What really was behind the financial crisis

Richard McCord, Henderson

Monday, April 26, 2010 | 2:01 a.m.

I’m a portfolio manager in the banking industry, and as Congress and President Barack Obama go about demonizing the big banks to help pass new legislation that will do nothing to protect consumers or prevent another meltdown, this is a good time for us to recall the actual cause of the financial crisis.

The crisis was the ultimate consequence of politicians from both parties pursuing the objective of greater home ownership. In pursuit of that objective they encouraged Fannie Mae and Freddie Mac to increase their guarantees of subprime mortgages.

With a wink and a nod, they let Fannie and Freddie know that the taxpayers would pick up the tab if need be. At the same time, they used the Community Reinvestment Act to coerce the banks into making more subprime loans.

The banks needed to offload those risky loans, and they found willing buyers in the securities markets, who were attracted to the triple-A ratings awarded by the credit rating agencies based on Fannie and Freddie guarantees. The foundation for the house of cards was in place.

Easy money for mortgages spawned the biggest housing bubble in history, building the house of cards, and its collapse was triggered when the Fed raised short-term interest rates, on which adjustable mortgage rates were based.

Instead of more regulations that will only make our banking system less competitive and create more complacency, what is needed is for voters to tell politicians to stay out of the mortgage business.