September 29th, 2009:

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via They Call This Season ‘Fall’ for a Reason | The Public Record
By Dave Lindorff , The Public Record, Sep 28th, 2009

So now it turns out that the whole Troubled Assets Relief Program (TARP) was a flop or more likely a scam. Remember Bush Treasury Secretary Henry Paulson telling us last September that credit markets had locked up, and then, after half of the $750 billion that he extorted out of Congress was handed out to Wall Street firms, new President Barack Obama justifying the spending of the second half of the money because we needed to “get the banks lending again”?

Well, now Neil Barofsky, the special inspector general for TARP, is telling us that all that money, and more than $2 trillion in loans, accomplished nothing.  In an interview with Lagan Sebert, published in Huffington Post, Barofsky says, “We were told by Treasury that the purpose of the TARP fund was to increase lending. But we haven’t increased lending.”

Well yeah, that’s true. Just ask any ordinary working stiff. My little bank, the Harleysville National Bank here in eastern Pennsylvania, far from expanding lending, has been shutting down customer credit lines. As a bank manager told me, they were “reviewing all our equity lines” in light of declining property values (actually, property values in our area north of Philadelphia have remained pretty stable).

In general, banks across the country have been canceling credit lines, closing credit card accounts on customers deemed risky—including small businesses—and making it very hard to get a new mortgage. (They’ve also been raising all kinds of fees, ripping customers off in other ways, but that’s another story.)

Read on…

Here’s my two cent’s worth on the lending situation.

Getting a home loan was no problem. This past May, I called and made an appointment with the guy who handles home loans with my little home town credit union and asked for a home mortgage. We, my wife and I, went to the appointment after we got all the papers together. I was pleasantly shocked when he revealed to us that all the manila folders on his desk, and the ones on a table behind his desk, several stacks, were new loan applications and they were in the chute to close; it was just a matter of the borrowers waiting for the lowest rate possible. We went through the process of applying for a loan, were pre-approved, and we went house hunting. It was just that easy.

The point is, I think that the situation of the lack of lending by banks is both local and varies individually from one applicant to the next. For this reason everyone must take extra care with their credit rating. Don’t borrow unless you can comfortably make the payments. During the past decade or so, people borrowed knowing that they would have to scrape to make payments and put themselves in a high wire balancing act.

We all know that the second part of this debacle is the commission of predatory lending practices. There are some very good methods to protect yourself from predatory lending at this HUD website. Here are a couple of things you can do to prevent becoming a victim:

Do NOT let anyone persuade you to make a false statement on your loan application, such as overstating your income, the source of your downpayment, failing to disclose the nature and amount of your debts, or even how long you have been employed…

Do NOT let anyone convince you to borrow more money than you know you can afford to repay…

There is also a list of characteristics of predatory lending at the HUD website.

But what caused all this? What pushed the big banks over the edge so as to need a bailout in the first place? We’ve all heard that they bundled sub-prime mortgages to falsify their worth, but weren’t there supposed to be bank regulators watching this? 

The answer is simple. Deregulation caused this. Here is the heart of the matter – the exact piece of legislation that caused all this trouble:

The Gramm-Leach-Bliley Act (GLBA), also known as the Financial Services Modernization Act of 1999, repealed the part of the Glass-Stegall Act of 1933 that prohibited banks, investment banks, and insurance companies from acting as a combination of any of those three. This is from Wikipedia:

Contrary to Phil Gramm’s claim that “GLB didn’t deregulate anything” (see Defense), the GLB Act that he co-authored explicitly exempted security-based swap agreements (a derivative financial product based on another security’s value or performance) from regulation by the SEC Commission by amending the Securities Act of 1933, Section 2A, and similarly the Securities Exchange Act of 1934, Section 3A, to read, in part:^{[27] [28]}

1. The definition of “security” in section 2(a)(1) does not include any security-based swap agreement (as defined in section 206B of the Gramm-Leach-Bliley Act [15 USCS § 78c note]).

2. The Commission is prohibited from registering, or requiring, recommending, or suggesting, the registration under this title of any security-based swap agreement[.] …

3. The Commission is prohibited from … promulgating, interpreting, or enforcing rules; or … issuing orders of general applicability; … as prophylactic measures against fraud, manipulation, or insider trading with respect to any security-based swap agreement[.]

Bundling mortgage derivatives based on sub-prime (shaky) loans, then trading them as securities led to the housing bubble collapse once the loans began to default. A few of these derivatives going bad would not have been much of a problem, but the number of these derivatives traded were vast.

GLBA has to be reversed back to Glass-Stegall standards. Stronger regulation is the answer. You can’t fix the damage done by deregulation with more deregulation.