The American Spectator

Bob| 6.19.09 @ 7:26AM

While I'm not a big fan of the CRA, it was not this legislation that played a huge role in the subprime mortgage mess. The CRA was passed in 1977. If it was so bad, why didn't we have a problem sooner. In fact, bad subprime mortgages didn't start growing until the 1990's fueled by securitization and the deregulation offered by Gramm-Leach-Bliley. If the investment banks and AIG had to keep capital requirements and Greenspan hadn't kept borrowing rates irrationally low, you would not have had the housing bubble and would not have had this problem. Furthermore, you call this the "subprime" mess, but half of the problem came from speculators with their "no money down" schemes.

So please, Vadum, get a clue. Either talk to Phil Klein who partially understands the dynamics or give me a call and I will take you through the underlying principles here. After all, I worked in the industry and you didn't.

Pete| 6.19.09 @ 9:33AM

It is silly to say the CRA played no part here. The broader issue is government intervention in the marketplace and the perverted incentives that result. By itself, forcing lenders to lend to people outside of their normal risk profile wouldn't be a problem if the lenders were allowed to price for that risk (read high rates, many restrictions). But, combine this pressure with implicit government backing of this risk (giving the false illusion of lower risk) and you have a big problem. So if the CRA had been stand alone legislation, it wouldn't have mattered too much, but our little social engineers in DC wanted more. Not only should these non creditworthy people have houses, they thought, they should pay nothing extra for their un-creditworthiness. Did speculators also take advantage of these government perverted incentives? Of course they did. Did the Democratic government get the ball rolling here with the CRA? Absolutely.

Bob| 6.19.09 @ 9:45AM

Pete, you are wrong on this one. I agree with you on government intervention, but markets only work when they are regulated properly. This is different than incentives -- in fact, I'm even against tax incentives since government has never been good at that. That's why I support a flat tax with no deductions.

Again, I was in the industry. If the mortgage originators were required to keep a portion of the risk, this would not have happened. I know, I worked for a mortgage originator to subprime. It was Gramm-Leach-Bliley that allowed all of this to occur. Again, the CRA was passed in 1977. If this legislation was the problem, we would have had a crisis a long time ago.

And by the way, this whole effort was pushed much more by George Bush than Frank and Dodd. Bush believed in home ownership at any cost. Derivatives would not have existed without GLB. AIG would not have swaps if it weren't for GLB. If derivatives and swaps of CDO's didn't exist, then, as before, the CRA would have had very little impact.

Pete| 6.19.09 @ 10:18AM

Sorry, Bob, hate the disagree with you.... If the markets had been regulated "properly" (if there is such a thing - in this instance would have amounted to correcting an intial government mistake), the illusion of less risk when there was more would not have been allowed. I don't care who held the risk ultimately (originators all the way to any number of instruments), if it had been allowed to be fairly priced, the problem wouldn't have existed. I don't blame derivatives, CDOs or any other instrument out there...the instruments themselves weren't and aren't the problem. The underlying incentives and mis-pricing of risk was the problem...caused the illusion of a free lunch - and plenty of people bellied up to the table in all parts of the financial industry. As for your Bush statement, I'd love to see some proof. While he certainly could have done more to stop the train wreck caused by his buddies across the aisle, he was not an avid promoter of these policies.

Bob| 6.19.09 @ 10:40AM

Pete, it is clear you don't understand the industry, but it is complicated and most people don't understand it. Markets do not operate properly unless there is a risk/reward balance. If you can get rewards without any risk -- as was true here -- then markets do not operate properly. The mortgage originators would have been self-regulating if they also had to look at the consequences of any mistakes they made in giving out mortgages. But through securitization, derivatives and swaps, they were able to get rid of ALL of the risk. Regulations are necessary so that people who take the risk lose if their bet doesn't work out. That didn't happen here. If they had to keep capital to cover the downside risk, instead of being leveraged 40-to-1, this never would have happened. That's why the mortgages could never be fairly priced. It's called maximizing quarterly results.

If regulated properly, you are correct that the instruments are not the problem -- but the investment banks and AIG were not regulated. AIG had NO supporting capital for their swaps. Even Fannie and Freddie played a minor role as they only held 30% of the subprime mortgages -- and they were the best performing ones.

You might want to read this article on Bush's push on housing...

http://www.boston.com/business/articles/2004/10/05/zero_down_mortgage_initiative_by_bush_is_hit/

Bob| 6.19.09 @ 10:42AM

By the way, Pete, this is the exact same reason I was against the bailouts -- because it would allow companies to get the reward without the risk.

Pete| 6.19.09 @ 11:42AM

Bob, as a graduate of one of the top business schools in the country, I feel pretty sound in my thinking on this topic. Clearly, education doesn't necessarily mean much given the Messiah's background, but as a white male perhaps my experience was different? In the end, we are saying roughly the same thing - that risk must be adquately priced. I am arguing that this did not happen due to government intervention, and I am not quite sure what you are arguing, except that perhaps more regulation would have helped. As for the article you cite, zero down mortgages by themselves are not necessarily bad if given to the creditworthy - it is the social engineering aspect that gets you in trouble where you are loaning to folks who don't have the ability to pay off the loan. They key quote from that article: ""You can't get these products if you're not creditworthy," she said." At least we can agree that there should be no reward without commensurate risk. Have a nice day.

Bob| 6.19.09 @ 12:04PM

Pete, I am also a graduate of one of the top business schools in the country -- and I worked at both a subprime lender and at AIG. I know the dynamics of this business from the inside. Again, the CRA was passed in 1977 and GLB occurred in 1999. These problems began just after GLB was passed. Government intervention had NOTHING to do with pricing risk -- I know, I was part of the pricing committees. We priced based on our company risk. As long as we could continue to get good S&P ratings and sell the securitizations, we would price lower to get more customers. We received our profits on the front end of the transaction. It had NOTHING to do with the CRA. Without proper capital reserves and proper risk assignments, there is no check and balance on mortgage originations. We were NOT pressured by politics to lower loan requirements. We lowered the requirements to make more quarterly profits for our shareholders.

Pete, I fear you have been caught in the trap of "the power of politics". When it comes to unregulated private enterprises, what happens in the political sphere has no effect on how you run your business. I have also worked in the insurance business which is highly regulated -- primarily by states. There, it is almost all politics. You don't know how much time I spent with state regulators and politicians trying to get legislation favorable to our business and reduce predatory lending laws.

This is a case where your lack of knowledge about how the industry operates makes a huge difference. You are not alone, however. If I didn't have industry experience here, I'd be saying the same as you.

Pete| 6.19.09 @ 12:23PM

"Government intervention had NOTHING to do with pricing risk" Perhaps true from where you sat, but there is a vast value chain involved here and you know it (I hope).

I can't help you, Bob. Nor do I appreciate your veiled condescension. Adios.

Bob| 6.19.09 @ 1:32PM

So, Pete, you are a conspiracy theorist... And the condescension was not veiled. I was a senior executive and involved with the government. They had NOTHING to do with pricing risk. Greenspan had something to do with it. GLB had something to do with it. AIG had something to do with it. But the CRA did not come into play. You didn't even "sit" in the chain at all -- you were just a spectator with no industry knowledge. Again, if I were not in the industry, I would not have had this perspective. So how many mortgage pricing committees were you on??????

Keen Observer| 6.21.09 @ 10:46PM

Pete and Bob are most likely telling the truth about being graduates from top business schools, but the truth stops there for Bob.

Pete is a Republican, most likely a Conservative and behaves accordingly: Bob, however, claims to be a RINO/Fiscal Conservative who belies his claim by his incessant defense of Obama's corruption. Regardless of the instance of Obama's corruption being discussed--Bob will always vigorously defend it.

Usually, at the conclusion of Bob's screed defending Obama's latest misdeed, Bob will condescendingly hurl 'Conspiracy theorist' at the other blogger (for proof, see Bob's last post). Condescension is always a major theme in Bob's posts.

So, dear Conservatives who comment in good faith on this lovely site, be aware that Bob is a nasty fascist-liberal Obama loving troll who is pretending to be one of us.

No need to engage the little lying moron; all that is required is derision in copious quantities aimed directly at the lying fool of a troll, Bob.