McCain’s Fingerprints Found on Banking Disaster

Paul Krugman unearthed this smoking gun quote from John McCain:

“Opening up the health insurance market to more vigorous nationwide competition, as we have done over the last decade in banking, would provide more choices of innovative products less burdened by the worst excesses of state-based regulation.”

It’s a twofer. Not only does it pin him to the banking crisis but the quote also has him wishing for the same dangerous deregulation for health insurance.

(H/T Josh Marshall)

8 Responses to “McCain’s Fingerprints Found on Banking Disaster”

  1. gcotharn says:

    Apples and oranges.

    The banking crisis occurred when government, in misguided affirmative action mode, forced banks to lend to “underserved” Americans who were unqualified to receive loans at favorable rates.

    The problem was not deregulation, but rather government interference into previously solid banking practices. There were other problems, to be sure – including lack of understanding – even amongst financial experts – about how to properly regulate new types of derivative financing. However, government blackmail of banks into extending risky affirmative action loans was the major factor which triggered the meltdown.

    BTW, just to be clear, and even though Fannie Mae and the Congressional Black Caucus were in bed together and experiencing carnal mortgage orgasm of lewd proportions: my comments have no racial tinge. Bad credit risk persons of all colors benefitted from the government blackmail of lenders. It was affirmative action lending to everybody.

    McCain spoke out in favor of closer regulation of Fannie and Freddie in both 2002 and 2006. Barack has to hit McCain so as to deflect attention from the large amount of contributions Barack received from Fannie and Freddie, and so as to deflect from the Fannie and Freddie executives who are advising Barack(for instance, on the VP selection). However, Barack is only executing a political hit. McCain looks prescient about Fannie and Freddie.

    If government forces insurers to give low rates to the “underserved” population of Americans who are bad insurance risks, then you will have an apples to apples comparison between the banking crisis and a future insurance crisis.

  2. DrGail says:

    Shorter version of gcotharn: It’s poor people’s fault, and the lousy Democrats who persist in forcing them to be treated equally to upstanding (read: rich) Americans.

    Where to begin? There is — and was — nothing forcing banks to make mortgage loans to risky borrowers. Nothing, that is, except greed. Abetted by an administration touting “the ownership society” as well as a lack of regulation or lax enforcement standards, low-information borrowers were sold into inappropriate mortgages with limited or no attempts to ensure they were qualified for these loans nor had a high probability of paying them back.

    Before you initiate a screed about “low-information borrowers”, please ask yourself whether you personally had a lawyer look over the papers for your most recent home loan. I know I didn’t.

    And why would otherwise reasonable banks lend money to people who represented high risk, you might ask, since this appears to be contrary to sound stewardship of the banks’ money? I’m so glad you asked.

    Because the risky nature of those mortgages could be thoroughly disguised when they were repackaged into sophisticated investment instruments (read: money-making opportunities for other banks and financial institutions, not for you and me) which sported attractive returns with little indication of their shaky nature.

    And why would the shaky nature of these investment instruments be disguised, you might ask? I’m so glad you asked.

    Because there were no regulations nor oversight designed to ensure that the exact nature of the risk was obvious to anyone considering purchasing these instruments. Had the risks been clearly communicated, they would not have been so attractive to investors. Had these repackaged bundles of mortgages not been so easy to sell, the shitty mortgages that comprised them would have been far less available.

    So, in other words, much of the banking crisis arose because of a lack of regulation, not an excess of regulation.

  3. Kathy says:

    At the risk of repeating what Gail said, this statement by you, gcotharn:

    “The banking crisis occurred when government, in misguided affirmative action mode, forced banks to lend to “underserved” Americans who were unqualified to receive loans at favorable rates.”

    is false. It’s not a matter of opinion. It’s simply not true. As I wrote in a post on this matter a couple of days ago, the Community Reinvestment Act, which is what you’re referring to above, did not force banks to lend to unqualified loan-seekers. What it did do was require banks to seek out credit-worthy customers in neighborhoods in which banks refused to operate at all; i.e., redlining.Thus people living in those neighborhoods who *could* qualify under safe lending guidelines were automatically disqualified simply because of where they lived. No bank was ever “forced” to intentionally approve bad loans.

  4. gcotharn says:

    Investor’s Business Daily points to pressure to make affirmative action loans:

    [I]t was the Clinton administration, obsessed with multiculturalism, that dictated where mortgage lenders could lend, and originally helped create the market for the high-risk subprime loans now infecting like a retrovirus the balance sheets of many of Wall Street’s most revered institutions.

    Tough new regulations forced lenders into high-risk areas where they had no choice but to lower lending standards to make the loans that sound business practices had previously guarded against making. It was either that or face stiff government penalties.
    Yes, the market was fueled by greed and overleveraging in the secondary market for subprimes, vis-a-vis mortgaged-backed securities traded on Wall Street. But the seed was planted in the ’90s by Clinton and his social engineers. They were the political catalyst behind this slow-motion financial train wreck.

    Webutante blogs a personal experience:

    For some years my father, a small town businessman and employer, was chairman of the board of this little bank and continued the tradition of good business and solid loan practices. The community flourished.

    Several years after he retired as chairman, the Feds in the Clinton Administration came in and started dictating to this bank as well as banks across America: they had to start making a certain percentage of bad loans even if management knew the loans would never be repaid. In essence the bank was told to start a policy that in effect was the same as giving a portion of its money away. If my hometown bank failed to comply with this insane new banking policy, it would face stiff penalties from the Feds.

    Then, the Feds came in and strongly urged another insane policy: my hometown bank and over 8,000 other banks across this nation were strongly urged to buy millions of dollars of Fannie Mae preferred stock.

    After this urging, management of this bank felt obliged to buy FNM preferred stock almost as an act of patriotism. Today, this FNM preferred stock is worthless and my privately held bank will have to write off over $5,000,000 losses. The bank is also having to write off a number of bad loans that the Feds told them they had to make.

    I’m in favor of regulation. However, the deregulation Dems are commonly demagoguing had little to do with the meltdown. Further, in this instance government regulation – rather than overseeing and limiting risk – was actually forcing banks to make subprime loans. <a href=”″IBD again:

    Age-old standards of banking prudence got thrown out the window. In their place came harsh new regulations requiring banks not only to lend to uncreditworthy borrowers, but to do so on the basis of race.

    These well-intended rules were supercharged in the early 1990s by President Clinton. Despite warnings from GOP members of Congress in 1992, Clinton pushed extensive changes to the rules requiring lenders to make questionable loans.

    Lenders who refused would find themselves castigated publicly as racists. As noted this week in an IBD editorial, no fewer than four federal bank regulators scrutinized financial firms’ books to make sure they were in compliance.

    Failure to comply meant your bank might not be allowed to expand lending, add new branches or merge with other companies. Banks were given a so-called “CRA rating” that graded how diverse their lending portfolio was.

    I agree with you that Fannie and Freddie, especially, willingly leapt into offering risky mortgages to unsophisticated borrowers. The problem is: Fannie and Freddie were in blatantly in bed with Democrats, and especially the Congressional Black Caucus. Efforts to regulate were routinely blocked by Congress, with Dems in general, and Barney Frank and Chris Dodd in particular, playing huge and prominent roles. This is all on the record. To claim differently – to try and make this a Repub deregulation scandal – is to overtly skew history. WaPo recounts Treasury Dept. attempts to get Congress to regulate the growing problem in 2000. In 2003, NYT reported on the Bush Administration getting Fannie and Freddie Directors to agree to a plan of increased regulation:

    The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.

    Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry.

    The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios.

    The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac — which together have issued more than $1.5 trillion in outstanding debt — is broken.
    Reflecting the changing political climate, both Fannie Mae and its leading rivals applauded the administration’s package. The support from Fannie Mae came after a round of discussions between it and the administration and assurances from the Treasury that it would not seek to change the company’s mission.

    After those assurances, Franklin D. Raines, Fannie Mae’s chief executive, endorsed the shift of regulatory oversight to the Treasury Department, as well as other elements of the plan.

    ”We welcome the administration’s approach outlined today,” Mr. Raines said.

    Still Congress refused to act.

    That McCain overtly favored increased regulation of Fannie and Freddie all along the way – from at least 2002 to the present – is on the record and is impossible for fair-minded persons to dispute. WaPo again:

    In 2006, he pushed for stronger regulation of Fannie Mae and Freddie Mac — while Mr. Obama was notably silent. “If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole,” Mr. McCain warned at the time.

    One element of the Obama campaign’s brief against Mr. McCain is that he supported repeal of the law separating commercial banks from investment banks. “He’s spent decades in Washington supporting financial institutions instead of their customers,” Mr. Obama said yesterday. “Phil Gramm, one of the architects of the deregulation in Washington that led directly to this mess on Wall Street, is also the architect of John McCain’s economic plan.” Would it be churlish to point out that another author of the Gramm-Leach-Bliley law is former congressman Jim Leach, a founder of Republicans for Obama? Or that Obama advisers Lawrence H. Summers and Robert E. Rubin supported the repeal — which was signed by President Bill Clinton?

  5. gcotharn says:


    I note your point about redlining. I’m in favor of government taking a close regulatory look at this practice. However, as I’ve taken pains to document above (in a post which is currently caught in the blog’s moderation, and remains unpublished at the moment), government affirmative action pressure went far beyond looking into redlining. Though abusive government affirmative action regulation was certainly not the only cause of this crisis, it was a major root cause of the problem. To deny that is … just … fantastical and wishful denial of reality.

  6. Kathy says:


    That Investors’ Business Daily article you linked to claims lenders were pressured to make unsafe loans by Bill Clinton’s administration, but offers no evidence or support for that argument. So basically, you are not supporting your claim that there was pressure; you are just pointing to another article that says there was, w/o any evidence to back that up.

    In fact, there is no such evidence; the evidence actually undercuts your argument. Here is a quote from a detailed description of the changes made to the CRA under Clinton. Note in particular the lines I have bolded at the end of the quote. The article is here.

    The CRA regulations were substantially revised again in 1995, in response to a directive to the agencies from President Clinton to review and revise the CRA regulations to make them more performance-based, and to make examinations more consistent, clarify performance standards, and reduce cost and compliance burden. This directive addressed criticisms that the regulations, and the agencies’ implementation of them through the examination process, were too process-oriented, burdensome, and not sufficiently focused on actual results. The agencies also changed the CRA examination process to incorporate these revisions.

    Examination Approaches
    Since 1995, the agencies’ CRA regulations have tailored the examination approach to the institution’s size or its business operations. Currently, for depository institutions with assets greater than $1.061 billion1 CRA performance is evaluated based on a lending test, an investment test, and a service test. Under the lending test, an institution’s lending performance is evaluated on both quantitative and qualitative factors, and the outcome is generally weighted to count for 50 percent of the institution’s overall CRA rating. An institution with a Needs to Improve or Substantial Noncompliance rating on the lending test cannot be assigned an overall passing grade for CRA.

    Under the investment and service tests, investments benefiting low- and moderate-income individuals and neighborhoods, or distressed or underserved rural areas are assessed, and services to the entire community, including low- and moderate-income individuals and neighborhoods, are reviewed. An institution’s performance in making investments and providing services each accounts for 25 percent of the institution’s overall rating. Examiners also weigh the innovativeness of the institution’s community development lending, investment, and service programs and activities.

    Institutions with assets between $265 million and $1.061 billion are designated as “intermediate small institutions” and are evaluated on their record of lending in low- and moderate-income areas and to lower-income people in the institutions’ assessment areas. A community development test is also included in the review of these institutions. This test encourages institutions to engage in a range of community development lending, investment, and services but provides them flexibility to target their resources where they will produce the most community benefit. The designation of “intermediate small institutions” was the product of a regulatory change that followed from a 2002 interagency review of the effectiveness of the 1995 regulatory changes.

    Currently, institutions with assets less than $265 million are evaluated primarily on their lending performance in their communities, including low- and moderate-income areas and populations. Given their more limited capacity and resources, small institutions are not expected to engage in more complex community development activities.

    The regulations also provide a different evaluation method for institutions designated as “wholesale” or “limited purpose.” This examination method focuses on evaluating an institution’s community development lending, services, and investments. In addition, any institution can opt to develop a CRA “strategic plan” and be evaluated under that plan, if it is approved.

    During the CRA examination, examiners assess an institution’s performance within the context of all relevant factors, such as its business strategy, capacity and constraints, the overall economic conditions and credit needs in its assessment area2, and the availability of community development activities appropriate to the institution. This performance context recognizes that while insured depository institutions have an affirmative obligation to meet the credit needs of the communities in which they are chartered, they must engage only in activities that are safe and sound.

  7. matttbastard says:

    Rather than wasting precious time reading gcotharn’s latest craven attempt to score McCain points comments, and Kathy’s subsequent troll-feeding rebuttal, I suggest folks just head over to Sadly, No!

  8. gcotharn says:

    IBD quote, 7th line: “It was either that or face stiff government penalties.”

    Webutante quote, 8th line: “If my hometown bank failed to comply with this insane new banking policy, it would face stiff penalties from the Feds.”

    Second IBD quote, 10th line: “Failure to comply meant your bank might not be allowed to expand lending, add new branches or merge with other companies. Banks were given a so-called “CRA rating” that graded how diverse their lending portfolio was.”

    Some persons are giving personal accounts of how the reality of the program amounted to pressure to lend to bad credit risk persons, with special emphasis on black persons.

    Your link is to testimony of Sandra F. Braunstein before the Committee on Financial Services, U.S. House of Representatives. This is Ms. Braunstein’s job description:

    Director of the Federal Reserve Board’s Division of Consumer and Community Affairs. The division administers the Board’s responsibilities for rulewriting and examinations for federal laws involving consumer protection in financial services, including the CRA. We oversee and provide policy direction for consumer compliance and CRA examinations of state member banks conducted by Federal Reserve examiners. Through our national Community Affairs Program, we share knowledge about successful approaches to community development with bankers and other CRA stakeholders. We also analyze and report to the Board on CRA issues that arise in connection with certain applications by financial entities to expand their businesses.

    Ms. Braunstein had every incentive to represent that she and her department were performing excellently and fairly. She had zero incentive to testify she and her department were performing poorly or unfairly.

    Anyone might’ve been lying: from the IBD reporters, to their sources, to Webutante, to Ms. Braunstein. But, I don’t put a lot of trust in Ms. Braunstein’s representation of her own job performance. In my personal case, b/c I read her blog, Webutante has a lot of credibility with me.

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