—securities backed largely by subprime instruments—and that credit default swaps had been "key to the growth" of its out-of-control cdo business. (Gramm declined to comment for this article.)

Gramm's record as a reckless deregulator has not affected his rating as a Republican economic expert. Sen. John McCain has relied on him for policy advice, especially, according to the campaign, on housing matters. The two have been buddies ever since they served together in the House in the 1980s; in 1996, McCain chaired Gramm's flop of a presidential campaign. (Gramm spent $21 million and earned only 10 delegates during the gop primaries.) In 2005, McCain told a Wall Street Journal columnist that Gramm was his economic guru. Two years later, Gramm wrote a piece for the Journal extolling McCain as a modern-day Abraham Lincoln, and he's hailed McCain's love of tax cuts and free trade. Media accounts have identified Gramm as a contender for the top slot at the Treasury Department if McCain reaches the White House. "If McCain gets in," frets Lynn Turner, a former chief sec accountant, "we'll have more of the same deregulatory mess. I like John McCain, but given what I know about Phil Gramm, I wouldn't vote for McCain."

As a thriving bank exec and presidential adviser, Gramm has defied a prime economic principle: Bad products are driven out of the market. In John McCain, he has gained an important customer, so his stock has gone up in value. And there's no telling when the Gramm bubble will burst.

Quote:

Subprime 1-2-3
Don't understand credit default swaps? Don't worry—neither does Congress. Herewith, a step-by-step outline of the subprime risk betting game. —Casey Miner

Subprime borrower: Has a few overdue credit card bills; goes to a storefront lender owned by major bank; takes out a $100,000 home-equity loan at 11 percent interest

Lending bank: Assuming housing prices will only go up, and that investors will want to buy mortgage loan packages, makes as many subprime loans as it can

Investment bank: Packages subprime mortgages into bundles called collateralized debt obligations, or cdos, then sells those cdos to eager investors. Goes to insurer to get protection for those investors, thus passing the default risk to the insurer through a "credit default swap."

Insurer: Thinking that default risk is low, agrees to cover more money than it can pay out, in exchange for a premium

Rating agency: On basis of original quality of loans and insurance policy they are "wrapped" in, issues a rating signaling certain slices of the cdo are low risk (aaa), medium risk (bbb), or high risk (ccc)

Investor: Borrows more money from investment bank to load up on cdo slices; makes money from interest payments made to the "pool" of loans. No one loses—as long as no one tries to cash in on the insurance.

yes, again, I don't think that the taxpayer should be picking up the bill. The companies took the risk as did the "investor" they IMO BOTH lose. If there's fall out from that, there is fall out from that, but please in god's loving earth why are you going to let people believe that if things get bad, the government will just bail everyone out, and those that default on the loans can just walk away and take the bankruptcy hit.

dc_dux · 06-03-2008, 03:58 PM

Quote:

Originally Posted by Cynthetiq

...yes, again, I don't think that the taxpayer should be picking up the bill. The companies took the risk as did the "investor" they IMO BOTH lose. If there's fall out from that, there is fall out from that, but please in god's loving earth why are you going to let people believe that if things get bad, the government will just bail everyone out, and those that default on the loans can just walk away and take the bankruptcy hit.

For the record, I dont support government bailouts. I would support reasonable temporary relief measures for some home owners...depending on what those measures would be.

I do support strong banking regulations to minimize future need to even raise the issue of bailouts....but I dont want that regulatory enforcement power in the hands of the Fed Reserve.

From the article on Phil Gramm

Quote:

As a thriving bank exec and presidential adviser, Gramm has defied a prime economic principle: Bad products are driven out of the market. In John McCain, he has gained an important customer, so his stock has gone up in value. And there's no telling when the Gramm bubble will burst.

And I am looking forward to the Gramm bubble bursting and coating him in slime...with a spillover on McCain, who has his own S&L scandal history.

aceventura3 · 06-04-2008, 07:17 AM

Quote:

Originally Posted by dc_dux

OK....ace, if you say so

Who am I to point out facts from a study on the CRA and its impact on the mortgage crisis over your opinion.

The comment here tells me that you did not get my point. You can reread the posts if you want, I won't try to restate it.

Also regarding your facts - are you aware that a defined assessment area is different than the full scope of how the Community Reinvestment Act affects a bank or a community? Are you aware that a CRA Bank is just about every bank that has federal deposit insurance? Here is a quote from the study you referenced:

Quote:

This study isolates the 2006 performance of one category of mortgage lenders—banks originating loans in their Community Reinvestment Act (CRA) assessment areas, referred to herein as “CRA Banks.”

http://www.traigerlaw.com/publicatio...udy_1-7-08.pdf

This law has a much broader impact than the study you referenced suggests. And the limited scope of the study may be misleading given the conclusions drawn from it. Here is a summary of why:

Quote:

II. DEFINING THE PROBLEM

A. Direct Involvement by Banks in Predatory Lending

Banks can directly participate in predatory lending by originating or brokering predatory loans. Currently, both origination and brokerage activities may qualify for CRA credit even when they involve predatory lending.

There is a great deal of uncertainty regarding the extent to which banks originate predatory loans. (22) As we discuss infra, banks have significant disincentives to originating subprime, including predatory, loans. (23) Although theoretically the disincentives outweigh the incentives, there is anecdotal evidence that certain regulated depository institutions have originated predatory loans. For example, numerous borrowers have sued the failed subprime lender Superior Bank, (24) alleging that the bank engaged in predatory lending. (25) The plaintiffs have alleged that Superior encouraged them to assume loans they did not need or could not afford, and engaged in various forms of fraud. (26) If Superior was making predatory loans, it could have received CRA credit for these loans under the lending test.

When banks serve as loan brokers, they take borrowers' applications and perform various settlement functions, without assessing the creditworthiness of the applicants. Sometimes broker banks fund subprime loans for a brief period before assigning the loans to the originating lenders. Other times the broker banks do not fund the loans at all. (27) For the purpose of the CRA lending test, banks can ask examiners to take into account the loans that they brokered and briefly funded. Likewise, banks whose brokerage activities are limited to accepting applications and performing settlement functions can include these activities under the CRA service test. Lastly, banks can ask that their mortgage brokerage services be considered part of their community development service. (28)

B. Indirect Involvement by Banks in Predatory Lending

There are numerous ways in which banks can indirectly support predatory lenders. They can purchase predatory loans as investments, either as assignments of loans originated elsewhere or by buying securities backed by predatory loans. (29) If and when banks purchase predatory loans, they may be entitled to CRA credit under the lending test if the loans fall within CRA guidelines. (30) Similarly, when banks purchase securities backed by predatory loans made to LMI borrowers, they may receive credit under the investment test. (31)

Banks also finance non-bank subprime lenders, through warehouse lending facilities and other working capital loans (32) and through loan guarantees in the form of letters of credit. In addition, banks serve as underwriters, trustees, registrars and paying agents for securitizations of subprime loans, some of which may be predatory. (33) These bank activities raise CRA implications because some of the activities receive explicit federal guarantees, while others may benefit more generally from federal subsidies. Explicit subsidies arise, for example, when subprime lenders obtain financing through commercial paper placements guaranteed by letters of credit issued by banks. (34) Conventional letters of credit issued by insured banks qualify for up to $100,000 in federal deposit insurance. (35) Past failed bank resolution methods that protected uninsured creditors in bank insolvencies, send an additional signal that the uninsured balances of bank letters of credit may receive de facto protection as well. (36) Banks can accordingly charge lower fees for those letters of credit. The possibility that banks are receiving CRA credit for indirectly supporting predatory lending, and that federal subsidies may be facilitating predatory lending, requires that we consider utilizing CRA to deter abusive lending practices.

C. Steering of Prime Borrowers to Subprime and Predatory Loans

One of the most troubling conclusions to emerge from the research on the subprime market is that substantial numbers of customers who qualify for prime loans are steered to costlier subprime loans that should be reserved for customers with weak credit ratings. (37) Mortgage brokers have strong incentives to engage in steering due to "yield spread premiums." (38) These are premiums lenders pay mortgage brokers if they persuade borrowers to accept higher interest rates even though the lenders would, if pressed, grant the loan at lower rates. (39) Unsuspecting borrowers typically never know that they are paying these premiums. Under the Truth in Lending Act, (40) for example, lenders do not have to include yield spread premiums in the calculation of finance charges, even though the cost of the premiums is passed on to the borrowers. (41) Similarly, even when loan disclosure documents list yield spread premiums, relatively few borrowers recognize that these premiums will cause them ultimately to pay higher interest rates. (42) Similar problems are posed by overages, which are incentive payments to loan officers in the form of negotiable interest and fees over and above the minimum rates lenders would be willing to accept to close the loans. (43)

In the bank context, there are two ways that lenders can induce prime loan customers to take out subprime loans. First, banks that offer both subprime and prime loans can steer prime-eligible borrowers to inappropriate subprime products. Second, where banks make prime loans directly, but segregate subprime lending in non-bank affiliates or subsidiaries, the subprime entities may refrain from referring prime-qualified applicants to the banks where they could obtain prime loans. (44) Alternatively, banks may discourage some prime-eligible applicants from securing prime loans by, for example, imposing onerous documentation requirements. Ironically, banks can receive CRA credit for making subprime loans to LMI borrowers even when the borrowers are eligible for prime loans.

Steering by non-bank affiliates rarely even appears on the radar screen of federal bank regulators. The activities of affiliates are not subject to CRA scrutiny unless parent companies voluntarily submit to it. Although mortgage lending by non-bank affiliates (like banks themselves) is subject to the reporting requirements of the Home Mortgage Disclosure Act ("HMDA"), (45) until recently HMDA's regulations did not require reporting of annual percentage rate ("APR") data, which made it difficult to identify subprime loans, let alone steering. (46)

CRA examiners do consider steering when there are allegations that lenders have discriminated by charging higher rates to minorities or other protected groups. (47) Such discrimination claims are relatively rare, and are difficult and costly to prove. (48)

Due to heavy press coverage and in-depth studies by the agencies themselves, (49) federal banking regulators are cognizant that steering is a problem. Since December 2000 or so, the Federal Reserve has expected applicants for approval of deposit facilities to represent that they will review their subprime loan applications for prime-eligible applicants and offer those customers prime products. (50)

CRA examinations, however, are a different matter. In contrast to the Fed's new approach to deposit facility applications, federal banking regulators have not provided guidance to CRA examiners on how to curb steering. In two advance notices of proposed rulemaking, one by the Office of Thrift Supervision in April 2000 and the other by federal banking agencies jointly in July 2001, the agencies solicited public comment on how best to respond to this problem. (51)

D. The Paucity of Legitimate Subprime Lending by Banks

Although CRA-covered lenders originate the greatest number of loans in LMI neighborhoods and to LMI borrowers, these lenders focus primarily on prime lending. As a result, LMI borrowers with impaired credit often turn to non-bank lenders--some of whom are predatory lenders--for subprime loans. Between 1993 and 1998, there was a tremendous surge in lending to LMI borrowers. CRA-covered institutions accounted for eighty-three percent of the growth in prime loans to these borrowers. (52) In contrast, CRA-covered institutions were responsible for only fifteen percent of the increase in subprime loans during the same period. (53) Subprime lenders not covered by CRA accounted for two-thirds of the increase in subprime mortgages. (54) The failure of CRA-covered institutions to meet the demand for subprime loans in LMI neighborhoods runs counter to CRA's goal for banks to "serve the credit needs of their entire communities." (55)

As community institutions with valuable reputations to maintain, banks may be disinclined to lend to customers with impaired credit because they risk criticism if they increase their rejection rates, charge higher interest rates, or have to foreclose on people's homes. Similarly, banks may be concerned that CRA and bank examiners will look askance if they...

dc_dux · 06-04-2008, 08:04 AM

Quote:

Originally Posted by aceventura3

The comment here tells me that you did not get my point. You can reread the posts if you want, I won't try to restate it.

ace....I got your point.

We disagree on the impact of the CRA as opposed to the impact of Reagan's banking dereg bill (Depository Institutions Act) and Phil Gramm/Bill Clinton dereg bill (Financial Services Modernization Act).

And you have not provided any data that the CRA had a greater adverse impact.

No reason to carry this further.

aceventura3 · 06-04-2008, 11:14 AM

Quote:

Originally Posted by dc_dux

ace....I got your point.

I don't think you did.

Quote:

We disagree on the impact of the CRA as opposed to the impact of Reagan's banking dereg bill (Depository Institutions Act) and Phil Gramm/Bill Clinton dereg bill (Financial Services Modernization Act).

In terms of proximate cause you don't show your connection to banking deregulation and the housing crisis. There were many intervening market drivers between the Reagan Administration and the crisis.

Quote:

And you have not provided any data that the CRA had a greater adverse impact.

Read what I have provided, and you will see it. True, I have not given you any charts or graphs, but you don't seem to understand the concept of what caused the crisis. Given that, what good would charts and graphs be?

Quote:

No reason to carry this further.

True. You and your cited study take the view that if a bank reports it, it must be true. I don't. That difference, between you and me, tells me that you would never question the data a bank would put in a CRA report for the government and for the public to review. You don't seem to accept the possibility that a bank would publish data in a manner to put the bank in the most favorable light, meaning any study based on that data would be......(come on, you can get it)......"biased".

If nothing else perhaps you can remember this - the government can not legislate away greed. Smart people will always find away game loop holes in legislation and regulation. True competition is the equalizer.

dc_dux · 06-04-2008, 11:18 AM

Quote:

Originally Posted by aceventura3

...True competition is the equalizer.

spoken as a true "free marketeer"

Nope...I dont buy it...never have, never will.

aceventura3 · 06-04-2008, 11:55 AM

Quote:

Originally Posted by dc_dux

spoken as a true "free marketeer"

Nope...I dont buy it...never have, never will.

Again, I thought you wrote there was no reason to "carry forward". And I still don't know what purpose writing something like that serves. Oh, the mysteries in life.

You don't specify what "it" is, so you can't be proven wrong. Cool.

dc_dux · 06-04-2008, 12:02 PM

Quote:

Originally Posted by aceventura3

Again, I thought you wrote there was no reason to "carry forward". And I still don't know what purpose writing something like that serves. Oh, the mysteries in life.

You don't specify what "it" is, so you can't be proven wrong. Cool.

ace..that "holier than thou" approach wont work.

I am still trying to figure out what purpose writing something like this served:

Quote:

Also, are you involved in some illegal CIA internet monitoring activity? How do you know that I am not a Republican member of Congress? Who did you check with? Should I be concerned? Should I be expecting a visit from some friends of Nancy Pelosi? Am I going to get audited by the IRS after Obama or Clinton moves into the White House?

I honestly dont know if it was a bad joke (dont quit your day job) or a pit-bull meltdown.

Let it rest, ace....we have a difference of opinion on the value of regulation as opposed to the value of a free market.

aceventura3 · 06-04-2008, 12:24 PM

Quote:

Originally Posted by dc_dux

ace..that "holier than thou" approach wont work.

Is that what I project?

Who are you to "point out facts", and how dare I question those facts? My initial post was simply my view on the subject with a few references. Who took this into the gutter? Not me, but I went in with you, occasionally I feel the need to respond to subtle insults.

Quote:

I am still trying to figure out what purpose writing something like this served:

I stated that I was a registered Republican and what I would support.

I responded to your comment about what you think you know about me, and how you think you know it. As I recalled you said something like: "the last time I checked...", what did you check, where did you check it? Was your comment a "lie"?

Quote:

I honestly dont know if it was a bad joke (dont quit your day job) or a pit-bull meltdown.

I have not melted down. I don't avoid responding to direct questions. I admit when I am wrong. I also defend my views. I know I can be offensive when I am defending my views, and I often warn people of that, hoping they understand it is not personal. I often respond to posts without looking to see who wrote it. To me they are words and arguments. If your feelings get hurt, and you don't want to interact with me, don't.

Quote:

Let it rest, ace....we have a difference of opinion on the value of regulation as opposed to the value of a free market.

Let what rest? All I do is give my view on a subject, I give citations, I give explanations, support, etc. Isn't that the point of TFP. If you want me to stop doing that - it is not enough, if the community at TFP wants me to give it a rest, I will.

dc_dux · 06-04-2008, 12:29 PM

LOL....ok, ace

But for the record:

Quote:

Are you involved in some illegal CIA internet monitoring activity? How do you know that I am not a Republican member of Congress? Who did you check with? Should I be concerned? Should I be expecting a visit from some friends of Nancy Pelosi? Am I going to get audited by the IRS after Obama or Clinton moves into the White House?

NO, I am not involve in CIA monitoring activity...and you should have no concern about a visit from Pelosi or the IRS...at least on my account

I will continue to reponsd to your posts when I feel a need, particularly when I think your sources are questionable or biased....but I do so for the edification of others...so that they can see both sides.

That doesnt mean I feel a need to engage in discussions with you on every post that (and I think you might even agree) usually go nowhere.

Carry on...dont ever "let it rest" if that works for you.

I just dont take it that seriously.

aceventura3 · 06-04-2008, 12:44 PM

Quote:

Originally Posted by dc_dux

LOL....ok, ace

But for the record:

NO, I am not involve in CIA monitoring activity...and you should have no concern about a visit from Pelosi or the IRS...at least on my account

I will continue to reponsd to your posts when I feel a need, particularly when I think your sources are questionable or biased....but I do so for the edification of others...so that they can see both sides.

That doesnt mean I feel a need to engage in discussions with you that (and I think you might even agree) usually go nowhere.

Carry on...dont ever "let it rest" if that works for you.

I just dont take it that seriously.

So, what is the point of your subtle little insults and then the pretense that you are some how a victim? Anyone who has paid attention knows the pattern. You can see it to if you want, in many of the threads. Like I said, sometimes I don't ignore it. I guess that is when I am all "holier than thou" and stuff. Like in this thread - did you really address any thing relevant to my first and second posts on this subject. No you did not, so much for edification.

dc_dux · 06-04-2008, 12:47 PM

ace...anything further you can say to me in a PM

aceventura3 · 06-04-2008, 01:05 PM

Quote:

Originally Posted by dc_dux

ace...anything further you can say to me in a PM

No thanks.

Strange Famous · 06-07-2008, 02:26 PM

Quote:

Originally Posted by Locobot

This radio show helped me understand the issue quite a bit better:
http://www.thisamericanlife.org/Radi...spx?sched=1242

One thing that has become clear to me is that the credit crunch/mortgage crisis IS a part of the current Republican fiscal policy. They want the local property tax base to disappear so that local governments and schools are bankrupted. Notice that the only measures they're willing to take are to help out the banks, not property owners.

One of the fascinating parts in the show linked above is when they talk about how peoples mortgages have been sold and split so many times that even figuring out who is owns them can be daunting.

Mate, its happening in the UK too, and I dont think we have a Republican govt.

Its a global crisis.

But it does seem to me, and this is just my judgment, that fiscal issues arent seen as key in this US election, and what I see is people politicizing it rather than addressing the actual economic levers.

05-31-2008, 02:31 PM	#1 (permalink)
Strange Famous follower of the child's crusade?	The Credit Crunch It strikes me that the credit crunch and the collapse of the housing market in the US is a far more important national and global issue than Iraq or whether homosexuals can get married, or really anything else that faces America right now. I am not close enough to it, but what are the fiscal policies which Obama and McCain propose? What do the Democrats and Republicans offer as solutions to the credit crunch? __________________ "Do not tell lies, and do not do what you hate, for all things are plain in the sight of Heaven. For nothing hidden will not become manifest, and nothing covered will remain without being uncovered." The Gospel of Thomas

05-31-2008, 03:24 PM	#2 (permalink)
SecretMethod70 Human Administrator Location: Chicago	Please don't take the brevity of this post as ignoring your questions, I just don't have the time right now to compile a fully informative and thoughtful post. Hopefully someone else will come and do that. What I came here to point out, though, is that the Iraq war is closely tied to our economy, and it's difficult to separate the two issues. The amount of money we've spent and are continuing to spend in Iraq could have gone to countless other programs which would have more directly benefitted the country. http://www.washingtonpost.com/wp-dyn...111600865.html http://www.timesonline.co.uk/tol/com...cle3419840.ece __________________ Le temps détruit tout "Musicians are the carriers and communicators of spirit in the most immediate sense." - Kurt Elling Last edited by SecretMethod70; 05-31-2008 at 03:29 PM..

05-31-2008, 07:48 PM	#4 (permalink)
Seaver Junkie Location: Fort Worth, TX	One large aspect which McCain will try to do is drag our over-inflated government kicking and screaming to stop christmas tree'ing. It was the ONE promise Dem's talked about in '06 which I wanted to see, where they can't tack-on $150mil to pig farmers on a military body-armor bill. Of course they forgot about that promise when they had the power to tack on the bills, but McCain is making it a large part of his fiscal policy. Hopefully he can get it done. Obama openly admits he wants to raise taxes. This, combined with the credit/mortgage/oil problems would only cause more problems. __________________ "Smite the rocks with the rod of knowledge, and fountains of unstinted wealth will gush forth." - Ashbel Smith as he laid the first cornerstone of the University of Texas

06-03-2008, 05:29 AM	#12 (permalink)
Cynthetiq Tilted Cat Head Administrator Location: Manhattan, NY	Yes, I was young when that happened and I didn't agree with it then. I still disagree with it now. Banks should not have become these huge profit centers. Nothing good was to come of it I believed at the time, and am seeing now. The restrictions were put in place to make sure that something bad didn't happen, then again now that I consider it, Sarbanes Oxley is in place to make sure bad things don't happen, and I can't tell you what a pain in the ass that regulation is and how it is styming getting things done in Corp Businesses. I guess that's why I'm not a banker or politician. __________________ I don't care if you are black, white, purple, green, Chinese, Japanese, Korean, hippie, cop, bum, admin, user, English, Irish, French, Catholic, Protestant, Jewish, Buddhist, Muslim, indian, cowboy, tall, short, fat, skinny, emo, punk, mod, rocker, straight, gay, lesbian, jock, nerd, geek, Democrat, Republican, Libertarian, Independent, driver, pedestrian, or bicyclist, either you're an asshole or you're not. What's the best nation in the world? DO-NATION!

06-03-2008, 08:25 AM	#15 (permalink)
Cynthetiq Tilted Cat Head Administrator Location: Manhattan, NY	LOL deloitte is making money hand over fist on SOX compliance audits. There are usually extra work arounds and extra things to do that don't make sense. Here's an example: When new coding gets inserted into my application, I have to send an email stating: “I have reviewed the test results and I authorize the turnover to Production.” I look at the test results, I don't look at the code, someone else I guess does. I don't know if the code has any backdoors, hidden time bombs, locks, etc. Also for access... there's 3 other people that have to funnel ID creation requests, so what, it's just more people to email and say, "Please give access to:" No one knows who the people are, you just do it because it showed up in your inbox and you it's our job to do these things. and when someone goes on vacation or fired/leaves forget about it... people still use old logons because the process takes too long to get for a new hire/temp. back to the credit crunch... ace: that's also a problem as well. There was a guy who stopped the chase/citibank merger with a few well placed letters stating that they didn't reinvest in his community enough here in NYC. __________________ I don't care if you are black, white, purple, green, Chinese, Japanese, Korean, hippie, cop, bum, admin, user, English, Irish, French, Catholic, Protestant, Jewish, Buddhist, Muslim, indian, cowboy, tall, short, fat, skinny, emo, punk, mod, rocker, straight, gay, lesbian, jock, nerd, geek, Democrat, Republican, Libertarian, Independent, driver, pedestrian, or bicyclist, either you're an asshole or you're not. What's the best nation in the world? DO-NATION!

06-02-2008, 03:51 PM	#9 (permalink)
Locobot is awesome!	This radio show helped me understand the issue quite a bit better: http://www.thisamericanlife.org/Radi...spx?sched=1242 One thing that has become clear to me is that the credit crunch/mortgage crisis IS a part of the current Republican fiscal policy. They want the local property tax base to disappear so that local governments and schools are bankrupted. Notice that the only measures they're willing to take are to help out the banks, not property owners. One of the fascinating parts in the show linked above is when they talk about how peoples mortgages have been sold and split so many times that even figuring out who is owns them can be daunting.

06-03-2008, 03:47 PM	#19 (permalink)
Derwood Who You Crappin? Location: Everywhere and Nowhere	ha ha ha, is there anything Reagan DIDN'T deregulate? christ!

06-04-2008, 12:47 PM	#32 (permalink)
dc_dux Location: Washington DC	ace...anything further you can say to me in a PM __________________ "The perfect is the enemy of the good." ~ Voltaire