To the Editor:
I continue to grow weary of the mainstream media lack of coverage of Barack Obama’s role in the current banking crisis.
Obama, the community organizer, and the leadership of ACORN, taught their people the methods of civil disobedience. That is right. Obama gave instruction. This schooling prepared ACORN to use force and intimidation to disrupt normal banking practices that determine credit worthiness of home buyers.
A false pretense of entitlement was established that everyone was entitled to own a home even if you could not pay for it. Banks were accused of discrimination if past credit history was used to determine current credit worthiness. ACORN members showed up to harass banks into lowering those criteria. Down payment standards were revised. Normal practice was a 20 percent down payment allowing a home mortgage representing 80 percent of the appraised value of the home. Down payments of only 10 percent were allowed, followed by 0 percent down. Finally financing was approved that allowed loans of 103 percent appraised value.
Eventually Obama filed suit in Chicago to force further changes in banking practices. Enter Representative Barney Frank. Under his leadership in the House of Representative he is responsible for further deterioration of lending standards in Fannie Mae and Freddie Mac. Memos were issued threatening severe penalties over managers who did not loosen up credit standards.
It seems clear to me that Obama and Frank both have a significant liability regarding the subprime mortgage crisis. The debacle at AIG was the force multiplier for poor lending standards.
The concept is basically this. Banks worldwide need collateral on their balance sheet as the basis to extend credit. The regulation that controls banking standards is known as Basel II. In the simplest terms it forces banks to own an asset to back up the credit extended.
In industry or computers we talk about a “work around”. In order to increase their available credit with out the burden of a triple A asset the bank work around was to go to AIG which as a “company” was rated triple A.
AIG sold a product called a “Credit Default Swap” that used computer modeling, a vast collateral of subprime mortgages, and the historic low default rate on U.S. mortgages. For a fee, banks purchased these credit default swaps that were not regulated but came from a triple A company and based on that collateral credit was issued.
This background now allows a better understanding of what happened next. The mortgages owned by AIG were trash paper. As the real estate boom or bubble slowed down the owners of those homes with subprime mortgages defaulted. This obviously was precipitated by politically correct corrupted lending practices. AIG now owned collateral worth very little.
Their triple A rating no longer existed. The world wide banking system could no longer extend credit based on worthless credit default swaps. It may be a little harsh to say it this way but for about 10 years credit was issued in the world wide banking system based on little more than thin air. Commerce stops.
Socialist pundits proclaim that this just proves capitalism is a failure, or that the free market is a failure. Capitalism did not fail. Political correctness and greed over took honor, truth, and plain old common sense.
It is just a rhetorical question but now I am curious. I understand our Federal Government is going to give loans to Wall Street Bankers and in return accept their equities as the collateral. Isn’t anyone else concerned with the financial stability of our monetary system if the Dow falls to say 8000? Isn’t this just a continuation of a house of cards?
Dana D. Dyer, Round Pond