Bush, Obama, NINJA Loans and the Greek Debt Crisis

By Max Musson:

It appears that Greece is teetering in the brink of bankruptcy and if we were to listen to the usual financial pundits of the mass media, it would appear that ‘those Greeks’, those ‘lazy, hot-headed’ Mediterranean types — the kind of people who like to spend all day in the sun, eating olives and kebabs and drinking cheap red wine and ouzo — have gotten themselves in one hell of a financial mess, and now they expect everyone else to bail them out! The truth however is never as simple as it might at first seem, and certainly not as simple as the mass media would have us believe.

Like almost all western economies, Greece is afflicted with chronic financial problems, some of which may be marginally more severely felt than elsewhere, but none that are not shared by virtually every other Western nation. However, it seems to have passed out of the public consciousness that Greece’s financial problems have really only been ramped up to their current critical level since the financial crisis of 2007-2008 — the so-called ‘Credit Crunch’ — and logically therefore we should look to that crisis to begin to formulate an explanation of what is happening in Greece today.

One reason for the current misunderstanding of the Greek crisis has been the refusal of economists and politicians to acknowledge the true causes of the Credit Crunch and the reason why almost all Western nations have in recent years been forced to shoulder vast amounts of public debt, to suffer prolonged recession, to endure high unemployment and austerity.

The Credit Crunch

The Credit Crunch has traditionally been blamed on two things: irresponsible lending and exorbitant banker remuneration, and while these two factors were indeed symptoms of the Credit Crunch which no doubt exacerbated an already dire situation, they were not per se, the causes of the crisis.

In exposing the levels of irresponsible lending by our banks, we were told about the credit card debt that we had each accumulated; we were told about the large mortgage multiples that had been introduced and the sub-prime mortgages. Furthermore, we were told about how all these various debts were securitised into ‘junk bonds’ that had found their way into the reserves of most of our banks. However, as someone who has in the past been a financial adviser and who is familiar with the credit risk assessment systems employed by major banks in the UK, these explanations, with the inference that virtually everyone in banking and finance, and virtually every consumer across the Western world was at least partially to blame, don’t stand up to scrutiny.

Firstly, while there was over a period of at least two to three decades a loosening of credit restrictions in the UK, and while the total of both national and consumer debt was by 2007 higher than at any previous time in our history, there did not exist at that time, the kind of ‘NINJA’ loans that analysts have since identified, there has not been a massive wave of loan defaults in this country and certainly nothing has happened on the domestic consumer front that could have been blamed for the collapse of Northern Rock and the demise of Bradford & Bingley and Halifax, Bank of Scotland Group (HBoS).

The roots of the Credit Crunch go back much further than anyone in authority has so far been prepared to admit and they go back to one particular source, the USA.

NINJA Loans & ‘Sub-Prime’

‘NINJA’ is an acronym standing for ‘No Income, No Job, or Assets’, and this terms signifies a kind of home loan that was not available here in Europe, but which was widely made available in the USA to people who were not required to substantiate the income they claimed, who were not required to substantiate the employment they claimed and who were not required to have any assets that might otherwise have been required as collateral in order to establish their credit worthiness for the loans in question.

In order to explain why ‘NINJA’ loans were a feature of the US housing market, we need to study a little history.

The Great Depression ‘ Fannie Mae’ & ‘Freddie Mac’

Following the Great Depression of the 1920s it became apparent to government in the US that many communities were suffering from a lack of credit availability.

In those days, many rural communities and small towns had their own local, one branch banks and because of their lack of resources, dealing with only the financial needs of a small, relatively poor farming community, these banks followed a very strict policy of financial probity, operating on a mutual basis, much as building societies have traditionally done in the UK. Consequently as these communities struggled to recover from the Great Depression there was often a greater demand for credit facilities than the small town banks could provide, and this tended to hinder economic recovery.

In 1938, the Federal National Mortgage Association or ‘Fannie Mae’ as it become known, was formed as a government agency to create liquidity and expand credit availability in the mortgage market.

Fannie Mae would ‘buy’ mortgage debts from small town banks, package them up and sell them on to merchant banks as debt based investments. This practice relieved the small banks in rural areas of their debt burden and gave them fresh money that they could make available to new borrowers, thereby giving a greater number of people the opportunity of home ownership.

This policy was very successful because the banks still applied strict lending criteria and in the main were only lending to responsible, overwhelmingly White customers who had been raised in a culture that fundamentally disapproved of borrowing and indebtedness unless it was absolutely necessary and which had a strong ethic of paying off one’s debts promptly.

In 1968 Fannie Mae was converted into a private shareholder-owned corporation to take it off the government’s balance sheet, but this move was more cosmetic than substantial as Fannie Mae continued to carry an implicit government guarantee so that if or when it failed, taxpayers would bail it out. A competitor to Fannie Mae was also created 1970, the Federal Home Loan Mortgage Corporation otherwise known as ‘Freddie Mac’. ‘Freddie’ and ‘Fannie’ subsequently competed in buying mortgages from loan providers, and in repackaging and selling the mortgages on to investors in what became known as the ‘secondary mortgage market’.

ACORN

The Association of Community Organizations for Reform Now (ACORN) was also formed in 1970. It is a not-for-profit, so called non-partisan social justice organization with national headquarters in New York, New Orleans and Washington, D.C. and has since become the USA’s largest grassroots community organization of ‘low and moderate income people’ with over 400,000 member families organized into more than 1,200 neighbourhood chapters in 110 cities across the USA.

In the US, the term ‘low and moderate income people’ is a euphemism for ‘black and minority ethnic’ people, and while ACORN does ostensibly represent the interests of poor white people also, the graphics used on its website (www.acorn.org) until quite recently made it obvious that it was, in the run-up to the Credit Crunch and for some time afterwards, primarily a civil rights group acting almost exclusively in the interests of the Black and Hispanic communities. Since the Credit Crunch the website has been given a racially sanitising make-over and is now almost devoid of the tell-tale graphics.

ACORN was co-founded by Gary Delgado and Wade Rathke, both ex-organisers of the left-wing National Welfare Rights Organization. Rathke is also an ex-member of SDS (Students for a Democratic Society) a student Marxist group and part of the culturally Marxist, radical New Left movement that formed in the US during the post war period.

In 1977, the ‘Community Reinvestment and Home Mortgage Disclosure Act’ (CRA) was signed into law by President Jimmy Carter. The CRA mandated that each banking institution be evaluated to determine if it is meeting the credit needs of its entire community. The purpose of this legislation was to ensure that ‘under-served populations’, another euphemism for the Black and minority ethnic communities, could obtain credit and loans on terms sufficient to boost home ownership rates amongst such groups.

Then in 1980, ACORN and other community organizations, under the auspices of the CRA began to accuse banks of ‘redlining’, i.e. of discriminating against minorities in mortgage lending. They argued that home ownership amongst minority communities was significantly lower than amongst the White majority and it was claimed, this was evidence that banks operated lending policies that were racially discriminatory.

In 1989, Congress dominated by the Democrats, amended the CRA in order to force banks to collect racial data on mortgage applicants, with the intention that in so doing, the institutions would provide the likes of ACORN and federal regulators with the statistical ammunition needed to bring about change in banking practices vis-à-vis lending to Black and other ethnic minority applicants.

Three years later in 1992, under pressure from ACORN and in an effort to appear compliant and in tune with the spirit of legislation in this area, the Federal Reserve Bank of Boston published a study indicating that black and Hispanic mortgage applicants in the Boston metropolitan area were roughly 60 percent more likely to be turned down for a home loan than were Whites. ACORN’s Marxist political outlook would not accept that minority loan applicants were rejected more frequently for legitimate and prudent banking reasons. While the banks argued that Black and other minority applicants on average had lower incomes than White applicants; rarely had a deposit to put down when purchasing a home; had less stable employment histories; and had worse credit histories than White applicants on average, and that because of these legitimate reasons they presented a greater risk of mortgage default and were less attractive prospective borrowers, ACORN dismissed these factors amid allegations of ‘institutional’ racism.

Barack Obama & HUD

During this period, Barack Obama was a newly qualified civil rights lawyer involved in community activism with ACORN. He was engaged by ACORN to provide training for their community activists and in 1994 acted as attorney representing one Calvin Robertson in a ‘Class Action’ lawsuit against Citibank. The bank was accused of systematically denying mortgages to African-American applicants and others from minority neighbourhoods. In this case, Obama and four other lawyer associates from his law firm jointly attacked Citibank and using a premise introduced by the Department of Housing and Urban Development (HUD) under the Clinton administration, that where the application of contractual terms and conditions on average produces differential outcomes for different racial groups, such contractual terms constituted evidence of racial discrimination even if such terms and conditions had been applied fairly and with no intent to discriminate. ‘Disparate impact’ as it became known, was regarded as evidence of discrimination.

Obama and his colleagues won the class action lawsuit, which cost Citibank a massive amount of money paid in compensation to the plaintiffs, and which was one of a number of similarly highly publicised cases against banks and lending institutions instigated by ACORN with the support of HUD during the 1990s. These lawsuits served as a warning to mortgage providers that their records with the regulators needed to show ‘equality of outcomes’ and not just ‘equality of opportunity’. In short, where minority applicants were found to be less successful than white mortgage applicants when lending terms and conditions were applied even handedly, lenders were required to relax their lending criteria for minorities until a parity of outcomes was achieved.

As a consequence of this mounting duress, mortgage lenders began to provide home loans to low-income households and especially to minority customers on increasingly generous, some might say irresponsible terms. In the five years from 1994 to 1999, the number of African-American and Latino homeowners increased by two million.

During the early to mid-90s activists and community organisers from ACORN conducted a campaign of ‘direct action’ aimed at intimidating banks and more specifically their staff, to increase lending to minority applicants. Organisers led mobs into bank premises and turned up at bank employees’ homes in order to physically intimidate bank staff and their families in a campaign that was directly comparable to the kind of low grade ‘terrorism’ conducted by animal rights activists against the proprietors and employees of Huntingdon Life Sciences during the same period.

In 1995 changes were made to the Community Reinvestment Act to establish a system by which banks were rated according to how much lending they did in low-income (Black and Hispanic) neighbourhoods. A good CRA rating was necessary if a bank wanted to get regulators to approve mergers, expansions and even new branch openings. A poor rating could be disastrous for a bank’s business plan. It was a different kind of coercion, but just as effective.

Throughout the 1990s and beyond, the Department of Housing and Urban Development (HUD) pressured Fannie Mae and Freddie Mac to increase the percentage of mortgages they purchased from primary lenders that were derived from loans to borrowers earning below the median income for their area, i.e. Black and Hispanic borrowers. Initially the requirement was set at 42% but it was increased to 50% in 2000 and 52% in 2005.

In April 1998, Andrew Cuomo, President Clinton’s Secretary of Housing and Urban Development announced an ‘affirmative action’ settlement with Accubank, a Texas bank. HUD forced Accubank to provide 2.1 billion dollars in risky mortgages to low-income Americans.

George W Bush

When George W. Bush addressed a White House Conference on Increasing Minority Homeownership at George Washington University on October 15th 2002, he said, “… in America today two-thirds of all Americans own their homes, yet we have a problem here in America because fewer than half of the Hispanics and half the African Americans own their home. That’s a homeownership gap. It’s a gap that we’ve got to work together to close for the good of our country, for the sake of a more hopeful future.

“We’ve got to work to knock down the barriers that have created a homeownership gap.

“I set an ambitious goal. It’s one that I believe we can achieve. It’s a clear goal, that by the end of this decade we’ll increase the number of minority homeowners by at least 5.5 million families… And it’s going to require a strong commitment from those of you involved in the housing industry …”

Bush went on to say, “Last June, I issued a challenge to everyone involved in the housing industry to help increase the number of minority families to be home owners. And what I’m talking about, I’m talking about your bankers and your brokers and developers, as well as members of faith-based community and community programs. And the response to the homeowners challenge has been very strong and very gratifying. Twenty-two public and private partners have signed up to help meet our national goal. Partners in the mortgage finance industry are encouraging homeownership by purchasing more loans made by banks to African Americans, Hispanics and other minorities.”

“Freddie Mac recently began 25 initiatives around the country to dismantle barriers and create greater opportunities for homeownership. One of the programs is designed to help deserving families who have bad credit histories to qualify for homeownership loans.”

As we can see from the above, the roots of the sub-prime lending crisis and the subsequent ‘Credit Crunch’ extend back over more than three decades to the Carter Presidency and the 1977 Community Reinvestment Act. Successive Democratic and Republican administrations having absorbed the tenets of cultural Marxism wanted to create a situation in which there would be ‘equality of outcomes’ between the various ethnic and racial groups in their endeavours to buy their own homes, not just ‘equality of opportunity’.

The effect of all the pressure placed upon American banks and mortgage-lending institutions was that they further relaxed already previously relaxed lending criteria where Blacks and minorities were concerned, in order to accommodate the political aims of the federal government and left-wing minority advocacy groups:

• Gradually reducing the requirement for borrowers to place a deposit as a down payment when buying a home until eventually 100% advances were commonplace
• Making low-start and deferred interest payment mortgages available to low income non-professional applicants who had no prospect of a significant increase in income in the foreseeable future
• Not taking up employer’s references and by allowing low-income applicants to self-certify that they are employed and that they have the income necessary to afford the loans applied for and
• Not taking up credit references, so that even low-income applicants with horrendous histories of previous loan defaults could still obtain loans.

In short, US banks invented the NINJA loan in direct response to the political pressures, the commercial duress and the incentives being applied. The banks found that they could make full blooded ‘NINJA’ loans to poor Black and Hispanic applicants almost with impunity as they were able, through the facility provide by Freddie Mac and Fannie Mae, to relieve themselves of any adverse financial liability that would come from the ‘Tsunami’ of loan defaults and repossessions that would inevitably follow from such a reckless policy.

The Securitisation of Bad Debt

The banks were able to package up the highly risky ‘sub-prime’ mortgages and sell them on, together with the consequent financial liabilities to Freddie Mac and Fannie Mae. In turn, Freddie and Fannie were able, in conjunction with Bear Stearns, which was one of the largest investment banks in the US, to re-package the sub-prime mortgages into debt-based securities and off-load them as ‘low-risk’ SDIs (Structured Debt Investments) to unsuspecting banks around the world.

The Market Goes Pear Shaped

All was well for a while as property prices continued to rise in the US during the late 1990s and early 2000s. As borrowers later began to default on their mortgage repayments however, the investment incomes that should have been derived from the supposedly ‘low-risk’ debt-based securities sold by Freddie Mac and Fannie Mae to unsuspecting banks around the world did not fully materialise and alarm bells started to sound. Happily, when repossessions took place, the proceeds from the re-sale of the properties involved were initially sufficient to recover all of the income arrears as well as the capital loaned.

In 2006 however, the property boom in the US came to an end and property values started to fall. Re-sale proceeds were suddenly no longer sufficient to cover the financial losses derived from loan defaults and the purchasers of the debt-based securities that Fannie and Freddie had sold them via Bear Stearns found that instead of low risk, AAA rated securities, they had been effectively sold ‘junk’ bonds that were far lower in value than had previously been imagined.

In effect, the sale of these supposedly ‘low-risk’ investments composed of securitised ‘high-risk’ mortgage debts was fraud on a massive scale, in which the worldwide customers of the Western banks who bought the dodgy investments were left to absorb the financial losses suffered as a result of institutionalised and politically motivated irresponsible lending for the purposes of promoting home ownership among Blacks and ethnic minorities.

The Liquidity Crisis

Throughout most of the world, banks operate on a system known as ‘fractional reserve’ banking. This means that banks are able to lend far more money than they actually have deposited with them and M3 the total value of all bank notes and coins and bank deposits is massively greater than M0, the total of all of the money that physically exists in the form of notes and coins.

Banks have tended to hold as their reserves not just cash, but also ‘near money’, i.e., Commercial Paper, Treasury Bills, Government Stocks and other debt-based, fixed-interest securities and banks around the world had purchased the SDIs (Structured Debt Investments) sold by Fannie and Freddie via Bear Stearns and were holding these amongst their reserves. Suddenly their reserves were no longer worth anything like the values that had previously been placed upon them and banks all around the world suddenly realised that they had lent massively more than they should have done based upon prudent liquidity ratios and compared to the new lower values of their reserves.

The consequence of this realisation was threefold;

Firstly, the banks needed to halt further lending and call in as many loans as possible in an attempt to re-establish healthy liquidity ratios;

Secondly, no-one wanted to purchase further debt-based ‘near money’ from other financial institutions for fear of making matters worse by buying more concealed junk bonds; and

Thirdly, investors began to realise that many banks had inadvertently become technically insolvent and were in danger of financial collapse. Investors therefore began selling shares in banking institutions and investment companies like AIG who were known to have acquired large quantities of potentially ‘toxic’ SDIs.

Bank Failures, Rescue Packages & the ‘Bail-Out’

Bear Stearns, Freddie Mac and Fannie Mae were widely recognised as being the source of the ‘toxic debt’ that was at the heart of the financial crisis and as other institutions shunned them and investors began selling their stock, Bear Stearns collapsed and Fannie and Freddie had to be rescued by the federal government.

Here in the UK, Northern Rock was well known as a bank that catered for the sub-prime end of the market and unfortunately for Northern Rock, although they had not indulged in sub-prime lending with anything like the recklessness of the American banks — they had certainly never offered NINJA loans — however they were tarred with the same brush and institutional investors suddenly stopped buying their packaged mortgage investments. This meant that Northern Rock had no way of raising new money to lend and as their business model relied upon a constant turnover of money generating new fee income, they ran into immediate serious financial difficulties and had to be rescued by nationalisation. The story at Bradford & Bingley was very similar.

Realising that the financial standing of almost all banks had been seriously damaged and that share prices in the banking sector were going to fall come what may, hedge funds began short selling bank stocks, targeting those banks that they viewed as the weakest and whose stock was likely to fall the fastest thereby presenting the greatest opportunity to profit from this misery. Thus Lehman Brothers were driven into liquidation and HBoS was weakened sufficiently to require rescue by Lloyds TSB and ultimately the British taxpayer.

Something had to be done to correct the liquidity crisis, to provide banks with additional capital so their liquidity ratios would return to normal and rectify their technical insolvency. Governments on both sides of the Atlantic felt the need to use public money to prop up our failing financial institutions, but treasury coffers were bare and so a dilemma was created. Governments needed to borrow enough money to bail out their banks, but the banks had no money to lend to governments because they were the one’s in trouble and needing help as a result of the liquidity crisis.

Financial Sleight Of Hand & The National Debt

As stated earlier, the entire banking system of the Western World operates on the principle of fractional reserve banking under which and within certain limits imposed by liquidity ratios, commercial banks are able to create money out of nothing.

Less well understood is that when governments wish to increase the money supply, instead of instructing the Mint to print more bank notes, they usually ‘borrow’ the new money into existence. Therefore while our banks were unable to cure their liquidity crisis on their own because their reserves were no longer sufficient, with the help of the government they could conduct a feat of near magic, creating more money by financial sleight of hand.

When governments ‘borrow’ money into existence, they issue Treasury Bills to the value of the amount by which they wish to increase the money supply. These Treasury Bills are a promissory note issued by the government stating that in return for a capital sum of say £500billion, the government promises to pay interest on that sum for a term of years and to repay the capital amount at the end of that term. The Treasury Bills are given to the banks and in exchange, the government’s current account with their central bank is credited with £500billion. This is money that has been conjured out of nothing and created by making a simple electronic data entry in the central bank’s computer. Following such a transaction, the government then has £500billion to spend and this is £500billion of the same type of ‘electronic money’ that constitutes the difference between the M0 and M3 money supplies, vast billions of pounds of which already exists and ‘circulates’ happily within our economy just so long as vital liquidity ratios are maintained.

Virtually all Western leaders and their Treasury advisers, including the Greek government, decided that the way out of the financial crisis was to ‘borrow’ hundreds of billions of Dollars, Pounds Sterling and Euros etc., by issuing Treasury Bills or the equivalent. They used the ‘money’ created to buy shares in the banks and the hundreds of billions of Dollars, Pounds and Euros etc. worth of Treasury Bills were used by the banks to supplement their depleted reserves and in doing so re-establish for a while, equilibrium in the world of finance.

As with all borrowing however, the ‘fly in the ointment’ is that borrowed money has to be repaid, and despite the fact that much of the borrowed money was conjured out of nothing, the stability of the financial world relies upon all debts, including those comprised of ‘magic money’ to be repaid with interest, with real money that has been earned by our honest labour and paid to the various national treasuries in taxes.

Quantitative Easing

Needless to say, the massive bank bail-outs that took place as a result of the Credit Crunch and the massive loans that governments took on in order to make those bail-outs, have placed a massive strain upon the economies of various nations and have driven some to the very brink of bankruptcy, including Britain, the USA and Greece. Where Britain and the USA are concerned however, we have control of our own currencies and as bankruptcy loomed ever closer, our government were able in 2008, and on a number of occasions since, to relieve the crushing weight of our respective debt burdens by indulging in Quantitative Easing (QE), in which our governments simply printed bank notes debt free, and used these to pay off some of our debts, bringing the overall debt burden down to manageable levels.

The Greeks on the other hand were not able to do this, as they are part of the Eurozone and are unable to gain the relief from debt that QE provides without getting the agreement of the other twenty-seven member states of the EU, including Germany, where the European Central Bank is located. QE can only be employed by a government if it has its own currency with its own central bank and the freedom to act as it wishes in terms of fiscal policy. Greece no longer has any of these, because it is part of the Eurozone. The currency in Greece is the Euro, their de facto central bank – the European Central Bank – is outside of Greek control, and the Greeks have surrendered their national sovereignty through their membership of the European Union and the Euro-zone.

Therefore, while the Greeks may or may not have been marginally more financially irresponsible than other nations, their current financial crisis does not follow from that. It comes as a direct consequence of the 2007-08 Credit Crunch, which was in turn a direct consequence of a policy of social engineering in which successive American governments, through policies of coercion, blackmail and fraud, tried to boost ethnic minority home ownership in the USA at the expense of everyone else.

The Greek Prime Minister Alexis Tsipras has been placed in an invidious position in which he is being urged by his EU counterparts to subject his people to extreme austerity measures in which they will have to pay the price for the high-level financial con-trick that was played on the peoples of the West and accept a reduced standard of living, or in which he will be forced to withdraw Greece from the Euro-zone and re-issue a Greek national currency in a return to the Drachma.

Common sense and natural justice suggests that he should do the latter, however, how that would impact upon Greek membership of the European Union and how it would impact upon the nations remaining within Europe and the Eurozone remains to be seen. What is ironic however, is that while Tsipras is a left-wing politician, circumstances and the dire plight of his people are currently forcing him to adopt an increasingly nationalistic position, economically speaking at least.

By Max Musson © 2015

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