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Guest column | C.D. Chamberlain

Bankers' greed created mess

Financial crisis is government's fault | Nov. 10 guest column by Jack McPherson

The Community Reinvestment Act required banks to end their practice of red-lining certain neighborhoods. When a bank receives a public charter from the state or federal government, along with the privileges granted by the charter come certain responsibilities. Yes, banks are permitted, under law, to make loans that private citizens are prohibited from making. Helping to rehabilitate communities and prevent blight is a reasonable trade off for the privileges the community grants banks. There can be no privileges without offsetting responsibilities.

It seems the writer also chose to ignore the role of mortgage insurance. When a mortgagee does not have at least a 20 percent equity in the mortgaged property, the mortgagee must purchase mortgage insurance. The premium paid by the mortgagee protects the interest of the bank in case of default.

So, the risk presented by sub-prime mortgages was insured. This being the case, defaults on sub-prime mortgages could not have produced the meltdown. The problem exists elsewhere. The problem developed when lending institutions sold sub-prime mortgages to other institutions.

Say the original mortgage was for a property with a market value of $100,00 with zero dollars down. Normally, a bank would have to maintain reserves equal to about 8.5 percent of the face value of the mortgage to cover the risk of default. To get around this legal requirement, banks sold the mortgage to other institutions and then removed the $100,000 from their mortgage book. Banks examiners chose to ignore the dangers this created. Foreign banks, relying on the solid reputation previously earned by U.S. banking practices bought these securitized bonds.

Of course, when the mortgage was sold, there was a fee for the transaction. This meant that the original $100,000 had fees tacked on to it and was now priced at maybe $110,000. As the paper continued to be sold, re-sold, sliced and diced, and sold again, with fees, commissions, and mark-ups being added with each transaction, what began as a $100,000 mortgage created a paper value far in excess of the value of the actual real estate. As a result, financial services now exceed all manufacturing in our Gross Domestic Product.

The poor families who took out sub-prime mortgages did not make the millions that bankers, bond-traders, and various schemers managed to wring from these transactions. So far, it appears that the bailout has been targeted at helping bankers. In socialist countries these ne'er-do-wells would have been fired and then placed in prison.

Finally, the writer needs to understand what men like Norman Thomas advocated. Socialism advocates workers should own the means of production. Today, through pension and 401(k) plans, workers are the largest stock holders in U.S. corporations. Unfortunately, small stock holders are lucky to come out even on their investments; CEOs and top management are now paid about 7 percent of corporate profits. Or to put it another way, two years ago when our nation saw a 7 percent increase in productivity, 6 percent of that increase went to the top 5 percent and the rest of the population got to divvy up the remaining 1 percent. This distribution of wealth slipped our nation back to the ratios that existed in 1929. We all know where that put us.

Our nation is facing a huge crisis due to the joint failure of the brilliant financial managers and government regulators to admit they had no idea what they were doing. This is not the time to victimize the poor by asserting they are the ones who are responsible for the collapse of the unreasonable and unsustainable practises of investment bankers.

C. D. Chamberlain lives in Spring Hill

Bankers' greed created mess 11/11/08 [Last modified: Tuesday, November 18, 2008 3:17pm]
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