How this whole mess started
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Louis Ginesi Dominguez
Published: September 24, 2008
It all started with neighbors borrowing from neighbors at the local banks which acted as intermediaries. The local banks made sure that loans did not exceed the borrower’s capacity to pay or the bank’s
ability to cover losses. The banks sustained themselves by keeping some of the interest paid by borrowers and by paying a small interest on savings accounts and other forms of deposits.
Then, everything changed with the arrival of the ambitious bank managers: they started borrowing money from larger banks to make bigger loans to individuals and businesses. The banking industry soon
exceeded their capacity to borrow from each other so they started to merge resulting in bigger banks and eventually the small banking chains were acquired by the big banks and the super banks begin to
emerge.
The super banks at some point, responding to competition and greed, became reckless: they offered new products such as variations of “pay later even if you can’t,” and by approving loans for those who
could not possibly qualify for any kind of loan because they did not have the income to repay the mega loans that banks and others were willing to give them.
The mega banks in order to keep going began to borrow money from the Fed, money that they could not possibly repay.
Like in the Ponzi scheme (the old illegal pyramid game), the banks ran out of money to loan because the borrowers began to default in their loans and their reserves were razor thin and could not cover a
fraction of the losses. Something similar to the present Social Security where the fund pays more than it is taking in.
By bailing out the losers and cheaters in the banking industry (banks, investment firms, brokers, etc.) the feds are only delaying the day of reckoning by compounding the problem. They are treating the
symptoms and not the disease. And not only that, but they are also jeopardizing the country’s future by loaning and/ or giving out money that they don’t have and will not be able to earn in the future.
LOUIS GINESI DOMINGUEZ
Gainesville
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Posted by ( jVA ) on September 29, 2008 at 11:49 am
“The point is Congress the reason that this problem is here, not the free market. “
What? You mean congress was out there making bad mortgage deals with consumers?
Jim, I agree that Congress hasn’t helped the problem. The same can be said of George Bush. You would think that after Enron, we would have gotten more oversight/regulation, but that hasn’t been the case.
The root of the problem is greedy, super wealthy people on Wall Street. This is nothing but a huge Ponzi scheme, and it looks like we taxpayers are going to have to pay for this mess.
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Posted by ( Jim ) on September 29, 2008 at 11:08 am
The point is Congress the reason that this problem is here, not the free market. Now Congress wants to fix it. That is like asking an arsonist to put out the fire he started.
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Posted by ( jVA ) on September 29, 2008 at 10:28 am
“It looks like pressure was applied to make loans to people that wouldn’t qualify for the loans in the first place and would not be able to pay the Banks back “
This is such a huge crock of you know what. Republicans want us to believe that the current economic crisis was basically caused by Jimmy Carter and brown people. How convenient. And look it only took 31 years for it to come home to roost!
Why not just blame FDR and the new Deal you morons?
Here’s some inconvenient facts about the CRA that the Limbaugh idiots won’t bother to mention:
* Approximately half of the loans were made by independent mortgage companies that were not regulated by the CRA and thus had no government obligation to offer credit to minorities.
* In the later part of the crisis, these mortgage companies made subprime loans at twice the rate of CRA banks.
* Another third of the major subprime lenders were regulated but had very little CRA involvement.
* The weakening of the CRA in 2004 was followed by intensified subprime lending.
It does sound better though to blame Jimmy Carter and people who aren’t white. That’s pretty much the Republican way though, isn’t it?
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Posted by ( Jim ) on September 29, 2008 at 10:07 am
In 1977, Congress enacted the Community Reinvestment Act (CRA) to require banks, thrifts, and other lenders to make capital available in low- and moderate-income urban neighborhoods, thereby boosting the nation’s efforts to stabilize these declining areas.
It looks like pressure was applied to make loans to people that wouldn’t qualify for the loans in the first place and would not be able to pay the Banks back
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Posted by ( rafaelva ) on September 27, 2008 at 6:59 am
Actually, the Community Redevelopment Act (12 U.S.C.2901) was enacted by Congress in 1977, not 1999. The act was pointed at what is termed community banks. Banks having assets of 250 Million Dollars or less. It created a regulatory structure by which community banks could be evaluated on the basis of how well they served the community.
At no time did the act encourage the granting of loans to individuals who were not credit worthy. The FED, FDIC, and Office of Thrift Supervision monitored how well the a bank was serving it’s community.
The Law was modified several times
from 1977, thru 2006, and minor changes were made to meet the growing’
marketplace. The only change in 1999 was in how often a bank would be audited under the ACT, based on it’s prior performance. This change was made in accordance with the Regulatory Relief Act. The 1999 change in codifed
into law as 12 U.S.C. 2908 in 2006.
The CDA never forced banks to take on
high risk loans, it encouraged reinvestment of some of a banks assets back into the community from which it’s deposits came. It did set a cap on ARM Mortgage interest rates, which is to say an ARM Mortgage could not have an open ended interest rate increase structure.
In reality, it does not appear that the regulatory change in 1999 increased pressure on banks to make high risk loans, it relaxed the Federal monitoring under CDA, wherein a bank that had a prior outstanding rating would only be looked at every 60 months. It was the lessening of regulatory pressure, oversite, and monitoring that allowed banks to enter the high risk mortgage market.
CDA did not cause the crisis, it was deregulation that caused the crisis.
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Posted by ( jVA ) on September 26, 2008 at 2:21 pm
hahah. I’m loving this new GOP talking point about the Community Reinvestment Act. This is great. You can blame the economic crisis on both Democrats AND minorities at the same time. Brilliant stuff.
I did some reading myself this afternoon just to make sure guys like “Jim” here aren’t on to something I don’t know about. This is what I found out:
“Approximately half of the subprime loans were made by independent mortgage companies that were not regulated by the CRA, and thus had no government obligation to offer credit to minorities. In the later part of the crisis, these mortgage companies made subprime loans at twice the rate of CRA banks. Another third of the major subprime lenders were regulated, but had very little CRA involvement. Also the weakening of the CRA in 2004 was followed by intensified subprime lending.“
These facts are all readily available if you care to look. But of course the wingnuts will listen Rush and Hannity and believe what they want.
This is truly a crisis of greed AND ignorance.
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Posted by ( RonCharest ) on September 26, 2008 at 1:47 pm
Uhh Jim,
No. Look around PWC, and look at who formerly owned the homes that are now empty or in foreclosure. Many of these houses were snapped up by speculators (non-minority types) who thought they could flip them and make a quick buck. Others were first time home buyers of all colors who allowed themselves to believe realtors telling them they could afford more house than they really could.
I know what realtors were saying two years ago, as I was then buying a house in this area. Lucky for me, I had enough education and experience to know the realtors were BSing me, telling me I could afford twice as much as my estimates showed.
The mortgage companies themselves gambled with bad loans, bundled them and drove up market prices. Now the mortgage companies, run into the ground by people who nominally should have had enough training and experience to know better, want tax dolars to bail their sorry butts out of trouble.
Should be the new Republican mantra: Privatize Profits, Socialize Losses.
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Posted by ( Jim ) on September 26, 2008 at 11:45 am
Phil Graham had nothing to do with this. It was the Community Reinvestment Act of 1977 and the expansion/increased push of it in 1999 did set this all in motion. It may have been a noble jester as an effort to get people who could not afford buying a house into a house. It was Congress’s stupidity of messing with the free market that caused this by putting a lot pressure on the Banks to lend money for mortgages to people that wouldn’t qualify for the loan in the first place and would not be able to pay the Banks back. It is basic economics.
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Posted by ( rafaelva ) on September 26, 2008 at 5:57 am
Can we identify the bad actors? Let’s see, which Big Banks aren’t failing?
Bank of American, and JP Morgan Chase?
Did they not invest in the bad paper scheme, or were they the prime movers.
In a pyramid scheme, everything below the top eventually fails.
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Posted by ( RonCharest ) on September 25, 2008 at 5:43 pm
Yes, this mess started in 1999 when a Republican-controlled Congress rammed through banking deregulations. The law was slipped into a must-pass funding bill as a amendment by then Senator Phil Graham.
This would be the same Phil Graham who is now McCain’s finance advisor. The same Phil Graham who just a few weeks ago stated is an interview that the US finances were stable, and that the real problem was that Americans were a nation of whiners.
The same Phil Graham who is also a lobbiest for Swiss Bank UBS, who directly benefited from banking deregulation, then directly benefited from government bailouts.
This is also the same Phil Graham who Sen McCain has indicated would be our Treasury secretary in a Palin/McCain administration.
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