Thursday, March 5, 2009

READ, LEARN, WEEP AND PRAY

I once read a book called, "How to Be An Insurance Salesman," by Justin Case.

(Study on that one a little...you'll get it. It helps to say it out loud.)

Insurance companies make lots of money betting (in the case of life insurance) that you will not die before they can earn enough from your premiums, the premiums of others and the careful investment thereof to cover their pay-out when you do die.

With car insurance, the big insurance companies are betting that of all of their customers, only a few will be involved in accidents that exceed the value of the premiums paid in.

Then there is housing insurance.

The big insurance companies, the really big ones, like AIG, insure the loans made by banks, for a price that they calculate will exceed the number of loan defaults.

(And here you thought that was only done by the FDIC...)

Always ready to help, the federal government stepped in.

We don't know what they stepped in, but it made a real mess of things.

The Community Reinvestment Act of 1977 sought to address discrimination in loans made to individuals and businesses from different areas or neighborhoods,and mandated that all banking institutions that receive insurance from FDIC be evaluated by the relevant banking regulatory agencies to determine if the institution has met the credit needs of its entire community in a manner consistent with safe and sound operations.

The Financial Institutions Reform Recovery and Enforcement Act of 1989 (FIRREA) was enacted by the 101st to increase public oversight of the process of issuing CRA ratings to banks. It required the agencies to issue CRA ratings publicly and written performance evaluations using facts and data to support the agencies' conclusions. It also required a four-tiered CRA examination rating system with performance levels of 'Outstanding', 'Satisfactory', 'Needs to Improve', or 'Substantial Noncompliance'.

The Federal Housing Enterprises Financial Safety and Soundness Act of 1992 required Fannie Mae and Freddie Mac to devote a percentage of their lending to support "affordable" housing.

In July 1993, President Clinton asked regulators to reform the CRA in order to make examinations more consistent, clarify performance standards, and reduce cost and compliance burden.

During March 1995 congressional hearings William A. Niskanen, chair of the Cato Institute, criticized the proposals for political favoritism in allocating credit and micromanagement by regulators, and that there was no assurance that banks would not be expected to operate at a loss. He predicted they would be very costly to the economy and banking system, and that the primary long term effect would be to contract the banking system. He recommended Congress repeal the Act.

In 1999, on signing the Gramm-Leach-Bliley Act, President Clinton said that it, "establishes the principles that, as we expand the powers of banks, we will expand the reach of the [Community Reinvestment] Act".

In early 2005, the OTS implemented new rules that allowed thrifts with over $1 billion in assets to meet their CRA obligations without regard to services for, or investments in, their communities. In April 2005, a contingent of Democratic Congressmen issued a letter protesting these changes, saying they undercut the ability of the CRA to "meet the needs of low and moderate-income persons and communities". The changes were also opposed by community groups concerned that it would weaken the CRA.

On April 15, 2008 an FDIC official told the United States House Committee on Financial Services that the FDIC was exploring offering incentives for banks to offer low-cost alternatives to payday loans. Doing so would allow them favorable consideration under their Community Reinvestment Act responsibilities.

In other words, since 1977 the federal government has required that banks make a percentage of their loans to people living in "low income housing" complexes, and other low income areas, many of whom had no way to pay them back.

Now imagine what happens when billions of dollars in mortgages go unpaid because the borrowers cannot pay their monthly house payments, either because they have no job, or because they make to little money at the jobs they do have.

The banks don't care, at first, because they are covered by FDIC and AIG and other innocuous letters of the alphabet.

Low income people began to default on their loans by the hundreds of thousands, just because they did not earn enough to make the payments and pay other bills associated with home ownership.

AIG and other insurance companies were hit with pay-outs to banks that exceeded the income generated by premiums and investments.

With life insurance, companies are required to have in reserve enough to pay out all of their potential benefits, even if every policy holder dies prematurely.

No such requirement existed (or exists) for insuring bank loans, because they would be backed by Fannie Mae, Freddie Mac, FDIC and other government and quasi-government institutions.

Enter the mis-management of Fannie Mae and Freddie Mac, AIG and Lehman Brothers (owners of BNC Mortgage, a sub-prime mortgage lender).

Now there is chaos in the world of loan insurance pay-outs.

With a sudden, and all-the-time expanding, influx of foreclosed houses on the market, inventories of available housing began climbing...at first a hey-day for realtors.

Existing homes began decreasing in value, due to the ever increasing supply and the so-called "housing bubble" burst.

Interest rates had to fall, thus decreasing the amount banks made on the remainder of their loan inventories.

The trickle-down effect of the glut in the housing market, the drop in home values and the tightening of credit, caused a drop in business for related industries: plumbing, contracting, electric wiring, block-laying and hundreds of industries supported by them.

Retailers lost sales because people lost jobs because lenders lost money, because insurance companies lost premiums because the feds made them do what they were never designed to do.

The moral of the story is: What the Government Touches, The Government Ruins.

And you have elected a man, now in his 44th day of his War on Achievement who thinks this is all Bush's fault, evil-greedy CEO's fault or any body else's fault but the federal government.

His solution: Let the Government Touch It Some More.

Will you ever learn?

6 comments:

Z said...

Wait! I'm commenting on an article from Thursday and it's not Thursday in LA yet !(Smile)

Justin Case, huh? Heh heh

the whole thing's so scary that PRAY is about all I can do these days...thanks, Joe. Good piece

Joe said...

Z: Thanks for coming by. It was Thursday in your heart.

I'm beginning to think we have no real allies in the Republican Party, and I don't know what to do.

The letter I got back from "Republican" Connie Mack took the tone, "We have to do something," a Democrat line.

We are no longer united, our states have no rights and we don't look like America.

Tapline said...

Joe, we dont have any states rights because we abrogated them to the Federal Government with money given to the states by the feds, for a price. I keep going back to seatbelts. The feds wanted them pushed by the lobbist for Insurance companies, I assume,,,,money from transportation for roads,,etc if we would pass legislation making seatbelts manditory,,,,after all it was for your health...States wanted money,,,,,money/////money/////to find roads etc....Sooooooooo,,laws were passed by states so they could get the money......Now we are going in further and further.....There is no stopping this landslide.....and unfortunately it's not just in domestic polity...regurgitation, but also in Foreign policy....It is sure frightening.....

Tapline said...

Joe, we dont have any states rights because we abrogated them to the Federal Government with money given to the states by the feds, for a price. I keep going back to seatbelts. The feds wanted them pushed by the lobbist for Insurance companies, I assume,,,,money from transportation for roads,,etc if we would pass legislation making seatbelts manditory,,,,after all it was for your health...States wanted money,,,,,money/////money/////to find roads etc....Sooooooooo,,laws were passed by states so they could get the money......Now we are going in further and further.....There is no stopping this landslide.....and unfortunately it's not just in domestic polity...regurgitation, but also in Foreign policy....It is sure frightening.....

snaggletoothie said...

Joe, take a look at my site. I posted a collection of puns and dedicated them to you. They are just below the poem Hound of Heaven, which is just below a YouTube of Lou Dobbs and Chris Hitchens discussing the UN proposal to criminalize mocking or criticism of Islam. What a crazy world we live in when people can't get it together in their own countries blithely school the rest of the world on how to behave.

Joe said...

snaggletoothie: That was great! Thanks.

My favorite was: "Time flies like an arrow. Fruit flies like a banana."