Larry Kudlow is Dead Wrong: CRA Didn't Start the Meltdown

by: Rob K. Blake

Larry Kudlow earlier this month stated during an interview with David Walker that the Community Reinvestment Act "created subprime loans". Larry Kudlow in this interview is really pushing the agenda attempting to help minority groups get their piece of the American Dream "caused" the subprime meltdown.

In this post-Bear Stearns (NYSE:BSC) bail out interview, David Walker made the connection those who originated and funded the subprime loans where not the ones taking the risk in the future. Those getting the fees are not now taking the risk - the Fed is.

Kudlow is clearly concerned the federal government will take steps to regulate Wall Street since the Fed opened the discount window to investment banks for the first to facilitate the Bears Stearns deal and this is a preemptive salvo to stave off government regulation of his Wall Street pals. This far-reaching attempt to link previous government regulation - the Community Reinvestment Act - as the cause of the subprime meltdown doesn't even pass the smell test.

It's laughable. It's ridiculous. It's borderline racist.

Kudlow glosses over Walker's point since it is moving to attack the Wall Street traders who profited most from subprime (like Bear Stearns) swinging the blame back onto minority groups who wanted to own a home.

Kudlow says:

CRA which essentially created subprime loans…the original subprime loan…all came out of the CRA….that ought to be repealed.

Becky, his co-host chimes in to clarify by asking, "What is the connection between CRA and subprime?" She clearly doesn't buy his line of thought either.

Kudlow answers:

CRA created subprime loans…that's where it began…that's exactly where it began. Nobody wants to look at this.

Kudlow admits the CRA was passed to outlaw redlining "bad" neighborhoods but says amendments in 1997 laid the groundwork for the subprime meltdown.

I have never heard such tripe… I can't believe even Kudlow believes this line of thinking.

Who or What Really Started the Subprime Meltdown?

In a word, Wall Street. And Kudlow knows it. He just doesn't want you to know it…or any potential Federal regulators.

Bloomberg News reporter Mark Pittman did a 5 part series of on the subprime mortgage crisis chronicling the Wall Street cowboys creation of subprime mortgage derivatives.

Pittman's article as it appeared on seattlepi.com says:

Representatives of five of Wall Street's dominant investment banks gathered around a blond-wood conference table on a February night almost three years ago. Their talks over take-out Chinese food led to the perfect formula for a U.S. housing collapse.

The host was Greg Lippmann, then 36, a fast-talking Deutsche Bank AG trader who aspired to make mortgage securities as big a cash cow for Wall Street as the $12 trillion corporate credit market.

His allies included 34-year-old Rajiv Kamilla, a trader at Goldman Sachs Group Inc. with a background in nuclear physics, and 32-year-old Todd Kushman, who led a contingent from Bear Stearns Cos. Representatives from Citigroup Inc. and JPMorgan Chase & Co. also were invited. Almost 50 traders and lawyers showed up for the first meeting at Deutsche Bank's Wall Street office to help set the trading rules and design the new product.

"To tell you the truth, it's not very glamorous," Lippmann says. "Just a bunch of guys eating Chinese discussing legal arcana."

Those meetings of the "group of five," as the traders called themselves, became a turning point in the history of Wall Street and the global economy.

As a mortgage broker for the past 15 years, I can say in all honesty I didn't sell subprime loans since I knew they were a bad deal for everyone involved. After all what good is it to put a borrower in a home and a loan they will eventually lose?

However, doing the relatively few minority loans the Community Reinvestment Act called for to bring equity to minorities didn't bring down the system…greedy traders like the "group of five" did.

Kudlow would have us believe minority home owners were responsible for a worldwide credit collapse instead of what Pittman describes about these Wall Street created subprime derivatives, as being able to,

…magnified losses so much that a small number of defaulting subprime borrowers could devastate securities held by banks and pension funds globally, freeze corporate lending and bring the world's credit markets to a standstill.

Walker's point that the those earning the profits are not now taking on the risks is correct. Walker's second point concerning not knowing the extent of the derivatives multiplied negative effects is the cooling force behind the frozen credit markets.

Kudlow also forgets that upwards of 35% of all subprime lending went to housing speculators. Speculators who expected rising values to continue indefinitely. Once again not the purview of the Community Reinvestment Act, more the purview of greedy house traders.

So whether you trade in homes or mortgage derivatives, you got the profits but didn't take on the losses. And those losses are still mounting. If there was ever an example of market players in dire need of regulation…this is it.