An Obama Fact Check, Sub Prime Finger Pointing


This post has developed very interestingly, while researching the sub prime mortgage crisis some months back I came upon some dates that tied the Housing Bubble to legislation as far back as 1994. Now, with Obama, blaming a Republican Congress and George Bush, those dates started popping back in my head. So, I started looking and found some interesting information. Well, the news is not all great for me though, it is making me rethink the conclusion I drew on my post Market Correcting Itself.

Now there is no denying the Republican Congress and George Bush are complicit in the Sub Prime Crisis, through the American Dream Downpayment Act and the Zero Down Payment Act. But the waters here run much deeper than that; enter Phil Gramm, Bill Clinton, Jimmy Carter and the 1977 Community Reinvestment Act, and Glass-Steagall Act of 1933.

If you notice, sub prime mortgages running flat until 1997. Then from 1997-98 there was a very noticeable spike that continued until 2000. Then it runs flat from 2001-02, possibly because of the economic implications of 9-11. After 2004, with the passing of the above mentioned Acts, there is a huge increase in the number of sub prime mortgages being acquired.

Let's backtrack to the Community Reinvestment Act and its amendment n 1995, under then President, Bill Clinton. As passed by the Carter administration, the CRA was supposed to provide credit, including home ownership opportunities to undeserved populations and commercial loans to small businesses. Under Bubba, there was an increase in the number and aggregate amount of loans to small businesses and to low- and moderate-income borrowers for home loans. CRA Moving forward a bit to 1996-97, with Glass-Steagall, a law which prohibited a bank from offering investment, commercial banking, and insurance services. Glass-Steagall was passed by the FDR administration, after a Congressional study revealed that the banking collapse of 1933 was directly attributed to the mixing of commercial and investment banking as well as the stock market crash of 1929. Glass-Steagall Act
In December 1996, with the support of Chairman Alan Greenspan, the Federal Reserve Board issues a precedent-shattering decision permitting bank holding companies to own investment bank affiliates with up to 25 percent of their business in securities underwriting (up from 10 percent). This expansion of the loophole created by the Fed's 1987 reinterpretation of Section 20 of Glass-Steagall effectively renders Glass-Steagall obsolete. [1]

If you noticed on the graph above there was a spike in sub prime mortgage loans from 1997-99. This is rather fascinating to me, because this truly highlights the very beginning of the Sub Prime Bubble.
By 1997, good loans were bundled with poor ones and sold as prime packages to institutions here and abroad. That shifted risk from the loan originators, freeing banks to begin pyramiding and make more of these profitable subprime products. [2]

This next little piece taken from a 1997 Wachovia press release provides some very interesting hindsight also, notice some of the names of these institutions involved.

The affordable mortgages were originated or acquired by First Union Corporation and subsidiaries. Customers will experience no impact - they will continue to make payments to and be serviced by First Union Mortgage Corp. CRA loans are loans targeted to low and moderate income borrowers and neighborhoods under the Community Reinvestment Act of 1977."The securitization of these affordable mortgages allows us to redeploy capital back into our communities and to expand our ability to provide credit to low and moderate income individuals," said Jane Henderson, managing director of First Union's Community Reinvestment and Fair Lending Programs. "First Union is committed to promoting home ownership in traditionally underserved markets through a comprehensive line of competitive and flexible affordable mortgage products. This transaction enables us to continue to aggressively serve those markets."The $384.6 million in senior certificates are guaranteed by Freddie Mac and have an implied "AAA" rating. First Union Capital Markets Corp. is the investment banking subsidiary of First Union Corporation. [3]

Now, jump to Oct-Nov. 1999, Senator Phil Gramm (R-TX) successfully passes legislation that eliminates Glass-Steagall through passing of the Financial Services Modernization Act. Thus giving simple lending banks the ability to underwrite huge securities, as noted above (This is exactly what Bank of America has done with Merill-Lynch, hence my apprehension). This gave way to the evolution of Citicorp and Travelers merging into the mega-colossus, Citigroup. Unfortunately the elimination of Glass-Steagall did not come with out a price, enter Bill Clinton, once again, and the Community Reinvestment Act.

At first Gramm could not get the legislation to eliminate Glass-Steagull pushed through. He had to make a compromise with the Democrats concerning the Community Reinvestment Act.

Crucial to the passing of this Act was an amendment made to the GLBA, stating that no merger may go ahead if any of the financial holding institutions, or affiliates there of, received a "less than satisfactory [sic] rating at its most recent CRA exam", essentially meaning that any merger may only go ahead with the strict approval of the regulatory bodies responsible for the CRA. [4]

There were a few other equally important provisions added, one of note was Gramm's insistence on transparency concerning coercion of banks by community groups such as ACORN. But this, although, related is an entirely different article.

Gramm had maintained that he did not want anything in the bill that would expand the application of the Community Reinvestment Act because it was, he said, unnecessarily burdensome to banks.He had sought a provision that would exempt thousands of smaller banks from the law. He also wanted a provision that would expose what he has described as the "extortion" committed by community groups against banks by requiring the groups to disclose any special financial deals the groups extract from the banks. [5]

Summarizing this information, Clinton seeks to strengthen opportunity for home ownership in the States and amends the CRA, a few years later Phil Gramm seeks to overturn a Depression era piece of legislation, he cannot because of the Clinton administration concerns about lending practices concerning poorer people in the community. Gramm makes the compromise to get the Financial Services Modernization Act passed. You have coupled the farthest reaching free market thinking with a massive liberal community giveaway program. The regulations forced on these institutions, along with their greed, gave rise to the Sub Prime Bubble. Then a few years later, you have a Republican Congress and President who forgot they were Conservatives, passing liberalized legislation under the guise of free market thinking and I give you the Sub Prime Mortgage Crisis. Obambi might want to go back and check his facts, because it looks like most of the players in this were wrong, not just the Republicans. The last thought I have is what a wonderful idea it is to regulate an attempt at deregulation.


[1] The Long Demise of Glass-Steagall
[2] Age And Experience: Carter's Catastrophes
[3] Wachovia Press Release
[4] Gramm-Leach-Bliley Act
[5] Agreement Reached on Overhaul of U.S. Financial System


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