CRA

Trojan Horse Financial “Reform” Bill Enriches Goldman Sachs, Rips Off Taxpayers

by Hans Bader on April 19, 2010

in Bailout Watch, Economy, Legal, Politics as Usual, Precaution & Risk, Regulation

The Obama administration and Congressional leaders are pushing a trojan-horse financial “reform” bill that would enrich the wealthy and powerful investment bank Goldman Sachs, which was recently cited for massive fraud by the Securities and Exchange Commission (SEC).  That’s the discovery of John Berlau, who won the National Press Club’s Sandy Hume Memorial Award for exposing the conflicts of interest of a former IRS Commissioner.

Earlier, the administration used the AIG bailout to give billions in legally unnecessary payments to Goldman Sachs, which is so rich that it has admitted it didn’t even need the money.  Goldman Sachs, one of the Democratic Party’s biggest donors, is using its political connections to reap record profits.

Moreover, Obama’s legislation would do nothing to rein in the worst offenders behind the mortgage crisis, the government-subsidized mortgage giants Fannie Mae and Freddie Mac, even as it would give the government the permanent ability to bail out Wall Street firms.

Obama’s proposed financial rules overhaul does absolutely nothing about Fannie Mae and Freddie Mac, admits Obama’s Treasury Secretary Timothy Geithner, even though he admits that “Fannie and Freddie were a core part of what went wrong in our system.” Worse, the Obama administration lifted the $400-billion limit on bailouts for Fannie and Freddie, so that they could continue to buy up junky mortgages at taxpayer expense, and showered their executives with $42 million in compensation.

The administration is now expanding the bailouts of these mortgage giants, which are now giving lavish pay to their CEOs and reducing the payments of deadbeat mortgage borrowers.  (At the direction of the Obama administration, Freddie Mac is now running up $30 billion in losses to bail out mortgage borrowers, some of whom have high incomes.  Federal regulators sought to make Freddie Mac hide the resulting losses from the SEC and the public).

Fannie and Freddie helped spawn the mortgage crisis by acting as loan toilets, buying up risky mortgages and thus creating an artificial market for junk.  “From the time Fannie and Freddie began buying risky loans as early as 1993, they routinely misrepresented the mortgages they were acquiring, reporting them as prime when they had characteristics that made them clearly subprime.”

Why did they buy these risky loans?  They put up with Clinton-era affordable-housing regulations that required them to buy up lots of risky loans, in order to curry favor on Capitol Hill and thus retain their annual $10 billion in tax and other special privileges (which they possessed owing to their status as “Government-Sponsored Enterprises” or GSEs). They paid their CEOs millions in the process, and engaged in massive accounting fraud — $6.3 billion at Fannie Mae alone — to increase the size of their managers’ bonuses.  As GSEs, they were exempt from the capital requirements that apply to private banks, so they did not have enough reserves to cover their losses when their mortgages started defaulting.

Banking expert Peter J. Wallison, who prophetically warned against the risky practices of Fannie Mae and Freddie Mac for years, says that Obama’s proposals will lead to “bailouts forever” and give big, politically connected banks that are “too big to fail” the ability to drive smaller rivals out of business at the expense of consumers and taxpayers.  His colleague Alex Pollock notes that Obama has not lived up his administration’s claims that it would back reform of Fannie Mae and Freddie Mac.

Government pressure on banks to make loans in economically-depressed neighborhoods was another key reason for the mortgage meltdown and the financial crisis.  If Obama has his way, that pressure will increase.  The House earlier approved Obama’s proposal to create a Consumer Financial Protection Agency. “The agency would be in charge of enforcing the Community Reinvestment Act, a law that prods banks to make loans in low-income communities.”  It would do so without regard for banks’ financial safety and soundness, even though the Community Reinvestment Act was a key contributor to the financial crisis.

Mortgage Meltdown Was Caused by Government Mandates

by Hans Bader on October 21, 2009 · 2 comments

in Bailout Watch, Legal, Politics as Usual, Precaution & Risk, Sanctimony

The mortgage meltdown was caused partly by the government, which created an artificial market for bad mortgages.  The Washington Examiner cites a recent study by Peter Wallison, who had prophetically warned about risky financial practices for years, finding that two-thirds of all bad mortgages were either “bought by government agencies or required to be bought by private companies under government pressure.” Now, the Federal Housing Administration is ramping up its purchases of low-quality mortgage loans, threatening taxpayers with hundreds of billions of dollars in losses, and creating the risk of another housing bubble in the future.

As Michael Barone notes, Congress is now seeking to pass costly legislation that could reinflate the housing bubble, threatening future financial meltdowns.

The Obama administration is also busy promoting the junky, risky mortgages that fueled the housing bubble, showing that it has learned nothing from history.

Obama has sent to Congress his proposal to create a politically-correct entity called the Consumer Financial Protection Agency. “The agency would be in charge of enforcing the Community Reinvestment Act, a law that prods banks to make loans in low-income communities.”

Government pressure on banks to make low-income loans was a key reason for the mortgage meltdown and the financial crisis. Yet Obama’s disturbing proposal would empower the new agency to enforce the Community Reinvestment Act without regard for banks’ financial safety and soundness.  The Community Reinvestment Act was a key contributor to the financial crisis.

The mortgage crisis was also caused by the reckless government-sponsored mortgage giants (“GSEs”) Fannie Mae and Freddie Mac, and by federal affordable-housing mandates.

But Obama’s proposed financial rules overhaul does absolutely nothing about Fannie Mae and Freddie Mac, admits Obama’s Treasury Secretary, tax cheat Timothy Geithner, even though he admits that “Fannie and Freddie were a core part of what went wrong in our system.”

Worse, Obama’s plan is “largely the product of extensive conversations” with two lawmakers responsible for the corrupt status quo, Chris Dodd and Barney Frank, and it expands the reach of regulations that have been used by left-wing groups to extort pay-offs from banks.

ACORN Sues Whistleblowers for Exposing Its Wrongdoing in Scandal

by Hans Bader on September 24, 2009

in Deregulate to Stimulate, Healthcare, Legal, Personal Liberty, Politics as Usual, Privacy, Sanctimony

ACORN is now suing the whistleblowers who allegedly filmed it promoting illegal sexual activities for $2 million! And not just them, but also the conservative web site that made the video public! ACORN seeks an injunction to silence them — a classic example of an unconstitutional prior restraint.

That’s a flagrant violation of the First Amendment, but the lawsuit was filed in state court in Baltimore, where the judges are very liberal, so who knows if ACORN’s lawsuit will be dismissed. Even if it is, the lawsuit will cost the whistleblowers thousands of dollars in lawyers’ bills. The Baltimore City prosecutor has already expressed hostility to the whistleblowers who exposed ACORN’s wrongdoing, threatening to prosecute them under a state “privacy” law restricting audiotaping.

(Similar “privacy” laws in Massachusetts have been used to shield kidnappers calling in ransom demands, and police abusing motorists!).

I earlier discussed some of the First Amendment issues here. A commenter at National Review argued that the lawsuit is meritless even if you ignore the First Amendment.

The Supreme Court has held that privacy lawsuits, and lawsuits in general, can’t be based on protected speech, in cases like Bartnicki v. Vopper.  That principle was extended by today’s appeals court ruling in Snyder v. Phelps overturning a Maryland jury’s $5 million damage award for intrusion-upon-seclusion, and an earlier ruling limiting state audiotaping laws in Jean v. Massachusetts State Police (2007).

The IRS just ended its controversial relationship with ACORN, which earlier had its housing funds cut-off by Congress over a recent controversy, and is now embroiled in a tax evasion scandal.

ACORN has long received taxpayer money despite a history of financial fraud and voter registration fraud. ACORN helped spawn the mortgage crisis by promoting “liar loans.”

ACORN is a left-wing group that launched Obama’s career as a community organizer. He has long-standing ties to ACORN, and an ACORN affiliate received received $800,000 from Obama’s campaign. ACORN stands to profit greatly from Obama’s financial-regulation proposals, which would strengthen the Community Reinvestment Act (The Community Reinvestment Act is extremely harmful to banks and prudent lending, pressuring banks to make risky, low-income loans).

ACORN affiliates would also likely profit from Obama’s health-care plan, which contains subsidies for community organizers. (Obama’s health care plan would raise taxes, break promises, increase the deficit, destroy many inexpensive health-care plans, and take away important freedoms.)

ACORN’s Empire Will Expand Under Obama’s Health-Care Plan and Financial Rules

by Hans Bader on September 22, 2009

in Deregulate to Stimulate, Healthcare, Legal, Politics as Usual, Sanctimony

Congress recently voted to cut off federal housing funds to controversial group ACORN.  But since most federal money goes to ACORN-related entities and affiliates, not ACORN itself, Congress’s action is expected to have little practical effect. ACORN’s chief defender in Congress, House Banking Committee Barney Frank (D-Mass.), claims that the cut-off is unconstitutional. House Majority Leader Steny Hoyer (D-Md.) suggests that Congress’s action was purely symbolic, and not expected to have any effect on ACORN.

Indeed, ACORN’s empire is likely to expand thanks to pending legislation to broaden its and its affiliates’ ability to shake down banks. ACORN, a beneficiary of many welfare and war-on-poverty programs, is a “creature of the Community Reinvestment Act” (CRA), which allows groups like ACORN the ability to shake down banks seeking to obtain regulatory approvals, by accusing them of making insufficient low-income loans.

The Community Reinvestment Act was a key contributor to the financial crisis, because it forced banks to make risky, low-income loans.  Yet Obama is now proposing a new agency to more stringently enforce it without regard for banks’ financial safety and soundness.  Obama’s Congressional allies are working to expand the CRA’s reach and make it “explicitly race-based.”

ACORN may also benefit from the Obama health-care plan, which contains subsidies for community organizers like ACORN. While funneling money to community organizers like ACORN, Obama’s health care plan would raise taxes, break promises, harm people with insurance, explode the budget deficit, destroy many inexpensive health-care plans, and take away important freedoms.

While enriching ACORN, Obama’s proposed financial rules overhaul does absolutely nothing about the reckless government-sponsored mortgage giants Fannie Mae and Freddie Mac, admits Obama’s Treasury Secretary, tax cheat Timothy Geithner, even though he admits that “Fannie and Freddie were a core part of what went wrong in our system.” The mortgage crisis was caused partly by the reckless government-sponsored mortgage giants Fannie Mae and Freddie Mac, and by federal affordable-housing mandates, which created an artificial market for junky sub-prime mortgages.

Worse, Obama’s plan is “largely the product of extensive conversations” with two lawmakers responsible for the corrupt political status quo, Chris Dodd and Barney Frank.

NBCC/CRA study estimates Waxman-Markey would reduce employment by 2.3 million jobs in 2015

by Marlo Lewis on May 21, 2009 · 2 comments

in Global Warming

The National Black Chamber of Commerce (NBCC) today released a study by Charles River Associates (CRA) on the economic impacts of H.R. 2454, the American Clean Energy and Security Act of 2009 (ACESA), the regulatory climate bill sponsored by Rep. Henry Waxman (D-CA) and Ed Markey (D-MA).

The results aren’t pretty, and they generally get worse over time as the Act’s emission caps tighten. Relative to baseline levels, ACESA would:

  • Reduce employment by 2.3 million jobs in 2015, 2.7 million jobs in 2020, 2.5 million jobs in 2030, and 3 million jobs in 2050;
  • Lower average annual wages by $170 in 2015, $270 in 2020, $400 in 2030, and $960 in 2050; and,
  • Decrease average household purchasing power by $730 in 2015, $800 in 2020, $830 in 2030, and $940 in 2050.

More valuable than any of these estimates, which depend on many variables that can change unpredictably, is the report’s clear economic logic and common sense.

The report specifically debunks two myths propagated by ACESA proponents. One is that there would be virtually no cost to consumers because (a) utilities would receive lots of free emission allowances, avoiding costs they would otherwise pass on to ratepayers, and (b) revenues from auctioned allowances would be returned as dividends to low-income households.

What this myth overlooks is that emission caps inescapably–and by design–increase the cost of producing and consuming energy. The “cap” in cap-and-trade “works”–that is, reduces emissions–by creating an artificial scarcity in the right to produce and use fossil (carbon-emitting) energy. This drives up the price of coal, oil, and natural gas. It also increases reliance on higher-cost non-fossil energy. 

About 85% of our total energy is carbon-emitting, and about 99% of all transport sector energy is carbon-emitting. Since energy is used to produce and move everything from autos to food to houses to bytes of electronic information, ACESA’s impacts would cascade through the economy. In the report’s words:

This analysis reveals that businesses and consumers would face higher energy and transportation costs under ACESA, which would lead to increased costs of other goods and services throughout the economy. As the costs of goods and services rise, household disposable income and household consumption would fall. Wages and returns on investment would also fall, resulting in lower productivity growth and reduce employment opportunities. 

Although free allocations and revenue recycling can ameliorate the impacts of cap-and-trade on some industries, communities, or income groups, “the cost of bringing emissions down to the levels required by the caps cannot be avoided.”

Proponents also claim ACESA can revive the economy by creating millions of “green jobs.” The CRA study agrees that ACESA would lead to “increases in spending on energy efficiency and renewable energy, and as a result that significant numbers of people would be employed in ‘green jobs’ that would not exist in a no carbon policy world.” However, proponents ignore both the fossil energy-related jobs ACESA would destroy and other job losses due to rising energy costs and lower productivity:

This study finds that even after accounting for green jobs, there is a substantial and long-term net reduction in total labor earnings and employment. This is the unintended but predictable consequence of investing to create a “green energy future.”

Several other findings are noteworthy:

  • Declines in employment are heavier in the Mountain West (-3.5%), Great Plains (-1.4%), Oklahoma and Texas (-1.8%), Missiippie Valley (-1.5%), Mid-Atlantic (-1.3%), Southeast (-1.1%), and Midwest (-0.6%)  than in California (-0.4%) and Northeast (-0.3%). ”The Northeast and California fare better than other regions because of their initial economic circumstances. Namely, these regions’ industries are less energy-intensive, as is hte overall composition of industry.” By sheer coincidence (not), the bill’s co-sponsors, Henry Waxman and Ed Markey hail from California and the Northeast.
  • The bill’s renewable electricity and energy efficiency mandates  make neither economic nor environmental sense even if we assume that global warming is a “planetary emergency.”  The rationale for cap-and-trade is that it allows the market to find the least-cost methods of reducing emissions. By superimposing a system of renewable electricity and energy efficiency mandates on that system, ACESA would dictate the means as well as the goals. There are two possibilities. If, by coincidence, the cap itself motivated all of the actions required to comply with those mandates, then the mandates “would waste resources on needless monitoring, measuring, enforcement and compliance.” If, as is more likely, the mandates compel industry to buy more renewable energy or invest more in efficiency upgrades than it otherwise would to comply with the cap, the total emissions reduced would not change but industry’s (hence consumers’) costs would be higher. The renewable electricity and energy efficiency mandates “can only substitute more costly GHG cuts for those that could have been made at lower cost.”
  • The economic impacts estimated in the report are conservative because they make a very favorable assumption in favor of ACESA, namely, that domestic industries would be able to exceed the cap by about 30% during 2012-2050 by purchasing international offsets (e.g. payments to preserve forests in development countries). Access to international offsets are especially important to cost-containment in ACESA’s early phase, totalling 83% of the required emission “reductions” in 2015. “However, in light of the difficulties in measuring, verifying, and ensuring the permanence of these offsets, international negotiations have stressed domestic sources of emission reductions over international offsets.” The Kyoto II treaty that will be negotiated in Copenhagen “might allow far fewer” offsets than ACESA would provide. ”This would drive up costs substantially.” 

Unbelievable Gall from the New York Times

by Hans Bader on December 9, 2008 · 3 comments

in Bailout Watch, Economy, Legal, Nanny State, Precaution & Risk, Regulation

As economists and the Wall Street Journal have noted, the Community Reinvestment Act was an important ingredient of the financial crisis, by pressuring banks to make risky loans to people in low-income, predominantly-minority neighborhoods, even if such loans were unlikely to be repaid. Now those loans, which were economically unjustifiable, are defaulting, resulting in pain for both banks and borrowers alike.

So what does the New York Times recommend as a solution? To “strengthen” and expand the Community Reinvestment Act’s provisions “requiring banks to lend, invest and open branches in low- and moderate-income areas,” by making it even more onerous and inflicting it on even more lenders! As if we don’t already have enough risky subprime mortgage loans fueling the mortgage crisis. The mindset of a Manhattan liberal is truly beyond belief. If the definition of insanity is doing the same thing over and over again (even after it has proved unsuccessful), and expecting a different result, then the editors of the New York Times must be insane.

The New York Times is getting criticism for its role 75 years ago in concealing Stalin’s “terror famine,” in which the Soviet dictator deliberately starved to death six to ten million Ukrainians, in an artificially-engineered famine that the New York Times denied was occurring, even as its Russia correspondent, Walter Duranty, was writing glowing reports about Russian harvests, and receiving expensive gifts from the Soviet government. (The Times has refused to return the Pulitzer prize that Duranty and it received for their misleading coverage of life in the Soviet Union).

Bailout fails — Move on to Mark-to-Market Reform

by John Berlau on September 29, 2008 · 13 comments

in Bailout Watch, Economy

Oh, Happy Day! And it certainly is for all those who value freedom, responsibility and the true free market in which individuals are free to profit from their risks on the condition that they don’t stick the rest of us with their losses.

It’s not hyperbole to say the Republican and Democratic backbenchers who defied both parties’ leadership to defeat this $700 billion package of Wall Street socialism literally saved America. Whatever their reasons, this defeat (or rather victory for freedom), means that America is much less likely to turn into France, Venezuela, or the old Soviet Union, as this bailout/nationalization package would have set us on the road to becoming.

Several great speeches on the Right and Left were given. Democrats Brad Sherman of California and Earl Blumenauer of Oregon gave powerful speeches against corporate giveaways. And conservative leaders of the Republican Study Committee — such as Jeb Hensarling, Jeff Flake, Mike Pence, and of course Ron Paul — spoke about how government intervention was largely the cause of this predicament, but the bailout would doom arguments for the free market form here on out. The idea of the government making this kind of outlay to high-flying risk takers just didn’t jibe with members, and certainly not with the American people.

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Investing in Communal Failure: The Current Economic Crisis as a Result of Regulation

by Michelle Minton on September 29, 2008 · 11 comments

in Bailout Watch, Economy, Precaution & Risk

Unfettered greed is the suspect many point at to explain the current economic crisis. To some extent, they are right, but it isn’t irrational greed on the part of bank managers or fat cat CEOs. It is the unwieldy bank regulations that forced the entire industry to walk the proverbial plank and then blame it for drowning.

Critics have alternately claimed that over-regulation and under-regulation are the causes for the current crisis. I believe one specific regulation, the Community Reinvestment Act (CRA), should shoulder a lot of the blame for creating an environment where a lending institution’s short-term survival hinged on it making the decisions that in the long-term would likely cause its demise.

As I noted in my paper The Community Reinvestment Act’s Harmful Legacy, one of the effects of the CRA was the creation of a weapon that has been effectively utilized to extort money from lenders. When lending institutions wish to open a new branch, expand, or merge, they must apply for permission from one of the four governing bodies (Federal Reserve, Office of Comptroller of the Currency, Federal Deposit Insurance Corporation, and Office of Thrift Supervision). Their request can be postponed or outright denied if any community group files a CRA protest. Lending institutions can of course fight these protests, but CRA investigations can take months and cost large sums of money.

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