Sunday, March 9, 2014

Late news from the crash

Gretchen Morgenstern, in of the heroines of the business press in the runup to the Bush Crash of 2008, has a tasty morsel in the New York Times: emails from Credit Suisse admitting in 2006 and 2007 and 2008 that they were not applying any standards to loans they funded:
Many of the emails show the struggle between executives interested in keeping loan volumes high and those worried about the perils posed to the bank by its acceptance of risky mortgages. In June 2006, for example, one Credit Suisse executive wrote an email about a fellow executive that said, “I spend my time playing defense from a guy supposedly on my team who won’t stop waiving credit guidelines until we’ve taken on so much water the firm will pull the plug. Trust me, when this Titanic goes down,” the executive concluded, that colleague “will be the guy on the bow proclaiming ‘I’m the king of the world!!!!!’ ”
So much for claims that the banks were forced into their madness by the Community Reinvestment Act. This claim is the mantra of the rightwingers, but it is preposterous. As more and more historical documents are brought to the public (in this case by discovery motions in a civil lawsuit), the folly of te claim is made more and more certain. (Credit Suisse blew about 400 Solyndras on that.) UPDATE MONDAY On another blog, a rightwinger cast doubt on the reliability of the Times report. We're in tinfoil beanie territory, but it was amusing and instructive to use the magic of the Internet and skip the Times and go to the source. This paragraph is fun:
"Specifically, a borrower obtained a loan for $450,000 in 2006 which was contained within the BASIC 2006-1 offering. This borrower had income in 2006 of between $0 and just $1,262 per month, according to the borrower’s sworn bankruptcy filings. "However, the borrower’s monthly debt payments were at least $5,555, far in excess of the borrower’s monthly income. The borrower’s monthly debt payments were in addition to the borrower’s monthly expenses for things such as taxes, utilities, groceries, health care, transportation, and the like. Clearly, this borrower could not afford to repay the loan. "This is confirmed by the fact that the borrower declared bankruptcy shortly after obtaining the loan at issue, in 2007."


  1. Bollocks.

    Economists at the National Bureau of Economic Research concluded that banks undergoing CRA-related regulatory exams took additional mortgage lending risk. The authors of a study entitled "Did the Community Reinvestment Act Lead to Risky Lending?" compared "the lending behavior of banks undergoing CRA exams within a given census tract in a given month (the treatment group) to the behavior of banks operating in the same census tract-month that did not face these exams (the control group). This comparison clearly indicates that adherence to the CRA led to riskier lending by banks." They concluded: "The evidence shows that around CRA examinations, when incentives to conform to CRA standards are particularly high, banks not only increase lending rates but also appear to originate loans that are markedly riskier." Loan delinquency averaged 15% higher in the treatment group than the control group one year after mortgage origination.

    CRA easing of borrowers' equity requirement v. banks' asset ratios and the consequent massive expansion of the secondary market. Discuss.