Banks and Their Buddies Learned Little to Nothing from the Great Recession

New Orleans     When we can muster up the attention span to read past the latest Mueller investigation activity and the Trump tantrums, we can see what Congress is doing to try to make life easier for the banks and gut Dodd-Frank requirements that force them to pay more attention in class rather than going the “greed is good” route.  It turns out that there is little relief in revisiting the lessons our old friends, the banks, have learned from their reckless behavior that led to the real estate bubble and the Great Recession only a long decade ago.

Of course, they certainly learned to be careful in dealing with the subprime lending market and its exorbitant and often predatory interest rates.  Wrong!  They only learned that they shouldn’t lend in their own names and through direct subsidiaries, but instead should supply nonbank middlemen with billions so that they can take the first fall when that bubble crashes.  The Wall Street Journal calculates that between 2010 and 2017, yes within 2 years of the meltdown and their repeated mea culpas to politicians and customers, they jumped in hard and collectively have made $345 billion in loans to such companies.  Many of these subprime loans are not in real estate, but in auto financing and similar areas that are even more unstable, if that’s possible.   Don’t for a minute think that this is just something the smaller fry are feeding on, because the big fish are goring on these loans.  Major bank loans to nonbank financial companies that loan money to subprime borrowers include Wells Fargo at $81.1 billion, Citigroup at $30.5 billion, Bank of America at $30.2 billion, JP Morgan Chase at $28.1 billion, Goldman Sachs at $22.2 billion and Morgan Stanley at $16.3 billion.

That’s not all that banks and their buddies haven’t learned.  On the wild right there are still pundits and posers who claim that loose credit standards, ACORN and the Community Reinvestment Act triggered the real estate meltdown and the recession, rather than their own activity.  Two researchers from the Urban Institute, which is the real estate industry and developers own think tank, in a working paper plainly state that the blame game is misplaced.

we … show that First-Time-Home-Buyers have similar loan performance as that of repeat buyers. This evidence indicates that the expansion of lending to include more marginal borrowers may not be the main cause of the financial crisis. Instead, the poor performance of the cash out refinances and refinances more generally, are more important contributing factors.

They put the shoe firmly on the foot of cash out refi’s that were popular for hordes of speculators and investors trying to take money out of properties as the bubble got bigger and then being caught short in their ability to pay as the market became overloaded and crashed.  In plain language speculators, big and small, with the help of bank’s emphasis on refinancing, were a much larger factor.

When banks won’t even admit to themselves what their role was in the crisis, how can they learn the lessons to avoid the next disaster?  Playing button-button on subprime loans and having their lobbyists dissemble in Congressional hallways about where the blame really lies are both signs of more meltdowns to come by the refusal to learn the lessons of the last one.

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Banks, Too Big to Fail, but Too Small to Regulate, Huh?

Biloxi     Once upon a time in America, and much of the world, there was a reliable way to identify a populist.  The litmus test was their view of banks.  If they saw them as somewhere between a criminal enterprise and a bunch of blood suckers, then the odds were good that they were populists.  If they saw them as pillars of the community and local members of Rotary and supporters of the high school football team, then they were definitely not populists, and most likely were Republicans or members of whatever party claimed to be the voice of small business.

This scorecard no longer seems to helpful at all.

Now a populist in common vernacular is someone who hates immigrant workers, supports Trump, and isn’t sure what to do about the increasing power of women and minorities in public and private life.  A populist also is someone in this distorted definition who is not for the people, but mainly against this, that, and the other, and one of the big things they are against is outsiders, rather than hometowners.   I suspect what blurred every bright-line test was free flowing campaign contributions which are available to local pols in more ways from smaller, so-called community banks, and that don’t trickle down to them much from the big Wall Street and regional behemoth money center banks.  Call me cynical.

Now in an era that has been marked by wild abuses from banks that crashed the real estate market and most of the world’s economy, some of which is still being felt a decade later, politicians are arguing about how they can give banks more breaks.  Now when there is abundant evidence that banks have not only created a credit desert, but are also blatantly discriminating in city after city, community after community, politicians are arguing about how they can relax, rather than reinforce, regulations covering banks.

Reports now indicate a bill before the Senate is gaining support from some Democrats and splitting the caucus, particularly among some red-state Demos facing election, who are claiming that they need to help the smaller, community banks against the consolidating, greedy big banks of Wall Street and its suburbs around the country.  That almost sounds old school populist, until we come to understand that they want to help out about two dozen midsized banks from protective Dodd-Frank rules by raising the regulatory triggers from $50 billion in assets to $250 billion in assets.

I don’t want to seem unsympathetic to local, community financial institutions, but we’re not talking about credit unions here.  Since when is $50 billion in assets not a big bank, wherever it gets its mail?  If you are going to play in the street, even if it’s not Wall Street, you still have to be careful about not bumping into the curb when you make a turn.  Some campaign contributions shouldn’t buy you the ability to just speed on the roads willy-nilly without obeying the rules and remembering that passenger, customer and community safety comes first.

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Please enjoy Kacey Musgraves’s Slow Burn. Thanks to KABF.

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