Bailout Fuels Bitter Race to the Bottom

Maybe I just missed Harley Davidson’s thank you note to me and other taxpayers for bailing them out during the height of the financial crisis.

Perhaps the iconic motorcycle maker  didn’t think it would have to send a thank you note.

After all, they had every reason to think that the Federal Reserve’s emergency, low interest, $2.3 billion loans in the wake of the financial crisis would remain their little secret.

But the financial reform legislation spoiled all that, forcing the Fed to disclose details of  trillions of dollars worth of confidential loans they made, which amounted to a giant subsidy because of the low interest charged.

Beneficiaries included not just the country’s largest banks and foreign banks, but corporate giants such as General Electric, Verizon, Toyota and Harley Davidson.

It turns out that these companies borrow millions every day to pay their expenses. When the credit market froze up in the meltdown, Harley Davidson and the others turned to the Fed, which stepped in with loans at low rates and no questions asked.

Maybe the thank you note is still on Harley Davidson’s to-do list.

The company has been awfully busy, what with opening a new plant – in India, closing plants in this country and bullying its remaining U.S. workers to give back wages and benefits or face more plant closures.

It’s not that the company is incapable of showing gratitude. In 2009, a year in which the company suffered steep sales declines and more than 2,000 workers had been laid off, they paid their CEO $6.3 million – including a $780,000 bonus. Since January, 2009, the company has laid off more than a fifth of its work force, and closed two factories. By the end of next year, another 1,400 to 1,600 face layoffs.

In 2009, the average Harley Davidson worker who still had a job  was paid $32,000.

After threatening to close its York, Pa. plant and move production to Shelbyville, Ky., the company and the workers reached an agreement to keep the plant open – with 600 fewer employees and wage concessions. But not before the Pennsylvania governor, Ed Rendell, offered $15 million in tax incentives to the company.

All the cuts are paying off – at least for the company’s shareholders. In July, the company reported a $71 million profit, more than triple what it earned a year ago.

Maybe sending taxpayers thank you notes slipped their minds while company officials were busy hiring lobbyists to fight financial reform last year, to the tune of $115,000 – about $100,000 less than they spent the year before.

Harley Davidson is using the lift it got from its bailout subsidy to join the latest trend – companies make more profit with fewer workers, and wringing concessions from those that remain. As if the bailout wasn’t enough of a gift, the company squeezes even more from state taxpayers just for the privilege of keeping their plants open. For the company’s executives, the bailout fueled their escape from financial ruin and their race to the top. But workers and taxpayers are left standing on the sidelines.

Imagine if Harley Davidson had just split its $2.3 billion low-interest loans with its individual workers. Imagine if the taxpayers, who actually funded corporate America’s bailout, were  the recipients of anywhere near that kind of generosity. Imagine if we had a government with  as ferocious a commitment to shovel trillions into taxpayers and workers'  hands with no conditions of any kind.

We’ll never know what kind of creative energy, not to mention how much economic stimulus, would have been unleashed.

But that’s not the kind of bailout we got.

Harley Davidson, you're welcome.

Federal Reserve / Martin Column / Outrage - 12/11/2010

The Republican Who Tackled Foreclosures

President Obama isn’t the first politician to have to stare a massive foreclosure crisis in the face.

The last time foreclosures loomed so large in the economy and the national consciousness was during the Great Depression, when farmers and homeowners were losing their land in massive numbers.

Several states passed laws including moratoriums on foreclosure. Not because the banks couldn’t prove they owned the farms, or because they screwed up the paperwork. The moratoriums were implemented in recognition that the country was in an economic emergency and that having so many people lose their homes was bad for the country.

Minnesota passed such a law in 1933. After a judge allowed a couple to postpone foreclosure, the building and loan association that owned the mortgagee challenged the law. The firm appealed to the Supreme Court, contending that law was a violation of the Contracts Clause of the Constitution. But in its  landmark ruling in Home Building v. Blaisdell, the high court upheld the law. By a 5 to 4 vote the court ruled that the contracts clause wasn’t absolute and it didn’t outweigh the rights of the states to protect the vital interests of its citizens. In dissent, Associate Justice George Sutherland warned that the ruling would be just the beginning of further erosion of the contracts clause.

Chief Justice Charles Evans Hughes, an appointee of President Herbert Hoover, wrote the majority opinion. Hughes wasn’t some ivory-tower judge but a seasoned and fascinating Republican politician who had served as two-term governor of New York, with a record for establishing a public service commission, as well as pushing through labor law and insurance reform. He ran unsuccessfully for president against Woodrow Wilson before serving his first stint on the Supreme Court before running for president. After a stretch as secretary of state under President Calvin Coolidge, he was in and out of private life before President Hoover appointed him chief justice in 1930.

Though liberals gave him a hard time in his confirmation hearing, he often provided a swing vote in favor of the New Deal on a highly contentious court. But Hughes also repeatedly tangled with Roosevelt, voting against the constitutionality of the National Recovery Administration and opposing FDR’s court-packing scheme.

What do we get from this excursion into history? There’s some comfort in knowing the country has grappled with these tough times and issues before and survived. But it’s hard to encounter a figure like Hughes and not wish that some of his courage and unpredictability could rub off on our current crop of leaders, who seem so timid and tame by comparison, and who seem to have forgotten that protecting the vital interests of citizens isn’t just a matter of bailing out banks and tax cuts for the rich and hoping some of the booty will trickle down to the rest of us.

Foreclosures / Martin Column - 10/13/2010

Around The Web: Nothing Natural About Financial Disaster

Maybe this is the one that will finally cause people to take to the streets.

The crack investigative journalists at Pro Publica and NPR’s Planet Money have uncovered the latest evidence of how the big bankers schemed to keep their bonuses and fees coming by creating a phony market for their mortgage-backed securities, which were tumbling in value as the housing market tanked in 2006.

The Pro Publica/NPR investigation shows how the bankers from Merrill-Lynch, Citigroup and other “too big to fail” financial institutions undermined a system of independent managers who were supposed to be evaluating the value of the securities. The banks simply browbeat the managers into buying their products rather than face losing the banks’ business.

Meanwhile, the bankers continued to make money off every deal, even though the rest of us paid a high price for their continued trafficking in complicated financial trash.

Then when the entire business unraveled in the financial collapsed, these bankers got a federal rescue and a return to profitability.

Pro Publica acknowledges it’s complex material, so they’ve accompanied their investigation with a cartoon and graphs to make it easier to understand.

My WheresOurMoney colleague Harvey Rosenfield wrote recently about the falseness of the claim that either Hurricane Katrina or the financial collapse were primarily natural disasters. The NPR/ProPublica investigation is yet more evidence that the bankers’ irresponsible self-dealing turned a downturn in the housing market into full-blown catastrophes.

Writing on his blog Rortybomb, Mike Konczai hones in on the stark contrast in the fate of the bankers and many of the rest of us:  “Remember that by keeping the demand artificially high for the housing market in the post-2005, these banks created its own supply of crap mortgages. These mortgages inflated and then crashed local housing prices. Meanwhile the biggest banks got tossed a lifeline and homeowners can’t even short sale their home much less have a bankruptcy judge that can set their mortgage to the market price with a large penalty. And everyone lines up to tell those people what ‘losers’ they are, how `irresponsible’ they’ve been for being pulled into becoming the artificial supply for artificially created demand of housing debt. What sad times we are living in.”

Meanwhile the SEC is supposedly investigating the self-dealing. We’re still waiting for the tougher new SEC that the Obama administration promised. In the latest indication that we may have to wait a while longer, a federal judge has rejected the agency’s proposed $75 million settlement with Citibank over charges that the bank misled its own shareholders about the shrinking value of its mortgage-backed securities. The SEC said the bank misled investors in conference calls by saying its subprime exposure was $13 billion, when it was actually more than $50 billion. Among the pointed questions the judge asked: Why should the shareholders have to pay for the misdeeds of the bank executives, and why didn’t the SEC go after more of the executives?

The judge’s questions about accountability mirror the uneasy questions a lot of us have about this administration’s reluctance to take on the bankers whose behavior led to ruin for the country while they profited.

Around the Web / Derivatives / Executive Pay / Martin Column / Outrage / Securities and Exchange Commission (SEC) / Too Big To Fail / Uncategorized - 08/31/2010

The Credit Wolves Stalk South-Central

Before they fell into a costly cycle of subprime refinancing, Harold and Patricia King could afford to live in their modest two-bedroom home in south-central Los Angeles. They had paid $17,500 for it in 1968 with the help of a low-interest G.I loan.They raised two children and two grandchildren there. Harold retired in 1994 after 30 years on General Motors’ assembly line. His wife retired a few years later from her clerical job with the school district. They had a monthly fixed income of $2,900 and a fixed monthly mortgage payment of less than $1,000. They could handle it.

Unlike some who were able to take advantage of the cash they squeezed from the value of their homes, the Kings have little more than financial devastation to show for it. They refinanced 10 times — eight times between 2000 and 2006 — through various financial institutions. They wound up with more than a half million dollars in debt and payments more than their monthly income. Earlier this year they joined the more than 1 million other homeowners across the country that face foreclosure.

While we’ve seen and heard lots of stories of families suffering through losing homes they could never actually afford, the King’s saga puts into sharp focus one of the overlooked aspects of the on-going foreclosure crisis –many homeowners who had traditional– and affordable – mortgage loans were sold into subprime hell via refinancing deals.

In its 2006 study, “Losing Ground,” the Center for Responsible Lending found that between 1998 and 2006, “the majority of subprime loans have been refinances rather than purchase mortgages to buy homes,” and that homeowners who repeatedly refinance face a higher likelihood of facing foreclosure.

In February, the Kings packed their belongings in boxes, preparing for the loss of their long-time home. But they decided to fight for the home they’ve lived in for more than 40 years.  With the help of their lawyer, they’ve been able to stave off foreclosure, at least through the rest of the year. They’ve gone on the offense, suing their most recent lenders earlier this year for fraud and elder abuse.

Tracking the complex cast of characters and institutions with key roles on the business side of the Kings’ plight also offers a stark reminder that the explosive growth in subprime created vast wealth that never trickled down to hard-hit communities like south-central Los Angeles, a once-vibrant largely African-American and Latino neighborhood increasingly blighted by the lasting marks of the severe recession – high unemployment and high rates of foreclosure.

Take for example Deutsch Bank, which bought the MortgageIT firm that provided one of their Kings’ refinancings. In 2009, the banking giant increased its compensation to its executive board nine-fold over the previous year, led by the bank’s president, who was paid $13 million. Deutsch Bank’s path through the rocky financial crisis was helped along by its share of more than $50 billion it got in funds from the taxpayer bailout–funds the federal government paid to insurance giant AIG, which were then passed on to AIG’s clients – what has been labeled the “back-door bailout.”

The Kings also crossed paths with a lesser-known firm called Green Tree, which at one time was hired to act as the servicer on their loan – collecting the Kings’ mortgage payments every month. Founded by Lawrence Coss, a former car salesman, the firm had made a fortune in the 1990s by loaning money to people to buy mobile homes. Around the time Harold King was retiring from GM, Coss was drawing attention as the country’s highest-paid executive, winning a $69 million bonus ­– the largest bonus of all time when it was awarded in 1996. The following year he did even better, with a $102 million bonus. However, the fat profits that got Coss the bonus later turned out to be a mirage, built from bundles of risky loans and shaky accounting. Coss had to give some of his bonus back but managed to hang onto his ranches and philanthropic foundation. If anybody had been paying attention back in 2001, the unraveling of Green Tree’s business could have provided an early warning signal of the problems to come.

But in places like south-central Los Angeles, the country’s financial institutions were on a lending spree.  The Kings originally borrowed some money against their equity to supplement their retirement income. But then a series of lenders decided that the retired couple on a fixed income were good candidates for much larger refinancing.  What they offered the Kings were adjustable-interest rate loans with low teaser rates and exorbitant closing costs, fees and prepayment penalties. The Kings readily acknowledge now that they are financially unsophisticated and didn’t understand what they were getting themselves into. The deeper they went into debt the worse they felt.

“I felt guilty; I didn’t want to discuss it,” Patricia King says now. “I knew that something was deeply wrong. You hope for the best. But nothing good ever happened.”

Eventually lenders told the Kings that they needed to find somebody with better credit if they wanted to refinance their home. They brought in their 35-year-old grandson Antonio, who at the time worked at the Coca-Cola bottling plant.

According to the Kings’ lawsuit, Antonio King informed lenders that his monthly income was $3,700 a month, but when the broker or lender prepared the application, it showed his monthly income as $10,200 a month. The application, submitted on Antonio King’s behalf, also exaggerated the value of the home, from $154,000 to $540,000.  The Kings’ lawyer, Philip Koebel said of their grandson: “He threw himself to the credit wolves.”

Koebel said Antionio King found an ad for what sounded like an attractive new loan with a monthly payment of about $1,000 a month.

The Kings didn’t understand that they were getting into a negative amortization loan. The Kings were told that they would save $1,000.00 per month in comparison to a conventional mortgage if they made the minimum payment. They were not told that the minimum payment didn't even cover the interest. They were not told that the difference would be added to the principal of their mortgage and that they would be charged additional interest on the ever increasing balance of their mortgage.

With the money they got, the Kings paid off the previous loan. But they couldn’t keep up with the new payments. Antonio tried to work out a loan modification but Green Tree, which was servicing the loan,  “was not interested in making the loan affordable to the Kings,” according to their lawsuit.  Eventually Antonio filed bankruptcy in an effort to save his grandparents’ house. His 80-year old grandfather mows lawns in the neighborhood to bring in a couple of hundred dollars a month.

The lenders have fought to have the Kings lawsuit thrown out, so far unsuccessfully. In court papers their defense lawyers characterize the lawsuit as nothing more than “vague allegations and broad generalizations.” The Kings, they say, were “reaping the rewards of the strong housing market at the time and taking cash-out payment after cash-out payment each time they refinanced the loans.”

The Kings “were clearly very familiar with the loan refinancing process,” the lenders’ lawyers contend.

Like many others, the Kings didn’t see that the world had fundamentally changed, Koebel said. “Once a mortgage loan had been a relatively simple matter; a talk with a banker and a fixed payment for life. They’re not supposed to put your home at risk.”

Foreclosures / Martin Column - 08/09/2010

Around the Web: Landmark or Pit Stop?

I understand why people feel the need to tout the historical significance of the financial reform package that passed the conference committee. The president needs it politically and those who support him want to give him credit for getting anything at all in the face of the onslaught of bank lobbyists. Lots of folks worked very hard against tremendous odds to get something passed.

But I think a more sober analysis shows that what’s been achieved is pretty modest. It hands over many crucial details to the same regulators who oversaw our financial debacle.

Summing up, Bloomberg reports: “Legislation to overhaul financial regulation will help curb risk-taking and boost capital buffers. What it won’t do is fundamentally reshape Wall Street’s biggest banks or prevent another crisis, analysts said.”

Zach Carter characterizes it as a good first step. The Roosevelt Institute’s Robert Johnson writes: “This first round was not the whole fight. It was the wake-up call and the beginning of the fight. Rest up and get ready. There is so much more to do.”

The question is when we’ll get the chance to take the additional steps that are needed. The public is skeptical that the new rules will prevent another crisis, according to this AP poll. The Big Picture’s Barry Ritholtz grades the various aspects of the reform effort. Overall grade? C-. Top marks go to the new minimum mortgage underwriting standards. But legislators get failing grades for leaving four critical issues on the table: “to big to fail banks,” bank leverage, credit rating agencies and corporate pay.

Ritholtz saves some of his harshest evaluation for the proposal to house the new consumer protection agency inside the Federal Reserve, which he finds “beyond idiotic.”

Around the Web / Executive Pay / Financial Reform Legislation / Martin Column - 06/25/2010

Around the Web: Can WAMU be the Blue Cross of Financial Reform?

During the debate over health care reform, the public was galvanized by the disclosure of  outrageous insurance rate increases by Blue Cross.

It was that public outrage that finally got the healthcare legislation passed over Republican opposition.

Now Senate backers of  a strong overhaul of the financial system hope that televised hearings on the details of the reckless lending, incompetent management and multiple regulatory failures that sank the nation’s largest savings and loan will fuel support for financial reform in the face of relentless opposition from Wall Street.

The hearings got underway Tuesday in the Senate’s Permanent Subcommittee on Investigations, headed by Sen. Carl Levin,D-Michigan.

In strong contrast to hearings  held recently by the congressionally appointed committee to investigate the financial crisis, Levin’s opening hearing was tough, pointed and thorough. Levin said he intended for the hearings to serve as a case study for what happened at financial institutions during the meltdown. He compared WAMU’s selling and packaging of  high-risk option ARM and no-doc loans to dumping “pollutants into a river.”

Calling Washington Mutual’s former CEO Kerry Killinger “a forgotten villain of the financial crisis", Fortune’s Colin Barr sets the stage here. Business Week recounts the testimony here. CSPAN carried the hearings live they can be viewed here.

The star witnesses from WAMU were Killinger and former Chief Operating Officer Stephen Rotella. Killinger testified that WAMU was unfairly targeted by regulators because it not “too clubby to fail” as were larger financial institutions. Killinger insisted WAMU could have worked its way out of the crisis if regulators hadn’t eventually shut it down.

On Friday, we’ll hear from the regulators, who were well aware of WAMU’s questionable lending and securitization but continued to find that the savings and loan was financially sound.

Around the Web / Martin Column / Outrage - 04/13/2010

Strong Financial Consumer Protection Not Optional

While a key Democrat has been wobbling in his support for an agency to protect financial consumers, President Obama and members of his administration have recently come out strongly in support.

But will they fight for it in the face of relentless opposition from bank lobbyists, Republicans and Blue Dog Democrats?

The Obama administration’s abandonment of the public option in the health care debate provides a grim omen for the financial reform battle.

Some have compared the public option to the Consumer Financial Protection Agency. Both enjoyed broad public support but have been fiercely opposed by the businesses they would challenge: insurance companies fought hard against the public option while financial institutions fiercely oppose the consumer protection agency.

Aside from industry opposition, the public option and the CFPA shared the potential to provide a shield for consumers against abuses.

At various times, the president also supported the public option. Today his spokesman said the public option just didn’t have the votes. But that assessment was something of a self-fulfilling prophecy. There’s little evidence that President Obama put much pressure on legislators in support of the public option, and his ambiguity in public didn’t help it, either.

After initially supporting the public option, the president signaled it was not a crucial aspect of health-care reform.

But the public option offered the only potential check on the insurance companies, which are about to get a glut of new customers forced to buy policies from them. Democrats are suggesting a tepid combination of subsidies and insurance cooperatives that won’t provide meaningful accountability for the insurance companies.

Now Republicans are digging in their heels in opposition to the CFPA, with the usual rhetoric about wasteful government bureaucracy. It’s nothing but a thinly disguised fundraising pitch to woo the financial industry back from Democrats. Chris Dodd, soon to be retired head of the Senate Banking Committee, has suggested the consumer protection function might co-exist within some other agency. That’s a very bad idea. Just look at how much consumer protection the Federal Reserve, Treasury Department and other agencies accomplished in the housing bubble and its aftermath.

If that’s not enough to convince you, look at the recent shenanigans by banks and credit card companies piling on new fees.

The New York Times reported this morning how banks are getting ever more aggressive in socking their customers with higher over-draft protection fees. Credit card companies, even in the face of new regulations, are finding new ways to gouge their customers, charging fees for paying off your card on time, or even charging fees for not using a card.

There’s nothing stopping the Treasury and the Fed from using their bully pulpits to rail against these continuing abuses now. But they don’t. They ignored warnings about predatory lending during the housing bubble and have shown no stomach for protecting consumers since the economic collapse.

Dodd is supposed to unveil his latest version of financial reform this week. Let President Obama and your senators know that you won’t be fooled by financial reform in name only. Whether President Obama is capable of staying the course we don’t know. But we do know we need a strong, independent Consumer Financial Protection Agency.

Consumer Financial Protection Agency / Martin Column / President Barack Obama - 02/23/2010