Congress Tries To Fix What It Broke
By INVESTOR'S BUSINESS DAILY
Regulation: As the financial crisis spreads, denials on Capitol Hill
grow more shrill. Blame an aloof President Bush, greedy Wall Street,
risky capitalism, anybody but those in Congress who wrote the banking
rules.
Such denials won't hold against the angry facts banging on their
doors. The only question is whether the guilty party can keep up the
barricade until Election Day.
A visibly annoyed House Speaker Nancy Pelosi rejected suggestions that
Democrats share blame for the meltdown. "No," she snapped at reporters
who dared ask.
Stick to our narrative, she scolded: The bursting of the housing
bubble was another story of market failure and deregulation.
"The American people are not protected from the risk-taking and the
greed of these financial institutions," she said, while calling for
investigations of the industry.
Only, the risk-taking was her idea and the idea of all the other
Democrats, along with a handful of Republicans, who over the past 30
years have demonized lenders as racist and passed regulation after
regulation pressuring them to make more loans to unqualified borrowers
in the name of diversity.
They were the ones who screamed "REDLINING!" and sent banks
scurrying for cover in low-income neighborhoods, where they have been
forced to lower long-held industry standards for judging
creditworthiness to make the subprime loans.
If they don't comply, they are threatened with stiff penalties under
the Community Reinvestment Act, or CRA, a law that forces banks to
make home loans to people with poor credit risks.
No fewer than four federal banking regulatory agencies are responsible
for enforcing the law. They subject lenders to racial litmus tests and
issue regular report cards, the industry's dreaded "CRA rating."
The more branches that lenders put in poor neighborhoods, and the more
loans they make there, the better their rating. Those lenders with low
ratings can not only be fined, but also blocked from mergers and other
business transactions needed to expand.
The regulation grew to monstrous proportions during the Clinton
administration, obsessed as it was with multiculturalism. Amendments
to the CRA in the mid-1990s dramatically raised the amount of home
loans to otherwise unqualified low-income borrowers.
The revisions also allowed for the first time the securitization of
CRA-regulated loans containing subprime mortgages. The changes came as
radical "housing rights" groups led by ACORN lobbied for such
loans. ACORN at the time was represented by a young public-interest
lawyer in Chicago by the name of Barack Obama.
HUD, in turn, pressured Fannie Mae and Freddie Mac to purchase more
subprime mortgages, and Fannie and Freddie, in turn, donated to the
campaigns of leading Democrats like Barney Frank and Pelosi who
throttled investigations into fraud at the agencies.
Soon, investment banks such as Bear Stearns were aggressively hawking
the securities as "guaranteed." Wall Street's pitch was that MBSs were
as safe as Treasuries, but with a higher yield.
But they weren't safe. Everyone in the subprime business from
brokers to lenders to banks to investment houses absolved themselves
of responsibility for ensuring the high-risk loans were good.
The mortgage lenders didn't care, because they were going to sell the
loans to other banks. The banks didn't care, because they were going
to repackage the loans as MBSs. The investors and traders didn't care,
because the MBSs were backed by Fannie and Freddie and their implicit
government guarantees.
In other words, nobody up and down the line from the branch office
on main street to the high-rise on Wall Street analyzed the risk of
such ill-advised loans. But why should they Everybody was just doing
what the regulators in Washington wanted them to do.
So everybody won until everybody lost, including the minorities the
government originally mandated the banks to serve.
The original culprits in all this were the social engineers who
compelled banks to make the bad loans. The private sector has no
business conducting social experiments on behalf of government. Its
business is making profit. Period. So it did what it naturally does
and turned the subprime social mandate into a lucrative industry.
Of course, it was a Ponzi scheme, because they weren't allowed to play
by their rules. The government changed the rules for risk.
In order to put low-income minorities into home loans, they were
ordered to suspend lending standards that had served the banking
industry well for centuries. No one wants to talk about it, so they
just scapegoat Wall Street. Even John McCain has joined the Democrat
chorus on this.
The FBI is now investigating 24 large mortgage lenders for alleged
abuses. But who will investigate the pols and the lobbyists and the
community agitators who made the bad decisions that ultimately forced businesses to make their bad decisions?