Enough Already!

In each presidential election cycle it appears that the hyperbole, distortions and outright lies get exponentially worse than in the previous cycle. And so it is now. The latest claptrap being pushed by the right wing pod-people and pundits is that....lo and behold....POOR people are to blame for the credit crunch!

The gist of it, launched by Rush Limbaugh some weeks ago, is that the "Community Reinvestment Act" is to blame by opening the doors to poor folks (mainly African-American, of course) who didn't have the capital or means to own in the first place. And hence, the genesis of the sub-prime meltdown.

Thus, the CRA opened its door unscrupulously to any manjack that wanted to own a home, or needed a mortgage. This take has since been exploited by the likes of Neil Cavuto of Faux News to assert (in mid-September): if banks hadn't been "forced to lend to minorities and risky folks" the Wall Street disaster would never have happened.

George Will went one better in a column, claiming banks were hostage to similar legislation to the CRA which criminalized any refusal to lend as discrimination if the bank didn't make mortgage loans to unproductive borrowers.

This is all nonsense.

First, a few facts, which for the Right usually cause their assorted neurons to melt down:

1)The CRA only applies to banks that get federal insurance, which excludes 75% of those that made the sub-prime loans.

2) No clause, provision or code exists anywhere in the Act which requires any bank to make a sub-prime loan to any borrower. Indeed, 180 degrees opposite, the Act calls on banks in the needy communities to make loans "consistent with the safe and sound operation" of the lending institution.

3)Contrary to other Limbaugh-esque nonsense, a number of studies has shown that the CRA recipients pay their bills on time and ultimately become successful homeowners. Thus, the claim by the right's blowhards - that the CRA unleashed millions of deadbeats - is pure bollocks.


So, if neither the CRA (or ACORN - The Association of Community Organizations for Reform Now) is responsible for the housing implosion and credit crunch than who or what is?

Okay, the "who" are the quants, a gaggle of quantitatively-gifted brainiacs who were unable to get decent paying work in their native mathematics or physics professions, and sought higher remuneration in the halls of finance - usually in investment banks like the late Bear Stearns and Lehman Bros.

These quants devised, configured and invented a whole slew of obscure financial instruments, such as derivatives with the name of "credit default swaps" that were sliced, diced then repackaged into "collateralized debt obligations" (CDOs) then resold to banks who repackaged them with other financial crappola and sold them as SIVs or "structured investment vehicles".

These things are now lying around on the books of thousands of banks, wreaking havoc on their equity and making interbank lending impossibly risky because no bank knows how much of this toxic crap any other bank has. Thus, a loan - any loan - would be fraught with peril to the landing bank if IT has high liquidity and is properly capitalized.

Thus, the "what" that is responsible are mainly the CDS (credit default swaps) and the SIVs into which they were packaged - then sold to trusting counterparties - but with false bond ratings (usually given AAA, reserved for the highest quality, instead of the AA or lower (A) they really deserved).

An excellent recent article that fully backs up my contention is 'AIG's Complexity Blamed for Fall' which appeared in the Oct. 7 edition of The Financial Times.
Another excellent article which backs me up appeared in the October FORTUNE, and is entitled 'The $55 TRILLION QUESTION' (p. 135). Quoted in the piece, a University economics professor (Frank Partnoy) who doubles as a Morgan Stanley derivatives salesman noted: "The big problem is there are so many public companies- banks and corporations, and no one really knows how much exposure they have to CDS (credit default swap) contracts."

Since most CDS contracts are made "on the fly", in no formal mode, and often by word of mouth on cell phones (ibid.) or via instant messaging, no one even knows where all the $55 trillion of this toxic waste is buried. As another hedge fund operator (Chris Wolf) quoted in the article put it:

"This has become essentially the dark matter of the financial universe" - comparing it to the dark matter discovered in astrophysics.


Finally, and most apropos, as the FORTUNE piece observed:

“you can guess how Wall Street's cowboys responded to the opportunity to make deals that: 1) can be struck in a minute, 2) require little or no cash upfront and 3) can cover anything.”

Clearly, the blame – 100 percent of it- is on the Street’s capitalist cowboys and all the quants they suckered into working for them for filthy lucre! The Right wing blowhards now need to give it a rest, put down their mics or typewriters, and get with the program.

That future program requires that all these CDS as they currently exist be banned outright from the world of finance. If they are introduced they must be rigorously regulated as all derivatives need to be. It is long past time that the Republican sympathizing regressives stop blaming poor people for the ongoing credit debacle.