Posts Tagged ‘CRA’

The financial crisis inquiry report

Saturday, January 29th, 2011

The government has investigated the “2008” financial crisis and released a detailed report.   (Actually it was the 2005 crisis, in that the panic set in towards the end of 2005 , but the government successfully covered things up and managed to get all the major players to pretend that everything was normal until 2008.)

The summary and conclusions are of course, piles of lies, intended to divert attention from those actually guilty.

Overall, it sticks to the cover story that hardly anyone noticed anything out of the ordinary until 2007.  It correctly observes that regulators failed to use the authority that they had, and to the extent that they used their authority, used it corruptly in ways that worsened the crisis – from which it concludes that the regulators need more power and to exercise that power more forcefully.

It correctly observes that

The kings of leverage were Fannie Mae and Freddie Mac, the two behemoth government-sponsored enterprises (GSEs). For example, by the end of 2007, Fannie’s and Freddie’s combined leverage ratio, including loans they owned and guaranteed, stood at 75 to 1.

So the next time you hear someone say that leverage caused the crisis, that is actually a euphemism for saying that government-sponsored enterprises were the major players causing the crisis, not an explanation of the crisis. After all, as the Republicans on the committee point out, leverage only produces bad results if you lose money, and the question therefore is how such large amounts of money were lost. So what, then, did Fannie and Freddie do to piss away large amounts of money?

It also tells us that

As early as September 2004, Countrywide executives recognized that many of the loans they were originating
could result in “catastrophic consequences.”

Yet fails to quote that testimony or document in full.   Surely those who saw the crisis coming, knew what was causing the crisis, yet we don’t hear what they said back then.

The report is overcooked, presenting conclusions without the data from which those conclusions were drawn.

Crabtree testifies to large numbers of abandoned houses in 2006, of entire neighborhoods collapsing, of the lawns unmowed, the houses empty except for homeless people squatting. If the mortgages were busted in 2006, surely the crisis was in full swing in 2006? Why then is every commissioner telling a story that has the crisis suddenly manifesting in 2007/2008?

In November 2005 I said “Now is the time to panic”, and it appeared to me that everyone did panic, within a few days of me saying it. People gave the commission the same testimony.

Warren Peterson, a home builder in Bakersfield, felt that he could pinpoint when the world changed to the day. Peterson built homes in an upscale neighborhood, and each Monday morning, he would arrive at the office to find a bevy of real estate agents, sales contracts in hand, vying to be the ones chosen to purchase the new homes he was building. The stream of traffic was constant. On one Saturday in November 2005, he was at the sales office and noticed that not a single purchaser had entered the building. He called a friend, also in the home-building business, who said he had noticed the same thing, and asked him what he thought about it. “It’s over,” his friend told Peterson.

Why then does the commission stick to the story that this crisis happened in 2008?

Bad loans were made. The money was lost in bad loans. Why were those bad loans made?

The Democrats on the commission conclude that bad loans were made for profit:

We find that the risky practices of Fannie Mae—the Commission’s case study in this area—particularly from 2005 on, led to its fall: practices undertaken to meet Wall Street’s expectations for growth, to regain market share, and to ensure generous compensation for its employees. Affordable housing goals imposed by the Department of Housing and Urban Development (HUD) did contribute marginally to these practices.

Peter J. Wallison argues that affirmative action and affordable housing contributed massively to these practices, in particular the HUD “Best practices initiative”

If a financial entity was failed to follow HUD “best practices” it was likely to be sued for racism, redlining, and any number of vague crimes that can never be disproven, so everyone had to follow “best practices” and if a company followed HUD “best practices” it was bound to make huge numbers of bad loans.

“Best practices” required that the lender accept “non traditional” evidence of ability to pay – and the reason such evidence was non traditional is that it is not evidence.  If a mortgage business followed HUD “best practices”, as in practice it had to do, best practices meant in practice that they were allowing borrowers or their loan officers to make $#!% up.

How to fix the financial crisis

Friday, May 21st, 2010

Proposed reforms, both left and right, are unlikely to have any effect on the continuing massive misappropriation from the financial system.  It is absurd that people are discussing obscure details of the credit swap market.

To fix the financial crisis, we have to revoke, or at least denounce and denigrate, Marie Curie’s Nobel prize.

When they gave a Nobel prize to Marie Curie for being female, that did not hurt anyone except more deserving potential Nobel prize winners.  But handing out phony Nobels on the basis of sex, race, and nationality necessitated handing out phony degrees on the basis of race and sex, and handing out phony degrees on the basis of race and sex necessarily led to a crisis where these phony degrees were being ignored by employers, so employers necessarily had to be forced to give out well paid phony jobs on the basis of race and sex.

But being given well paid phony jobs on the basis of race and sex failed to result in recipients living a middle class lifestyle, so lenders had to be forced to give out a middle class lifestyle on the basis of race and sex.

Which has led to our present financial crisis.  It all began with Marie Curie.  Each lie required a new and bigger lie.  We need to start by acknowledging that genders and races tend to have different abilities – that if you are looking for people that are the best at something, whether the fastest runners or the greatest mathematicians, they will almost all be of one particular race and gender, and some races will be completely absent, and if you are merely looking for people that are acceptably good at something, for example accountants, basketball players, or donut makers, they will be mostly of one particular race and gender.

We cannot end the crisis unless we admit who is defaulting on their mortgages, we cannot admit who is defaulting without admitting that they cannot perform their jobs either, we cannot admit they cannot perform their jobs without admitting that their degrees are phony, and we cannot admit their degrees are phony without admitting that many Nobel prizes, starting with Marie Curie, were phony.

Yale Harvard and Basel style Free Enterprise

Sunday, May 16th, 2010

After the collapse of socialism, the elite support free enterprise – they support it the way they support free speech.

If anyone is allowed to disagree with the orthodoxy taught at Yale and Harvard, or even doubt it, this endangers the free speech of people from Harvard and Yale, and similarly if any enterprise run by people from Harvard or Yale could go bust, this endangers the free enterprise of people from Harvard and Yale.

Basel II is tens of thousands of pages of regulations, no one knows how vast it is, because not all the regulations can be found in any one place, but it could all be replaced by two simple rules:  Politically correct victim groups shall always find it easy to borrow money, regardless of their ability or intention to pay it back, and politically well connected businesses shall always make money, regardless  of whether they are competently run or not.

The seeds of the crisis were the CRA and the ratings agencies.  I have discussed the CRA at length, but the CRA would have been resisted had it not been for other changes in the system that insulated the players against the consequences of making bad loans.  These changes, guaranteeing that badly run businesses would succeed, started with the bailout of the ratings agencies in the seventies, forty years ago.

Back then, the ratings agencies were in trouble, because they had made a lot of bad calls.  It seemed that whenever an institution was going under, the guys at the credit rating agencies were the last to know about it.  Back then, they sold their assessments of credit risk to subscribers. So no one wanted to subscribe.

So in the seventies, the regulators stepped in to make people use the credit rating services. In 1975 the SEC created the Nationally Recognized Statistical Rating Organization (NRSRO) designation. Credit rating agencies so designated received what was in effect a grant of governmental power. The SEC then relied on the NRSRO’s credit risk assessment in establishing capital requirements on SEC-regulated financial institutions – which meant that for SEC-regulated financial institutions to borrow and lend, they had to get rated.  A cascade of regulatory decisions followed over the years, each decision forcing more and more reliance on the risk assessments issued by these demonstrably incompetent institutions – and less and less reliance on other people’s risk assessment.  For more and more organizations, it became illegal for them to make their own judgments about risk.

By the 1990s, as Levine and Partnoy tell us, the NRSROs were not selling assessments of credit risks, but licenses to issue securities.  The rating agencies did not genuinely assess risk, nor did anyone really expect them to.  Nor could repeatedly demonstrated incompetence reduce demand for their services, so the ratings agencies had no incentive to provide correct credit ratings.  Since their income was entirely dependent on the state granting them power, they did, however, have an incentive to make politically correct credit ratings.  If you lend to the poor, the oppressed, etc, and you are run by good old boys from Yale and Harvard, and you make donations to the right politicians, the NRSROs have a very powerful incentive to give you a good credit rating.  And if you have a good credit rating, you can borrow as much as you like – and if you go bust, the government will bail you out.

Badly run companies that had been empowered to borrow as much as they pleased got in trouble – and were bailed out for the same reasons as they had been empowered to borrow as much as they pleased.

In addition to corruptly favorably rating the politically correct, the NRSROs corruptly favorably rated those who simply gave them money, which is perhaps what those who complain about “deregulation” have in mind.  The banks creating structured financial products would first pay the rating agencies for “guidance” on how to package the securities to get high ratings and then pay the rating agencies to rate the resultant products – a glaring conflict of interest, though one less apt to lead to bailouts when the proverbial hits the fan.

Now since all this dirty dealing has cost the taxpayer trillions, you may well ask what measures have been taken to punish the NRSROs for bad conduct, or give them incentives for better conduct in future, or indeed restrain them from continuing to do this stuff?

All the strengthened regulation is regulation to make people continue to treat NRSRO ratings as true, even though it has become horrifyingly apparent that the ratings are generally false.  All the strengthened regulation is more of what caused this mess in the first place.  Any real reform would necessarily start by abolishing the legal privilege of NRSROs, would have to start by rolling back regulations to what they were in 1974.  Instead, compulsion and bailouts are being applied to make NRSRO ratings true, or to enable people to continue pretend that they are true.  Their power has been increased, their misconduct unpunished, and their incentives have become even worse.

Where the money went

Monday, February 15th, 2010

The government has been shuffling the money around to obfuscate who stole it.  It lends money, and then announces that there is no problem, the money has been paid back.

But after much fiddling, the money has mostly come to rest, in that the government is now the proud owner of about one trillion dollars of mortgage backed securities guaranteed by Fannie, Freddie, and the FHA, plus some Fannie, Freddy, and FHA debt.

The first graph in the above link is the money wizzing around in complicated circles to obfuscate who is at fault, the second graph is the bailout of private entities, other than General Motors, and the third graph is primarily the bailout of Fannie, Freddy, and the FHA.

That these Mortgage Backed Securities are “Fully guaranteed by Federal Agencies” implies that the vast majority of the crisis, the vast majority of the bailout, was dud mortgages rubber stamped Fanny, Freddie, and the FHA, that privately issued mortgage backed securities have been liquidated – that the dud mortgages underlying privately issued mortgage backed securities have been settled by foreclosure and bancruptcy, but the dud mortgages underlying Fannie, Freddy, and FHA issued mortgage backed securities are on the tax payers tab to the tune of about a trillion dollars.

Overtime, as the mortgages are resolved, the trillion dollars of mortgage backed securities will diminish with time.  In proportion as they were worthless, the agency debt will correspondingly increase.

The vast majority of defaults were black and hispanic

Friday, August 7th, 2009

Hat tip Steve Sailer who provides the breakdown of defaults.

The proximate cause of the international crisis is that the US$, the international reserve currency, lost much credibility.  The proximate cause of the US$ losing credibility was massive defaults by blacks and Hispanics, and the proximate cause of the massive defaults by blacks and Hispanics was affirmative action lending to people whom I could tell at a glance from twenty paces were highly unlikely to repay their debts.

In the last days before the crash, I saw in California a steady parade of people buying expensive houses no money down whose own mothers must have been reluctant to lend them ten dollars. Lax though credit standards were, not one of them would have been able to borrow money had he been non Hispanic white.

Laderman and Reid of the Federal Reserve Bank of San Francisco have done the unthinkably politically incorrect, and though they do not directly reveal the proportion of defaults that were affirmative action, they tell us:

We also find that race has an independent effect on foreclosure even after controlling for borrower income and credit score. In particular, African American borrowers were 3.3 times as likely as white borrowers to be in foreclosure, whereas Latino and Asian borrowers were 2.5 and 1.6 times respectively more likely to be in foreclosure as white borrowers.

They also argue that CRA loans were just fine:

a CRA lender significantly decreases the likelihood of foreclosure

They obtained this contradictory result by controlling for race – in other words, they are not saying CRA loans were unlikely to default, but that a CRA loan made to a non hispanic white is (unsurprisingly) unlikely to default – in other words, affirmative action loans have no harmful effect, indeed beneficial effect, to the extent that they were not in fact affirmative action loans.

They do not directly tell us what proportion of defaulters were black and Hispanic, but since the great majority of defaulters were subprime, and 77% of subprime borrowers were black and Hispanic, and blacks and Hispanics three times more likely to default than whites …

Creating the next crisis 2

Friday, June 26th, 2009

Remember all that junk mail:

Bad credit?
No credit?
No problem! Buy the house of your dreams with no money down!

Well thanks to the great Bush-Obama stimulus package, looks like you will be seeing it again.

When the government says that private lending has dried up, this is code for the strange absence of no money down loans to people with bad credit.  People I know, such as my sister in law, who had money and good credit found that lenders rolled out the red carpet for them.  There was never lending crisis for traditional borrowers.

When the government says there is a lending crisis, it means the problem is that a drunken no-hablo-English wetback seems to be finding a bit of trouble borrowing.  But never fear.  Your ever helpful and benevolent government is remedying this terrible market failure.  Whatever would we do without regulation and subsidy?

The FHA is now providing one hundred percent government guarantees for loans to people with bad credit.  Supposedly the borrower must put three and a half percent down, but since real estate agent fees, mortgage broker fees, and assorted charges theoretically add up to slightly over ten percent, a clawback from the various people involved can and does reduce this to zero.  When I transact a house, I usually manage to clawback four to six percent from these various charges, so if I was purchasing a house with what on paper was a three and half percent down loan, and managed to get my usual clawbacks, I would get the house and two percent cash in hand – negative money down.  And that is without a kickback from the seller. Of course that is why the lenders would rather do the loan with a drunken no-hablo-English wetback, who is unlikely to be so fierce at clawing back and chiseling down their fees as I am.

When you buy a house on a loan with small money down, you usually also get an under the table kickback from the seller.  With a kickback from the seller and clawbacks from agent and broker fees, three and a half percent down vanishes fast.

Creating the next crisis:

Wednesday, June 17th, 2009

In a free market, financiers who take stupid risks lose money, and cease to be financiers.  The core of the Obama Bush interventions is to ensure that financiers who take stupid risks continue in business and continue in charge of other people’s money.

In the Washington Post, Obama’s chief financial advisers explain their program:

In theory, securitization should serve to reduce credit risk by spreading it more widely. But by breaking the direct link between borrowers and lenders, securitization led to an erosion of lending standards, resulting in a market failure that fed the housing boom and deepened the housing bust.The administration’s plan will impose robust reporting requirements on the issuers of asset-backed securities; reduce investors’ and regulators’ reliance on credit-rating agencies; and, perhaps most significant, require the originator, sponsor or broker of a securitization to retain a financial interest in its performance.

“How big a financial interest?” I hear you ask.

Summers is a little bit vague, about this, but if you dig, the answer is five percent – enough to make a difference, but not enough to make a significant difference, not enough to deter banks from making irresponsible loans.

The fundamental problem is that the government wants banks to continue make loans to irresponsible borrowers in important voting blocks, borrowers who should not be able to borrow money, and therefore must maintain a regulatory structure that enables bad loans. A transfer of wealth from a concentrated interest group (financiers) to an important voting block (hispanics) is not politically feasible.  So instead, such dud loans must ultimately wind up being financed by the government.

The government issues regulations that require financiers to refrain from “discriminating against” a voting block – which seeming benefits the voting block at no cost to the government. But there is no such thing as free lunch.  Who will pay?

You can be sure a concentrated interest group is not going to pay.


Wednesday, May 6th, 2009

From the point of view of oligarchs and crony capitalists, the crisis is not that a lot loans were made to no hablo English wetbacks. The crisis is that people are rejecting securitization of debt.

The Obama regime’s capitalism smashing measures are intended not to destroy capitalism, nor to install socialism, but to restore securitization of debt. This is socialism for the financiers, not for the proles:  Crony socialism, crony capitalism, a fascist economic order.

Regular old fashioned loans are going through just fine. There is no credit crisis, the financial system is not freezing up. Securitization is freezing up, and it @#$% well should freeze up.

When debts are securitized, many different debts of many different borrowers are piled together into a great big pool of debt, and then shares in the pool are sold to lots of creditors – which means that there is no one person responsible for verifying that any one particular loan is sound, that the assets securing the loan are worth what they are supposed to be worth, that the person responsible for making payments on the loan can read and write, that he speaks the language that the papers that he signed were written in, that he was sufficiently sober when he signed them to remember signing them, or even that the paperwork exists and is in good order.

For securitization to work, the particular organization that arranged the loan, and the particular people in the particular organization, would have to remain responsible for that loan.  The debtor would have to be making payments through the people that arranged the loan for the life of the loan.

Securitization leads carelessness with large sums of other people’s money. Such carelessness leads to crime. Crime destroys the trust that is necessary for the economic system to work. Securitization must stop. If securitization continues, capitalism will end. By and large, those who favor continued securitization are wealthy criminals, who personally benefited from stolen money, as over the years carelessness slowly became indistinguishable from deliberate fraud.   The problem before Obama was not lack of regulation, but that the foxes were regulating the chickens, and now under Obama the foxes are still regulating the chickens.  Each Obama intervention has the effect of keeping the criminals in power over other people’s money, resisting the natural propensity of capitalism to purify itself through creative destruction.

Securitization was born in fraud:  The original motivation for securitization was the 1995 Community Reinvestment Act. If the government is pressuring you to make loans on the basis of race, rather than willingness and ability to pay one’s just debts, you want to get rid of the politically correct mortgages to some other sucker as fast as possible.

Securitization of debt is only legitimate when the people that arranged the loan remain linked to the loan.  Otherwise, securitization is a scam, as the origins of mortgage securitization demonstrate.

Trillion missing, top accountant dead

Thursday, April 23rd, 2009

David Kellerman, the acting Chief Financial Officer and Senior VP at
Freddie Mac, was found dead early this morning from at his home in Virginia. It is described as an apparent suicide.

The press is rightly comparing this with the very similar “suicide” of Enron’s top accountant.

When large sums of money disappear, the person who knows most about where the money went often, by an interesting coincidence, winds up with his mouth permanently closed.

Freddy Mac and Fannie May have had accounting scandals before, but during the housing boom, all their sins were forgiven, and the offending executives retired with golden parachutes. This time around, the public is in a less forgiving mood.

There is an effort to link this murder with Obama, which is unreasonable because he has nothing he needs to cover up yet, not being in charge when the money vanished. On the other hand, his treasury department is full of friends of Obama who do have something to cover up.

Smashing capitalism

Wednesday, April 1st, 2009

President Barack Hussein Obama tells us:

Your warranty will be safe. In fact, it will be safer than it has ever been. Because starting today, the United States will stand behind your warranty.

This reads like something out of “Atlas Shrugged”.

I predict fifty percent inflation or so over the next three or four years – and that is if we eventually turn back from this course, or at least stop walking along it.  If, on the other hand, this goes on, with the government taking responsibility for one thing after another, as each intervention creates a crisis bigger than the last crisis, leading to more interventions, then I predict hyperinflation and widespread inability or unwillingness of government to provide order and protect property. Obama is not going to get under your car and fix it, and as the government takes on an ever growing multitude of tasks it is incapable of performing, its performance in its area of core competence (hurting people and breaking things) will deteriorate.

This crisis did not start with Obama, it did not even start with Bush.

During the final years of the Clinton presidency, Clinton greatly strengthened the CRA, which was glowingly reported by the newspapers

More than $1 Trillion Invested through CRA

Lenders and community organizations have negotiated $1.09 trillion in CRA dollars from 1992 to 2000.

A more accurate report of the same facts would be

Politicians shovel one trillion dollars of off budget money to irresponsible and improvident members of narrowly targeted voting blocks, for which taxpayers are going to wind up on the hook

Government regulation winds up as off budget handouts to voting blocks (in this case mostly Hispanics) and well connected insiders (in this case some elements in Wall Street).  Crisis ensues as the bill comes due. To maintain the superficial appearance of normality, there is a drastic increase in intervention, but the synthetic normality is a mere facade, like putting makeup on a corpse.

We now have trillions of dollars of capital flowing away from well managed businesses, to businesses with implicit or explicit government guarantees – businesses that will rapidly lose that money – a huge increase in the already huge off budget expenses of government, in addition to the huge and rapidly growing on budget deficit.  Unacknowledged off budget government expenditures far exceed government’s ability to tax.  They will not necessarily exceed government’s ability to borrow – yet.