Politicians are busy pointing fingers at the greed of “Wall Street” causing the pain on “Main Street.” The same players that were intimately involved in fostering the environment that resulted in this credit crisis are now posturing as our saviors as they give away billions of taxpayer dollars.
In 1977, Congress passed and President Carter signed the Community Reinvestment Act, or CRA. The law was designed to encourage commercial banks and savings associations to meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods. The intent of the CRA was to stop the practice of “redlining” (not granting loans in low-income neighborhoods) and thus curb deterioration of our inner-cities. Unfortunately, the result was to force banks to make loans to people who were not qualified.
In 1993 and again in 1999, President Clinton signed laws that expanded the CRA. In 1997, Bear Stearns issued the first securitized CRA package guaranteed by Freddie Mac. In 2000, the Clinton administration’s Department of Housing and Urban Development mandated that Freddie Mac and Fannie Mae dedicate 50 percent of their lending to low and moderate income families. At the same time, interest rates plummeted and the money supply was flooded to counteract the anticipated problems of Y2K and the real problems of Sept. 11, the dotcom bubble, ENRON, etc. A perfect environment had been created for the subsequent housing bubble.
Banks and non-banks (like Countrywide) were bidding to see who could make the most outrageous loans to non-qualified buyers. Greed on Wall Street and predatory lending? Yes, but only because Congress mandated that lenders loan to non-qualified buyers without adequate supervision or safeguards. Those same Congressmen are now crafting $700 billion bailouts to fix the problem. What will be the next unintended consequence?
Meanwhile, there is no longer Wall Street to blame. Bear Stearns was sold to JP Morgan in March with taxpayer guarantees. Merrill Lynch was forced into Bank of America. Lehman Brothers was allowed to implode, and Morgan Stanley now carries the stamp “Made in Japan” as the Mitsubishi Bank bails it out — also with substantial guarantees backed up by the taxpayer.
Admittedly, it is more complex than this. But, Congress’s good intentions of a home for everyone are a significant factor in the credit crisis that has killed Wall Street and decimated credit markets around the world. Investors have no confidence in their brokers, no trust in their banks, and no credit to support our economy. Yet, we have to trust the government to save us. It’s like the bank robber returning the money after he is arrested and requesting the reward.
We have lost about $9 trillion in the stock markets and $5 trillion in residential real estate in the last year. Is it time to find some new people to trust?
The above information is extracted from my current client newsletter “The Perfect Financial Storm — Part Four.” Please contact my office for a copy.
Mr. Wheeler is President and CEO of WheelerFrost Associates, Inc. a Wealth Management firm in San Diego. WheelerFrost has regularly been recognized by Worth, Bloomberg, and San Diego magazines as one of the top wealth managers in San Diego and the United States. For more information: firstname.lastname@example.org or 866-478-8794.