I am unsure of why I am not seeing this reported anywhere. I would like all readers to bear with me here as I try to explain what has caused the subprime crisis. There are many factors at play, and too often lately, I have heard the CRA blamed for this crisis. I set out to find out more information about what caused the crisis, and narrowed it down to a bill that has not gotten much press lately: The Gramm-Leach-Bliley act. This act repealed protections that would have made this crisis IMPOSSIBLE! This bill was despicable and was filled with the money of lobbyists, and to no surprise, McCain voted for it.
The factors behind the problem
The first factor that we need to get an understanding of is mortgage backed securities:
Quote:
Securitization is a structured finance process in which assets, receivables or financial instruments are acquired, classified into pools, and offered as collateral for third-party investment. There are many parties involved. Due to securitization, investor appetite for mortgage-backed securities (MBS), and the tendency of rating agencies to assign investment-grade ratings to MBS, loans with a high risk of default could be originated, packaged and the risk readily transferred to others. Asset securitization began with the structured financing of mortgage pools in the 1970s.
http://www.dallasfed.org/news/ca/2005/05wallstreet_assets.pdf
We also need to take a look at Collateralized Debt Obligations:
Quote:
Traditionally, banks lent money to homeowners for their mortgage and retained the risk of default, called credit risk. However, due to financial innovations, banks can now sell rights to the mortgage payments and related credit risk to investors, through a process called
securitization. The securities the investors purchase are called mortgage backed securities (MBS) and collateralized debt obligations (CDO). This new "originate to distribute" banking model means credit risk has been distributed broadly to investors, with a series of consequential impacts.
http://en.wikipedia.org/wiki/Subprime_Crisis
Then we need to look at Underwriting and Digitalization
Quote:
Underwriters (working for the actual banks who lend the money, not mortgage brokers) determine if the risk of lending to a particular borrower under certain parameters is acceptable. Most of the risks and terms that underwriters consider fall under the three C’s of underwriting: credit, capacity and collateral. See mortgage underwriting.
In 2007, 40 percent of all subprime loans were generated by automated underwriting. An Executive vice president of Countrywide Home Loans Inc. stated in 2004 "Prior to automating the process, getting an answer from an underwriter took up to a week. We are able to produce a decision inside of 30 seconds today. ... And previously, every mortgage required a standard set of full documentation." Some think that users whose lax controls and willingness to rely on shortcuts led them to approve borrowers that under a less-automated system would never have made the cut are at fault for the subprime meltdown.
http://www.realtor.org/rmodaily.nsf/f3c66d0c6457c1e1862570af000cb13b/b187c47b7d488dd8862572a7004ec179?OpenDocument
Lastly, we need to look at excessive speculation:
Quote:
Speculation in real estate was a contributing factor. During 2006, 22% of homes purchased (1.65 million units) were for investment purposes, with an additional 14% (1.07 million units) purchased as vacation homes. During 2005, these figures were 28% and 12%, respectively. In other words, nearly 40% of home purchases (record levels) were not primary residences. NAR's chief economist at the time, David Lereah, stated that the fall in investment buying was expected in 2006. "Speculators left the market in 2006, which caused investment sales to fall much faster than the primary market.
http://money.cnn.com/2007/04/30/real_estate/speculators_fleeing_housing_markets/index.htm
Mortgage backed securities, CDOs, excessive speculation, and underwriting are directly responsible for this crisis.
The Glass-Steagall act
In 1933, the United States enacted a series of bank reforms in response to troubling economic times. These reforms fell under an act called the Glass-Steagall act. The Glass-Steagall Act of 1933 established the Federal Deposit Insurance Corporation (FDIC) in the United States and included banking reforms, some of which were designed to control speculation. At the time, "improper banking activity", or what was considered overzealous commercial bank involvement in stock market investment, was deemed the main culprit of the financial crash. According to that reasoning, commercial banks took on too much risk with depositors' money.
Commercial banks were accused of being too speculative in the pre-Depression era, not only because they were investing their assets but also because they were buying new issues for resale to the public. Thus, banks became greedy, taking on huge risks in the hope of even bigger rewards. Banking itself became sloppy and objectives became blurred. Unsound loans were issued to companies in which the bank had invested, and clients would be encouraged to invest in those same stocks.
As a collective reaction to one of the worst financial crises at the time, the GSA set up a regulatory firewall between commercial and investment bank activities, both of which were curbed and controlled. Banks were given a year to decide on whether they would specialize in commercial or in investment banking. Only 10% of commercial banks' total income could stem from securities.
http://www.investopedia.com/articles/03/071603.asp
John McCain and the Republican Party
Banks were not happy with the Glass-Steagall act. <a href="http://www.highbeam.com/doc/1G1-59679987.html">They spent $200 million</a> lobbying to get it repealed in the 90's. The bill that ultimately repealed the Glass-Steagall act was introduced in the Senate by Phil Gramm (R-TX) and in the House of Representatives by James Leach (R-IA) in 1999. The bills were passed by a 54-44 vote along party lines with Republican support in the Senate and by a 343-86 vote in the House of Representatives. The bill is known as the Gramm-Leach-Bliley act.
The repeal enabled commercial lenders such as Citigroup, the largest U.S. bank by assets, to underwrite and trade instruments such as mortgage-backed securities and collateralized debt obligations and establish so-called structured investment vehicles, or SIVs, that bought those securities. Citigroup played a major part in the repeal. Then called Citicorp, the company merged with Travelers Insurance company the year before using loopholes in Glass-Steagall that allowed for temporary exemptions. With lobbying led by Roger Levy, the "finance, insurance and real estate industries together are regularly the largest campaign contributors and biggest spenders on lobbying of all business sectors [in 1999].
Upon reading all of this, I jetted to find out if McCain voted on it... To no surprise, he did. McCain was directly responsible for the subprime crisis.
You can view his vote right here:
http://www.govtrack.us/congress/vote.xpd?vote=s1999-105
McCain: Aye.
Biden: Nay.
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Edited by AnonymousRabbit (09/30/08 12:00 PM)
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