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Today's Visionary: An Illustrated Guide to Dr. King's 21st Century Insights

Richard Eskow — Fri, 13 Jan 2012 11:37:33 -0500

Here it comes again. This holiday weekend we'll see a lot of media coverage of Martin Luther King, Jr. But we'll hear very little about what he really was - a brave and visionary leader whose vision is as relevant today as ever.

One year ago I listed ten quotes by Dr. King, and mourned the lack of a movement that would advance his kind of vision. Then came the uprising in Madison and the Occupy movement, which began a long-overdue national debate about economic, as well as racial inequality.

Once again, Dr. King's insights provide offer insight and vision for today's movement activists - and tomorrow's.

1. "True compassion is more than flinging a coin to a beggar; it is not haphazard and superficial. It comes to see that an edifice which produces beggars needs restructuring." Where Do We Go From Here? August 1967 speech.

"Bain Capitalism" - aka "vulture capitalism" - didn't happen out of nowhere. It was made by politicians. It should be un-made by politicians. The system is the problem and it needs to change.

A long list of corporations and banks enriched itself by triggering the events that led to the Great Recession, and many of them took Federal bailout money when it happened. Each of them has a Corporate Social Responsibility policy, designed to show they're good citizens who give back to the community. And each of them has a fleet of lobbyists working to protect their privileged status and tax benefits.

Meanwhile the poverty rate, which had been declining, started to rise again in 2000. That year it stood at 11.3%, but by 2009 the Census Bureau reported that it had climbed back to 14.3%. At last count, 46 million Americans lived in poverty, more than 15 percent of the population. More than 16 million of them are children, which means that nearly one in four American kids (22 percent) is living in poverty.

Is that okay with you?

The situation has become so grave that The Nation responded by allocating an entire page to poverty, which is managed by Greg Kaufman. Sadly, it is now essential reading if we're to understand the real state of our union. As Kaufman points out, one study suggests that 340,000 children joined the ranks of the impoverished last year.

As the New York Times reported last September, another 2.6 million people slipped below the official poverty line in 2010. The official total of impoverished Americans was the highest it's been in the 52 years that it has been reported. For white Americans, the figure was 9.9 percent. The poverty rate for African Americans surged to 27.4 percent. For Hispanics the figure was 26.6 percent. For African American children the figure was 39 percent.

Is that okay with you?

(photo by Jeff Schrier, Saginaw News)

2. "We must develop a federal program of public works, retraining, and jobs for all - so that none, white or black, will have cause to feel threatened ... There is nothing except shortsightedness to prevent us from guaranteeing an annual minimum and livable income for every American family." Where Do We Go From Here?

Many economists agree that the unemployment rate will remain tragically high unless there is a concentrated program of government-funded, short-term job creation. Instead, budget cutbacks are forcing layoffs of government employees, especially at the state level. Republicans are refusing to back any extension of unemployment benefits. Among their Presidential candidates, only Mitt Romney appears to support increasing the minimum wage.

President Obama's pre-compromised and therefore overly mild jobs proposal was weakened with ineffective tax breaks for businesses, but it would have provided some jobs. Yet even that proposal was rejected by the Republicans. Of the political groups in Washington, only the House Progressive Caucus is willing to propose an effective ob creation bill - one that would also reduce the nation's deficit. But mainstream media have stigmatized it as "extreme" and no major politician is willing to back it.

What did Dr. King say about jobs?

"The unemployed, poverty-stricken white man must be made to realize that he is in the very same boat with the Negro. Together, they could exert massive pressure on the government to get jobs for all. Together they could form a grand alliance. Together, they could merge all people for the good of all."

Today it seems that the only bills that even get proposed are those that disguise tax breaks for corporations as "stimulus" spending, even though there is widespread agreement they're an ineffective way of creating jobs when there's not enough consumer demand.

With 24 million people out of work or under-employed, demand is hard to come by. ALong-term unemployment is a portrait of human loss, of human beings cast out of productive, wage-earning lives and into an existence of hopelessness and deprivation.

How bad is unemployment today? There are a number of ways to illustrate it. Here's one:

Pundits and politicians get excited about short-term blips in unemployment figures. But nobody's addressing this long-term catastrophe..

3. "A true revolution of values will soon look uneasily on the glaring contrast of poverty and wealth." Beyond Vietnam: A Time to Break Silence, April 1967 speech.

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Hello, Occupy!

The gap between the wealthy and the rest of society is greater now than it was when Dr. King spoke those words in April, 1967. The progress we made toward reducing poverty is being eroded as the result of increasingly maldistributed wealth, Wall Street's reckless gambling, and the cost of the Great Recession that followed. Wall Street's doing fine, now that it has been rescued by the American public. But the American public isn't doing so well. We threw a life preserver to the drowning bankers, and now they're sitting on the shore as millions of their rescuers go down for the third time.

Income inequality in this country is worse than it is in Egypt. As economist Edward Wolff explains, wealth inequality has more than doubled in this country since the mid 1970s. The GINI coefficient, which measures economic inequality, has risen nearly 20% since it was first measured in this country (coincidentally, the same year Dr. King's speech was given.)

Where are the trends headed?

The increasing disparity in wealth has been greatest for the top 0.5% of earners - the wealthiest of the wealthy - yet their tax burden has dropped from 70% in 1967 to 35% today (it was scheduled to "soar" to 39.6% until the Obama/McConnell tax deal of December 2010). And hedge fund managers - including the billionaires - continue to pay 15% instead of the 28% commonly paid by teachers, nurses, and police officers. (One hedge fund manager likened the possibility of a change to Hitler's invasion of Poland.)

The Federal minimum wage, however, has dropped from $6.58 in fixed-dollar terms (1996 equivalent) to $5.29 since this speech was given. When Dr. King gave his speech, it was possible to support a family of three on this wage and stay out of poverty, but that's no longer possible.

4. "The profit motive, when it is the sole basis of an economic system, encourages a cutthroat competition and selfish ambition that encourages men to be I-centered rather than thou-centered." Where do we go from here?

The I-centeredness of American business leaders has reached a level Dr. King could not have dreamed of. Two short years after Wall Street ruined the economy and was rescued by the American people, the depth of its self-absorption and self-pity was a miracle of human indulgence. It reflects a self-centeredness so profound that its leaders are in danger of morally imploding, spiritual black holes in an amoral universe.

Case in point: Steven Schwartzman, the hedge fund manager we mentioned earlier, who felt that paying taxes on his billions' at a laborers' rate was the moral equivalent of the invasion of Poland.

Or Goldman Sachs CEO Lloyd Blankfein, who said "We're very important ... we do God's work." (Reverend King might beg to differ.)

Or erstwhile Democrat Daniel S. Loeb comparing himself and his fellow investors to an oppressed minority, victims of tyranny (a "tyranny" that rescued them and asked nothing in return), and even underpaid workers.

Or John Coulson, head of the Mortgage Bankers Association, lecturing underwater homeowners not to walk out on their mortgages - even as his organization was walking away from a headquarters building they lost nearly forty million dollars on in two short years.

Or the King of the Emo Executives, Jamie Dimon, pouring out his hurt feelings to the New York Times - "My Achilles heel?" Jay-Z rapped, "Love! I don't get enough of it!" - even as his bank was on its way to earning record profits in a time of record unemployment (and as it continued to engage in unscrupulous business practices).

Dimon, who has also contributed to the Democratic Party, is stridently resisting regulations that would remove the existential threat his bank (and others like it) pose to the economy. And he won't stop whining.

I'm tired of going after the guy, so this time we'll let Josh Brown tell him what time it is. All these greedy, rapacious, whiny CEOs help to remind us that shame performs a useful social function.

We need better laws and regulations - and they should be ashamed of themselves.

5. "Lamentably, it is an historical fact that privileged groups seldom give up their privileges voluntarily. Individuals may see the moral light and voluntarily give up their unjust posture; but, as Reinhold Niebuhr has reminded us, groups tend to be more immoral than individuals." Letter From a Birmingham Jail, April 1963 open letter.

Tea Party supporters may have populist impulses. But the movement itself was created with an outburst by an investor-turned-television commentator who was cheered on in his rantings by traders on the Chicago Board of Mercantile Exchange. And the movement's been funded by wealthy interests ever since.

After it was bailed out, Wall Street immediately redoubled its lobbying efforts. Banks were able to blunt the most effective and urgently needed financial reforms, like breaking up banks that are "too big to fail." Now they're hard at work eliminating the reforms that were passed, with the help of the Republican Congress they helped get elected. Big-bank CEOs have spent more than $170 million to influence politicians in the last ten years.

The situation has gotten so bad that the International Monetary Fund - hardly a leftist organization - issued a report showing a strong correlation between bank lobbying and risky bank behavior in the United States.

That's why the Occupy movement is so important, and why it must grow and evolve in 2012.

6. "An unjust law is a code that a numerical or power majority group compels a minority group to obey but does not make binding on itself. This is difference made legal." Letter From a Birmingham Jail

Recent court cases have revealed widespread lawbreaking on the part of United States banks - a "power majority group" - as they foreclosed on homes that in some cases they don't even own.

Members of both parties have indicated an eagerness to rescue banks from the consequences of their own disregard for state and local laws, which has led to numerous and egregious violations (like foreclosing on a home that is fully paid for). But the criminality goes further: In many cases, mortgages changed ownership without proper notification to the borrower. The new holder of the note often changed the rules - about due dates for payment, late penalties, and other contractually agreed-upon terms - without informing the homeowner, then began imposing steep fees and penalties retroactively. (The banks own servicing companies that benefit from these fees.)

Many homeowners are now delinquent because of these wrongfully-imposed fees. Many of the solutions now being proposed would allow them to seize the homes anyway. The Administration's HAMP program, ostensibly designed to help homeowners, has too often become an "extend and pretend" program that allows banks to take another year or two's worth of mortgage payments before seizing the home anyway.

That's why the Obama Administration's cushy settlement deal - which would immunize bankers from criminal prosecution, or even investigation - must be stopped. (You can help by making your voice heard here.)

7. "When machines and computers, profit motives and property rights are considered more important than people, the giant triplets of racism, materialism, and militarism are incapable of being conquered." A Testament of Hope (posthumously published essay).

Banking has become divorced from reality. When the financial sector can enrich itself with speculation alone, it no longer needs to fund concrete business activities. That's why statements like "Main Street and Wall Street rise and fall together" are 100% incorrect: Those two geographies have never been more distant from one another.

Robo-trading. Flash crashes. Databases where mortgages are traded like gambling chips. Incentives to lie, and to hide the truth. Banks are "automated greed factories." The most human thing about banking in the 21st Century is its greed.

Is racism conquered? When infant mortality for African Americans in 2.5 times that of whites? With these disparities in poverty and employment?

Militarism? The Cold War is over and the Defense budget continues to expand. We didn't shift military spending when the world changed—we added to it. The Homeland Security Complex is enormous, growing—and looking for targets of surveillance.

And as Tom Engelhardt points out, President Obama's much-touted "defense cuts" are really just a slight reduction in the rate of spending increase. That's like an alcoholic boasting that he's solved his drinking problem by only having three more drinks a day next month, instead of his original plan to have four more.

As for conquering materialism, how many people even want to anymore? Dr. King's "three triplets" still walk the earth.

8. "There is also the violence of (African Americans) having to live in a community and pay higher consumer prices for goods or higher rents for equivalent housing than are charged in white parts of the city." A Testament of Hope

Payday lenders disproportionately exploit minorities and lower-income communities. Big banks (like Jamie Dimon's) make it harder for working minorities to get credit through normal channels. Then they help finance usurious payday lenders who step in and offer credit at outrageous rates designed to trap the borrower in a cycle of debt, so that a "one-time" fee for borrowing against next week's paycheck turns into a revolving loan that costs the borrower 300-400% in interest per year.

As a theologian and scholar, Dr. King would recognize a practice that was condemned as sinful in both the Old and New Testaments.

Big banks also back auto loans, which have been shown to charge more to African Americans than whites. HSBC Bank settled when it was found to have been charging minority customers more than others.

When it comes to banks, Dr. King would recognize the United States of the 21st Century. And he wouldn't be surprised to learn that the government is still more inclined to rescue banks than force them to change. He would probably be encouraging citizens to take action - action that would change things. The CFPB is now up and running with a full-time Director. We wish Richard Cordray and his staff the best.

9. "Congress appropriates military funds with alacrity and generosity. It appropriates poverty funds with miserliness and grudging reluctance. The government is emotionally committed to the war. It is emotionally hostile to the needs of the poor." Domestic impact of the war in America, November 1967 speech..

Today's politics would look all too familiar to Dr. King. In the matter of poverty, as in so many things, the Washington consensus of "centrist" Democrats and Republicans fails to reflect the opinions of the American people.

He would be pleased to learn that the American people are dedicated to eliminating poverty - and to protecting Social Security, defending Medicare, and asking the wealthy to pay their fair share.

He would be disappointed, however, to find that there aren't more national leaders speaking up for the public's values in Washington.

10. "Ultimately a genuine leader is not a searcher for consensus but a molder of consensus." Domestic impact of the war.

Dr. King was discussing a critic who told him that taking a controversial position on Vietnam might diminish his authority as a civil rights leader and weaken his political influence in Washington. Here's the full quote:

And I had to answer by looking that person into the eye, and say 'I'm sorry sir but you don't know me. I'm not a consensus leader.' I do not determine what is right and wrong by looking at the budget of my organization or by taking a Gallup poll of the majority opinion. Ultimately a genuine leader is not a searcher for consensus but a molder of consensus.

We're speculating now, but we can't help imagining that Dr. King might have challenged today's leaders to try harder at molding consensus before seeking to achieve it. That was his idea of genuine leadership.

Lately the President of the United States has been taking a tougher rhetorical stance on behalf of the American majority. We hope that his words will be followed by a year of aggressive action. But we won't be waiting to find out. We'll be acting for ourselves and encouraging others to do the same.

See you at the demonstrations.

Today's Visionary: 10 Things Martin Luther King, Jr. Taught Us About Today's Struggles

Richard Eskow — Sun, 28 Aug 2011 14:17:18 -0400

A lot of people in the media are so afraid of offending anyone that they can't even tell the truth about the man whose memorial is being unveiled this weekend in Washington. Their coverage could give you the impression that the purpose of Martin Luther King, Jr's life was simply to make everybody in this country feel good about themselves. So once again we're presenting ten quotes that represent Dr. King as he truly was -- the kind of brave and visionary leader we so badly need today.

You might be forgiven for thinking that everybody liked and admired Dr. King while he was alive except maybe for a few angry old white people down South (who later realized the errors of their ways and were very sorry.) The media have been so reluctant to convey Dr. King's true message that Glenn Beck can claim to have inherited his mantle and millions of people believe him. They're so afraid of telling his truth that a Pentagon official can claim that the recipient of the Nobel Peace Prize, the spiritual heir to Gandhi's mantle of nonviolence, would have supported the wars in Iraq and Afghanistan.

In this fame-addicted age, this activist and challenger of comfortable ideals has been presented as just another celebrity. And these days "celebrity" is another word for "commodity." Dr. King: Didn't they use his picture for one of those Apple ads (or was it Nike?) Didn't he have his picture taken with movie stars and singers? Future generations may come to believe he was famous just for being famous - like a Kardashian.

This weekend Dr. King's name will be spoken by politicians and business leaders who would probably despise what he would have had to say about 21st Century America. They'll try to appropriate his name and memory to ensure their own well-being. They hope to domesticate his moral challenge in order to protect their own ambition.

Fortunately, Martin Luther King left his words behind. In his honor, here are ten quotes from Dr. King, illustrated with images from today's events to show their continued meaning. If they don't manage to comfort the afflicted on this national holiday—and at least unsettle the comfortable—they're followed by a slide show with even more quotes.

A long chain of corporations and banks enriched itself by triggering the events that led to the Great Recession, and many of them took Federal bailout money when it happened. Each of them has a Corporate Social Responsibility policy, designed to show they're good citizens who give back to the community. And each of them has a fleet of lobbyists working to protect their privileged status and tax benefits.

The poverty rate, which had been declining, started to rise again in 2000. That year it stood at 11.3%, but by 2009 the Census Bureau reported that it had climbed back to 14.3%. At last count, 43.6 million Americans lived in poverty. In raw numbers, that's the highest number since these statistics were first collected more than fifty years ago (although it's been higher as a percentage of the population).

We're moving in the wrong direction. Children are being hit the hardest, and their rate of poverty is growing the fastest. More than 20% of children in the United States - one child in five - lived in poverty in 2009. The poverty rate for African Americans was 25.8%, a considerably higher percentage than possess a college degree. A college education is still the best ticket out of poverty - but there's considerable pressure to cut funding for education, too.

Poverty rates would have been even higher if not for unemployment insurance, which was not extended for the long-term unemployed. That means they're likely to jump again. The "99ers" have exhausted their ninety-nine weeks of special unemployment, and the agreement that extended tax cuts for the wealthy and the middle class included nothing for them.

(photo by Jeff Schrier, Saginaw News)

Had Dr. King's vision become reality, it wouldn't have been necessary to extend unemployment for the 99ers. As he said:

"The unemployed, poverty-stricken white man must be made to realize that he is in the very same boat with the Negro. Together, they could exert massive pressure on the government to get jobs for all. Together they could form a grand alliance. Together, they could merge all people for the good of all."

Today the idea of Federal support for jobs is considered so politically unfeasible that President Obama didn't even bother asking Congress for the full stimulus package economists felt was needed - and that was in a national emergency. The only bills that can passed are those that disguise tax breaks for corporations as "stimulus" spending, even though there is widespread agreement they're an ineffective way of creating jobs when there's not enough consumer demand.

With 25 million people out of work or under-employed, demand is harder to come by. And the rapid rise in long-term unemployment is a portrait of human loss, the outline of human beings cast out of productive, wage-earning lives into an existence of hopelessness and deprivation:

In the mid-sixties there was vigorous protest at the idea that 5% might be an acceptable unemployment level. The racial disparities of Dr. King's day haven't changed much, at least as far as employment is concerned: The African American rate that month was 15.8%, as opposed to 8.5% for Caucasians. Official figures reflect the fact that unemployment in the black community is twice that of whites - and the true difference is probably even greater, once figures are adjusted for those who have given up seeking employment. Underemployment is also considerably higher among African Americans.

But Caucasians aren't winning this game, either. 8.5% is a devastating figure. Increased employment for some people means more jobs for all, as newly-employed workers spend their earnings and stimulate economic growth. Dr. King's words are as true today as they were when he spoke them: A unified movement to demand more jobs would benefit all races and communities in the United States.

Income support for lower-income Americans was cut during the Clinton years, in the name of welfare reform. Dr. King's dream of an annual minimum income for all Americans, working or unemployed, may sound hopelessly radical today. But Richard Nixon proposed a guaranteed national income (he called it a "negative income tax") and it almost made it through Congress while he was President.

Could a President as economically progressive as Richard Nixon get elected today? It's hard to tell, because nobody's tried lately.

3. "A true revolution of values will soon look uneasily on the glaring contrast of poverty and wealth." Beyond Vietnam: A Time to Break Silence, April 1967 speech.

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As economist Edward Wolff explains, wealth inequality has more than doubled in this country since the mid 1970s. The GINI coefficient, which measures economic inequality, has risen nearly 20% since it was first measured in this country (coincidentally, the same year Dr. King's speech was given.)

This increasing disparity in wealth has been greatest for the top 0.5% of earners - the wealthiest of the wealthy - yet their tax burden has dropped from 70% in 1967 to 35% today (it was scheduled to "soar" to 39.6% until the Obama/McConnell tax deal of December 2010). And hedge fund managers - including the billionaires - continue to pay 15% instead of the 28% commonly paid by teachers, nurses, and police officers. (One hedge fund manager likened the possibility of a change to Hitler's invasion of Poland.)

Case in point: Steven Schwartzman, the hedge fund manager we mentioned earlier, who felt that paying taxes on his billions' at a laborers' rate was the moral equivalent of the invasion of Poland.

Or Goldman Sachs CEO Lloyd Blankfein, who said "We're very important ... we do God's work." (Reverend King might beg to differ.)

Or the King of the Emo Executives, Jamie Dimon, pouring out his hurt feelings to the New York Times - "My Achilles heel?" Jay-Z rapped this year, "Love! I don't get enough of it!" - even as his bank was on its way to earning record profits in a time of record unemployment (and as it continued to engage in unscrupulous business practices).

Poverty's up. Unemployment's essentially unchanged. The American family is struggling. American businesses just had their best quarter ever. Yet its leaders are whining. They're using the rhetoric of freedom in defense of greed.

Dr. King trained his followers in the path of nonviolent resistance to endure jail, starvation, beatings, and even death without complaint or retaliation. He would not be impressed with America's CEOs.

After it was bailed out, Wall Street immediately redoubled its lobbying efforts. Banks were able to blunt the most effective and urgently needed financial reforms, like breaking up banks that are "too big to fail." Now they're hard at work eliminating the reforms that were passed last year, with the help of the Republican Congress they helped get elected. Big-bank CEOs have spent more than $170 million to influence politicians in the last ten years.

And that report was issued before the lobbying frenzy of the last twelve months - before the White House hired more bank executives to placate Wall Street, and before leading Republicans paraded themselves before bank lobbyists like le Pigalle hookers on a Parisian summer's night.

Guess who wasn't represented? The American public, 72% of whom want Washington to do more to rein in Wall Street misbehavior. Washington still lives by its version of the Golden Rule: Whoever has the gold, sets the rules.

Recent court cases have revealed widespread lawbreaking on the part of United States banks - a "power majority group" - as they foreclosed on homes that in some cases they don't even own.

The incestuous relationship between big banks and government threatens to undermine fundamental principles of law and justice, some of which were established in the Magna Carta. A recent proposal from "centrist" group Third Way is typical ("centrist" is a term Dr. King wouldn't recognize in its present use, where it denotes a right-wing ideology masquerading as middle-of-the-road "common sense'). It would override centuries of legal tradition and the legal responsibilities of the states to protect the nation's banks at the expense of their clients.

There are rumors that the Administration is sympathetic to solutions of this kind. It seems safe to say that Dr. King would not have felt the same way.

Is racism conquered? When infant mortality for African Americans in 2.5 times that of whites? With these disparities in poverty and employment?

As for conquering materialism, how many people even want to anymore? Dr. King's "three triplets" still walk the earth. And three years into what has become a permanent depression for millions of Americans, reality shows about rich people are still popular.

As a theologian and scholar, Dr. King would recognize a practice that was condemned as sinful in both the Old and New Testaments.

Big banks also back auto loans, which have been shown to charge more to African Americans than whites. HSBC Bank settled when it was found to have been charging minority customers more than others.

He would be pleased to learn that the American people are dedicated to eliminating poverty - and to protecting Social Security, defending Medicare, and asking the wealthy to pay their fair share. He might be disappointed, however, to find that there aren't more national leaders speaking up for the public's values in Washington.

10. "Ultimately a genuine leader is not a searcher for consensus but a molder of consensus." Domestic impact of the war.

And I had to answer by looking that person into the eye, and say 'I'm sorry sir but you don't know me. I'm not a consensus leader.' I do not determine what is right and wrong by looking at the budget of my organization or by taking a Gallup poll of the majority opinion. Ultimately a genuine leader is not a searcher for consensus but a molder of consensus.

This post was produced as part of the Curbing Wall Street project.

TV Interview On The IMF and World Bank: International Echoes Of Domestic Banking Policies

Richard Eskow — Sun, 17 Apr 2011 23:44:47 -0400

Did an interview with RT Today on the meeting of the International Monetary Fund, and on the ways that IMF and World Bank policy reflect the same combination of austerity economics and a 'liberalized' financial sector that we're seeing here and in Europe. The video is here:

Breaking Up The Banks: I Did It!

Eric Lotke — Tue, 22 Mar 2011 08:14:29 -0400

As the debate heats up over Elizabeth Warren to head the Consumer Financial Protection Bureau, I took a step out on my own. I got a divorce. I am no longer a wholly owned subsidiary of Wells Fargo Bank.

First Wells Fargo acquired the bank I’d been banking in. Then Wells Fargo acquired my mortgage. The roof over my head and the little savings accounts where my kids manage their newspaper money were just parts of Wells Fargo’s diversified portfolio. So we left.

I opened a new account at a community bank near me. It has exactly the same tools for online banking, check cards and so forth that I’ve come to expect, and better interest rates on every product from checking to CDs to my kids' little savings accounts. I’m even better off with ATMs. I feared I’d be limited, but my community bank solves the problem by picking up the fees for me to use any ATM at any bank anywhere in the world.

The staff was friendlier, too. Many of them previously worked for banks like Citi and Wells Fargo, and they appreciated the cultural change even more than I did. They stayed open a little late to accommodate my work schedule, and we finished up by telephone and email.

I learned a bunch in the process, too. I learned that the Huffington Post was way ahead of me. They recommended that people make this move last year, and they even created a site to help find your local bank and tell your story.

Last year my bank was one of the four that held half of the nation's mortgages, two-thirds of its credit cards and controlled about 40 percent of the nation's deposits. My bank was one of the six that had assets valued at 64 percent of America’s GDP. That’s too big. I took no pride in it, and got nothing out of it. As Senator Bernie Sanders (I-Vt.) says, a bank that’s too big to fail is "too big to exist". We need to control these banks and restore the New Deal Glass-Steagall reforms that created a division between investment brokers and traditional banks. We also need Elizabeth Warren at the CFPB.

I can’t do much about any of that – but I still control my own money. Wells Fargo no longer does. One small blow against Big Brother Inc.

Afghanistan's "Too Big to Fail" Bank Is Failing. Guess Our System Doesn't Work There, Either.

Richard Eskow — Wed, 02 Feb 2011 05:15:49 -0500

The collapse of Afghanistan's largest bank will seem familiar to Americans, and so will the upcoming reports of its bailout. We've heard the story before: Unheeded warnings. Lax (or nonexistent) law enforcement. An American auditor who said nothing as the books imploded. Sloppy, reckless, and greedy lending. Politicians in bed with banks. And a corporate crime wave led by bankers who can break the law with impunity, knowing they won't be punished even if they're caught.

The Kabul Bank story is a sad inversion of nation-building. It might have provided some moments of black humor for the recession-ravaged middle class, if only Americans and Afghans weren't paying for it with their lives. We promised to teach the Afghans everything we know about running a modern economy.

Apparently we did.

Exporting hypocrisy

The financial collapse of 2008 discredited an economic philosophy which had dominated both political parties for decades. That philosophy created a toxic cocktail of deregulation, ineffective oversight, concentrated wealth, and incentives to cheat. The end result cost the economy trillions in lost wealth, ongoing hardship for tens of millions of people, and a bailout whose true cost is still being hidden from the public. And what did we learn from all of that?

Not too much, judging by the evidence. The list of institutions advising the Afghans includes the US Treasury Department and the Department of Justice - both of whom have, shall we say, underperformed when it comes to regulating banks and prosecuting financial crimes. And the consulting group that was awarded nearly $100 million to help the Afghans develop sound financial practices went bankrupt in the middle of its assignment. That's right -- bankrupt.

But the source of our failure in Afghanistan isn't in the government's choice of advisors or its failure to manage its developmental efforts properly, as harmful as those things have been. The real problems in Afghanistan are philosophical, not managerial, and they're the same ones that have plagued us at home: a continued belief in failed economic theories; indifference or hostility toward regulation and regulatory agencies; a too-cozy relationship between banks and politicians; and, worst of all, the willingness to tolerate (and therefore condone) a list of bank crimes that includes fraud, forgery, and laundering drug money.

"Thin Tightrope"

Cables released by Wikileaks reveal that U.S. Ambassador Karl Eikenberry considered it necessary to walk a "thin tightrope" when working with corrupt officials. The cable indicated that Eikenberry collaborated with an "allegedly corrupt official because he could serve as a "stabilizing ... force" (militarily, in this case.) This official's "illicit (drug) trafficking" was not to be tolerated in the interests of security.

That philosophy extended to banking, where the now-failing Kabul Bank and other banks were widely understood to be helping Afghans get illicit drug money out of the country. Kabul Bank's no different from Wells Fargo, either in its willingness to handle drug money or its apparent impunity from the law. Wells Fargo As Bloomberg News originally reported, Wells Fargo's internal screening unit repatedly turned a blind eye to money laundering on behalf of mass-murdering Mexican drug cartels.

Regarding these drug laundering charges,Bloomberg reported that "no big U.S. bank -- Wells Fargo included -- has ever been indicted Instead, the Justice Department settles criminal charges by using deferred-prosecution agreements, in which a bank pays a fine and promises not to break the law again." As Bloomberg explains, "Large banks are protected from indictments by a variant of the too-big-to-fail theory."

In other words, once a bank is big enough to pose a threat to the economy it receives effective immunity for past and future criminal behavior - a license to commit crime. Yet "too big to fail" provisions were removed from last year's US financial reform law by lawmakers on Capitol Hill whose own favorite investments included Bank of America, Goldman Sachs, and JPMorgan Chase. And Afghanistan's largest bank, a corrupt collaboration between its President and the bank's principal owners, grew large enough to become a "systemic risk" to the nation's economy ... as our own government stood and watched.

Meanwhile, here at home, corporate lawbreakers like Bank of America, Wells Fargo, Goldman Sachs, and JPMorgan Chase are apparently still considered a "stabilizing force."

Too big to fail

As the New York Times

reported this week, " Fraud and mismanagement at Afghanistan's largest bank have resulted in potential losses of as much as $900 million -- three times previous estimates -- heightening concerns that the bank could collapse and trigger a broad financial panic in Afghanistan, according to American, European and Afghan officials.

"The extent of these losses make it clear that keeping the bank afloat -- something the government has said it is determined to do -- would require large infusions of cash from an already strained budget."

The crisis was a long time coming. As the Times reported last September, Afghan President Hamid Kharzai has family ties and a personal financial interest in the bank, and agreed to bring the brother of one of the bank's principals into the government as his Vice Presidential running mate. (But then, American Administrations from both parties (including the current one) have hired a string of senior bank officials and watched others leave government to join big banks - not as egregious, perhaps, but a clear conflict of interest.)

If an institution is allowed to become "too big to fail," it's rarely an accident. The corruption has already taken place somewhere along the line.

Austerity and Deregulation

We're told that Deloitte, the auditor in place at Kabul Bank, was not specifically tasked with reviewing its accounts. Deloitte apparently acquired the contract when it purchased BearingPoint, the consulting firm that went bankrupt. But unless there are more contracts being awarded than have been widely reported, the original BearingPoint contract (worth a reported $98 million) was designed to help banks "improve economic governance." There were reports as far back as 2005 that some of the consultants on the project were "subpar" and that US contractors were receiving widespread criticism locally.

BearingPoint has promoted a privatization-oriented approach during its richly (and, let's not forget, publicly) funded tenure in Afghanistan, as it has in other countries. The firm and its successor unit within Deloitte have done some good work, but remain part of a well-paid consultant nexus that emphasizes the same set of shared values that undermined the US economy. In other words, BearingPoint and like-minded vendors have been faithful in the execution of an austerity-minded philosophy - a philosophy that can sometimes become anti-government in many ways, and whose philosophy of "austerity" rarely extends to its own practitioners.

The Afghan Research and Evaluation unit, a group set up by the international aid community in Afghanistan, assessed Afghan aid as follows:

"Consistent with the current consensus on development held by the donor community and international financial institutions (IFIs), the privatisation process has gained increased momentum in Afghanistan ... Fifty four fully state-owned enterprises (SOEs) have been slated for privatisation as going concerns or through liquidation by the end of 2009."

In BearingPoint's case, their sympathy for this downsizing-government approach isn't surprising. Alice Rivlin, the economist best-known for relentlessly advocated Social Security cuts, was a member of the Board and the company's leading economic figure - before it went bankrupt.

They say they weren't doing the bank's books. But If they were there "improve the economic governance" of Kabul Bank, an institution whose misdeeds were well-known and whose implosion could topple the economy, then it's certainly fair to say that their work has been "subpar."

Toxic Assets

A report commissioned by the International Monetary Fund got the problems right. "As of March 2008," the report noted, "the two largest domestic private banks accounted for almost 50 percent of total banking system assets. The combined loans of these two banks were 70 percent of total commercial bank lending."

The mayor of Kabul was indicted by the Afghan government on corruption charges, but US officials wound his explanation credible: He was arrested by corrupt officials after he exposed their own misdeeds. Specifically, he told officials that he found files for more than 30,000 applicants who paid for "nonexistent plots of land in Kabul." These toxic assets were part of a larger get-rich-quick schemes for officials who apparently found his investigations inconvenient.

The IMF report also included this observation: "Most banks did not attach particular importance to analysis of borrowers' balance sheets, cash flow, or business plans." That kind of lax underwriting will be familiar to observers of American lending practices. The report also noted, somewhat laconically, that "banks that lend extensively domestically engage in extra-judicial, non-traditional contract enforcement."

Extra-judicial? As in illegal? It sounds like we've exported foreclosure fraud, too.

Do as we say, not as we do

The procurement process for USAID projects in Afghanistan seems to be a mess. Sen. McCaskill was surprised to learn that major contractors there were not being asked to file the usual tracking reports. The Obama Administration was criticized for awarding a major contract to a Democratic party donor, and for using the "no-bid" process it has criticized in the election campaign to do it.

After Kabul Bank's impending failure was reported, the US government insisted that the Times update its story to include a quote from a Treasury Department spokesperson saying that "no American taxpayer funds will be used to prop up Kabul Bank." But that doesn't have any more credibility than Treasury Department claims that bank bailouts in this country have been fully repaid - a claims that don't count aid funneled through the Federal Reserve, the cash value of low- and zero-interest bank loans, and other taxpayer-funded measures.

Ninety percent of Afghanistan's national budget was financed by foreign countries last year, with the US assuming a significant chunk of the cost. When the Afghans conduct their first bank bailout, under United States supervision, the funds will undoubtedly come from the Afghan treasury. And then funds from ours will help make up the shortfall elsewhere.

Yes, corruption among politicians and other officials is a much greater problem there. They're a drug-based economy whose principal export is poppies. Their country is divided, impoverished, and largely illiterate. But economic behavior is universal. Ttheir bankers are subject to the same "moral hazard" as bankers everywhere: When "too big to fail" banks can gamble with absolute certainty that they'll be rescued, that's exactly what they'll do. When bankers know they can commit crimes go unpunished, they'll commit crimes. And they won't stop until people start going to jail - in both countries.

"You complete me ..."

A jargon-laden report from the Congressional Research Service addressed what it called "ROL," an acronym that stands for the "rule of law," and concluded:

"Helping Afghanistan build its justice sector ... suffers from the same difficulties that have complicated all efforts to expand and reform governance in that country: lack of trained human capital; traditional affiliation patterns that undermine the professionalism, neutrality, and impartiality of official institutions; and complications from the broader lack of security and stability in Afghanistan."

In other words, they're saying that Afghans are too tribal and primitive to do things the American way. But that's not true. Yes, education and training is needed. But their lack of law enforcement, especially in the financial sector, directly reflects the level of emphasis we've placed on it ourselves - in their country and here at home. We've lavishly funded privatization efforts and the unrestrained growth of private and morally corrupt banks, while at the same time devaluing the role of regulation and law enforcement.

The problem with the Afghans isn't that they're not like us. The problem is that we're too much alike. People everywhere are, pretty much, especially where money's concerned. So until we change the way we govern, the results are likely to be the same wherever we go. Crimes will still be committed, banks will still fail, and we'll all keep paying the price for a moral, legal, and economic blindness that keeps leading us off the same cliff over and over again.

____________________________________

This post was produced as part of the Curbing Wall Street project.

Today's Visionary: 10 Things Martin Luther King, Jr. Taught Us About Today's Struggles

Richard Eskow — Sun, 16 Jan 2011 04:04:59 -0500

A lot of people in the media are so afraid of offending anyone with controversial truths that they can't even tell the truth about the man whose holiday we're celebrating this weekend. Their coverage could give you the impression that the purpose of Martin Luther King, Jr's life was simply to make everybody in this country feel good about themselves—so good, in fact, that we deserve a day off just for having the wisdom to be born American.

You might be forgiven for thinking that everybody liked and admired Dr. King while he was alive - except maybe for a few angry old white people down South, who later realized the errors of their ways and were very sorry. The media have been so reluctant to convey Dr. King's true message that Glenn Beck can claim to have inherited his mantle and millions of people believe him. They're so afraid of telling his truth that a Pentagon official can claim that the recipient of the Nobel Peace Prize, the spiritual heir to Gandhi's mantle of nonviolence, would have supported the wars in Iraq and Afghanistan.

In this fame-addicted age, this activist and challenger of comfortable ideals has been presented as just another celebrity. And these days "celebrity" is another word for "commodity." Dr. King: Didn't they use his picture for one of those Apple ads? Or was it Nike? Didn't he have his picture taken with movie stars and singers? Future generations may come to believe he was famous just for being famous - you know, like Heidi Montag.

(photo by Jeff Schrier, Saginaw News)

Had Dr. King's vision become reality, it wouldn't have been necessary to extend unemployment for the 99ers. As he said:

"The unemployed, poverty-stricken white man must be made to realize that he is in the very same boat with the Negro. Together, they could exert massive pressure on the government to get jobs for all. Together they could form a grand alliance. Together, they could merge all people for the good of all."

With 15 million people out of work, demand is harder to come by. And the rapid rise in long-term unemployment is a portrait of human loss, the outline of human beings cast out of productive, wage-earning lives into an existence of hopelessness and deprivation:

Some people "celebrated" last month when the official unemployment rate dropped from 9.8% to 9.4%. (In the mid-sixties there was vigorous protest at the idea that 5% might be an acceptable unemployment level.) The racial disparities of Dr. King's day haven't changed much, at least as far as employment is concerned: The African American rate that month was 15.8%, as opposed to 8.5% for Caucasians. Official figures reflect the fact that unemployment in the black community is twice that of whites - and the true difference is probably even greater, once figures are adjusted for those who have given up seeking employment. Underemployment is also considerably higher among African Americans.

Could a President as economically progressive as Richard Nixon get elected today? It's hard to tell, because nobody's tried lately.

3. "A true revolution of values will soon look uneasily on the glaring contrast of poverty and wealth." Beyond Vietnam: A Time to Break Silence, April 1967 speech.

(Daimler Maybach sedan, manufacturer's suggested retail price $366,000 - plus delivery and other charges)

Case in point: Steven Schwartzman, the hedge fund manager we mentioned earlier, who felt that paying taxes on his billions' at a laborers' rate was the moral equivalent of the invasion of Poland.

Or Goldman Sachs CEO Lloyd Blankfein, who said "We're very important ... we do God's work." (Reverend King might beg to differ.)

Poverty's up. Unemployment's up. The American family is struggling. American businesses just had their best quarter ever. Yet its leaders are whining. They're using the rhetoric of freedom in defense of greed.

After it was bailed out, Wall Street immediately redoubled its lobbying efforts. Banks were able to blunt the most effective and urgently needed financial reforms, like breaking up banks that are "too big to fail." Now they're hard at work eliminating the reforms that were passed last year, with the help of the Republican Congress they helped get elected. Big-bank CEOs have spent more than $170 million to influence politicians in the last ten years.

Recent court cases have revealed widespread lawbreaking on the part of United States banks - a "power majority group" - as they foreclosed on homes that in some cases they don't even own.

There are rumors that the Administration is sympathetic to solutions of this kind. It seems safe to say that Dr. King would not have felt the same way.

Is racism conquered? When infant mortality for African Americans in 2.5 times that of whites? With these disparities in poverty and employment?

As a theologian and scholar, Dr. King would recognize a practice that was condemned as sinful in both the Old and New Testaments.

Big banks also back auto loans, which have been shown to charge more to African Americans than whites. HSBC Bank settled when it was found to have been charging minority customers more than others.

10. "Ultimately a genuine leader is not a searcher for consensus but a molder of consensus." Domestic impact of the war.

And I had to answer by looking that person into the eye, and say 'I'm sorry sir but you don't know me. I'm not a consensus leader.' I do not determine what is right and wrong by looking at the budget of my organization or by taking a Gallup poll of the majority opinion. Ultimately a genuine leader is not a searcher for consensus but a molder of consensus.

This post was produced as part of the Curbing Wall Street project.

A Tax Deal Fit For The Gilded Age

Zach Carter — Tue, 07 Dec 2010 12:26:28 -0500

President Barack Obama and Congressional Republicans are ready to mortgage the American economy to billionaires in exchange for a few months of unemployment benefits. This deal is easily the gravest economic outrage of the Obama presidency to date, and signals that other political assaults on the economy are ahead.

The basic deal: One year of unemployment benefits, a $40 billion extension of an anti-poverty tax credit, a $120 billion tax cut for workers and some additional tax cuts for American businesses that are already sitting on $1 trillion in cash and refusing to hire new people. In exchange, we get the Bush tax cuts for billionaires, plus an estate tax even more regressive than the worst estate tax implemented by George W. Bush. A few billion for the poor, hundreds of billions for the rich, and nothing—nothing – that will alleviate epic unemployment. It may even fail to prevent the economy from deteriorating further. The best I can say for it is that it will prevent things from getting too much worse.

David Dayen at Firedoglake does some number-crunching and finds $116 billion of actual new stimulus in this deal. He acknowledges that this is a charitable figure, because $56 billion of that total comes from extending unemployment benefits—meaning "not cutting them off"-- not exactly a "new" program. Under either calculation, the result is pathetic. The George W. Bush stimulus from 2008 was $160 billion, and featured a roughly similar approach to the stimulative measures in this one: putting money in workers' pockets. It's better than not putting money in workers' pockets, but it's simply not enough.

This is it, folks—the only economic aid package we are going to see until 2012. If it passes, both parties will praise it as a great bipartisan victory, and critics demanding further economic relief will be told to give it time to "work," as the worst recession since the Great Depression grinds on and on and on. It will be the stimulus package disaster all over again. And remember, Americans actually liked the stimulus plan when it was enacted. Today, most Americans already want to see the Bush tax cuts for billionaires expire.

The actual consequences of this deal, of course, will be more severe than the political fallout in 2012. We'll soon hear about "tough choices" facing the country as a result of our allegedly out-of-control budget deficit (bond interest rates, shmond interest rates!). Now that raising taxes on the rich has been taken off the table, those "choices" will translate to devastating cuts in Social Security. After agreeing to useless tax cuts for the rich in the name of economic "stimulus," Wall Street executives and Congressional Republicans will demand Social Security be slashed, further sabotaging our demand-starved economy, and actually starving our senior citizens.

The United States does not have a deficit problem, with or without the Bush tax cuts for billionaires. Interest rates on U.S. Treasury bonds are at record lows, and aren't going anywhere with Europe, the U.K. and Japan in serious fiscal distress, and with China buying up as much U.S. debt as it can in order to support its own economy.

But that doesn't mean the Bush tax cuts for billionaires will be without consequences. Asset bubbles don't just materialize out of thin air. They occur when a few people have loads of money to invest, while most people don't have the money to buy things. When most people can't buy things, the rich can't invest their money in productive enterprises—however good somebody's new product may be, it can't be sold to people who are broke. So investments flow to things that aren't actually very useful, inflating their value—things like the stock market in the 1990s and the housing market in the Bush years. There are other factors, of course, but severe inequality is a key component.

Right now demand in the economy is much, much weaker than it was in the '90s or the naughties, and we have a too-big-to-fail banking industry that not only receives generous bailouts, but cannot even be bothered to follow the law in carrying out foreclosures. Extending the Bush tax cuts without seriously addressing unemployment, big finance and foreclosures is asking for another asset bubble. And that's how we get to a real fiscal problem: another bubble, another round of epic bailouts for banks that are bigger than those we bailed out in 2008 and 2009.

Today, banks are facing huge losses from foreclosure fraud, and asset valuations based on outrageously optimistic home prices that have not come to fruition (translation: banks are pretending big losses are big profits). This is a problem that can be solved, and one that will not wreak economic havoc if investors are forced to help bear the costs of solving it. But so far policymakers have only attempted to address the issue by papering over the problem for banks, with many actively encouraging more and faster foreclosures (read: deflation).

More Bush tax cuts, more unemployment and more bad banking. So we beat on, boats against the current, borne back ceaselessly into the past.

The Fed Lied About Wall Street

Zach Carter — Thu, 02 Dec 2010 17:09:24 -0500

The data from the Federal Reserve audit is full of frightening revelations about U.S. economic policy and those who implement it. When Wall Street went off the rails in the fall of 2008, policymakers told the public we had a certain kind of problem, knowing all along that the actual nature of the problem was very different—and far more severe. This was a terribly destructive lie. Had policymakers fully explained the scope of Wall Street’s 2008 troubles, today’s problems with foreclosure fraud would simply not exist.

Here’s the basic issue. As Lehman Brothers, AIG and other major financial firms teetered on the verge of collapse, the Fed and the Treasury Department insisted that the trouble on Wall Street was one of “liquidity.” That’s a finance term meaning, “the banks are fine, but everybody is confused.” Banks have lots of money in long-term assets, but can’t convert those long-term assets into short-term cash.

In retrospect, that view was clearly an error. The bank held hundreds of billions of dollars worth of subprime mortgage assets, which were not merely worthless in the panic-stricken view of the financial mob, but worthless, full stop. At the time many people argued that the financial system faced not a liquidity crisis, but a liquidity crisis and a solvency crisis. That is to say, even if the government had helped the banks deal with day-to-day problems, the banks were still fundamentally unable to pay their debts. They were not merely illiquid, but insolvent.

I stole this perspective on the financial crisis from Mike Konczal, and the same basic framework was portrayed very forcefully by Nobel Prize-winning economist Paul Krugman in 2008 and 2009. Krugman’s major concern was that the U.S. would end up with a handful of dominant “zombie banks”—firms which were kept alive by government aid, but which were fundamentally insolvent, and unable to support the economy with productive lending.

The truth has been far worse than Krugman predicted. Not only are today’s major banks unable to support the economy, they are actively sabotaging the middle class with fraudulent foreclosures. This is a direct result of policymakers’ failure to address the fundamental solvency problem in 2008 and 2009. And what’s worse, it appears that the Federal Reserve was aware of the solvency problem, even as its top officials publicly insisted that the bailed out banks were fine.

To fix a liquidity crisis, the Fed has had a longstanding policy of offering short-term, low interest loans. In exchange for these loans, the Fed demands high-quality collateral. That’s as it should be: if a bank is truly experiencing a liquidity crisis, there is a public interest in keeping it afloat so it can meet its financial obligations.

And so in 2007 and 2008, the Fed created several facilities to ease liquidity based on this principle. The trouble is, starting on Sept. 15, 2008—right when Lehman Brothers was going under—the Fed started accepting total garbage as collateral for its loans. Not just a little bit of garbage, either. According to data released by the Fed yesterday, the central bank accepted $1.32 trillion in collateral rated “junk bond” status or lower, starting Sept. 15, through it Primary Dealer Credit Facility alone. That compares to $8.95 trillion in total loans extended through the Primary Dealer outlet from March 2008 through May 2009. From Sept. 15 onward, the Fed lend out $7.60 trillion through this window alone, meaning that a full 17 percent of its lending from this point was backed by junk bonds, or worse.

These total figures are somewhat exaggerated—the facility in question offered overnight loans, and many banks chose to roll-over their loans from one day to the next. Nevertheless, the collateral comparison is apt. However you measure it, nearly one-fifth of the Fed’s lending through this facility was backed by junk bonds.

What does all this mean? The Fed knew it was facing a solvency crisis, even as it publicly insisted that Wall Street was merely dealing with a liquidity issue. If the Fed had truly believed Wall Street only faced liquidity troubles, it would not have allowed major banks to pledge junk bonds as collateral for loans. And indeed, for months, the Fed did not allow banks to put up junk bonds as loans. But things changed when Lehman Brothers went under.

The Fed and the Treasury had to do something in the fall of 2008. But to fix liquidity without fixing solvency was a grave error. By denying the solvency crisis, major bank executives who had run their companies into the ground were allowed to keep their jobs, and shareholders who had placed bad bets on their firms were allowed to collect government largesse, as bloated bonuses began paying out soon after.

But the banks themselves still faced a capital shortage, and were only kept above those critical capital thresholds because federal regulators were willing to look the other way, letting banks account for obvious losses as if they were profitable assets.

So based on the Fed audit data, it’s hard to conclude that Fed Chairman Ben Bernanke was telling the truth when he told Congress on March 3, 2009, that there were no zombie banks in the United States.

“I don’t think that any major U.S. bank is currently a zombie institution,” Bernanke said.

As Bernanke spoke those words banks had been pledging junk bonds as collateral under Fed facilities for several months. From March 4, 2009 through May 12, 2009, when the Fed data stops, only two institutions borrowed money from the Fed’s Primary Dealer window: Bank of American and Citigroup. They borrowed almost every day, pledging junk bonds as collateral. Bernanke either knew this, or should have known it as a major public official.

This is the heart of today’s foreclosure fraud crisis. Banks are foreclosing on untold numbers of families who have never missed a payment, because rushing to foreclosure generates lucrative fees for the banks, whatever the costs to families and investors. This is, in fact, far worse than what Paul Krugman predicted. Not only are zombie banks failing to support the economy, they are actively sabotaging it with fraud in order to make up for their capital shortages. Meanwhile, regulators are aggressively looking the other way.

The Fed had to fix liquidity in 2008. That was its job. But as major banks went insolvent, the Fed and Treasury had a responsibility to fix that solvency issue—even though that meant requiring shareholders and executives to live up to losses. Instead, as the Fed audit tells us, policymakers knowingly ignored the real problem, pushing losses onto the American middle class in the process.

Will The Fed Withdraw Its Foreclosure Predator Bailout?

Zach Carter — Tue, 30 Nov 2010 13:17:48 -0500

Yesterday, The New York Times ran an editorial opposing a new Federal Reserve proposal to eliminate predatory lending penalties. The rule under consideration is the same obscure regulation I blogged about a couple of weeks back, and it's very encouraging to see major publications paying close attention to the technical workings of regulatory policy. Usually even important rules like this slide right by under the media radar, but this particular rule is a major signal as to how policymakers will deal with the ever-escalating foreclosure fraud problem. Will the Fed and it's allies stand up for homeowners and the rule of law, even if it means sticking it to the banks? Or will they continue to screw homeowners to preserve capital at too-big-to-fail behemoths?

The Times editorial makes essentially the same argument I did, and it's totally correct, if I do say so myself. Right now, when a bank is found guilty of illegally withholding information about a mortgage from a borrower, the borrower can "rescind" the loan. They still have to pay off the principal balance, but all profits that the bank would have reaped from the loan—interest, fees, etc.—are nullified, and the bank loses its right to foreclose on the borrower.

This process is called "rescission," and it reflects a standard feature of contract law that dates back several centuries. If a contract is fraudulent, the minimum proper remedy is to undo the contract. With mortgages, this means the bank gets its money back, but it doesn't get to keep the profits it would have made from an illegal loan. Restricting borrower access to information is a key tactic in predatory lending, and as The Times notes, rescission is essentially the only federal remedy available to homeowners who have been defrauded.

The Fed is now attempting to eliminate this remedy due to "concern over banks’ compliance costs," as The Times describes it. This is a rather generous description of the proposal, given the depth and severity of the foreclosure fraud outbreak currently sweeping the country. There are three key places that banks can commit fraud in the mortgage process—when the mortgage is pushed on a borrower, when the mortgage is sold to an investor, and when a bank is collecting payments or foreclosing. Much of the fraudulent activity we see among investors and in the foreclosure process helps cover-up fraud at the original sale of the mortgage to a borrower.

If borrowers cannot obtain relief through rescission, then they have little reason to press claims about fraud in other parts of the mortgage process. This is an enormous gift to the nation's four largest banks, with major public policy implications that go beyond the very critical problem of rampant, illegal foreclosures. If borrowers don't press claims about foreclosure fraud, investors will not be able to access key information for filing lawsuits.

The single gravest threat to bank balance sheets (and bonuses) is a slew of lawsuits from mortgage bond investors. Banks packaged lousy mortgages into bonds and sold them off to investors, often without making proper disclosures to the investors, who subsequently lost a ton of money. Investors are currently organizing to take action against the banks, and in many cases have obvious, open-and-shut fraud claims against Wall Street titans if their cases come to court. But the key is actually getting their case before a judge. To do that, 25 percent of the investors in any bond have to file a lawsuit together. For multi-billion-dollar bond issues, that requires coordination among dozens of different institutions, often from different countries. That's a difficult technical feat, but investors will be much more likely to participate if they have lots of evidence of fraud before them. That evidence is produced by homeowners pressing their own individual cases. If homeowners don't go to court because they can't get anything out of it, the investors will have a harder time organizing.

So the Fed isn't really concerned about "compliance costs." This is, in fact, a rather absurd notion. Predatory lending is a form of theft. Imagine if the shoe were on the other foot, and the bank was being robbed. Can you imagine bank robbers complaining about the "compliance costs" of having to give back stolen cash? They would be laughed out of any courtroom. But the Fed is not only seriously considering such an argument from bankers, it is actively promoting it as official public policy.

The Fed's proposal is itself illegal. Regulators like the Fed have the right to make rules that enforce laws passed by Congress. When Congress passed the Truth in Lending Act in 1968, it explicitly granted borrowers the right of rescission as a remedy for predatory lending. The Fed is now attempting to interpret that statute to mean that, actually, borrowers have no such right. If the Fed's proposal is enacted, it will be a 180-degree reversal of the law on the books.

It's hard to imagine a way for the Fed to disgrace itself any further than it did by failing to rein in the mortgage mess over the past decade. But if it proceeds with this effort to protect banks that engaged in predatory lending, it will not only be guilty of falling down on the job and looking the other way, but of actively encouraging illegal mortgage lending.

Whether the Fed withdraws its proposal or not, this is not what bank regulators are supposed to do, especially in the middle of a foreclosure fraud crisis. Elizabeth Warren and the Consumer Financial Protection Bureau will get formal jurisdiction over these issues in July 2011, and it won't come a moment too soon. The Fed is proving, once again, that it cannot be trusted to protect the middle class from illegal abuses. Or even simply follow the law itself.

The Fed's New Foreclosure Predator Bailout

Zach Carter — Tue, 16 Nov 2010 11:50:15 -0500

Despite escalating outrage over rampant foreclosure fraud, the Federal Reserve now appears ready to eviscerate a key mortgage regulation in an effort to spare banks the losses from their own wrongdoing. Even as bank executives preposterously claim to have wronged nobody in the foreclosure process, they're pushing hard to unwind the only serious federal rule that protects borrowers from predatory loans and improper foreclosures. As if the last decade of abuse wasn't bad enough, banks are once again mobilizing to screw borrowers in the pursuit of epic bonuses. And once again, it appears that the Federal Reserve has become an accomplice to this nationwide mortgage scam.

Today, top mortgage officers from the nation's largest banks are telling the Senate Banking Committee that they aren't kicking the wrong people out of their homes. This is simply false. Problems at mortgage servicers have been going on for years, long before banks got into trouble for illegally robo-signing foreclosure documents. People are kicked out of their homes without cause in the United States every day. If the top executives at America's largest banks don't know this fact, they lack the competence needed to run their organizations.

Law firms that work with troubled borrowers are jam-packed with horror stories about foreclosures caused entirely by banks, not borrowers. Families who never miss a payment come home to an eviction notice, or a thug breaking down their door.

But it's even more common for borrowers to find themselves in trouble because their bank engaged in blatantly predatory lending. There is only one serious federal remedy for predatory lending, and the Fed is now knowingly trying to gut that remedy in order to help banks avoid losses from their own fraud. The remedy is called rescission, and it works like this:

If a bank failed to make key consumer protection disclosures about a mortgage, the borrower can demand that all of the interest and closing costs on the loan be refunded. Equally important, the bank must also stop all foreclosure proceedings and give up its right to foreclose. Once the bank gives up its right to foreclose, the full amount of the mortgage, minus interest and closing costs, becomes due. This isn't a free lunch for the borrower, especially when the value of her home has declined dramatically, but it's better than nothing, and it does impose real costs on banks.

For this process to function at all, it is absolutely critical that the bank be barred from foreclosing before the borrower has to pay off the remainder of the loan. A borrower can easily owe hundreds of thousands of dollars after winning a rescission. Few victims of predatory lending actually have that kind of money on hand.

This is the whole point of rescission, and it's been on the books since the Truth in Lending Act was passed in 1968. Without it, the consumer protections detailed by that law have no teeth. A bank is barred from engaging in predatory lending, but if it does it anyway, it faces no serious punishment.

Rescission, in other words, is the only federal legal device keeping banks in check on predatory lending (as the last decade proves, it's nowhere near enough). Predatory lending is really bad. If banks engage in it, they should face dramatic consequences. They don't get to foreclose and they give up all of the profit they expected to score from the predatory loan. If the borrower doesn't have all of the money on hand to pay off what's left, the bank has to deal with this money coming in over time.

The bank lobby and the Fed are now trying to completely gut the substance of this regulation. The Fed has just proposed a new rule that would reverse the order of payments and the right to foreclose under rescission. Under the new rule, a bank that has engaged in predatory lending does not have to give up its right to foreclose until after the borrower has paid off the full remaining balance of the loan.

Under the Fed's proposal, if you're the victim of illegal predatory lending, the bank will still get to foreclose on you unless you pony up hundreds of thousands of dollars all at once. And you'll have to pony up what the bank says you owe, which may be very different from what you actually owe. That eliminates the usefulness of rescission, making the new rule a bailout for predators.

The Fed knows full well that it's gutting the law here. The Board of Governors and their staff have met with key consumer lawyers no less than three times about this exact rule proposal, and the Fed is going ahead with it anyway.

Here's what's really going on. The largest banks don't have enough capital to weather a bad housing market. And any process that sheds light on the documentation procedures at mortgage servicers will expose the big banks to investor lawsuits. But investors can't sue without those documents. Rescission judgments create a paper trail for illegal loans. In addition to creating immediate losses for banks, rescission documents that banks sold illegal loans, giving investors who bought mortgage-backed securities ammunition for well-founded lawsuits. Those lawsuits, in turn, could sink some of the biggest names on Wall Street, something the Fed has been trying to prevent at all costs since 2008.

How close to the edge are the banks? Many mortgages that they account for as profitable assets are actually huge losses. The most obvious example of this insanity involves second lien mortgages. There are lots of kinds of second liens loans, but the important thing to remember is that they're the first asset to be wiped out when housing prices decline. Right now, they're in big trouble.

The second-lien holdings of Citigroup, Wells Fargo, Bank of America and JPMorgan Chase are about equal to their total capital. If you wipeout second liens, these banks are done. Right now the banks are accounting for these second liens as if they were worth nearly 100 percent of their original value—even though these loans only trade at only about one-quarter of that value. If banks take the market's value of just one class of assets, they're gone.

This class of assets goes completely under if banks have to own up to the current foreclosure fraud mess. The only real way to fix the documentation fraud problems is a nationwide program reducing the amounts that borrowers owe on their mortgages to current home values. Doing that forces the banks to acknowledge that their second lien mortgages are, in fact, worthless.

So the big banks and their protectors at the Fed are launching a two-pronged strategy. First, they're trying to prevent investors from obtaining the loan documents that will fuel well-justified lawsuits. Second, they're trying to give banks even greater control over the foreclosure process, in order to allow banks to continue to game accounting rules. This is a premeditated strategy to save banks from losses created by their own fraudulent, predatory behavior. It has no place on the books of the Fed, particularly after the central bank's total failure to prevent the mortgage abuses of the past decade.

It's not too late for the Fed to turn back. It can, in fact, abandon this bailout, and leave consumer protection issues to the new Consumer Financial Protection Bureau, which is designed to handle exactly this sort of issue, for exactly this reason.