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NationofChange / Op-Ed
Published: Saturday 5 November 2011
“The institutions that originated the great majority of the riskiest mortgages, as economist Robert Gordon showed conclusively, weren't even covered by CRA.”
Bloomberg vs. Occupy Wall Street
Americans listen when Michael Bloomberg speaks, not only because he is the mayor of New York City, but because he is a self-made billionaire and a smart guy. People think Bloomberg knows a lot about business and investment, which he surely does. But he nevertheless sounds terribly misinformed sometimes, as he did the other day — when he complained that "Occupy Wall Street" is unfairly blaming the nation's big bankers for the crash and recession, when the real culprits are Congress and the government-sponsored housing lenders, Fannie Mae and Freddie Mac.
"It was not the banks that created the mortgage crisis," said the mayor. "It was, plain and simple, Congress, who forced everybody to go and give mortgages to people who were on the cusp. ... But they were the ones who pushed Fannie and Freddie to make a bunch of loans that were imprudent, if you will. They were the ones that pushed the banks to loan to everybody."
It was Bloomberg's misfortune to blurt those remarks a day before the U.S. attorney in Manhattan, whose offices are only blocks away from City Hall, announced that the Justice Department is suing Allied Home Mortgage Corp. for perpetrating a gigantic, decade-long fraud, in violation of federal regulations and statutes, that cost the government at least a billion dollars and forced thousands of American families out of their homes.
Indeed, if the mayor only read the fine news service that carries his name, he would know that such massive frauds in the private sector were behind the financial crisis — and that his friends on Wall Street made billions by "securitizing" those bad loans — and then brought down the world economy when their game could no longer be sustained.
Nobody in Congress and nobody at Fannie or Freddie forced them to do that.
The most authoritative studies, notably the final report of the Financial Crisis Inquiry Commission — which examined many other academic and think-tank works — have demonstrated that whatever their other problems, Fannie and Freddie were not the most significant contributors to the subprime disaster. More than 84 percent of the subprime mortgages in 2006, for instance, were issued by private lending institutions, including 82 percent of the subprime loans to low- and moderate-income borrowers.
Nor were Fan and Fred — or Congress, for that matter — culpable in the enormous crime wave of mortgage fraud that engulfed states like Florida, Arizona and California, which would keep a special prosecutor busy for the next five years if only somebody appointed one.
Bloomberg may also have meant to allude to the Community Reinvestment Act, an even more favored target of Republicans (since many of them have partaken of Fannie and Freddie's largesse, just like their Democratic brethren in Washington). But again, there is simply no evidence that CRA played a major role in the mortgage meltdown — or the slicing and dicing of mortgage derivatives that spread the contagion to every major bank here and many across the world.
Nothing in the act, designed to encourage lending in poor communities, required the excessively leveraged, insufficiently overseen "creative financing" that caused the crisis. The institutions that originated the great majority of the riskiest mortgages, as economist Robert Gordon showed conclusively, weren't even covered by CRA.
So much for the mayor's cheap shot against the "Occupy" protesters, whose encampment in lower Manhattan he considers inconvenient. He may want them to leave; he may eventually force them to leave. But their message — that Wall Street's perpetrators of the crisis have escaped accountability and profited obscenely, instead — is undeniable no matter what he says or does.
Copyright Creators.com
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16 comments on "Bloomberg vs. Occupy Wall Street"
November 06, 2011 2:11pm
Evidently you think that by choosing the CRA you can more credibly assert or pretend, that government policies didn't cause our financial crisis. I will show that you are wrong even about the CRA, last paragraph below.
Most people realize, price controls never work. But interest rates are the price of money. Federal Reserve policy of artificially low interest rates since 1998 are the biggest factor behind the tech stock market bubble in yr. 2000, the later housing bubble and the financial collapse of 2008.
The CRA and HCDA, the Federal Reserve, and Fannie Mae controlling half of all U.S. mortgages, are just a few examples of how our government massively distorted the private marketplace. Whether they mandate behavior or give incentives to influence behavior, the fact is they changed the behavior of everyone in America who even thought about buying or selling anything, including those people and corporations on which you'd like to pin responsibility for the crisis.
I don't necessarily argue with the idea behind the original CRA of 1977, I don't argue that it's not altruistic to want low income families to own a home, I want that also. But people who are all equal do not have freedom, and people who have freedom are never equal. As long as there is freedom and the right to own property, there will always be somebody who has less than others. There will always be people who wish to be, and people who wish to be seen as, altruistic and kind. They cannot be seen as altruistic unless advocating for gov't to "do something", therefore the goals are constantly increased over time and more mandates or incentives added, further distorting the market. Meanwhile bear in mind that America's poor have a car, internet and tv, foodstamps and at least housing that's warm if not beautiful, while others worldwide suffer true poverty, not just income inequality. For instance 80% of India's population burns cow dung to keep warm and cook their meals. Is it really altruistic to want people of lower than median U.S. income to get a cheaper mortgage? Barbara Bachmann's $500K home also went thru fannie mae.
Evidently GHW Bush didn't want his party and ideology to be outdone by the CRA and other previous market distortions so in 1992 he instituted the HCDA Housing and Community Redevelopment Act, bringing Fannie Mae's 30% affordable housing goals which were gradually raised over the years to 55%.
Clinton policies in 1999 demanded increased ratios of fannie's lending to low income borrowers specified in the CRA. In response to the higher ratios of CRA eligible borrowers, mandated or requested by the administration, Fannie lowered her credit requirements on all mortgages. So it can be said that the CRA prescribed goals, although perhaps not mandated, contributed to the crisis. This is info from the wikipedia page on fannie mae.
November 10, 2011 5:53pm
Reply to Dave Brillig:
Give it up corporatist! Nobody believes your lies anymore. Your attempt to bury us with voluminous verbosity does not hide the fact that your are dodging the truth.
November 06, 2011 11:40am
Can there be any question what caused our credit markets to freeze in Sept. 2008? Read further to realize events of the credit crisis begun in 2008.
Fannie Mae had assets of $5.6TN in Sept. 2008, representing nearly 1/2 of all the mortgages in the U.S. $12TN housing market. She was really worth only $75BN since she had debts of $5.57TN, she was leveraged 75 to 1! For some perspective, Lehman was only worth about 10% of that....... $620BN.
Every investment bank on Wall St. owned either Fannie issued securities or Fannie issued debt. Fannie went into recievership on Sept. 7, 2008, and within 3 wks afterward, the the private mortgage industry collapsed. Lehman first on 9/15, then Merrill Lynch, Wamu, AIG, Wachovia, etc..... in the 2nd week after Fannie's collapse is when Hank Paulson made the infamous statement in meeting with some congressmen, that either we had tarp on Friday or "we may not have an economy on Monday".
Fannie had been granted special accounting privileges, that allowed her to actually count some debt as capital, and she was exempted from the Sarbanes/Oxley act, which was passed to require greater accountability from public companies after Enron. EXEMPTED! She was able to borrow money more cheaply than any of her competitors due to her implied gov't guarantee. Fannie invented the mortgage backed security in order to allow her to sell the mortgages she wrote, so she'd have more money to lend.
The whole idea of gov't involvement in the market place was to "juice" the economy. The Fed kept interest rates way too low ever since 1998, first we had the stock market bubble and then the real estate bubble. FNMA's control over the housing market and her affordable housing goals set the whole economy up for a fail.
The FCIC - Financial Crisis Inquiry Commission - was a politicized body and the report was also, obviously politicized. Congress appointed six Democrats and four Republicans to the commission, reflecting the % makeup of congress at the time. Six of the commissioners voted to accept the main opinion, and four commissioners wrote two dissenting opinions. Both dissenting opinions were that Fannie contributed greatly, or was the main cause of the crisis. In the main opinion by the six Democrats, in the first chapter entitled "Conclusions" they make the statement that they "reject the notion" that the crisis was caused by lack of rules & regulations on the books. In the same chapter on conclusions they also say that Lehman was the first big failure, completely ignoring the failure one week prior to Lehman, of Fannie Mae - a private corporation ten times the size of Lehman! That should tell us something, especially when the two dissenting opinions put the blame squarely on Fannie.
People, please wake up and smell the coffee. Back away from both parties, and do what's good for our country instead of what's good for any party.
I say if you like the way the economy is performing with massive government intervention like FNMA and the Fed, then by all means advocate for more of it.
Dave must be a paid propagandist for the 1%. A simple check will yell you that the CRA never mandated any bank or lender do anything. Alt A loans are not synonymous with subprime loans. Loans that would give lenders CRA "credit" were tiny fraction of loans that defaulted and were LESS likely to default. There is NO evidence for CRA culpability in the mortgage disaster.
November 06, 2011 10:48pm
It is obvious that Dave doesn't know what he is talking about when he is in total denial of the massive fraud perpetrated upon buyers across the nation and encouraged by the Wall Street banks that then bundled the fraudulent mortgages to sell all over the world. I think you are right -- he is a shill for the 1%.
November 13, 2011 8:40am
I am no shill, learn for yourself instead of spreading misinformation.
If you like the way the gov't has managed and regulated the economy, ask for more of the same.
November 06, 2011 12:29pm
Let's face it, by choosing the CRA to support, without mentioning the HCDA or any other legislation affecting the GSE's, or any of the policy changes various administrations made, your belief is that allows you to write an article in support of government intervention in the marketplace, pretending that the government didn't create our financial problems.
The CRA and HCDA, the Federal Reserve keeping interest rates near zero and Fannie Mae, are just a few examples of how the gov distorts the private marketplace. Whether they mandate behavior or give incentives to influence behavior, they change the behavior of the private companies on which you'd like to pin responsibility for the crisis.
I don't necessarily argue with the idea behind the original CRA of 1977, or that it's not an altruistic endeavor to want low income families to own a home. But people who are all equal do not have freedom, and people who have freedom are never equal. There will always be somebody who has less than others and there will always be people who wish to be, or at least wish to appear to be, altruistic. Therefore the goals are constantly increased over time and more mandates or incentives added, further distorting the market.
Evidently GHW Bush didn't want his party and ideology to be outdone by the CRA and other previous market distortions so in 1992 he instituted the HCDA Housing and Community Redevelopment Act, which instituted the affordable housing goals.
However 1999 Clinton policies forced increased ratios of fannie lending to low income borrowers specified in the CRA, and in response Fannie lowered her credit requirements on all mortgages. So it can be said that the CRA contributed to the crisis.
November 06, 2011 11:35am
From the fannie mae page of wikipedia, this illustrates the bi-partisan screw-ups and constant tinkering in the market that lead to our downfall:
In 1992, President George H.W. Bush signed the Housing and Community Development Act of 1992. The Act amended the charter of Fannie Mae and Freddie Mac to reflect Congress' view that the GSEs "... have an affirmative obligation to facilitate the financing of affordable housing for low- and moderate-income families in a manner consistent with their overall public purposes, while maintaining a strong financial condition and a reasonable economic return;"[14] For the first time, the GSEs were required to meet "affordable housing goals" set annually by the Department of Housing and Urban Development (HUD) and approved by Congress. The initial annual goal for low-income and moderate-income mortgage purchases for each GSE was 30% of the total number of dwelling units financed by mortgage purchases[15] and increased to 55% by 2007.
In 1999, Fannie Mae came under pressure from the Clinton administration to expand mortgage loans to low and moderate income borrowers by increasing the ratios of their loan portfolios in distressed inner city areas designated in the CRA of 1977.[16] Because of the increased ratio requirements, institutions in the primary mortgage market pressed Fannie Mae to ease credit requirements on the mortgages it was willing to purchase, enabling them to make loans to subprime borrowers at interest rates higher than conventional loans. Shareholders also pressured Fannie Mae to maintain its record profits.[16]
In 1999, The New York Times reported that with the corporation's move towards the subprime market "Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980s."[17] Alex Berenson of The New York Times reported in 2003 that Fannie Mae's risk is much larger than is commonly held.[18] Nassim Taleb wrote in The Black Swan: "The government-sponsored institution Fannie Mae, when I look at its risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. But not to worry: their large staff of scientists deem these events 'unlikely'".[19] Mike Stathis also warned about the risks of Fannie Mae, triggering the financial crisis in America’s Financial Apocalypse. “With close to $2 trillion in debt between Freddie Mac and Fannie Mae alone, as well as several trillion held by commercial banks, failure of just one GSE or related entity could create a huge disaster that would easily eclipse the Savings & Loan Crisis of the late 1980s. This would certainly devastate the stock, bond and real estate markets. Most likely, there would also be an even bigger mess in the derivatives market, leading to a global sell-off in the capital markets. Not only would investors get crushed, but taxpayers would have to bail them out since the GSEs are backed by the government. Everyone would feel the effects.
November 06, 2011 11:38am
The obvious & truthful explanation of why private companies wrote most of the subprime loans is this: Fannie is the one who made the definition of subprime. Fannie Mae is the one who defined & made that cutoff point, that's why she didn't own very many of them. Fannie controlled the market, she wrote half of all mortgages in the entire $12TN U.S. housing market.
"Subprime" is the same thing Fannie labeled "alt-a" mortgages, and Fannie didn't start buying them untill 2004 when her mandated "affordable housing" goals were raised to 55% - that's right, over half of all Fannie's mortgages were mandated to be written to low income buyers, and Fannie issued or controlled nearly 1/2 of the entire $12TN U.S. market, so nearly 25% of all U.S. mortgages were mandated to be low income loans, either issued, securitized or owned by Fannie Mae.
If you were in the mortgage or mbs business, this was your competition. What is one supposed to do, go sell pencils on the street? No, you get in there and compete with FNMA according to the rules. In fact, not only was Fannie your competition, she was also probably one of your biggest suppliers, AND your best customer. She controlled the market. There was a desktop computer app to tell if the loan qualified for purchase by Fannie Mae. The lender would know before they even wrote the loan, that they could sell it to Fannie immediately.
More than 75 employees of Fannie received specially packaged cheap mortgages for their own homes from Countrywide, right along with Chris Dodd and Barney Frank, in Countrywide's "friends of Angelo Mozzillo" program. Angelo's best customers!
Fannie didn't start buying alt-a mortgages (subprime), for which she wrote the definition, until 2004 when the low income goals were raised to 55% - so, for many years the only place to get a loan, if you didn't qualify for a fannie loan was in the private market. - the very definition of "subprime" is any loan that didn't qualify for fannie. (But even fannie started buying them in 2004)
Can there be any question, how our economy got loaded with defaulted loans? Fannie controlled the market, she issued half the loans, she set the definitions and set the pace for private companies, and her main mission was to lend to low income borrowers.
Search youtube for this. Because he studied Austrian economics instead of Keynesian, Ron Paul predicted the housing bubble, the subprime crisis, and the credit crisis as early as 2001 thru 2008 when they all happened.
Stop arguing and supporting falsehoods on both sides of the aisle. Put party and ideology aside and do what's right for our economy instead, so people can work and support themselves. If you like the way our gov't has managed the economy thru Fannie and the Fed, go ahead and allow it to manage it even more.
November 05, 2011 4:45pm
This article really hits home. Thank you!
Diane, thank you, I agree completely.
Seekerthinker, I hope the mega banks will be prosecuted, then broken up. They will need people like you to testify to the gross mismanagement.
November 05, 2011 4:30pm
So much misinformation goes around yet NO one questions it. Fox & CO Rush & 800 con talk radio shows makes it all sound like fact . Truth is 1981 Reaganomics Bush GOP Deregulation policies, which allowed predatory lending, aka fraud led to this disaster. Lenders Banks old JUNK mortgage securities to investors falsely labeled as TRIPLE AAA Those loans defaulted but lenders did not care since they sold them and made billions.
It was a feeding frenzy I saw it as a Realtor Lenders called them liar loans which was legal under deregulation, our safe guar had been since 1981 . Under deregulation the super wealthy ran amok and abused their home buyers with misleading info. Mayor Bloomberg like all billionaires has a bias in favor of Goldmans Wall ST / Robber Barons Wall St Goldman Chase Citi Wells fargo Goldman were all complicit in predatory lending Fannie /Freddie were a small part of that mix But GOP loves that lie since it helps to break Obama as they vowed to do
November 06, 2011 12:54am
Dianne, here's how that worked: Fannie Mae invented the mortgage backed security by the way. 3,000 or more mortgages are bought by the same co. and re-packaged into a security. They take about 5% of the total amount, and they call it the top "tranche" or slice. When they resell this top tranche, they promise the buyers that any payments that come in from those 3,000 mortgages every month will be paid to them first. So, more than 95% of the 3,000 mortgages would have to default before the top tranch buyers wouldn't get paid that month. It's a lot less risk, who would think that 95% would default, even though they were sub-prime mortgages.
All the bigger companies in the business had "quants" on their payrolls to perform quantitative mathematical analysis to figure the % chance of default, and these quants would work with the ratings agencies to try to get their approval to put AAA rating on the top tranche. It was all above board, I'm sure there was some fraud as there always is but for the most part, they just didn't figure there was much of a % chance of something drastic happening to the economy like Merrill Lynch, Wamu, Lehman Bros and AIG all going broke in the same 3 weeks after Fannie Mae went into gov't receivership. The prospectus all explained these securities were backed by subprime mortgages, so anybody sophisticated enough to be investing in mortgage backed securities could have read that fact in the prospectus.
I son't belong to any party, I'm independent so don't say I'm GOP. I promise you, this fiasco happened because of gov't involvement in the economy, not because of the lack of it. If you think the gov't has done a good job of managing the economy, then you should advocate for more of that.
November 05, 2011 12:30pm
HEY 99%! Are you angry? Use it!
We have POWER! “Buying Power.” And, it’s about time we used it. Here’s how.
STOP BUYING THINGS. STOP BUYING…EVERYTHING.
WE CAN INSTANTLY STOP THE FLOW OF BILLIONS OF DOLLARS.
STRANGLE THE COMPANIES THAT ARE KILLING US!
Companies want our money, but they don’t want to help America get back on its feet?
We are being starved, now let’s starve those greedy corporations who took our money.
We want companies to hire us, politicians to vote for us, and this is how to force it.
We have an incredible mobile army of millions and millions and millions of people!
Let’s combine the power that we all have. VOTE, by NOT spending.
Stop buying as much as you can. Stop buying from ALL of the big corporations, retailers and banks; Wal-Mart, Walgreen’s, CVS, Rite Aid, Kroger, Costco, Target, Home Depot, Best Buy, Sears, Lowe’s, Supervalu, Procter & Gamble, Unilever, Georgia Pacific, RJR, Brown & Williamson, Kraft Global, Sara Lee, Tyson, BP, Shell Oil, Exxon Mobile, Hewlett-Packard, AT&T, Sprint, Dell, Microsoft, Dow Chemical, Chevron, Kimberly-Clark, Coca-Cola, Pepsi, J.P. Morgan Chase, Citigroup, Wells Fargo, Bank of America, Capital One, Ford, Chrysler, GM, Disney, Macy’s, Kohl’s, The Gap, Penny’s, Colgate, Nike, Staples, Office Depot, Lilly, Johnson & Johnson, Avon, Starbucks, McDonald’s, Wendy’s, Burger King, Kellogg’s, Dean Foods, General Mills, etc., etc., etc. All of them!
Add your own companies to our list and pass it on.
Don’t use global banks. Move your money from a big bank to a neighborhood bank.
Don’t use your credit cards or ATM’s…at all.
Don’t shop any retail chain stores. Shop local, or mom and pop shops.
Don’t buy gasoline. Walk, take a bus, car pool, or ride a bike.
Don’t buy any extras like music, movies, electronics, or toys…nothing.
BUY AS LITTLE AS POSSIBLE, FOR AS LONG AS POSSIBLE.
STOP SPENDING OUR BILLIONS OF DOLLARS AND WATCH WHAT HAPPENS.
Greedy global companies will be left in shock not knowing what to do.
Wall Street, the oil barons, corporate fat cats, stockholders, executives, marketers, retailers, politicians, and President Obama, will be asking us, the 99%, what we want!
“WE” WILL FORCE WALL STREET AND CORPORATIONS TO HELP AMERICA!
We have already started.
V
November 06, 2011 9:25am
Think more truthfully.
November 05, 2011 11:27am
I'm glad you wrote this article. I was an information technology manager at Lehman Brothers who was unwittingly responsible for helping create the legal infrastructure for Lehman's massively unethical activities, specifically in the area of misrepresenting risks from securities created by their mortgage company Aurora. To claim that Lehman and AIG (the underwriter of much of the insurance for the crap paper Lehman generated) are innocent players in the cdo/mortgage-backed-security aspect of the crisis is blatantly false. The managers who instructed me in my work knew exactly what they were doing and simply didn't care about the consequences.
November 13, 2011 9:23am
@seekerthinker First you claim you were unwittingly responsible.
Then you say that Lehman and AIG, two inanimate objects are responsible.
Then you say your managers were witting participants in fraud.
What about the quants who worked for Lehman, the mathematicians who did the statistical analysis, who worked with their counterparts at the ratings agencies to figure the percentage chance that 95% of the mortgages in any one security labeled AAA would fail? Did they knowingly perpetrate fraud, or was it simply a mistake and nobody expected the entire system to crumble?
What about the buyers of the securities that were labeled AAA, yet the prospectus said SUBPRIME MORTGAGES all over it, were they not responsble for reading the prospectus, and their own due diligence?
Fannie Mae entered receivership on Sept. 7 2008, she was a 5.6 TN company. Your company, Lehman Bros, was worth 10% of that at $620BN and went bankrupt one week after fannie on Sept. 15, followed by Merrill Lynch, AIG, WAMU, Wachovia and all the others, all within 3 wks of FNMA's failure. Does that tell us anything?
This is all from various wikipedia pages on fannie mae and the crisis so if you're interested in seeking the truth, dig.
FNMA was the book that fell into the dominoes and started the cascade. She had been granted special acccounting rules that let her count some items as capital that were actually debt. She was exempted from the Sarbanes/Oxley act which was passed to straighten up accounting rules after the Enron scandal. She had assets of $5.6TN but was only worth $75BN because she had so much debt - she was leveraged 75 to 1. She borrowed more cheaply than any of her competitors because of her implied gov't guarantee. 55% of her loans were mandated by gov't to be made to low income borrowers.
If you were in the mortgage business, this was your competition. But not only that, in many cases she was also your best customer and a supplier. FNMA invented the mortgage backed security, this is how she recoups her investment to make more loans. She built and controlled the mortgage market.