A recent column written by fellow

columnist Barry Snell in response to a Monday column written by

myself reintroduced many vital occurrences that contributed to the

2008 market collapse. Although, I feel that his article did not

place enough emphasis on this great concavity. The recession was

caused by numerous factors, and it would be foolish to place the

blame simply upon low-income loan recipients. There are simply too

many misconceptions about the recession, and, I suppose, it should

be my duty to expound upon the complexities.

Let us begin with the Community

Reinvestment Act of 1977, which sought to require “that each

depository institutions’ record, in helping meet the credit needs

of its entire community, be evaluated periodically.” There is a

tendency to believe that this was government enforcement upon

banks, requiring them to dole out subprime mortgages to high-risk

borrowers. Contrary to that belief, the act, as stated by the Board

of Governors of the Federal Reserve, did not “require institutions

to make high-risk loans that jeopardize their safety.” It was

merely to prevent communal discrimination through a loan practice

known as “red-lining.” Red-lining occurs when banks either deny

mortgages or boost interest rates against specified low-income

neighborhoods.

Banks were not required to make

high-risk loans. In fact, in 1995, after strengthening the act,

President Bill Clinton’s Secretary of the Treasury Lloyd Bentsen

said, “The only thing that ought to matter on a loan application is

whether or not you can pay it back, not where you live.”

If the banks were handing out toxic

loans, why were low-income borrowers accepting them? The answer is

predatory lending and diminishing mortgage-underwriting standards.

Predatory lending occurs when lenders attempt to entice borrowers

by offering very low interest rates for home refinancing. The loans

were given, such as in Countrywide Financial’s standards, with

extensive paperwork. Borrowers were encouraged by lenders to sign

the paperwork because their income-level would satisfy the mortgage

payments, which were around 1 to 1.5 percent interest. The

borrowers did not have the money or the time to sort through the

paper work, and with the bank’s reassurance, signed.

The banks were quite clever,

however, and issued the loan on an adjustable rate. This created

negative amortization, which isn’t usually noticed by the credit

consumer for a very long time. In addition, in the midst of the

Financial Crisis Inquiry Commission, Richard M. Bowen, CitiBank’s

chief underwriter correspondent, testified that approximately 60

percent of mortgages purchased by CitiBank were defective. This is

indicative of the diminishing mortgage-underwriting standards at

the time. In fact, the FBI’s annual mortgage fraud tally indicated

that fraud filings from financial institutions had risen 36 percent

in 2008 alone.

Why were banks giving out such toxic

loans? The answer is: “The Securitization Food Chain.” Through

innovative financing techniques in the 2000s, banks bundled

mortgages together and sold them to investment banks, therefore

dropping their own exposure to risk. The investment banks took the

mortgages and combined them with many other loans, such as car

loans, student loans, etc. This bundle of mortgages and other loans

were then sold to investors in the form of Collateralized Debt

Obligations.

When homeowners paid their

mortgages, it went straight through the chain to investors. The

securitized derivatives, CDOs, transferred credit risk from one

entity to another. Why would investors buy the toxic loans? The

investment banks paid rating agencies, such as Standard &

Poor’s, to analyze and rate the CDO’s. It is by lucrative

serendipity, or perhaps sheer stupidity, that the toxic loans

should be rated AAA, the highest investment rating. This enticed

investors, especially ones managing retirement funds. Investment

banks’ CEO’s and rating agents received huge incentives and bonuses

for creating such profit. They knew the loans were toxic, but in

the short-term, the high incentives were difficult to

ignore.

The economy was set for failure.

Banks made a record amount of loans because they no longer had to

deal with the risk of defective mortgages. The Organization for

Economic Cooperation and Development performed a study, which found

that government regulations led to banks finding circumventions,

encouraging the use of financial instruments such as derivatives.

The conclusion of OECD’s study stated, “Refocusing banks’ attention

toward their main economic functions is a core requirement for

durable financial stability and sustainable economic

growth.”

Based on this overwhelming evidence,

which only scrapes the surface, how could we not say that greed

created the “Great Recession”? Profit motivation and huge bonuses

were fueled by greed. As the consumers, we were thus consumed by

the obsessive behaviors emanating from a character of selfishness.

Vices and virtues formulate character. When this character impinges

upon the rights of other citizens, the government must intervene.

While the constitution does not permit government to define virtue

from vice, it is our duty as a citizenship to prevent the results

of these behaviors. We cannot stop greed and its presence in all of

us, but we can regulate the results in accordance with the

protection of our indelible rights.

Everybody wanted a slice of the pie.

Only the clever ones would dine.