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Yet another example of how the sub-prime market was a creature of the profit motive, and not government mandates.

There is this fascinating little anecdote in Connie Bruck’s Angelo’s Ashes — about Angelo Mozilo’s experiences in Florida as a dark skinned NY Italian, and how that impacted his later venture into minority lending (early 90s) amnd subprime lending (middle 90s):

“The new company [Countrywide] sent Mozilo first to Virginia Beach and then to Orlando. He had never lived outside the Bronx, and years later he told friends that it had been difficult to be a darkskinned Italian-American in these communities. In Virginia Beach, the local club where businesspeople congregated refused to admit him, and in Orlando he had trouble selling mortgages until he met a group of Jewish homebuilders who couldn’t get financing. As his sister, Lori, told me, “Angelo said, ‘Nobody wants to work with you. Nobody wants to work with me. Let’s do it together.’

He was always this Italian guy people didn’t want to accept.” She went on, “When he tans he gets really dark. My mother told me that when he worked in Florida he was asked to sit in the back of the bus.”

And just what might have this done to Angelo’s world view later on? Alex, I’ll take pop psychology for $100:

Despite Mozilo’s ideals, Countrywide did not have a strong record of lending to minorities. In 1992, shortly after Mozilo became chairman of the Mortgage Bankers Association, the Federal Reserve Bank of Boston issued a report stating that it had found systemic discrimination by mortgage lenders against African-American and Hispanic borrowers. Robert Gnaizda, former general counsel of the Greenlining Institute, a nonprofit organization focussed on minority rights, sent the report to Mozilo and other mortgage bankers. “I received a harsh response from Mozilo,” Gnaizda told me.

Privately, however, Mozilo was appalled. He ordered that all Countrywide’s records on rejected minority applicants be sent to him, and he retroactively approved about half of them. Then he dispatched African-Americans, posing as prospective borrowers—he called them “mystery shoppers”—to Countrywide branches, and concluded that they were indeed treated differently from white borrowers.

Countrywide opened new offices in inner-city areas, created counselling centers, and loosened some lending standards, to include borrowers with less than pristine credit histories. Between 1993 and 1994, the company’s loans to African-American borrowers rose three hundred and twenty-five per cent, and to Hispanics they increased a hundred and sixty-three per cent. In 1994, Countrywide became the first mortgage lender to sign a fair-lending agreement with the Department of Housing and Urban Development.

“Countrywide went from close to the bottom in lending to minorities to near the top,” Gnaizda said. “I remember Mozilo telling me, ‘I don’t want to narrow the gap in lending to minorities, I want to end it.’ ”

Eventually, subprime loans became too attractive a business for Countrywide to resist. In September, 1996, it created a new subsidiary for these loans, called Full Spectrum Lending; if the loans performed poorly, the Countrywide brand would not be tarnished. “It was a careful entry, considered closely by those at the top of the company,” a former high-level Countrywide executive recalled. “We sat together and asked each other, ‘Would you make this loan with your money?’ ”

To offset the credit risk posed by subprime lending, the company required borrowers to make a substantial equity investment, ranging from fifteen to thirty-five per cent. . .”

It was the Private sector that saw a profit opportunity and went for it. They made the loans. The government’s role was to provide rhetoric . . .

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Source:
Angelo’s Ashes
Connie Bruck
THE NEW YORKER, JUNE 29, 2009

http://www.newyorker.com/reporting/2009/06/29/090629fa_fact_bruck

PDF: Man-with-a-tan-6-29-09

Source:
The “Most Important Level of the Year”
Aaron Task
Jun 26, 2009 10:37am

http://finance.yahoo.com/tech-ticker/article/270702/%22Animal-Spirits%22-Could-Boost-S&P-to-950-Harrison-Says-The-%22Most-Important-Level-of-the-Year

While the CRB index is flat on the week, the implied inflation rate in the 10 yr TIPS has fallen 22 bps this week to 1.71%, the lowest since May 20th. It also coincides with the conventional 10 yr bond yield falling to the lowest since May 25th on the heels of the three solid bond auctions this week. Why is this? Inflation fears got ahead of itself (the y/o/y May PCE rose just .1% today)? The FOMC, while maintaining their current QE program, didn’t add to it and they also believe that inflation will remain subdued for some time due to ‘substantial resource slack’? Yesterday’s jobless claims data has traders worried again about the economy and the labor market and the deflationary implications, notwithstanding the upside surprise in durable goods orders on Wednesday? Or is it just a consolidation of the sharp move higher in inflation expectations over the past few months?

Discussing whether a more substantial correction is still to come, with Paul Desmond, Lowry’s Reports and Bill Strazzullo, Bell Curve Trading.

CNBC, 6/25/09

The final June UoM confidence # rose to 70.8 from the initial reading and forecast of 69 and up from 68.7 in May. It is now at the highest level since Feb ’08 but the gain from the preliminary # was all in the Outlook component which rose to 69.2 from 65.4 (preliminary June #) while Current Conditions fell 1.3 points to 73.2 in preliminary reading. However, from May, current conditions rose 5.5 points while the Outlook was down a hair. Current conditions stand at the highest level since Sept ’08 while the Outlook is just shy of its highest since Oct ’07. One year inflation expectations were 3.1%, in line with the preliminary survey but up from 2.8% in May and at the highest level since Oct ’08. Today’s confidence survey stands in contrast to Wednesday’s ABC poll which fell to within one point of a record low dating back to 1985. With today’s # being a phone survey conducted within the past few days, it is a very timely indicator but only matters if it translates into a change in consumer behavior, rather than just with their thoughts. In Europe earlier, French consumer confidence rose to the most since March ’08.

Peter Boockvar

Managing Director

Equity Strategist

Miller Tabak + Co.

Office: 212-370-0346

May Personal Income rose 1.4%, well above expectations of a .3% gain and April was revised up by .2% with the influence being “the increased government social benefit payments associated with the” stimulus plan. Disposable income as a result rose 1.6% BUT ex these special factors, disposable income rose just .2% as wages and salary’s fell by .1%. Due to the steroid shot into incomes, the savings rate rose to 6.9% after Personal Spending rose .3%, in line with forecasts. Because headline PCE rose .1%, REAL spending rose .2%, the first real gain since Jan. Bottom line, analyzing the savings rate has become more difficult in light of the one time special government transfer payments and with spending rising more than disposable income this month, the real savings rate likely would have fell a touch.

Given how thoroughly the “CRA caused everything” meme has been debunked, you have to wonder why some poor souls are still pushing this discredited political talking point (other than as linkbait).

I’ve already spilled too many pixels debunking Phil Gramm‘s attempt to shift blame from his radical deregulation to other parties (see partial list at bottom). Oh, and I dropped another 322 pages explaining the actual causes of the crisis.

And yet, these attempts at misplaced fault continue.

So this morning, I want to try a completely different approach — the opposite of our usual data driven, analytical framework. Rather than show more facts, data and specific details, instead, I want to do a little thought experiment.

Imagine, if you will, that the discredited far right meme is actually correct: Assume that the CRA was a prime cause of the mortgage, credit and housing related crises.

Yes, he typed, it was all the CRA’s fault. (Stay with me here).

Assume arguendo that CRA legislation forced banks into making high risk, ill advised loans. And, let’s further assume a huge percentage of these government mandated mortgages have gone bad. The buyers who could not legitimately afford these homes or otherwise qualify for other mortgages have defaulted, and these houses are either in default, foreclosure or REOs.

What would this alternative nation look like?

Given the giant US housing boom and bust, this thought experiment would have several obvious and inevitable outcomes from CRA forced lending:

1) Home sales in CRA communities would have led the national home market higher, with sales gains (as a percentage) increasing even more than the national median;

2) Prices of CRA funded properties should have risen even more than the rest of the nation as sales ramped up.

3) After the market peaked and reversed, Distressed Sales in CRA regions should lead the national market downwards.  Foreclosures and REOS should be much higher in CRA neighborhoods than the national median.

4) We should have reams of evidence detailing how CRA mandated loans have defaulted in vastly disproportionate numbers versus the national default rates;

5) CRA Banks that were funding these mortgages should be failing in ever greater numbers, far more than the average bank;

6) Portfolios of large national TARP banks should be strewn with toxic CRA defaults; securitizers that purchased these mortgages should have compiled list of defaulted CRA properties;

7) Bank execs likely would have been complaining to the Bush White House from 2002-08 about these CRA mandates; The many finance executives who testified to Congress, would also have spelled out that CRA was a direct cause, with compelling evidence backing their claims.

So much for THAT thought experiment: None of these outcomes have occurred.

Zero.

In reality, the precise opposite of what a CRA-induced collapse should have looked like is what occurred. The 345 mortgage brokers that imploded were non-banks, not covered by the CRA legislation.  The vast majority of CRA covered banks are actually healthy.

The biggest foreclosure areas aren’t Harlem or Chicago’s South side or DC slums or inner city Philly; Rather, it hs been non-CRA regions — the Sand States — such as southern California, Las Vegas, Arizona, and South Florida. The closest thing to an inner city foreclosure story is Detroit –  and maybe the bankruptcy of GM and Chrysler actually had something to do with that.

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I spent a year of my life researching and writing in painstaking details what the actual causes of the crisis were. I put together all of the moving parts as to what the actual causes were — and wrote them up in Bailout Nation, to wit: Irresponsibly ultra-low rates that led to a huge housing boom; a failure by the Fed to supervise non-bank lenders; An abdication of lending standards by both banks and non-banks; Radical deregulation of financial markets; the now discredited belief that markets can self-regulate; a shadow derivative market allowed to operate unlike every other financial product; Compensation schemes that rewarded short term risk taking over long term profitibility; Increases in leverage to the major investment houses from 12-to-1 to 35-to-1; These were the causes of the collapse — not some 1977 legislation.

Its not simply that the overwhelming amount of evidence points to many factors outside of the CRA, the actual results of CRA were minor. Relative to these other ginormous factors, the CRA impact is all but irrelevant.  And to date, nobody has produced any data based evidence that the CRA was relevant to the crisis. Not one shred.

Until that evidence is produced, the CRA remains a marker, one that separates proponents of intellectually honest debate versus the parrots of partisan talking points, not worthy of your time or effort.

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Deal Journal’s Michael Corkery and Dennis Berman discuss whether Ben Bernanke unduly used his influence to push Bank of America’s Ken Lewis into a deal with Merrill Lynch.

6/25/2009

Good Evening: As Thursday dawned, market participants were a little on edge. Yesterday’s FOMC statement was found a bit wanting by most investors, leaving them concerned about not only the Fed’s exit strategy from Quantitative Easing but also Chairman Bernanke’s exit strategy for a successful escape during today’s Congressional hearings on the BAC-MER deal. Those worries proved premature on both fronts, and the U.S. capital markets celebrated with a solid up day for both stocks and bonds. Longer term, however, I wonder if Mr. Bernanke and the Fed can escape political challenges to their independence during the next twelve months.

There were some interesting gyrations in our stock index futures overnight, perhaps due to some position jockeying by the off-hours trading crews ahead of Mr. Bernanke’s testimony. With the Russell indexes facing a large rebalancing tomorrow and with the end of the second quarter next week, our markets may see some choppiness that has more to do with portfolio positioning than with shifting fundamentals. This morning’s economic data were another potential source of volatility, but they more or less offset one another. Initial and continuing jobless claims were slightly worse than had been expected, while the final revision to the Q1 GDP figures was slightly better than the forecasts. Stocks opened with smallish losses as all eyes turned to the Bernanke hearings. “What does Congress have on the Chairman — and can he survive?” were the questions posed on T.V. and on trading desks.

Equities had already reversed their early downticks when Mr. Bernanke’s prepared testimony was released at 10am edt. The nascent rally under way grew legs once it was apparent that Mr. Bernanke had come prepared to defend himself quite vigorously (see below). As the hearings dragged on, it looked less and less likely that Congress would be able to lay a glove on the Fed Chairman, let alone disclose the type of information that might lead to a TKO (Bernanke’s resignation).

Stocks continued to rally, and they went higher still when the Fed released a statement addressing the status of some of the alphabet soup lending programs they’ve been sponsoring (see BAC-MER piece below). One program was closed and a couple of others shrank a touch, and while these moves won’t have much impact on the credit markets themselves, the downshifting nature of the announcement implied the Fed is cognizant of the need for an exit strategy for all the liquidity created by these facilities. This news was quite welcome, since many analysts and investors were disappointed yesterday when the widely anticipated FOMC statement didn’t address these issues at all.

With this morning’s twin concerns about the Fed now addressed, market participants were handed a final bit of good news from the bond market. A seven year note auction was quite well received, capping off a very successful week for the Treasury. The major averages made one final push to the upside in the wake of the auction results, and stocks prices then went mostly sideways for the rest of the afternoon. The final tally left every index with gains of more than 2%, with the Dow Transports (+4.4%) leading the way for the third straight day. As mentioned above, Treasurys also enjoyed solid gains as yields declined between 7 and 15 bps. The dollar weakened a touch and commodities exploited this downtick in the greenback. Led by a very firm energy sector and with some help from the metals complex, the CRB index rose 1.4% today.

Ben Bernanke came out swinging in his own defense today, quelling (for now) fears that his job might be on the line over the Fed’s role in the Bank of America–Merrill Lynch merger. Prior to the hearings, no one really knew if the Committee calling him to the microphone had some real evidence of impropriety or if the politicians were just grandstanding for the voters back home. Luckily for Mr. Bernanke, it was the latter. The most humorous moment came when Mr. Bernanke told those assembled that the Fed “acted with the highest integrity throughout its discussions” (over the BAC-MER deal). Some of the elected officials looked momentarily stumped over the meaning of the word “integrity”, and I thought they would have to turn to their staff flunkies for an explanation.

I bring it up because the hearing itself was a farce. As usual, Congress is focusing on the wrong issue, choosing to overanalyze an aftermath sideshow to the financial crisis when they should be focusing their attention on the root causes of the crisis and how to prevent them in the future. Given his easy money policies that fostered the credit bubble, his advocacy of dismantling the financial regulatory framework, and the general abdication of monitoring lending practices that were allowed to become dangerous under his stewardship, it should have been Alan Greenspan sitting in the hot seat on the Hill — not Mr. Bernanke. Mr. Bernanke was handed this mess by the Maestro, who was aided and abetted by the very Congress that spent the morning grilling his successor.

And, speaking of successors, another unseemly aspect of today’s proceedings lies in just who in the administration leaked the BAC-MER documents to Congress. The prime suspect, who — of course — will have left no fingerprints, is none other than the man who covets Mr. Bernanke’s job. I am speaking of Larry Summers, and if he somehow convinces President Obama to ditch Mr. Bernanke when the current Chairman’s term expires next year, it will be a disaster. Not because I revere Helicopter Ben, mind you, nor because I have a problem with Mr. Summer’s political party. I would shed no tears if Mr. Bernanke were suddenly replaced by a tough, hard money advocate like Paul Volcker (see the fascinating article about this man of character below), but though they share the same party affiliation, Mr. Summers is Mr. Volcker’s polar opposite.

Summers contributed to the current crack up when he championed the abolition of Glass-Steagall while working for President Clinton, and he also pushed for the law that banned the regulation of the very credit derivatives that have wrought so much damage during these past 24 months. In addition to being “part of the problem” that brought us here, Mr. Summers is an active member of the current administration, one who helps set economic policy for the President. I can think of no other potential appointee who would be viewed as a greater risk to the Fed’s independence than Mr. Summers. It’s a prospect that would not sit well with investors, especially our global creditors. Why else would Warren Buffett offer the glowing endorsement he gave Chairman Bernanke yesterday? As someone who knows well the dynamics in the current administration, the Oracle of Omaha knows full well who Mr. Obama would call upon as the next Fed Chair. The risk such a fate might befall Mr. Bernanke in the wake of today’s hearing is why market participants were nervous this morning. His swift dispatch with the proceedings helped both stocks and bonds soar this afternoon.

Again, my beef with Mr. Summers isn’t personal, nor is it political; it is one grounded in ideological common sense. If we are going to have a central bank in this country, it needs to have the independence we preach about to the rest of the world. Thus, while Bernanke dodged a bullet today, the markets rightly fear there is still one out there with his name on it. It may never happen, but if Summers some day replaces Bernanke, investors will likely react by selling bonds and buying precious metals. In the eyes of investors at least, we might as well just mail the keys of the Eccles building to 1600 Pennsylvania Avenue.

– Jack McHugh

U.S. Stocks Gain as Bernanke Defends Actions on Merrill Lynch
Treasuries Rise After U.S. Auctions $27 Billion of 7-Year Notes
Bernanke Defends His Record on Bank of America Talks
A step toward an exit strategy
Volcker Gets Less Than He Wants in Curbing Wall Street Excesses

What Felix Said . . .