Posts tagged with 'subprime mortgages'
Weekly Audit: Crashing the Corporate Christmas Party
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By Zach Carter, Media Consortium Blogger
While Wall Street will ring in the new year with huge bonuses and taxpayer-fueled profits, there is little holiday cheer for the workers whose tax dollars funded the bank bailouts. Although bank stock prices have soared for most of the year, the unemployment rate has steadily climbed and the foreclosure crisis has swelled to epic proportions.
Nomi Prins details the disconnect between Wall Street and the rest of us for AlterNet. The government’s massive giveaways to big banks did not stop with the $700 billion Troubled Asset Relief Program. In fact, earlier this month, the Internal Revenue Service granted Citigroup a $38 billion tax break for, well, nothing. Like every other financial boon the Treasury and the Federal Reserve have granted banks since 2008, this special holiday gift will help boost Citigroup’s profits, but does little to boost lending to small businesses, lower credit card interest rates or help struggling borrowers stay in their homes. (more…)
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: How Predators are Profiting from the Economic Collapse
While the economy sinks into the abyss, some of the financial industry’s most egregious scam artists are already back on the prowl looking to take advantage of troubled borrowers.
In a sickening turn of events, financial professionals who profited from the predatory Wall Street mortgage regime are now remodeling themselves as specialists to help consumers avoid foreclosure. The Nation Institute helped fund a devastating expose written by Alyssa Katz on the mortgage broker makeover. published in Salon.com. Katz details how an industry that once pushed people into unaffordable loans with deceptive marketing and misleading documentation is now raking it in by helping people who are behind on their mortgages obtain modified loan contracts.
“The problem is that the majority of loan mods are lousy deals for homeowners,” Katz writes. “Federal banking regulators recently determined that more than half of all mortgages that were modified by lenders in early 2008 ended up heading into foreclosure again in less than six months. Most loan modifications, in fact, dig borrowers deeper into debt.”
These predators cash in on setting borrowers up for a fall, and instead of being barred from the banking world or prosecuted, end up raking in again to help them renegotiate their mortgages. Loan modifications almost never reduce how much borrowers actually owe on their mortgages. Often, whatever amount a borrower is behind by is added to the overall debt burden, giving banks a bigger pool to collect interest on. Nearly half of all loans modified in the fall of 2008 did not even result in a lower monthly payment for borrowers.
Over at Colorlines, Dom Apollon highlights the rise of a new mortgage company called PennyMac run by former Countrywide executives—the same Countrywide that is being sued by local governments for destroying communities with abusive subprime loans. PennyMac plans to buy delinquent mortgages on the cheap, alter the terms of the loans to keep borrowers in their homes, and pocket the difference between the new mortgage payments and what it paid for the loans as profit. If you think that is going to end well for the homeowners, then I’ve got a few condos in south Florida to sell you.
People who cause massive problems are not usually the best people to solve them. That’s why when the U.S. government agreed to bail out the world’s largest insurance company, AIG, policymakers kicked out CEO Martin Sullivan. But even after being nationalized, AIG has continued to drain taxpayer coffers, coming back to the bailout trough twice for a total of over $160 billion. To put that number in context, it’s about what the entire savings and loan crisis cost taxpayers back in the late 1980s and early 1990s.
Josh Marshall has a series of excellent posts on the AIG drama for Talking Points Memo. When the Federal Reserve and the Treasury Department refused to let AIG fail back in September, it was supposedly because letting AIG default on its enormous credit default swap business would be a disaster for the financial system. Credit default swaps were originally designed as insurance for loans. If a Goldman Sachs made a loan to Bank of America, Goldman could get AIG to insure the loan against default. Goldman would pay AIG a few dollars a month in insurance premiums, but if Bank of America failed to pay up, AIG would reimburse Goldman for the entire value of the loan. Eventually, however, the process got crazy. Companies started taking out “insurance” on transactions they had no involvement with. JPMorgan could go to AIG and agree to pay a few dollars a month in case Bank of America defaulted on its loan from Goldman Sachs– essentially betting with AIG on whether Bank of America would pay Goldman back. The same contracts could be used to insure mortgage-backed securities against default. Wall Street eventually put more money in credit default swaps than an entire year’s worth of global economic output.
By keeping AIG running on taxpayer support, Marshall notes, the government is essentially using the company as a conduit to funnel tax dollars to other major financial firms who made credit default swap bets with AIG. Who is getting the AIG bailout money? Neither the Treasury or the Fed will say, and Marshall points out, the government refuses to even explain why it will not tell us who is getting money. Maybe the government is worried that investors will pull their funds out of companies who are scoring big paydays from the AIG bailout, deeming them nonviable without government support.
That may very well happen. But indefinitely pouring federal money into Wall Street companies through AIG is not a solution, and taxpayers deserve to know how their money is being spent.
But at least one system for fleecing taxpayers seems to be on its last legs if President Barack Obama has his way. About four-fifths of student loans are made by private lenders who are subsidized by the government, while the remaining 20% are made directly to students by the Department of Education. The problem with the private-sector partnership plan is its inefficiency: a lot of that subsidy money goes to paying student loan company executives, while some of it simply ends up as profits for the bank. How much? According to Aaron Tang of Wiretap Magazine, Obama’s budget proposal would kill the subsidy program and instead invest that money in the direct loan program, freeing up $4 billion a year, enough to help millions of students pay for a college education.
The Obama administration’s willingness to end irrational financial policies should not end with the student loan program. Predatory lenders who created the mortgage meltdown should be barred from the banking industry, and the Treasury needs to be honest with taxpayers about who it is paying off.
One Last Note
The unemployment numbers keep getting worse: after losing almost 600,000 jobs in January, the U.S. economy shed another 651,000 in February, sending the unemployment rate all the way to 8.1%. As Steve Benen notes for The Washington Monthly, the accelerating job losses may not be surprising at this point, but they are painful nevertheless. The only good news for the labor market over the last week was the roll-out of CanMyBossDoThat.com, a site dedicated to informing workers on their legal rights on everything from COBRA health insurance benefits to getting employers to actually deliver final paychecks workers have already earned. The site, which is funded and managed by Interfaith Worker Justice, comes at an important moment, according to Wendy Norris of The Colorado Independent, who highlights that the unemployment rate would be a massive 14.8% if it included people who have been looking for a job for more than a year and people who want full-time work but are can only get a part-time position.
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.