Monday, January 12, 2009

Will The Circle Be Unbroken?

First, there was the Community Reinvestment Act. Uncle Sam required banks to make loans to people who ordinarily wouldn't qualify for them.

These loans became known as Subprime Mortgages. You may have heard of them, especially if you've stopped living under a rock or if you finally decided to leave the monastery. There was plenty o' money to be made on Subprime Mortgages, since the banks could charge slightly higher interest on these loans and there were the written and unwritten guarantees that Uncle Sam would intervene if too many people defaulted on them (an assumption that was later proven to be correct).

This created the towering house of cards (or game of Jenga) that eventually collapsed, leaving a lot of investors holding houses that are now worth....not a lot. They were built on the assumption that there were plenty of people who could afford them. It's gonna take a while for the market to clear.

But that's ok. The Government has stepped in with your money, and is propping up the system.

Now, in an effort to guarantee full employment for Government system-proppers, here's this gem from the January 12, 2009 issue of Time magazine.

In an effort to enable Americans to buy cars again, the U.S. Treasury bought a $5 billion stake in beleaguered auto-financing company GMAC and offered to loan up to $1 billion to shareholder General Motors. GMAC, which has drastically tightened loan criteria in recent months, said it would immediately begin lending to consumers with lower credit scores.

Did you get it? Huh? Did you see it? Want to read it again?

In an effort to enable Americans to buy cars again, the U.S. Treasury bought a $5 billion stake in beleaguered auto-financing company GMAC and offered to loan up to $1 billion to shareholder General Motors. GMAC, which has drastically tightened loan criteria in recent months, said it would immediately begin lending to consumers with lower credit scores.


But there's a reason that GMAC hasn't been making those loans in the past, right? Aren't these loans the GM equivalents to Subprime Mortgages? Let's look at those two sentences again.


In an effort to enable Americans to buy cars again, the U.S. Treasury bought a $5 billion stake in beleaguered auto-financing company GMAC and offered to loan up to $1 billion to shareholder General Motors. GMAC, which has drastically tightened loan criteria in recent months, said it would immediately begin lending to consumers with lower credit scores.


How can the good people at Time magazine type that drivel without further commentary? The U.S. Treasury is as broke as the 10 Commandments, and it's making 6 billion dollar loans to GMAC, which is about to go broke, so GMAC can make loans to people with lower credit scores?

If everyone with a low credit score would now offer to loan money to the U.S. Treasury, then the The Circle Would Be Unbroken. You could all get rich by guaranteeing loans and defaulting on each other. The Treasury, to GMAC, to You, to The Treasury, to GMAC, to You.

Not one penny of your own money will be at risk.

14 comments:

Browncoat Libertarian said...

Pure effing insanity. And of course, what else would you expect from that bastion of big government cheerleading, "Time" magazine. All of this, and the Obamessiah hasn't even taken office yet.

Any person that claims advocacy for small government and still justifies their vote for the GOP (or AGAINST the Dems) is *says something vulger*

Gar said...

Being the victim of a low credit score and still being able to buy a house after my divorce 9 years ago, I can't say that lending to people "with low credit scores" is necessarily a bad thing.

What we are complaining about is the government using public funds to bail out businesses that make bad decisions.

Maybe GMAC will make better decisions regarding who they lend money to. Perhaps they'll not hang everything on a score but spend a little more money investigating individual circumstances. Perhaps they'll bring world peace and end world hunger.

The Whited Sepulchre said...

Browncoat,
Agreed.

Gar,
I would agree if we hadn't just blown billions bailing out Wall Street because Wall Street invested too much money in the loans made to people with low credit scores.
Now we're going to turn around and encourage GMAC to do the same thing?

Gar said...

I hear what you are saying. I just worry that it's too "general". Obviously if GMAC uses the same credit check as the mortgage companies then they'll be digging themselves a deeper hole with our money.

However, basing it all on an imperfect credit score is also a bad thing. There is probably a very good business opportunity for someone to make higher interest loans to people with low credit scores as long as they do due diligence in investigating the people they are lending to.

But that's another interesting point. If we are already irritated with the government for bailing out companies with our money, should we be more or less irritated with the government when they also tell the companies how to spend our money? Don't we want less government interference?

Flee said...

Whited-

I don't think it will be as much of a problem because there is no money to be made in buying a car and putting new carpet in it and reselling it for more money six months later.

The housing crisis was caused when they ran out of people with ok credit to buy more of the over priced homes. That market became saturated and they needed more buyers to continue their ponzi schemes. The only people left were the people who could make up a large number and sign their name no questions asked. The money was made by the brokers in the fees and bonuses and this is what drove them to write more mortgages. The rating agenies that were being paid by the banks helped to perpetuate the housing bubble. Money is the crack of rich people and will cause them to do anything if left on their own unregulated.

For the record I didn't favor any of the bank bailouts. I think this mess would have been over sooner if they had to face their responsibilities and it was only done to keep the wealthy wealthy. I wouldn't have a problem with loans to the auto makers if they came foreward with a real plan.

MrBold said...
This comment has been removed by the author.
MrBold said...

This is really offensive: "First, there was the Community Reinvestment Act. Uncle Sam required banks to make loans to people who ordinarily wouldn't qualify for them."

CRA does not require banks to make loans to people who ordinarily wouldn't qualify for them. CRA forbids discrimination based on zip code-a practice known as redlining. The CRA had nothing to do with banks engaging in subprime lending. The CRA doesn't tell banks to write loans to people with bad credit.

The Whited Sepulchre said...

Mr. Bold,

Ahem....

http://www.lewrockwell.com/dilorenzo/dilorenzo125.html

You can google the particulars for more info.

Flee said...

Writting the mortgages to people with poor credit was risky. Bundling those mortgages into Mortgage Backed Securities and peddling them to the masses for huge fees as the new road to wealth was the ponzi scheme.

The Government-Created Subprime Mortgage Meltdown By Thomas J. DiLorenzo was written 16 months ago and does not mention the role the rating agencies helped to play in this mess.

What is worse, buying a house that you can't afford and praying that it will work out or writing mortgages to people who you know do not have the income or worse yet even the job to make the payments just so you can continue to rake in huge fees and bonuses?

And what now with all the layoffs adding to the foreclosures, do we continue to blame the CRA?

MrBold said...

Yeah it is stil pretty offensive Whited Sepulchre. Unless you're pro discrimination based on zip code like those at LewRockell. But then they're generally in favor of businesses being allowed to discriminate for whatever reason they come up with.

Like Flee suggested this is indeed...."worse yet even the job to make the payments just so you can continue to rake in huge fees and bonuses?"

White Sepulchre and the neoConfederate nutjobs at Lew Rockell are blaming the victims instead of those who profited from making these loans.

MrBold said...

Here are some particulars for you Whited Sepulchre:
http://www.newamerica.net/blog/asset-building/2008/no-larry-cra-didn-t-cause-sub-prime-mess-3210

And you can tell Dr. diLorenzo that his theory is bunk. CRA enforcement went down while subprime lending increased.

The Whited Sepulchre said...

Ok, let me rephrase it.

Let's assume that you had some authority in the lending area.

Would you have made those "subprime" loans with your money?

Let's assume that you work for the Treasury, made a mint, and then retired. You've got money, and you've got expertise. Would you bail out those who bundled Mortgage Backed Securities (and the credit derivatives) with your own money? Can you imagine anyone getting vicious enough to take money from others, via taxes, and bailing out those who did so?

I don't know where you think I want to "blame" anybody. They can all bankrupt, bail, and blow each other to kingdom come. Just as long as they're not using taxpayer money to do it.

It's not my problem, it shouldn't be my problem, but it's about to be my problem.

You're exactly right. It's (sniff sniff) offensive.

If someone were passing the hat around to bail out any or all parties involved (Treasury, GMAC, Subprime borrowers, and Subprime lenders) would you give any money to any party in the deal?

The Whited Sepulchre said...

And one other thing....

Starting about 4-5 years ago, I noticed that when people disagree with something, or in many cases, just wish it wasn't so, they claimed that the concept was "offensive".

The fact that certain spiders eat their mates, that many carnivores can only survive by eating flesh, that 25,000 people will die of malnutrition today, and that tons of Subprime Loans were made at our government's insistence?

All of these concepts are offensive. But it doesn't mean they aren't true.

Flee said...

"The fact that certain spiders eat their mates, that many carnivores can only survive by eating flesh, that 25,000 people will die of malnutrition today, and that tons of Subprime Loans were made at our government's insistence?

All of these concepts are offensive. But it doesn't mean they aren't true."


The government wrote the law is true but that is where the truth ends. The greedy bastards and their MBS that used the law to their advantage and created this mess. The government did not tell the banks to write mortgages at 125% of the homes worth with no money down and no income varifcation. The government did not create ajustable rate mortgages. When the market became saturated, when the people that could afford a home all had a home, they needed more mortgages to bundle together. The money was made in the fees these MBS brokers and banks charged and their bonuses. They needed these subprime mortgages to keep their income rolling in. That is why the MBS themselves are worthless while the homes still have value. The banks are hoarding our money they received last fall because they know these MBS are worthless. That is why they should not have gotten any money last fall, now or ever.

My point is when this whole mess started it appeared to be just the writing of bad sub-prime mortgages while there is so much more to this story.

What we need to start thinking about now is what we are going to replace our consumer based economy with now that the house of cards it was based on is falling down.