The Home of the Free Got Foreclosed

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On Wednesday’s Gitmo anniversary, Jonathan Turley had a WaPo column listing 10 reasons why the US was no longer the “land of the free.” I thoroughly endorse his list:

Assassination of US citizens

Indefinite detention

Arbitrary justice

Warrantless searches

Secret evidence

War crimes (impunity for torture)

Secret court

Immunity from judicial review

Continual monitoring of citizens

Extraordinary renditions

But I do think the list skews (not surprisingly, given that it was a GItmo anniversary piece) to ways the war on terror have circumscribed our civil rights and rule of law generally.

It’s worth noting that the same things have been happening domestically, with at best only a tangential tie to “security.” For example, where Turley describes renditions and indefinite detention, he might as well have included the immigration deportation system, which like the terrorism one operates with a great deal of arbitrariness, but which also rounds up more American citizens. Turley discusses surveillance generally, but we should note that some of that war on terror surveillance–National Security Letters and drones, for example–are being used increasingly in criminal law enforcement. Add in the increasing militarization of the police–some of which came directly from the drug war, some of which has been reapplied generally in the name of national security.

And then there’s the courts. Even putting the defunding of legal aid aside, even putting aside the broad push to force consumers and employees into privatized arbitration rather than courts, even our legal system itself is showing signs of failure. Most spectacularly, that failure shows in efforts to let banks steal homes so as to pass all the losses of the banks’ own failures onto homeowners.

Turley is right that the war on terror has chipped away at fundamental freedoms. But so has increased corporate power and related efforts to coerce the 99%.

It’s not just that Al Qaeda bombed the land of the brave; so, too, did America’s own corporations foreclose on the home of the free.

Ubercapitalist Begs for Government Intervention

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Fresh off the Friday news dump that its profits stalled in the last quarter (after it had to stop laundering money for Iran and inheriting the lost money of MF Global customers), fresh off the news that JPMorgan Chase might lose $5 billion in the Europe crisis, and, it should be said, fresh off the departure of a JPMC Exec from the White House Chief of Staff position, Jamie Dimon is calling for a real solution to the housing market.

“I would convene all the people involved in the business, I would close the door, I’d stay there until we resolved a bunch of these issues so we could have a more healthy mortgage market,” the 55-year-old chief executive officer of JPMorgan Chase & Co. said today.

The patchwork of U.S. and international regulatory policies governing the housing and mortgage markets are hampering recovery here and abroad, Dimon said on a conference call with analysts after the New York-based bank released fourth-quarter earnings. In the U.S., state foreclosure laws conflict with a variety of federal policies on refinancing or modifying loans to troubled borrowers, Dimon said.

Leadership is needed to overhaul the industry, including reviving the market for private-label residential mortgage bonds and reforming regulations governing mortgage repurchases and foreclosures, he said.

“You could fix all this if someone was in charge,” Dimon said, tapping on the table for emphasis. “No one is in charge.”

Which is pretty funny, since a bunch of Attorneys General just did show some leadership.

Attorneys general or representatives from nearly 15 states met in Washington, D.C., on Tuesday to discuss and share different enforcement options and strategies around various mortgage-related issues, according to sources familiar with the conversation.

The meeting was prompted by the slow pace at which a national foreclosure settlement led by the Obama administration is progressing, and is likely to be the first in a series, said these sources.

[snip]

“This past Tuesday, a group of like-minded Attorneys General met in D.C. to discuss ongoing and future investigations into the mortgage finance and foreclosure industries,” said Delaware Deputy Attorney General Ian McConnel.

“The talks weren’t just about investigations,” said a source with knowledge of the discussions. “They were also about the attorneys general offices feeling uninvolved in a process by which their federal colleagues have been negotiating on their behalf.” [my emphasis]

Or maybe it’s this show of leadership that’s got Dimon whining?

But what I find most amusing about this ubercapitalist begging for government intervention is this: Dimon says he’s gonna lock “all the people involved in the business” in a room until they come up with a solution. But note who he’s going to invite?

Jamie Dimon has a plan to fix the U.S. housing market: lock mortgage lenders and regulators behind closed doors until they figure it out. [my emphasis]

Because if you realized that homeowners, too, were a fundamental part of the housing business, you might lose your cred as a psychopath.

Mitt’s Welfare-Driven Vulture Capitalism

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When I hosted Steve Rattner at FDL Book Salon, I noted how blind he was to problems of other private equity firms–in the context of the auto bailout, Cerberus. So I was interested in Rattner’s attempt to defend Mitt’s tenure at Bain.

Bain Capital is not now, nor has it ever been, some kind of Gordon Gekko-like, fire-breathing corporate raider that slashed and burned companies, immolating jobs wherever they appear in its path.

[snip]

Instead, with modest exceptions (keep reading to learn more about these), Bain Capital was a thoroughly respectable — nay, eminent — investment manager that successfully discharged its responsibility of earning high returns for its investors by deploying capital in companies privately rather than by buying shares in the public market. (Hence the name, private equity.)

The point Rattner of course doesn’t delve into is this one: how taxpayers effectively subsidize this process because of tax law.

So what are the question marks (promised above) around the story of Romney and Bain Capital? First, it’s fair game to question the amounts of debt that are sometimes used in leveraged buyouts. While higher debt usually means higher returns — because debt is cheaper than equity, thanks in part to its tax deductibility — it also means higher risk of bankruptcy.

The problem, as private equity guy and public monies-scamming Steve Rattner sees it, is all this debt leads to more bankruptcies.

But what does it mean that all this debt incurs tax advantages?

Thankfully, Rortybomb posted this interview with Josh Kosman, who wrote a book on the topic, to explain it.

Your research has found that, far from being natural, private equity exists largely due to issues with the tax code. Can you explain?

The whole industry started in the mid-to-late 1970s. The original leveraged buyout firms saw that there were no laws against companies taking out loans to finance their own sales, like a mortgage. So when a private equity firms buys a company and puts 20 percent down, and the company puts down 80 percent, the company is responsible for repaying that.

Now the tax angle is that the company can take the interest it pays on its loans off of taxes. That reduces the tax rate of companies after they are acquired in LBOs by about half. Banks, also realizing this tax effect, were willing to finance these deals. At the time, you could also depreciate the assets of the company you were buying — that’s not true today.

They saw that you could buy a company through a leveraged buyout and radically reduce its tax rate. The company then could use those savings to pay off the increase in its debt loads. For every dollar that the company paid off in debt, your equity value rises by that same dollar, as long as the value of the company remains the same.

So the business model is based on a capital structure and tax arbitrage?

Yes. It’s a transfer of wealth as well. It’s taking the wealth of the company and transferring it to the private equity firm, as long as it can pay down its debt.

[snip]

A recent paper from the University of Chicago looking at private equity found that “a reasonable estimate of the value of lower taxes due to increased leverage for the 1980s might be 10 to 20 percent of firm value,” which is value that comes from taxpayers to private equity as a result of the tax code. Can you talk more about this?

That sounds about right. If you took away this deduction, you’d still have takeovers, but you’d have a lot less leverage and the buyer would be forced to really improve the company in order to make profits. I think that would be a great thing.

The whole interview very accessibly lays out precisely what I was trying to get at the other day: there are aspects of private equity that have bad consequences baked in. And they’re all baked in, in part, precisely because taxpayers are subsidizing the takeovers in the form of tax benefits.

Or welfare, as the creative destructionists ought to call it.

Update: Per prostratedragon, see this Dean Baker diary putting some numbers to this rich person welfare.

Santa’s Elves Just Got Fired

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Remember the “good” jobs report last week? As Dean Baker explained, many of the new jobs were actually the “couriers” who delivered your holiday presents.

The sharp drop in the unemployment rate over the last four months (from 9.1 percent to 8.5 percent) is not consistent with the job growth reported in the establishment survey. The survey reported 200,000 jobs in December; however, this figure is skewed by the 42,200 job gain reported for couriers. There was a similar gain in this category reported for last December, which was completely reversed the next month. Clearly this is a problem of seasonal adjustment, not an issue of real job growth. Pulling out these jobs, the economy created 158,000 jobs in December, in line with expectations.

Pulling out the courier jobs, growth has averaged 145,000 per month over the last four months. This is somewhat better than the 90,000-100,000 a month needed to keep pace with the growth of the labor force, but certainly not rapid enough to explain a 0.6 percentage point drop in unemployment. At this pace, we would not get back to pre-recession levels of unemployment until 2027. [my emphasis]

Now Baker’s predicted reversal in those jobs has started to appear, with initial jobless claims up 24,000 this week.

More Americans than forecast filed applications for unemployment benefits last week, raising the possibility that a greater-than-usual increase in temporary holiday hiring boosted December payrolls.

Jobless claims climbed by 24,000 to 399,000 in the week ended Jan. 7, Labor Department figures showed today in Washington. The median forecast of 46 economists in a Bloomberg News survey projected 375,000. The number of people on unemployment benefit rolls rose, while those receiving extended payments decreased.

Hiring by package delivery companies and retailers during the holidays to meet demand for gifts may now be giving way to an increase in dismissals.

These words–“couriers” and “package delivery companies”–are very cold. What we’re really talking about are Santa’s Elves, the wondrous people who make your holidays magical, particularly given how they help you avoid crowded malls by allowing you to shop online. In all the cartoon Christmas specials, those elves spend the off-season making more toys for the next Christmas. Not so our “modern” economy. Now, we benefit from their services, enjoy our holidays, and then <<BAM!!>> the Elves are on the street again, looking for work.

Merry Christmas!

Associate Attorney General Thomas Perrelli to Leave DOJ in March

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The guy in charge of–among other things–the elusive foreclosure fraud settlement with the banksters just told NPR’s Carrie Johnson he’ll be leaving in March.

Associate Attorney General Tom Perrelli will leave the third highest-ranking post at the Justice Department in March after nearly three years managing a bustling portfolio that has run the gamut from mortgage abuses and the oil spill in the Gulf of Mexico to stamping out domestic violence in Indian country.

Perrelli, 45, says that he’ll take several months off to spend with his growing family. He and his wife have a five-year-old, a two-year-old, and a pair of twins due in May. “This is the best job I’ll ever have,” Perrelli tells us, “you really couldn’t ask for better.” But, long hours spent overseeing Justice Department units that handle tax, civil rights, environment, antitrust, civil cases and billions of dollars in federal grant programs has taken “an enormous amount of energy and commitment and sacrifice.”

As Johnson points out, Perrelli has had his fingers in a number of contentious issues: the Cobell settlement and the BP investigation. But I suspect it also sets a finite deadline for the foreclosure fraud settlement, rumored to be imminent for about a year.

One of his biggest efforts has yet to come to fruition. For more than a year, the Justice Department and state attorneys general have been hammering out a settlement with the country’s largest mortgage servicing companies over faulty paperwork and forclosure abuses known as “robo signing” that helped push people out of their homes. The process has been complicated and sometimes fractious, as top lawyers for the state of California and New York criticized the process as going too soft on the banks.

And then, of course, there’s the question of a replacement–because there’s no way Republicans are going to confirm anyone for a functional post at a Department of Justice they like to claim is responsible for sending guns to Mexican drug cartels.

Just what this country needs, a DOJ even more hampered by missing key operational executives.

The Mafia Bank

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In his book, McMafia, Misha Glenny describes how mobsters filled the vacuum left by communism in Eastern Europe and Russia.

The new circumstances bewildered old international institutions. All had to improvise and no party quite understood the implications of its actions or their unintended consequences.

One group of people, however, saw real opportunity in this dazzling mixture of upheaval, hope, and uncertainty. These men, and occasionally women, understood instinctively that rising living standards in the West, increased trade and migration flows, and the greatly reduced ability of many governments to police their countries combined to form a gold mine. They were criminals, organized and disorganized, but they were also good capitalists and entrepreneurs, intent on obeying the laws of supply and demand.

Which appears to be what’s happening in Italy, too, where the mafia now constitutes the country’s largest “bank.”

Organized crime has tightened its grip on the Italian economy during the economic crisis, making the Mafia the country’s biggest “bank” and squeezing the life out of thousands of small firms, according to a report on Tuesday.

Extortionate lending by criminal groups had become a “national emergency,” said the report by anti-crime group SOS Impresa.

Organized crime now generated annual turnover of about 140 billion euros ($178.89 billion) and profits of more than 100 billion euros, it added.

“With 65 billion euros in liquidity, the Mafia is Italy’s number one bank,” said a statement from the group, which was set up in Palermo a decade ago to oppose extortion rackets against small business.

Now, obviously, the strength of the Italian mafia is nothing new. Nor is its role in loan-sharking.

Nevertheless, it appears that the chaos caused by the financial crisis–and the oligarchs’ refusal to pursue a sane approach that puts the interest of society ahead of bond-holders–has created another vacuum the mob can fill.

Of course, that just makes Italy like many other countries in the world, where the mob has similarly accrued more power in recent years.

The refusal to inconvenience the oligarchs is really going to increasingly empower a more obviously brutal form of oligarchs. Something to look forward to!

“Creative Destruction” as Catchall

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Matt Yglesias has responded to my post on the destruction wrought by some capitalism with a fairly narrow complaint about my sarcastic comment about what I still maintain his original post entailed: an apology for the kind of destruction that Bain Capital engages in because (he argued) all successful capitalism creates such destruction.

I don’t really want to get into the weeds of things with Marcy Wheeler on private equity, so let me just say that this view she sarcastically attributes to me is the reverse of the view I hold:

Capitalism is all about creative destruction, you see, so we must celebrate that creative destruction.

What I think is that in a market economy creative destruction happens, and that has terrible consequences for the lives of people who are adversely effected by circumstances beyond their control.

[snip]

The message of creative destruction, when you understand it, is that the idea that “a rising tide lifts all boats” is a cruel lie. Growth is broadly beneficial over the long-term but individual human beings live out their lives on finite time scales and many individual people suffer from even generally positive economic trends.

He goes on to describe several things as creative destruction:

  • The rise of desktop publishing software and the damage it does to established graphic artists*
  • The hypothetical legalization of gambling in CA and the damage it would do to Las Vegas’ casino industry
  • The decline of Kodak (which in his earlier post he attributed to the rise of digital cameras) and the decline it brought to Rochester, NY, generally

I won’t get too deep in this, but I think it useful to, first of all, point out that these are not all like things. Indeed, the legalization of gambling is only partly about market forces at all, it’s about legislative forces (and usually, in this day and age, is brought about by the purchasing of influence, precisely the opposite of real capitalism), and it often doesn’t lead to real growth at all. And both desktop publishing and digital cameras combine two things: the introduction of new technologies and their successful marketing. The example of Kodak also involves globalization. All of which are distinct from the financialization of capitalism represented by Bain, which is where this all started.

I’d like to suggest that we do ourselves a big disservice by lumping them all in together under the term “creative destruction.” The very term is one rolled out to excuse the ravages of capitalism. And used as Yglesias does, it doesn’t make fairly clear distinctions we can make between different practices of capitalism or even forces–like technology–that interact powerfully with capitalism but are distinct from it. Nor does it permit analysis of whether any useful “creation” is going on at all. That is, the term closes off precisely the kind of discussion we ought to be having–and Mitt’s Bain critics were engaging in, before Yglesias accused them of simplifying the issue–about the choices we make in our society and economy.

Yglesias and I absolutely agree we need to help those who suffer as a result of change brought about by capitalism, technology or (in the case of casinos) money-driven policy decisions. But there is, at the same time, plenty of space for distinguishing between capitalist practices that are considered noble or useful, and those which should be treated with shame and moral outrage, if not regulatory prohibition.

And I believe that those practices that serve no useful purpose for the society as a whole, like Bain’s vulture capitalism, falls into the latter category.

* In the interest of full disclosure, I should note that my father was one of those people at the intersection of technology and career success. As such, he had a significant hand in changes–particularly the roll out of the PC–that brought about the introduction of software that changed the value attributed to skills of graphic designers and secretaries. Which of course means all the advantages I’ve had in my life derive in part from the pain that computers have caused people. Not that it changes that fact, but I will say that many of my adolescent drag-down fights with my father consisted of me calling him a stupid asshole for rolling out technology before society was ready and the software was appropriate.

The Greatness of America: “Ashes of Doomed Factories, Pink-Slipped Workers, and Towns Laid to Waste”

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I’m utterly delighted with this paragraph:

But as is so often the case, the reality is more complicated. Almost every successful business career is built on the ashes of doomed factories, pink-slipped workers, and towns laid to waste.

Not because it’s true–it’s not! But because I’m so amused that someone (in this case, Matt Yglesias, presumably drawing on his long career as a business tycoon) claiming to complicate a purportedly simplified issue–whether Mitt Romney and other corporate raiders are the same as “the good kind of businessman, the one who launches and grows firms, creating new products and jobs and opportunities”–would make such a claim.

“Almost every successful business career.” Wow. Almost every one, huh? That’s a lot of towns laid to waste. I wonder … is this a one-to-one relationship? One successful business career for every town laid to waste? Does each “successful business career” entail doomed factories, pink-slipped workers, and towns laid to waste–all three–as the “and” logically suggests? Or is, um, “the reality … more complicated”?

And what counts as a “successful business career,” according to Yglesias, anyway? Just those titan-driven technology companies and industries he invokes–Apple, Google, broadcast, cable, Internet–or also the local business owner who succeeds at business by providing goods her customers want with excellent service? It seems laying to waste entire towns implies a scale that doesn’t include many–perhaps most–successful business careers.

Even more telling, though, is the causality. Read more →

Commodity Bubbles and the Resource Curse

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The FT links to this Oxford Policy Management study showing that 15 low and medium income countries have become newly dependent primarily on some commodity–fuel or minerals–for export income in the last 14 years.

The number of low- and middle-income countries1 that depend on minerals for more than 25%
of their tangible exports – defined as ‘mineral-dependent’ countries – increased by more than
30% between 1996 and 2010, from 46 to 61 countries.

  • Over this period, seven low- and middle-income countries became dependent on non-fuel minerals including: Montenegro, Guyana, Laos, Burkina Faso, Bolivia, Georgia, Somalia and Ghana.
  • Six low- and middle-income countries became dependent on fuel-based minerals including: Belarus, Belize, Chad, Cote d’Ivoire, Myanmar and Timor-Leste.
  • By 2010, more 80% of non-fuel, mineral-dependent states were low- and middle-income countries, compared to about 70% of fuel-dependent countries.
  • Overall, 45 countries depend on fuel-based minerals and 40 countries depend on non-fuel minerals, nearly half of which are in Africa.

The report goes on to raise concerns about the “resource curse,” the common occurrence by which oil and mineral dependent countries become especially corrupt, resulting in a decline in quality of life for the bulk of people in those countries.

This is an unsurprising outcome of the development- and speculation-driven growth in commodity prices of late. But that–plus our stated intent to conduct small-footprint paramilitary operations in to pursue claimed terrorist and drug threats–does suggest we’re headed for further globalization-driven destabilization. Sure, globalized finance was always part of the problem in developing countries, as corrupt elites incurred debts, stripped their country of cash, and then hid it outside of the country (where it would make western bankers a profit).

But now, it seems likely you’ll see more cash coming in, more weapons, and more inequality.

How Dare the President Protect Consumers!?!?!

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We’ll have to come back to the issue of why President Obama decided to use his recess authority to appoint Richard Cordray to head the Consumer Financial Protection Board but not Dawn Johnsen or Elizabeth Warren. But for now, I’d like to collect the wails of Republican outrage.

Shorter John Boehner: Protecting consumers from rapacious banks is an extraordinary and entirely unprecedented power grab! Protecting consumers is bad for the economy!

Shorter Mitch McConnell: Obama has arrogantly circumvented the American people by protecting the American people!

Shorter Orrin Hatch: It is a very grave decision by this heavy-handed, autocratic White House to appoint someone to protect consumers. The American people deserve to be treated with more respect than this White House is affording them by protecting them from the banks!

Shorter Spencer Bachus: Appointing a director to the CFPB will cripple it for years. The greatest threat to our economy right now is uncertainty, and by protecting consumers the President just guaranteed there will be even more uncertainty.