would anyone proof this, please

[mercuryblues]

I need to make sure my analysis and facts are correct


The Glass Steagall Act: After the Great Depression this regulation on the banks was made law. Its primary purpose was to separate investment banking and commercial banking. Why was this important? It prevented banks from taking your money and gambling on Wall Street with it. In the early to mid fifties, congress added insurance banking to the regulation. This regulation ensured that another great depression would not occur. If one type of bank failed it would not bring the others down with it. Sort of like, if you volunteered to bake 3 cakes for the school’s bake sale, you would not grab a big bowl and simply triple the recipe. You would mix them up separately and bake them separately, in case something goes wrong. Only one cake would not be good, not all three.

Fannie Mae and Freddie Mac are government securitized entities. The reason they came about was because of the stock market crash in the thirties, banks stopped lending. The Community Reinvestment Act of 1977, was enacted to counter what is called ‘redlining’. Redlining was basically banks drew a map and redlined the areas they would not allow loans for, the inner cities or to qualified minorities. This practice prevented minorities from owning homes in the neighborhood they lived in. It also denied minorities the right to buy homes in ‘white’ neighborhoods. The CRA did not allow for people with bad credit to buy homes (that would come later) It allowed for people with a good credit rating to buy a home they could afford. Fannie Mae does not originate home loans, they buy and back loans that other banks originate so those banks can keep lending. The only country that Fannie operates in is the USA, they are not an international financial institution. Were they the cause of the financial collapse, no. They were a contributing factor, but no more so and in some cases far less so, than other financial institutions.

One of the reasons they took on so much of the subprime loans is that Bush pretty much ordered them to. There was a problem with Fannie’s accounting practices and for them to get bailed out from the government, Bush required them to take on a higher ratio of subprime loans in exchange for the bailout. This allowed other lending institutions to take on more subprime lending. However there are only so many people to actually buy homes (keep this in mind). In the meantime government regulations imposed on lending was loosened and oversight was lax. Federal interest rates were lowered; banks were allowed to take on a higher debt to asset ratio; potential buyers were no longer scrutinized by banks for ability to repay and value of property to amount of the loan among other things. Banks were now making their profit from home loans by bundling and reselling them to Fannie/Freddie; other banks; but mostly on Wall Street. They were no longer concerned with making their profit from the interest on the loan or repayment of the loans. Credit checks that would weed out high risk lenders, just got in the way of their profit. Normal standards might give a high risk lender a loan still, but their interest rate would reflect that ie: the higher the risk, the higher the interest rate applied. In the new era of lax government restrictions and oversight banks and other lending institutions were offering low interest, no interest, no payments for 6 months; adjustable interest rates; anything to get borrowers to flock to them. These institutions did not care if the loans would be repaid, they were selling them off and making their share of profit before a payment was due.

To be fair politicians across the board were sounding the warning bell as early as 2003 about an imminent crash and the implications. Economists were screaming that the new lending standards would lead to massive bailouts, directors of federal agencies were fired for opposing the lending practices and a roll back on regulations. Reputations were ruined, for sounding the alarm.

Under the Clinton administration, modest requirements to raise lending level via the CRA to low income buyers were established. This act was put on steroids by the Bush administration. Bush proposed reforms on Fannie and Freddie, republicans and democrats blocked it. Bush had already weakened the agency that had oversight over lending practices; his proposal would abolish it, and reconstitute its regulator within the Department of the Treasury. (Much like what he did with FEMA. We know how well that worked out) Republicans proposed reforms on Fannie and Freddie, democrats blocked it. The republican bill and the democratic bill went into committee and were close to a compromise. Then Bush informed the Congress he would veto any bill that came out blocked it. The bill never made it out of committee. The financial industry lobbied heavily against these bills and made substantial campaign contributions to key politicians. (reason #1 for Occuppy Wall Street) The financial industry did not want tighened restriction on Fannie and Freddie. That would have a huge impact on their own ability to buy up sub-prime mortgages and then dump them on Fannie/Freddie when their value started to deminish. Remember when fannie needed government support and Bush supported them alright. Their bailout money came with strings. They were to buy up an even higher ratio of sub-prime loans with it. This created a higher asset to debt ratio For fannie. The eventual collapse was in place.

http://economistsview.typepad.com/economistsview/2010/02/did-fanniemae-cause-the-financial-crisis.html

http://www.businessweek.com/investing/insights/blog/archives/2008/09/community_reinvestment_act_had_nothing_to_do_with_subprime_crisis.html

http://en.wikipedia.org/wiki/Fannie_Mae

http://en.wikipedia.org/wiki/Subprime_crisis_impact_timeline

[mercuryblues]

1. thnx

for the recs.

[pnorman]

2. Can't "proof" this but I'll certainly read it! K & R!

n/t

[mercuryblues]

3. I'm

not finished with it yet. I just needed to make sure I was on the right track before I went further. This was a brain drain and I know the finishing paragraphs are going to be even worse. The Wall Street greed.

[snot]

4. Re- proofing:

Capitalize "Congress" and "Great Depression." And isn't there a hyphen in Glass-Steagall?

I don't think the main point of Glass-Steagall was to prevent contagion. It was, as you initially point out, to prevent bankers from gambling depositors' savings away. So the 3-cake analogy is irrelevant re- Glass-Steagall.

The comma after "crash in the thirties" should be a semi-colon.

The Community Reinvestment Act - this is not obviously related to Fannie or Freddie; I'd start a new paragraph.

'redlining' -- the quotes should be normal, "-type quote marks, and the period should be inside the quotes.

I could go on; but what is this for?

[mercuryblues]

5. Writing it for a friend and blog post.

People seem to forget the cliff this country was on. I thought it was time for a nice reminder.

Thanks for the tips. I understood that part of the Glaas-Steagall Act was if one type of banking melted down it would only have a nominal effect on the other banks.

I meant to finish this in the Am, but real life got in the way. My SO got a survey from the R party. He is a registered Dem, donates to the Democratic Party and votes in the Democratic primaries. Typical caging technique. Yes, I copied and emailed it to the democratic HQ.