THE first targets to loom large in the cross hairs of the credit-crunch blame game are the fat cat bankers of Wall Street. Bedecked in pin stripe tailoring and replete from gorging themselves on industrial-sized bonuses, they make an easy target. But, before we pull the trigger, perhaps its worth asking if they really are to blame.
If the banks have lent money inappropriately, packaged up the poorly performing debts and then sold them on to others, who else but the bankers can be responsible for the current mess?
However, before jumping to conclusions, it is worth peering th
rough the fog and understanding why banks were lending money to those that could ill-afford to pay it back in the first place.
Banks have never prospered from bad debts. Why then were so many so keen to hand out the now famous Ninja mortgages to people with no income, no job and no assets?
Looking back through the annals, the Community Reinvestment Act (CRA), put on the US statute books in 1977 by the Jimmy Carter administration, has a seminal role to play in our present problems.
This legislation effectively forced banks into providing loans to those who simply could not afford to service them and was aimed particularly at opening up credit to minority communities and those in the most economically depressed geographical locations.
Essentially the legislation demanded that banks cater for everybody, rather than cherry picking the safest customers. Banks were then scored on their ability to service the community as a whole and the subsequent rating played an important role in determining the financial facilities they would be granted by the government.
In 1993, the Clinton administration then extended the obligations set out by the CRA to increase access to mortgages for those in inner cities and distressed rural communities. The new rules came into force at the beginning of 1995 and put a spotlight on just who the banks were lending to in terms of race, income bracket and neighbourhood. Where certain groups or areas were missing out, the legislation gave action groups a stick with which to beat the banks.
One of the most zealous to wield that stick was the Association of Community Organisations for Reform Now (Acorn), for which a certain Barack Obama acted as a community organiser and legal representative.
In many instances, Acorn representatives turned up at bank managers' houses and lobbied in company foyers and the pressure put on institutions was hugely significant in the volume of sub-prime loans they subsequently made. As the number of these loans grew, so too did the appetite to bundle them up and sell them on as securities.
The ready made securities market provided by Fannie Mae and Freddie Mac in the US saw volumes boom and by the time people realised the borrowers were unable to pay off the underlying mortgage assets and house prices began to fall, it was way too late to avert the financial crisis currently being played out.
So what does all this tell us about the mess we find ourselves in today? In the first instance it points the finger of blame firmly in the direction of Capitol Hill, where the CRA was thought up, passed and reinforced over three decades of political posturing.
Of course it was not just this legislation that was responsible for all of the subprime loans made to borrowers who could ill afford to pay them back, but it certainly was a significant factor and created some very ugly if unintended consequences.
It is right that financial institutions should help as many people as possible in the communities they serve, but providing debt to those unable to service it is like throwing an anvil to a drowning man.
Financiers can only work within the parameters set out by politicians and regulators and when it comes to causing financial havoc, the fat cats on Wall Street are fireplace moggies compared to the wildcat politicians, who continually fail to understand or truly consider the potential impact of their proposals.
• Alan Steel is chairman of Alan Steel Asset Management
The full article contains 701 words and appears in The Scotsman newspaper.
