Archive for November, 2008

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The credit crunch at street level

Posted by robin in Financial Articles Tuesday November 18, 2008 5:39 pm

Yesterday’s City financial crisis is today’s street level road kill.

An old friend tells his tale of woe. He borrowed heavily at the start of the year to expand his business. He was bust by September.

Another is committed to buying a property and had £1m with an Icelandic bank…

Who to blame for subprime

Posted by robin in Financial Articles Market Commentary Tuesday November 18, 2008 4:24 pm

Lord Rees-Mogg’s frank apology in yesterday’s Times column is interesting on two counts.

First, even the great and good it seems can be caught out in the hurly burly of newspaper deadlines and the tyranny of regular ‘comment’.  

How was he caught out? He blamed George W Bush for the subprime mess. Back came the cyberspace response in double quick time. It wasn’t his fault…or not all of it anyway.

And this is the second interesting point… The seed of the subprime mortgage crisis was sown not during the two term Bush presidency but decades before says Rees-Mogg. Back in the days when peanut farmer Jimmy Carter ran The White House.

He wanted to help the poor and, in 1977, a piece of legislation called the Community Reinvestment Act was passed. It encouraged banks to lend to all segments of society including those with high credit risk.

“The Act imposed an obligation on the banks to provide subprime mortgages for social housing.” 

Subsequent regulations increased the pressure to comply.

Twenty years later, the first securitisation of $384m of CRA debt was launched by Bear Stearns and First Union Capital Markets. Rubber stamped with a AAA rating by virtue of a guarantee from Freddie Mac, it was ”several times oversubscribed”. That was 1997, when Bill Clinton was in his second term.

And ten years after that the whole house of cards started to collapse.

Whether the CRA should take the blame for subprime appears a controversial and somewhat politicised debate judging from the attention it gets in Wikipedia. Defenders say CRA loans tended to be better quality. Critics, including the great Ron Paul, say it pushed banks into rash loans they wouldn’t otherwise have made.

That charge seems hard to deny.

 

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