Can anyone supply a link to an article that actually explains the stuff that this article purports to be about? The test of "actually explains" being "explains how to prevent."
This article explains what needs to be done and what needs to be stopped:
http://www.aspousa.org/index.php/2009/03/no-we-cant/
FTA: What is the biggest impediment in 2009 to mitigating the harmful effects of energy problems in the 21st century? The answer may surprise you—it is insolvent zombie banks and our entrenched FIRE economy (Finance, Insurance, Real Estate).
Matt Tiabbi does write with a certain muckraker-type style, and because it's only an article, it can only go so deep in the story. Having said that, as far as I can tell what he says is pretty much spot on and very much factually correct.
One example: He spends a few sentences explaining how banks created CDOs: take some good loans, take some bad loans, put them together and using some math convince regulators and investors that these things are AAA rated. Wired wrote an article (itself not that detailed) explaining the formula that allowed them to do this: http://www.wired.com/techbiz/it/magazine/17-03/wp_quant
I don't think there can be an article that explains this stuff. Some years from now, someone who is both smart and an excellent writer will be able to look back and write a book that explains everything, but until then this stuff will be about as good as it gets.
Details on "how to prevent" are even harder, and you'll probably have to look at the upcoming G20 summit in April where the Europeans will try to at least start talking about some kind of regulatory framework, while the Americans will just want everyone to throw more money at the same people that fucked things up.
> One example: He spends a few sentences explaining how banks created CDOs: take some good loans, take some bad loans, put them together and using some math convince regulators and investors that these things are AAA rated.
You write that like it's wrong or in error.
As Google has demonstrated, you can create something that it is more reliable than its parts.
A bundle of somewhat independent things has less variance than the pieces.
"somewhat independent" is the crux of the problem. In a crash the only things going up are the correlations. The modelling behind mortgage securities assumed that defaults were uncorrelated based on the short time period they based them on. Now we know better.
Misunderstanding correlations among defaults was part of it but the other big surprise was that different asset classes which less independent than thought.
For example, no one expected an increase in mortage defaults to be accomplied by problems in stocks.
In fact, its likely that these two things fed each other, that the unexpected correlation in defaults is at least partly due to the unforseen correlation across asset classes and the unforseen correlation across asset classes is at least partly due to the unexpected correlation in defaults.
Paul: There is probably more than a single article's worth in terms of explaining how to prevent, but you could start with Barry Ritholtz' blog http://www.ritholtz.com/blog -- he also has a book coming out that will probably be very illuminating: http://www.amazon.com/exec/obidos/ASIN/0470520388/thebigpict... . You might also try nakedcapitalism.com, another well respected blog.
the Accounting and Auditing Act of 1950. The relevant section, 31 USC 714(b), dictated that congressional audits of the Federal Reserve may not include "deliberations, decisions and actions on monetary policy matters." The exemption, as Foss notes, "basically includes everything."
Does congress not have the power to change that act?
Congress certainly has the authority to change the Act if they did so in the first place in 1950. I do not think that they did have the authority to give up their responsibilty if it was un-constitutional in the first place.
One of posters on this thread, 'jhancock' said that quote "creating money isn't spending."
Well, hey buddy! What do you call what the Fed has been doing since 2008? So far they have lent 3 Trillion US dollars and provided some 5.7 Trillion bucks in guarantees on PRIVATE investments.
Definitely illegal according to the Constitution. It is outside of their mandate. How it will play out if we, the tax-payer, tell them to take a flying leap...Beats me!
I support H.R. 1207 that would require the GAO to audit the Fed. It is a start. After that I am sure most Americans will want to get rid of it and control our own money.
I am sorry, I attributed the comment to the wrong poster! I agree with the first comment of jhancock now that I more closely read it. Again apologies! Hope to hear more comments on this thread!
I have been taught the U.S. Constitution mandates ALL spending must be initiated through Congress. If this is correct, then the above cited Act is not constitutional.
There are many that argue the Fed has long been exercising powers it does not have. We shall see how much longer this behavior continues.
No one ever asked you to stay up all night eight days a week trying to get filthy rich shorting what's left of the American auto industry or selling $600 billion in toxic, irredeemable mortgages to ex-strippers on work release and Taco Bell clerks.
Facilities like CRA and TIF did not contribute to the housing crisis in the manner you postulate.
They contributed by giving real estate developers political and, more importantly, financial cover for redeveloping inner city areas. The areas redeveloped were full of impoverished people, BUT the areas were not redeveloped FOR the impoverished people. Generally, those people were moved out to section 8 housing, (rentals), and new people would come in. People who were decidedly non poor. Then, of course, those people started to default on their mortgages and the rest is history. Witness the downtown condo boom that happened across the US. Then witness the downtown condo bust that is happening presently. Been to Chicago or Miami lately?
So, in short, the developers never sold their condos to "ex-strippers on work release and Taco Bell clerks". They sold them to retirees, empty-nesters, and a crapload of yuppies and speculators. Now the data coming in right now, at least the data for the developer that I worked for, seems to indicate that selling to yuppies and speculators was a mistake. But the gentrification of those neighborhoods was not a mistake, in my own opinion. I know others may think differently.
I have to ask you if you even know what the CRA is, because your description of its effects appear to be based on not knowing. It is a requirement that banks load to people who couldn't afford a mortgage on their own merits because of the politically-oriented belief that the reason why these people couldn't get mortgages was not that they couldn't repay them, but because the bankers are racist.
It is impossible for the CRA to have had any involvement in the creation of an area for "retirees, empty-nesters, and a crapload of yuppies and speculators", because those people would not have qualified under the CRA, what with being relatively rich and all. (Excepting the last one; one of the saddest outcomes in my opinion of this whole mess are those who use the CRA to speculate. Oops.)
The CRA's entire, explicit purpose was the creation of a large number of toxic mortgages, a function it continues to perform. (It is of course impossible that a law so noble, so totally full of those glorious good intentions could be a bad idea, and the idea that it should be repealed is of course racist.) So, as my parenthetical sarcastically points out, that's not how the politicians see it, but it is an accurate description of the act in terms of what it actually does in practice. You can argue about the extent of responsibility it bears, but it is inarguable that it created toxic mortgages to some extent; for the CRA, that is working as designed.
One of the major issues in this debate is the disconnect in how things like CRA are perceived, and how they are implemented.
If you check the CRA what you will discover is that it is intended to increase lending in 'disadvantaged communities'. That's right, the loans are based on neighborhood, not individual disadvantages. For instance, an impoverished person from inner city Chicago finds a great deal on a house in Evanston, a suburb. CRA does NOT cover this situation, as you imply, because Evanston is not a 'disadvantaged community'. Same guy wants to buy a house in inner city Chicago and CRA DOES cover his situation.
That's where the fun starts!
It's at that point that people like me were helping large development firms come in and buy up property in the 'disadvantaged communities'. You keep just enough poor people to keep the disadvantaged designation and you build condos that sell like hot cakes. Usually you set aside a few units in every building for 'disadvantaged' people to buy. But here's the beauty of it. Most municipalities classify 'economically disadvantaged' as 'at or below the median income' for that municipality.
By way of example, in Madison, WI, at the time, I believe it was $50000 per year that made you 'economically disadvantaged'. Make below $50000 per year, and you would qualify for one of the set aside units. The developer still made a killing, the cities looked like they were helping regular folks, and crime in the downtown areas dropped dramatically.
Of course, now we see the mortgage crisis and the unintended consequences, but it all seemed like a good idea at the time. And parts of it were a good idea.
Now, I don't know who explained CRA to you. But I can tell you unequivocally that for developers tools like this were VITAL. TIF as well. Downtown redevelopment rarely works without them.
IF it is the case that politicians wanted to help these people, then they should have written the law so that it centered on the people and not the neighborhoods. My own opinion is that the real estate development industry probably lobbied hard to have CRA center on the idea of disadvantaged neighborhood. Because the whole thing was just too easy to not have been planned.
In summary, take my word for it, I am VERY well versed with urban real estate development. CRA was not, indeed cannot, be used in the fashion you intimate. If someone told you that CRA obliged a bank to loan to people who could not afford it, then I'm afraid you've been misinformed. CRA obliges banks to lend in NEIGHBORHOODS that are disadvantaged.
It is not by accident that many luxury condo developments are in formerly sketch areas. Nor is it a happenstance that the 'downtown condo' rose to prominence with the expansion of CRA. Go to any major city in the US and find a long time resident to walk around downtown with you. The story s/he will tell you will go something like this:
"Boy, I can remember when this was a really dangerous area. But they really have fixed it up haven't they! When my kid goes off to college, we're thinking of moving down here!"
And finally, as always, don't take my word for it. That was your mistake before, when you took the word of someone else that CRA obliged banks to lend to people who could not afford it. What I would encourage you to do is read through the act your self. Start here, http://www.ffiec.gov/cra/. You will see that 'communities' and 'neighborhoods' are the units of interest.
Always get the data on your own kid. There are a lot of people out there trying to manipulate right now. Left wing socialists, right wing corporatists. Trust no one! Go read it for yourself.
I have read the act for myself. I am not so naive as to take it at face value, because the politics surrounding it are plain-as-day, as well as the debates held in Congress on it. The focus on neighborhoods is to make it pass Constitutional muster, not to change who it was intended to help or the fact that it was very well was designed, virtually by definition, to force banks to make loans that they did not want to make.
What you cite is the fact that second-order effects allowed abuse.
Look up the activities of ACORN. Not just what they say or what they are accused of, but what they actually do. If the CRA is not intended to work as I described, they sure did manage to turn it that way.
The problem with CRA is not that it "obliges" banks to lend to people who can't afford it. The problem is that if you don't lend enough money to minorities (who disproportionately can't afford it), the federal bank regulators can block you from acquiring/being acquired by other banks.
Again, CRA is centered around the concept of NEIGHBORHOOD investment. Not investment in minorities. When you say:
<<"The problem is that if you don't lend enough money to minorities (who disproportionately can't afford it), the federal bank regulators can block you from acquiring/being acquired by other banks.">>
I'm confused as to which part of the act you are speaking about. Perhaps you could post the link to the relevant statute, and we can discuss this based on the data.
Regarding the links you provided, again, what is the relative default rate? This is the key piece of data we need. Even better, would be the absolute amounts of money that were defaulted on. That said, I would observe that it is interesting, wouldn't you say, that default rates on FHA HUD loans should be so public, and default rates on the Fannie and Freddy backed stuff so closed. Even more interesting that, as I said in response to your other post, Ginnie Mae should still be solvent considering Fannie and Freddy are basket cases.
Finally, I am uncertain as to how the links you provided support the assertion that CRA precludes banks who don't lend to minorities from acquiring or being acquired. If you would elaborate on the connection I could determine better whether or not I agree with you.
Have you actually read the CRA? I guess I'll spell it out for you.
From the NCRC pdf linked above, "Since the passage of CRA in 1977, lenders and community organizations have signed over 428 CRA agreements totaling more than $4.2 trillion in reinvestment dollars flowing to minority and lower income neighborhoods."
802.a.1 - `"regulated financial institutions are required by law to demonstrate that their deposit facilities serve the convenience and needs of the communities in which they are chartered to do business;"`
803.3 - `the term "application for a deposit facility" means an application to the appropriate Federal financial supervisory agency otherwise required under Federal law or regulations thereunder for--`
803.3.E `the merger or consolidation with, or the acquisition of the assets, or the assumption of the liabilities of a regulated financial institution requiring approval`
804.a `SEC. 804. (a) IN GENERAL.--In connection with its examination of a financial institution, the appropriate Federal financial supervisory agency shall--
(1) assess the institution's record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of such institution; and
(2) take such record into account in its evaluation of an application for a deposit facility by such institution.`
"Last week the Senate passed a bill over-hauling the regulation of banks, including a provision sponsored by Sen. Phil Gramm (R., Texas), chairman of the Banking Committee, to reform the Community Reinvestment Act. Mr. Gramm's provision has stirred controversy, to say the least. Last month hundreds of ``community activists'' descended on his house, where they pounded on the windows, trampled the landscaping and left the yard covered with garbage."
"The 20-year-old CRA requires banks to serve their entire community. Regulators take banks' CRA compliance into account when deciding whether to approve applications for mergers or expanded services. In the recent wave of bank consolidation, banks have made billions of dollars of loan commitments and signed agreements with numerous community organizations in order to be seen as complying with CRA."
I'm not trying to make you angry here, but intellectual honesty demands that I point out the fact that these clauses do not state that banks must lend to minorities. They state that banks must meet '...the credit needs of its entire community, including low- and moderate-income neighborhoods..." A 'low- and moderate-income' neighborhood in the process of redevelopment has a surprisingly large credit need, though not much of it goes to the 'low- and moderate-income' people living there. I have already gone over the redevelopment thing above. Further, the clause goes on to state, '...consistent with the safe and sound operation of such institution;'. Which is the loop hole that most financial institutions use to get out of their CRA lending obligations when no redevelopment is happening in qualified neighborhoods. In short, banks don't have to lend if they think lending will affect their safe operation.
So you have submitted a set of clauses that say that banks must lend to economically disadvantaged neighborhoods. The clauses you reference do not say that banks must lend to economically disadvantaged people. This is my material point, and the pivot on which the majority of urban redevelopment turns.
Just as an aside, lending encompasses more than just mortgages. For example, I can also qualify for a lot of CRA, or TIF type help if I construct . . . say . . . a small business incubator in one of these economically disadvantaged neighborhoods. The only reason I say that is because I am starting to get the feeling that you believe the entire USD4.2 Trillion was given on mortgage loans for minorities.
I feel like I'm reading comments from a (smarter) alternate universe version of myself. I run a small real estate company in Atlanta and bilbo0s is nailing the CRA on the head.
Minorities could not walk into a bank and get a mortgage because they were a minority. That is patently false. However, in my neck of the woods, Atlanta, GA (in Fulton County one of the 35 worst), money was made by developers who "invested" in low income areas.
Areas like the West End and Lakewood saw tons of development during the real estate boom, and then developers disappeared, after they removed the equity from these homes. There are now streets in these neighborhoods where the average price of a home sold is under $35,000, but the foreclosed properties are listed at more than $300K.
@bilbo0s, I would LOVE to talk to you. I'm doing a foreclosure bus tour in a month, and I would love to be able to explain the CRA situation as eloquently as you did on this forum. You can email me at broderick at sktrealty dot com.
Thanks a lot to skrealty and tortilla. I don't do blogs, because I believe there are too many as it is. I try to encourage people to go to actual reliable data sources to get information. My thinking is that this will lead to a more informed discussion, and get at least a few more people in the habit of questioning and verifying news and information sources. I think we are all responsible for what Maria Montessori called, "...Creating that habit of hearts and minds necessary to the functioning of a great democracy..."
In this case however, I think I may have hit a nerve here, and that was not my intention. People seem to be getting really angry, so I thought it was best for me to stop commenting.
I'm out of real estate investing now, and currently do tech investing stuff. Mostly gaming like everyone else it seems, but it is keeping me very busy. I do wish you luck with the endeavor though.
Thanks again guys, it is good to know that there are at least a few people I did not offend.
Not sure why you think I'm getting angry. I'm glad to be speaking with someone who is pretty knowledgeable about this topic. I just don't think you read between the lines :-) Have you read Tom Wolfe's "Mau-Mauing the Flak Catchers"? I have, and perhaps it's for this reason that whenever I see some sort of "Community Activist Organization" I immediately think of one type of organization.
Or how about Phil Gramm speaking at the American Enterprise Institute (http://www.aei.org/events/eventID.1862,filter.all/transcript...):
"We ended up when the bubble finally broke with three different quotas. One quota was for below-average-income borrowers and that was a requirement that 56 percent of the loans bought by Freddie and Fannie had to conform to that guideline. The second quota had to do with the low-income individuals. These were individuals with 60 percent of the income of the census tract in which they lived, and by the time the bubble broke, that quota was 27 percent of all mortgages held by Freddie and Fannie had to fit within that quota. And the final quota that was set in proportional terms was geographically targeted principally at inner cities and depressed areas, and that was a quota that said 35 percent of all the loans held by Freddie and Fannie or purchased by them had to fall into that category."
Then there's Countrywide (not a bank and hence not covered by CRA), which originated something like 20% of America's subprime mortgages (Countrywide did not hold on to these mortgages but sold them to banks). Here's a great 2007 NYTimes article about their wonderful lending practices: http://www.nytimes.com/2007/08/26/business/yourmoney/26count...
And a great presentation at Harvard by their CEO talking about the 600 billion he's pledging for "previously underserved Americans" - http://www.jchs.harvard.edu/publications/homeownership/M03-1...
"More than half of the nation's foreclosures last year took place in 35 counties"
"A few of the 35 counties leading the foreclosure boom are in already-distressed areas around Detroit and Cleveland. But most are clustered in places such as Southern California, Las Vegas, Phoenix, South Florida and Washington, where home values shot up dramatically in the first half of the decade, then began to crumble."
A nice data point. Though, the critical thinker will immediately notice that the article discusses foreclosures, and not foreclosures on CRA loans. Indeed, a little research will confirm that most of the places you listed, do not qualify for CRA. For instance, Lehigh Acres (Ft. Meyers FL), often described as ground zero of the mortgage crisis would have in no way qualified for CRA loans. Contrast that with the North and South Carolinas. Both states have huge, impoverished, minority communities. Both states have communities that make liberal use of CRA. Odd, is it not, that these states should be so relatively void of foreclosures.
An interesting exercise I am trying to engage in is to determine, what percentage of CRA loans were defaulted on in comparison to Fannie and Freddie loans. It is difficult to determine as right now Fannie and Freddie seem almost desperate to keep that information opaque. Why?
What I can say is that here is a telling datapoint, Fannie and Freddy have collapsed, but Ginnie is still going strong. What problems Ginnie has, it got through foolhardy government attempts to save Fannie and Freddy. "What is Ginnie?", you ask. Ginnie Mae is the explicitly government backed entity that handles all of the FHA HUD housing stuff, indian (native American) housing, housing for military veterans etc. Incidentally, FHA HUD housing provides loans explicitly to those with low credit scores and low incomes. Strange, don't you think, that they are not having trouble right now? I mean given that these are exactly the people who are alleged to have caused the problem. Even more curious that Fannie and Freddy would collapse, considering Ginnie was the one on the hook for all of these low credit score mortgages.
Now you are probably asking why you've never heard of this stuff before? Because data, takes analysis and critical thought. It doesn't fit well in a soundbite. Seneca said that a lie could make it halfway around the world before a fact could get its shoes on. The great CRA debate is a textbook example of this phenomenon.
FWIW I don't think that our current problems were caused entirely by the CRA. The rocket scientists on Wall Street who leveraged themselves 30x on the assumption that housing prices would never go down are just as culpable. Another issue is that in the 70's the big three ratings agencies started charging bond-issuers for ratings, rather than bond-buyers, setting up a huge conflict of interest.
Why would he? It's not like he did anything illegal, and if you tried to say what he was doing should be illegal, or at the very least regulated and in the open, then you would have been called a loser socialist who's jealous of financial innovation.
Let's not forget what the prevailing attitude was just a few years ago, and you can still see lots of it left over today.
Cassano was not committing fraud in the narrow context that our politicians had been bought off to ease regulations to allow him to do what he did. Additionally, our executive branch pulled the age-old political trick of "speak loudly but underfund". That is, there was noone providing oversight in the OTS. According to the article, there was only 1 OTS employee that had a background and position to oversee the entire industry.
Incidentally, a similar thing happened with Pentagon spending: for much of the Bush years, there was reportedly only 1 person to review ALL expense reports from all contractors. The result was everything was approved; zero oversight.
FTA:"The latest bailout came as AIG admitted to having just posted the largest quarterly loss in American corporate history — some $61.7 billion. In the final three months of last year, the company lost more than $27 million every hour. That's $465,000 a minute, a yearly income for a median American household every six seconds, roughly $7,750 a second. And all this happened at the end of eight straight years that America devoted to frantically chasing the shadow of a terrorist threat to no avail, eight years spent stopping every citizen at every airport to search every purse, bag, crotch and briefcase for juice boxes and explosive tubes of toothpaste. Yet in the end, our government had no mechanism for searching the balance sheets of companies that held life-or-death power over our society and was unable to spot holes in the national economy the size of Libya (whose entire GDP last year was smaller than AIG's 2008 losses)."
