# The CRA/repeal of Glass-Steagal caused the financial crisis **URL:** \ **Category:** Great Debates\ **Created:** [August 15, 2012, 2:21pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564 "2012-08-15T14:21:50Z")\ **Posts on this page:** 20\ **Page:** 3
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [August 16, 2012, 6:39pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/41 "2012-08-16T18:39:35Z")
> [@sweeteviljesus](#): > > I meant Brooksley Born. I remembered the B, the R and the N, correctly and in the right order. Do I get partial credit? > > BTW, what, if anything, is being done about the incentive for ratings agencies to overrate bonds? What could or should be done? > > Thanks, > Rob IIRC, there is a proposal to more or less blindly assign bonds to rating agencies, so that the banks can’t shop for better ratings. I don’t have time to search for this, and I don’t know if it has or is going to be implemented. My cite is Marketplace on the radio, not very useful for this discussion. ---
**Author:** ![sweeteviljesus](https://avatars.discourse-cdn.com/v4/letter/s/898d66/32.png) [@sweeteviljesus](https://boards.straightdope.com/u/sweeteviljesus)\ **Post date:** [August 16, 2012, 6:44pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/42 "2012-08-16T18:44:05Z")
> [@leahcim](#): > > Price it on the open market. That’s how credit is currently priced into bonds: You say “XXX promises to pay you 4% per year and then 100000 in five years, how much do you think XXX’s word is worth?” and the market responds with a price that takes that into account. Isn’t that effectively the same as letting a bunch of independent agencies rate the instrument and taking an average? I suppose they are as likely to adequately assess the risk as the big three. Wouldn’t there need to be a bunch of sophisticated players in the game and time period to allow them to complete their analyses? Thanks, Rob ---
**Author:** ![Damuri\_Ajashi](https://avatars.discourse-cdn.com/v4/letter/d/898d66/32.png) [@Damuri\_Ajashi](https://boards.straightdope.com/u/Damuri_Ajashi)\ **Post date:** [August 16, 2012, 7:56pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/43 "2012-08-16T19:56:02Z")
> [@sweeteviljesus](#): > > By which you mean the incentive of the ratings agencies to overrate securities (because they were insured by credit default swaps), Not really. Remember, Credit ratings agencies used to be a sleepy little corner of the finance world. Securitization exponetially increased their deal volume. They started charging more and spending less time on each deal. There was an incentive to just rubber stamp stuff that they didn’t really understand. CDS’s were part of what they didn’t undersand but they frequently didn’t understand the base securities either. > [@](#): > > lack of rules or enforcement of rules preventing lying on mortgage applications, This sort of retail fraud is hard to prevent if the folks who are buying the mortgages intend to securitize the whole thing and get it off their books, there is simply no real underwriting. > [@](#): > > lack of rules regarding disclosure of the underlying mortgages, low interest rates designed to stimulate the economy which required businesses to take on more risk, and, well, I am not sure about the last thing. Is that correct? From a 50K foot view, its close enough but there are some devils in the details. > [@](#): > > I ask because I don’t know that I see anything fundamentally unsound about securitizing debt. there is nothing fundamenatlly unsound about securitizing debt if the integrity fo the process from th retail level up to the ultimate investor is sound but when noone keeps skin in the game, it is really just a game of hot potato. I was frankly pretty shocked at the sort of shit that went on. You can take a bunch of crappy securities, bundle them together and come up with two slices, one of them is just as crappy as the securities you started with but the other slice has priority so they might be AAA with a little bit of credit support. > [@](#): > > I would also assume that insuring the debt lowers the risk on the debt. I thought the problem was that the insurers undercharged for the insurance because they couldn’t adequately assess the risk of the component mortgages. > > Thanks, > Rob The insurers were frequently in no position to pay if there was more than a statistical variance in default rates. > [@Linden\_Arden](#): > > The CRA and Glass had nothing to do with the 2008 financial crisis. > > Lehman, Bear, Merrill, AIG, Fannie, Freddie, and countless others were exempt from both. Yet Wachovia, Washington Mutual, NBank of America and Citigroup would have been. I don’t think CRA had anything to do with it but repeal of galss steagall made banks bigger. > [@JohnT](#): > > In my readings (and I’ve read at least 40 books on the '08 meltdown) I don’t ever recall it being said that the rating agencies (RA) gave AAA ratings to securities because of CDS’s\*. Instead, they gave increasingly higher ratings _because ratings were being shopped_: There was also some greed involved. They never saw this kind of money before in their life. > [@sweeteviljesus](#): > > Another thought I just had: if the CDOs were made from so many little parts of different mortgages, wouldn’t the expected default rate on those mortgages asymptotically approach the national average default rate? Couldn’t that be used to assign the risk? These parts were not all identical. You would frequently see a mortgage split between the principal portion and the interest portion. So if you buy the principal portion and the principal is repaid faster than expected through sale of the home or refinancing (models expected a certain level of prepayment) then you got a higher rate of return than you bargained for. If you owned the interest portion then you wanted that mortgage to stick around for 30 years. Now you pool a bunch of these principal portions and you have two slivers. One sliver gets paid first and the other sliver only gets paid if there is anything left over (the second sliver is cheaper). These things were not split vertically or horizontally or daigonally. They were chopped into fine little peices and molded into things taht looked nothing like the original peices. > [@](#): > > Also, what regulation of derivatives did Dr. Barnes have in mind? We are referring to the CDSs here and not the CDOs which are debt instruments, right? Mostly talking about regulation of CDS I think. There was a vibrant OTC market that just begged to be regulated through a clearinghouse or exchange but the profits from the lack of transparency that you get in the over the counter market was not something the banks wanted to surrender. > [@WillFarnaby](#): > > The response was the problem. Instead of banks keeping adequate reserves, they lobbied for FDIC. This way consumer confidence was restored without the necessity of changing questionable banking practices. What questionable practices? > [@](#): > > Do you have a degree in electrical engineering? If not, how many fires have started because you purchased faulty lamps or wiring? There is electricity coursing through nearly every home in the U.S. Shouldn’t there be more electrical fires if an advanced degree is required to make smart consumer decisions? No but we have building regulations, would YOU move your family into a home that hasn’t been inspected by a building inspector merely because you would have legal recourse against your builder if your family burned alive in an electrical fire? > [@JohnT](#): > > 1. You would think but I’m sure somebody smarter than I can build a model that shows that the more risk you take on, the safer you are. Oh, wait… they already did, which is why the crash happened in the first place. 😉 Two things, separate but related. The law of large numbers tells us that if you have multiple risks, you can more reliably predict that the net outcome of those risks. So if you spin a roullette wheel 32 times, you probably have very little predictive ability on where the ball will land. If you spin the wheel 32 billion times, you are going to get close to the ball landing on each spot about a billion times. Risk Diversificiation. This is basically the portfolio effect. multiple non-correlated risk is less risky than a single risk. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [August 16, 2012, 10:36pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/44 "2012-08-16T22:36:51Z")
> [@Damuri\_Ajashi](#): > > Risk Diversificiation. This is basically the portfolio effect. multiple non-correlated risk is less risky than a single risk. However if you are wrong and your risks really are correlated, you are really screwed. From what I’ve read the risk models the banks used assumed that the deals were put together with no thought of the risk model, and were more or less random variables. However the dealmakers learned the risk models, and put together deals (by which I mean products) just barely clearing the risk limit, since these deals made the most money. Therefore when things went south they really went south. ---
**Author:** ![WillFarnaby](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/willfarnaby/32/514_2.png) [@WillFarnaby](https://boards.straightdope.com/u/WillFarnaby)\ **Post date:** [August 17, 2012, 3:03pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/45 "2012-08-17T15:03:29Z")
> [@Voyager](#): > > You should read the history of the time. No bank can practically have enough reserves to guard against a run. The problem was purely psychological, as people feared for the safety of their money even in banks which were strong. The FDIC eliminated that fear, and the problem of bank runs disappeared. The bank runs disappeared because there was no need for bank runs when the money is insured. What FDIC did was destroy a market mechanism for keeping banks in check with the possibility of bank runs. That threat is no longer on the bank’s radar. Which is why underregulation is blamed for the housing crisis. Government regulation failed to fill this void with adequate regulation. > [@](#): > > Given banks failing during the last crisis, I bet that without the FDIC we’d have a much bigger disaster on our hands. You can’t say this. The entire set of conditions would have been different. It’s pretty safe to say that nearly nobody in the US that is still alive has lost money due to a bank failure. Why should they care which bank they use? > [@](#): > > Actually I do. 🙂 Remember though, that major wiring jobs have to be done by licensed electricians, which cuts down on the number of fires. (That pesky gummint again.) No it doesn’t. In order to be up to code, yes they have to be licensed, but that isn’t stopping someone from doing it themselves or asking an unskilled friend. Anyone who contracts a major wiring job would have the incentive to find a skilled electrician. Government didn’t create this incentive. > [@](#): > > While I didn’t see much more than 12 volts in any of my labs, I know enough to want to study real hard about the issues before I would wire my house, or, better, get someone with experience. The real danger is from those who don’t know enough to know what they don’t know. You know, the kind of people who keep the makers of quack remedies in business. Anyone who deposits in a bank rated by the financial equivalent of the makers of quack remedies will lose their money. That doesn’t mean a wise investor should subsidize their loss. That just perpetuates foolish investments and quack rating agencies. > [@](#): > > And while lamps are certified by UL, the power of government is lurking in the background. If there were tons of competing certifiers, we might be forced to go to a government one. Government “lurking in the background” is a scary image. There is no market for tons of competeing certifiers because the UL brand is so strong. Who is to say this couldn’t happen in the financial sector? ---
**Author:** ![WillFarnaby](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/willfarnaby/32/514_2.png) [@WillFarnaby](https://boards.straightdope.com/u/WillFarnaby)\ **Post date:** [August 17, 2012, 3:09pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/46 "2012-08-17T15:09:40Z")
> [@Damuri\_Ajashi](#): > > What questionable practices? Failing to keep adequate reserves. > [@](#): > > No but we have building regulations, would YOU move your family into a home that hasn’t been inspected by a building inspector merely because you would have legal recourse against your builder if your family burned alive in an electrical fire? No, of course not. In the absence of government building regulations and inspectors I would see that the house was inspected by someone I trust. I would trust someone if I knew that houses they inspected in the past were of high quality. ---
**Author:** ![septimus](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/septimus/32/410_2.png) [@septimus](https://boards.straightdope.com/u/septimus)\ **Post date:** [August 17, 2012, 3:51pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/47 "2012-08-17T15:51:25Z")
> [@WillFarnaby](#): > > Which is why underregulation is blamed for the housing crisis. Government regulation failed to fill this void with adequate regulation. Do you propose stricter or laxer regulations? It’s hard for me to tell. And, since you didn’t answer the question about what reserve percentage is appropriate for banks, would it be up to the bank and, hence depositor? (I might choose between two banks, one advertising higher interest on savings, the other higher reserves?) IIRC, you want to dismantle FRB. If so, what form do the reserves take? Not FRB deposits, so banknotes issued by other commercial banks? Gold bullion? With only FRB reserves allowed in the present system, reserve levels are easily audited. Are you worried about fraudulent accounting in your system? ---
**Author:** ![doorhinge](https://avatars.discourse-cdn.com/v4/letter/d/a5b964/32.png) [@doorhinge](https://boards.straightdope.com/u/doorhinge)\ **Post date:** [August 17, 2012, 3:56pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/48 "2012-08-17T15:56:11Z")
> [@sweeteviljesus](#): > > Isn’t that effectively the same as letting a bunch of independent agencies rate the instrument and taking an average? I suppose they are as likely to adequately assess the risk as the big three. Wouldn’t there need to be a bunch of sophisticated players in the game and time period to allow them to complete their analyses? > > Thanks, > Rob It depends on who is going to hold the investment. If you buy stocks, a home, a painting, it’s in your best interest to have an outside/independent agency verify that you’re getting what you paid for. Is the companies fianancial status what the company says it is? Is the home livable and within local codes? Did Rembrandt actually paint it? You have a vested interest because you are investing your money in something you are going to own. The problem with the sub-prime market is that the Congressional Banking Committee created a substandard (not prime) mortgage that would be offered to people who were less likely to pay the loan back. Defaults rates were **expected** to be higher. People who couldn’t apply for a prime rate mortgage, with it’s 60 day verification process with rules and regulations requiring proof that you had a job or other means to pay back the loan and didn’t carry too much debt, could apply for a congressionally approved sub-prime and skip all that paperwork. The companies making sub-prime loans weren’t required to hold any of the sub-prime loans in-house. Make the loan and pass the paper along to someone else. If the loans defaulted, it wouldn’t affect their bottomline, it was someone elses problem. There were several Congressional hearings to discuss the default rates and increasing market share of the sub-prime product. The pro-sub-prime side said that any attempts to rein in the sub-primes were racist or anti-poor. The agencies pointing out that this had become a dangerous financial bubble were deomonized. Barney Frank said he wanted “to roll the dice some more” as if he was playing some kind of board game? When the bubble finally burst, Congress said it wasn’t “their” fault. It was all those greedy people out there. However, as the primary regulatory organization, there would have been no possibility for a bubble if Congress hadn’t created the opportunity for that bubble. Congress had several opportunities to stop, curtail, or slow the bubble but they refused. Barney Frank said he didn’t see a problem. Stands to reason that if there wasn’t a problem, there was nothing to fix. Until the bubble actually burst and took the economy with it. ---
**Author:** ![wevets](https://avatars.discourse-cdn.com/v4/letter/w/e9a140/32.png) [@wevets](https://boards.straightdope.com/u/wevets)\ **Post date:** [August 17, 2012, 4:33pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/49 "2012-08-17T16:33:18Z")
> [@doorhinge](#): > > The problem with the sub-prime market is that the Congressional Banking Committee created a substandard (not prime) mortgage that would be offered to people who were less likely to pay the loan back. Defaults rates were **expected** to be higher. People who couldn’t apply for a prime rate mortgage, with it’s 60 day verification process with rules and regulations requiring proof that you had a job or other means to pay back the loan and didn’t carry too much debt, could apply for a congressionally approved sub-prime and skip all that paperwork. It’s not clear to me that the Congressional Banking Committee creates mortgage products. Cite? I looked on the wikipedia page for [Subprime lending](http://en.wikipedia.org/wiki/Subprime_lending) and don’t see any reference to the role of the Banking Committee, but Wikipedia is hardly an exhaustive or reliable source. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [August 17, 2012, 4:47pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/50 "2012-08-17T16:47:19Z")
> [@WillFarnaby](#): > > The bank runs disappeared because there was no need for bank runs when the money is insured. What FDIC did was destroy a market mechanism for keeping banks in check with the possibility of bank runs. That threat is no longer on the bank’s radar. Which is why underregulation is blamed for the housing crisis. Government regulation failed to fill this void with adequate regulation. You think that before they lined up to remove their money they went and requested bank records to make sure that the bank was really weak? Bank runs were caused by rumor as well as weakness - and no bank can reasonably be expected to have the reserves to meet a panic. Yes, tighter regulation would have helped reduce the number of bad mortgages - but remember the worst players were not banks, so bank regulation wouldn’t have made any difference. Before the housing market really tanked community banks did better than the bigger banks. > [@](#): > > You can’t say this. The entire set of conditions would have been different. It’s pretty safe to say that nearly nobody in the US that is still alive has lost money due to a bank failure. Why should they care which bank they use? Aha, so the FDIC and regulation has worked! Not only have there been no runs, the FDIC hasn’t had to pay much out except in cases of panic, such as the deregulation caused bank crisis of a few decades ago. People should choose banks based on matches to their needs and cost to them. Not everyone has the ability and the time to look through bank records. Don’t you think it is reasonable for people to expect that whatever bank they pick is safe? > [@](#): > > No it doesn’t. In order to be up to code, yes they have to be licensed, but that isn’t stopping someone from doing it themselves or asking an unskilled friend. Anyone who contracts a major wiring job would have the incentive to find a skilled electrician. Government didn’t create this incentive. When you sell your house you might be in trouble. and there is of course an incentive to use unlicensed contractors - they are cheaper. People underestimate risks all the time to save money or to make more money - which is exactly how the crash happened. > [@](#): > > Anyone who deposits in a bank rated by the financial equivalent of the makers of quack remedies will lose their money. That doesn’t mean a wise investor should subsidize their loss. That just perpetuates foolish investments and quack rating agencies. Oh, the empathy of the conservative and libertarian is so impressive to see! Someone without the financial smarts of you and me (me, anyway) deserves to be out on the street after losing their money. Someone without the medical smarts deserves to get suckered by quacks. > [@](#): > > Government “lurking in the background” is a scary image. > > There is no market for tons of competeing certifiers because the UL brand is so strong. Who is to say this couldn’t happen in the financial sector? Easy. When you certify a product, you buy the product and run tests (or do it on prototypes.) You can’t buy a bank. Is a bank going to open its books to all sorts of rating agencies, some perhaps set up by competitors? Also, products have long lifetimes. How often must banks be checked to keep them from cutting corners? The SEC can even place people in banks to make sure they are staying in the bounds of the law. Will private agencies be able to do this? Let’s face it. The FDIC and the regulations you had so much has meant that no one has lost deposits in a covered bank in nearly 80 years, an amazing record. And you think this is awful because of your ideological blinders. Wonderful. ---
**Author:** ![leahcim](https://avatars.discourse-cdn.com/v4/letter/l/b4bc9f/32.png) [@leahcim](https://boards.straightdope.com/u/leahcim)\ **Post date:** [August 17, 2012, 4:48pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/51 "2012-08-17T16:48:37Z")
> [@Voyager](#): > > However if you are wrong and your risks really are correlated, you are really screwed. This is essentially it. Correlation is much more difficult to infer from market data that single-entity credit-worthiness, so it was improperly modeled in pricing CDOs (arguably on purpose at some level). Junior tranches of CDOs were expecting risk because any default hurts them. Senior tranches were not because the probability that a sizable percentage of the assets will go into default was underestimated. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [August 17, 2012, 4:52pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/52 "2012-08-17T16:52:37Z")
> [@wevets](#): > > It’s not clear to me that the Congressional Banking Committee creates mortgage products. > > Cite? > I looked on the wikipedia page for [Subprime lending](http://en.wikipedia.org/wiki/Subprime_lending) and don’t see any reference to the role of the Banking Committee, but Wikipedia is hardly an exhaustive or reliable source. A while back I looked at the Federal Reserve Web page, and it said in large friendly letters that no banks had to make bad loans for CRA. Non-banks even less. I’d like to see a cite also - from the law, not from some foaming at the mouth reactionary blogger or columnist. ---
**Author:** ![leahcim](https://avatars.discourse-cdn.com/v4/letter/l/b4bc9f/32.png) [@leahcim](https://boards.straightdope.com/u/leahcim)\ **Post date:** [August 17, 2012, 5:12pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/53 "2012-08-17T17:12:24Z")
> [@sweeteviljesus](#): > > Isn’t that effectively the same as letting a bunch of independent agencies rate the instrument and taking an average? I suppose they are as likely to adequately assess the risk as the big three. Wouldn’t there need to be a bunch of sophisticated players in the game and time period to allow them to complete their analyses? Not entirely. First off, there are a lot more actual investors than there are ratings agencies. Secondly actual investors are backing up their guesses with money instead of just offering an opinion, and maybe some reputation, which incentivizes them a little more to be right. Not that they are always right, of course, but they tend to come up with the best guess possible. Arguably, the high yields of CDOs that attracted all these investors were a sign of the additional risk. Actual sellers were selling cheaply enough that they got above market returns. This tends to mean that you’re getting paid for taking on additional risk. Where ratings agencies come in is that some pension funds and other kinds of funds are required to invest only in securities that have some rating or higher. If ratings go up, banks can sell instruments to a wider set of clients. If they buy, lose money, and it is found later that there were improprieties in the ratings process, people get pissed off. ---
**Author:** ![wevets](https://avatars.discourse-cdn.com/v4/letter/w/e9a140/32.png) [@wevets](https://boards.straightdope.com/u/wevets)\ **Post date:** [August 17, 2012, 5:48pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/54 "2012-08-17T17:48:47Z")
> [@Voyager](#): > > I’d like to see a cite also - from the law, not from some foaming at the mouth reactionary blogger or columnist. I’m not sure what he might be talking about - it’s possible he means the [Alternative Mortgage Transaction Parity Act](http://en.wikipedia.org/wiki/Alternative_Mortgage_Transaction_Parity_Act_of_1982) of 1982, which overrode the laws of some states that restricted mortgages to conventional fixed-rate amortizing mortgages. Definitely without that Act the crisis of 2008 would not have been nearly as large or as big a deal. But it’s hard to reconcile that with **doorhinge** ’s statement since he talks about Barney Frank, who was in Congress starting in 1981, but wasn’t on the Banking Committee until sometime in the 1990s. ---
**Author:** ![doorhinge](https://avatars.discourse-cdn.com/v4/letter/d/a5b964/32.png) [@doorhinge](https://boards.straightdope.com/u/doorhinge)\ **Post date:** [August 17, 2012, 5:59pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/55 "2012-08-17T17:59:09Z")
> [@wevets](#): > > It’s not clear to me that the Congressional Banking Committee creates mortgage products. > > Cite? Who created the The Community Reinvestment Act (CRA, Pub.L. 95-128, title VIII of the Housing and Community Development Act of 1977, 91 Stat. 1147, 12 U.S.C. § 2901 et seq.)? Congress did. The CRA was originally designed to help meet the needs of potential home owners/borrowers, including low and moderate income borrowers. Sounds good doesn’t it. Who created the legislative changes to CRA in 1989, 1991, 1992, 1994, 1995, 1999, 2005, and 2007? Congress did. Who passed the Financial Services Modernization Act that repealed parts of the Glass–Steagall Act? Congress did. How did it become possible for people to obtain mortgages that they couldn’t afford to pay back? What organization was setting the standards for sub-primes? What organization encouaged Fannie Mae and Freddie Mac to become more involved in buying poorly regulated sub-primes? Prime rate mortgages have been heavily regulated. The failure rate of prime mortgages “was” low. The failure rate of sub-prime mortgages was expected to be high when they were envisioned. When Congress was made aware that poorly regulated and nonvetted sub-primes were become more and more popular, eventually reaching 50% of the mortgage market, why did Congress chose to “roll the dice some more” instead of trying to slow down or reverse the growing bubble? Who was elected to watch out for the best interests of the taxpaying voter? Congress. Who failed to watch out for the best interests of the taxpaying voter? Congress. ---
**Author:** ![doorhinge](https://avatars.discourse-cdn.com/v4/letter/d/a5b964/32.png) [@doorhinge](https://boards.straightdope.com/u/doorhinge)\ **Post date:** [August 17, 2012, 6:05pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/56 "2012-08-17T18:05:40Z")
> [@wevets](#): > > …But it’s hard to reconcile that with **doorhinge** ’s statement since he talks about Barney Frank, who was in Congress starting in 1981, but wasn’t on the Banking Committee until sometime in the 1990s. Barney Frank was the lead spokesperson repeatedly saying that there “wasn’t” a problem. Frank said he didn’t “see” a problem. Frank had the audacity to say he wanted to “roll the dice some more” on YOUR and the countries economic future. Bubbles burst. That’s what they do. Many people took Frank at his lying-thru-his-teeth word. ---
**Author:** ![Damuri\_Ajashi](https://avatars.discourse-cdn.com/v4/letter/d/898d66/32.png) [@Damuri\_Ajashi](https://boards.straightdope.com/u/Damuri_Ajashi)\ **Post date:** [August 17, 2012, 6:26pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/57 "2012-08-17T18:26:06Z")
> [@Voyager](#): > > However if you are wrong and your risks really are correlated, you are really screwed. > > From what I’ve read the risk models the banks used assumed that the deals were put together with no thought of the risk model, and were more or less random variables. However the dealmakers learned the risk models, and put together deals (by which I mean products) just barely clearing the risk limit, since these deals made the most money. Therefore when things went south they really went south. Well thats the thing about the law of large numbers. It makes the results MORE predictable but because you generally have to pool similar risks to apply the law of large numbers, if some sort of flood plain event occurs, then you get wiped out. > [@WillFarnaby](#): > > Failing to keep adequate reserves. In what way did they fail to keep adequate reserves? It seems like you are implicitly accepting that fractional reserve banking is OK (this would be a very short discussion if you didn’t acknowledge at least that), but are you saying that the reserve level is insufficient or that the risks were greater than they appeared and justified more restrictive capital weighting. > [@](#): > > No, of course not. In the absence of government building regulations and inspectors I would see that the house was inspected by someone I trust. I would trust someone if I knew that houses they inspected in the past were of high quality. Hmm, I don’t know about that. When I was having my house built, the building inspector twice, once BEFORE they put up the drywall and once before I was ready to move in. If your well trusted home inspector going to tear down your drywall and check out the wiring or just test the outlets and take a look at the fusebox? ---
**Author:** ![septimus](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/septimus/32/410_2.png) [@septimus](https://boards.straightdope.com/u/septimus)\ **Post date:** [August 17, 2012, 6:42pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/58 "2012-08-17T18:42:30Z")
> [@](#): > > Well thats the thing about the law of large numbers. It makes the results MORE predictable but because you generally have to pool similar risks to apply the law of large numbers, if some sort of flood plain event occurs, then you get wiped out. 😕 :smack: Your mention of “flood plain event” gives yourself an out (and maybe I’m taking an isolated post out of context) but … **It should have been obvious to anyone with half a clue that the biggest risk in 2000-era home loans was bubble bursting**. I didn’t think one needed an advanced degree in statistics to realize that “diversifying” risks has minimal effect when the risks are strongly correlated; perhaps I was wrong. Hmmm. The big bankers did have statistics experts on their payrolls, whether they needed them or not… What does this tell us? ---
**Author:** ![wevets](https://avatars.discourse-cdn.com/v4/letter/w/e9a140/32.png) [@wevets](https://boards.straightdope.com/u/wevets)\ **Post date:** [August 17, 2012, 6:48pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/59 "2012-08-17T18:48:06Z")
> [@doorhinge](#): > > Who created the The Community Reinvestment Act (CRA, Pub.L. 95-128, title VIII of the Housing and Community Development Act of 1977, 91 Stat. 1147, 12 U.S.C. § 2901 et seq.)? > > Congress did. > [@http://www.law.nyu.edu/ecm\_dlv2/groups/public/@nyu\_law\_website\_\_academics\_\_colloquia\_\_law\_economics\_and\_politics\_of\_urban\_affairs/documents/documents/ecm\_pro\_061027.pdf](#): > > First, the data show that overall, lending to low- and moderate-income communities comprised only a small share of total lending by CRA lenders, even during the height of subprime lending in California. Second, we find loans originated by lenders regulated under the CRA, in general, were significantly less likely to be in foreclosure than those originated by IMCs. This held true even after controlling for a wide variety of borrower and loan characteristics, including credit score, income, and whether or not the loan was higher-priced. Quoted from post #5 in this thread. The evidence indicates that loans made under the CRA did not go into foreclosure at a higher rate than loans made outside the provisions of the CRA. ---
**Author:** ![Linden\_Arden](https://avatars.discourse-cdn.com/v4/letter/l/53a042/32.png) [@Linden\_Arden](https://boards.straightdope.com/u/Linden_Arden)\ **Post date:** [August 17, 2012, 11:21pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/60 "2012-08-17T23:21:55Z")
> [@doorhinge](#): > > How did it become possible for people to obtain mortgages that they couldn’t afford to pay back? What organization was setting the standards for sub-primes? What organization encouaged Fannie Mae and Freddie Mac to become more involved in buying poorly regulated sub-primes? The free market caused the sub-prime meltdown - not Congress. Fannie and Freddie (GSE) had tighter loan standards than the free market. They are called “conforming” loans. To this day the GSE’s “putback” subprime loans to the original mortgage originator for their failure to meet credit standards. Subprime writers like WaMu, IndyMac, and Countrywide failed en masse while big national banks like USB ignored the subprime market. MBS poolers like Lehman bought the trash Fannie and Freddie would not and created bogus AAA securities. The GSE’s failed due to over leverage - not credit risk. Your understanding of the mortgage market is poor. [Previous page](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564.md?page=2) [Next page](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564.md?page=4)