CNBC Editor Launches Sloppy, Dishonest Attack on AlterNet in Defense of Wall Street
A recent column debunking the right's ludicrous claim that hapless Wall Street financial giants were forced by all-powerful regulators, against their will, to make shaky loans to poor people didn't sit well with CNBC senior editor John Carney. In his zeal to shift blame for the Great Recession from Wall Street to the government, Carney penned what may be among the laziest, most ideologically skewed criticisms one is likely to encounter. He can't get my rather simple name right, and ignores most of the substance of my essay, but nonetheless says that I have my facts “all wrong.” Such is the sorry state of our lapdog financial press.
But before digging into what passes for an “argument” on CNBC's blog, let me again restate that it was not home-mortgages that caused the world-wide recession. Even if Carney weren't completely wrong about regulators forcing lenders to adopt ridiculously lax standards, it would still be the case that the global meltdown was caused by an array of “innovative” financial instruments that were cooked up in the by-then-largely-deregulated financial sector. I wrote:
The entire subprime mortgage market was worth only $1.4 trillion in the fall of 2007, and that includes loans that were up-to-date. As former Goldman Sachs trader Nomi Prins noted in her book, It Takes a Pillage: Behind the Bailouts, Bonuses, and Backroom Deals from Washington to Wall Street, the federal government could have bought up every single residential mortgage in the country – good, bad and in between – and it would have cost a trillion less than the bailouts.
What brought down the global economy was as much as $140 trillion worth of financial gimmickery built on top of the mortgage industry. It was the alphabet soup of the credit meltdown – the CDOs, default swaps and other derivatives that made less than a trillion dollars of foreclosed loans into an economic weapon of mass destruction that would cost the American economy alone $14 trillion in lost wealth.
In other words, it was the massive pile of paper and heavy “leverage” built on top of those home loans that caused the financial crash. Ignoring a central argument that one can't refute is a sure a sign of intellectual dishonesty, and despite the fact that I begin my piece with this simple reality, Carney doesn't touch it at all in his rant.
Instead, he devotes his post to advancing, yet again, the frequently and decisively debunked fable about how the Community Reinvestment Act (CRA) mandated that banks loosen their standards – a narrative disassembled not only by myself and Nomi Prins, but also by Nobel Prize-winning economists Joseph Stiglitz and Paul Krugman, former FDIC Chair Sheila Bair, the Federal Reserve Board of Governors, and many, many others. I called it a “zombie lie” because no matter how frequently it's stabbed by factual reality, there is always someone like Carney ready to dig up its remains and bring it back to life to divert attention for Big Finance.
Carney's central contention is that I'm a liar, and totally wrong, before he concedes that I'm actually entirely right, but only technically. And in reality I'm still wrong because... well, you'll mostly have to trust him.
He begins with a quote, as I explain that the CRA has no real carrots or sticks attached to it. It has no hard targets as far as how many loans a bank must make, and regulators can only “consider” whether a bank is in compliance when reviewing an application for a merger or to open new branches. While Big Finance was building its house of cards, CRA compliance was considered to be largely a pro forma matter – lenders didn't have to jump through hoops to satisfy regulators, as purveyors of the zombie lie claim.
There's not one sentence in those three paragraphs that is true.
To believe anything that Hollander claims you have to be a statutory fundamentalist, someone who believes all that matters is what the law says. To put it slightly differently, you have to believe the actual operation of the law and the activities of regulators it empowers are irrelevant.
So, again, my summary of what the act contains isn't true at all, unless you insist on focusing on what the act actually says.
Carney doesn't marshal a single piece of evidence from the last decade to support his contention that the CRA in fact forced banks to make bad loans to poor people. He instead answers this by going all the way back to 1993 to find an example of a bank that did have an acquisition blocked because of non-compliance – the acquisition of New Datrmouth Bank by the Shawmut National Corporation.
“The Fed refused to approve the merger on the grounds that Shawmut hadn't done enough to make CRA loans,” writes Carney. “How did Shawmut react? It immediately began touting its 'flexible income criteria'" for loans and establishing mortgages with down payments of as little as 2.5 percent.
He calls it “a shot across the bow of the banking industry,” and then cites a New York Timesreport from the time:
"The Fed is sending a strong signal to the banking industry that they're going to be looking at banks' lending practices," said Joseph Duwan, a banking analyst with Keefe, Bruyette & Woods. "Clearly Shawmut is being made a little bit of scapegoat."
In a move showing banking regulators' increased emphasis on ending loan discrimination, the Federal Reserve Board has, for the first time, blocked a large bank merger because of concern over possible bias against minority groups in mortgage lending.
That, again, was in 1993, and Carney doesn't mention that CRA was amended prior to the crash in 1994, 1995, 1999 and 2005. In fact, everything Carney uses to bolster his claims (including an earlier column he wrote for Business Insider and several studies he sent me during a subsequent exchange on Twitter) preceded passage of the Financial Services Modernization Act of 1999, the most sweeping piece of financial deregulation in decades.
It killed off the last vestiges of the Depression-era Glass-Steagal Act – already watered down by three decades of Wall Street lobbying – and it was only after its passage that the worst excesses of the lending industry flowered. In my piece, I detailed how the dismantling of Glass-Steagall led to banks' investment and commercial banking units cooking up innovative ways, through the process of securitization, to transfer the risk inherent in even the shakiest of loans to investors, and, having broken the link between lenders and borrowers, allowed them to rake in huge fees in the process. No, for Carney, it was simply the pressure of complying with regulations that never actually mandated banks make any loans that were inconsistent with “sound lending policies” (the language used in the Community Reinvestment Act).
In our exchange on Twitter, Carney simply denied that the financial industry did all of this in search of profits. This wishes away the reality that the banks pushed their new investment vehicles hard, and investors gobbled them up with glee. Writing in the Columbia Journalism Review, Dean Starkman cited reports from the business press about loan agents at Ameriquest being ordered to watch "Boiler Room," the film about sleazy financial brokers pushing bad investments on gullible retirees (Ameriquest was a predatory subprime lender that went down in the crash). Starkman quoted an executive with Morgan Stanley's mortgage unit as saying, "It was unbelievable. We almost couldn't produce enough to keep the appetite of the investors happy. More people wanted bonds than we could actually produce." The banks were indeed pursuing big profits by securitizing these loans – big profits which, according to a Senate investigation into the roots of the financial crisis (PDF) were also used to buy AAA ratings for Wall Street's “toxic” securities from compliant ratings agencies – another piece of the puzzle with which regulators had nothing to do.
The bipartisan Senate report places the blame squarely on Wall Street, in the absence of adequate regulation: the “investigation found that the crisis was not a natural disaster, but the result of high risk, complex financial products; undisclosed conflicts of interest; and the failure of regulators, the credit rating agencies, and the market itself to rein in the excesses of Wall Street.” It makes no mention of CRA pressuring banks to lower standards.
Carney takes one of the most important pieces of evidence against his zombie lie and turns it on its head: the fact that the majority of high-risk loans that went bad were not covered by the CRA in the first place. “A 1999 study by the Treasury Department,” writes Carney in an attempt to revise this bit of history, “concluded the CRA was influencing the lending practices of institutions that weren't covered by the law.”
"Furthermore, by helping banks and thrifts discover that lending to LMI [low- and moderate-income] borrowers and areas can be profitable, the CRA may have had a positive “demonstration effect” on lenders not covered by the Act, and thus indirectly increased lending by these institutions as well," the study said.
It's a bit of cherry-picking. The study he cites is about the increase in lending to low and moderate-income borrowers between 1993-1998 – before the rise of the housing bubble, the process of loan securitization and, again, prior to the huge wave of financial deregulation in the 1990s that culminated in the Financial Services Modernization Act of 1999.
The study says that CRA, as well as “a variety of other factors” -- including a strong economy, “product innovation by lenders,” increased incomes for African American families and “intensified merger activity among depositories, which has increased incentives for these lenders to take CRA performance seriously” -- were all major factors in the increase.
The study, like many critics of Carney's zombie lie, also noted that CRA played a part in increasing lending to lower income areas “in a way that is consistent with safe and sound lending.”
Carney also claims that regulators “wanted down payments to come down or be eliminated altogether.” Not that they enacted any rules towards that end, but they “wanted” it. As evidence, he links to a Business Insider column by one John Carney, which focuses on a 1996 pamphlet on the CRA, and a 1998 speech by a former Federal Reserve Governor whose only mention of down payments comes when he notes that an “interesting development is use of these technologies by banks to develop and market new credit programs that are specifically targeted toward low- and moderate-income consumers. New mortgage products, for example, that employ low or no down payments and up to 100 percent loan-to-value ratios are made possible by credit scoring and automated underwriting.” Nothing about regulation.
It's clear that Carney's argument, if one feels generous enough to call it that, is rich with ideologically informed assertions and bereft of any evidence from the years in which the housing bubble – and as much as $140 trillion worth of financial instruments not directly related to home loans – was growing most rapidly.
Carney is quite haughty, titling his post “The Mortgage Lending Lies Continue,” but ignores the inherent illogic of his narrative. As David Abromowitz and David Min of the Center for American progress noted, “analogous housing and financial bubbles ... occurred contemporaneously in other countries such as Iceland, Ireland, the United Kingdom, and Denmark, which did not have Fannie or Freddie Mac or CRA.” Perhaps in a follow-up, Carney will explain how American regulators, rather than a quest for easy profits, forced European banks to leverage themselves to the hilt in the securitization casino.
In the meantime, I will leave you with the words of Sandra Braunstein, Director of the Division of Consumer and Community Affairs of the Federal Reserve System, in testimony to Congress:
I can state very definitively that, from the research we have done, that the Community Reinvestment Act is not one of the causes of the current crisis... We have run data on CRA lending and where loans are located, and we found that only six percent of all higher cost loans were made by CRA covered institutions in neighborhoods targeted, which would be low to moderate income neighborhoods targeted by CRA. So I can tell you... that CRA was not the cause of this loan crisis.
That would be true even if it were in fact true that people's mortgages brought the global financial system to its knees.
Update: After publication, Carney noted that only his headline, which he did not write, suggested Holland was lying.