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jlrogers±³©[_2_]

"Dave" wrote in message
...
On Fri, 10 Oct 2008 11:30:31 -0700 (PDT), said:

We have a financial crisis caused by the CRA and commercial banks
giving mortgages to unsuitable lenders. But the investment banks have
nothing at all to do with the CRA and they're the biggest part of this
crisis.

You're seeing only part of the picture, Doug. The major players among the
home mortgage originators were neither the commercial banks (which lend
primarily to business) nor the investment banks (who also didn't generally
originate home mortgages). You had a vast universe of mortgage banks, S&Ls
community banks and others who originated mortgages, warehoused them for a
short time, and the sold them to investment banks, who packaged them into
pools, carved up those pools into various risk tranches, and sold the
pieces. Those pieces then ended up in the hands of a number of players,
including both investment banks buying the pieces, often the riskiest
pieces, on the basis of high leverage. Some, but not all, of the mortgage
originators were subject to CRA requirements. In addition, banks could
satisfy CRA requirements by buying into pools of mortgages made to buyers
in
poorer areas. CRA was, if you will, one element that increased the
pressure
to push more low quality mortgages through the pipeline, ultimately ending
up as parts of the pools.

When the high default rates surfaced, the effect was that nobody knew what
the value of the various pieces of the pooled mortgages were worth. Buying
dried up, depressing the value of these pools. Then mark to market
accounting came into the picture and said that since mortgage backed
obligations were being sold at low prices, everybody holding those
obligations had to write down the value of those obligations to the low
prices, whether or not they intended to sell at those prices. Those
write-downs hit earnings and reduced the regulatory capital of the
institutions holding them. Since the amount these institutions can lend is
limited by the ratio of their regulatory capital to their risk-weighted
assets and total assets, they reduced lending (loans are an asset on their
balance sheets), including not just home lending, but lending to
businesses,
and tried to raise capital. You can trace it from there.

I get to see the process first-hand, since I regularly have to wrestle
with
how community banks can stay in compliance with regulatory capital
requirements.

Maybe you can explain just a little further Dave. You may be making a
leap of faith here that I can't follow....

Hope this helped.

Well said.