By on September 19, 2011

 

At the height of “bailout fever,” after TARP had been instituted but before the automakers had been completely bailed out, one argument that we heard a lot of from Detroit’s defenders was “how can you begrudge the manufacturing base a few billion when speculators at the banks are receiving far more support?” At the time, the argument seemed to me like a convenient way to shift attention away from Detroit’s failures and undercut the argument that consumers, not a credit crunch, were responsible for killing off GM and Chrysler… but at least then it still had some validity. Fast forward to today, and history has stripped it of all relevance, as it turns out the banks will likely be picking up the automakers’ bailout tab.

 

The Detroit News‘s David Shepardson reports that the Obama Administration has resurrected its “Financial Crisis Responsibility Fee” as part of its new deficit-reduction package, which, in the words of Treasury Secretary Tim Geithner,

 is designed to make sure that if there are any losses from the emergency actions we took to put out the financial fires of ’08 and ’09, that we recover those losses in the form of a fee on the institutions that benefited most directly from those programs… If Congress did not legislate a fee like this, then if we ultimately realize losses on the emergency programs, then those would add to the deficit. So by proposing this fee, we try to make sure that doesn’t happen.

Sounds good, right? Well, here’s the problem with expecting payback for bailouts: the firms that “benefit most directly” from them are least likely to be able to pay them back. As a result, the big bad banks that have not only paid back most of their loans but also lent Chrysler the cash to pay back its TARP loans are the ones in line for a soaking. The automakers, which received less up front but are paying back a lower percentage of their loans, are in line for a free pass. Think of this as a handy reminder of all that “moral hazard” stuff people were talking about a few years ago.

The Freep explains the details

The fee would be restricted to firms with more than $50 billion in assets, according the Obama administration plan – and is estimated to raise $30 billion over 10 years.

By “firms with more than $50b in assets,” the Freep means the biggest banks. With the exception of AIG, Ally Financial (formerly GMAC, GM’s once-captive finance arm), and the Fannie/Freddie twins, this refers to banks that were the quickest to recover post-bailout, and have repaid most or all of their TARP loans. And the last time the Obama Administration proposed this Fee, the heads of those banks were not amused. In early 2010, the WSJ reported that

[J.P. Morgan Chase CEO James Dimon] said it felt like the banks which have already paid back taxpayers, were being asked to subsidize the bailout of General Motors and Chrysler.

At the time, I wrote

The real irony is that the bank bailout allegedly took place because nobody understood the real nature of the crisis, shrouded as it was in the opacity of financial industry jargon. Now that the moment of crisis is over, the banks are back to making money, while the automakers are still dreaming of that first post-bankruptcy profit. Which one turned out to be the more difficult, complex industry?

But now that Detroit is making big profits, what’s the excuse? By my count, Chrysler still owes the American people around $5.3b that it shows no interest in ever repaying. At current stock prices, the taxpayers are likely to lose around $15b on the GM bailout. And GM is already making so much money it has to shell out nearly a quarter-billion dollars to the union that helped drag it from industry-dominator to federal charity case. But rather than putting GM and Chrysler on a payment plan until they square up with the American people, we’re going to shake down the banks for their share? Is this making sense to anyone?

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44 Comments on “Obama: Banks Should Pay For The Auto Bailout...”


  • avatar
    pleiter

    Ed, $5.3B with a B, not that little m crap.

  • avatar
    APaGttH

    The real irony is that the bank bailout allegedly took place because nobody understood the real nature of the crisis, shrouded as it was in the opacity of financial industry jargon. Now that the moment of crisis is over, the banks are back to making money, while the automakers are still dreaming of that first post-bankruptcy profit. Which one turned out to be the more difficult, complex industry?

    Way over simplistic Ed. When Lehman Brothers was allowed to go under the wheels fell completely off. Banks wouldn’t lend money to Jesus even if Mohammad and Moses were his cosigners. The banking industry little froze up for business and consumers.

    Today we’re in an environment to get a conventional non-FHA mortgage you need a FICO score of about 720 or above, representing about 40% of Americans. Of that 40%, some are upside down on their existing mortgages, so have no equity, or don’t have 20% equity to make a move. Others are struggling to pay the bills but keeping above water keeps the score up. Sure, you can go FHA down to 3.5% down payment and a FICO around 640, and pay much higher interest rates along with PMI – defeats the purpose.

    The moment is crisis is not over. It’s far from over. Everyone is holding their breath on a Greek default, and what that could do the Euro, and ripple effect that could tear across Europe pulling down Italy, Portugal, Ireland, and finally Germany. Siemens is already yanking its money out of European banks (do a search – discovered today) and there is signs a run on the banks to get cash out has started. This will put the whole globe back into recession, and the banks into crisis.

    The only reason the banks are sitting on massive profits is they got all that ‘guberment cash and are basically refusing to loan it to business or consumers alike. Oh if you’re in that 40% band things are sunshine and good (I’m in that band).

    Crisis over? Hardly – we’re getting for round two on this wild roller coaster.

    • 0 avatar
      highdesertcat

      Highly accurate! There’s a lot of stuff that is waiting to hit the fan and may start sooner than we think if Greece gets its sixth bail-out tranche this go’round. With over 1 million of its citizens employed by the government and sucking on the government teat, there is no way Greece can ever right itself before they collapse financially.

      Scary part is that so many US banks are heavily invested in Euro securities based on loan instruments which may default and that could easily affect the US financial system.

      If Greece does default, it is likely that Portugal and Italy will also which would cause France and Germany to be direly affected. Check out the WSJ Financial pages for up-to-date coverage.

  • avatar
    Pch101

    This stuff has to be paid for. If you know of a better way to do it, feel free to suggest it.

    Well, here’s the problem with expecting payback for bailouts: the firms that “benefit most directly” from them are least likely to be able to pay them back.

    Well, here’s the problem with not expecting payback for bailouts: That suggestion requires more of my money.

    And among all of those parties here, I can assure you that I am the one who is least responsible for having caused it; I didn’t crash the banking system in any way whatsoever. Why you’re so eager to stick me with the tab, I don’t know.

    • 0 avatar
      vww12

      «This stuff has to be paid for. If you know of a better way to do it, feel free to suggest it»

      Taxing corporations such as banks, while reassuring for the short-sighted, is an exercise in distraction.

      For banks, taxes are simply another cost of doing business. Look forward to all large banks screwing you out of a few more pennies per ATM transaction, or credit card fees, or checking fees, or wire transfer fees or cashier´s check fees or whatever.

      In the end, any corporate taxes end up being paid for by… taxpayers.

      • 0 avatar
        Pch101

        For banks, taxes are simply another cost of doing business.

        Only the larger ones will be assessed the fee. That constrains their ability to pass the entirety of it through to the consumer, since there will be competing institutions that don’t have the obligation.

        In any case, if you’re correct and it doesn’t matter, then I’d still prefer to have them pay for it directly, rather than stick me with it. I didn’t crash the system.

      • 0 avatar
        charly

        Not all banks were saved. Only the “Too big to fail” banks were. This leads to a situation that those big banks are safer than small banks because they are too big to fail so they can lend money cheaper and this subsidy leads to a bigger share of the lending market being owned by TBTF banks. If you tax TBTF banks more you will correct the market to were it should be (or you want it to be depending on how much the big banks contribute to the elections)

      • 0 avatar
        BuzzDog

        Look forward to all large banks screwing you out of a few more pennies per ATM transaction, or credit card fees, or checking fees, or wire transfer fees or cashier´s check fees or whatever.

        …except for the fact that the Durbin Amendment to the Dodd–Frank Wall Street Reform and Consumer Protection Act sets a price ceiling on ATM fees and some credit card transaction fees, as determined by the Federal Reserve.

        I’m not saying that some banks didn’t get greedy with ATM fees, but there’s a point at which government intervention into the economy no longer stabilizes it; rather, it seems to lead to other “knee jerk” actions and regulations that further hamper free markets.

      • 0 avatar
        charly

        But we are way past the point for government interference. And that is not necessary a bad thing as there is a high correlation between countries which it is good to life in and big government interference.

        ps. The republicans can at least claim that government interference didn’t start under them. It was already under full force with the whigs.

  • avatar
    psarhjinian

    Heh…. Heheheheh…. AAAHAHAHAHAHAHAHAHAAAA!

    Oh, I’m sorry, got a little too amused with the entire idea of perhaps the second- or third-most corporate-friendly administration suddenly, after three years of completely not getting it, finally cluing in.

    Churchill is right: Americans will do the right thing only after exhausting every possible alternative.

    You have a twin problem of lack of demand because of a disenfranchised lower- and middle classes, and a nearly unprecedented hoarding of capital by the wealthy. Have we finally learned that cutting taxes to stimulate investment in a balance sheet recession does not work?

    Considering how the administration was backing off claims of class warfare, I guess not. And yes, this (redistributing to pay for the auto bailout) is class warfare. So what? So is cutting taxes for the rich and imposing austerity on the poor, only that’s the “good” kind.

    And yes, this just gets passed onto consumers since we’re in a race to the bottom, but hey, it’s at least funny to watch the epiphany.

    • 0 avatar
      FleetofWheel

      Letting some rich woman keep more of her own money is not redistribution.

      You can not redistribute someone’s own property to that very same person.

      “Imposing austerity on the poor”.

      As if they were non-poor until the govt took less money from rich persons thereby making the poor poverty-stricken through lack of sufficient redistribution. Sounds like the logical twists of a wacky creationist theory.
      We’ll call it the Progressive Theory of Poverty Creation.

      • 0 avatar
        psarhjinian

        The hording of capital by the rich or banks is not because of anything more than uncertainty.
        NOBOY…not YOU or I, will invest any of our money IF we think the game is changing.

        Ah, yes, “uncertainty”, the latest attempt to reframe the debate now that we’ve exhausted the deficit canard and can’t whine about taxes with a straight face.

        That “uncertainty”, by the way, is uncertainty about demand. When people actually go out and do actual surveys of actual business people, what they find out is that companies aren’t spending because people aren’t buying. People aren’t buying because they aren’t sure of their jobs or their assets, and that’s because holders of capital are sitting on it or proxying it into more wealth, rather than investing.

        If you listen to popular opinion on the right, supposedly cutting taxes and regulations will help this. Well, we’ve been giving tax breaks, toxic-asset compensation and have allowed quite a but of regulatory slack and, surprise, surprise, companies still aren’t investing in a useful way.

        They are certainly “investing”, just not in a way that benefits the rest of society at all. They’re doing that because, frankly, there’s more money to be made as rentier than growing an actual business during a period of underemployment.

        I think, at this point, with corporate and upper-income taxes at historic lows, that tax and regulatory relief is not the answer. Money is very obviously pouring up, not trickling down.

        No…I wager both you and I…IF we had the money and were in their shoes…would do exactly the same thing.

        You’re probably right. Why would I set up a widget factory to employ people when there’s no market for widgets, and there’s no market for widgets because not enough people have useful jobs to buy them. I’d probably dump my money into hedge funds and make $millions rather than tie it up employing people and making stuff. And hey, if it gets really bad, I can just move.

        Do you see why this is not a sustainable cycle, and why twisting the arm of industry and directly investing in infrastructure (instead of cutting revenue an investing less) would be a smart thing for government to do?

      • 0 avatar
        CamaroKid

        Funny… remember how “W” was so quick to point out that the surplus that was left to him by Clinton was “The peoples money”… guess what… the opposite is just as true. The debt is the “The peoples debt” And the people who should pay it are the people who have benefited the most from living here.

        User pay, baby!

        Its the republican way!

    • 0 avatar
      TrailerTrash

      psarhjinian

      this is a twisted logic…a logic that only works once again IF other important events are excluded.
      The hording of capital by the rich or banks is not because of anything more than uncertainty.
      NOBOY…not YOU or I, will invest any of our money IF we think the game is changing.
      Do you really think people with money do not want to invest money and then make even more money?

      If that is an assumption, it is very, very wrong. My friend, this is HOW they got/get rich. It is their DNA. It’s what they do. It’s what they breath.

      WHY invest in a new hire and get a simple employee tax incentive when you are also told in a few months or so another higher tax or penalty is going to make the whole deal end up more costly than if you just sat it out until the plan was settled???

      No…I wager both you and I…IF we had the money and were in their shoes…would do exactly the same thing.

      Can we have a little more understanding of the complete financial and business problem?

      And “trickle down” is exactly what happens with money.
      However, the plan now is to tax it down.

      The failure of this country, and that of democracy itself, will be when people find they can vote away the wealth and work of others to themselves.
      Rule of law be damned.

  • avatar
    Steven Lang

    Banks currently have well over $2 TRILLION dollars that they are not loaning out.

    Why?

    1) Depositor interests rates are so low that banks do not have to do much lending in order to make a lot of money.

    2) There is a collective ‘holding back’ throughout our economy. Corporations are sitting on another $2 trillion, the savings rate of consumers has gone up substantially, and as many here have already pointed out…. Europe is crumbling.

    I have no problem with making the banks pay for the bailout, except for one thing. They are not even remotely responsible for it.

    If you want to bail out someone, bail out the savers who have seen their CD rates go from 5% to 1% since 2008.

    • 0 avatar
      dvp cars

      going back to EN’s original question, no, it makes no sense, and hasn’t for quite a while. Banks and carmakers seem only tangentially related to me. Why, hypothetically, should Nebraska and North Dakota be singled out to pay for post-Katrina reparations in Louisiana?
      There is a long standing tradition of trashing “big banks”, but, in case nobody’s noticed, they aren’t quite so big any more. Despite all their rogue trading, ridiculous bonus, derivative plagued past (and ongoing) transgressions, we still need them…..would we rather deal with the local loanshark?
      Now does not seem like the time to single out banks for carmakers’ bad debts (I’d love to “follow the money” on that Fiat no-money down Chrysler sleight-of-hand). Even Europe knows that…all this Greece/Italy/Spain hand-wringing is a desperate attempt to save their banks from extinction…they’re totin’ the note.

      • 0 avatar
        highdesertcat

        All this may become a moot point once Greece defaults and the financial repercussions follow. It’s not a matter of ‘if’ any more but of ‘when’ and how long the Euro zone can stave off the inevitable.

        China has already bailed and told Europe that they’re on their own and not to expect any financial help from the PRC.

        Anyone, individuals and banks alike, who isn’t scrambling to protect their financial interests right now should have their head examined. Serious business.

      • 0 avatar
        charly

        Enough Greece debt has been moved from the balance sheets of the banks to that of the states that the banks will survive this. Besides Greece, Portugal & Ireland are economic unimportant in the EU

      • 0 avatar
        psarhjinian

        Banks and carmakers seem only tangentially related to me. Why, hypothetically, should Nebraska and North Dakota be singled out to pay for post-Katrina reparations in Louisiana?

        Because the costs of a disaster (financial or real) seldom stay within geographic or political borders. If it did, then Greece (which is a flyspeck) sneezing shouldn’t cause America to catch a cold.

        There is a long standing tradition of trashing “big banks”, but, in case nobody’s noticed, they aren’t quite so big any more. Despite all their rogue trading, ridiculous bonus, derivative plagued past (and ongoing) transgressions, we still need them…..would we rather deal with the local loanshark?

        That ignores the real issue: it’s not that the banks are bad or not, it’s that a) they were bailed out (and given tax cuts as part of the stimulus package) with the intent of keeping the economy going, and now they’re hoarding capital and not investing, and b) it’s not that they’re big, it’s that they’re unregulated, and now that we’ve bailed them out an given them tax breaks, they really ought to accept the oversight they’ve demonstrated they need.

        It’s worth noting that no country that (figuratively speaking) ballbusts it’s banks with regulation suffered the kinds of failures that are epidemic in countries that do.

      • 0 avatar
        CamaroKid

        Not so big anymore! WTF they are freaking BIGGER.. Where you asleep during all of the mergers and take overs that occurred in late 2008? Only a handful of banks actually failed, most were swallowed alive into MONSTER super banks which are so large now that even the government will not be able to save them next time.

  • avatar
    NormSV650

    Rob Peter to pay Paul or the Obama’s biggest ponsi scheme yet. Let’s take from Federal workers, cut post office down by one day, raise the cost of new mortages, and raise cost of public services like TSA screening at airports. Who says there is no middle class tax cuts?

    At least he is not blaming Bush or Congress, the later whom have a hand in making the rules of the game.

    http://finance.yahoo.com/news/New-government-fees-pepper-apf-4120540659.html?x=0&.v=2

  • avatar
    tparkit

    …”the Obama Administration has resurrected its “Financial Crisis Responsibility Fee”…”

    Pure political theatre, to allow the White House and Democratic congressmen to posture pre-election as being tough on the bailed-out.

    We are going to be paid back, allright — with our own money. Sound familiar?

    http://www.thetruthaboutcars.com/2010/04/grassley-was-gms-payback-shuffle-about-avoiding-the-tarp-tax/

  • avatar
    passive

    (hmm, took me half a dozen logins to get this box to show up, weird).

    I’ve got three problems with this article. Number one is the only real substantiative one.

    1) Banks have not “paid us back” by any stretch of the imagination. At best they have paid back some of the original bailout loans, which were only a small fraction of the measures taken to ensure their survival.

    2) The auto bailout was necessary because after decades of shoddy management, GM and Chrysler were unable to handle the sudden drop in consumer activity. The financial bailout was necessary because the banks decided to go gambling with what were supposed to be “safe” investment funds (and congress let them). The former is an example of stupid and stubborn behaviour. The latter is reckless and corrupt.

    3) As the American government IS the American people, we made some loans to a number of people in tough times. We’re taking a loss on some of those loans, so we’re going to cover it by asking those who have done well with all the money we have fed them to pay a little more. I don’t have a problem with this.

  • avatar
    FleetofWheel

    President Obama and his best men showed their ineptitude and possible malfeasance in the bad Solyndra solar loans.

    Those industrial planners are embarrassing themselves again.

    And this is the team that academia, unions and big media think can manage an entire economy and fine tune auto company bailouts?

  • avatar

    I have no problem going after the banks to pay their share. We allowed them to run amuck during “self regulation” and making bad investments on subprime loans. The gross overexageration of security ratings was a direct cause of the banking collapse. Government regulators turned a blind eye and we are now paying the price. The banks complicity makes them prime targets.

    • 0 avatar
      TrailerTrash

      Oh…please wait here!

      As long as we are so full of JUSTICE here at TTAC today, why not actually get some real criminals in front of a Judge?
      I mean, I have seen Bush, Rich People and Big Business all thrown rocks at by the people of the town.

      Vigilantes in the night. Witch burners all.

      Well, OK…let’s get the sex pig still today running around offering advice…Bill Clinton.
      How about Barney Fwanks and others from this same period?
      Were they NOT the very group that fixed the protection laws of the financial world and allowed such fake-assed schemes to become a part of the picture?

      You bet your losses they were.

      And STILL these clowns walk about lecturing and scolding others for wrong doings.

      This is again, my TTAC friends, a con.

      • 0 avatar
        aristurtle

        The Community Reinvestment Act was signed by Carter, not Clinton.

        And no, the 2008 meltdown was not caused by a piece of Carter-era legislation. More than half of the subprime loans were from non-CRA banks. And besides, the subprime loans weren’t the problem; the problem was slicing them up, faking their safety ratings, selling them to investment funds, taking out insurance on them, faking the insurance’s ratings and selling off chunks of that, etc.

      • 0 avatar
        geeber

        The Communmity Reinvestment Act planted the seeds the grew into the current mess. It got the ball rolling; the banks later figured out that they could make money on these loans, so they eagerly jumped in with both feet. If there hadn’t been large numbers of subprime loans in the first place, financial institutions wouldn’t have dreamed up ways to make money off of them.

        Repealing the capital gains tax on the sale of a primary residence in 1997 was another factor. All of this fueled a real estate boom that priced people out of the market, which increased demand for increasingly exotic mortgages to allow people to “afford” a house.

      • 0 avatar
        aristurtle

        And, again, the problem wasn’t the mortgages. If we just had a few sleasy mortgage brokers going bankrupt, we wouldn’t have had a global economic catastrophe. The problem was the bad mortgages getting turned into tranches of “investment grade CDO bonds” and then sold into people’s retirement funds and hedge funds and such. Then, the only way to short these crappy investments was the “credit default swap”, which became “virtual CDOs” which then further poisoned the rest of the economy.

        In other words, the problem was passing off bad investments as good investments; this has been going on since the concept of investment, we just hit a particularly severe and widespread episode of it. Pointing at the CRA is just a transparent attempt by Republicans to blame some Democrat for a mess that wasn’t really either party’s fault. (Mind you, I’m not blaming the Republicans for blame-flinging; that sort of nonsense is endemic to our political system. Ask “anyone”: everything bad that happened in Obama’s administration is Bush’s fault, everything bad that happened in Bush’s administration is Clinton’s fault, etc. etc. ad nauseum)

      • 0 avatar
        TrailerTrash

        Lots of what is said here is truth.
        But it isn’t the main issue.

        Once again, the issue is still being missed.
        Yes, Carter did such. However, BIG rules were also changed under Clinton that allowed for, and even forced, loans to be made to those who up till then would not have been awarded loans.
        This was a major part of the Clinton glory economy. You want home loan, you got it.
        You want to buy homes you cannot afford and flip. Flip. Flip again? You got it.
        It was so frigged up, every hair dresser became a real estate broker!
        PULEEEZE!
        A con yet again, my friends.

        However, and this is REALLY important, regulations did NOT allow for banks and other investments to partake in not just these, but other “non” banking issues otherwise and up till then only the market of Wall street and other speculative worlds. This was where speculation, winning and losing, had always been done. NOT the Banks!

        Under Bill Clinton and the democratically controlled congress, this was changed.
        Now, and not since the great depression reforms, had the banks been allowed to partake of this kind of risky business.
        It was all for those creeps in the business and NOT for the safety and regulation of the banking world as we had become comfortable with.

        Please, now let us be real. This was not just a democratic party event.
        Many criminals (by my definition) and many, many players. And Fwanks and others deeply involved.
        However, it WAS under Bill Clinton and his watch this horrible change took place.

        IF there is to be any real truth be spoken here on TTAC…this Must be acknowledged.

  • avatar

    The root of all the bailouts were becasue of our “trustworthy” financial institutions and years of deregulation. If the banks had not failed, the automakers would not have required a bailout.

    I’m not saying that wouldn’t have ever failed becaue they did/do have their problems created by over-zealous unions, high legacy costs, and having to count on high-profit leases to keep them afloat.

    Just let’s not forget why all of this started in the first place. It’s not just the auto industry that failed. If the building/construction industry consisted of only three large corporations, they would have also required a bailout. In a way, they did, with unemployment…

    Make no mistake that EVERY form of business in this country was hurting becasue of greed, deregulated, financial robber-barons have caused.

    When I lost my house and filed for bankruptcy, becasue of the Great Recession, I was more than happy to let it happen. It was because of them that I lost my job. That was MY bailout. I hope the bank CEOs choke on my foreclosed home that is worth less than a third of what I owed them for it!

    So I guess, just like with GM and Chrysler, you can hold that over my head too now that I am personally profitable again.

    • 0 avatar
      jplew138

      Oh yeah…don’t forget about the recent revelations of the SEC routinely trashing investigations into Goldman Sachs and the other major financial institutions that got the majority of the bailout money.

  • avatar
    jeoff

    It was also the mis- and mal-regulation associated with “good intentions”. That is, there was a desire in the governmet to increase home ownership among folks that in the past would not have been approved for loans in the past. When this took shape in public poicy at first banks were being “pushed” to make risky loans, and eventually there was a big market for these loans, and this resulted in a lot of bad loans and contributed to the collapse. It was big business acting in a predictable way in response to a poor attempt at social engineering by our govenrment.

    • 0 avatar
      aristurtle

      yeah, right, that’s why banks started shoveling around subprime loans based on business space mortgages or foreign mortgages or second home mortgages, which made up a significant chunk of the mess going on and weren’t subject to that Carter-era law you’re talking about.

      no, what happened is banks realized they could make crappy loans and then pass the hot potato to someone else before it goes off, which works until your entire economy is built on hot potatoes.

      • 0 avatar
        jplew138

        One word: Greed.

      • 0 avatar
        geeber

        Here is a link that gives a detailed overview of how the Community Reinvestment Act played a part in current crisis.

        http://www.businessinsider.com/the-cra-debate-a-users-guide-2009-6

        Here are some key quotes from the article:

        A Treasury Department study published in 2000 found that the CRA had successfully lowered down payments not just for CRA loans, but for all mortgages.

        (Regarding automatic underwriting systems, which were blamed for placing speed over accuracy): This was another lending innovation praised by regulators to the point that it became mandatory for banks. Those who were not employing automated underwriting would be putting their CRA ratings at risk. Automated underwriting was seen as a way of eliminating bias in lending.

        (Regarding claims that securitization was the real culprit): The government pushed for greater mortgage securitization in an effort to increase CRA lending. At the behest of HUD Secretary Andrew Cuomo, Fannie and Freddie promised to buy $2 trillion of “affordable” mortgages. The government was intentionally decreasing the risks to the original lenders in order to increase loans to low-income borrowers, and minorities in particular. In short, you can’t blame securitization without coming back around to the CRA.

        (Regarding claims that the majority of subprime loans were made by companies not subject to the act): This is true. But it is largely beside the point. A huge driver of the demand for subprime loans was the demand for CRA bonds. Banks operating under the CRA could meet their obligations by buying up CRA loans or MBS built from CRA loans. The CRA created a demand that the mortgage servicers were meeting.

        What’s more, many smaller mortage service companies hoped to be acquired by larger banks. Increasing their CRA lending made them more attractive take-over targets.

        A study put out by the Treasury Department in 2000 found that the CRA was encouraging the mortgage servicers to provide loans to low-income borrowers, in part because the CRA loans had been so successful.

        Finally, the Clinton adminstration threatened to subject the mortgage companies to the CRA if they didn’t comply voluntarily. They promptly agreed to increase their CRA-type lending in order to escape the kind of public scrutiny that comes with official CRA regulated status.

        Was the act the ONLY factor? No. Are Republicans and the financial institutions completely off the hook? No.

        But to describe the current mess as the result of deregulation, or a failure of the free-market system, is not accurate. Nor is absolving the Community Reinvestment Act. There was a tremendous amount of government intervention – not all of it by Democrats, to be sure – that led us to the present place.

      • 0 avatar
        Pch101

        Here is a link that gives a detailed overview of how the Community Reinvestment Act played a part in current crisis

        Not a very good link, frankly. John Carney is a hack. I’ve read some of his stuff, and he often doesn’t know what he’s talking about. You can expect his work to be stilted, not well researched and far from balanced.

        The numbers don’t really support your position. Your views are based upon a false presumption that the problem was primarily a subprime problem and that the mortgage market was completely CRA-driven, when both positions weren’t true. What actually happened is that the lending market became so enticing to non-bank lenders that private securitization became all the rage. Because much of the low-hanging fruit had already been plucked, they lent to whoever was left and at very aggressive terms, using recent market data as an excuse to ignore traditional underwriting standards.

        We are living under CRA today, and you’ll notice that we have the opposite of a mortgage bubble. That’s due to the fact that the private securitization market has shrunk considerably. That leaves banks with holding loans in their portfolio and producing conforming loans that can be securitized by the GSEs, which results in higher standards.

        Banks don’t make loans unless they think that they can make money doing it. The US president can’t force them into it, regardless of what John Carney may think. In this case, the banks changed their business model from one of portfolio lending (making a spread on their loans — renting money at a higher price than they pay for it) to servicing (collecting fees for collecting payments on the behalf of the loan holder.) Since servicing appeared to be less risky and more lucrative, they went for it with gusto. And that meant pumping out loans in high volumes, which would lead to higher incomes and greater profits. Since the risk didn’t (seem to) belong to them, they no longer saw much need to underwrite as they once would have.

        The solution to this lies in limiting the impact of private securitization. In essence, the ability of investor equity to influence the market has to be curtailed. It isn’t a problem now because the investors have been scared off, but when they lose their fear, watch out for the next bubble.

      • 0 avatar
        TrailerTrash

        THANK YOU GEEBER and PCH101!!!

        I bow to you both on the effort given towards the truth.
        Really, thanks.

        But I guess the sick part is so what?
        It doesn’t matter.
        Without a real revolution against this dealing, it continues.

        Madness, really greedy madness.

      • 0 avatar
        geeber

        Mr. Carney linked to other sites featuring discussions of this issue, and was originally one of those who didn’t believe that the Community Reinvestment Act was to blame in any way, shape or form. His arguments are supported by other sources. I guess we’ll just have to agree to disagree on this one.

  • avatar
    Zackman

    It’s almost October: Wait for the crash, ’cause if it comes, that’s probably when you’ll see it!

    As governments around the world run out of money, who is sitting on assets not even taxed? Religious organizations! You may well see this happen. I’m no seer or anything, just thinking and musing out loud as nations scramble for money and assets to make up for their debt that has any real value.

    Yes, GREED. Now it’s time to pay up. Nothing is free!

  • avatar
    Contrarian

    Amerika needs moar redistribution Comrades!

  • avatar
    jimboy

    While I do agree that the automakers could pay back more, I still find your numbers optimistic, to say the least. Why should Chrysler be held responsible for loans to it’s suppliers? I questioned you before on this and you failed to answer then, so in my books it is well below $4B, and there is still some money to come through the IPO when it happens. Since you have been CONSISTENTLY wrong about Chrysler’s prospects for the last 2 years, why don’t you just wait and see what really happens instead of trying to stir a pot that boiled a long time ago? Even according to your weird little chart, Chrysler has done far better than some others in repaying the LOANS @20%, not found money, as you seem to imply.

  • avatar
    Conslaw

    We are not out of the woods yet. The reason the banks paid back the money is because they get lots of direct and indirect subsidies from the Federal Reserve and from the mere holding of bank charters which allow them to borrow at the discount window and lend out the same money several times over. That’s actually how the money supply is supposed to grow. The banks aren’t lending, so the money supply isn’t growing.

    Several banks including Bank of America have been dodging any real accounting of their problem mortgage loans. Robosigning is a symptom of a disease, and that disease is that the banks don’t even know what they are holding. The attorneys general settlement appears to be stalled because people are starting to realize that the AGs have been trying to come to a settlement before they really did an investigation, and that won’t work because it doesn’t resolve the issues regarding the validity of the mortgages. Without knowing the validity of the mortgages, you can’t know the value of the mortgage securities. Without knowing the value of the securities, you don’t know if your 401k really has enough money for you to retire.

    The relatively tiny bailouts of Chrysler and General Motors, though not paid back by the car companies, can be justified because they have already paid for themselves in avoided extended unemployment payments and other transfer payments. If you want to really point a finger of blame, look at Fannie Mae and Freddie Mac. They had plenty of warning signs of predatory lending, and always looked the other way. They could have spotchecked loans to make sure that these trillions of dollars of investments were properly documented and secured. Look at the green lines for the money disbursed, and they’re still at the window begging for more money. To make things worse, the regulator of Fannie and Freddie that was effectively imposed on them after the meltdown is a roadblock to a potentially huge mortgage refinancing strategy aimed at refinancing all of the government secured loans whether over secured or not. The money saved would add liquidity to the market and could actually decrease government payouts on defaulted mortgages because lower monthly payments would result in fewer defaults.


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