By York Van Nixon III
Washington, DC -- J.P Morgan Chase, Bank of America, Citigroup and Deutsche Bank are among 17 defendants named in lawsuits Friday by the Federal Housing Finance Agency. Recovery of 30 to 45 billions in losses repaid by taxpayers is at the heart of this government legal action.
Increased deregulation of the banking industry fostered an environment of greed, which resulted in Fannie Mae and Freddie Mac purchasing billions in bogus mortgage-backed securities in good faith. Some of the funds banks have been reluctant to lend may have to be used to bail themselves out of long and expensive days in court.
Contrary to popular understanding of the banking collapse, which started with the downfall of Lehman Brothers, it was avaricious banks pretending to comply with established underwriting standards that caused the near decimation of our financial system, and, to a lesser degree, homeowners buying homes they could not afford. This conclusion is based on personal observations and the findings of the Financial Crisis Commission.
In summary, “We conclude dramatic failures of corporate governance and risk management at many systemically important financial institutions were a key cause of this crisis. There was a view that instincts for self-preservation inside major financial firms would shield them from fatal risk-taking without the need for a steady regulatory hand, which, the firms argued, would stifle innovation. Too many of these institutions acted recklessly, taking on too much risk, with too little capital, and with too much dependence on short-term funding. In many respects, this reflected a fundamental change in these institutions, particularly the large investment banks and bank holding companies, which focused their activities increasingly on risky trading activities that produced hefty profits. They took on enormous exposures in acquiring and supporting subprime lenders and creating, packaging, repackaging, and selling trillions of dollars in mortgage-related securities, including synthetic financial products. Like Icarus, they never feared flying ever closer to the sun.”
Another misleading assertion by right-wing detractors is GSEs (Fannie Mae and Freddie Mac) made bad loans. The truth is makers of the secondary market do not generally originate loans. Having borrowers complete mortgage applications and verifying information is the purview and responsibility of lenders like Chase, Bank of America and others.
GSEs set underwriting standards through their proprietary software systems like Desktop Underwriter. But like must rules, a clever person will always find a way to the break them. In house underwriters at member banks all too often turned a blind eye when a previously unqualified borrower was approved weeks later for debt he or she could not afford.
The Clinton Administration is often lauded for its bipartisanship. One such example was the repeal of the Glass-Steagall Act, which had forbidden investment banks from operating as commercial lending institutions. When the wall came down, greed was left unchecked. This 1933 law was replaced by the Gramm–Leach–Bliley Act in 1999, when Clinton was under pressure by a Republican controlled Congress, but there was substantial support from Democrats in the Senate and the House.
The Dodd-Frank Act recently passed was more title than substance. While it promises to keep a closer eye on banks through the Volcker Rule, full implementation and enforcement usually depends on which side of aisle has the louder voice.
With a Republican controlled House and a weak majority of Democrats in the Senate, getting banks to pay up will be difficult, if a conservative agenda prevails in Election 2012.
Business as usual is usually the way business is done in Congress. Expecting real reform is little more than chimera as light between parties fade and focus is centered on special interests playing both sides of the street.
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