Tuesday, February 7, 2012

Zone of Reality: CRA Meltdown

By Rich Kozlovich

While reading this please keep in mind that these two agencies were merely the structural framework that made the meltdown happen. The real culprit was the Community Reinvestment Act. Without that there wouldn’t have been such a huge drive to finance so many people who were completely incapable of paying the mortgage. I would also like to point out that the CRA made speculators huge amounts of money because it kept forcing the price of housing farther up than it ever would have gotten otherwise. All of this greed was a natural reaction to a system devoid of common sense imposed by legislation that was insane. I would also like to point out that both Clinton and Bush raised the percentage of these CRA (bad) loans until the banks were required to put out bad loans to the tune of over 50%.

I have a question. Can anyone name one government employee; one government economist or one government agency that predicted that Microsoft would become a soft ware giant that would make the owner one of the richest people in the world? Government doesn't do business well.


Financing Fannie and Freddie’s Failures
Back in August 2008 then-Treasury Secretary Paulson pulled a team together to work on resolving the deeply insolvent Fannie and Freddie. As recounted in the Andrew Ross Sorkin book, "Too Big to Fail", Robert Scully of Morgan Stanley laid out a blunt question: “Do you want to kick the can down the road?” Secretary Paulson was emphatic: “No. I want to address the issue. I don’t want to leave the problem unsolved.” Although it took guts for Paulson in combination with the Federal Housing Finance Agency to take control of Fannie and Freddie and place them in conservatorship, the problem of the two mortgage behemoths is by no means ‘solved.’ In taking control, Paulson highlighted the “flawed business model” underlying the pair............So have Fannie and Freddie begun to downsize or unwind from their flawed business model? The SEC Form 10-K and 10-Q that they must file indicate that the answer is an unequivocal no. Fannie’s filing reveals its mortgage credit and guaranty book of business are both up since 2008 standing at over $3 trillion. Freddie’s filing reveals a mortgage portfolio that has hovered in the neighborhood of $2.2 trillion.

Fannie, Freddie, and the Aftermath of the Financial Crisis
What should be done? Some policymakers have called for fiddling with Fannie’s and Freddie’s governance and operations, but a much better alternative would be to put them into receivership and wind them down. The FHFA has had the authority to do this since 2008. Moreover, there is a historical basis for believing that this could be done effectively: in the late 1980s and early 1990s, the Resolution Trust Corporation succeeded in placing hundreds of insolvent savings and loans into receivership and transitioning them to private ownership. Putting Fannie and Freddie into receivership would allow them to be broken up into smaller companies and transferred back to private hands. Critics argue that doing this would jeopardize the recovery of the housing market, but as McKinley notes, these are the same critics who mistakenly claimed that placing Fannie and Freddie into conservatorship would devastate the housing market. “Given its track record, we have to stop listening to that discredited crowd,” McKinley concludes.

FINANCING FAILURE: A Century of Bailouts
The nation’s federal financial regulators and the politicians claim to have saved the American economy. In truth they have done everything within their power to expand their own influence—often far out of view from the public and media. Instead of openly explaining their actions, the bailout agencies have attempted to prevent the public from reviewing their decision-making, often at tremendous cost to taxpayers. McKinley’s painstakingly researched and clear-headed analysis of bailouts and government intervention shows that the American public has accepted too many official pronouncements at face value, and that reining in the federal regulators is a necessary step toward truly promoting the safety and soundness of the financial system.

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