Bill Clinton, Bush, Bankers and Servicers, Et Al
Part I of IIIBill Clinton, during his tenure as President of the United States, signed numerous pieces of Legislation that ultimately lead to the Housing Bubble and its eventual rupture, and the loss of millions of homes by some homeowners, and the reduction of the values of many millions of other homes, in the United States. Mr Clinton signed the Gramm-Leach-Bliley Act which essentially repealed the Glass-Steagall Act. The Glass-Steagall Act was considered an important part of Depression era Legislation, which created a wall between Banks and Investment Companies.
Before the abandonment of Glass Steagall, the Banks were permitted to loan their own money, and act as a depository for the monies of its customers, but were not permitted to sell Securities. In theory, when you took a loan from a bank to purchase a house, the bank was providing money held by that bank. The bank had money to lend because it had customers who were depositing money in that bank. The bank held unto the mortgage and had a lien on the home that provided Security for the mortgage.
The interest that the bank collected on its loans provided Capital for the bank to continue its operations. Traditionally, this was the primary method in which banks were able to generate revenue. The banks, despite the restrictions of Glass Steagall, had certain advantages. The money they were lending was based upon fiat currency, and not attached to any real asset. The United States Currency was removed from the Gold Standard during the Nixon Administration. There hasn’t been any real Silver in coins since around 1963. Today, there isn’t even much available in terms of fiat currency. Most of the money manipulated by banks are just digits and decimals on a computer screen.
With the repeal of Glass Steagall, however, the banks were free to act as an investment broker. That is exactly what they did. Most of the loans to home purchasers leading up to the Mortgage Bubble were packaged Securities. For example, a pension fund or investor is looking for a vehicle in which to invest its or his money. The bank creates a “housing security” whereby investors can place their money, with hopes of a certain return or profit, on their investment.
The monies from all these investors are aggregating into a fund, and monies from this fund become the loans that allow the purchasers to buy houses. In theory, when the purchaser starts paying his mortgage, with added interest, the interest monies or some of the interest monies, are then delivered back to the pension fund or investor.
The banks were no longer lending their own money. Not even their own fiat money. It became much less important to the banks whether the mortgages were based upon sound or sober lending practices. Think of it in common sense terms. If you lend your own money to someone, with expectations of repayment, you are probably going to be somewhat careful as to whom you lend money. If that money is not yours, the ramifications of nonpayment are less severe personally.
Mr. Clinton also signed the Commodities Futures Modernization Act, which exempted Credit Default Swaps from regulation. In 1995, Clinton signed the Community Reinvestment Act, which weakened credit and applicant requirements for loan approval, and placed additional pressure on banks to loan money in low income neighborhoods.
Mr Clinton was not the only creator of the eventual housing collapse in late 2005. The banks were not either. Both played major roles. Other players include the Bush Administration, Ian Greenspan, the Underwriters, the Servicing Companies, and the Consumers themselves. The Obama Administration was not until 2008, so it cannot be blamed for the housing collapse. However, most of its measures either were of no or little benefit in ameliorating the problems presented by the collapse of the housing market.
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