

The Big Takeover - martythemaniak
http://www.rollingstone.com/politics/story/26793903/the_big_takeover/print

======
jeroen
I don't get this:

 _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?

(please note that I'm not from the US)

~~~
jhancock
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.

~~~
anamax
(1) Creating money isn't spending. And, technically congress merely controls
govt spending and the fed, so the argument goes, isn't really govt.

(2) "The Fed is unconsitutional" argument was lost long ago.

------
pg
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."

~~~
martythemaniak
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.

~~~
anamax
> 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.

~~~
petewarden
"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.

~~~
anamax
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.

------
agotterer
For anyone who still doesn't understand whats going on. Check out
<http://crisisofcredit.com/> (already been posted).

------
antidaily
So why isn't Cassano sitting in jail with Bernie Madoff?

~~~
martythemaniak
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.

------
drewr
_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._

Someone did ask for the latter:
<http://en.wikipedia.org/wiki/Community_Reinvestment_Act>

~~~
bilbo0s
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.

~~~
jerf
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_.

~~~
bilbo0s
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.

~~~
defen
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.

For data on default rates see
[http://www.huduser.org/publications/affhsg/FHASingleFamily.h...](http://www.huduser.org/publications/affhsg/FHASingleFamily.html)

For data on CRA dollars committed see [http://www.community-
wealth.org/_pdfs/articles-publications/...](http://www.community-
wealth.org/_pdfs/articles-publications/cdfis/report-ncrc.pdf) (4.2 TRILLION
between '92 and '05)

~~~
bilbo0s
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.

~~~
defen
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."

From the CRA (<http://www.fdic.gov/regulations/laws/rules/6500-2515.html>)

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.`

See also this WSJ article (entered into the Senate record)
<http://thomas.loc.gov/cgi-bin/query/R?r106:FLD001:S05028>

"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."

~~~
bilbo0s
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.

~~~
sktrealty
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.

~~~
bilbo0s
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.

------
Slzr
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)."

