Tuesday, December 09, 2008

Bank of America gets strong armed into making another bad loan.

I brought this up before. Liberals don't want to hear any part into how their political heroes actions were responsible for how financial crisis got started. We all know that it started with the federal legislation of the Community Redevelopment Act and community activist groups putting pressure on banks to make loans to dead beats that had no way in prepaying those loans. Here is a classic example of what I mean but with a twist. The Chicago based Republic window-and-door factory had to go out of business after it defaulted on a credit line issued by Bank of America. The company was using it's credit line as working capital, and once the credit line was shut off it's business couldn't continue. Any normal person with somewhat common sense would have probably blamed the way the company was being managed or the down turn in the economy right? I did say normal people. Apparently the bad guys in all of this is Bank of America, because they had the nerve to follow their lending practices. Once the former employees of the Republic Windows Factory found out that they wouldn't be getting their pay, vacation time and severance. They decided to have a "sit in" and not leave the premises until they got their money. Well this stupid story actually made national headlines. It made such headlines that the messiah Barack Obama made a statement claiming that the former employees were right in what they were doing. Just a quick update, the grand total of business experience Obama has is still zero as of December 9th, 2008. I'd just though I would mention that. With all of this madness going on somehow Bank of America was made out to be the villain because the windows company couldn't pay their employees. So the Governor of Illinois who is now an arrested jailbird Rod Blagojevich, at a news conference in front of the Republic Windows & Doors factory, called on state agencies to suspend business with Bank of America. There is a word in the dictionary to describe perfectly what Governor Blaojevich did to Bank of America.The word is "extortion". Blaojevich used intimidation to get Bank of America to comply with something it had nothing to do with. As of today Bank of America said "it was "prepared to provide a limited amount of additional loans" without specifying the amount. The bank said it would offer the additional financing "despite the fact that Bank of America is not obligated to pay Republic's employees or make additional loans to Republic." Does this all sound familiar? Banks being forced by intimidation tactics to make bad loans. Think about it this way. How is Bank of America going g to get paid back this additional money when they never got back the original amount they loaned Republic Windows Company in the first place? So Bank of America is going to LOSE MONEY TWICE. This is how the whole sub prime market got started. Banks that didn't play ball were threatened with bad press of "discrimination" or "lawsuits". Some habits die hard it looks like.


Anonymous Anonymous said...

You are correct in your analysis. Furthermore here is something for the liberal media to become heated over.

If government agencies pressure banks to give loans to people who are poor credit risks, do you view this as a failure of capitalism or a failure of government? A number of left-wing politicians and commentators have made the assertion that the financial crisis is a result of too much deregulation under the "capitalistic" policies of President Reagan. Those who make the assertion are either ignorant of the facts or being untruthful.

First, a few basic facts: It is universally understood that the present financial meltdown began with the problems of two enormous government-sponsored enterprises (GSEs) - Fannie Mae and Freddie Mac. These two enterprises purchased mortgages from banks to allow banks to issue larger and riskier mortgages with the explicit goal of increasing homeownership.

Fannie and Freddie were allowed to have a lower percentage of capital reserves, needed in case of losses, than other purely private banks were required to keep. Fannie and Freddie both engaged in accounting practices that the courts have ruled to be improper and fraudulent. Fannie and Freddie have contributed millions of dollars to political candidates, including most members of Congress.

During the Carter administration, the Democratic Congress passed the Community Reinvestment Act (CRA), which gave federal regulators the power to pressure banks into issuing loans to high-risk households and small businesses. During the Clinton administration, the CRA was given more power to force banks to issue even riskier loans to poor households. Officials of the Bush administration and members of Congress, who tried to rein in the CRA because they saw a train wreck coming, were accused of racism by some congressional Democrats and left-wing activist groups.

The Federal Reserve engaged in a policy of excessively easy money, cutting the federal funds rate to only 1 percent in June 2003, a rate lower than inflation. Thus, banks were encouraged to provide many very low-rate adjustable mortgages that they, in turn, could offload on the GSEs. Everyone knew interest rates would eventually rise and many borrowers would then be unable to pay the mortgages. But each party in the chain thought it could pass off the bad paper to the next sucker. The result, the taxpayer becomes the ultimate sucker.

Financial regulators are supposed to protect the integrity of the system, the investors and consumers. It was the anti-capitalist left that insisted the regulators make banks originate bad loans and made sure that the GSEs would not have to abide by the rules that everyone else did. If you have any doubt about this, take at look at this video,which shows members of Congress attacking the regulator and defending the improper practices of Fannie Mae and Freddie Mac, which touched off the financial crisis.

There is a danger that the bailout bill and other related measures will be used to further undermine free-market capitalism, and again permanently expand the scope of the federal government, rather than put in measures to correct the real problem of laws and regulations that undermine the proper functioning of the market. Ronald Utt, former association director of the Office of Management and Budget and now a senior fellow at the Heritage Foundation, recently wrote this following bit of history that all too many have forgotten:

"Following the stock market collapse in October 1929, the Hoover administration tried to spend its way out of the Great Depression, increasing federal spending by 47 percent between 1929 and 1932. As a result, federal spending as a percentage of GDP increased from 3.4 percent in 1930 to 6.9 percent in 1932, and reached 9.8 percent by 1940. During that period, many of the federal programs now being buffed up for expanded action - Fannie Mae, Home Owners' Loan Corp., the FHA [Federal Housing Administration], the FHLBB [Federal Home Loan Bank] - were created."

"While this point of nostalgia has excited many advocates of an expanded federal government, ordinary citizens and taxpayers should note that, despite all of the new government spending and bureaucracy, fewer Americans had jobs 1940 than in 1929. Furthermore, the homeownership rate of 43.6 percent in 1940 was the lowest recorded by the Census Bureau, even below the 47.6 percent rate of 1890."

Federal government spending has now grown to more than 20 percent of GDP, and the total of federal, state and local spending now totals more that one-third of GDP. Regulatory expenditures have even grown more rapidly. The problem is not a result of too little regulation, but of too much regulation used to line the pockets and power of politicians rather than serve legitimate purposes.

What we have seen is not a failure of free-market democratic capitalism, but another failure of a government that destroyed the normal market mechanisms for dealing with risk. There have been many calls for the "greedy" to be punished, but the political "greed" for power and money is even more dangerous than excesses practiced by occasional business people. If the greedy should pay fines or go to jail for their sins, it is important not to leave out Democratic Rep. Barney Frank of Massachusetts and Sens. Chris Dodd of Connecticut and Charles Schumer of New York, and many of their colleagues. Their actions have been far more
costly to the American people, and others, than the actions of any Wall Street executive.

12:24 AM  
Blogger JMK said...

"If government agencies pressure banks to give loans to people who are poor credit risks, do you view this as a failure of capitalism or a failure of government? (Anonymous)
Without question, the current credit crisis is the result of government-meddling in the mortgage market and the GSEs lamely trying to prop up all that bad debt by repackaging it and selling on various global financial markets.

The ugly irony is that while ALL our current economic woes are due to our escalated shift back toward 1970s styled Keynesianism, since 2007, the group that's temporarily benefitted from this are...the Keynesians (Frank, Dodd, etc).

In 1976 the Nixon/Ford administration handed off an economy rife with inflation and rising unemployment after 12 straight years of Keynesian (big-government liberalism) policies.

Carter, led by a largely Liberal Democratic Congress hiked taxes, bailed out Chrysler and Lockheed-Martin and Jimmy Carter became the first post-WW II American President to preside over four straight years of double-digit Misery Indexes and to this day, the President who presided over "The WORST Amerian Economy Since the Great Depression."

Carter's average annual Misery Index was a whopping 16.2!

Ironically enough, today we have another Keynesian Republican (G W Bush has, aside from two early Supply Side tax cuts that BOTH increased tax revenues, has been as Keynesian as his Dad) handing off a failing economy to another Liberal Democrat along with a Liberal-led Democratic Congress.

Without question, the same economic results would result in Liberalism being made a dirty word for yet another generation.

Can a different character and a different time yield different results for the same failed policies?

Hardly likely.

2:03 PM  

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