The Economy Improved Last Month

Too little, too late to salvage the McInsane-Failin’Ticket

Let me get this straight. Investment banks and insurance
companies run by centimillionaires blow up, and it’s the
fault of Jimmy Carter, Bill Clinton, and poor minorities?

These arguments are generally made by people who read the
editorial page of the Wall Street Journaland ignore the rest
of the paper-economic know-nothings whose opinions are
informed mostly by ideology and, occasionally, by prejudice.
Let’s be honest. Fannie and Freddie, which didn’t make
subprime loans but did buy subprime loans made by others,
were part of the problem. Poor Congressional oversight was
part of the problem. Banks that sought to meet CRA
requirements by indiscriminately doling out loans to
minorities may have been part of the problem. But none of
these issues is the cause of the problem. Not by a long shot.
From the beginning, subprime has been a symptom, not a cause.
And the notion that the Community Reinvestment Act is somehow
responsible for poor lending decisions is absurd.

Here’s why.

The Community Reinvestment Act applies to depository banks.
But many of the institutions that spurred the massive growth
of the subprime market weren’t regulated banks. They were
outfits such as Argent and American Home Mortgage, which were
generally not regulated by the Federal Reserve or other
entities that monitored compliance with CRA. These
institutions worked hand in glove with Bear Stearns and
Lehman Brothers, entities to which the CRA likewise didn’t
apply. There’s much more. As Barry Ritholtz notes in this
fine rant, the CRA didn’t force mortgage companies to offer
loans for no money down, or to throw underwriting standards
out the window, or to encourage mortgage brokers to
aggressively seek out new markets. Nor did the CRA force the
credit-rating agencies to slap high- grade ratings on
packages of subprime debt.

Second, many of the biggest flameouts in real estate have had
nothing to do with subprime lending. WCI Communities, builder
of highly amenitized condos in Florida (no subprime
purchasers welcome there), filed for bankruptcy in August.
Very few of the tens of thousands of now- surplus
condominiums in Miami were conceived to be marketed to
subprime borrowers, or minorities-unless you count rich
Venezuelans and Colombians as minorities. The multiyear
plague that has been documented in brilliant detail at
IrvineHousingBlog is playing out in one of the least-subprime
housing markets in the nation.

Third, lending money to poor people and minorities isn’t
inherently risky. There’s plenty of evidence that in fact
it’s not that risky at all. That’s what we’ve learned from
several decades of microlending programs, at home and abroad,
with their very high repayment rates. And as the New York
Times recently reported, Nehemiah Homes, a long-running
initiative to build homes and sell them to the working poor
in subprime areas of New York’s outer boroughs, has a
repayment rate that lenders in Greenwich, Conn., would envy.
In 27 years, there have been fewer than 10 defaults on the
project’s 3,900 homes. That’s a rate of 0.25 percent.

On the other hand, lending money recklessly to obscenely rich
white guys, such as Richard Fuld of Lehman Bros. or Jimmy
Cayne of Bear Stearns, can be really risky. In fact, it’s
even more risky, since they have a lot more borrowing
capacity. And here, again, it’s difficult to imagine how
Jimmy Carter could be responsible for the supremely poor
decision-making seen in the financial system. I await the
Krauthammer column in which he points out the specific
provision of the Community Reinvestment Act that forced Bear
Stearns to run with an absurd leverage ratio of 33 to 1,
which instructed Bear Stearns hedge-fund managers to blow up
hundreds of millions of their clients’ money, and that
required its septuagenarian CEO to play bridge while his
company ran into trouble. Perhaps Neil Cavuto knows which CRA
clause required Lehman Bros. to borrow hundreds of billions
of dollars in short-term debt in the capital markets and then
buy tens of billions of dollars of commercial real estate at
the top of the market. I can’t find it. Did AIG plunge into
the credit-default-swaps business with abandon because
Association of Community Organizations for Reform Now members
picketed its offices? Please. How about the hundreds of
billions of dollars of leveraged loans-loans banks committed
to private- equity firms that wanted to conduct leveraged
buyouts of retailers, restaurant companies, and industrial
firms? Many of those are going bad now, too. Is that Bill
Clinton’s fault?

Look: There was a culture of stupid, reckless lending, of
which Fannie Mae and Freddie Mac and the subprime lenders
were an integral part. But the dumb-lending virus originated
in Greenwich, Conn., midtown Manhattan, and Southern
California, not Eastchester, Brownsville, and Washington,
D.C. Investment banks created a demand for subprime loans
because they saw it as a new asset class that they could
dominate. They made subprime loans for the same reason they
made other loans: They could get paid for making the loans,
for turning them into securities, and for trading
them-frequently using borrowed capital.

At Monday’s hearing, Rep. John Mica, R-Fla., gamely tried to
pin Lehman’s demise on Fannie and Freddie. After comparing
Lehman’s small political contributions with Fannie and
Freddie’s much larger ones, Mica asked Fuld what role Fannie
and Freddie’s failure played in Lehman’s demise.
Fuld’sresponse: “De minimis.”

1. shfelby posted the following on October 22, 2008 at 4:42 pm.

   And are you Daniel Gross? Who the heck are you?

   Reply to shfelby