Architects of Ruin
by Peter Schweizer
By 2007 up to 4.2 Trillion dollars of sub prime loans had been made. "By 2005, almost 33 percent of the new mortgages were interest-only and 32 percent of new home buyers put no money down "(Schweizer, 2009 ).
Peter Schweizer's book: Architects of Ruin explains how these dire credit conditions and the resultant economic calamity happened.
Schweizer asks and answers this question: "Why has this story been missed? It isn't all that hard to understand. First of course, the operations of quasi-governmental agencies such as Fannie Mae and Fredddie Mac are shrouded in layers of bureaucratic tedium. Few reporters take the time to actually dig into their inner workings. Besides, they are governed by congressional committees, so people naturally assume that some responsible is paying attention."
Carter
Schweizer details how activist organizations developed tactics to challenge redlining. This was begun by Jesse Jackson's PUSH and Gale Cincotta of NPA and Acorn.
"In 1976 Cincotta began pushing for something she called the Community Reinvestment Act (CRA). Again , the idea sounded simple enough: declair that banks have "an afffirmative obligation: to lend to people in their own neighborhoods, and make their record of doing so part of the approval process for mergers, acquisitions, or expansion. In short , make it the law that banks needed to lend in areas they had traditionally avoided out of fear that they were poor credit risks." Page 16.
Reagan and Bush I
"For more than fifteen years, fair housing activists had been using the Community Reinvestment Act to compel banks to make increasingly risky loans. Using tactics of intimidation, delay, and public embarrassment, they had achieved stunning results. By 1990 some $5 billion had been shaken from banks through these tactics."
Clinton
"By early 1995, the Clinton administration was pushing a revision to the CRA. It wanted a numerical quota system to be used to evaluate whether banks were loaning enough to low-income and minority groups." Page 66
"By the middle of the Clinton administration, Fannie and Freddie were no longer simple lubricants of the American financial system. Instead, they became ground zero of a vast social engineering project that was willing to take exorbitant risks with taxpayer dollars. Once securely in the hands of idealistic baby boomers who constantly confused their corporate mission with their activist vocation, these institutions soon abandoned their traditional conservative approach to mortgage finance and became avenues for relaxed lending standards, helping in turn to inflate the subprime credit bubble." Page 80
"Meanwhile , the Clinton adminstration had created a culture of government-funded risk in the financial markets and in collusion with Wall Street had midwifed a new form of state capitalism. The constant bailouts of failing Wall Street firms meant that the large banks and investment houses were shielded from the consequences of unruly speculation." Page 153
By the end of the Clinton administration, Treasury Secretary Robert Rubin could proudly announced that "the number of home mortagage loans extended to African-Americans has increased by amost 60 percent, to Hispanics by a little over 60 percent, to low and moderate income borrowers by a touch under 40 percent, figures that are well above overall market increases." page 72
Bush II
"Owen Ullmann, a former BusinessWeek writer who covered economic policy for USA Today, wrote of Fannie Mae, 'It will hire key government critics to buy their silence, and it will intimidate lawyers, consultants and financiers who go up against it by pressuring clients of opponents to withdraw their business.' he goes on to quote a congressional source: 'Fannie has this grandmotherly image. But they'll castrate you, decapitate you, tie you up and throw you in the Potomac. They're absolutely ruthless.' Not what you expect to hear about a government-sponsored agency." (Page 108)
"To cope with the rising tide of concern in the Bush administration and on Capitol Hill, Fannie and Freddie embarked on a an ambitious political plan." (Page 111)
"Fannie and Freddie sponsored more than eighty fund-raisers for congressional candidates, even though federal law bans corporations from engaging in direct political activity. This blatant violation of the law would lead to a record fine of $3.8 million from the Federal Election Commission." (Page 111)
"Both Snow and Greenspan were blunt: 'The mortagage portfolios of Fannie Mae and Freddie Mac present a risk to the nation's financial system and federal geovernment.'
"In early 2003, the Senate Banking Committee approved bill to tighten the regulation of these lenders, thanks to the support of every Republican on the committee. All committee Democrates voted against it. The bill was killed on the Senate floor." (Page 113)
"As she wrote, "Since 1996, sub-prime lending has grown 489% -- from $90 billion to $530 billion -- largely through the extension of credit to first-time borrowers." (From Meredith Whitney page 160)
"Mortgage-backed securities are very complex investment tools. Basically, they involve pooling large batches of mortgages, splitting them up into small pieces, and selling the resulting products to investors as securities." (Page 161)
Conclusions
"Vernon Smith, a Nobel laureate in economics, says the federal government 'set the stage for housing bubbles by creating those implicitly taxpayer-backed agencies, Fannie Mae and Freddie Mac, a lenders of last resort.' In other words, far from being the results of runaaway capitalism, the housing bubble and the financial crisis that followed are the results of runaway government." (Page 119)
"The great irony is that those who unleashed this economic calamity appear to be the main beneficiaries of the crisis they helped to create. What's more, they are back in power today and are basicaly planning the next one." (page 166)
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