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CREDIT EXPANSION 

community, including [low- and moderate-income] areas, with or without private
agreements.” 
In its public order approving the merger, the Federal Reserve mentioned the com-
mitment but then went on to state that “an applicant must demonstrate a satisfactory
record of performance under the CRA without reliance on plans or commitments for
future action. . . . The Board believes that the CRA plan—whether made as a plan or
as an enforceable commitment—has no relevance in this case without the demon-
strated record of performance of the companies involved.” 
So were these commitments a meaningful step, or only a gesture? Lloyd Brown, a
managing director at Citigroup, told the FCIC that most of the commitments would

have been fulfilled in the normal course of business. Speaking of the  merger
with Countrywide, Andrew Plepler, head of Global Corporate Social Responsibility
at Bank of America, told the FCIC: “At a time of mergers, there is a lot of concern,
sometimes, that one plus one will not equal two in the eyes of communities where the
acquired bank has been investing. . . . So, what we do is reaffirm our intention to con-
tinue to lend and invest so that the communities where we live and work will con-
tinue to economically thrive.” He explained further that the pledge amount was
arrived at by working “closely with our business partners” who project current levels
of business activity that qualifies toward community lending goals into the future to
assure the community that past lending and investing practices will continue. 
In essence, banks promised to keep doing what they had been doing, and commu-
nity groups had the assurance that they would.

BANK CAPITAL STANDARDS: “ARBITRAGE”

Although the Federal Reserve had decided against stronger protections for con-
sumers, it internalized the lessons of  and , when the first generation of sub-
prime lenders put themselves at serious risk; some, such as Keystone Bank and
Superior Bank, collapsed when the values of the subprime securitized assets they
held proved to be inflated. In response, the Federal Reserve and other regulators re-
worked the capital requirements on securitization by banks and thrifts.
In October , they introduced the “Recourse Rule” governing how much capi-
tal a bank needed to hold against securitized assets. If a bank retained an interest in a
residual tranche of a mortgage security, as Keystone, Superior, and others had done,
it would have to keep a dollar in capital for every dollar of residual interest. That
seemed to make sense, since the bank, in this instance, would be the first to take
losses on the loans in the pool. Under the old rules, banks held only  in capital to
protect against losses on residual interests and any other exposures they retained in
securitizations; Keystone and others had been allowed to seriously understate their
risks and to not hold sufficient capital. Ironically, because the new rule made the cap-
ital charge on residual interests , it increased banks’ incentive to sell the residual
interests in securitizations—so that they were no longer the first to lose when the
loans went bad.