JIM ROGERS: The worst crash in our lifetime is coming

Business Insider ^ | 8 Jun 17 | Jacqui Frank and Kara Chin

[Pelham]

Looks like just another writer who either doesn’t know the difference between a commercial bank and an investment bank or ignores the difference because it would spoil his argument.

The CRA applied only to deposit taker banks. Banks and S&Ls that offer checking and savings accounts, that are covered by FDIC, that are regulated by the Fed and some offices of the Treasury.

It did not apply to investment banks, hedge funds, pure mortgage lenders and any other firm that raises its money from investors. They are regulated by the SEC, when regulated at all.

Moreover the CRA did not mandate low quality loans. Banks were free to write conforming loans and if they intended to sell the paper to the GSEs they needed to do that. The CRA mandated that a percentage of loans be made in the community where a deposit taking bank was getting its deposits- the C in CRA. It didn’t require them to be mortgages. It didn’t require them to be subprime. It didn’t require them to be non-conforming.

The greatest number of loans and the most exotic and risky mortgages were written by the non-CRA shadow banks of Wall Street. That’s where the No Income No Job No Asset NINJA loans came from, and the 120% Loan to Value, No Doc and all the rest. These firms wrote high risk, high yield mortgages for their own reasons, they actively wanted and developed that market and were under no pressure or requirement to do so. It was immensely lucrative for them but they badly miscalculated the risk involved, having misled themselves by, among other things, David X Li’s Gaussian copula function aka ‘the formula that killed Wall Street’. It’s worth reading the article Wired has on that gem:

https://www.wired.com/2009/02/wp-quant/

[hopespringseternal]

You’re missing the point — even though it was targeted to one segment of the market it changed all of it.

[Pelham]

That’s not a new claim and it has always failed to explain the fact that the shadow banks had been looking for a large market that would yield a higher interest rate than what they were able to get from bonds.

Subprime lending offered high yields but it had been confined to small hard money loans by the likes of Household Finance and Aames Home Loans. No one had figured out how to cultivate a large subprime market. After Greenspan cratered interest rates in the wake of 9-11 the hunt for yield became more urgent. One of the Wall Street firms had been toying with subprime real estate loans in the 90s but had dropped the idea. After 2000 other investment banks picked up the ball and ran with it- mortgage loans are a big enough market to absorb the kind of money that they were looking to invest and they did exactly that in a huge way.

You can find all of this written about in ‘Chain of Blame’ ‘Fools Gold’ and other books by people in the industry who watched this all develop. Most of these firms weren’t even making mortgage loans before they decided to enter the market in the early 2000s. No one forced them to do this. They wanted a market where they could write high yield paper and they went out and consciously developed it. They didn’t care about the CRA. At most the CRA provided them with a few extra clients but they were developing this market no matter what anyone else was doing, including the gov’t.

[Blue Highway]

Did you mean EF Hutton?

[Lumper20]

Yes.