Add President Clinton to the long list of people who deserve a share of the blame for the housing bubble and bust. A recently re-exposed document shows that his administration went to ridiculous lengths to increase the national homeownership rate.
It promoted paper-thin downpayments and pushed for ways to get lenders (Predatory Lending Schemes) to give (FLOOD THE MARKET) with mortgage loans to first-time buyers with shaky financing and incomes.
It’s clear now that the erosion of lending standards pushed prices up by increasing demand, and later led to waves of defaults by people who never should have bought a home in the first place. – Business Week
Bill Clinton Repealed The Glass Steagall Act (which had prevented bankers from making ‘derivative’ (Loans Without Real Money) in 1999.
Foreclosure filings and sales increase throughout most of our coverage are in August. Foreclosure starts jumped significantly, reversing what had been a declining trend over the past several months. Investors bought more properties on the courthouse steps in August than in July everywhere except in Washington. The number of properties Sold Back to Bank jumped significantly in Oregon, and also rose in California and Nevada.
Foreclosure starts (the first notice filed, either a Notice of Default or Notice of Trustee Sale depending on the state) rose in every state. This appears to have been primarily driven by Bank of America and related entities, where we saw an overall 116 percent increase from July to August. Wells Fargo and US Bank also saw an increases in foreclosure start filings, while filings by JP Morgan Chase and Citibank were essentially flat.
“Bank of America appears to be primarily responsible for the surge in foreclosure starts this month,” says Sean O’Toole, Founder and CEO of ForeclosureRadar.com. “Since their average time to foreclose has recently increased to more than a year, it is unclear that these foreclosure starts will lead to an increase in foreclosure sales anytime soon.”
Joseph R. Mason, is a finance professor at Drexel University’s LeBow College of Business, a senior fellow at the University of Pennsylvania’s Wharton School, and a consultant at Criterion Economics.
The Clinton-era document that Mason cites—“The National Homeownership Strategy: Partners in the American Dream”—was hiding in plain sight on the website of the Department of Housing & Urban Development until last year, when according to Mason it was removed (probably because the housing bust made it seem embarrassing to the department). Mason credits Joshua Rosner of Graham Fisher & Co. with saving a copy of it before it was expunged. – Business Week
Notice of Trustee Sale filings, up 15.0 percent from the prior month, reversed a four-month downward trend. Properties Sold Back to Bank (REO) continued a five-month decline, with an 8.0 percent drop from July to August, and a 42.8 percent drop from this time last year. Investors were more active in August, with properties Sold to 3rd Parties up 4.9 percent month-over-month and up 38.7 percent year-over-year. Time to foreclose in August was flat from July at 175 days but 15.0 percent longer than a year ago.
View all Arizona stats by state, county, city or ZIP
Notice of Default filings increased 69.5 percent to the highest level in a year. Notice of Trustee Sale filings were up more moderately, rising 6.0 percent month-over-month, but down 23.6 percent year-over-year. Cancellations were nearly flat, up just 1.9 percent from July. Activity on the courthouse steps increased in August. Properties Sold Back to Bank (REO) increased 12.3 percent from the prior month. Properties Sold to 3rd Parties rose 9.9 percent month-over-month, and 10.8 percent year-over-year. Time to Foreclose increased to 333 days in August, which is 49 days longer than a year ago.
View all California stats by state, county, city or ZIP
The National Homeownership Strategy began in 1994 when Clinton directed HUD Secretary Henry Cisneros to come up with a plan, and Cisneros convened what HUD called a “historic meeting” of private and public housing-industry organizations in August 1994. The group eventually produced a plan, of which Mason sent me a PDF of Chapter 4, the one that argues for creative measures to promote homeownership.
The very worst idea in the plan, which fortunately never gained approval, was to let first-time homebuyers freely tap their IRA and 401(k) retirement-savings plans with no penalty to scrounge up a downpayment. That, HUD estimated, would have “benefited” 600,000 families in the first five years.
Plenty of other ideas in the plan did become reality, though. Knowing what we know now about the housing bust, the earnest language in the document seems faintly ridiculous. Here’s an excerpt. Read it closely and you can see the seeds of disaster being planted:
For many potential homebuyers, the lack of cash available to accumulate the required downpayment and closing costs is the major impediment to purchasing a home. Other households do not have sufficient available income to to make the monthly payments on mortgages financed at market interest rates for standard loan terms. Financing strategies, fueled by the creativity and resources of the private and public sectors, should address both of these financial barriers to homeownership.
Note the praise for “creativity.” That kind of creativity in stretching boundaries we could use less of. Mason puts it well: “It strikes me as reckless to promote home sales to individuals in such constrained financial predicaments.”
Notice of Default filings jumped 44.2 percent month-over-month, but fell 13.6 percent year-over-year. Notice of Trustee Sale filings slipped for the fifth consecutive month, dropping 9.9 percent month-over-month, and 43.4 percent year-over-year. Investor activity increased in August. Properties Sold to 3rd Parties rose 19.8 percent from July, and 27.8 percent from last year. Cancellations declined for the fourth straight month, dropping 9.0 percent in August to the lowest level in 15 months. Time to Foreclose jumped 14.3 percent in August from July, reaching a new record of 368 days. The Time to Resell increased month-over-month for both Banks at 179 days and 3rd Party Investors at 108 days.
View all Nevada stats by state, county, city or ZIP
Notices of Default were up in August over July by 35.6 percent, but filing activity remains 45.8 percent below this time last year. Properties Sold Back to Bank (REO) rose dramatically, up 243.3 percent month-over-month, as Recontrust, a subsidiary of Bank of America, began to clear the 2,800 foreclosures it started in April. Properties Sold to 3rd Party investors were up as well, 46.0 percent month-over-month and 17.4 percent year-over-year. The Time to Foreclose dropped in August for the second month in a row, down 9 days from July to 150 days.
View all Oregon stats by state, county, city or ZIP
Washington saw a 3.4 percent increase in Notice of Trustee Sale filings in August from July, which reversed four months of consecutive declines. Activity on the courthouse steps slowed as foreclosures Sold Back to Bank (REO) dropped 29.4 percent month-over month, and foreclosures Sold to 3rd Parties, typically investors, were down 33.3 percent. Time to Foreclose was nearly flat in August at 104 days.
View all Washington stats by state, county, city or ZIP
|State||Notice of Default||Notice of Sale||Back to Bank||Sold to 3rd Party|
|Arizona||n/a||+ 15.0%||– 8.1%||+ 4.9%|
|California||+ 69.5%||+ 6.1%||+ 12.3%||+ 9.9%|
|Nevada||+ 44.2%||– 9.9%||+ 1.2%||+ 19.8%|
|Oregon||+ 35.6%||n/a||+ 243.3%||+ 46.0%|
|Washington||n/a||+ 3.9%||– 29.4%||– 33.3%|
1837: Following his years of fighting against the Rothschilds and their central bank in America, President Andrew Jackson finally succeeds in throwing the Rothschilds central bank out of America. It would not be until 1913 that the Rothschilds would be able to set up their third central bank in America, the Federal Reserve.
Thus the need for the Glass Steagall Act by FDR, which protected Americans from Rothschild exploitation by investment banking. Bill Clinton subsequently repealed The Glass Steagall Act in 1999, which allowed Rothschild to foment a housing bubble, using fraudulent derivative backed mortgages. This then led to the pretext for too big to fail by Rothschild cronies, which subjugates Americans, to pay off $Trillions worth of printed money.
Re-Introduction of the Glass Steagall Act, would retroactively make Rothschild responsible for his own housing bubble debt, and retroactively lower the debt ceiling into normal levels. 1845: Andrew Jackson (The 7th President of the United States) dies.
This Great Patriot leaves instructions in his will to have, “I Killed The Bank,” inscribed on his headstone, a reference to the fact he banished the Rothschilds second Central bank in the United States from the US in 1837.
Congress in 1933 prohibits commercial banks from engaging in the investment business.
The Banking Act of 1933 was probably the newly-elected Roosevelt administration’s most important response to the perceived shambles of the nation’s financial and economic system. But the Act did not change the most important weakness of the American banking system — unit banking within states and the prohibition of nationwide banking. This structure is considered the principal reason for the failure of so many U.S. Banks, some 90 percent of which were unit banks with under $2 million in assets. (In contrast, Canada, which had nationwide banking, suffered no bank failures and only a few of the over 11,000 U.S. Banks that failed or merged were branch banks.) Instead, the Act established new approaches to financial regulation — particularly the institution of deposit insurance and the legal separation of most aspects of commercial and investment banking (the principal exception being allowing commercial banks to underwrite most government-issued bonds).
Carter Glass and Henry Steagall
The primary force behind the law was Mr. Glass, a 75-year-old senator who stood 5 feet 4 inches. A former Treasury secretary, he was a father of the Federal Reserve System and a critic of banks that engaged in what he considered the risky business of investing in stocks. He wanted banks to stick to conservative commercial lending, and he exploited the antibank sentiment to push through the changes he wanted. But just two years after Glass-Steagall was enacted, Mr. Glass helped lead an effort to have it repealed, as “he thought it was a mistake and an overreaction.” Mr. Glass passed on in 1946 at the age of 88. Mr. Steagall (pronounced stee-GAHL), a Democratic who was chairman of the House Banking and Currency Committee, developed a passion for helping farmers and rural banks from growing up in Ozark, Alabama. He had little interest in separating banking from Wall Street, but signed on to the bill after Mr. Glass agreed to attach Mr. Steagall’s amendment, which authorized bank deposit insurance for the first time.
For several years before 1933 Senator Glass had wanted to restrict or forbid commercial banks from dealing in and holding corporate securities. He strongly believed that bank involvement with securities was detrimental to the Federal Reserve system, contrary to the rules of good banking, and responsible for stock market speculation, the Crash of 1929, bank failures, and the Great Depression. It is generally accepted that he was unable to achieve the goal of separating commercial and investment banking until revelations concerning National City Bank were brought forth in the Senate Committee on Banking and Currency’s Stock Exchange Practices Hearings. Disillusionment with speculators and securities merchants carried over from investment bankers to commercial bankers; the two were often the same, and an embittered public did not care to make fine distinctions. The Banking Act of 1933 was passed and quickly signed into law.
Restrictions and Repeals in the Bank Holding Company Act
Curbing banks’ ability to grow too large has been a common theme in legislation through the years. During the 1930s and 1940s, banks stuck to the basics of taking deposits and making loans. Congress didn’t intervene again until 1956, when it enacted the Bank Holding Company Act to keep financial-services conglomerates from amassing too much power. That law created a barrier between banking and insurance in response to aggressive acquisitions and expansion by TransAmerica Corp., an insurance company that owned Bank of America and an array of other businesses. Congress thought it improper for banks to risk possible losses from underwriting insurance. While many banks today (1990s) sell insurance products provided by insurers, banks can’t take on the risk of underwriting.
Several attempts since 1933 by commercial bankers, and at times regulators, to repeal or draft exceptions to those sections of the law that mandate separation of commercial and investment banking — usually referred to alone as ‘Glass-Steagall Act’ — generally have not been successful. As a result, the United States and Japan (which was forced to adopt laws similar to the U.S. Banking statues after the Second World War), alone among the world’s important financial nations, legally require this separation. (Japanese banks can engage in many securities activities, however, including underwriting and dealing in commercial paper and ownership of up to 5 percent of non-bank enterprises.).
The Provisions Within the Sections of the Glass-Steagall Act
The Glass-Steagall Act has come to mean only those sections of the Banking Act of 1933 that refer to banks’ securities operations — sections 16, 20, 21, and 32. These four sections of the Act, as amended and interpreted by the Comptroller of the Currency, the Federal Reserve Board and the courts, govern commercial banks’ domestic securities operations in various ways.
Sections 16 and 21 refer to the direct operations of commercial banks. Section 16 and 21 refer to the direct operations of commercial banks. Section 16, as amended by the Banking Act of 1935, generally prohibits Federal Reserve member banks from purchasing securities for their own account. But a national bank (chartered by the Comptroller of the Currency) may purchase and hold investment securities (defined as bonds, notes, or debentures regarded by the Comptroller as investment securities) up to 10 per cent of its capital and surplus. Sections 16 and 21 also forbid deposit-taking institutions from both accepting deposits and engaging in the business of ‘issuing, underwriting, selling, or distributing, at wholesale or retail, or through syndicate participation, stock, bonds, debentures, notes or other securities’, with some important exceptions. These exceptions include U.S. Government obligations, obligations issued by government agencies, college and university dormitory bonds, and the general obligations of states and political subdivisions. Municipal revenue bonds (other than those used to finance higher education and teaching hospitals), which are now of greater importance than general obligations, are not included in the exceptions, in spite of the attempts of commercial banks to have Congress amend the Act. In 1985, however, the Federal Reserve Board decided that commercial banks could act as advisers and agents in the private placement of commercial paper.
Section 16 permits commercial banks to purchase and sell securities directly, without recourse, solely on the order of and for the account of customers. In the early 1970, the Comptroller of the Currency approved Citibank’s plan to offer the public units in collective investment trusts that the bank organized. But in 1971 the U.S. Supreme Court ruled that sections 16 and 21 prohibit banks from offering a product that is similar to mutual funds. In an often quoted decision discussed at length in section IV of this chapter and in Chapters 2,3,4 and 5, the Court found that the Act was intended to prevent banks from endangering themselves, the banking system, and the public from unsafe and unsound practices and conflicts of interest. Nevertheless in 1985 and 1986 the Comptroller of the Currency decided that the Act allowed national banks to purchase and sell mutual shares for its customers as their agent and sell units in unit investment trusts. In 1987, the Comptroller also concluded that a national bank may offer to the public, through a subsidiary, brokerage services and investment advice, while acting as an adviser to a mutual fund or unit investment trust. Since 1985 the regulators have allowed banks to offer discount brokerage services through subsidiaries, and these more permissive rules have been upheld by the courts. Thus, more recent court decisions and regulatory agency rulings have tended to soften the 1971 Supreme Court’s apparently strict interpretation of the Act’s prohibitions.
Sections 20 and 32 refer to commercial bank affiliations. Section 20 forbids member banks from affiliating with a company ‘engaged principally’ in the ‘issue, flotation, underwriting, public sale, or distribution at wholesale or retail or through syndicate participation of stocks, bonds, debentures, notes, or other securities’. In June 1988 the U.S. Supreme Court (by denying certiorari) upheld a lower court’s ruling accepting the Federal Reserve Board’s April 1987 approval for member banks to affiliate with companies underwriting commercial paper, municipal revenue bonds, and securities backed by mortgages and consumer debts, as long as the affiliate does not principally engage in those activities. ‘Principally engaged’ was defined by the Federal Reserve as activities contributing more than from 5 to 10 per cent of the affiliate’s total revenue. In 1987, the DC Court of Appeals affirmed the Federal Reserve Board’s 1985 ruling allowing a bank holding company to acquire a subsidiary that provided both brokerage services and investment advice to institutional customers. In 1984 and 1986 the Court held that affiliates of member banks can offer retail discount brokerage service (which excludes investment advice), on the grounds that these activities do not involve an underwriting of securities, and that ‘public sale’ refers to an underwriting.
Section 32 prohibits a member bank from having interlocking directorships or close officer or employee relationships with a firm ‘principally engaged’ in securities underwriting and distribution. Section 32 applies even if there is no common ownership or corporate affiliation between the commercial bank and the investment company.
Sections 20 and 32 do not apply to non-member banks and savings and loan associations. They are legally free to affiliate with securities firms. Thus the law applies unevenly to essential similar institutions. Furthermore, securities brokers’ cash management accounts, which are functionally identical to cheque accounts, have been judged not to be deposits as specified in the Act.
Commercial banks are not forbidden from underwriting and dealing in securities outside of the United States. The larger money center banks, against whom the prohibitions of the Glass-Steagall Act were directed, are particularly active in these markets. Five of the top 30 leading underwriters in the Eurobond market in 1985 were affiliates of U.S. Banks, with 11 per cent of the total market. These affiliates include 11 of the top 50 underwriters of Euronotes. Citicorp, for example, has membership in some 17 major foreign stock exchanges, and it offers investment banking services in over 35 countries. In 1988, it arranged for its London securities subsidiary to cooperate with a U.S. Securities firm to make markets in securities in the United States. The Chase Manhattan Bank advertises that it ‘has offices in almost twice as many countries as ten [major listed] investment banks combined. Furthermore, commercial banks’ trust departments can trade securities through their securities subsidiaries or affiliates for pension plans and other trust accounts.
In summary, commercial banks can offer some aspects of investment advisory services, brokerage activities, securities underwriting, mutual fund activities, investment and trading activities, asset securitization, joint ventures, and commodities dealing, and they can offer deposit instruments that are similar to securities.
The Generally Accepted Rationale for the Separation of Commercial and Investment Banking
The generally accepted rationale for the Glass-Steagall Act is well expressed in the brief filed by the First National City Bank (1970) in support of the Comptroller of the Currency (William Camp), who had given the bank permission to offer commingled investment accounts. For this case (Investment Company Institute v. Camp, 401 US 617, 1971), which the Supreme Court decided in favor of the Investment Company Institute, FNCB’s attorneys described the rationale for the Act thus: (First National City Bank, 1970, pp. 40-2):
The Glass-Steagall Act was enacted to remedy the speculative abuses that infected commercial banking prior to the collapse of the stock market and the financial panic of 1929-1933. Many banks, especially national banks, not only invested heavily in speculative securities but entered the business of investment banking in the traditional sense of the term by buying original issues for public resale. Apart from the special problems confined to affiliation three well-defined evils were found to flow from the combination of investment and commercial banking.
Provisions of the Glass-Steagall Act were directed at these abuses
(1) Banks were investing their own assets in securities with consequent risk to commercial and savings deposits. The concern of Congress to block this evil is clearly stated in the report of the Senate Banking and Currency Committee on an immediate forerunner of the Glass-Steagall Act.
(2) Unsound loans were made in order to shore up the price of securities or the financial position of companies in which a bank had invested its own assets.
(3) A commercial bank’s financial interest in the ownership, price, or distribution of securities inevitably tempted bank officials to press their banking customers into investing in securities which the bank itself was under pressure to sell because of its own pecuniary stake in the transaction.
A Summary of the Rationale Leading up to the Enactment of the Glass Steagall Act
The original (and in some measure, continuing) reasons and arguments for legally separating commercial and investment banking include:
- · Risk of loses (safety and soundness). Banks that engaged in underwriting and holding corporate securities and municipal revenue bonds presented significant risk of loss to depositors and the federal government that had to come to their rescue; they also were more subject to failure with a resulting loss of public confidence in the banking system and greater risk of financial system collapse.
- · Conflicts of interest and other abuses. Banks that offer investment banking services and mutual funds were subject to conflicts of interest and other abuses, thereby resulting in harm to their customers, including borrowers, depositors, and correspondent banks.
- · Improper banking activity. Even if there were no actual abuses, securities-related activities are contrary to the way banking ought to be conducted.
- · Producer desired constraints on competition. Some securities brokers and underwriters and some bankers want to bar those banks that would offer securities and underwriting services from entering their markets.
- · The Federal ‘safety net’ should not be extended more than necessary. Federally provided deposit insurance and access to discount window borrowings at the Federal Reserve permit and even encourage banks to take greater risks than are socially optimal. Securities activities are risky and should not be permitted to banks that are protected with the federal ‘safety net’.
- · Unfair competition. In any event, banks get subsidized federal deposit insurance which gives them access to ‘cheap’ deposit funds. Thus they have market power and can engage in cross-subsidization that gives them an unfair competitive advantage over non-bank competitors (e.g. Securities brokers and underwriters) were they permitted to offer investment banking services.
- · Concentration of power and less-than-competitive performance. Commercial banks’ competitive advantages would result in their domination or takeover of securities brokerage and underwriting firms if they were permitted to offer investment banking services or hold corporate equities. The result would be an unacceptable concentration of power and less-than-competitive performance.
- · Universal v. Specialized Banking. If the Glass-Steagall Act were repealed, the U.S. Banking system would come to resemble the German universal system, which would be detrimental to bank clients and the economy.