There are many causes of the nation's economic crisis. One of them has its origin right here in our backyard.
Corporate greed, fat-cat chief executives, lax regulations and complex financial instruments that no one fully understood have all been cited as causes of the mortgage meltdown that has swallowed up Wall Street giants, dried up credit and may lead to a taxpayer-financed bailout approaching $1 trillion.
There's truth in all of that. But strip away the complexity and what's left is a simple mistake at the core of the mess we're in: Lenders gave mortgages to people who really couldn't afford to pay them.
Why would ordinarily sensible bankers suddenly start lending money to people who couldn't afford to pay? Because the federal government ordered them to do so.
And it started right here.
Back in 1991, New England financial institutions were reeling from the last real estate meltdown, caused by unsound home and commercial lending in a market driven to new heights by the high-tech boom. When the boom went bust, banks were left holding worthless mortgages given to homeowners who were now out-of-work and loans to developers building properties that no one wanted anymore.
In October 1991, state bank regulators seized seven failed Southern New Hampshire banks. The Federal Deposit Insurance Corp. stripped away their bad assets and reorganized what remained into two new banks sold to new owners, First NH Bank and New Dartmouth Bank. The hope was that some bigger player with plenty of capital would come along and purchase the new banks, thereby restoring a functioning credit market in the region.
In 1993, Shawmut National Bank, then a big regional player, stepped in to fill that role.
Shawmut sought to purchase New Dartmouth Bank in a deal worth $140 million. Everyone, including then-Gov. Stephen Merrill, hailed the deal as a great development for New Hampshire's sluggish economy.
But the Federal Reserve under former chairman Alan Greenspan did not see it that way. The Fed blocked the merger. Why? Because the Justice Department under Clinton administration Attorney General Janet Reno had accused Shawmut of racial discrimination.
The Clinton administration was pushing for more affordable housing and an end to what it perceived as discrimination against minorities in lending. The administration cited a study by the Boston Fed that found mortgage rejection rates for blacks were more than twice that of whites. The assumption was that the reason was not differing economic factors but racism, according to Robert Stowe England, an independent journalist from Virginia who has written on the mortgage industry for 20 years. England wrote a prescient article in 1993 for the National Review citing the Shawmut-New Dartmouth deal and predicting much of the mess we're in today.
The administration wanted more lending in poor, minority communities and the Federal Reserve would provide the hammer to make it happen. The Fed's blocking of the Shawmut-New Dartmouth deal until Shawmut reimbursed rejected minority applicants nearly $1 million was a message to the banking community that the government was serious.
"The crackdown is, therefore, not a boon but a roadblock to racial progress," England wrote in his 1993 paper. "If it succeeds in driving banks to make bad loans in order to improve their minority approval rates, this will eventually lead to more foreclosures in troubled inner-city communities."
In chasing the goal of home-ownership-for-all, the country's political leaders set the stage for the economic crisis we face today.
"There has been pressure to increase home ownership. It is a worthwhile goal," England said in an interview Friday. "But trying to achieve home ownership at any cost is a mistaken philosophy. It's a recipe for disaster."
