This post speaks to the role, or non-role, of the CRA (Community Reinvestment Act) and GLB (Gramm-Leach-Bliley Act) in contributing to the financial crisis.
There is a lot (a lot) of noise out there on this subject. And I quickly found that Internet articles were not generally valuable to me in their entirety. If they were, it would be easy to just give you those links, and send you there. End of story. But what I found was that many articles were seeking to pin responsibility for the crisis on one person or another, one party or another, one President or another. Still, that reality I found didn't preclude valuable information and insight from existing in those articles, and being lifted out. So I started lifting. On the CRA (Community Reinvestment Act of 1977), on GLB (Gramm-Leach-Bliley of 1999), on Fannie/Freddie, on Fed policy, on the demand-push for perceived low-risk securities offering a higher return than U.S. T-Bills. In doing the "lifting", I looked for nuggets of confirmation across different sources, whether assertions of blame or debunking of same. This proved effective, and allowed for the cross-checking of information from both Republican/conservative-leaning articles and Democrat/progressive/liberal-leaning articles. But what it made difficult was giving you a tidy list of links. So, you won't find them here. I have them bookmarked, and there are quite a few. Perhaps I will offer up a post which is simply the entire list of links, and thereby you can see where I went, and what I looked at.
The culprit (drum roll, please) is not the CRA, or GLB, nor the securitizing of mortgages, Fannie/Freddie, the Fed, or the demand-push for a safe security that paid better than T-Bills. It is all those things, in my view, in one manner or another, interacting, and contributing to the financial crisis. The least responsible are CRA, GLB, and Fannie/Freddie, in that order. The most responsible are regulations never considered or implemented with respect to the securitizing of mortgages, or on separating mortgage-lending, investment banking and securities brokerage from co-existing within the same company. Second in line is Fed policy, specifically, interest-rate policy, in the years leading up to the explosion in lending, sub-prime and otherwise, which began around 2004-2005.
It's not CRA. CRA was passed in 1977 to see that depository banks (as opposed to investment banks) were reinvesting (offering loans) in the same areas where the deposits were coming from. The Act is over 30 years old, and has had its intended effect, to offer more home loans in poorer areas where banks had previously red-lined and not even considered for loans (they just didn't bother applying underwriting resources to those areas and those borrowers; but they did happily use their deposits to lend to other areas). For much of its tenure, CRA loans have been about 1% of the market, though that increased somewhat with the real-estate boom. Finally, a few key points: (1) CRA loans can only be made by depository banks, (2) the vast majority of CRA loans are not sub-prime, (3) CRA loans have performed well over their tenure, and not seen higher-than-average foreclosure rates. Points (1) and (2) are important, because all acknowledge the impact of an increase in sub-prime lending to the financial crisis, but over 80% of sub-prime loans were made by investment or commercial banks, not depository banks. If all depository sub-prime loans were CRA (again, the vast majority are not sub-prime), CRA would have been responsible for less than 20% of the sub-prime problem.
It's not GLB. This basically repealed the Glass-Steagall Act of 1933, which kept depository banks separate from investment banks, brokerage houses, and insurance companies. GLB allowed Citibank and Travelers to merge. But also, in the current crisis, allowed Chase to buy Bear Stearns, and Bank of America to buy Merrill Lynch, which many would cite as a good and intended result of GLB. Those who would fault GLB would say that it broke down firewalls of separation within the larger financial industry (comprised of banks, investment banks, brokerage houses, and insurance companies), and that the lack of those firewalls prior to the Depression caused many banks to fail, since they had taken deposits and invested them in the stock market which eventually crashed. That's what Glass-Steagall prevented, but prevented in a heavy-handed way, by disallowing it entirely. It was a disallowing that consequently became diluted in a thousand different ways, to where, as with Prohibition, its formal repeal was a codifying of its de facto repeal over time. The trouble was that the authors of Glass-Steagall were not wrong in identifying the risk associated with depository banks investing deposits in securities or insurance. The risk is real, and it was a regulatory failure over a few decades that did not identify the proper, more specific regulations (in lieu of an entire ban) required to allow banks, investment banks, and insurance companies to merge.
Next time, the rest of it, Fannie and Freddie, the insufficient regulation of securitized mortgages, and the moral hazard that created; and the insufficient regulation around investment banks who also write or securitize mortgages and then market those securities to investors through their brokerage houses, and the moral hazard that created; and the role of Alan Greenspan and the Fed.
By the way, CRA is associated with Carter and Clinton, so blaming it blames Democrats. GLB, all the names associated with those initials, were Republicans; and even though Clinton signed the bill, blaming GLB blames Republicans. My conclusions are these are largely red herrings. CRA a bit more than GLB. But still, GLB, as I said, is more effect than cause, since it was really the codifying of a trend toward the cross-pollinization of banks, investment banks, and insurance companies, which had been progressing for years.
That was a great article also one should focus on : Clean up your balance sheet, Think ahead, Consider a career shift, Remember that everything is cyclical,Develop a skills portfolio to go.
Posted by: bankruptcy attorney Chicago | October 30, 2010 at 07:51 AM
We must have to clear our balance when we wish to end up our loan.
Posted by: loan officer compensation | May 16, 2011 at 05:48 AM