Posts tagged with 'subprime mortgage'
Weekly Audit: Ending the Economic Status Quo
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by Zach Carter, TMC MediaWire Blogger
The banking lobby still holds enough sway inside the Beltway to torpedo sensible consumer protection rules, even after releasing a flood of predatory mortgages that kicked off the current economic crisis. On issues ranging from payday loans to subprime mortgages, the banking industry continues to successfully defend itself against new regulations that would protect the consumer. As if that weren’t outrage enough, the finance lobby has also joined other corporate interest groups to fund misinformation campaigns that smear unions and block wage growth.
As Mary Kane explains for The Colorado Independent, the push to rein in predatory mortgage lending appears to be losing steam on Capitol Hill. An extremely complex mortgage reform bill that is conciliatory to the finance lobby passed the House last month, angering consumer advocacy groups. Among the problems: the bill pre-empts many stronger state predatory lending laws and protects the Wall Street investment banks that gorged themselves on mortgage-backed securities.
Consumer protection shortfalls are not limited to messy mortgages. Lagan Sebert and David Murdoch detail the payday loan industry’s continued assault on U.S. consumers for the American News Project. By offering small loans, typically in amounts ranging from a few hundred to a few thousand dollars, payday lenders target consumers who need money for basic necessities, then charge them outrageous interest rates (as in, above 700%).
For years, newspaper editorials have denounced payday lenders for systematically exploiting the most vulnerable members of society, including members of the U.S. military, who are often targeted as a result of their reliable paychecks. The solution to the problem is as simple as the business is repulsive: Capping annual interest rates on all consumer credit products at 36% would make this kind of predation impossible.
Nevertheless, the payday loan industry has been able to escape a regulatory crackdown via an intense and sustained lobbying effort. Senate Banking Committee Chairman Chris Dodd, D-Conn., is now parroting payday lending lobbyists. Since payday loans are supposedly paid back within a matter of weeks, Dodd and the payday lending lobby say that it’s unfair to hold them subject to the same standards as a 30-year mortgage.
The argument is insane. No bank would ever get away with charging a 36% interest rate on a mortgage. Even the most predatory subprime mortgages didn’t have interest rates anywhere near that high. But Sebert and Murdoch go further, highlighting a report from the Center for Responsible Lending which found that payday lenders make 90% of their revenue from borrowers who do not pay their loans off on time. The loans are structured to be so expensive that consumers become trapped into making payments for the long-term, often spending thousands of dollars over multiple years to get out from under an initial loan of just a few hundred dollars.
Dodd has received major campaign contributions from the banking industry, but sometimes the lobbying effort is much more subtle. Several major corporate lobby groups have united under the misleading moniker of “Alliance to Save Main Street Jobs” to finance shoddily researched projects that defend the interests of the executive class in economic policy. An Alliance for Main Street Jobs report written by Anne Layne-Farrar has received quite a bit of attention for its claim that the Employee Free Choice Act (EFCA) would kill 600,000 jobs by making it easier for employees to organize. Several major news outlets have cited the allegation, including Fox News, MSNBC, The Wall Street Journal, and CBS News. As Art Levine reveals for In These Times, however, this research relies on completely meaningless statistical trends and disingenuous research design that render its findings utterly hollow.
Corporate executives are not afraid of EFCA because they think it will kill jobs or disenfranchise workers. They are afraid because it will empower workers to fight for living wages and provide safe working conditions—things that leave less money around for big executive bonuses at the end of the year and give workers a greater say in how companies operate.
In some respects, EFCA also represents the other side of the predatory lending problem. It is important to ban abusive loans, but it is just as important to make sure people are paid fairly for their work to ensure they don’t need to seek out shady credit just to make ends meet.
When so many brewing legislative battles relate to the economy, it’s easy to forget about the programs that have already been enacted. Some of the tax cuts included in the economic stimulus package were aimed at fostering investment in low-income and minority neighborhoods—a worthy goal. But as Michelle Chen notes for ColorLines, the program has some significant flaws. Chen highlights a report from the Government Accountability Office (GAO) which found that minority-owned community development entities are largely being excluded from the program, with approval rates about 67% lower than other applicants. The GAO could find no reasonable explanation for why minorities were not making the cut, especially when some recipients of the tax credits have a history of consumer exploitation. Capital One Bank, for instance, is receiving $90 million of these tax credits, despite its long history of abusive subprime credit card lending.
There have been some successes this year in the push for an economy that answers to workers and consumers. Much of the stimulus bill is designed to make sure important jobs don’t disappear during the recession, and Sen. Dodd’s credit card reform bill passed both chambers of Congress by comfortable margins and included some very strong improvements. But we know what caused the economic crisis: stagnant wages and predatory lending. A true recovery will have to empower workers and protect consumers, both of which will require breaking with the corporate status quo.
This post features links to the best independent, progressive reporting about the economy. Visit StimulusPlan.NewsLadder.net and Economy.NewsLadder.net for complete lists of articles on the economy, or follow us on Twitter. And for the best progressive reporting on critical health and immigration issues, check out Healthcare.NewsLadder.net and Immigration.NewsLadder.net. This is a project of The Media Consortium, a network of 50 leading independent media outlets, and was created by NewsLadder.
Weekly Audit: Debt and Taxes
by Zach Carter, TMC MediaWire Blogger
Earlier this month, President Barack Obama rolled out a new plan to limit the use of offshore tax havens and crack down on corporate abuse of the tax system. These tax havens siphon over $100 billion a year from the government, and have allowed many U.S. banks to duck paying taxes despite receiving massive, taxpayer-funded bailouts. The president’s plan is far from perfect, but comes as a welcome acknowledgment of the unfairness embedded in the current tax code.
Corporate taxes are precisely the type of issue that mainstream media outlets prefer to avoid. Even though the government’s tolerance of corporate tax evasion is a major scandal, it takes time to explain the issue’s intricacies, and it’s easier to resort to pundit-jousting than to provide a detailed report on how companies are cooking the books.
Most discussions of corporate taxes are quickly distorted by focusing on the overall income tax rate for the wealthiest corporations. This rate is 35% in the U.S., which is relatively high when compared to other developed nations with complex economies. But corporate lobbyists have successfully pushed thousands of complex loopholes into the U.S. tax code, making the actual, paid tax rate much lower. In a battle between pundits, a talking head screaming “Thirty-five per cent!” tends to be more persuasive than an academic talking about offshore deferred compensation.
This sheer density of the tax code creates a destructive feedback loop for policymakers. “If the loopholes are very complicated, then the only people who know enough to argue over them will be the lobbyists dedicated to their preservation,” Ezra Klein writes for The American Prospect.
As a result of this information imbalance, lobbyists can convince Congress to gouge ordinary citizens, even when those lobbyists are representing companies dependent on taxpayer largess for their very existence. Financial firms are particularly fond of establishing small sub-corporations in the Caribbean to shield their income from the U.S. Treasury. By registering their headquarters in these tiny nations, companies pay tiny fees to their “home” country and shirk being taxed in the U.S.
Citigroup has received over $45 billion in direct capital injections from taxpayers and billions more in federal insurance, but as Jim Hightower notes, the banking behemoth has a total of 427 sub-corporations scattered around the globe, and they serve no purpose other than avoiding taxes.
It’s not as if these companies have actually moved their employees or their trading houses or their factories to these remote locales. Their existence outside the United States entirely a fiction of paperwork crafted by clever corporate lobbyists. About 400,000 companies are headquartered in the British Virgin Islands, and none actually do any business there.
“All 400,000 companies are located in one gray, two-storey building in the town of Tortola,” Hightower notes.
Similar situations exist in dozens of other tax-haven nations. The Cayman Islands have over 12,000 companies “housed” in a single building. As David Cay Johnston explains in The Nation, the Caymans bar these pseudo-firms from engaging in any business beyond hiding profits.
Corporate tax-dodging has real consequences. “Honest taxpayers have to make up for the revenues lost through this offshore cheating in three ways: we pay more in taxes, we get fewer government services and we incur rising government debt,” Johnston writes.
The practice also helps artificially inflate corporate profits—and fake profit-taking was one of the chief drivers of the current financial crisis. In an illuminating interview with GritTV’s Laura Flanders, former banking regulator William Black explains how top-level executives at major financial institutions used accounting gimmicks to score record bonuses at the expense of the greater economy.
“It was an epidemic of fraud lead by the CEOs, and they were using accounting to commit that fraud,” Black says.
Subprime loans have much higher interest rates than ordinary prime loans. This means subprime loans are actually worth more to banks, provided the borrower can actually pay the loan. An executive with an eye to his own paycheck might urge his company to gobble up massive quantities of subprime loans, according to Black, enabling the bank to book record profits for the few months or years that borrowers could actually keep up with their mortgage payments. Giant profits generate gigantic bonuses for the executives, so even when the company is destroyed by all this subprime binging, the executive walks away rich.
Executives also aligned the pay incentives of employees lower on the corporate food chain with this strategy, ensuring that lenders churned out as many loans as possible, regardless of quality. The result is a devastating chain of fraud starting at the Wall Street CEO and ending at the mortgage broker. In the below video for American News Project, Lagan Sebert outlines the operations subprime mortgage giant Ameriquest and their Wall Street enablers, Citigroup.
Obama deserves some credit for acknowledging that corporate tax-scamming is a problem—Presidents Bill Clinton and George W. Bush were happy to sign-off on laws that made it easier for wealthy companies to evade taxes. But Obama’s crackdown doesn’t go nearly far enough. His plan would only bring in about 10% of the revenue the U.S. Treasury Department thinks it is losing through these scams. If Obama is serious about restoring accountability to Wall Street, that commitment does not end with the tax code. It is equally essential for Obama to secure new regulations on CEO pay that tie compensation to meaningful, long-term profits instead of short-term risk-taking, and to hire financial regulatory officials who will not tolerate endemic fraud.
This post features links to the best independent, progressive reporting about the economy. Visit StimulusPlan.NewsLadder.net and Economy.NewsLadder.net for complete lists of articles on the economy, or follow us on Twitter. And for the best progressive reporting on critical health and immigration issues, check out Healthcare.NewsLadder.net and Immigration.NewsLadder.net. This is a project of The Media Consortium, a network of 50 leading independent media outlets, and was created by NewsLadder.
Weekly Audit: Obama’s Stimulus Plan Signals End of Era
Since the U.S. is officially in a recession, and the Congressional Budget Office has predicted the worst economic downturn since the Great Depression, just about everybody acknowledges that times are tough. Everybody, that is, except the National Republican Congressional Committee. Talking Points Memo’s David Kurtz caught the Republican fundraising operation spouting some embarrassing doubletalk on their website earlier this week, including the proud declaration that “the U.S. economy is robust and job creation is strong.”
In fact, job creation is non-existent. The U.S. economy is losing over half a million jobs every month and even optimistic Wall Street economists expect unemployment to keep rising for at least another year.
Tough times call for unity, and President Barack Obama dedicated much of his inauguration speech to working together to usher in a “new era of responsibility.” Obama’s sentiment is essential—there is no way we can limit the damage of this recession without a massive collective commitment. The problem is, we all know how we got here, as Jose Garcia points out at The Progressive. Reckless bank lending, lax government oversight and insufficient social safety nets combined to saddle consumers with unaffordable levels of debt and directed family savings into completely irrational home values.
“Yes, we all need to pitch in, but above all the private sector and government regulators need to act responsibly,” Garcia writes. The surge in U.S. consumer debt over the past twenty-five years has been accompanied by stagnant wages and deceptive loan contracts. People often rely on credit to meet basic needs, Garcia notes, and bankers routinely do not disclose how much those loans will cost borrowers. Banks rewarded loan officers and mortgage brokers for pushing unaffordable loans, and a recent study by the Center for Responsible Lending revealed that most people do not understand the fine print on their credit cards.
Let’s be clear, then: Collective responsibility means overhauling Wall Street regulations and not holding the plight of working Americans hostage to banker bonuses.
Collective responsibility also means making sure that everyone has an affordable place to live. The Bush administration supported unregulated subprime mortgages and a totally disregarded rental housing programs. That approach was misguided. Renting is the only realistic housing option for the least well-off swath of the U.S. population, and affordable housing is supposed to help that demographic. Inattention to the rental market has created serious imbalances for low-income Americans. Adam Doster highlights some frightening statistics in a piece for The Nation, noting that a full-time worker would have to earn $17.32 an hour to afford the average rent on a two-bedroom apartment, well over double the minimum wage.
But there is evidence that Obama’s economic recovery package signals an end to an era of neglect. Fresh from being named one of the 25 most influential liberal voices in U.S. media by Forbes Magazine (read: the bad guys are afraid of him), Kevin Drum emphasizes the important health care provisions and expanded unemployment benefits in stimulus bill in a blog for Mother Jones. Key measures in the plan include an immediate $450 increase in benefits for the blind, disabled and elderly, along with expanded Medicaid funding and more food stamps for the 30 million Americans currently receiving them.
“With this plan, the new government confirms that it has some responsibility for providing a safety net for its poor and disabled, its children and elderly,” Drum writes.
For those of you interested in tracking the stimulus plan as it develops, make sure to check out StimulusPlan.NewsLadder.Net, which features the best independent reporting and analysis of this bill.
Over at The American Prospect, Ezra Klein–another blogger whose name strikes terror in the hearts of Forbes editors everywhere–offers some insight on bank nationalization. Nationalization is a major step, but the terms of former Treasury Secretary Henry Paulson’s bailout operation are actually more suspect. Paulson’s plan only nationalized private-sector losses, while allowing bank shareholders to enjoy any profits stemming from public help. The result? Backward incentives for bank executives and a waste of taxpayer dollars.
Once the government allows banks—or any companies—to become too big to fail, incentives for excessive risk-taking become standard fare. Does anybody seriously believe that Bank of America would have gobbled up Merrill Lynch in weekend merger negotiation if it did not think that government support would always be available, even in a worst-case-scenario? If taxpayer largess is always on the table, then meaningful consequences should accompany it. If a bank would not be viable without the collective support of taxpayer, and it remains in the collective interest to keep the bank in operation, then the government should nationalize it, kick out the management team and wipe out the shareholders. Going halfway and simply nationalizing the losses does nothing to discourage bad management behavior.
Unfortunately, however good Obama’s recovery package may be, both his administration and Congressional leaders are sending signals that we will not see anything resembling reasonable financial policy in the near future. Truthdig posts some comments from Vice President Joe Biden and House Speaker Nancy Pelosi indicating that much more money than the original $700 billion bailout outlay could be coming down the pipe.
It is more important than ever to have a strong voice heading the Labor Department to make sure the administration does not lose focus on the nonfinancial economy. Hilda Solis, President Obama’s nomination for Labor Secretary, is just such a voice, as Kim Bobo argues in an op-ed for In These Times. She has been a staunch defender of organized labor throughout her political career. Senate Republicans are stalling her nomination citing her support for the Employee Free Choice Act, a bill that would allow workers to unionize once a majority of employees at a workplace agree. The business exec lobby is already spending big bucks to spread misleading information about the legislation, saying it would mean an end to “secret ballots” in union elections, when in fact the bill would simply allow workers to enter a union without first holding an election.
Those elections are frequently subject to intimidation from employers. We are not taking collective responsibility when we allow our workers to be threatened by their bosses when they ask for decent pay and benefits.
This post features links to the best independent, progressive reporting about the economy. Visit Economy.NewsLadder.net for a complete list of articles on the economy, or follow us on Twitter. And for the best progressive reporting on critical health and immigration issues, check out Healthcare.NewsLadder.net and Immigration.NewsLadder.net. This is a project of The Media Consortium, a network of 50 leading independent media outlets, and was created by NewsLadder.