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Subprime Stoked By Deregulation and Bipartisan Greed, not CRA,  Community Reinvestment Act

Byline: Matthew R. Lee of Inner City Press in the South Bronx: News Analysis

SOUTH BRONX, September 28 -- First on the fringes and now on Fox News, the Community Reinvestment Act is being blamed by some for today's financial crisis. The argument is that by encouraging FDIC-insured banks to lend in lower income neighborhoods, the government -- read, Democrats, from Jimmy Carter to Bill Clinton -- created the explosion in high interest rate subprime loans.

   There's a major factual problem, though: with a single exception, no bank sought CRA credit for its subprime loans. And the investment banks which were purchasing, bundling and securitizing the loans were not covered by CRA. Bear Stearns was not covered by CRA, but was bailed out by the Federal Reserve Board for $30 billion dollars. AIG, an insurance company, was not covered by CRA, but its subprime activities have led to a $75 billion loan from the Federal Reserve, whose chairman Ben Bernanke nevertheless claimed to Inner City Press that  the Fed does not control AIG, despite owning warrants for 79% of its stock, click here for that story.

  In fact, community advocates had been telling the Federal Reserve about the dangers of subprime lending since the 1990s.  For example, Bronx-based Fair Finance Watch commented to the Federal Reserve about the practices of now-defunct non-bank subprime lender New Century, when U.S. Bancorp bought warrants for 24% of New Century's stock. The Fed, rather than take any action on New Century, merely waited until U.S. Bancorp sold off some of the warrants, and then said the issue was moot.

  Likewise, when community groups from all over the country complained to the Office of Thrift Supervision about the subprime practices of Washington Mutual's affiliate Long Beach Mortgage, the OTS responded that is was only concerned with WaMu's savings bank, not its finance company. WaMu never got CRA credit for Long Beach's loans, but now WaMu has failed and been bought at fire sale prices by bottom-feeder JPMorgan Chase.

Prince of Citi, growth in subprime had nothing to do with CRA

  The list goes on and on. Non-U.S. institutions that now stand to benefit from the bailout bill being quickly considered in Congress are not covered by the CRA: UBS of Switzerland, Nomura of Japan, even some sovereign wealth funds that bought subprime securities.

  Deregulation and a lack of business ethics are major causes of the subprime meltdown; these have been bipartisan. Republicans are more closely identified with deregulation, but it was Clinton who oversaw the breakdown of the wall between investment and commercial banking, for example. Several Clinton administration officials went to work or advocate for subprime lenders, defending their cashing-in as in support of the democratization (literally) of credit.  While Republican Phil Gramm went to work for UBS as it got more and more into subprime, Democrat Robert Rubin went to work for subprime-heavy Citigroup and did nothing to reform its practices. It is notably that Citigroup has not yet showed up for bailout funds.

  Citigroup's grown in subprime had nothing to do with the CRA. Rather, insurer Travelers Group, controlled by Sandy Weill and Chuck Prince (and Robert Willumstad who would later drive AIG into the ground), which already owned subprime lender Commercial Credit, bought Citicorp and then subprime lender Associates. They renamed the operation CitiFinancial, but never sought CRA credit for Citibank for its operations. And when Inner City Press asked Chuck Prince of Ciitgroup's securitization of loans by Ameriquest, Prince said that had nothing to do with the CRA.

   There is more than enough blame to discredit both political parties. But it's not the Community Reinvestment Act statute that's to blame. If anything, the CRA provided a venue by which many of the problems were raised, and some were even solved. When Atlanta-based SunTrust, for example, applied to the Federal Reserve for approval of a merger in Memphis, Fair Finance Watch showed the Fed that SunTrust was lending to a slew of predatory lenders. SunTrust ultimately committed to get out of some of these fields, and had its application approved. That was CRA at work, in a way conveniently not mentioned in the sloppy arguments being advanced.

Watch this site, and this (UN) debate.

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These reports are usually also available through Google News and on Lexis-Nexis.

Click here for a Reuters AlertNet piece by this correspondent about Uganda's Lord's Resistance Army. Click here for an earlier Reuters AlertNet piece about the Somali National Reconciliation Congress, and the UN's $200,000 contribution from an undefined trust fund.  Video Analysis here

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