Social “Justice” and Wealth Destruction

Source: Federal Reserve Bank of St. Louis
Source: Federal Reserve Bank of St. Louis

by James A. Bacon

It is well documented that African-Americans and Hispanics lost a higher percentage of their net worth since the Great Recession of 2007 than did whites and Asians. The pressing question is why?

The dominant explanation is that racism and discrimination — or at least the after-effects of overt racism and discrimination reflected in practices embedded in major U.S. institutions such as schools, universities, banks, real estate markets and the like — is to blame. But there is a hardy dissenting viewpoint that, while private U.S. institutions may fall short of the ideal, the greatest threat to minority well being is activist government: In the effort to fix inequality, social justice advocates exercising the levers of government power unwittingly do more harm than good. The effects of the real estate crash and ensuing recession are a perfect illustration of that principle.

William R. Emmons and Bryan J. Noeth don’t frame the issue that way in a paper published last year, “Why Didn’t Higher Education Protect Hispanic and Black Wealth?” The two economists, working for the Federal Reserve Board of St. Louis, were preoccupied with the question of why collegeeducated Hispanics and blacks fared so poorly during and after the recession. Given that higher education is associated strongly with higher income and greater household wealth, it seemed anomalous that college-educated blacks and Hispanics saw much greater plunges in net worth than whites and Asians. But the data the authors provide is entirely consistent with the idea that social-justice activism combined with blundering government efforts to right past wrongs is a recipe for minority disaster.

Look at the chart atop the post. The thing that will stand out to social-justice warriors, always alert for any sign of inequality, is that the percentage loss in net worth between 2007 and 2013 was far greater for college-educated blacks and Hispanics than for college-educated whites and Asians — the very points that caught the attention of Emmons and Noeth. But at least two things will stand out to those who don’t embrace the presumption of racism.

First, the percentage loss in net worth for less-educated whites is in the same ballpark as that for less-educated blacks and Hispanics. If racism/ discrimination were a decisive factor, why did non-college-educated whites fare nearly as badly?

Second, educated Asians actually gained wealth during the time period, the only group to do so, while their less-educated peers suffered more disastrous losses (expressed as a percentage of net worth) than any other ethnic racial group. How does the racism explanation fit here? Do the forces of institutional racism disproportionately favor educated Asians and punish less-educated Asians?

As it turns out, Emmons and Noeth provide data that account for much of the disparity. The key variable was indebtedness, or more precisely, the median debt-to-income ratio in 2007. Some racial-ethnic groups had piled up more debt, much of it mortgage debt, than others. Consequently, when the real estate market tanked, the economy crashed, and people started losing their jobs, some were more vulnerable to the downturn than others.

Let’s take a closer look.

Source: Federal Reserve Bank of St. Louis.
Source: Federal Reserve Bank of St. Louis.

It turns out that not only did college-educated Americans in 2007 take on more debt in absolute terms than did their less-educated peers, they took on more debt in comparison to their incomes. College-educated blacks and Hispanics took on the highest debt levels of all — up to 164.7% in the case of blacks. When real estate markets crashed, they were the most exposed, and they suffered the greatest losses. It is not coincidence that the group taking on the least debt, educated Asians, was the one group that saw an increase in net worth.

Conversely, less-educated Asians were the most highly leveraged of their racial-ethnic peers. Not surprisingly, they saw the greatest percentage losses in net worth.

Why did educated Hispanics suffer even greater net-worth losses than educated blacks? Is America’s real estate-financial system more rigged against Hispanics than blacks? No. A better explanation for the disparity between Hispanics and blacks is that Hispanics predominated in California, Florida, Arizona, Nevada and other real estate markets that suffered the worst crashes.

Social justice and government activism, a deadly combination

So, the real question is how blacks and Hispanics came to be so highly leveraged? Was it a rapacious capitalist system that preyed upon the poor and ignorant by loading them up with debt? No. Poor blacks and Hispanics took on the least debt (as a ratio of their income) of any group. It was the educated blacks and Hispanics who loaded up on debt and got clobbered the worst by the recession.

Now let’s take a little journey back through time. Does anyone remember the political climate of 2006? Everyone, Republicans and Democrats alike, was supporting programs to promote home ownership. And no one was targeted for this feel-good initiative more than blacks and Hispanics — minorities who were deemed to be the victims of past discrimination, thus denied the wealth-creating opportunities of home ownership. No one was more aggressive than the social justice warriors who agitated endlessly to remove the “barriers” to home ownership — in other words, to lower lending standards. Private-sector “greed” did not lower lending standards. Social justice advocates dismantled the lending standards that “greedy, uncaring banks” supposedly had erected to unfairly limit access minorities to mortgage markets. (I refer you to Gretchen Morgenson’s book, “Reckless Endangerment,” for the details of the sordid story.)

As a consequence of this disastrous policy, millions of Americans of all races and ethnicities were suckered into taking out mortgages in the most over-heated real estate market in U.S. history. The devastating loss of wealth experienced by blacks and Hispanics was the direct result of misguided social activism and government meddling in mortgage markets during a time when sane people (like me) were warning that consumer debt generally, and real estate prices particularly, were unsustainable.

But being a social-justice warrior is never having to say you’re sorry. Just cloak yourself in moral superiority, wave the bloody flag of racism and move on to the next fiasco.

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54 responses to “Social “Justice” and Wealth Destruction”

  1. VaConsumer Avatar

    You stop the analysis too soon. Are you sure it was misguided social activism and government meddling in mortgage markets? Could it have been taking on huge student loans? Something else? Like having responsibility for more family members (family of origin as well as own family)? Other things?
    Could do without your last two sentences. They don’t help the cause.

    1. I agree — student loans do factor into the situation. They contribute to indebtedness. Who borrows disproportionately — lower-income groups, especially blacks and Hispanics. Another program spun out of control by the Social Justice crew which finds it easier to let students rack up debt than to address the underlying problem of higher-education inflation.

  2. LarrytheG Avatar

    I love the myth-spinning!!! NOT!

    the folks who made these unscrupulous loans were UNREGULATED.

    ” It is clear to anyone who has studied the financial crisis of 2008 that the private sector’s drive for short-term profit was behind it. More than 84 percent of the sub-prime mortgages in 2006 were issued by private lending. These private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year. Out of the top 25 subprime lenders in 2006, only one was subject to the usual mortgage laws and regulations. The nonbank underwriters made more than 12 million subprime mortgages with a value of nearly $2 trillion. The lenders who made these were exempt from federal regulations.”

    any number of credible sources will confirm that most sub-prime loans – actually were made by unregulated lenders…

    basically the mortgage loan equivalent of payday lenders who also have been largely unregulated and resist regulation.

    why do folks like Jim insist on trying to re-make history?

    you know – you have to go out of your way to do that – to purposely ignore the available evidence and then go on to make up the preferred story…

    1. Larry, you’re wrong. Just plain wrong.

      Social activist groups spent a decade successfully relaxing traditional loan criteria for mortgages and promoting loans to the poor. It was all about “democratizing the access to capital.” Read Morgenson’s book.

      If you want to blame the private sector, blame it for devising the financial instruments (collateralized debt obligations, etc.) that created a limitless appetite for the garbage mortgages that were being churned out. But, then, you’d also have to blame Freddie Mac and Fannie Mae, who were playing the same game.

      1. LarrytheG Avatar

        Jim – the evidence is clear. These lenders were UNREGULATED.

        no one “forced” them to loan money – they did it on their own

        you’re saying that unscrupulous lenders “create an appetite” that you then blame on govt.

        Jim – have you read the credible analysis of the subprime crisis?

        you’re claiming the govt is the one who encouraged this lending with their policies – but the reality is that these lenders were unregulated…

        you continue to believe the made-up fairy tales concocted by the right – without even bothering to check credible info.

        SHOW ME – some CREDIBLE analysis that backs your beliefs.

        1. “Reckless Endangerment,” by Gretchen Morgenson.

          Read it and weep.

          For what it’s worth, Morgenson was a New York Times reporter, not part of the right-wing “echo chamber.”

          1. LarrytheG Avatar

            Jim – do you admit that these lenders were unregulated?

            how about providing some CREDIBLE analysis not some book by someone who does not even have a background in the field?

          2. LarrytheG Avatar

            ” HOEPA, which was enacted in 1994, contains specific statutory protections for a narrow category of high cost loans used for mortgage refinancings. These protections include restrictions on prepayment penalties, balloon payments, and extensions of credit without consideration of a borrower’s ability to repay. HOEPA defines these high cost loans in terms of threshold levels for either interest rates or points and fees. Many of the toxic mortgage products that were originated to fund the housing boom did not fall within the high cost loan definition under HOEPA. However, many of these toxic products could have been regulated and restricted under another provision of HOEPA that requires the FRB to prohibit acts or practices in connection with any mortgage loan that it finds to be unfair or deceptive, or acts and practices associated with refinancing of mortgage loans that it finds abusive or not otherwise in the interest of the borrower.

            Problems in the subprime mortgage market were identified well before many of the abusive mortgage loans were made. A joint report issued in 2000 by HUD and the Department of the Treasury entitled Curbing Predatory Home Mortgage Lending noted that a very limited number of borrowers benefit from HOEPA’s protections because of the high thresholds that a loan must exceed in order for the protections to apply. The report also found that certain terms of subprime loans appear to be harmful or abusive in practically all cases. To address these issues, the report made a number of recommendations, including that the FRB use its HOEPA authority to prohibit certain unfair, deceptive and abusive practices by lenders and third parties. During hearings held in 2000, consumer groups urged the FRB to use its HOEPA rulemaking authority to address concerns about predatory lending. Both the House and Senate held hearings on predatory abuses in the subprime market in May 2000 and July 2001, respectively. In December 2001 the FRB issued a HOEPA rule that addressed a narrow range of predatory lending issues.

            It was not until 2008 that the FRB issued a more extensive regulation using its broader HOEPA authority to restrict unfair, deceptive, or abusive practices in the mortgage market. The new regulation, effective in 2009 and 2010, covers closed-end mortgage loans that meet a new definition of “higher priced” mortgage loans. The definition is designed to capture closed-end loans in the subprime mortgage market, and is set by the FRB based on a survey of mortgage rates currently published by Freddie Mac.

            For this new category of higher priced mortgage loans, these changes address many of the abuses which led to the current housing crisis and help assure that mortgage borrowers have stronger, more consistent consumer protections, regardless of the lender they are using or the state where they reside. The rule imposes an “ability to repay” standard in connection with higher-priced mortgage loans. For these loans, the rule underscores a fundamental rule of underwriting: that all lenders, banks and nonbanks, should only make loans where they have documented a reasonable ability on the part of the borrower to repay. The rule also restricts abusive prepayment penalties.”

            Statement of Sheila C. Bair, Chairman, Federal Deposit Insurance Corporation on the Causes and Current State of the Financial Crisis before the Financial Crisis Inquiry Commission; Room 1100, Longworth House Office Building
            January 14, 2010


      2. Excellent analysis and Larry is wrong, dead wrong. At the macro level I have always wondered how America’s die hard liberals reconcile the racist policies of white privilege with Asian – American economic success. I am just waiting for the left to declare some new nursery rhyme term to justify their observably wrong theory of economic justice. Anglo – Asian Advantage?

        Larry’s contention that the lenders were unregulated is beyond absurd. They were regulated nine ways from Sunday. The problem was, as you describe, was that the regulations were inept and counter-productive. Beyond that, the federal government’s oversight of the regulated entities was incompetent.

        The Democrats were more the cause of the banking crisis than the Republicans although both parties behaved badly. George W. Bush’s Treasury Secretary – John Snow – proposed placing the Fannie Mae and Freddie Mac under Treasury oversight with strict controls over risk and capital reserves. The NYT labeled the proposal “the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago”. This reform was vehemently opposed by Barney Frank in particular. “These two entities—Fannie Mae and Freddie Mac—are not facing any kind of financial crisis,” said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. “The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”

        Jim, in retrospect, the record is fairly clear and you describe the events which actually occurred quite well.

        Since the banking crisis the Obama Administration has routinely refused to use its law enforcement power to prosecute the offenders in the banking industry. Contrast this with George W Bush’s cleanup of Bill Clinton’s “dot com” / telecom / Sarbanes Oxley fiasco. Top telecom executives like Bernie Ebbers remain in jail to this day while Obama has done everything possible yo molly-coddle the bankers who caused a far worse economic problem. Obama has allowed banking executives to spend shareholder money to avoid criminal prosecution.

        Larry lives in a fantasy world where repeatedly shouting the same tired leftist talking points somehow make those talking points true.

        Next up – why Republican Governor Larry Hogan of Maryland is proving to be a mistake.

        1. Reed Fawell 3rd Avatar
          Reed Fawell 3rd

          Good statement of key facts.

  3. Hill City Jim Avatar
    Hill City Jim

    Hmmm. Aren’t the 6 years of this study the first 6 years of Barry’s 2 terms?
    “Change” you can count on!

  4. LarrytheG Avatar

    ” Private sector loans, not Fannie or Freddie, triggered crisis”

    ” Derivatives such as CDS were unregulated or barely regulated. Several sources have noted the failure of the US government to supervise or even require transparency of the financial instruments known as derivatives”

    1. Yes, Larry, the financial CDOs and other financial instruments were deregulated. But that’s not the issue here. The issue is the systemic undermining of traditional lending standards.


      The problem is summed up succinctly by Stan Liebowitz of the University of Texas at Dallas:

      From the current handwringing, you’d think that the banks came up with the idea of looser underwriting standards on their own, with regulators just asleep on the job. In fact, it was the regulators who relaxed these standards–at the behest of community groups and “progressive” political forces.… For years, rising house prices hid the default problems since quick refinances were possible. But now that house prices have stopped rising, we can clearly see the damage done by relaxed loan standards.

      Read the whole article.

      1. LarrytheG Avatar

        re: ” The issue is the systemic undermining of traditional lending standards.”

        Jim – what is the ACTUAL ROLE OF GOVT in that?

        give me the proof of the actual govt policies that forced lenders to engage in bad lending practices?

        you blame govt.

        govt did not do it.

        yet you persist in blaming govt even when the evidence is clear that it did not.

        you equate “social activists” with resulting govt actions… wrongly.

        and WHY are you using a Right Wing publication to back up your claims – AGAIN!

      2. LarrytheG Avatar

        this is the problem Jim –

        ” Yes, Larry, the financial CDOs and other financial instruments were deregulated. But that’s not the issue here. The issue is the systemic undermining of traditional lending standards.”

        then you turn around and quote this guy who says this:

        “From the current handwringing, you’d think that the banks came up with the idea of looser underwriting standards on their own, with regulators just asleep on the job. In fact, it was the regulators who relaxed these standards–at the behest of community groups and “progressive” political forces.”

        the BANKS … these were NOT BANKS – these were UNREGULATED lenders……………….

        so why is this guy saying this?

      3. TooManyTaxes Avatar

        During the material time period, I worked with a big, national law firm that represented a wide number of financial services companies. I advised them on electronic marketing and bill collection regulations and got to learn their businesses. Some were more traditional companies and others were focused on the sub-prime lending markets. I’d never say their hands were clean on every deal, but, unless everyone was lying to me, they did receive great pressure from interest groups and the federal government to weaken lending standards so that they could make loans that would not otherwise have passed through their underwriting groups. This was done to extend homeownership to people who would not have likely qualified under more traditional lending standards. These institutions were required by the federal government to demonstrate annually they were making home loans to significant numbers of borrowers with lower incomes and fewer assets.

        Now what these lenders did with securitizing the loans and selling them in creative new products is something else. But no one can fairly assert the policies of the federal government did not contribute substantially to the real estate bubble in sub-prime mortgages.

        1. VaConsumer Avatar

          Is there data to show that the groups that banks were encouraged to help defaulted more often than “traditional” customers?
          Did these customers get “traditional” products or the new ones like those with the unreal balloon that no one could have paid – and that they may have been unaware of due to their lack of experience in the marketplace and never having heard of balloon? or unable to figure out the contract?
          Did the government push lenders to people ignoring ability to repay? What made the industry start ignoring that? Can we really blame the government for that? How did the regulators tolerate offering products that people who lacked resources to pay and processes that ignored ability to repay?

          1. TooManyTaxes Avatar

            I was told by both lawyers and managers from multiple companies that regulators pressured financial institutions to use lax underwriting standards and that those companies were measured by the number of unconventional loans made. Does this mean every employee and agent was squeaky clean? No. I cannot believe all these people from all these companies over several years lied to me on a consistent basis. Uncle Sam was pushing lenders to make loans to people who may not have been in a position to repay their mortgages especially after the price bubble burst.

            I’m not arguing the private sector was not responsible for any of the economic downturn and resulting loss of wealth. But much of the blame must go to the federal government.

  5. LarrytheG Avatar

    ” SEC Enforcement Actions Addressing Misconduct That Led to or Arose From the Financial Crisis”

    Now the question is – if “social activists” and the Govt caused the crisis how did all these fines get imposed – and these institutions not defending themselves from those fines by producing the govt policies that actually forced them to engage in deceptive and illegal practices?

    Stats (as of Jan. 13, 2016)
    Number of Entities and Individuals Charged 198
    Number of CEOs, CFOs, and Other Senior Corporate Officers Charged 89
    Number of Individuals Who Have Received Officer and Director Bars, Industry Bars, or Commission Suspensions 53
    Penalties Ordered or Agreed To > $1.93 billion
    Disgorgement and Prejudgment Interest Ordered or Agreed To > $1.47 billion
    Additional Monetary Relief Obtained for Harmed Investors $418 million*
    Total Penalties, Disgorgement, and Other Monetary Relief > $3.76 billion

  6. LarrytheG Avatar

    SEC Enforcement Actions Addressing Misconduct That Led to or Arose From the Financial Crisis

    Key Statistics (through Jan. 13, 2016)
    Concealed from investors risks, terms, and improper pricing
    in CDOs and other complex structured products:

    Citigroup – SEC charged Citigroup’s principal U.S. broker-dealer subsidiary with misleading investors about a $1 billion CDO tied to the housing market in which Citigroup bet against investors as the housing market showed signs of distress. The court approved a settlement of $285 million which will be returned to harmed investors. (10/19/11)

    Commonwealth Advisors – SEC charged Walter A. Morales and his Baton Rouge-based firm with defrauding investors by hiding millions of dollars in losses suffered during the financial crisis from investments tied to residential mortgage-backed securities. (11/9/12)

    Deutsche Bank AG – SEC charged the firm with filing misstated financial reports during the financial crisis. Deutsche Bank agreed to pay a $55 million penalty. (5/26/15)

    Goldman Sachs – SEC charged the firm with defrauding investors by misstating and omitting key facts about a financial product tied to subprime mortgages as the U.S. housing market was beginning to falter. (4/16/10)

    Goldman Settled Charges – Firm agreed to pay record penalty in $550 million settlement and reform its business practices. (7/15/10)

    Fabrice Tourre Found Liable – A jury found former Goldman Sachs Vice President Fabrice Tourre liable for fraud relating to his role in a synthetic collateralized debt obligation tied to subprime residential mortgages. (8/1/13)

    Harding Advisory LLC – SEC charged a Morristown, N.J.-based firm and its CEO for misleading investors in a CDO about the asset selection process. (10/18/13)

    ICP Asset Management – SEC charged ICP and its president with fraudulently managing investment products tied to the mortgage markets as they came under pressure. (6/21/10)

    ICP and President Settled Charges – ICP and its president Thomas Priore agreed to pay penalties and settle the SEC’s charges (9/6/12)

    J.P. Morgan Securities – SEC charged the firm with misleading investors in a complex mortgage securities transaction just as the housing market was starting to plummet. J.P. Morgan agreed to pay $153.6 million in a settlement that enables harmed investors to receive all of their money back. (6/21/11)

    Merrill Lynch – SEC charged the firm with making faulty disclosures about collateral selection for two CDOs that it structured and marketed to investors, and maintaining inaccurate books and records for a third CDO. Merrill Lynch agreed to pay $131.8 million to settle the charges. (12/12/13)

    Mizuho Securities USA – SEC charged the U.S. subsidiary of Japan-based Mizuho Financial Group and three former employees with misleading investors in a CDO by using “dummy assets” to inflate the deal’s credit ratings while the housing market was showing signs of severe stress. The SEC also charged the deal’s collateral manager and portfolio manager. Mizuho agreed to pay $127.5 million to settle the charges, and the others also agreed to settlements. (7/18/12)

    NIR Capital Management – SEC charged the two managing partners of the Charlotte, N.C.-based investment advisory firm for compromising their independent judgment and allowing a third party to influence the portfolio selection process of a CDO. Scott H. Shannon and Joseph G. Parish III agreed to collectively pay more than $472,000 to settle the charges. (12/12/13)

    Stifel, Nicolaus & Co. – SEC charged the St. Louis-based brokerage firm and a former senior executive with defrauding five Wisconsin school districts by selling them unsuitably risky and complex investments. (8/10/11)

    RBC Capital Markets – SEC charged the firm for misconduct in the sale of unsuitable CDO investments to five Wisconsin school districts. The firm settled the charges by paying $30.4 million to be distributed to the school districts through a Fair Fund. (9/27/11)
    Wachovia Capital Markets – SEC charged the firm with misconduct in the sale of two CDOs tied to the performance of residential mortgage-backed securities as the housing market was beginning to show signs of distress. Firm settled charges by paying more than $11 million, much of which will be returned to harmed investors. (4/5/11)
    Wells Fargo – SEC charged Wells Fargo’s brokerage firm and a former vice president for selling investments tied to mortgage-backed securities without fully understanding their complexity or disclosing the risks to investors. Wells Fargo agreed to pay more than $6.5 million to settle the charges. (8/14/12)

    UBS Securities – SEC charged UBS Securities with violating securities laws while structuring and marketing a CDO by failing to disclose that it retained millions of dollars in upfront cash that should have gone to the CDO for the benefit of its investors. UBS agreed to pay nearly $50 million to settle the SEC’s charges. (8/6/13)

    Concealed the extent of risky mortgage-related and other investments
    in mutual funds and other financial products:

    Bear Stearns – SEC charged two former Bear Stearns Asset Management portfolio managers for fraudulently misleading investors about the financial state of the firm’s two largest hedge funds and their exposure to subprime mortgage-backed securities before the collapse of the funds in June 2007. (6/19/08)

    Cioffi and Tannin Settled Charges – Agree to pay more than $1 million and accept industry bars. (6/18/12)

    Charles Schwab – SEC charged entities and executives with making misleading statements to investors in marketing a mutual fund heavily invested in mortgage-backed and other risky securities. The Schwab entities paid more than $118 million to settle charges. (1/11/11)

    Citigroup – SEC charged two Citigroup affiliates with defrauding investors in two purportedly safe, low-risk hedge funds that later crumbled and collapsed during the financial crisis. The Citigroup affiliates agreed to pay nearly $180 million to settle the charges. (8/17/15)

    Evergreen – SEC charged the firm with overstating the value of a mutual fund invested primarily in mortgage-backed securities and only selectively telling shareholders about the fund’s valuation problems. Evergreen settled the charges by paying more than $40 million, most of which was returned to harmed investors. (6/8/09)
    The SEC also charged the lead portfolio manager of the fund, Lisa Premo. In December 2012, a judge found Premo liable for aiding and abetting some of Evergreen’s violations, and she was barred from working as an investment adviser for five years.

    Morgan Keegan – SEC charged the firm and two employees with fraudulently overstating the value of securities backed by subprime mortgages (4/7/10)

    Morgan Keegan Settled Charges – Firm agreed to pay $100 million to the SEC and the two employees also agreed to pay penalties, including one who agreed to be barred from the securities industry. (6/22/11)

    OppenheimerFunds – SEC charged the investment management company and its sales distribution arm for misleading statements about two of its mutual funds that had substantial exposure to commercial mortgage-backed securities during the midst of the credit crisis in late 2008. (6/6/12)

    Reserve Fund – SEC charged several entities and individuals who operated the Reserve Primary Fund for failing to provide key material facts to investors and trustees about the fund’s vulnerability as

    Lehman Brothers sought bankruptcy protection. (5/5/09)
    State Street – SEC charged the firm with misleading investors about exposure to subprime investments while selectively disclosing more complete information to specific investors. State Street agreed to repay investors more than $300 million to settle the charges. (2/4/10)
    Two Former State Street Employees Charged – Accused of misleading investors about exposure to subprime investments. (9/30/10)

    TD Ameritrade – SEC charged the firm with failing to supervise representatives who mischaracterized the Reserve Fund as safe as cash and failed to disclose risks when offering the investment to customers. Firm settled charges by agreeing to repay $10 million to certain fund investors. (2/3/11)

  7. LarrytheG Avatar

    Jim – you and the folks you believe keep saying that it was the govt that “required” lenders to lend but all you provide are references that repeat that claim without ever substantiating it by showing actual govt regs .

    repeating it over and over does not make it any truer.

    at the same time I have provided to you multiple credible sources that provide clear evidence that the lenders were, in fact, UNREGULATED.

    so the claim – over and over is that “somehow” these lenders were forced by the govt who in turn was being pushed by social activists to make bad loans to people who could not afford them.

    but it’s just a repeated claim -over and over.. without any credible evidence.

    you apparently consider those repeated claims as “proof”

    I do not.

    and I again cite to you all these lenders who were subsequently fined and disciplined for engaging in fraudulent activities –

    and you would think that all of these folks would have defended themselves by showing the govt rules that required them to make these loans.. and not a one of them did…. they all admitted guilt.

  8. Wow, Jim, these are very interesting data, painting such a graphic result. Policy shifts, the private sector responds, and along the way the group targeted for assistance is victimized anew. The disparity of lost net worth between college-educated Hispanics & Blacks points to mortgages as cause because the student loan debt defaults did not occur on a scale massive enough to wipe out that much money in the period 2007-13. We have that meltdown still to come. That, too, will disproportionately punish minorities and the poor.

  9. Reed Fawell 3rd Avatar
    Reed Fawell 3rd

    Jim Bacon is quite right about this. I am highly familiar with what happened. In an effort to help those who otherwise did not quality for a home loan, Fannie Mae and Freddie Mac were politicized by Congress, forced to fund loans to borrowers who could not afford the those loans. This laid a trap for those borrowers. So the inevitable happened, wiping out their credit, their homes, their wealth, even their health and families. It also spread panic and liquidity problems throughout the nation’s financial system triggering the national meltdown of 2008.

    It also corrupted Fannie Mae. Even today it threatens to destroy both Fannie and Freddie, previously very fine institutions that had played a critical roll in building loans that were accessible and affordable to America’s middle class, giving those people the ability to own their own homes and hook into the American dream, building for them wealth, financial stability and health they had never before enjoyed. These two American institutions, Fannie and Freddie were the envy of the world. They did for the majority of Americans what no nation had done before, building and operating and system of mortgage financing that made it possible for them to own their own homes, build strong families, stable neighborhoods and net worth and all the rest of it.

    The damage done here by the US Congress is beyond calculation.

    1. Thank you Reed for saying so. As DonR said, “Larry’s contention that the lenders were unregulated is beyond absurd. They were regulated nine ways from Sunday. The problem was, as you describe, was that the regulations were inept and counter-productive. Beyond that, the federal government’s oversight of the regulated entities was incompetent.” Or TMT: “I was told by both lawyers and managers from multiple companies that regulators pressured financial institutions to use lax underwriting standards and that those companies were measured by the number of unconventional loans made. . . . Uncle Sam was pushing lenders to make loans to people who may not have been in a position to repay their mortgages especially after the price bubble burst. . . . Now what these lenders did with securitizing the loans and selling them in creative new products is something else. But no one can fairly assert the policies of the federal government did not contribute substantially to the real estate bubble in sub-prime mortgages.”

      I’m sorry, LarryG, but on this one a recitation of all the SEC enforcement proceedings is beside the point. Of course there was enormous bad behavior, triggered by the lax regulation. But it was conciously, deliberately, lax. All that enforcement after-the-fact proves the point.

      But one of the great ironies is that this go-go financial leveraging of assets and derivatives was aided and abetted, perhaps even fundamentally caused by, Richmond’s own Joe Bliley and friends. From Wikipedia: “The Gramm–Leach–Bliley Act (GLBA), also known as the Financial Services Modernization Act of 1999 . . . repealed part of the Glass–Steagall Act of 1933, removing barriers in the market among banking companies, securities companies and insurance companies that prohibited any one institution from acting as any combination of an investment bank, a commercial bank, and an insurance company.” Conservatives can’t even blame Barney Frank for that whopper!

  10. LarrytheG Avatar

    Here’s the “Social Justice” – reported in today’s news:

    ” Goldman Sachs has agreed to pay $5.1 billion to settle U.S. and state claims related to its sale of residential mortgage-backed securities from 2005 to 2007, the firm announced today (Jan. 14).

    [ yes that’s 5 BILLION dollars… think about how many home loans that represents]
    The agreement will resolve actual and potential civil claims by the U.S. Department of Justice, the New York and Illinois Attorneys General, the National Credit Union Administration, and the Federal Home Loan Banks of Chicago and Seattle, the bank said.
    Residential mortgage-backed securities (RMBS)—essentially packages of mortgages that are sliced up and sold off to investors—were a major catalyst of the financial meltdown.

    Goldman joins other banks that have paid massive settlements around similar claims. JPMorgan Chase paid a record $13 billion fine in 2013 for its role in underwriting and selling such securities.”

    Now – if it was true that the govt “encouraged”/”forced” these companies to make loans – then how in the world are they getting fined billions of dollars for their roles?

    Don’t you think if they had evidence that the govt and/or Fannie Mae “forced them to make bad loans” – or even just “encouraged” them -that they’d be waving that evidence all over creation?

    the simple truth here are the facts – on display – that virtually every Wall Street Participant in the subprime crisis has pled guilty and paid huge fines – dozens of them – and not a single one has produced one scintilla of evidence to demonstrate the govt encouraged their activities.

    yet – over and over – the right keep regurgitating their “beliefs” – no matter the hard facts…

    it’s become an article of faith – to PROVE that the meltdown was caused by govt not the private sector.

    these unregulated companies ADMITTED that they practiced predatory loan practices that victimized those who were financially unsophisticated in much the same way that payday loan folks work.

    Is it just outright lying or are some folks truly delusional about it or what?

    1. “Now – if it was true that the govt “encouraged”/”forced” these companies to make loans – then how in the world are they getting fined billions of dollars for their roles?”

      Seriously, Larry? You’re expecting the government to be consistent from one administration to the next? It’s all politics!

      1. Reed Fawell 3rd Avatar
        Reed Fawell 3rd

        Bottom feeders will always rise to the bait that Congress tosses out. Congress asked (demanded) Goldman and the rest to play the roll they did. And of course Wall Street was only to happy to comply.

      2. LarrytheG Avatar

        Jim – the continuing basic claim with various tweaks is that the govt caused the financial meltdown by encouraging bad loan practices so low income people could afford homes but the evidence to demonstrate that is not there.

        all you have provided – over and over is claims from various folks who themselves do not provide any evidence.

        and NOW – we are seeing that virtually all of these unregulated companies that engaged in these loan practices have been accused of fraud – and have preferred to pay huge fines and settle out of court rather than go to court and actually provide evidence of govt encouragement that would absolve them of guilt and prove that the govt indeed did cause the crisis.

        the reality – is that the govt had nothing to do with what they did – they choose to engage in predatory loan practices – that basically encouraged irresponsible loans by folks who either did not understand the terms or who did but planned on flipping the houses before the notes came due.

        But you insist on propagating that myth – wrapping it in “data” and “graphs” that once one goes to the core of your argument – finds out that – yet again – you are going back and dredging up that discredited canard as the core of the claim.

        come on guy. the evidence is crystal clear.

        these companies ran amok on their own -there were no rules… and about the best you can claim with any legitimacy is that Fannie and Freddie bought these bad loans once they were made – and the irony is – it’s that transaction that gave the gov the legal ability to go after these companies for fraud.

        the people who got these mortgages – were the same kinds of folks who would get payday loans … no matter how bad the terms are… just so they could get the money first – then try to figure out later on how to pay it back.

        and as a final comment – the other canard often bandied about by Conservatives is that people know better what to do with their money than the govt does!!!!

        yes indeed! these companies would have never been brought to account if there was not a tax-funded govt agency to do it!

        1. Larry, you are dead wrong, but I don’t have time to engage in this debate any longer. I have a blog to publish!

      3. LarrytheG Avatar

        Jim – did these companies that were charged with fraud – provide evidence that the govt encouraged or forced them to do these loans per the mythology propagated by you and your friends on the right?

        Did any of the sources you cite that make the claim – provide credible evidence to support the claim?

        Isn’t it all made up with nothing to back it up?

        Don’t you think – regardless of which administration they’d produce the documents that absolved them of blame, admitting guilt in the pleas and not paying fines?

        tell me how many of these companies – have claimed in court that it was govt policies that forced them to make those loans

        how many?

    2. I see a difference between writing loans to borrowers that will be unable to repay, and later securitizing mortgages in a manner that conceals the quality of the loans in the bundle. I don’t mean an ethical differance, just a separate sphere of activity. The government distinctly called for lower bar to home ownership. What Goldman Sachs and others did was to create derivative instruments that laid risk upon risk while the rating agencies were mute because they, too, were profiting.

      Here’s a fact: Andrew Cuomo, claimed Fannie Mae had exhibited “racial discrimination” and proposed that 50 percent of the GSEs’ (Fannie and Freddie) loan portfolio be made up of loans to low- and moderate-income borrowers by 2001.

      1. TooManyTaxes Avatar

        Lift, well stated. There were two things going on – government pressure to make home loans that would not meet traditional underwriting standards in the name of “social justice,” and, to be blunt, securities fraud. Both were wrong; and both lead to the crash in 2008.

        1. Excellent summary of the situation!

  11. Les Schreiber Avatar
    Les Schreiber

    Please go to the movies and see “The Big Short” and then read the book because the movie tells a lot of the story,but leaves out the credit default swaps provided by AIG. For a slightly more academic discussion try Alan Blinder’s”After the Music Stopped”. Please note that Goldman has agreed to pay $5 billion in fines regarding the crisis.

  12. LarrytheG Avatar

    Jim provides ZERO evidence that shows that the govt “encouraged” bad lending practices, much less forced it.

    and none of the dozens of companies that engaged in it and who admitted they were guilty of fraud and fined millions -billions of dollars chose to go to court and provide evidence that showed they were following govt directives.

    I have provided multiple links from credible organizations that have told the truth while Jim chooses books and opinion pieces – from those who have the same believes as Jim – but again not a scintilla of real proof – evidence of the claimed govt directives.

    so he publishes this blather wrapped in a chart showing how the financially illiterate were fraudulently screwed over by unscrupulous lenders – then cites his BELIEFS and others who believe it as proof – despite the fact that – that canard has been totally disproved – it just has become another right wing belief like supplys-side economics or other tom foolery.

    1. Larry, please read the comments of Lift, TMT and others. If you choose to believe that there was no movement to downgrade traditional lending standards in order to funnel mortgage credit to lower-income Americans, then you’re living in your own little world.

      Sure, there was plenty of blame to go all around. No one is saying that the mortgage melt-down was 100% the fault of government. But only someone who is intellectually dishonest would seek to pin 100% of the blame on the excesses of the market. Both played a role. I remember the controversy over the Community Reinvestment Act. I remember the way activist groups threatened to agitate against bank mergers if the acquiring banks didn’t have good enough track record about lending in poor areas. I remember how banks funneled credit into poor neighborhoods to polish their credentials and avoid retribution from the left. Maybe you weren’t paying attention. I was.

  13. LarrytheG Avatar

    here’s an example of how Virginia deals with predatory lending:

    Virginia officials offer auto title loan firms a chance to keep information secret — they take it

    ” The nation’s three major auto-title lenders are pressing Virginia officials to keep a wide range of their business records secret, including details about how often they get in trouble with regulators and how many cars they repossess from buyers who can’t repay their loans.

    The bid for secrecy is clear from heavily redacted annual reports the lenders filed with Virginia officials on Thursday. The redacted reports were submitted to the state as part of a public records dispute between the Center for Public Integrity and the firms TitleMax of Virginia Inc.; Anderson Financial Services LLC, doing business as LoanMax; and Fast Auto Loans Inc.”


    ” Whether the records are public is not entirely clear because the State Corporation Commission operates outside the Virginia open records laws.

    That should change, said Megan Rhyne, executive director of the Virginia Coalition for Open Government.

    Rhyne said the commission “regulates so many of the businesses that have direct impact on the public, yet there is far less ability to view the regulatory records … than the records of any other government agency or department.”

    you’ll likely never see a blog post on how Virginia chooses to not regulate payday loan and title loan lenders and what little regulation they do – refuse to release that data to the public which is pretty much the response of their feathered friends in Washington who ALSO – PREFER to NOT regulate sub-prime loans even AFTER it all blew up.

    Instead we continue to get fairy tales about how the govt “forced” predatory loan practices…

  14. Cville Resident Avatar
    Cville Resident

    Hmmm, well MIT pretty conclusively blows up the “lowering credit standards” argument:

    As only 6% of defaults were due to CRA and 94% were due to middle and upper middle income folks buying the idea that “real estate is a wonderful investment that can never go down…” I sure as heck remember it that way….in 2005, it was nearly impossible to find anyone, regardless of class or ethnicity, who didn’t believe that canard. That drove the 08 crisis as much as anything…..I wouldn’t lay the blame on the left or right…I’d lay the blame on ignorance of markets (by nearly everyone) that price is a signal, it’s not value.

    1. TooManyTaxes Avatar

      Cville – Here is a link to a study that suggests a different conclusion.

      I do agree that market ignorance – indeed, ignorance about fundamental economics, which transcends politics, also played a huge role in the meltdown.

      When I was in high school (so many years ago), everyone had to take a half-year course in consumer economics. Too bad there was no similar requirement for my kids.

    2. Larry has twisted my original argument — that the lowering of lending standards led to excess lending to poor people, who ended up defaulting on their mortgages — into the false idea that I blamed the collapse of lending standards for the entire mortgage crisis. You have to read what I say, not what Larry says I say. He accuses me of being an ideologue, but he runs my arguments through his own ideological filter and they come out unrecognizable.

  15. Cville Resident Avatar
    Cville Resident

    The biggest fallacy of the 08 crash was an uninhibited belief in the free market. That’s the difference between a critical thinker and an ideologue. A true market that relies on price needs volatility (risk) in order to create returns (wealth creation). Whenever one talks about the “benefits” of the market but doesn’t seem to talk about anything else, I realize I’m dealing with a low IQ ideologue. Yes, the market has “benefits” to those who have the ability (and means, which is often overlooked) to live in the LONG TERM. That’s who markets “benefit”. But for markets to properly function there has to be wealth destruction as well. And in the short term, that wealth destruction can be pretty devastating to most folks (most don’t have the means to ride out the storm). So whenever I see a right wing ideological huckster talking about 4% GDP growth or “wealth creation” without talking about recessions and wealth destruction (which are essential to that wealth creation), I know that’s an idiot, not someone who understands market-based economics. Any trend line that goes up, up, up is wrong, wrong, wrong…nothing goes up forever, if it does it’s either going to fall about the time you buy or the trendline is full of lies. And that’s what the hucksters and free market ideologues were spewing from 01-06 about real estate in America. Oh, a home is a vehicle for “wealth creation”…but nobody said there has to be an inevitable fall at some point. Of course the same morons (and just go look at right wing “economic” sites from 09-12) were then trying to convince fools that “emerging markets” and “commodities” were only heading up, up, up. How many fools bought that myth? More than you realize.

    1. Cville, many conservatives hew to the Austrian school of economics and revere people like Schumpeter and Hayek, who described market capitalism as a process of creative destruction. Many also see recessions as a necessary evil to wring inevitable excesses out of the market. One of the biggest mistakes the Fed (not dominated by doctrinaire free market types) makes is to avoid the temporary pain of recessions at almost any cost. But the result has been, and always will be, the build-up of risk, leverage and misallocated capital leading to bigger busts down the road.

      While Barnie Frank was willing to “roll the dice” and refused to rein in Freddie and Fannie, many on the right were warning that the real estate bubble was a disaster in the making. While I did not foresee the extent to which CDOs and the rest of the synthetic trash had poisoned the system, I bewailed the relaxation of lending standards and the over-heating of the market.

      As for the “uninhibited belief in the free market” back around 2005 and 2006, conservative outlets like the Wall Street Journal and my goldbug friend John Rubino (whose book on the topic I reviewed extensively on this blog) were the ones sounding the warning bell. The banking regulators and their friends in Congress did not see the bust coming. The Fed did not see the bust coming. Much of what you read about the real estate crash is after-the-fact explanation by people covering their ideological asses.

      1. Cville Resident Avatar
        Cville Resident

        I have always had respect for you. And I have read some Von Mises and Hayek.

        I have a certain degree of respect for the Austrians. But, an intellectually honest Austrian would concede that the Austrian school is not interested in “the national interest.” Which is fine. An Austrian would argue that there is no need for the state to intervene during “bubbles” or during the creative destruction process. I can respect that viewpoint.

        However, acknowledging that…In 08, we would have seen a lot more pain than we did. I don’t really think it’s a question that without gov’t/Fed intervention…Citi goes under. If the nation’s largest private bank goes under….who knows where we end up???? Maybe everything would have turned out ok. But, if you read George W. Bush’s Decision Points (not a bad book by the way, I think he’s fairly honest unlike a lot of memoirs), when the crisis happened, his advisers were all telling him that everything was so intricately tied up in the financial system that the bailout was the only option to avoid pure chaos. And that’s my biggest critique of the Austrians….the way that modern finance is so layered and complicated….I’m not really sure what “bankruptcy and liquidation” leads to….we saw a little bit of that with Lehman as one single investment bank’s bankruptcy sent the entire global financial system into chaos and lead to multiple banks closing around the world. Maybe some are willing to throw the dice. I’m a little risk averse when we start talking about letting the financial system “work itself out” through bankruptcy and liquidation.

        Of course, this gets back to a point I’ve made before…I don’t know that any school of economics is really applicable to our modern financial reality. The system is so full of bets, hedges, covers, etc. that it is far, far, far removed from how most of these schools (left and right) view banking…as loans to consumers and firms with interest charged as the condition for the borrowed funds. Banking hasn’t really been like that in decades.

        1. TooManyTaxes Avatar

          Wall Street is little more than Las Vegas on steroids. When I started practicing law, companies went to Wall Street to sell equity or debt to operate and expand their business. Now much of what is done is little different from Fan Duel, etc. When has the price of oil last been tied directly to supply and demand. It’s just legalized gambling. It should be regulated as gambling.

          When a company gets bailed out by taxpayers, its officers should be limited to the SES pay schedule and all other employers capped by the GS schedule. You need to pay a big price when the taxpayers fund your mistakes.

        2. Once the crash reached the level of severity that it did, the feds may have had no choice but to intervene in order to prevent an all-out economic catastrophe. From the perspective of Austrian economics, the mistake was in keeping the bubble going so long. Under Alan Greenspan, the Fed had kept interest rates artificially low, feeding the real estate frenzy, making it worse than it need have been. The problem with politicians is that they never, never, never want to see a recession on their watch, for the other side surely will blame them for it.

          But my goal in this post is not to re-argue the real estate crash, it’s to point out the consequences of failed social-justice policy.

        3. Cville, your statement rings very true that “The system is so full of bets, hedges, covers, etc. that it is far, far, far removed from how most of these schools (left and right) view banking…as loans to consumers and firms with interest charged as the condition for the borrowed funds. Banking hasn’t really been like that in decades.”

          I come back to the error(?) of repealing Glass-Steagall and the commoditization of derivatives and risk itself. Should we try to reinstate a basic banking system on the simpler lines the textbooks describe? Divorce the investment banks from the consumer banks again and leave the latter to resume their inefficient but locally-knowledgeable, Norman Rockwell worthy roles in small towns across the nation? Or has some morally-bankrupt systemic watershed been crossed, in the evolution of our financial system, with no possibility of returning?

          1. Cville Resident Avatar
            Cville Resident

            You and TMT bring up why I’ve almost quit voting for any GOP candidates. I used to favor the GOP before 2008.

            But, if I took any lesson away from 2008, it is the idea that contemporary finance is simply too large and powerful not to be heavily regulated. Even after Dodd-Frank, I will bet anyone $1000.00 that no one, private or public, can actually lay out the financial consequences of a major player’s bankruptcy. The system is still so opaque and unregulated that one major flop can cause global chaos because the “bets” are so intertwined. Who would have ever guessed that Lehman’s bankruptcy could almost wipe out Citi, Fannie, Freddie, WaMu, and AIG? Why? Because the market is so unregulated.

            Now, it seems to be GOP orthodoxy that “repeal of Dodd Frank” is part of the creed. So…we want to repeal what little oversight/regulation we have of a financial system that can swallow us all? That’s irrational. I view anyone talking about Dodd Frank repeal as someone who has no clue how powerful the global financial system is in our lives. Pretty much every loan and deposit you make isn’t really going to “the bank”…it’s going into an enormous international casino of structured debt. To simply set back and say “go at it, nobody’s going to say a thing about whatever bets you make” with nearly everyone’s livelihood threatened if we reach another 2008, I just can’t support any candidate who wants to let the roulette wheel spin with no oversight. The fact is that Vegas is more regulated than the GOP wants our financial system regulated…there are actual inspectors of the slots….not so with a lot of “financial innovation” that is with us in 2016.

          2. Reed Fawell 3rd Avatar
            Reed Fawell 3rd

            TMT – you have hit one important nail square on the its head. Thank you.

          3. Reed Fawell 3rd Avatar
            Reed Fawell 3rd

            you hit it with your comment below on 17 January at 7:31 pm.

        4. Opacity breeds the opportunity to rent-seek, as a very thoughtful article in the WPost today by Jim Tankersley makes clear. He writes about income inequality, about proceedings at the annual meeting of the American Economic Association, and in rebuttal to a paper by Paul Graham. And he fingers our financial community and our overpaid CEOs as the most successful rent-seekers of our economy. You know, LarryG and I may not agree on the government’s culpability in the mortgage crisis, yet agree fully that the way the private financial sector took advantage of it, through its opaque derivatives, manipulation of ratings-agency findings, and huge personal bonuses based on short-term results, was criminal in deed, if not in law.

          1. Reed Fawell 3rd Avatar
            Reed Fawell 3rd

            I agree generally with your characterization with one important caveat. What happened was enabled by, and could not have happened without, Congress, or the power of certain important members of Congress. These people were the moving parties, and thereafter they actively refused to act to stop what was going on, although others in government tried to intervene. And these very same congressional players also played a critical roll in facilitating the corruption of Fannie and Freddie so as to enable them to do what they otherwise could not have done in this sordid affair.

          2. TooManyTaxes Avatar

            I think there is a good factual argument that the huge explosion to excessive pay came when Congress grandstanded and limited corporate deductions for the top three executives to $1 M unless the extra compensation was tied to “performance measures.” They did, tying top compensation to short term results. We all lost.

  16. LarrytheG Avatar

    re: the free market vs government regulation

    you cannot get to where Jim Bacon and his cohorts are – on this issue – without hewing to an ideological view.

    and their basic view is that the free market works better than govt regulation.

    over and over – in their writings – and in this blog – whether it’s mortgages, payday and car title loans, health care, airnb, uber – you name it – the “belief” is that all of these things would work much better if the govt was not regulating them.

    so when there is a big economic disaster – it’s imperative that they go back and “fix” the history – to assure that it shows it WAS the govt that caused the meltdown.

    and over and over – when challenged – it boils down to what they “believe” because actual evidence overwhelmingly confirms what happens when business are not regulated – they run amok and many, many thousands of individuals are harmed by unscrupulous hucksters.

    I’m NOT – PRO-regulation – I think there IS dumb and unnecessary regulation… but regulation is needed.

    In the case of the meltdown – it’s crystal clear that if those companies were actually regulated like banks and FDIC that they would not have been able to make those kinds of loans.

    And it’s totally apparent – even after the fact – when there are folks who want to regulate them – that the VERY SAME folks who blame the govt also don’t want the regulation and then go on to say that regulation “hurts” consumers and “hurts” the economy and economic growth”.

    the same folks support supply-side and laffer curve policies… despite ample proof they fail – when they are implemented… but the “belief” is akin to a religion… you either “believe” or you do not regardless of evidence and history – especially if you go back and re-do the history as Jim is doing here.

  17. Larry, I can’t agree with you that “you cannot get to where Jim Bacon and his cohorts are – on this issue – without hewing to an ideological view.” It’s your ideological view that is blinding you to what is being said here. Correct me if I am wrong but the heart of your argument seems to be, “NOW – we are seeing that virtually all of these unregulated companies that engaged in these loan practices have been accused of fraud – and have preferred to pay huge fines and settle out of court rather than go to court and actually provide evidence of govt encouragement that would absolve them of guilt and prove that the govt indeed did cause the crisis. The reality – is that the govt had nothing to do with what they did – they chose to engage in predatory loan practices – that basically encouraged irresponsible loans by folks who either did not understand the terms or who did but planned on flipping the houses before the notes came due. . . . These companies ran amok on their own -there were no rules… and about the best you can claim with any legitimacy is that Fannie and Freddie bought these bad loans once they were made – and the irony is – it’s that transaction that gave the gov the legal ability to go after these companies for fraud.”

    IMHO you are correct that mortgage lenders “chose to engage in predatory loan practices” but we disagree about why. The loans they made in the 2006-08 time frame were made in contravention of years of lending regulations and enforcement precedent that said they would get in trouble if they relaxed their criteria and lent money to folks who were (by past standards) bad credit risks. But they were getting a wink and a nod and other such signals from those very same regulators and from the GREs and from Congress itself: lend, lend, lend; it’s time to make amends for perceived redlining; let these formerly-excluded folks enjoy the decades-long run-up in real estate prices along with the rest of us. And what’s more, these poor-criteria loans were highly profitable; indeed, they WERE “predatory” by past standards. But you couldn’t refuse to play; everyone else was making money and you had to compete, despite any misgivings. And then it all went THIAHB (to hell in a handbasket!) and suddenly these lenders were caught up to their eyeballs in bad loans, which according to many of the regulations still on the books were so lax that, for a bank to offer them for securitization amounted to FRAUD! And for investment banks to have securitized them, and rating agencies to have rated them as better than junk, was FRAUD! The combination of regulatory encouragement and regulatory hindsight faultfinding was deadly to lots of innocent people.

    Now, some would say that those folks who acquiesced in the will of Congress and the federal and State regulators to make all these bad loans should never have done so as long as the regulations themselves weren’t amended. Some of them were. As for the rest: there are regulations, and then there is enforcement of those regulations which can send a very different signal. And there is a general decline in moral integrity when the the lender is removed from the consequences of his loan to his own institution. A lot of people got caught up in making a mockery, a sham, of the whole mortgage-lending credit-check process — because a mortgage is only the original lender’s risk while he owns it, and the federal government-run GREs were busy buying up that risk as fast as you could find people to lend to. Another example of federal encouragement of what happened.

    I don’t expect you to agree with me, but then you say, “the “belief” is akin to a religion… you either “believe” or you do not regardless of evidence and history – especially if you go back and re-do the history as Jim is doing here” — you seem to be saying, Jim is making all this up — and I think Jim, and lots more folks on this blog, have more integrity, and better sense, than that!

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