To Serve Banks

-Submitted by David Drumm (Nal), Guest Blogger

Recently, Rep. Spencer Bachus (R-AL), the next chairman of the House Financial Services Committee, told the Birmingham News, “my view is that Washington and the regulators are there to serve the banks.” As part of that service, Republican members of the bipartisan Financial Crisis Inquiry Commission, that was established to examine the causes of the current financial and economic crisis, are rewriting the history of the crisis.

They want to blame Fannie and Freddie.

Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs), meaning they are privately held, but receive Federal government support. Or they were until the U.S. Treasury put them into conservatorship in Sept. 2008, run by the Federal Housing Finance Agency (FHFA).

Fannie and Freddie purchase mortgages from banks and other primary lenders. This function benefits the banks. No bank wants to have a lot of debt, especially in the form of mortgages. These long maturity loans reduce the bank’s liquidity, their ability to meet their financial obligations. One of those obligations is payment to depositors who want their money. Liquidity problems account for 35% to 57% of bank failures.

Fannie and Freddie then bundle the mortgages into mortgage-backed securities (MBSs), a process known as mortgage securitization, that are sold to investors worldwide, with a guarantee of payment, even if there’s a default.

Before Fannie or Freddie will purchase a loan it must conform to their underwriting guidelines, it must be a “conforming loan.” Two of the guidelines are the credit score and debt-to-income ratio of the borrower. In Dec. 2009, the guidelines got tougher, the credit score minimum went from 580 to 620, and your monthly debts can account for no more than 45% of your gross (after taxes) monthly income. The mortgage lobby complained.

But Fannie and Freddie had competition from private-label securitization entities with less stringent underwriting guidelines. The private-labels would buy and bundle subprime mortgages with adjustable interest rates, get AAA ratings from pay-to-play agencies such as Moody’s and S&P, and sell the securities to investors. Without those AAA ratings, investors would not have bought the MBSs. Columbia University Nobel laureate Joseph Stiglitz observed:

I view the ratings agencies as one of the key culprits. They were the party that performed that alchemy that converted the securities from F-rated to A-rated. The banks could not have done what they did without the complicity of the ratings agencies.

Fannie and Freddie got into financial trouble when, as housing prices and the economy continue to decline, foreclosures spread beyond subprime loans into the higher-quality, conforming, loans.

Republicans are walking a tightrope. The first question they have to answer is: “how will you prevent this from happening in the future?” The obvious reply is regulation of the financial industry. Regulation is not a word that the banking overlords want to hear.

H/T: Paul Krugman, McClatchy, Ben S. Bernanke.

23 thoughts on “To Serve Banks

  1. Nal:

    After the recent proof of financial avarice by our banking institutions, I have to agree with good ol’ boy, Spencer Bachus, but likely not in the way he means:

  2. Lets see……de-ronaldization started when? and some things are better run by private institutions…. and……de-bushization…..free enterprise……and …..geeze Neil…..you got burnt by those savings and loan mtgs……never fear……

    We can all thank government for lining the pockets of the most wealthy….they get to take minimal risk for a maximum investment with the greatest rate of returns…..and even if they guess wrong the government is there to pick up the pieces……

    The TEFRA under Uncle Ron was designed to screw the wealthiest whom has a great percentage of investments in municipal security type bonds….that financed the infrastructure of every city, town, state since the basic inception of time, one way or the other….the bonds were always issued on the full faith and credit of the issuing agency and the state…..now isn’t that a joke….that’s what toll roads are for…….yeah right……

  3. I prefer the old chairman, Barney Frank. Some have said tossing the democrats would be a good thing for progressives. It does not appear to be the case.

  4. Blame Fannie and Freddie is the Fox News Business line. The agency was headed by a black man and gave loans to unqualified minorities, and they, therefore, caused the crash.

  5. They say that”kids”always tell you the truth.

    ““my view is that Washington and the regulators are there to serve the banks.”

  6. mespo,

    You beat me to the punch! I too thought of Mr. Serling when I read the headline. There’s a sequel to that episode that some in Washington have never heard of apparently.

    “To Serve Congress”

  7. eniobob,
    I am beginning to believe that this is just the beginning. The Tea Party is not going to sit still and watch Congress try to regulate our wonderful friends in the big banks! It could get intereting.

  8. very funny Twilight Zone piece. I noticed that altruism was mentioned. I suppose no one sees the irony. Banks were asked to increase the number of home owners because of the Community Reinvestment Act. An altruistic motive which went horribly wrong as does most altruism.

    A shout out to Mespo727272 for that bit of unintended irony. Rational self interest works. Altruism doesn’t.

    And the banks? They were following governments lead.

    A 9′ tall human eating alien, an apt metaphor for our current government.

  9. I was struck by Rep. Bachus’ comments when they first appeared in the press. Of course, he has it reversed. The Republican philosophy, which increasingly appears to be endorsed by the Supreme Court, is that the business of government is business. If it is the job of Congress to serve the banks, why do they need lobbyists?

  10. J. Brian Harris, Ph.D., P.E.
    1, December 19, 2010 at 2:18 pm
    Are we in the midst of a feeding frenzy?

    When the Banks are Served, who gets Fed?

    ==========================================================

    Dude, you are good!

  11. ECON 101 NERD
    1, December 19, 2010 at 5:49 pm
    It pretty much was Fannie and Freddie along with the Fed that caused the problem.

    =================================================

    REVISIONIST 101

  12. The banks are more concerned with legislation and it’s impact on their earnings then they are on customer defection and their impact on earnings. The arrogance of the banks in assuming that their customers will stay is only overshadowed by the 73% of people who are angry with the way the three biggest banks do business yet they continue to do business with them. If 73% of a big bank’s customers transferred their accounts to local or regional banks and credit unions that bank would change the manner in which it does business. If we continue to do business with the big banks and simply expect them to change then shame on us as consumers. We have only one vote when it comes to these banks and that is with our wallets and deposits. If you are truly unhappy with the way these big banks do business, move your relationship to a local or regional bank.

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