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The Craziest Claims Yet about the Credit Crisis

Jonathan Lipson

Herbert Kohn Professor of Law, Temple Law School (2012-Present). Previously Professor of Law, University of Wisconsin Law School, professor at Temple (2004-2010) and University of Baltimore (1999-2004) law schools. Before that, a lawyer in Boston and New York.

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12 Responses

  1. JP says:

    McTeer has a comment that responds to criticism similar to yours here.

    I agree that calling bank CEO’s the “victims” is crazy. That said, I think you’re wrong to suggest he’s blaming the crisis on “minority borrowers.” Maybe he blames it in part on ‘institutions that lent money to poor people, with the governments encouragement,’ but I think you are stretching pretty far to implicitly accuse someone of racism. I read his post as making the point (raised by many others) that it is hypocritical for Congress to vilify institutions that issued or purchased risky loans after years of Congressional policy encouraging those same loans.

    (Relatedly, doesn’t your point 2 contradict point 1? If non-bank institutions like Countrywide* originated the bad loans, and then sold them to banks as investments, isn’t that exactly what McTeer was claiming? [*Is Countrywide a "non-bank institution?" I thought Countrywide had a banking operation that did the securitization?]

    Also, McTeer does (I think) suggest an alternative to mark-to-market. (Of course, since he’s only suggesting suspension or relaxation a replacement wouldn’t be quite right.) The Forbes article he links suggests something about keeping the assets on the balance sheet but holding them to maturity. I assume this is consistent with the WSJ article by Mr. Isaac that he links which recommends marking assets to their true economic value.

  2. Humblelawstudent says:

    I don’t pretend to understand all of this, but your point 2. seems questionable.

    First off, were non-bank originators like Countrywide not under similar pressure to increase the number of loans to minority communities and in particular to African Americans?

    Second, the enormously disproportionate sub-prime lending (52.44% from your source) to African-Americans suggests that race was strongly a factor influencing banks and non-bank originators.

    Roughly half of the subprice mortgages came from banks, and half not. Unfortunately, your source doesn’t break down the lending based on source. So, it is hard to figure out much more.

  3. Jonathan Lipson says:

    I won’t waste too much bandwidth here, but as stated, there is no meaningful evidence that the CRA caused the predatory lending to minorities that now accounts for such high default rates among African American borrowers. For more on this, see http://www.newamerica.net/blog/asset-building/2008/no-larry-cra-didn-t-cause-sub-prime-mess-3210.

    It is true that default rates among minority borrowers is high, but the evidence seems to be that this is because many were pressured into loans that were entirely inappropriate for them. To claim that the CRA caused this is wrong.

    For that claim to be true, this sort of lending to minorities would have to have occurred before the liquidity glut–which it did not. For it to have been true, the CRA would have to apply to the many non-depositary institutions that were originating these loans–which it does not.

    Make no mistake–there was pressure to make bad loans. But it was pressure that originated with the wall street investment banks who are now being bailed out, not the CRA. They created the securitization structures that (incorrectly) purported to disperse risk. While it may be somewhat simplistic, Moulo and Padilla’s “Chain of Blame” (http://www.amazon.com/Chain-Blame-Street-Caused-Mortgage/dp/0470292776) tells this story better than I could.

    I agree that there was widespread, profligate borrowing by lots of people (including minorities), and there is plenty of blame to go around. But to say that the CRA had anything to do with this is misleading and disingenuous.

    Since CRA is code for “minorities” for many on the right–who hate the CRA–I stand by my claim that McTeel’s insinuation–which he lacks the courage to say plainly–is that minorities are the real villians here. Given the real history here, that is simply outrageous.

  4. Humblelawstudent says:

    Nice try with the racist card, but your argument is laughable.

    The argument isn’t that it is the “minorities’ fault.” The argument is that the villian is the people and institutions that pressured banks to extend loans to people (of whom many were minorities) who could’t afford them. The argument may or may not be right, but it is hardly racist.

  5. amused says:

    It is true that default rates among minority borrowers is high, but the evidence seems to be that this is because many were pressured into loans that were entirely inappropriate for them.

    What evidence? Were they “pressured” into “inappropriate” loans because they were minorities? Pressured by whom? How? Why?

  6. Frank says:

    Both “amused” and “humble law student” might want to take a look at the Bush Administration OCC’s aggressive efforts to scuttle state laws prohibiting predatory lending. Here’s a good place to start:

    http://www.responsiblelending.org/policy/testimony/page.jsp?itemID=28632910

    There were people trying to stop this Ponzi scheme of fraud from taking off. They just happened to run into a deregulatory juggernaut.

  7. amused says:

    There were people trying to stop this Ponzi scheme of fraud from taking off.

    What exactly is a “Ponzi scheme of fraud” here? Lending to people with poor credit? Lending to minorities? Securitizing mortgages? Hedging? How does the administration’s opposition to “predatory lending laws” (most economists of both parties oppose those laws) constitute evidence that minorities were more likely to default than whites because minorities were “pressured” into “inappropriate” loans?

    And I am still waiting for “evidence” from Lipson.

  8. Jonathan Lipson says:

    Well, this certainly does get people excited.

    The rather incongruously named “humblelawstudent” claims:

    “The argument is that the villian is the people and institutions that pressured banks to extend loans to people (of whom many were minorities) who could’t afford them. The argument may or may not be right, but it is hardly racist.”

    No dispute. But that’s not the point. As previously explained, and as noted in the cites collected below, many continue to perpetuate the myth that minority lending *caused* the crisis. That’s what strikes me as racist.

    If McTeel has retracted his claim, good for him. Others, as you can see from these links (and the links they collect), have not. http://www.marginalrevolution.com/marginalrevolution/2008/09/did-minority-le.html; http://yglesias.thinkprogress.org/archives/2008/09/cra_once_again.php. Another good study that focuses on the role that predatory lending played in minority communities–and the connections to Wall Street–appears here http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1083184. I think Frank Pasquale’s excellent post today (http://www.concurringopinions.com/) and the work to which it cites, also illuminates some of this. (So, “amused,” your wait for “evidence” is now over.).

    As I noted here, and as I am always happy to note when discussing this, there is **plenty** of blame to go around–including greedy borrowers, conflicted mortgage brokers, irrationally exuberant home builders, complicit appraisers, etc.

    But taxpayers are not spending $700 billion to bail those guys out. We are bailing out the investment banks (and, in a different context, GSEs) that created the structures that were, at the end of the day, the pool from which this toxic liquidity flowed. I am not sure we have a choice given the state of the credit markets.

    But saying, as McTeel did, that bankers are the victims (a claim he has apparently not retracted) or that the CRA or minority borrowing caused this (which others persist in making), is what is truly “laughable.”

  9. JP says:

    Jonathan,

    Please correct me if I’m wrong, but I think you’re making a pretty fundamental mistake here. You argue that the CRA had no effect because it applied to banks, and not the originators that made the bad loans. You also argue that the originators were pressured by the banks to make the bad loans.

    But if the CRA gave banks credit for owning mortgages from low- and moderate-income communities, and the banks (and GSEs) in turn “pressured” (presumably by increased demand) non-bank originators to make these loans, it seems like there is a pretty direct causal effect between the CRA and sub-prime loans.

    You link to Tyler Cowen, who states that “[policies such as the CRA] contributed to our current problems by only a small amount.”

    As you (and McTeel) note, there is plenty of blame to go around. It also seems likely that McTeel was wrong to highlight the CRA as he did (implicitly claiming that it was a substantial cause). But I haven’t seen any claim that the CRA was THE cause of the crisis, and I still don’t see how the claim that the CRA was a contributing factor is definitively wrong, much less racist.

  10. just one more reason why I could never be a law professor – an inability to find rascism in everything I disagree with.

  11. bill says:

    If minorities are poorer than average, and have less savings to fall back on, doesn’t it make sense that, during the leading edge of an economic depression, they would make up a disproportionate share of mortgage defaults, ceteris paribus, regardless of what kind of mortgages are offered on a society-wide basis?

    Just sayin’, doggone it, y’know, ya betcha.

  12. amused says:

    If McTeel has retracted his claim, good for him. Others, as you can see from these links (and the links they collect), have not. http://www.marginalrevolution.com/marginalrevolution/2008/09/did-minority-le.html; http://yglesias.thinkprogress.org/archives/2008/09/cra_once_again.php. Another good study that focuses on the role that predatory lending played in minority communities–and the connections to Wall Street–appears here http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1083184. I think Frank Pasquale’s excellent post today (http://www.concurringopinions.com/) and the work to which it cites, also illuminates some of this. (So, “amused,” your wait for “evidence” is now over.).

    Lipson: Please explain which of these links provide support to your claim that

    It is true that default rates among minority borrowers is high, but the evidence seems to be that this is because many were pressured into loans that were entirely inappropriate for them.

    I didn’t ask you to link to a blog post disagreeing with someone else’s wacky conspiracy theory. I asked to provide evidence, which you claimed you had, for your own wacky conspiracy theory. And please make it evidence, not blog commentary. So, still waiting.

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