Posts Tagged ‘financial crisis’

Blaming Fannie & Freddie: Taking The Easy Way Out

“Will Obama Slay The Fannie and Freddie Beast?”  is the headline of one story appearing in Newsweek today. Basically, it appears that instead of doing anything to the major players that actually caused the economy to collapse, you know, those fat cat Wall Street CEOs with their stupid, blow-up-the-housing market schemes, once again the easy target gets the blame: poor people who shouldn’t have been able to buy homes in the first place.

The Obama administration appears to be suggesting — very subtly — that homeownership isn’t a God-given right. That the American dream has morphed into an American entitlement. That millions of people who should not have been homeowners in the first place ended up paralyzed by unsustainable debt as a result

The American Dream is indeed powerful and one of its major tenets is owning your own home. Why is that such a tenet, though? Because for years, owning a home was the only asset any except the top five percent of Americans could claim.  Having said that, homeownership has never been an entitlement and the idea that giving poorer Americans the ability to purchase homes led to this crisis is completely incorrect. It is par for the course, however, as it is easy to blame everything on those least able to represent themselves. Poor and working class Americans  don’t have a powerful lobby like Wall Street does.

The fact is that the financial crisis was NOT caused by making loans to poor people to buy homes. It was NOT caused by the CRA or Fannie and Freddie. It was caused by greedy Wall Street bankers knowingly creating financial products that were doomed to fail from the very beginning.  The Center For Responsible Lending and others have done studies which have  revealed that risky borrowers weren’t the problem;  it was the terms of the loans themselves .  In fact, the majority of people who received “subprime” loans could have qualified for conventional mortgages, with a much lower default risk.  Furthermore, most of the loans made were not loans to first time homebuyers: the majority were refinances and loans made to homeowners moving from one house to another.  

It is deeply saddening to me that the Obama Administration appears to be buying into the Republican talking points, given to them straight from Wall Street, that the cause of the crisis was government intervention to try and help people get a leg up when true cause was the absence  of government in making sure that the mortgage products that were being peddled to the American people were safe and sustainable.

Franken Amendment Regarding Credit Rating Agencies Passes 64-35

An important amendment that makes the current financial reform bill winding its way through Congress stronger has been passed by a vote of 64-35. Introduced by Senator Franken of Minnesota, this amendment would create a clearing house through which all credit agencies, such as Fitch Ratings, Standard & Poors, and Moody’s would be assigned to rate debt instruments.

Currently, securities firms may choose which agency to use based on the ratings the agency gives the bonds they wish to sell. This ability to shop around for the highest ratings constitutes a major conflict of interest since it incentivizes the rating agencies to inflate their ratings in order to compete for more business. This systemic conflict of interest played a major role in the financial collapse that we are still crawling out from under.

What the Franken amendment does is to put an non-biased, intermediary agency in between the securities brokers and the credit rating agencies.  Since this intermediary agency would assign out work to the credit rating agencies on a random basis, the incentive to rate a security higher in order to get more business would be gone.

Way to go, Senator Franken and Congress!

Senator Sanders’ Amendment To Audit The Fed Passed Unanimously 96-0

 

fed

In  a rare show of complete bipartisanship, the Senate today voted unanimously,  96-0, to approve an audit of the Federal Reserve.  The audit would be limited to Federal Reserve activity that took place from the beginning of the financial crisis in December of 2007 until the time the law is enacted. In addition, the Fed would be required to disclose the recipients of the more than $2 trillion dollars in emergency aid funding since that time. The list of recipients will be available on the Fed’s website beginning on December 1st 2010. The GAO will also look into whether or not there were any conflicts of interest involved in any of these financial deals granted during the review time period.

Today’s vote was on an amendment, proposed by Senator Bernard Sanders,  to the larger financial reform bill currently being worked on by both houses of Congress.  Originally, the measure had stronger language that would have required an on-going audit of the Fed, but faced with bipartisan opposition in the Senate as well as opposition from the White House and from Federal Reserve Chairman Bernake himself, the scope of the audit was scaled back to a one time occurrence.  In addition, the names of the recipients of the two trillion dollar emergency aid would not have to be published on the Fed’s website until December 1, 2010 instead of within 30 days of its enactment.

While this is good news, it is important to remember that this vote was only on an amendment to the larger financial reform bill, which is still has a long way to go before it passes, after which, it must be signed by President Obama in order to become law.

David Frum: Wall Street Didn’t Cause Financial Crisis- It Was China!

I had to laugh when I read this editorial by neo-con David Frum on CNN today.

To his credit, he acknowledges that Americans did not take out mortgages to buy homes they knew they couldn’t afford or that they borrowed too much because they wanted big screen TVs in every room.  He gets it right when he says that Americans were borrowing because incomes have not been keeping pace with the cost of living, but from there, he shifts into “alternate universe land.”

He says, and I kid you not, that China’s growth caused the financial collapse because it was buying up US debt like crazy in order to keep its factories fully staffed with workers, and of course, the largest source of American debt was U.S. mortgages. Wall Street, seeing the Chinese demand for U.S debt created the vehicles to produce more of it: mortgage backed securities. They were just the middle men.  Ergo,  it wasn’t Wall Street that increased the demand to the point that mortgage brokers were peddling risky loans doomed to fail, it was the Chinese hunger for American debt!

Rating Agencies Fudged Numbers For Wall Street Cash

On Thursday, a Senate panel investigating the cause of the financial crisis revealed evidence of corruption on the part of the credit rating agencies, Standard & Poors and Moodys. Specifically, the evidence suggests that these firms made deals with Wall Street investment banks to rate their mortgage backed securities as triple A rated risks for fees of over $1 million dollars per rating. Read the entire story here.

FDIC Chairman Sheila C. Bair: Financial Literacy Is Key In Preventing Another Financial Crisis

In a speech to the Operation Hope Financial Forum, FDIC Chairman Bair said that educating consumers about finances is a key ingredient to preventing another financial crisis. You can read her full speech here.

While she does also say that regulation is needed to protect people from bad loans, the bulk of her remarks seem to be aimed at the necessity of financial education.  Certainly, no one will disagree that arming people with financial knowledge is a good thing.  However, education is not enough.

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A Tale Of Three Families: Do Bad Decisions Lead To Financial Trouble?

A comment left on this entry by About.com’s LaToya Irby got me to thinking about people in financial trouble and how they got there, leaving aside for the moment the catastrophic economy that we’re in today.

In the best of all worlds, no one would ever spend more than they can afford and everyone would be debt free. However, we know that the world is far from perfect and people often make financial decisions based on emotion and necessity.

Consider a young couple with a child living on minimum wage. The husband works two jobs and the wife works one, and together they earn enough money to live with a little extra to spare. They decide to use that little extra bit they’re able to pull in to save towards buying their child an Xbox 360 as a Christmas present. December rolls around and they have the money saved up when disaster strikes. The wife breaks her leg and is out of work for six to eight weeks. Their Xbox 360 fund suddenly becomes a lifeline, but Christmas is still coming and they still want to see their child’s face light up when he opens up his gifts to see that he has a new Xbox 360. The family buys the Xbox on a store credit card.

Then there’s the solidly middle class two earner family. Both parents work in good paying jobs and on that income, they’re able to afford a decent house in a nice neighborhood. They run small balances on their credit cards and are paying part of the tuition for one of their children who is in college and braces for their middle child. Everything is fine until the husband gets laid off. Suddenly, the family’s income is cut in half and they dig into their savings to continue to pay the bills that don’t stop coming simply because of a lost job. Time drags on and the husband can’t find work. His industry has gone under, but the bills keep coming. Now this family is relying on their credit cards to make ends meet.

Finally, there’s the family earning six figures. This family is among the affluent and well-to-do. They live in a large house in a gated community and drive expensive cars. Curiously, just like the middle class family and even like the poor family, when one of the breadwinners no longer has a job, what was a rosy financial picture starts looking dingy and grim.  Because this family had been affluent, there is room for cutting back and for making lifestyle changes to adjust for lower income. They sell their expensive cars and buy cheaper ones. They don’t spend as much money as they are used to. However, some of the bills of the affluent lifestyle remain and can’t be gotten rid of. Among these is the house with the now unaffordable mortgage payment. This once affluent family now faces foreclosure.

These stories are purely hypothetical, but hundreds of them play out daily in real life. In the first case, human emotion and the desire to make a child happy result in what to cold hard facts is an irrational financial choice. In the other cases, it is about continuing to pay the bills that continue to come in the mail even when the income to pay them is no longer there.

To suggest that people in financial trouble got there because of poor decision making is too simplistic. It is never that black or white. Emotions and circumstance play a role and one can’t predict what lies beyond the next turn down the road of life.

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