Justice gets its “greedy banker”

Last week the U.S. Department of Justice announced a $13 billion settlement with JP Morgan Chase & Co. over Morgan’s misrepresentation of mortgages in 2006 and 2007.

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According to The New York Times,

In its statement of facts, the Justice Department… said the report showed that more than 6,000 of the loans purchased by JPMorgan in that period had not met the underwriting standards promised to investors. Yet, the department said, the bank accepted 3,238 of those loans for use in its pools.

Attorney General Holder commented that Morgan’s conduct “helped sow the seeds of the mortgage meltdown.”

So the “greedy bankers” did it after all.

Devotees of postmodernism know that there are two “narratives” out there that allocate the blame for the Crash of 2008. One of them is the liberal-Democratic line that “greedy bankers” recklessly loaned money to homeowners that couldn’t afford them and then sold those mortgages under false pretenses to investors.

But there’s another narrative, though you wouldn’t know it if you are getting all your news exclusively from the mainstream media.

The alternative narrative is that liberal policies drove the housing market bubble and ultimate crash.

Back in the 1970s, liberals were riled up about “red-lining,” the practice of banks not to loan money in decaying, often minority, urban neighborhoods.  ACORN activists went to Congress and got the Community Reinvestment Act of 1977 to bully banks into lending more money into these underserved neighborhoods.

But that wasn’t quite doing the job so in 1994 the new Clinton administration issued a National Homeowners Strategy to increase homeownership. The strategy “promoted paper-thin downpayments and pushed for ways to get lenders to give mortgage loans to first-time buyers with shaky financing and incomes,” i.e., “subprime” loans.

Not long after, Congress repealed the Glass-Steagall Act and allowed deposit banks to get into the investment banking business and sell securitized mortgages.

Then there were the government-sponsored enterprise twins, Fannie Mae and Freddie Mac, that buy mortgages and sell packages of them to investors. With the encouragement of Congress and politically connected Fannie CEO James A. Johnson, Fannie and Freddie started increasing the amount of subprime loans they would buy from mortgage originators and sell to investors.  Eventually, over half the mortgages handled by Fannie and Freddie were subprime — trillions of subprime dollars.

You can imagine that the ordinary, “greedy” bankers at J.P Morgan wanted in on this game that the noble government-backed Fannie and Freddie were playing, and so we get to 2008 and the near collapse of the credit system.

We all get confused about the credit system, but it is really very simple. If you lend money, you want to know that the borrower can keep making payments, even when the going gets tough; you also want to know that if the borrower defaults that the collateral is worth more than the money owed on the loan.

Under capitalism, we get “panics” and “crashes” when the economy goes south and people can’t make their payments and/or their collateral drops in price.  Why?  Well, would you leave your money in a bank with a big exposure to non-performing and underwater loans?

In 2008, it took about $20 trillion for the government to right the credit system with bailouts and guarantees.

Which narrative do you like? Is the problem “greedy bankers” or stupid politicians and crazed, liberal activists?

What do you think?

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