Quote:
Originally Posted by Dale Cooper
Exactly. Dems seem to have missed that important factoid. Barney Frank, Chrissy Dodd, and Barney's boy toy, Franklin Raines, caused the housing bubble to vomit all over itself.
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Actually, that's not what happened.
What happened is this:
Financial services companies packaged sub-prime mortgages that they purchased from lenders into CDO's, got the ratings companies (that are paid by the financial services companies, because you know, capitalism does a fantastic job of regulating itself) to give them AAA ratings (a CDO made up entirely of BBB mortgages would get a AAA rating by one of the three major ratings agencies) and then sold them. The fact that financial service companies wanted to buy them made it hugely profitable for lenders to put people into sub-prime loans.
And then in 2005, standardized credit default swaps (CDS--basically an insurance policy against a specific asset) were created. And that was like dumping gasoline on the fire. CDSs made it possible for investors and financial services companies to bet against the AAA-rated CDOs. Demand for sub-prime mortgages soared as investors now had a vested interest in seeing as many sub-prime mortgages as possible fail. Lenders no longer carried the risk of default for the mortgages (they were selling them to the financial service companies) and were making a profit, so they made bad loans like bad loans were Cabbage Patch Kids and it was 1983. The financial service companies sold the CDOs to investors and to public/private entities like pension funds groups (that by law, could only invest in AAA rated bonds, and btw, those groups got crushed when the bottom fell out). And then the financial service companies bet against the CDOs produced by other financial service companies (and they all knew that the other companies were doing this). This process created an exposure of the sub-prime mortgages that was roughly six times their actual value.
And then guess what happened? The bottom fell out. The people that were put into sub-prime loans couldn't pay, and then everybody, except those who had taken a short position against the CDOs by buying CDSs, got screwed. The people who bet against the CDOs made out like bandits. They kind of are bandits.
The government, at no time, put a gun to anybody's head and made this happen. But in the late 90s, the Democrats and Republicans, in a rare act of bipartisanship that just warms the heart, refused to allow the SEC to regulate credit default swaps. They also agreed, in essentially repealing Glass-Steagall, to allow commercial banks to merge with investment banks, creating massive, too big to fail financial monsters. Every single major mortgage industry conference in 2005 and 2006 (significant because in those years, the Democrats didn't have the majority in Congress) knew this was a problem and discussed it. And the CRA? Only 6% of the mortgages that defaulted during the crisis were related to the CRA.