by Ralph Brauer | 12/17/2008 10:20:00 PM

Carter Glass

Part III of IV

In 1997 the FDIC published an imaginary interview with Carter Glass that predicted what would occur with the repeal of the Glass-Steagall Act two years later.
Banks lent their names, prestige and tradition of sound banking operations to these affiliates, and on that basis did people invest and transact business with them. When calamity struck, not all bankers felt a responsibility to the citizens they had enticed.

This imaginary interview would prove especially prescient about people of color.

With Glass-Steagall out of the way, mainstream banks began getting into the loansharking business in a big way. In a paper for the St. Louis Federal Reserve System, Souphala Chomsisengphet and Anthony Pennington-Cross point out:
The market share of the top 25 firms making subprime loans grew from 39.3 percent in 1995 to over 90 percent in 2003. Many firms that started the subprime industry either have failed or were purchased by larger institutions.

A 1999 article “Banks Take Over Subprime” in National Mortgage News captures how the repeal of Glass-Steagall changed the market:
Among the top 25 sub prime lenders in the third quarter of 1999, ten are owned by either a bank or thrift. A year ago, just three of the top 25 were owned by depository institutions.

The myth persists that the victims of this boom in loansharking ended up in that position because they could not have qualified for other loans. Yet data from a 2002 Fannie Mae report dispels this notion. It found:
Credit quality alone therefore does not fully explain the extreme reliance of black households on the subprime market. Further research by Freddie Mac reports that as much as 35 percent of borrowers in the subprime market could qualify for prime market loans. Fannie Mae estimates that number closer to 50 percent.

There are others who have confirmed that the myth is false, most notably the Wall Street Journal, whose analysis of credit scores is one of the most widely-used sources. Authors Rick Brooks and Ruth Simon reported that the study of more than $2.5 trillion in subprime loans made since 2000 showed:
In 2005, the peak year of the subprime boom, the study says that borrowers with such credit scores got more than half -- 55% -- of all subprime mortgages that were ultimately packaged into securities for sale to investors, as most subprime loans are. The study by First American LoanPerformance, a San Francisco research firm, says the proportion rose even higher by the end of 2006, to 61%. The figure was just 41% in 2000, according to the study.

The repeal of Glass-Steagall did not change one fact--the prime victims of predatory lending remained people of color. A 1999 Woodstock Institute Report on lending in Chicago noted:
The restructuring of financial services industries and the failure of federal and state regulators to respond to these changes have increased the ability of certain lenders and brokers to exploit homeowners, particularly in minority and modest-income communities.

In October 2002, ACORN (Association of Community Organizations for Reform Now) released “The Great Divide,” a report on 2001 national loan data for 68 metropolitan areas. The report found continuing and even growing racial and economic disparities in home mortgage lending. Nationally, African‑American mortgage applicants faced rejection 2.31 times more often than white applicants, and Hispanics were denied 1.53 times more often than whites.

For those who hold an economic or class-based analysis of the subprime market targeting people of color, the ACORN study is an eye-opener, for it found income made little difference. ACORN notes in Chicago African‑Americans earning more than $84,600 had 2.06 times more likelihood of being turned down than whites earning less than $28,450. The report said:
The rise in subprime and predatory lending has been most dramatic in minority communities. Subprime lenders account for half, 51 percent, of all refinance loans made in predominantly black neighborhoods, compared to just 9 percent of the refinance loans made in predominantly white neighborhoods. Subprime lending, with its higher prices and attendant abuses, is becoming the dominant form of lending in minority communities.

The Community Reinvestment Association of North Carolina adds their study to the evidence:
In North Carolina, the incidence of high cost loans originated by African-American borrowers are more than four times (4.15) greater than for whites in North Carolina.

Foreclosed: State of the Dream 2008 by United for a Fair Economy has a graph that shows the pattern

The study goes on to point out:
We estimate the total loss of wealth for people of color to be between $164 billion and $213 billion for subprime loans taken during the past eight years. We believe this represents the greatest loss of wealth for people of color in modern US history.

The banking industry has tried to explain these figures in a variety of ways, the main one being the old dodge of shifting the argument from race to class, but the North Carolina study and others refute this theory.
We also staunchly argue that continuing discrimination and corporate practices are a factor in the loan pricing disparities by race. The history of racism in finance continues to play a role in access and cost of credit.

In 2007 testimony before the House Financial Services Committee Jim Campen, Executive Director Americans for Fairness in Lending, reported on results of an ongoing study his group is conducting in the Boston area:
The black/white denial rate ratio, which averaged about 2.0 during the 1990s, was 2.34 in 2005, while the Latino/white denial rate ratio, typically about 1.5 during the 1990s, was 2.07 in 2005.

In the highest income category, consisting of borrowers with incomes above $150,000, black applicants experienced a denial rate of 25.9%, almost triple the 8.9% denial rate experienced by their white counterparts; the 20.7% denial rate for Latinos with incomes above $150,000 was 2.3 times greater than the white rate.

I have focused my analysis on mortgage lending in Massachusetts, with particular emphasis on the city of Boston and the Greater Boston area, but I believe that a detailed examination of mortgage lending patterns in other cities and states would reveal qualitatively similar findings.

Again, a chart tells the complete story. Note what is essentially a flat line as income increases. The message to people of color is clear: not matter how much you make you will face discrimination in getting a mortgage.

In short, not only did the repeal of Glass-Steagall open the floodgates for banks to enter into loansharking, after the repeal the discrimination against people of color became worse!

Another graph from the Center for Responsible Lending shows the impact of discrimination:

Michael Hudson found that Citi was right in the middle of this:
In 1999, the company agreed to pay as much as $2 million to settle a lawsuit accusing Commercial and American Health & Life of overcharging tens of thousands of Alabamans on insurance. Beasley, Allen, claim[ed] nearly 1,500 clients in Alabama, Mississippi, and Tennessee who had Commercial Credit or CitiFinancial loans.

In 2002 Citi bought Associates First Capital, a sleazy Texas firm that had paid over $33 million in settlements to Georgia and North Carolina lawsuits. Martin Eakes of North Carolina’s Self-Help Credit Union even directly challenged Citi head Sandy Weill at a stockholders’ meeting in April 2001:
No company that values its good name would have bought Associates.

In the fallout over the merger and Citi's own subprime branch CitiFinancial (which had been created from the original Weill loansharking operation), Citi agreed to a $240 million settlement with the Federal trade Commission. Hudson noted that despite all the big numbers, each victim ended up with an average of $120 and the cost to Citi was two week's profits.

Jodie Bernstein, director of FTC's Bureau of Consumer Protection, said Citigroup's newly acquired affiliate-Associates First Capital-engaged in a wide variety of deceptive practices:
They hid essential information from consumers, misrepresented loan terms, flipped loans and packed in optional fees to raise the costs of the loans.

And where was Robert Rubin during all this?

The True Impact

This essay has featured an unusual number of quotes, charts and statistics, which at times march down the page one after the other. There are editorial and rhetorical reasons for this: editorially I have always believed in quoting directly from the source when writing on the web so readers can see what someone said and rhetorically I wanted readers to feel the weight of this evidence piling up.

For that is exactly the situation people of color find themselves facing. The real implications of the mortgage crisis press down on families and communities, suffocating dimensions of life that white suburbanites take for granted--good schools, easy access to shopping, and, most of all, choices.

We need to remember that behind the numbers lie people. Their personal experiences testify to the real consequences of the problem. One story comes from Michelle Allison of the NAACP’s Merced Branch in California, who was locked into a prepayment loan and now owes $100,000 above what she initially requested:
It’s like being over a barrel. I just wanted to be treated fairly and receive the best service. I was not given options or enough information for me to make an alternate decision. I want to get back to where I was financially before I received my loan.

The AARP has another story:
Betty Cooper was an older, wheelchair-bound African-American widow, living on a monthly pension. She experienced a bait and switch of her interest rate that resulted in unaffordable monthly payments. In addition, she was charged a hidden broker fee that cost her a steep 8 percent of the mortgage, and an unexplained balloon mortgage payment.

Multiply stories like these by the numbers in the statistics above and you have some idea of the trail of misery that has been left by loan sharking in communities across the country.

The Web of Deceit

The real shock is that many of these studies data back to as long as a decade ago, with each subsequent study piling on more evidence to support the previous ones. After much time spent reading all this evidence you begin to wonder if anyone else has read it. Yet some of the studies such as the North Carolina one were inserted into the Congressional Record where they lie today, largely unknown to the general public.

This is evidence of discrimination on a scale resembling the mountain of evidence marshaled for Brown v Board or the abuses of Reconstruction or the evils of slavery. In 1944 Gunnar Myrdal referred to the problem of race as an "American dilemma." Sixty years later the dilemma has become quite simply one of economic survival and with it the survival of our democratic society.

Sandy Weill built a financial empire on loansharking. Even long after Citi had mergered and acquisitioned its way to the very top of the American financial industry, Citi continued to engage in loansharking. And they are far from alone. Bank of America recently agreed to a settlement that will probably be the largest in history over the loansharking activities of its subprime affiliate, Countrywide.

Weill could not have done this alone. Instead he had help at the highest levels, including the three Congressmen whose names are on the bill that repealed Glass-Steagall to then Secretary of the Treasury Robert Rubin to the many economists and policy wonks who were gung-ho for securitization in all its manifestations. Rubin joined Citi shortly after leaving Treasury to become one of its most trusted advisors. Did he know about the loansharking or was he looking the other way?

Given the huge increase in subprime mortgages and the role they played in Citi's portfolio along with the mountain of evidence showing their disproportionate impact on people of color it is hard to believe anyone in the financial industry from regulators to bankers was not aware of this. Yet they chose not merely to look the other way, but to allow it to continue until the elephant in the room became too big to ignore.

This is what researchers mean when they speak of "structural racism," for it is not merely a matter of personal prejudice. Many of the people involved--including Sandy Rubin--would vehemently deny that they are racists. The ugly reality of structural racism is that like termites infecting a house it gnaws away at institutions until they weaken and threaten to topple.

Right now the entire American economy may topple because it is infected with the termites of structural racism. In a recent paper Rick Cohen writes:
The subprime crisis carries the seeds of structural racism not from discriminatory intent, but from ostensibly racially benign or supposedly ameliorative policies and programs. This is a difficult message for the nation to hear. The pushback has been strong.

Jim Campen agrees:
The enormous racial disparities in mortgage lending and the dramatic shrinkage of the portion of total mortgage lending that is subject to evaluation by bank regulators under the provisions of the Community Reinvestment Act (CRA) indicate the need for major changes in public policy toward the mortgage lending industry.

The final installment of this series examines some of these policy changes.

Continue to Part IV

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Blogger Unknown on 12/18/2008 8:00 PM:

I've been too busy to comment before this (yes, on my own blog!), but I want to let you know how eye-opening this series has been for me, a middle-class white boy who grew up believing that racism in this country was dead. I've moved a long way from that position since entering grad school (particularly after reading this book), but stories like this never cease to amaze me. That quote from the ACORN report should be emblazoned on the wall of every federal bureau in America. People who think we live in a post-racial society -- like I used to, unfortunately -- need a real wake-up call. Thanks for providing one here.