"A lot of the politicians are doing the three-monkey thing—hear no evil, see no evil, speak no evil—because they're so afraid of political correctness. (Jim Pendergraph, former Sheriff, Mecklenburg County, North Carolina)

A lot of politicians and, now we know, a lot of Wall Street CEOs are "doing the three-monkey thing." It was their hear-no-evil, see-no-evil, and, above all, speak-no-evil attitude towards lowered lending standards — to close the white-minority "home ownership gap" — that caused the immense destruction of wealth of recent months.

Contemplating the wreckage brings to mind another gap, the white-minority "achievement gap." Attempts to close this gap have also produced a spectacle of destruction, if one knows how to look. Let's take a glance before proceeding to the Wall Street variation.

My "Political Correctness and Textbooks" and "Unintended Consequences of No Child Left Behind" are snapshots. Assimilation, the Achievement Gap and 'White Guilt,' Part 1 and Part 2, Universities, offer assorted details. Forgotten victims are teachers. This comment appeared under one of the perennial reports on the achievement gap:

"As a long-term veteran teacher of the Oakland schools, I can only say that I completely dread the likely professional development which is surely to come, in which white teachers will again be told how culturally insensitive we are and how we fail at teaching. I have been hearing this (it's nothing new) for my entire tenure of nearly two decades in the district. I have been called a racist for every imaginable reason . . . except actual racism. Both black parents and students assume racism on the part of white teachers, and it's up to you to prove otherwise. Meanwhile, if I try to address issues such as absenteeism, illiteracy, or failure to do homework [that is, standards], I am taken to task by students and their families. The real story that should be investigated is the endless racism TOWARDS white teachers in the schools. Almost every white teacher in Oakland has been subjected to treatment that would be headline news if it were black teachers being treated this way. Welcome to OUSD!" ("Summit called to address racial disparities in academic performance," San Francisco Chronicle, November 12, 2007) (1)

To close "the home ownership gap," similarly deluded minds decided to target lenders — to increase their "cultural sensitivity" one might say. The subprime lending fiasco and the near-collapse of the financial system are the results.

Fortunately, sparking performances by key figures are on video. These glimpses of the arrogant and the foolish are fine background for digging into the critical details of this PC-produced debacle.

First, here's Andrew Cuomo, President Clinton's Secretary of Housing and Urban Development in an April, 1998 press conference, announcing 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. The latter five minutes of this eight-minute video features Barack Obama explaining his own efforts as community organizer working for ACORN to force banks to make high-risk loans. (2)

Next, watch President George W. Bush in 2002 cheerleading the attack on lending standards: seven-minute video. Excerpt: "...few(er) than half of the Hispanics and half the African Americans own the(ir) home . . . We've got to work to knock down the barriers that have created a home ownership gap. " Signal to bank regulators: ease up.

Saving the best, watch clips (nine minutes) of an October 2004 hearing of the House Subcommittee on Capital Markets, Insurance, and Government-sponsored Enterprises (GSEs). Watch Democrats harangue the director of the Office of Federal Housing Enterprise Oversight (OFHEO) for seeking stronger regulation of Fannie Mae and Freddie Mac. President Bill Clinton, in the final minute, blames Democrats for fighting regulation of Fannie and Freddie.

The videos give the gist of what's behind the market meltdown: not free markets, not deregulation. Delusional and/or corrupt social engineering brought disaster.

To make sense of slow-developing social catastrophes, a "time line" or "milestones" approach is helpful. I've used a milestones approach to show steps — legislation, court decisions — leading to today's immigration chaos. The concluding piece in that series, "Immigration Milestones: 2002: Cheap Banking for Illegal Aliens," features a marker that does double duty. It's also found on the path to financial turmoil. Let's retrace the journey:

1938 - The Federal National Mortgage Association, "Fannie Mae," is formed as a government agency to create liquidity in the mortgage market, that is, to buy mortgages from loan originators.

1968 - Fannie Mae is converted into a private shareholder-owned corporation to take it off the government's balance sheet. This is a charade. Fannie Mae carries an implicit government guarantee. If, when, it fails, taxpayers will bail it out.

1970 - The Federal Home Loan Mortgage Corporation, "Freddie Mac," is created to compete with Fannie Mae in buying mortgages from loan originators — and in repackaging and selling the mortgages to investors in the secondary mortgage market.

1977 - The "Community Reinvestment Act" (CRA) is signed into law by President Jimmy Carter. The CRA mandates that each banking institution be evaluated to determine if it has met the credit needs of its entire community. The purpose is to ensure that under-served populations can obtain credit, including home ownership opportunities.

1980s - ACORN (Association of Community Organizations for Reform Now) and other community organizations accuse banks of "redlining" — discriminating against minorities in mortgage lending.

1989 - Congress amends the Home Mortgage Disclosure Act to force banks to collect racial data on mortgage applicants. The 1989 legislation requires a four-tiered CRA rating system for banks: "Outstanding," "Satisfactory," "Needs to Improve," or "Substantial Noncompliance":

In the view of the current Chairman of Federal Reserve System, Ben Bernanke, the 1989 Act greatly increases the influence of advocacy groups on lending policies.

1992 - July - A Federal Reserve Bank of Boston study indicates that "even after controlling for financial, employment, and neighborhood characteristics, black and Hispanic mortgage applicants in the Boston metropolitan area are roughly 60 percent more likely to be turned down than whites." The study suggests racism is behind the higher loan denial rate.

1992 - A Democratic-majority Congress requires "that Fannie and Freddie increase purchases of mortgages for low-income and medium-income borrowers." Fannie agrees to "buy more loans with very low down payments — or with mortgage payments that represent an unusually high percentage of a buyer's income." (3)

1993 - Forbes Magazine queries Boston Fed Senior Vice President and Research Director Alicia H. Munnell on the default rates of black and white mortgage holders in the Boston Fed's 1992 study purporting to show that racism is behind the higher loan denial rate for blacks. The reporters learn that the default rates on loans of whites and minorities are equal. This indicates no discrimination, they point out to Munnell. "[That] is a sophisticated point," she replies. "You need that [lower default rates for blacks] as a confirming piece of evidence. And we don't have it."

Forbes: Did you ever ask the question that if defaults appear to be more or less the same among blacks and whites, that points to mortgage lenders making rational decisions?

Munnell: No . . . I do believe that discrimination occurs.

Forbes: You have no evidence?

Munnell: I do not have evidence . . . No one has evidence. (4)

1994 - Barack Obama represents Calvin Robertson in a lawsuit against Citibank "charging the bank systematically denied mortgages to African-American applicants and others from minority neighborhoods."

1994 - The Riegle-Neal Interstate Banking and Branching Efficiency Act repeals restrictions on interstate banking, beginning a wave of bank mergers. This gives activist groups like ACORN "power to demand more loans to their constituents because CRA allowed them to charge noncompliance and stop such mergers." (Wikipedia)

1995 - President Clinton establishes new CRA regulations "requiring numerical assessments to get a satisfactory CRA rating; using federal home-loan data broken down by neighborhood, income group, and race; encouraging community groups to complain when banks were not loaning enough to specified neighborhood, income group, and race" and "allowing community groups that marketed loans to targeted groups to collect a fee from the banks." (Ibid)

1996 - A study by the Federal Reserve System and academic specialists finds — like the 1993 Forbes investigation — no evidence "of substantial levels of bias in mortgage lending." Quoting from the abstract of the study:

"Results of the analysis fail to find evidence of better performance on loans granted to minority borrowers. Indeed, black borrowers are found, all else being equal, to exhibit a
higher likelihood of mortgage default than other borrowers. These findings argue
against allegations of substantial levels of bias in mortgage lending."

1996 - The Department of Housing and Urban Development (HUD) requires that 42% of the mortgages purchased by Fannie and Freddie should be held by borrowers earning below the median income for their area; 12% should be "special affordable" loans typically held by borrowers earning 60% of their area's median income. Note how HUD ratchets up these requirements in 2000 and then again in 2005. (5)

1997 - Bear Stearns, one of the largest global investment banks, makes the first public securitization of Community Reinvestment Act (CRA) loans.

1998 - HUD Secretary Andrew Cuomo announces an "affirmative action" settlement with a Texas Bank forcing it to provide 2.1 billion dollars in high risk mortgages to low-income Americans. (Video featured in opening paragraphs.)

1998 - The Clinton administration authorizes Fannie Mae and Freddie Mac to purchase subprime mortgages to satisfy their affordable housing obligations. Note these prophetic paragraphs in a 1999 New York Times report on Freddie and Fannie's expanded mission:

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980' s.

"From the perspective of many people, including me, this is another thrift industry growing up around us,' said Peter Wallison, a resident fellow at the American Enterprise Institute. "If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry."

1999 - Finance professors at the University of Illinois and at Wichita State University report findings on the creditworthiness of minorities consistent with the 1993 Forbes report and the 1996 Federal Reserve study cited earlier:

"[E]verything else being the same, minority applicants are probably less creditworthy, on average, than whites. Therefore, in the absence of fair lending laws, it is likely that minorities would be denied loans more frequently than whites and would pay higher interest rates and fees on approved loans . . . [F]air-lending laws have the perverse effect of forcing lenders to cross-subsidize minority borrowers from the higher profits they earn on white borrowers. Such cross-subsidization is inherently 'unfair' because it works as a tax on one group that is used as a subsidy for another.


1999 - November - The 1933 Glass-Steagall Act provisions that prohibit a bank holding company from owning other financial companies are repealed by the Gramm-Leach-Bliley Act signed by President Bill Clinton. Note: Efforts to link the financial meltdown to deregulation — or the failure of free markets — tend to pin the blame on the Gramm-Leach-Bliley Act. This is nonsense, says economist Peter J. Wallison (the same Peter J. Wallison who foresaw the catastrophe ten years years ago):

"Allowing banks and securities firms to affiliate under the same holding company has had no effect on the current financial crisis. None of the investment banks that have gotten into trouble — Bear, Lehman, Merrill, Goldman or Morgan Stanley — were affiliated with commercial banks. And none of the banks that have major securities affiliates — Citibank, Bank of America, and J.P. Morgan Chase, to name a few — are among the banks that have thus far encountered serious financial problems. Indeed, the ability of these banks to diversify into nonbanking activities has been a source of their strength."

2000 - HUD requires that 50% of the mortgages purchased by Fannie and Freddie should be held by borrowers earning below the median income for their area; 20% should be "special affordable" loans typically held by borrowers earning 60% of an area's median income. (5)

2002 - June - George W. Bush, at the White House Conference on Increasing Minority Ownership: "...few(er) than half of the Hispanics and half the African Americans own the(ir) homes . . . We've got to work to knock down the barriers that have created a home ownership gap." (Video featured in opening paragraphs.)

2002 - October: The Treasury Department instructs banks that the "know your customer" requirements of the Patriot Act do not prohibit banks from accepting Mexican matricula consular cards to verify a customer's identity when a opening account. (6) The insecure matriculas are issued by Mexico's 47 consulates throughout the United States to Mexican nationals — regardless of immigration status. Note: 80-85 percent of immigrants from Mexico since 1990 are illegal, according to the Pew Hispanic Center. (7)

2003 - The Federal Reserve engineers a federal-funds rate of 1.25%, a 40-year low — fueling the credit expansion. Interest rates on adjustable loans reach historical lows.

2003 & 2004 - Accounting fraud is detected at Fannie Mae and Freddie Mac. The intent was to maximize bonuses of executives. Freddie ousts CEO Leland Brendsel. Fannie Mae head Franklin Raines resigns.

2003 - September - Treasury Secretary John Snow testifies before the House Financial Services Committee: "We need a strong world-class regulatory agency to oversee the prudential operations of the GSEs . .. ."

Barney Frank, D-MA, ranking member (now chairman) of the House Financial Services Committee: "These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis. The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing."

Among groups denouncing the proposal: the National Association of Home Builders and Congressional Democrats "who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing." (8)

2004 - House hearings on accounting fraud at Fannie Mae and Freddie Mac: Democrats defend the two GSEs and savage the director of the Office of Federal Housing Enterprise Oversight (OFHEO) for seeking stronger regulation. President Clinton blames Democrats for resisting oversight of Fannie and Freddie. (Video featured in opening paragraphs.)

2004-2007 - Fannie and Freddie accelerate their high-risk lending. Peter J. Wallison (the same Peter Wallison who predicted the current crisis in 1999) and co-author Charles W. Calomiris, explain:

"In order to curry congressional support after their accounting scandals in 2003 and 2004, Fannie Mae and Freddie Mac committed to increased financing of 'affordable housing.' They became the largest buyers of subprime and Alt-A mortgages between 2004 and 2007, with total GSE exposure eventually exceeding $1 trillion. In doing so, they . . . substantially magnified the costs of its collapse ."

Watch Fannie Mae CEO Daniel Mudd "curry congressional support" in this 2005 footage (four minutes) of Mudd with his "family," the Congressional Black Caucus. Wallison continues:

"...Subprime and Alt-A originations in the U.S. rose from less than 8% of all mortgages in 2003 to over 20% in 2006. During this period the quality of subprime loans also declined, going from fixed rate, long-term amortizing loans to loans with low down payments and low (but adjustable) initial rates, indicating that [loan] originators were scraping the bottom of the barrel [of borrowers] to find product for [mortgage] buyers like the GSEs."

2005 - HUD requires that 52% of the mortgages purchased by Fannie and Freddie should be held by borrowers earning below the median income for their area; 22% should be "special affordable" loans typically held by borrowers earning 60% of their area's median income. (5)

2005 - February - Federal Reserve Chairman Alan Greenspan: "Enabling these institutions [Fannie Mae and Freddie Mac] to increase in size, and they will, once the crisis in their judgment [over discoveries of accounting irregularities] passes . . . We are placing the total financial system of the future at a substantial risk."

2005 -Freddie Mac secretly pays GOP consulting firm DCI $2 million to kill GOP regulatory overhaul bill sponsored by Chuck Hagen (R-NE). All Democrats on the Senate Banking, Housing and Urban Affairs Committee oppose the bill. The measure dies. (Between 1998 and 2008, Freddie would spend $94.9 million and Fannie $79.5 million lobbying Congress.)

2006 - January 4 - Julie Myers is appointed to head Immigration and Customs Enforcement (ICE). Lax enforcement turns on a dime. Myers leads an aggressive interior enforcement campaign. Particular ICE targets: work sites.

2007 - December - Barack Obama, speaking at a gathering of ACORN and other community organizations, invites the community organizers to help set his legislative agenda by serving on his transition team. Video (2min, 30sec). (9)

2008 - March - JPMorgan Chase, in coordination with the Federal Reserve Bank of New York, provides an emergency loan to Bear Stearns to prevent the firm's insolvency and avert a market crash. Two days later, Bear Stearns merges with JP Morgan Chase in a stock swap worth less than 10 percent of Bear Stearns' market value.

2008 - July 11 - Senator Chris Dodd, D-CT, chairman of the Senate Banking Committee, referring to Freddie Mac and Fannie Mae: "These are viable, strong institutions." Within three weeks both firms collapse.

2008 - September 7 - The U.S. government seizes control of Fannie Mae and Freddie Mac, placing liability for more than $5 trillion in mortgages onto the backs of taxpayers. Both companies are placed in government conservatorship.

2008 - Septermber 15 - Lehman Brothers becomes the largest bankruptcy in U. S. history. The global financial services firm is insolvent because it holds large positions in subprime and other lower-rated mortgages.

2008 - September 16 - AIG (American International Group) falls to $1.25 per share — a drop of 95 percent from its 52-week high. The insurance giant had tried to insure $57.8 billion in debt securities backed by subprime loans. The Federal Reserve Bank of New York loans $85 billion to AIG and, a few days later, another $37.8 billion.

2008 - October 3 - President Bush signs the Emergency Economic Stabilization Act, which provides $700 billion to purchase troubled assets of failing banks. Within days, the plan changes. The U. S. will purchase stakes (invest) in banks instead.

What to make of these events, studies, people?

Washington's effort to "close the white-minority home ownership gap" is a social engineering project with colossal "cost overruns." The project is akin — in quality of leadership, in denial of reality, in results for intended beneficiaries, in terrible costs imposed on the taxpayers — to our government schooling monopolies' forty-year obsession with closing the white-minority academic achievement gap.

How'd that work, by the way?

"By the time [minority students] reach grade 12, if they do so at all, minority students are about four years behind other young people. Indeed, 17-year-old African American and Latino students have skills in English, mathematics and science similar to those of 13-year-old white students."("Closing the Achievement Gap," National Governors Association Clearinghouse, 2002)

The subprime mortgage fiasco gives us a chance anew to study an American proclivity, the PC-blinded calamity. The financial meltdown has unique particulars from which much can be learned. But it belongs to a special category of failure that ought to be studied as such. I hope to examine those particulars and that category in a subsequent piece.


1) The leveling philosophy animating modern government monopoly schooling drew this pointed remark by Milton Friedman, perhaps the most influential economist of the twentieth century:

"I was able to go to it [college in the 1930s] because . . . The state of New Jersey at that time offered scholarships on a competitive basis. Had a series of exams, and the people who succeeded in those exams and who could demonstrate financial need received free tuition at Rutgers . . . The tragedy is that the state of New Jersey in their new incarnation now has a similar program, but the qualification for getting a scholarship is below average academic quality . . . It typifies what's happened in our society. Instead of emphasizing strengthening the opportunities open to the able, we have tended increasingly to shift into a state of victims in which the emphasis is on raising the people at the bottom. Now, no social progress has ever come from the bottom up. It's always come from the top small number pulling up the society as a whole and raising it."*

*Nobel Laureate in economics Milton Friedman on C-SPAN's BookTV.org: "Introduction to the 50th anniversary edition of F.A. Hayek's Road to Serfdom,"November 20, 1994:

2) For more on Andrew Cuomo's contribution, see "Andrew Cuomo and Fannie and Freddie: How the youngest Housing and Urban Development secretary in history gave birth to the mortgage crisis," Village Voice, August 5, 2008.

3) "Minorities' Home Ownership Booms Under Clinton but Still Lags Whites'," LA Times, Ronald Brownstein, May 31, 1999.

4) "The Hidden Clue," By Peter Brimelow and Leslie Spencer, VDARE.com, first published in Forbes, Jan 4, 1993.

5) "How Government Stoked the Mania," Russell Roberts, Wall Street Journal, Oct. 3, 2008.

6) "A Report to Congress in Accordance with Section 326(b) of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA Patriot Act)," Department of the Treasury, October 21, 2002. See Footnote #17 on page 16.

7) "Record Immigration is Changing the Face of New York Neighborhoods," New York Times, Jan. 6, 2006:

8) "New Agency Proposed to Oversee Freddie Mac and Fannie Mae," by Stephen Labaton, New York Times, September 11, 2003.

9) Obama-ACORN-Fannie/Freddie connection detailed: video (6 minutes).

Noteworthy: "Burning Down the House" is a content-rich ten-minute video illustrating many features of the subprime lending crisis. The video is highly partisan but its wealth of information compensates. "Burning Down the House" moves at a fast clip. Use the "pause button" to linger over graphs and text.

Tom Shuford tomshuford@aol.com is a retired teacher living in Lenoir, North Carolina.

Published October 22, 2008