Even though I’ve seen Elizabeth Warren repeatedly make masterful use of her very limited time during Congressional hearings to interrogate witnesses, I can’t recall her ever getting angry. But she did yesterday with a completely deserving target, and if anything, her display of ire made her more, not less effective.
The target was one Leonard Chanin who associate director of the Division of Consumer and Community Affairs at the Federal Reserve in the runup to the crisis. As we managed to ascertain by a peculiar bit of synchronicity in early 2007, the Fed then was deeply devoted to the idea that all mortgage fraud was being perpetrated against banks. And it became apparent shortly thereafter that even the bank regulator that is normally the most cronyistic, the Office of the Comptroller of the Currency, took its responsibilities under the Home Ownership and Equity Protection Act, which was designed to curb abusive practices with high fee, high interest rate mortgage loans, far more seriously than the Fed did.
And what was Chanin’s excuse? “No one presented us with statistically valid data.” You’ll see what Warren does with that one.
This excerpt from a May 2007 post gives an idea of how fiercely anti-borrower the Fed’s perspective was:
I happened to meet an official in the Fed’s Banking Supervision and Regulation division at a cocktail party this evening and chatted him up. He helped brief Roger Cole before met with the Senate Banking Committee last month to defend the Fed’s conduct regarding subprimes, so he is up to speed on this topic…
I was taken aback at what this individual said, and while he was not speaking in an official capacity, I have no reason to think his views were unrepresentative.
His view was that the Fed was not at all at fault in the subprime matter. He said that he disagreed with Roger Cole’s statement that in hindsight, the Fed could have done better. He said the Fed had enforced the laws that were in effect at the time (query why then did the OCC read and enforce HOEPA differently?).
He also asserted that there was a tremendous amount of consumer fraud, that the FBI was pursuing a lot of cases (if so, I wonder why this hasn’t been reported, since people like the Fed and the subprime originators would have every reason to present the institutions, rather than the consumers, as victims). In the narrow sense, there clearly was a lot of fraud, since in the “no doc” loans, a very high proportion of borrowers overstated their income by large amounts. But the implication of the Fed official’s statement was that the fraud was “fraud for profit” meaning the intent was to make off with money, as opposed to “fraud for housing” in which one gets to live in a house one shouldn’t on paper have. In “fraud for housing” a sensible lender will come out whole (even in a no-doc scenario, if the buyer makes a high enough down payment and the lender gets a realistic appraisal, it will come out fine even in a foreclosure, unless the local housing market falls out of bed). So despite the Fed guy’s aggrieved tone, it’s hard to see the lenders as victims.
Equally disturbing was his confidence that the markets were working fine. He noted that several banks had taken earnings hits, and that credit issuance was being tightened. He also said that subprimes had enabled a lot of people to buy housing who otherwise couldn’t have. I mentioned predatory lenders and he dismissed the Ameriquest case, in which the nation’s biggest home lender to people with poor credit agreed to pay $325 million to settle charges of fraud and overbilling. Many observers deemed this payment to be trivial when compared to the harm done to borrowers, some of whom lost their life’s savings. Only after some pressing did he accept the point that the products were difficult even for financially literate people to understand, and better disclosure was needed.
This “blame the poor” attitude seems almost Victorian. In the modern world, the rich need to present their wealth as legitimate, as the product of talent and hard work, as opposed to having the deck stacked in their favor. As a corollary, therefore, the poor have to be poor because they deserve it. Otherwise, the whole “wealth makes right” construct fails.
And you’ll see in due course why Warren is so confident about her dim view of this witness.