Goldman Sachs Avoids Prosecution

Dept of Justice decides not to prosecute Goldman Sachs for role in financial crisis (7mins. Here is the direct link

Has Justice Been Served ... Is It Ever ..... ?

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Permalink Reply by Lisa on August 13, 2012 at 9:51am

The Government-Created Subprime Mortgage Meltdown

by Thomas J. DiLorenzo
by Thomas J. DiLorenzo

The thousands of mortgage defaults and foreclosures in the "subprime" housing market (i.e., mortgage holders with poor credit ratings) is the direct result of thirty years of government policy that has forced banks to make bad loans to un-creditworthy borrowers. The policy in question is the 1977 Community Reinvestment Act (CRA), which compels banks to make loans to low-income borrowers and in what the supporters of the Act call "communities of color" that they might not otherwise make based on purely economic criteria.

The original lobbyists for the CRA were the hardcore leftists who supported the Carter administration and were often rewarded for their support with government grants and programs like the CRA that they benefited from. These included various "neighborhood organizations," as they like to call themselves, such as "ACORN" (Association of Community Organizations for Reform Now). These organizations claim that over $1 trillion in CRA loans have been made, although no one seems to know the magnitude with much certainty. A U.S. Senate Banking Committee staffer told me about ten years ago that at least $100 billion in such loans had been made in the first twenty years of the Act.

So-called "community groups" like ACORN benefit themselves from the CRA through a process that sounds like legalized extortion. The CRA is enforced by four federal government bureaucracies: the Fed, the Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Deposit Insurance Corporation. The law is set up so that any bank merger, branch expansion, or new branch creation can be postponed or prohibited by any of these four bureaucracies if a CRA "protest" is issued by a "community group." This can cost banks great sums of money, and the "community groups" understand this perfectly well. It is their leverage. They use this leverage to get the banks to give them millions of dollars as well as promising to make a certain amount of bad loans in their communities.

A man named Bruce Marks became quite notorious during the last decade for pressuring banks to earmark literally billions of dollars to his organization, the "Neighborhood Assistance Corporation of America." He once boasted to the New York Times that he had "won" loan commitments totaling $3.8 billion from Bank of America, First Union Corporation, and the Fleet Financial Group. And that is just one "community group" operating in one city — Boston.

Banks have been placed in a Catch 22 situation by the CRA: If they comply, they know they will have to suffer from more loan defaults. If they don't comply, they face financial penalties and, worse yet, their business plans for mergers, branch expansions, etc. can be blocked by CRA protesters, which can cost a large corporation like Bank of America billions of dollars. Like most businesses, they have largely buckled under and have surrendered to their bureaucratic masters.

Consequently, banks in every community in America have been forced to hold a portfolio of bad loans, euphemistically referred to as "subprime" loans. In order to compensate themselves for the added risk of extending these loans, many lenders have increased the lending fees associated with mortgage loans. This is simply an indirect way of doing what banks always do — and what they must do to remain solvent: charging effectively higher rates of interest on riskier loans.

But this is discriminatory!, complained the "community organizations." Thus, if one browses the ACORN web site, one can read of their boasts of having "predatory lending laws" passed in numerous states which outlaw such fees, prohibiting banks from protecting themselves from the added risk involved in making forced loans to "subprime" borrowers.

These are price control laws, and price controls always cause shortages. Normally, banks would respond to such laws by extending fewer riskier loans. But in this case the banks are forced to continue making the marginal loans by their bureaucratic masters at the Fed and the other three federal bureaucracies mentioned above. So-called predatory lending laws therefore force the banks to "eat" the losses. This is undoubtedly a contributing factor to the bankruptcy of dozens of mortgage lenders over the past year.

Then of course there is the issue of the Fed's monetary policy having created the housing bubble, characterized by a spectacular escalation of real estate values in every American city over the past decade or so. This created a further problem for the financial institutions that are victimized by the CRA. They are forced to make a certain amount of bad loans, but because of the Fed-created explosion in housing prices, many thousands of subprime borrowers no longer qualified, by a long stretch, for conventional mortgages based on their incomes.

The only way these borrowers could qualify for their mortgage loans (even ignoring their bad credit ratings) was to take out adjustable rate mortgages, some of which had astonishingly low first-year rates in the 3 percent range, and sometimes lower. This is what has largely fueled the subprime mortgage meltdown — the inability of thousands of subprime borrowers to afford their mortgages now that their rates have adjusted upward. Thus, the combination of the Fed's enforcement of the CRA (with the help of political pressure groups like ACORN) and its post 9/11 monetary policy in general are the reasons for the bursting real estate bubble and the "subprime" mortgage meltdown.

Don't expect to read about this in the "mainstream media," however, which generally views groups like ACORN as heroic champions of the poor, laws like the CRA as anti-discrimination laws, and places all of the blame for the subprime mortgage meltdown on greedy capitalists, especially mortgage brokers. Encouraged by such reporting, the odious Senator Charles Schumer of New York has promised federal legislation that will reign in these miscreants, while the Bush administration is proposing an indirect bank bailout by having the Federal Housing Administration cover many of the bad "subprime" loans. This will create what economists call a "moral hazard" by encouraging even more bad loans to be extended in the future. Every banker in America will be glad to extend loans (at high rates of interest) to the most uncreditworthy borrowers if he thinks there is no possibility of default with the FHA effectively guaranteeing the loan.

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In essence ~ not everyone should be given / have been given a loan to purchase a home.

“If you can’t afford it ~ you can’t have it.” (Thank-you grandmother for that sound advice)

So was it the Banks or was it the government forcing the banks to issue the loans ...

to people the banks normally would never loan money too ...

without the government claiming they will back-up the loans ?

I have “friends” who own homes that built bigger homes, ...

that I also know make no more income than I do, ...

and now they are renting their smaller, original home, through HUD.

Essentially these mortgages are being paid mostly by the tax payer ...

and very little by the occupant that truly can’t afford the home, but is residing there.

The tax payers no longer can afford this nonsense.

I believe it was the large government / public sector that caused the financial crisis ...

and they can’t convict the private sector because they were forced by “regulatory agencies” ...

to make these loans that now even the government can’t back-up.

I hear a lot of complaining about Capitalism, but this is why Socialism doesn’t work.

Not everyone is entitled to get everything they want in life.

The only things we’re entitled to is "Life, Liberty and the pursuit of Happiness"

If one wants that home we must earn it, and not have it subsidized by the government ...

e.g. the tax payer / our community / our neighbors.

Now the whole country is so burdened by our debt to China for this insanity, ...

we’re at risk of losing our freedoms as well.

"The rich rules over the poor, and the borrower is servant to the lender."

- Proverbs 22:7

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Permalink Reply by Keith Shaw on August 13, 2012 at 10:33am

Thanks Lisa, some interesting view points . Regarding Capitalism and Socialism, I think you will agree that the late Milton Friedman (Economist, Statistician & Nobel Prise Winner) sums it up very well in the below two short video clips. Excellent viewing.

Economist Milton Friedman taught Donahue a lesson when Phil attempted to equate greed with capitalism. Friedman regards free enterprise as the best economic system ever developed by civilization and cites history as the proof of his contention. (~2mins) Direct Link Here

Milton Friedman discusses the moral values encouraged by economic systems and explains that a primary difference between capitalism and socialism is the difference between free choice and compulsory force. (~ 6 mins)

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Permalink Reply by Lisa on August 13, 2012 at 10:53am

very good ...

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Permalink Reply by Keith Shaw on August 13, 2012 at 12:00pm

"Now the whole country is so burdened by our debt to China for this insanity "

The Great Wall of China v The Great Wallet Of China . . .

Excellent Reference By Max to Warren Buffet "Toilet Paper" ;)

China's appears to be heavily into BLING . . . .

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Permalink Reply by Peter jcp on August 13, 2012 at 12:13pm

Hi Keith and Lisa - worrying stuff.

Yes agree your grandmother is correct - if you cannot afford it - you cannot have it

Trouble is most people who buy a house need to borrow - otherwise probably 70% of people would never be able to own their own property.

However when mortgages got silly - ie over 30 yrs and even 5 -10 times you annual income and up to 120% of the value of the property - that's were it all went wrong

For years when mortgages were only for under say 70% of the value of the property and limited to annual expenses less than 3 times your yearly income everything worked well.

Then you get the so called clever money guys realize how they can "milk it".

I would love to be able to borrow say £100 million over 50 years with say 10 mill payment back every 10 years and the say 80 mill at the end of the period.

I reckon I would no longer be alive at the end of the 50 yrs - so out my 100 million i need only put 40 million aside to make my payments and then spend the rest ;-)

If anybody can find me a bank to help out - please let me know ;-)