Someone should “occupy” Fox News and talk radio for misleading the public on who was responsible for the financial meltdown that started in 2008. Fox News insists that it was Barney Frank, Fanny Mae and Freddie Mac who were responsible, hence the protesters should be occupying Washington. Ultra conservative talk radio is trying to pin it on Jimmy Carter and the Community Reinvestment Act (“CRA”).
Let’s separate fact from Fox News fiction, shall we. True, Barney Frank should not have brushed off concerns about government-backed subprime mortgage lending but he was a very small player in the the whole mess. The reality is that the long paper trail of events leans right politically not left. It started with Republican Phil Gramm’s 1999 Gramm-Leach Bliley Act that allowed for the consolidation of banks, securities firms, and insurance companies. Traditional banks could now purchase the subprime mortgage-backed securities (“MBS”) through their securities arms from brokers.
Following that in 2002, George Bush called for a massive increase in minority and low income homeownership challenging the private sector banks and Fannie Mae and Freddie Mac to make more than 5 million new low income mortgage loans. The former president aggressively pushed the largest banks to make over 1.1 trillion in low income subprime loans. He also made sure that Fannie and Freddie understood that their regulatory charters were up for renewal and stressed that they should increase their own commitment efforts. In addition, in 2003 the George Bush administration and the Republican Congress also passed the “American Dream Down payment Act of 2003” providing $200 million to low-income families with blemished credit and no ability to come up with a down payment. The following is an excerpt from the speech Bush gave at the signing of the American Dream Downpayment Act at the Department of Housing and Urban Development:
“This administration will constantly strive to promote an ownership society in America. We want more people owning their own home. It is in our national interest that more people own their own home. After all, if you own your own home, you have a vital stake in the future of our country. And this is a good time for the American homeowner. Today we received a report that showed that new home construction last month reached its highest level in nearly 20 years.” (Applause.)
“The reason that is so is because there is renewed confidence in our economy. Low interest rates help. They have made owning a home more affordable, for those who refinance and for those who buy a home for the first time. Rising home values have added more than $2.5 trillion to the assets of the American family since the start of 2001.The rate of homeownership in America now stands a record high of 68.4%. Yet there is room for improvement. The rate of homeownership amongst minorities is below 50%. And that’s not right, and this country needs to do something about it. We need to — (applause.) We need to close the minority homeownership gap in America so more citizens have the satisfaction and mobility that comes from owning your own home, from owning a piece of the future of America. “
“Last year I set a goal to add 5.5 million new minority homeowners in America by the end of the decade. That is an attainable goal; that is an essential goal. And we’re making progress toward that goal. In the past 18 months, more than 1 million minority families have become homeowners. (Applause.) And there’s more that we can do to achieve the goal. The law I sign today will help us build on this progress in a very practical way. Many people are able to afford a monthly mortgage payment, but are unable to make the down payment. So this legislation will authorize $200 million per year in down payment assistance to at least 40,000 low-income families. These funds will help families achieve their goals, and at the same time, strengthen our communities.”
Bush and the Republican Congress pushed hard for low income loans hoping the housing market would stimulate the economy and keep us out of a recession. The pressure forced the banks to lower their credit standards to meet their quotas. The increase in the mortgage loan originations also led to packaging of those loans into an ever more-complex market in mortgage-backed securities (when a bank securitizes a loan it removes the loan and the capital requirement for that loan off the balance sheet allowing the bank to free up its balance sheet to originate new loans for securitizations). This was an efficient and profitable way of allowing the banks to meet the demand at the time for the subprime securities – assuming they are prudently underwritten but they weren’t.
The fees that banks and Wall Street firms made from their securitization activities were so large that they ceased to be a means to keep capital flowing to housing markets and became ends in themselves. Mortgages and mortgage-backed securities began to be produced for Wall Street instead of Main Street. Wall Street bond traders sought more and more mortgages from lenders in order to create new securities that generated fees for their firms and large bonuses for themselves. Demand for securities prompted lenders to make more and riskier mortgage loans. Making and packaging new loans became so profitable that credit standards plummeted and mortgage lenders began making risky, exotic loans to people with little chance of making the payments.
Amplifying the potential for a financial crisis was the substantial exposure of billions in derivatives called Credit Default Swaps (“CDS”). A CDS is insurance against the default of a mortgage –backed security. A CDS is called a “swap” because the holder of bond is swapping the default risk with AIG the insurer, for a premium in return. It was estimated that the CDS market was around $60 trillion at the time of the crisis (meaning that the total face value of the bonds insured is $60 trillion).The derivatives market was unregulated so a company like AIG could sell as many CDS as it wanted potentially taking on too much exposure to default. That is exactly what happened. As defaults started rising on the MBS, companies like AIG who sold billions CDS were looking at unprecedented losses on them. AIG was a large net seller of CDS and if it couldn’t make good on the MBS losses no one could predict what the implications would be for the rest of the financial sector. Hence, AIG was“too large to fail” and required a bailout.
Some right-leaning media outlets like talk radio are going as far back as Jimmy Carter to lay blame for the financial mess. The number of defaulted loans originated prior to 2000- the Carter-era Community Reinvestment Act (“CRA”) loans- is a drop in the bucket compared to later defaults. Carter was a factor in lowering credit standards but two points on the CRA loans. First, only a small portion of subprime mortgage originations are related to the CRA. Secondly, CRA-related loan pools appear to perform comparably better to other types of subprime loans. Hence, the CRA loans seem to have not contributed in any substantive way to the mortgage crisis. http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4136).
At the end of the day, the Occupy Wall Street protesters are speaking out exactly where they should be, on Wall Street. Wall Street used to serve clients and promote commerce, but now it is all too often self-serving. The harm here isn’t just to clients poorly served by their investment bank but it effects all of us. The toxic mortgages and unregulated derivative instruments that these firms injected into our financial system have done incalculable harm to people who had never heard of a mortgage-backed security or a CDS, and who have no defense against the harm these Wall Street creations can cause.
The only other place the protesters might want to consider occupying is the Bush Ranch in Crawford, Texas.