No top executives of major banks were prosecuted for the financial mess witnessed over the past decade because politicians and corporate banks regulated the market to protect themselves while placing the risk of investment on the shoulders of citizens and future generations.
How is this possible? Are regulations created to protect the consumer?
The answer is no.
The housing regulations enacted over the past few decades were and still are an attempt to force the world view of a handful of politicians upon an entire industry, and in exchange for this the industry was given a means of shielding itself from the responsibility to act with reason and caution.
In order to understand why this law is the foundation of the economic crisis we witnessed over the last decade, one must review the details of this law. The Home Mortgage Disclosure Act outlines what the politicians at the time concluded was happening in a multitude of communities throughout the entire United States. It states, “[t]he Congress finds that some depository institutions have sometimes contributed to the decline of certain geographic areas by their failure pursuant to their chartering responsibilities to provide adequate home financing to qualified applicants on reasonable terms and conditions.”
The conclusion drawn in this justification for the law is flawed on its face. If “some” depository institutions have “sometimes” not made loans to provide adequate home financing in accordance with what a politician deems a qualified applicant, this means that often times many lending institutions do make loans to such people. With consideration of this, it is hard to imagine that the “decline of certain geographic areas” will change by forcing “some” lending institutions to lend money exactly as all others.
Furthermore, if some banks choose to not make loans to qualified applicants, the customer base to sell their products will be smaller than those who are willing to make the loan. A smaller customer base results in fewer sales and diminished growth, while the other larger population of banks will realize the benefit of having more qualified customers to market and sell their products.
The end result? The banks making decisions irrationally will be hindered in their efforts to expand or even be profitable, while the other larger population of banks will have a better opportunity to prosper.
This is how the free market corrects such situations.
When regulations are enacted to substitute for free market solutions, the results are always bad.
In this case, it was the belief that politicians can substitute their judgment for the perceived (and sometimes actual) poor judgment of bankers by taking away their right to make certain decisions upon their sole discretion. Once such rights are curtailed, it is the propensity of government to become more and more intrusive, thereby creating a situation in which decisions are more political than rational.
One may argue though, that this issue is addressed in section (c) of this law, in which it states that “[n]othing in this title is intended to, nor shall it be construed to, encourage unsound lending practices or the allocation of credit.”
Although this may not be the intent of this part of the law, when the rights of bankers to make decisions in their own self interest is removed, even if such decisions are not good decisions, politics take precedence over reason.
In order to understand how these regulations are the foundation of our credit crisis and why top bankers have not gone to jail, one must look more closely at accompanying laws that make up the basis of this crisis.
The Community Reinvestment Act of 1977 (“CRA”), SEC 801 – 809 of the Consumer Protection Laws, 12 U.S.C. 2901
According to the FDIC website, the Community Reinvestment Act seeks “affirmatively to encourage institutions to help to meet the credit needs of the entire community served by each institution covered by the statute, and CRA ratings take into account lending discrimination by those institutions.” To this end, there are a number of federal statues that seek to promote “fair lending” as perceived by politicians.
Sounds logical, does it not? Why should a lending institution be allowed to discriminate against certain people when loaning money?
The components of the CRA:
Section 801 (1): “[R]egulated financial institutions are required by law to demonstrate that their deposit facilities serve the convenience and needs of the communities in which they are chartered to do business.”
Exactly as stated, banks are required by law to show they are catering to the needs of their community. The primary criterion cited here is the needs of the community, not making sound investments.
“(a): In connection with its examination of a financial institution, the appropriate Federal financial supervisory agency shall . . .
“(1): assess the institution’s record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of such institution”
Yet again, it is the needs of the community that takes precedence. Although this part of the law reads that such loans much be constant with the safe and sound operation of the institution, the judgment of what is consistent with safe and sound operations is highly subjective. In other words, a bank is given the choice to either make a loan, or be subjected to the whims of a regulatory agency a government official has chosen to stand in judgment.
(1) (b): [When the government is assessing a financial institution and their ability to remain in business,] “the record of a nonminority-owned and nonwomen-owned financial institution, the appropriate Federal financial supervisory agency may consider as a factor capital investment, loan participation, and other ventures undertaken by the institution in cooperation with minority- and women-owned financial institutions and low-income credit unions provided that these activities help meet the credit needs of local communities.”
In other words, when the government is considering whether a lending institution can continue to exist in the marketplace, it at first does not take into consideration whether the loan was approved based upon a reasonable criterion, i.e. the credit worthiness of the borrower, but instead upon racist and sexist criteria.
Yet why would top executives of the largest lending institutions agree to such terms?
Of course, it would appear from the evidence shown above that politicians were really acting in the best interest of the community, and that their hearts were truly in the right place. However, as it has always been true in the case of coercive government, this is not a fact.
Politicians do not know the banking industry, and the banking industry does not know politics. So when the politicians decide they are going to make life more “fair” in the banking industry, what do they do? Invite the top leadership of the largest banks to their offices and discuss.
It is without a doubt there are members of society who actually believe that behind closed doors politicians and bankers sit and discuss the rest of the country’s best interest. This is the same population of people who believe politicians and insurance providers meet behind close doors and discuss how to make health care more affordable. They are the naïve among us.
The rest of the population understands that these discussions revolve around the price to be paid in order for politicians to impose their will and world view upon society. In the case of “fair lending,” the price to be paid was the creation of a means for banks to avoid the unfavorable consequences of lending practices based upon needs, race, and gender.
Enter Fannie Mae and Freddie Mac. These pseudo-government agencies were created to buy these loans from the banks, absolving them of responsibility almost immediately upon making a loan and thrusting the consequences of the bad lending policies imposed by the politicians onto the backs of American citizens.
Consider these facts carefully:
- Banks are told they must make loans to low income and moderate income people, companies, and other entities within a community based upon their need, sex, or race with a minor caveat that such loans should also be sound.
- Then they are told that if they do not make such loans based upon the judgment of some regulatory agency appointed by politicians, that their entire ability to operate will be brought into question and possibly be revoked.
- In exchange for the removal of their right to operate their business as they see fit, the government then absolves them of any responsibility for their actions.
THIS is why no top officials from large banks have been jailed: They were simply adhering to the deal made with those with the power to prosecute them. When one’s rights to live their life and run their business as they see fit is been taken from them, so goes their responsibility for their lives, actions, and business.
The weakest among us will welcome this; they do not care to take on the rigors of responsibility and freedom. Yet the productive and innovative suffer and pay the price.