regulation

Devastating, Job-Killing, Socialist Regulations

Dave Johnson — Sun, 18 Dec 2011 12:13:31 -0500

Conservatives, their movement funded by big oil and king coal, constantly complain about "job-killing regulations." They say that the Environmental Protection Agency is pushing "socialism" because it wants to lower the amount of pollution that energy companies pump into the air. And here is a story that makes their point.

From the AP: Russia oil spills wreak devastation,

Environmentalists estimate at least 1 percent of Russia's annual oil production, or 5 million tons, is spilled every year. That is equivalent to one Deepwater Horizon-scale leak about every two months. Crumbling infrastructure and a harsh climate combine to spell disaster in the world's largest oil producer, responsible for 13 percent of global output.

Oil, stubbornly seeping through rusty pipelines and old wells, contaminates soil, kills all plants that grow on it and destroys habitats for mammals and birds. Half a million tons every year get into rivers that flow into the Arctic Ocean, the government says, upsetting the delicate environmental balance in those waters.

It's part of a legacy of environmental tragedy that has plagued Russia and the countries of its former Soviet empire for decades, from the nuclear horrors of Chernobyl in Ukraine to lethal chemical waste in the Russian city of Dzerzhinsk and paper mill pollution seeping into Siberia's Lake Baikal, which holds one-fifth of the world's supply of fresh water.

OOPS

Oh, darn, sorry. My bad. Big mistake. Oops. That's a story about what happens if we don't strictly regulate the energy companies.

The oil industry in Komi has been sapping nature for decades, killing or forcing out reindeer and fish. Locals like the 63-year-old Bratenkov are afraid that when big oil leaves, there will be only poisoned terrain left in its wake.

"Fishing, hunting — it's all gone," Bratenkov said.

Our Chronic Cronyism — and Corruption

Sam Pizzigati — Sun, 01 May 2011 12:20:40 -0400

America's top bankers and CEOs don't have any more talent than millions of other Americans. They do have, two timely new data dumps remind us, plenty of generous friends in pivotal places.

We Americans, former Reagan White House budget director David Stockman told a reporter last week, “no longer have a democracy.” Instead, Stockman charged, we have “crony capitalism,” a system that’s rigging the economy to benefit the powerful few — at everyone else’s expense.

Last week brought still more evidence on how revoltingly raw this rigging has become. Wall Street and Corporate America, new data detail, have some incredibly thoughtful cronies who sit in some incredibly important places.

Some of these cronies run the Federal Reserve. Others serve on corporate boards of directors. Together, they’ve made the Great Recession a Great Sensation — for America’s corporate and banking elite.

Let's begin with the cronies that Wall Street can count on at the Federal Reserve, the formally independent institution that’s supposed to safeguard America’s financial health. Late in 2008 and early in 2009, the crunch time in our recent financial meltdown, these cronies at the Fed made hundreds of billions of dollars available to America’s biggest banks, at near-zero interest rates.

This generosity, Fed officialdom assured us, had a public purpose. The banks, the argument went, would turn Fed dollars into needed loans for small businesses.

Bernie Sanders, the independent U.S. senator from Vermont, didn’t quite buy that explanation. He shoved into the financial reform bill that passed Congress last summer a provision that forced the Fed to reveal exactly who received all those near-zero-rate loans.

Sanders subsequently had the Congressional Research Service analyze the data that disclosure produced. Last week, Sanders released the CRS analysis.

The nation’s six largest banks, the CRS researchers found, took those near-zero-rate billions the Fed so graciously loaned them and bought federal bonds. The federal bonds they bought paid the banks a much higher interest rate than the banks were paying on their loans from the Federal Reserve.

In effect, says Sanders, the Fed was providing America’s big banks “free money.”

In 2008’s fourth quarter, for instance, JPMorgan Chase was sitting on $10.1 billion in 0.6 percent-interest loans from the Fed. At the same time, JPMorgan Chase was holding $10.3 billion in U.S. government securities that yielded 1.7 percent.

In that same quarter, Citigroup had $32.3 billion in Fed loans, at interest rates as low as 1.1 percent. The bankers at Citi, the CRS found, “simultaneously held $24 billion in U.S. government securities with an average yield of 3.1 percent.”

The resulting “free money” from this sort of swapping would eventually help right Citi’s shaky ship — and generate huge windfalls for the speculators who had bet on Citi’s survival. Hedge fund manager John Paulson, all by himself, pocketed $1 billion betting that Citi would not sink.

Off Wall Street, at about the same time, the cronies of America’s top CEOs — the power suits who sit on corporate boards of directors — were doing their best to outdo the gracious generosity the Fed was showing the nation’s biggest banks.

These corporate directors, in the meltdown months of late 2008 and early 2009, showered their CEOs with stock options. By standard accounting conventions, these options didn’t seem to be worth all that much. Corporate stock, after all, was selling at the time at decade lows.

Corporate directors, in their rush to please, would endeavor to offset these depressed share prices by handing their execs more options than usual. Starbucks CEO Howard Schultz, for one, collected 2.7 million options in November 2008, about quadruple the number of options he had received the year before.

The options gave the Starbucks CEO the right to buy, at a future date, 2.7 million of the latte giant’s shares at the low they hit in November 2008. For accounting purposes, Starbucks valued the total option grant to Schultz at $12.4 million.

In the two and one-half years since then, Schultz has axed the jobs of 39,000 Starbucks workers and quadrupled the Starbucks share price. The 2008 option grant to Schultz, the Wall Street Journal noted last Tuesday, would, if redeemed today, add $76 million to the Schultz family fortune.

Starbucks shares, despite their recent rise, are still running 5 percent under their price five years ago. In other words, Starbucks shareholders who bought their shares in 2006 are still swimming in the red, while tens of thousands of baristas are looking for work and Howard Schultz is admiring a colossal windfall.

But the cronies-in-the-corporate-boardroom story stretches far beyond Starbucks, as the new data the Wall Street Journal released last week show.

Ninety percent of the CEOs at America’s top 500 companies grabbed up stock options at the depth of the Great Recession. These options, if exercised today, would bring the 500 CEOs an amazing $3 billion more than their companies originally estimated in 2008 and 2009.

The big option grants corporate directors handed out back then have become, muses CEO compensation consultant Brian Foley, winning “lottery tickets.” Executive pay, adds analyst Frank Glassner, has been “turbocharged.”

Cronies have, of course, always accompanied capitalism. But some economic eras do seem to see cronyism playing a more dominant role than others.

Our most crony-heavy eras — the Gilded Age after the Civil War and the Roaring Twenties — share a great deal in common. They all have wealth concentrating at America's economic summit, with little or no pushback from government.

We’re living in just such an epoch today. With annual rewards running as high as $4.9 billion, the top hedge fund take-home last year, the incentive to grab for the brass ring — by any means necessary — can become overwhelming. In that climate, the illegal and the unethical become everyday business practice.

We can, with David Stockman, call this corruption “cronyism.” But back scratching isn’t driving the greed dynamic we see all around us. Inequality is.

Sam Pizzigati edits Too Much, the online weekly on excess and inequality published by the Washington, D.C.-based Institute for Policy Studies. Read the current issue or sign up to receive Too Much in your email inbox.

In a Democracy, Freedom of Assembly Trumps “Free Enterprise”

Leo Gerard — Fri, 25 Feb 2011 09:40:22 -0500

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It’s illegal in America now to buy or sell a human being, but a recorded telephone conversation between a Republican governor and a guy he thought was a billionaire benefactor shows that it’s still possible to own a politician.

Wisconsin’s Republican Gov. Scott Walker didn’t have time to talk to Democratic leaders or union officials about his anti-union legislation – a proposal that has incited protests by tens of thousands for more than a week in Madison. But he jumped on the phone for 20 minutes this week when told the caller was billionaire David Koch, who was Walker’s second largest campaign contributor, who provided $1 million to a GOP fund to attack Walker’s opponent and who bankrolls radical libertarian organizations and the Tea Party.

Republicans like Walker, owned by billionaires like Koch, are fulfilling demands from corporate interests that government “free” enterprise by slashing corporate taxes and regulation. Over the past three years, America has suffered the consequences of a government under-funded after tax breaks to the rich and under-performing after years of lax regulation. The result: a growing federal deficit, the Wall Street collapse, the BP oil spill and the deaths of 29 Upper Big Branch miners. Still, Republicans want more government atrophy. That would leave only one restraint on corporate control of the economy, environment and government.

That one restraint is labor unions. A union is workers using their constitutionally-guaranteed freedom to assemble, the right to get together as a group, in this case a labor organization, to negotiate collectively with employers for better wages, benefits and working conditions.

Workers who gathered together in unions over two centuries in this country have succeeded in raising their wages, as well as the wages of non-union workers in competing industries. Union workers secured improved working conditions so fewer were killed on the job. And they achieved creation of the federal Occupational Health and Safety Administration, which protects the safety of all workers. Over the decades, unions played a major role is obtaining legislation barring child labor, standardizing the 40-hour work week, and creating both Social Security and Medicare.

Similarly, studies show union successes enhance the lives of all workers in a state. In anti-union states, the average worker earns $5,333 less a year, the proportion of people without health insurance is 21 percent higher and the rate of workplace death is 51 percent higher.

In addition, there’s evidence that union workers improve quality. Currently, after receiving an education from union teachers, Wisconsin youngsters collectively score second highest in the nation on the ACT/SAT college admission tests. By contrast, the five states barring teacher unions rank at the bottom of the pack: South Carolina dead last at 50^th; North Carolina, second last at 49^th; Georgia third from last at 47^th; Texas fourth from last at 47^th, and Virginia ever so slightly better at 44^th.

Still, Wisconsin Gov. Walker wants to destroy his state’s teachers unions. Two studies determined that public workers, that is those employed by governments such as teachers, firefighters and police officers, earn less than their counterparts in the private sector when both benefits and education are factored into the calculation. It wasn’t union workers, in the public or the private sector, who caused states’ financial crises. That was gambling on Wall Street, which ravaged the economy. Still, Republican governors across the country are demanding that government workers pay.

The government workers in Wisconsin already agreed to accept Walker’s financial demands – that they pay more for their pensions and health care. This negates Walker’s contention that this dispute is about the budget. The governor is demanding more than those financial concessions. He wants the legislature to cripple the unions’ ability to bargain for improvements in the future. In his “budget repair bill,” he would strip government workers of their right to negotiate over working conditions and benefits. They’d be able to discuss wages but could never get an increase above inflation.

This is union busting. At the demand of corporate interests. And Walker is joined by Republicans in Ohio, Indiana, Oklahoma, Tennessee and others in attempting to do it, both to private and public sector workers.

This is not about money. It’s about controlling America. Corporations have bought Republicans, who now chant the corporate mantra that government coddles its citizens with the likes of mine and food safety rules.

Walker’s eagerness to talk to David Koch illustrates this. Koch and his brother Charles own the second largest privately-held company in America. Only the fortunes of Warren Buffett and Bill Gates exceed the Kochs’ $35 billion. They’ve used that money to finance the supposedly-grassroots Tea Party and conservative groups like the Americans for Prosperity Foundation (APF) that have funneled money into anti-reform policies – including attempts to reverse environmental and health care legislation.

It’s a giant circle. Koch got Walker elected. The Koch-backed Tea Party now rallies in Madison against the public employees. The Koch-financed APF bought $320,000 in TV ads against the public workers. Other Koch-financed GOP governors are sending letters of support to Walker. In his few weeks as governor, Walker passed legislation to lower tax rates for and limit damage awards against businesses like the Kochs’. In addition, tucked into the anti-union bill is a provision that would enable Walker to sell the state’s power plants to the Kochs without bids or state agency review.

Corporations are accomplishing their goal of shriveling government to the point of ineffectiveness so “enterprise” is “free” to run rogue. Now with their purchased politicians, corporations are trying to do the same to unions – the only organization other than government that has traditionally effectively defended working Americans.

In the recorded conversation between Walker and a liberal blogger posing as Koch, Walker accepted an offer of a vacation trip from the “billionaire” if he “crushed” the public employee unions and said his effort was to get “our freedoms back.”

That’s exactly right. This is a contest between the excesses of “free” enterprise and the constitutionally-protected freedom of assembly. And getting “our freedoms back” means wresting them back from corporations.

How regulation came to be: Filling it up with Ethyl

Dave Johnson — Mon, 14 Feb 2011 10:46:42 -0500

Paul Ryan On Limited Government

Joseph M. Firestone — Tue, 01 Feb 2011 00:23:31 -0500

In my last two posts I reviewed the deficit reduction aspects of Paul Ryan's Republican response to the SOTU. But Ryan also placed considerable emphasis on the idea of “limited government” in his response. In this post, I want to evaluate what he had to say on this theme.

So I’d like to share with you the principles that guide us. They are anchored in the wisdom of the founders; in the spirit of the Declaration of Independence; and in the words of the American Constitution.

They have to do with the importance of limited government; and with the blessing of self-government. . . .

We believe, as our founders did, that “the pursuit of happiness” depends upon individual liberty; and individual liberty requires limited government.

I find myself in complete agreement with this position; but I think it raises a very big issue, and that issue is: in exactly what ways ought the Government to be limited? Unfortunately, the Constitution doesn't tell us that in a completely clear way. It leaves it up to us to figure it out. So let's see what Congressman Ryan thinks about this issue?

Limited government also means effective government. When government takes on too many tasks, it usually doesn’t do any of them very well. It’s no coincidence that trust in government is at an all-time low now that the size of government is at an all-time high.

There are a lot of factors that determine the effectiveness of Government. It's pretty clear that Government won't be effective if it's badly led and managed. So, since 1977 we've seen that Government wasn't very effective in many of its functions when managed by Ronald Reagan and the two Bushes. I wonder why. Could it be that these Republican Presidents wanted Government to be effective in the various areas of Government activity established by legislation they disapproved of?

It's also clear, that Government won't be effective if the people chosen to lead intend for it to perform poorly. So, when the Republicans have appointed Secretaries of Labor who were anti-labor, it's not surprising that the Labor Department performed poorly. Nor is it surprising that when they appointed people to head the FCC, or the Equal Employment Opportunity Commission that the work of these agencies suffered. Or take the EPA, the Republicans keep appointing EPA Directors who are opposed to environmental regulation. Clearly, they are there to stop the Government from performing not, to manage its enforcing the law.

As to the Government having too many tasks to do anything very well, it's quite clear that the size of the Government is not as important as the size of the units of Government performing the tasks it needs to perform, and as the communications among units that need to coordinate to perform tasks well. Also, whether units perform well is a function of the resources available to the units performing particular tasks.

For years Republicans and, to a lesser degree, Democrats, have been trying to shrink the Government, so that much of its work, has to be contracted out to the private sector. Of course, this introduces incentive problems, and also communication problems which interfere with both efficiency and effectiveness. There is no evidence that this policy of shrinking Government's permanent civil service employees, and contracting out to the private sector has been either less expensive for the Government, or more effective than Government operations in the 1950s and 1960s, which used many more civil service employees, and fewer private contractors to perform Government's work. In fact, it's likely that contracting out has been far more expensive and less effective than the old way of doing things, because private contractors have a tendency to stretch out work, and continue it as long as they can so that their billings are extended.

In any event, the size of the Government doesn't necessarily correlate with effective performance. We can see this by comparing national governments across the World. Many nations spent more, and some far more, as a percentage of GDP than the 34.6% the United States spent on Federal, State, and local Government in 2007; for example: France; Sweden, Denmark, Sweden, Belgium, Norway, The Netherlands, Austria, Finland, the UK, Germany, Canada, New Zealand, Australia, and Switzerland. Arguably all of these Governments performed more effectively than the US Government in that year. But, even if you don't believe that, it's hard to deny that they performed at least as well.

On the other hand, many nations that spent more on Government as a percent of GDP than the US, performed much more poorly than we did. My point is that there is no clear, strong, correlation between nations whose Governments are obviously effective, and nations with a particular size of Government, and certainly there is no empirical evidence that smaller Governments work better than larger ones.

Finally, the size of Government, viewed in terms of Government spending as a percent of GDP, is not at an all time high relative to the rest of the economy. It was larger in WW2 for one thing. For another, its recent increase is due to the effects of the recession and additional Government expenditures made to combat it.

Trust in the Government may be at or near an all time low, but that is due to the failures of the Bush Administration, the crash of 2008, and the Federal bailout of the banks without a corresponding bailout of Main Street. That is, the Federal Government hasn't performed very well, in large part due to the role of the Republicans, including Congressman Ryan, in opposing the passage of Government spending sufficient to create full employment, and in supporting the continued bailout of the banks, the payment of undeserved bonuses to FIRE sector personnel, and in opposing investigations of the mortgage and accounting control frauds that have put so many out of their homes.

This lack of trust, isn't due to too much Government action, and won't be fixed by Mr. Ryan's preferred policies of ineffective, or no regulation of the FIRE sector and fiscal austerity. On the other hand, it may be fixed by an effective Federal Job Guarantee program, a Federal Revenue Sharing program saving state and local jobs, a payroll tax holiday for employers and employees including Federal reimbursement of the Social Security account, ending the wars in the Middle East quickly, and passing a Medicare for All bill

The President and the Democratic Leadership have shown, by their actions, that they believe government needs to increase its size and its reach, its price tag and its power.

What planet does Congressman Ryan live on? The Democrats have done very little to increase the size of Government. The measure of that is that Federal Government spending as a percent of GDP is still extremely low compared to National Government expenditures by the nations mentioned earlier, and has only risen about 5 percentage points from Bush Administration levels.

In addition, the President, much to his discredit, has done all he could to keep Government expenditures revenue neutral or revenue positive, beyond expenditures for defense, and increases in social safety net expenditures resulting from the recession. His health care reform bill is a disgraceful attempt to bailout the insurance companies without taking them over, because he would not entertain Medicare for All.

We believe a renewed commitment to limited government will unshackle our economy and create millions of new jobs and opportunities for all people, of every background, to succeed and prosper. Under this approach, the spirit of initiative – not political clout – determines who succeeds.

Millions of families have fallen on hard times not because of our ideals of free enterprise – but because our leaders failed to live up to those ideals; because of poor decisions made in Washington and Wall Street that caused a financial crisis, squandered our savings, broke our trust, and crippled our economy.

The history of America is largely the history of extending initiative from the economic sector to politics and gaining advantage in both sectors. We've seen that with the railroads, the steel and oil industries, coal, the mass media, telecommunications, the software industry, the FIRE sector, and most other industries that have scaled the economic heights in this country. There is no way to separate economic initiative from its extension into politics. The idea that these two can be separated is a myth.

So, unfortunately, as much as we would like to believe that a company's success in America has nothing to do with politics. It, most often, is intertwined with either favorable political conditions, political influence, or both. Congressman Ryan knows that very well because he, and his Republican and Democratic colleagues, are the recipients of attempts to fix the political system, so that certain private sector businesses can profit. So, I don't know whether Congressman Ryan thinks that's the “spirit of initiative” or not. But I think it's just as much, if not more, about buying political clout.

Ryan goes on to blame Washington and Wall Street for decisions that caused the financial crisis. I certainly agree; But I also think that the wrong decisions made by Washington include de-regulating of Wall Street so that the spirit of “free enterprise” reigned supreme. That happened during the Clinton Administration under the influence of Robert Rubin and Larry Summers, and then the Bush Administration saw to it that the SEC would not enforce the inadequate regulations that still remained. Unregulated “free enterprise” produced unprecedented accounting control frauds and bubbles in the Real Estate markets which eventually led to the crash of 2008. Then the Obama Administration bailed out the banksters/fraudsters and until now has refused to investigate and prosecute the perpetrators, while moaning about how we have to look forward and not backward.

Meanwhile, Paul Ryan is responding to all this by telling us that we need to back off regulation of the private sector, and that will make everything all right. But anyone with an ounce of common sense knows that the only thing that will clean up the banking system, and restore public faith in it, is cleaning up the frauds and punishing the people responsible. Why isn't Paul Ryan calling for that if he wants people to have faith in “free enterprise” again? He needs to keep in mind that there's no freedom without responsibility and accountability, and that his prescription, and that of the Republicans is to put responsibility and accountability aside, and to let working people bear the burden of the failings of the Wall Street FIRE sector and the corrupt Congresses and Administrations that failed, and still fail, to regulate them.

Finally, Congressman Ryan's plea for a return to limited Government would be far more credible if he were as much concerned about limitations on the size and intrusiveness of Government when it comes to privacy, civil liberties, rights of habeas corpus, protections against torture, and the right to a speedy trial, as he is about the non-existent rights of businessmen to subvert markets through fraudulent activity hiding beneath the skirts of the ideal of “free enterprise. He would also be much more credible in his concern for liberty, if he were concerned that “necessitous men, are not free men,” and were willing, in the interests of liberty, to strengthen, instead of weaken, the social safety net by making its provisions as generous as the safety net in other civilized nations. He would, further, be still more credible, if his concern for liberty were great enough that he would support Medicare for All, so that employees in the United States would no longer be tied to jobs that they don't like, and were free to move to other employment without having to worry about interrupting or degrading their health care coverage.

He would, further, be even more credible, if his concern for liberty extended to providing a Federal Job Guarantee to everyone who wanted to work, so that they had the freedom to do so. And he would, finally, be even more credible that that, if he recognized that liberty is not about small sized Government or big Government, but is, instead, about Government that is the right size, to do those things that will maximize the liberty of as many people as possible in our nation. It's about recognizing that the liberty of individuals is often in conflict, and that you can't maximize liberty by giving some people (big business people and FIRE sector people) complete economic liberty from any reasonable rules, when that means removing or restricting the liberty of many or most of the other people in the United States, by chaining them to the wheel of extreme economic insecurity.

Government does need to be limited, but only a simpleton can fail to recognize that its limits have less to do with its size, and much more to do with its having processes that are just and fair and maximize liberty, rather than processes which enshrine arbitrariness, favoritism, exposure to political influence, and special favors for one group, placing them above the law. If Congressman Ryan understood that it is not about size, but about justice and activities that maximize liberty, then he would be worth listening to when he talks about limited Government, and his Party would gain the trust and honor among the American people that it has not had since the time of Teddy Roosevelt, and before that Abraham Lincoln. But don't hold your breath waiting for that understanding to happen. It's just not in the DNA of the 21st Century Republican Party.

(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).

GAO: Bank Regulators Not Even Looking At Foreclosure Practices

Zach Carter — Tue, 30 Nov 2010 15:13:00 -0500

A rather nauseating statement from a Government Accountability Office report on foreclosures:

Because they generally focus on the areas with greatest risk to the institutions they supervise, federal banking regulators had not generally examined servicers’ foreclosure practices, such as whether foreclosures are completed; however, given the ongoing mortgage crisis, they have recently placed greater emphasis on these areas.

You read that right. Bank regulators in the United States were not even looking at foreclosure practices before the media latched onto the foreclosure fraud outbreak. The Office of the Comptroller of the Currency and the Federal Reserve acknowledged this in hearings two weeks ago, but it's still harrowing to see the degree to which mortgage banking remains totally free of oversight, even after it drove the global economy off a cliff.

The rest of the report is about banks abandoning properties instead of proceeding with a foreclosure sale. Kind of sick-- throw a family out, then just abandon the house altogether, don't even bother to sell it. The GAO says it's not happening too much, but any sane businessperson would make sure that it never happens. A simple loan modification would cut everybody's losses here, but the banks can't be bothered with that. And nobody is bothering the banks about it.

You may recall that there was a tremendous legislative battle earlier this year over the creation of a new Consumer Financial Protection Agency. The bank lobby and regulators at the Fed, the OCC and yes, even the FDIC, all argued that we didn't need it, while essentially everybody else said we did. But the existing regulatory chiefs all made essentially the same argument against the CFPA: We have several regulators who oversee consumer protection, and they're all just great at it. Creating a new agency that focused only on consumer protection would be end up destabilizing the financial system, because regulating consumer protection without looking at bank safety and soundness would jeopardize bank capital levels.

This argument was absurd at the time, most obviously because the existing regulators were simply awful. They totally failed to restrain predatory mortgage lending for nearly a full decade precisely because they considered "safety and soundess" regulation to be their only job. Safety and soundness was construed as "bank profitability"—if a bank had lots of money, it was less likely to fail. In practice, that meant regulators would allow consumer protection violations so long as they made money for the bank. With the mortgage crisis, this consumer protection failure ultimately lead to a safety and soundness catastrophe, but that's not actually very common. Usually predatory lending is very profitable, which is why banks do it.

So what happened after all the top regulators went out in public and repeatedly screamed that we absolutely can't allow them to lose their consumer protection authority? They totally ignored consumer protection regulation. Look at the excuse that bank regulators fed to the GAO (emphasis mine):

Because they generally focus on the areas with greatest risk to the institutions they supervise, federal banking regulators had not generally examined servicers’ foreclosure practices.

Translation: Even after consumer protection violations wrecked the largest banks in the country, we still don't look at consumer protection unless it actually hurts a bank's bottom line, right away, right now.

The amazing thing here is that the legal liabilities from these foreclosure abuses once again could be putting bank solvency on the line. Global economy to Elizabeth Warren: Help!

Also, the link above is to a summary of the GAO report. The full report is here.

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.

Ridiculous Idea of The Day: Melissa Bean for CFPB

Zach Carter — Mon, 08 Nov 2010 11:38:20 -0500

This is a joke. Politico is floating the idea that notorious Wall Street crony Rep. Melissa Bean, D-Ill., could be tapped to head the Consumer Financial Protection Bureau if she loses her close election with Republican Joe Walsh. Even for Politico's rumor-mill, this is pretty funny stuff—only slightly less absurd than suggesting that Alan Greenspan might be picked to head the new agency.

The idea just gets a single paragraph in Politico's Morning Money column, and it even features an administration official shooting down the idea. With good reason, because it makes no sense. President Barack Obama went to the mat to put Elizabeth Warren in charge of the CFPB, and she is doing a terrific job setting up the agency. She's named one of the world's best researchers on consumer finance, Raj Date, as a top adviser, and has started cracking down on deceptive fine print in credit card contracts. There's no reason to replace her with anybody, much less a notorious consumer foe.

Melissa Bean is probably the single greatest consumer antagonist in the Democratic Party. As financial reform moved through Congress, Bean repeatedly slipped in amendments aggressively defending Wall Street's right to pillage our pocketbooks. She single-handedly held up negotiations in the House Financial Services Committee for months, hamstringing the reform process and earning plenty of enemies in the Democratic leadership and the Democratic base. She is simply unconfirmable.

Fortunately, Obama doesn't need to do much looking to find a good CFPB director. He's already got the best person for the job, Elizabeth Warren, steadily building a record of effectiveness getting the agency off the ground. When the time comes to name a permanent CFPB director, that record, along with Warren's decades of work protecting the middle class, will make a very compelling case for her appointment. To be sure, the Republican leadership will filibuster whoever Obama nominates, but Warren already has strong relationships on Capitol Hill with members of both parties, and is extremely popular with the public. If anyone can survive a Republican filibuster, Warren can.

Here's the silly plant in Politico:

MELISSA BEAN FLOATED AS CFPB HEAD – Buzz on Friday had Rep. Melissa Bean (D-Ill.) possibly getting tapped as the first Consumer Financial Protection Bureau head depending on the outcome of her too-close-to-call reelection race, in which Republican Joe Walsh maintained a slight lead as of Sunday afternoon. But a possible Bean nomination is not sitting well with reformers on the left who say the moderate Illinois congresswoman is far too close to the banking industry. Said one administration official: “It’s not clear she would be acceptable to the reformers.”

Campaign Cash: Biggest Loser Corporate Edition—Spending $2 Million on a Losing Race in Iowa

Zach Carter — Mon, 01 Nov 2010 11:03:31 -0400

Corporate America is on the attack in every state. As Joshua Holland explains for AlterNet, outside groups have spent somewhere between $750,000 and more than $2 million in an attempt to unseat Rep. Bruce Braley (D-IA) in a state where ad buys come cheap. But Braley is almost certain to win anyway, even if his lead isn't quite as comfortable as it was in 2008, when he took 64 percent of the vote. This is what corporations and wealthy elites are willing to pony up in races they're sure to lose.

Most of that money comes from two groups: the U.S. Chamber of Commerce, a front-group for some of the nation’s largest corporations, and America’s Future Fund, a right-wing front-group founded by GOP lobbyist and ethanol executive Nick Ryan. Public News Service's Eric Mack highlights the races in Hawkeye state that are unusually flush with cash.

Thanks to the Supreme Court's ruling in Citizens United v. Federal Election Commission earlier this year, corporations and wealthy elites now have license to spend unlimited sums to promote candidates they like (or attack ones they don't). Things are already getting out of hand. Outside groups are dumping millions of dollars into obscure races this year—even in places where they appear to have almost no chance of victory.

Republican candidates are raking it in

Thanks to Citizens United, much of the spending in midterm elections is secret. We'll never know who is spending millions of dollars on anonymous attack ads. But a tiny fraction of the electoral purchases by outside groups have been disclosed, and if those are any guide, the Republican Party is reaping the vast majority of the rewards. As Jesse Zwick details for The Washington Independent, of the roughly $12 million in public corporate expenditures, they're spending more than $9.7 million on behalf of Republican candidates.

The Chamber of Commerce's long history in elections

Though big spending on campaigns is new for many political action committees, the U.S. Chamber of Commerce has been playing fast and loose with election law for years. As Harry Hanbury explains for GRITtv, the only reason the Chamber’s top brass aren’t behind bars right now may be due to deliberate cover provided by the Federal Elections Commission—its six members consist of three Republicans and three Democrats. Without four votes, the FEC can't to do anything to curb the Camber's activities. With the panel's three Republicans ideologically opposed to the very idea of campaign finance regulation, serious action from the FEC is nearly impossible.

When the FEC’s own top lawyers found that a complaint against the Chamber reveals a gross violation of law, the partisans on the FEC board refused to take action. In 2004, when Citizens for Responsibility and Ethics in Washington took aim at $3 million in political spending that the Chamber deployed to re-elect President George W. Bush, the FEC did nothing because of the partisan deadlock.

Citizens United helps those at the top

As David Brodwin explains for American Forum, the Citizens United decision doesn’t benefit businesses or corporations in general—it benefits the biggest, wealthiest corporations. When the Supreme Court freed corporations to spend unlimited amounts on political efforts, that freedom doesn’t help companies with constrained resources. In other words, Citizens United is a structural force that will permanently and inevitably reinforce the status quo. As the Wall Street crash, the BP oil disaster, the mining malfunctions in West Virginia and countless other recent corporate shortcuts have shown, the status quo is not acceptable.

“The money that will flood the political system will not represent the views of companies in green America" Brodwin writes. "Instead, the money that will flood the system will come from organizations like the U.S. Chamber of Commerce, which is expected to spend more than $200 million this year on lobbying and direct campaign expenditures. This organization and others like it represent companies that don’t value responsible business. Is this the kind of business thinking that we want to dominate our political discourse?”

But wait, there’s more!

In a Q&A with Sam Petulla at The American Prospect, Sheila Krumholz, executive director at the Center for Responsive Politics, talks about how the current problems with Citizens United remind her of the 1990s.
Check out my interview on corporate spending on The Young Turks.
Alexandra Gutierrez explains at The American Prospect how Alaska's Republican Senate candidate Joe Miller became an unlikely opponent to the new rules created by Citizens United.

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