WingRight

So we have a financial melt-down and new government regulations are going to fix it.

The problem is that government regulations caused the melt-down in the first place.

The real origin of the melt-down is Fannie Mae and Freddie Mac, the most heavily regulated major financial instutions in the country and the most politically-connected.  If you want to see what a large institution looks like when it’s micro-managed by Congress, Phonie and Fraudie are exhibits A and B.

You see, Phonie and Fraudie are involved in more than just providing mortgage lending.  They’re experts on social engineering.  Poor people with lousy credit can’t afford to buy homes?  No problem.  Franklin Raines, the Clinton-appointed former head of Fannie Mae from 1998 to 2004, made it his top priority to make mortgages easier to get for people with poor credit, few assets and little money for a down payment.

Then Frank bundled lousy mortgages with good mortgages and sold them as mortgage-backed securities.  Why would smart buyers purchase these?  The answer is simple - they are backed by the Federal Government.  Phonie and Fraudie are “Government Sponsored Enterprises” which means that Uncle Sam promises that he/she (you) will pay if the deadbeat borrowers don’t.

As an aside, Frank was appointed by President Clinton and made over $100 million from Phonie in six years, in part, by engaging in accounting fraud.  Since his heart was in the right place (he was a Democrat), Frank didn’t go to jail, unlike those nasty Enron people who contributed to Republicans.

Regulatory reason #2 - The Community Reinvestment Act.  The “problem” that this legislation solved was that (gasp) banks don’t like to lend money to people who are unlikely to repay their loans.  The 1970’s were full of “redlining” stories about terrible banks who wouldn’t make mortgage loans to people who wouldn’t make their loan payments.

Where did the “redlining” come in?  I know that this will shock you, but deadbeats tend to live in the same neighborhoods, neighborhoods that are full of run-down real estate.  You could draw a line, maybe even a red line, around neighborhoods full of deadbeats and run-down real estate. When banks didn’t seem to be anxious to lend to such people, they did so only because those people were racial minorities.  Silly bankers, they were nothing but irrational racists who were bad and who also didn’t understand that there were lots of potential profits in lending to people who didn’t repay loans and securing those loans with real estate that no one wanted to buy (unless they got free money).

The Community Reinvestment Act was fairly dormant until Mr. Bill from Arkansas became President.  He decided that banks couldn’t merge or open new branches and maybe would even have their charters revoked unless they met quotas for lending to certain races in certain geographic areas.  Bankers wondered how they would do that, but Mr. Bill had a solution - give the money to organizations who were “sensitive” to the needs of innner-city racial minorities, pay a lot of money to those organizations and automatically, the bank would be in full compliance with the CRA.

What kind of organizations would be the best for CRA compliance?  Surprisingly, none were staffed by Republicans.  I guess the Republicans just weren’t sensitive enough.  ACORN was one of these organizations (who, surprisingly, was Barack Obama’s employer when he was a community organizer). The Bank of New York felt a big CRA gun at its head and gave ACORN Housing $760 million to lend . The Boston-based Neighborhood Assistance Corporation of America had a $3-billion agreement with the Bank of America; a coalition of groups headed by New Jersey Citizen Action had a five-year, $13-billion agreement with First Union Corporation.

Nobody extorts money from the financial like radical entrepreneurs who help the poor. You see, banks would have been happy to lend to many of the people who ended up with CRA-mandated loans, but the CRA compliance racket meant that ACORN got a piece of the good loans and the bad loans.

Bruce Marks, the CEO of the Neighborhood Assistance Corporation of American, was typical of this group of sensitive people helping the poor.

Marks, a Scarsdale native, NYU MBA, and former Federal Reserve employee, unabashedly calls himself a “bank terrorist”—his public relations spokesman laughingly refers to him as “the shark, the predator,” and the NACA newspaper is named the Avenger. They’re not kidding: bankers so fear the tactically brilliant Marks for his ability to disrupt annual meetings and even target bank executives’ homes that they often call him to make deals before they announce any plans that will put them in CRA’s crosshairs. A $3 billion loan commitment by Nationsbank, for instance, well in advance of its announced merger with Bank of America, “was a preventive strike,” says one NACA spokesman.

Marks is unhesitatingly candid about his intent to use NACA to promote an activist, left-wing political agenda. NACA loan applicants must attend a workshop that celebrates—to the accompaniment of gospel music—the protests that have helped the group win its bank lending agreements. If applicants do buy a home through NACA, they must pledge to assist the organization in five “actions” annually—anything from making phone calls to full-scale “mobilizations” against target banks, “mau-mauing” them, as sixties’ radicals used to call it. “NACA believes in aggressive grassroots advocacy,” says its Homebuyer’s Workbook.

The NACA policy agenda embraces the whole universe of financial institutions. It advocates tough federal usury laws, restrictions on the information that banks can provide to credit-rating services, financial sanctions against banks with poor CRA ratings even if they’re not about to merge or branch, and the extension of CRA requirements to insurance companies and other financial institutions. But Marks’s political agenda reaches far beyond finance. He wants, he says, to do whatever he can to ensure that “working people have good jobs at good wages.” The home mortgage business is his tool for political organizing: the Homebuyer’s Workbook contains a voter registration application and states that “NACA’s mission of neighborhood stabilization is based on participation in the political process. To participate you must register to vote.” Marks plans to install a high-capacity phone system that can forward hundreds of calls to congressional offices—”or Phil Gramm’s house”—to buttress NACA campaigns. The combination of an army of “volunteers” and a voter registration drive portends (though there is no evidence of this so far) that someday CRA-related funds and Marks’s troop of CRA borrowers might end up fueling a host of Democratic candidacies. During the Reagan years, the Right used to talk of cutting off the flow of federal funds to left-liberal groups, a goal called “defunding the Left”; through the CRA, the Clinton administration has found a highly effective way of doing exactly the opposite, funneling millions to NACA or to outfits like ACORN, which advocates a nationalized health-care system, “people before profits at the utilities,” and a tax code based “solely on the ability to pay.”

If Barack had any real talent for anything other than self-promotion, this is what he would have done in his community organizing days.

See The Trillion-Dollar Bank Shakedown That Bodes Ill for Cities by Howard Husock, a prescient analysis of the CRA racket published in the Winter, 2000, issue of City Journal for much more detail.

Mark to Market

The combination of Phonie, Fraudie and the CRA shakedown gave birth to big-time sub-prime mortgage-backed securities. Without these three, sub-prime would have been a small, unimportant part of the MBS world.

The final regulatory cause of the current melt-down originated with the fall of Enron. You’ll recall that Enron had a lot of assets that were allegedly over-valued and not properly reflected on its balance sheet. One of the solutions was Sarbanes-Oxley, the single greatest source of wealth for the London IPO market, but another was mark-to-market accounting incorporated in FASB 157 and other accounting idiocies.

Mark to market says that any assets owned by a public company must be valued at their current fair market value. What if there isn’t really a market value because no one is buying or selling an asset? Then FASB says that whatever the asset is, even if the company paid hundreds of millions of dollars for it and expects to make even more money by holding the asset to maturity, must not be worth much, if anything, because no one is willing to pay much for it right now.

Imagine that you paid $25 million for a house in a small town in which the next most expensive house would sell for $100,000. The $100K house is 1500 square feet with Home Depot budget plumbing fixtures and linoleum floors and your house is 50,000 square feet with solid gold fixtures and carpet made from unborn llama fur.

So what could you sell your house for, say within two weeks? $25 million? Not likely. $5 million? Nope. $150K? You could probably get that. So, using mark to market accounting, your house is worth $150K. You say that you would never sell your house for $150K and that, if you wanted to sell your house (you don’t), you would list it with Sotheby’s and spend 5 years finding a buyer who would pay $30 million? Sorry, but that doesn’t reflect today’s market for your house.

So, you’re the CFO of a big financial services company that owns a $25 million exotic mortgage-backed security. Using mark to market, what is that worth today? Nobody’s buying this today? It’s not worth much. Expect to generate $35 million in revenue from the security over 20 years and never plan to sell it? Sorry, but that doesn’t count.

As a CFO, you remember what happened to Enron’s CFO, Andrew Fastow. As much as you would love to value your MBS at its real value for the benefit of your shareholders, you don’t want to spend six years in chokey, so you mark it to market and say its worth a buck. Not really accurate, but no US Attorney is going to come after you at that valuation.

Even if you’re willing to take the risk of providing a real value, your auditors won’t let you. Enron’s auditor was the late, lamented Arthur Anderson. AA doesn’t exist any more because it was found guilty of obstruction of justice as part of the Enron nastiness. Since your auditors want to keep working, they’ll force you to say your MBS is worth a buck.

So, is “Wall Street Greed” to blame for the credit melt-down? Nope. It’s the regulations.

The solution that all good politicians propose for the melt-down? More regulations.

Will the economy recover? Yes, it will. Pay attention to those new regulations, however, and you’ll have a good chance of predicting the shape of the next meltdown.

Tags: Economy, Energy, Liberal "Solutions" //