SOCIAL CONTRACT EXPLAINED BY ELIZABETH WARREN

Elizabeth Warren, as I've noted here many times, knows what she's doing. This is what the social contract and the laws of justice are all about (mutual consent and political balance). Kudos to my friend Seven for finding this ...

“You built a factory out there? Good for you. But I want to be clear. You moved your goods to market on the roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police-forces and fire-forces that the rest of us paid for. You didn’t have to worry that marauding bands would come and seize everything at your factory — and hire someone to protect against this — because of the work the rest of us did.

“Now look, you built a factory and it turned into something terrific, or a great idea. God bless — keep a big hunk of it. But part of the underlying social contract is, you take a hunk of that and pay forward for the next kid who comes along.”

Warren is running for U.S. Senate in Massachusetts against Scott Brown. You can bet that Wall Street will throw a ton of money at Brown. Warren is the real deal. I hope she wins.


- Mark

TAXPAYERS IN HOUSING PURGATORY ... BUT SCREW YOU ANYWAYS

While America's financial institutions make their way through record profits and bonuses - made possible by trillions in government guarantees and taxpayer backed bailouts - millions of distressed homeowners are forced to sail the high seas of housing purgatory.

Matters are made worse for homeowners by financial institutions who are saving billions by dragging their feet on providing adequate service to distressed homeowners.

So, how much does dragging their feet save America's bailed out financial institutions? By not upgrading their procedures, by not hiring more workers, and by not making necessary loan-processing adjustments Bank of America alone has saved more than $6 billion. Wells Fargo, JPMorgan, Citigroup, and Ally have saved billions as well, according to a confidential presentation prepared by the Consumer Financial Protection Bureau (CFPB).

Overall, by delaying applications and providing shoddy service, the banks have saved about $40 billion. The impact has been predictable. Delinquencies and foreclosures have soared, while distressed homeowners, who might otherwise be prime candidates for payment reductions, aren't getting loan modifications.

But all is good for America's banks because - as I've pointed out ... over and over and over again - the banks are able to take the contract you walked away from, and get almost face value for them (BofA is especially good at this). Bonuses are had by all. You, on the other hand, can do little as your home life and credit scores are wrecked ...

... all of which is good for the big banks, but cost you in the long run.

Additional concerns made worse by banks dragging their feet include:

* The CFPB estimates that there are about 12 million U.S. homeowners underwater (about 23 percent), most of whom are not delinquent. Of those, nine million would be eligible for proposed principal-reduction programs.

* About 6.9 million homeowners were either delinquent or in foreclosure proceedings through February 2011.

* Underwater homeowners owe $751 billion more than their homes are worth. This number is made worse by the fact that ...

* Home prices continue to decline, and reached their lowest levels since 2003, according to the National Association of Realtors.

* With millions of homeowners in housing purgatory purchases of new U.S. homes dropped last month to the slowest pace on record, according to the Commerce Department.

The incredible thing is that fixing many of these problems would cost a fraction of the trillions it has cost U.S. taxpayers to bail out Wall Street. Specifically, lowering total mortgage debt for three million homeowners who are underwater by 15 percent would cost about $135 billion (or about what Wall Street's top 25 publicly traded banks and security firms paid out in compensation and benefits in 2010).

So, not only did America's biggest financial institutions get trillions in taxpayer guaranteed money, but they have no obligation to help their taxpaying customers stabilize their housing situation. Nice.

And why should they? They got their money. They can afford to wait (and make money doing so) as American taxpayers are slow-bled out of their homes.

So screw you American taxpayer.

- Mark

P.S. If you want to help do something about this ... and you're looking for a job ... and would like to work for the newly created Consumer Financial Protection Bureau (CFPB) ... and have experience in finance and auditing take a look at this site.

YET ANOTHER REASON WHY GEITHNER STINKS ...

So Tim Geithner opposes nominating Elizabeth Warren for the new consumer protection agency? Well, at least he's consistent ... about protecting the interests of Wall Street over Main Street. 

As I've suggested before, Elizabeth Warren is precisely the type of person we need to head an agency like the new consumer protection agency. While there's no evidence to indicate that he will, President Obama would do well to ignore Geithner's advice.

If he doesn't, well ...

- Mark

BANKS ARE CONSISTENT ONLY ABOUT ONE THING ... MAKING MONEY

Leave it up to Elizabeth Warren, Harvard Law Professor and chairwoman of the TARP Congressional Oversight Panel, to point out the flaws in the American Banker's Association (ABA) strategy for derailing financial reform. In a few words, the ABA is arguing that if Congress wants to protect consumers and regulate their industry they might as well as kiss the banks good-bye because the industry won't be able to make money. Here's the hypocrisy in the ABA's position according to Elizabeth Warren.

The banks fought lending regulations in 2006 because proposed reforms "overstated the risks" of what was happening in the market at the time. In a few words, the ABA said in 2006 "we know what we're doing, so don't put restrictions on us and don't tell us how to lend our money." More specifically, and according to their 2006 memo, they argued that:

(1) People with no income might still be good credit risks.
(2) Subprime and other toxic mortgage products were good bets according to their models.
(3) Combining consumer protections into industry regulations might confuse the issue.

Of these three, the last one is one for the record books. Imagine the police chief coming out and saying, "Police activities and the law have nothing to do with public safety, so let's not confuse us by trying to get us to understand the law too." You might hear something like that from Chief Wiggum, but not from people who are serious about a functioning society (and a functioning economy).

At the end of the day, Banks were arguing in 2006 that they knew what they were doing and didn't need regulations to be clarified, streamlined, or new ones imposed. Moreover, according to the ABA, consumers would be "confused" with consumer protections that might spill over into regulations. So let's keep consumer protection and industry regulations unclarified and distinct from one another.

Or as Chief Wiggum might say, "Let's not let the law interfere with my real job ... eating a good donut."

Fast forward to today and what do we have? The exact opposite. The ABA is arguing that if lending regulations and consumer protections are separated it will hinder the bank's ability to make money. So we need to put them under one roof, or we need to hide a consumer protection agency in the Federal Reserve, where new administrative hurdles will hinder consumer protection laws. Wonderful.

According to Elizabeth Warren, the 2008 market collapse showed us two things. First, the ABA and their member banks can't be trusted when it comes to assessing what makes their industry risky or profitable. Second, "bank lobbyists will say anything to block meaningful reform." Translated? Let's not listen to the ABA, or their individual members.

I agree. I say that we put some teeth into meaningful legislation, and put a stop to the banks continued extraction of wealth from the American economy.

- Mark

UPDATE: Here's Elizabeth Warren explaining why we need regulatory/consumer protection reform, with all the duties under one agency. It's the clearest explanation I've heard. Using football as an analogy she explains that when the other team is ready to punt you don't send five guys back to return the punt. If you do you'll get into trouble because punt returners run into one another, there's not enough blockers, etc.

  
As someone who returned punts in high school (my freshman year; I stunk up the place), I concur. You need one person who has the responsibility to get the blocking set up, someone to take responsibility for the direction of the return, etc. The same can be said for financial regulation. You can't have five (we actually have seven) financial regulatory agencies running around barking orders, and getting in each others way. It allows the industry to "agency shop" and pit one group against another.

ARE WE KILLING THE MORAL JUSTIFICATION OF CAPITALISM?

In my book I wrote that "The moral justification of capitalism in America rests upon one very simple assumption: If you work hard you will get ahead." Are we killing the moral justification of capitalism for America's middle class? I think so. Here's how.

While the banks have gone back to their old irresponsible habits (see previous post) Elizabeth Warren, chair of the Congressional Oversight Panel for the bailout has an interesting take on what's been happening to the heart and soul of America. Specifically, she's worried about what's happened to America's middle-class. Warren writes:

Today, one in five Americans is unemployed, underemployed or just plain out of work. One in nine families can't make the minimum payment on their credit cards. One in eight mortgages is in default or foreclosure. One in eight Americans is on food stamps. More than 120,000 families are filing for bankruptcy every month. The economic crisis has wiped more than $5 trillion from pensions and savings, has left family balance sheets upside down, and threatens to put ten million homeowners out on the street.

Part of the reason for this is that middle-class Americans are now spending more money on health care, taxes, and on their homes than they did thirty years ago. Wages? They've dropped for both married couples and single men. Americans might be working more hours (i.e. those who have jobs) but the reality is middle-class America is in trouble in the areas of job security, job quality, and salaries (though the top 1% are doing just fine).

Here's the incredible point. These developments aren't tied to some mythical invisible hand in the marketplace. Nor is it tied to irresponsible consumers who brought debt loads upon themselves. Put more simply, none of Middle America's descent into debt, uncertainty, and pink slips is an accident.

As I pointed out in my book what's happening today is tied to favorable legislation that inflates profits and then protects inherited and ill-gotten wealth. Want proof? Take a look at (1) the logic behind the 2005 Bankrupty Reform bill, (2) the real beneficiaries of "Dead Peasant" Insurance, (3) how the politics behind the Estate Tax had nothing to do with saving the "family farm" and (4) why corporations really locate in off-shore havens. These developments have literally transferred trillions of dollars from Middle America to the top 1%. And this was before the bank bailout.

Middle-class America's descent is also tied to a state that's bought into the idea that financial institutions create wealth, even when they're busy sucking it out of the American middle class via bailouts and government enforced bankruptcies and foreclosures. And all for what? So the financial titans of America can continue gambling on interest rates and foreign currencies, as they are currently doing? Give me a break. This is wealth extraction, not wealth creation.

While I'd like to say that the real losers in this capitalist market charade are middle-class Americans, local community banks, small businesses and future entrepreneurs, I can't. To be sure, they're losing out. But the real loser here is the American ideal.

More specifically, while Elizabeth Warren is correct to point out what's happening to America's middle-class it's more important to understand what's happening to America: We are slowly killing the moral justification of capitalism.

Simply put, the idea that you can work hard and get ahead is getting smothered by well-connected financial titans who believe they are entitled to government-escorted profits in an economy they wrecked ... It's being smothered by a political class that believes in free market fairytopias, where market players do the right thing (and must be left alone) because they're virtuous in the pursuit of profit ... Finally, it's going to get smothered by a middle-class that will one day balk at the idea of having to pick up the pieces in the form of higher taxes, more uncertainty, and a faded American Dream (an early sentiment captured in the photo below).

America became America because we figured out that financial reward shouldn't go only to those of social standing (aristocracies), protected networks (elites), or to those with royal bloodlines (monarchy). America became America because we learned how to create opportunities and reward for those who worked hard. Rather than believing in free market fairies we need to relearn how this happened.

- Mark

THE BORN CONSPIRACY (redux) ... STARRING ELIZABETH WARREN

One of the more exciting series I've watched is the Bourne trilogy, starring Matt Damon. Painted as an out of control experiment gone bad, Jason Bourne is pursued by powerful forces trying to protect both themselves and a turf they believe others simply don't understand. The Bourne reference to Elizabeth Warren will become clearer below ...

In 2007 Elizabeth Warren, head of the Congressional Oversight Panel for the Troubled Asset Relief Program, penned an article that argued for a new model of financial regulation. She wrote that financial products should be subject to the same - and by now routine - safety screens that "governs every toaster, washing machine, and child's car seat." You know, the kind of government-driven safety measures that we all take for granted, and assume are "market-driven."

As is the case with all good legislation, Warren was clear that the focus should be "primarily on consumer safety rather than corporate profitability." Specifically, Warren wrote:

No one expects every customer to become an engineer to buy a toaster that doesn’t burst into flames, or analyze complex diagrams to buy an infant car seat that doesn’t collapse on impact. By the same reasoning, no customer should be forced to read the fine print in 30-plus-page credit card contracts to determine whether the company claims it can seize property paid for with the credit card or raise the interest rate by more than 20 points if the customer gets into a dispute with the water company.

After what we've learned about the financial sector's abuses of consumers and their own markets in 2008 and 2009 one would think that developing a financial product safety commission that focuses on the economic health of consumers would be a slam dunk. Think again.

Thomas Cooley, dean of New York University’s Stern School of Business, is part of growing group of special interests - led by the Chamber of Commerce, the American Bankers Association and the Financial Services Roundtable - who sees a wild-eyed fundamentalist in Elizabeth Warren. Cooley argues that her regulatory efforts make her little more than “an ideological crusader” who will "stir up a lot of trouble.”

Using the same tired arguments built around "free markets" and their magical powers to reign in stupidity, greed, and fraud, Cooley is effectively arguing that the same markets that helped create and fund lending activities before the 2008 market collapse only need to be tinkered with by "thoughtful people" doing "thoughtful analysis." Elizabeth Warren, according to Thomas Cooley, is not one of these people.

Accusing her of “waging a self-righteous holy war” Cooley makes the same arguments that were made about Brooksley Born, former head of the Commodity Futures Trading Commission (CFTC), who warned about the dangers of an unregulated derivatives market in the mid-1990s.

Born, whose warnings were famously ignored and criticized at the time by Alan Greenspan (Federal Reserve Chair), Larry Summers (Clinton's Council of Economic Advisors), Robert Rubin (Treasury Secretary), and Arthur Levitt (SEC Chair), was labled as an out of control zealot. Because of her efforts to audit and regulate the derivative market, which helped bring down the American economy in 2008, Born was painted as an "irrascible, difficult, stubborn" woman who was "unreasonable" when it came to judging the power of markets.

The logic of the market was presumed to be so powerful at the time that Alan Greenspan even went so far as to argue that fraud could be handled by the market and should not be regulated. This is all discussed in the Frontline video, The Warning (Arthur Levitt is not pictured in this Frontline ad/promo; presumably because he later regretted going after Born, and was interviewed saying as much).

For her efforts, Greenspan, Summers, Rubin, and Levitt conspired to work against Born, eventually forcing her from her post as director of the CFTC. In many respects their efforts could have been labled The Born Conspiracy.

Cooley revives this anti-regulatory mentality, implying that Warren is devoid of "rational and clear-headed perspective." He even goes so far as to disparagingly suggest that Warren's goals are Crusade-like and little more than her war of "faith" on markets. The implication is clear. Like Jason Bourne in the trilogy - and Brooksley Born in the 1990s - regardless of the talent, skill, and motives involved in her efforts, Elizabeth Warren is viewed as an out of control force that needs to be stopped.   

That this kind of mentality exists, so close to the market collapse, is troubling. It also helps explain how, if we continue to do nothing to discipline or regulate market players, we're setting ourselves up for another market collapse.

- Mark

WE OVERPAID BANKS BY $78 BILLION

OK, now I'm convinced more than ever that we need to get some of our money back by going after salaries and bonuses that were paid to executives of failed institutions. It appears that we overpaid the banks with TARP money by $78 billion.

How did this happen? The congressional oversight panel for TARP is telling us that the Treasury Department under Secretary Henry Paulson misled the public as to how it would price assets that the government would purchase. Specifically, Elizabeth Warren told Congress:

"Treasury simply did not do what it said it was doing ... They described the program one way, and they priced it another,"...

Warren also told the banking committee that after three months on the job, her panel is still not getting enough answers from Treasury. This is not good.

Is there enough wrongdoing to drum up some indictments? It seems so. Read the post from Naked Capitalism to find out why.

- Mark