It must be understood that some subprime lending was the result of too much regulation, but that the bulk of subprime lending was the result of too little regulation. The issue is that a certain group of banks were regulated, by the CRA, but other groups of banks were not at all regulated by the CRA. Those banks were in the subprime business to make big money. And the concept of shadow banking was set up by Basel 2 in 1998, one year before the repeal of Glass Steagall and years before the Ponzi housing scam really took off.
The group of banks that were set up under the direction of ACORN made up a small portion of subprime lending. These banks were traditional savings and thrift banks. They were federally insured. And the one big bank that worked with them was Citicorp.
However, the shadow banks who made the bulk of the loans, transferred these loans, in an originate to distribute model, due to the repeal of Glass Steagall. These were not federally insured and the Fed and others didn’t regulate them. Indeed, these banks were able to make huge profits. Here are just some of them: GE Capital, New Century, Indymac (which was a Federally insured bank but stayed away from subprime regulations, lending jumbos instead), Countrywide Financial and GMAC (Ally Bank). Examples of shadow banks that bought the toxic loans from these originators include Bear Stearns, Lehman Brothers and other investment banks. And, of course, toxic loans were included in the off balance sheet assets on the books of the regular commercial banks as well as hedge fund assets. These TBTF commercial banks included JP Morgan, Citibank, Bank of America, and Wells Fargo.
So, what happened in a nutshell is that the shadow banking system saw a weakness in the legal structure of the United States and capitalised on it. The repeal of Glass Steagall not only helped the Federally insured banks make bad loans, but it allowed the shadow banking system to become virtually unregulated.
The repeal of Glass Steagall in 1999 allowed for all manner of loans to be securitized and sold. The repeal final vote was 90 to 8. Both parties had a vested interest in getting easy money into the system. I surmise that they knew the stock market was a bubble and they wanted to blow another bubble after it popped. But whatever the reason, the repeal allowed the easy money to start to flow. This was greatly increased in late 2003, as the shadow banks started to ramp up their activity.
There is no doubt that in the early days of subprime, the CRA and ACORN forced banks to lend to red lined districts. But this alone would not have caused a massive housing bubble. 80 per cent of subprime and all of the toxic prime and jumbo mortgages were not made based on anti red lining regulation! Even Janet Yellen of the San Francisco Fed unknowingly indicts the Fed by saying that red lined loans were more responsibly made. Shadow banking surpassed the level of standard banking starting in late 2003. Shadow and subprime lending that originated from Basel 2 planning was not regulated by the Fed and allowed to go wild on purpose! I urge you to study these five links as proof of this:
The Diabolical Nature of A Seemingly Harmless Plan. The Future Has Built In Systemic Risk
The seemingly harmless plan to allow federally insured banks to lend to subprime borrowers turned out to be small in comparison to the shadow banks engaged in the same processes. However, the small banks took it on the chin and are being shut down right and left. This actually establishes fewer banks with more assets. While the smaller banks took it on the chin, and while the shadow banks were taken down or folded into the larger banks, guess who got more powerful and bigger? You guessed it, the TBTF banks. These too big to fail banks are bigger now than before the Ponzi housing scam ever took place.
I maintain that this consolidation of banking was the goal all along. Glass Steagall, imposed in the Great Depression, acted as a buffer and a divider. It divided big investment banks from commercial banks. It is my contention that the ponzi housing scheme, set up at Basel 2, had a twofold plan.
1. The ponzi housing scheme of Basel 2 intended to weaken the competition and cause the smaller banks, who kept the toxic subprime loans on their books, to fail.
2. This ponzi housing scheme of 1998 also intended to consolidate the power of the biggest banks, and meant to extend easy money without the favourites of the cartel suffering too much damage. Getting these loans securitized and off to unsuspecting investors would make these banks a lot of money.
So then, what have we learned? We have learned that the CRA guided banks were too regulated, and that they took on risk they never should have taken on. We can thank Barney Frank for that. But then, we have learned that the shadow banks were unregulated, and they took on risk they knew they could get rid of, and that they made the bulk of the subprime loans. We have the BIS and Basel 2, 1998 to thank for that! And we have learned that all the subprime loans taken together constituted just a part of the housing meltdown, as alt a, prime and option arm liar loans made up over 50 per cent of the toxic easy money loans.
This originate to distribute model was a scam from the beginning. And when Fox News focuses the Tea Party and others on the smaller over regulated CRA scandal, they know that this will get people to seek less regulation. We know that is what the banksters at the highest levels want. They want the continued capacity to blow bubbles when and where they want through the central banks and with the blessing of governments!
I would maintain that this lack of regulation builds in systemic risk all over again.
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