Jul
4th
2018
Wholesome Rage: Breaking the Bankers Part One · 3:11am Jul 4th, 2018
It's also podcasted with my new mic, with a reading at the top of the page! Ideally these will be artworked and uploaded as videos, to capture that lucrative "I want takes on complex issues, but I don't like reading" market. Apparently there's dozens, dozens of these people.
There's a lot of really cool stuff here, and comments are always appreciated. I'm used to getting hundreds for my stories, so I will admit, the drastic drop in comments when I post non-fiction like this leaves me feeling all... twitchy. Your feedback sustains me.
As somebody who used to WORK at Toys R us till last Friday, the only way I can see to put a sorta stop to some of these private equity deals is to legislate a you have to upfront a 45 to 49% part of the buyout themselves. It really would krimp their style if they had to shell out more then the billion they actually used to purchase us, and at 3.5 billion we "might" have been able to pay it off in a longer term. I know somewhat that we were able to pay about a billion off, but the insane amount of interest from the 5.5 billion didn't leave any equity to really invest into the company. we were paying about 400 million just in interest alone.
Well this is depressing. Doubt that niche is going to be easily refilled.
This strategy only works because someone's buying the stock shares - someone who does get the chance to look over those legislated disclosures and thus see what these hedge funds are doing.
Who's buying the stock? Who's overlooking these raids? Why?
This is much like the real estate market was until 2008. When any idiot can make money, the market fills with idiots. I remember a *waitress* being interviewed once about the real estate crash, who was worried about what was going to happen to the *three* homes she was underwater on.
Toys-R-Us is a tragic example. It *could* have been bought out by a smart investment group who was willing to cut away the portions of the company that lost money and improve its floorspace and sales numbers with customer service, but they wound up being bought by a bunch of... (the name is not polite in social circles) who most probably made *less* money than if they had run it like a functional business. The Goose that laid the Golden Eggs would only last a few seconds in most corporate boardrooms before being turned into a roast for the evening stockholder strategy meeting.
I was planning to try and find something to say in a comment, but fortunately, some things suggested themselves without further effort on my part. :)
"In short, the pursuit of profit cannot be criminalized even when it is damaging or disadvantageous to society as a whole."
Sure it can! If Person A approaches Person B in a dark alley with a knife and demands fifty dollars or else, that's the pursuit of profit on Person A's part, but Person A could spend years in prison as a result.
The key difference, of course, is that a mere fifty dollars isn't much good for bribing a legislature, and while a law legalizing mugging one person for fifty dollars could benefit anyone with a knife and a convenient alley, a law legalzing the theft of millions to thousands of people's detriment, via some complex and initially-expensive bit of financial legerdemain, likely has a high enough barrier to entry to restrict the benefits to the sort of people who paid for the law.
This may be more cynical than the "Nothing says dogs can't play basketball" you talk about in the post, but as that's presented, at least the dog trick can't be used a second time, even if a different loophole is found. That does sometimes happen, but as far as I can see, very often the same trick is used over and over again, with governments doing nothing to stop it.
"A problem, if you want to call it that, is that you can’t outlaw the practice of investment."
I don't think one would have to, though.
Consider, say, a nut-containing candy bar, a Person B with a deadly nut allergy, and a Person A who secretly wants to murder Person B. Now, unlike with just poisoning someone with arsenic, the candy bar itself isn't illegal; for most people, it would be fine. In most cases, Person A giving out these candy bars to people would be fine. Even Person A accidentally giving Person B the candy bar might see no penalties for Person A, depending on how things went. But if it is found that Person A deliberately, with knowledge of Person B's allergy and the intent to kill, gave Person B the candy bar, that's still attempted murder. One doesn't need to completely outlaw, or even restrict, nut candy bars or the giving thereof to outlaw murder via nut candy bar; the crime is in the act, not the medium. Why could the same not exist in the financial world?
And when the majority of people have forgotten the mass-mauling of the Boston Celtics, the "Dog's Can't Play Basketball" rule is quietly revoked in a late-night session of the Senate
BankingBasketball Committee.4894504
The problem there wasn't the waitress, it was the people who lent her the money. It seems unfair to call her an idiot, at least, based solely on the information presented here.
That waitress might have been either very smart or very stupid, but she is in the end a waitress. She is not a doctor, or a lawyer, or, say... a manager of risk. (Which is what a banker is.) She may know something about those fields of endeavor, but her area of expertise is waitressing.
Bankers expertise is banking. And in fact lenders have certain legal obligations (as well as professional ethical ones) to offer good financial advice to their clients. They're not fiduciaries, although there's an argument that maybe we should require them to be, but they do have obligations.
Those risk managers were telling that waitress "your risk is minimal here. The value of your investment can only go up, because real estate always goes up, and you can always re-fi once the balloon payment hits if you haven't flipped the house yet." And, well, if she looked around she saw lots of people flipping homes. And real estate people make big money, right? And the logic seems sound... you buy the house, you fix it up or maintain it, you sell it for more than you bought it for, you keep the profit. Where's the downside?
She didn't do much wrong. All that waitress is guilty of is chasing the American dream. That's many things, but not idiotic.
Thankfully, that waitress lived here in the US. In the US, mortgages, by law, are non-recoverable. What that means is that you can mail the bank the keys and peace the fuck out and the bank can't do shit except trash your credit rating; the mortgage was secured by the property and handing the property over to the bank satisfies your obligation to them. Indeed, loans that are backed with the asset they're purchasing as collateral are often settled that way by big business; if a corporation takes a loan to buy new physical plant or property that is backed BY that physical plant or property, and there's a sudden and massive depreciation in its value, the corporation will walk away. This is considered good business practice and often doesn't even hurt their credit.
In other countries, of which the UK is one, mortgages are often what's called "fully recoverable." That means that you're on the hook for the full value of the note, always. You can't just mail the bank the keys. Or, rather, you can, but the bank will say "this property is only worth 100,000 now; the outstanding balance on your mortgage was 150,000. You still owe us 50,000." And they'll take you to court to enforce that, even though they already took your house.
(Fully-recoverable mortgages are shit.)
The interesting thing about Toys-R-Us, and in fact Borders before it, is that I believe it was running a primary surplus or damn close to it.
"Primary surplus" means "you're making enough money to cover all your necessary expenditures with some left over." The term is usually applied to national budgets but it has some meaning in the private and personal sphere as well.
Basically... suppose you're making enough to pay the rent, and the car payment, and the utilities, and the groceries, and internet, and your student loans, and have a few shekels left over for reasonable entertainment and quality of life expenditures. You're running a primary surplus. You're in great shape!.
... except that a few years ago you went absolutely buck wild with the credit cards. Your monthly payment is crushing, ruinous. Even if you sold everything and lived like a monk, existing only to work and pay the interest, you wouldn't make a dent in it. You can meet your basic needs, spending money on those "real" things, but your debt is strangling you.
Toys-R-Us was in that position. They had very healthy cash flow; it could have been healthier, it really could have, but they were making enough to maintain the stores and buy new inventory and pay the workers. (Whether they were paying them well enough is a separate question.) But their debt load was crushing, ruinous.
Now, there are, fortunately, methods in place to deal with situations like this: bankruptcy! Where before you could be placed in debt peonage for life (and you still can if your student loans are involved, but again, another topic) we decided as a society a long time ago that most debt should be dischargable under fairly generous terms. Chapter 7 and Chapter 13 bankruptcy are available for individuals, and Chapter 7 and Chapter 11 for corporations.
Toys-R-Us could have hit Chapter 11 and re-orged. It would be a long, slow climb out of the pit but again; without the debt, they were profitable or close to it, and if you're profitable or close to it the courts will usually go "it is the job of the economy to work for the people participating in it, not for a handful of wealthy creditors. You'll get your pound of flesh, but we're not going to kill this thing to do it."
But that would have been hard, and long, and risky.
It's not about the total amount of money; it's about the risk. Many investment groups are, as MrNumbers said, highly risk-averse. They're designed to be.
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The crime is in the intent, which is often extremely hard to prove. But in the case cited above, even the clear intent to make the company appear wildly more profitable than it actually was, is not a crime. In the rare case where there is a clear criminal act involved in such shady dealings, investment firms can use what is known as a "cut-out." This is often a mid-level employee who is gullible enough to believe the pretense behind the profit-making sale (or illegal step in the process), who is given sole authority to approve it. Yes, the rest of the firm knew it was illegal, but because the one person signing the documents didn't know, he had no intent to commit a crime, and is therefore innocent. Clever MFs, ain't they?
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I read "A horse crime" and thought this would cross over more than it did.
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"The crime is in the intent, which is often extremely hard to prove."
The intent itself is a crucial part, but I don't think that the intent alone is the crime. Difficult as it may be to prove the intent of an act once the act is committed, how is one to handle intent that has as of yet led to no action at all and is entirely internal?
"But in the case cited above, even the clear intent to make the company appear wildly more profitable than it actually was, is not a crime."
Right; I was talking about possibilities.
"Clever MFs, ain't they?"
Funny how corporations are people when it benefits them but often just groups of individuals when there are penalties to be handed out.
(And I hadn't even heard of the particular "cut-out" tactic you describe there before. Sigh...)
Damn that's depressing.
The price we pay for freedom is that assholes are going to take advantage of it to do messed up things.
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Yep. I'll believe corporations are really people when Texas executes one of them!
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Beg to differ.
We're all risk managers, 'cause life is made of risk - not just the financial kind, but all kinds. We probably make maybe a thousand or so risk decisions every day. We just don't think of them that way because they're mostly small decisions. And yet --
So, full disclosure, many years ago in another country [the UK, as it happens], I was the guy you talked about down below in your original comment. Sustainable income, covered my bills and enough surplus to live nicely, but did in fact kind of go buck wild with the credit cards, which left me in a less than great position when my job situation suddenly changed.
It took me maybe fifteen years to climb back out of that hole, and the first few of them, yes, were spent living in a flat I had to get a guarantor to sign off on, eating the cheapest crap I could find once a day, and playing every debtor's funnest game, "dodge the process server".
But was that the fault of the lenders? Well, I couldn't honestly say so. They all did their due diligence, checking bank statements and employment information and running credit checks and all that. (None of those were shonky tell-us-your-income-and-we-promise-to-believe-you loans.) They didn't lead me on with promises of stuff I could buy if I just took more of their money. From everything they knew and they could see, everything would be just peachy. I, as the only party who knew all the fiddly details of my life and things that might affect it, was the only one in a position to see that I was taking a big ol' gamble on everything going Just As Planned. That was my fuck-up to make, and I made it.
Basically, I was a goddamned idiot. The only person in a position to save my ass was me, and since I have agency, I own that. And, y'know, I seeing as they're grown-ass people, I think we should also acknowledge the agency of other people when they make what are, in essence, very similar and equally poor judgment calls.
She may or may not be an idiot - very smart people sometimes do triple-down on very dumb mistakes; see above - but she sure as hell did something very stupid, and we're not doing her or anyone any favors by pretending that it's someone else's fault for not being able to figure that out and pad the walls ahead of time.
Now here's where we're really going to differ, because this is one of those things that really piss me off, despite the above. If someone - or some corporate entity, even - lends you money, they are doing you a favor. They are helping you do something that you otherwise couldn't.
Now, maybe I'm being tragically old-fashioned here, but I tend to believe that when someone does you a favor, and you make an agreement with them, you have a personal, ethical obligation to do your damnedest to live up to that and repay the damn loan.
(Bankruptcy is needed, certainly, for people who have in one way or another incurred debts that it's really impossible for them ever to pay back, and obviously we don't live in the ideal world of cooperation over defection in which all debtors are honest and all creditors offer reasonable terms to let you pay them back and still have a life, but none of that changes the basic principle.
You. Voluntarily. Accepted. The. Deal. Therefore. You. Owe. Your. Half.)
Here in the US, sure, you can stiff your mortgage lender if you're underwater on your house, businesses routinely get away with strategic/voluntary default, and there are various other entirely-legal wriggles, if you care to dig 'em up, to get out of paying your debts. Just ask yourself "What Would Donald Trump Do?", since he's made his career out of screwing over his creditors.
Doesn't mean that, like him, you aren't a pretty shitty human being/corporate entity for using them, though. Legal ain't the same thing as moral.)
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Blindly taking the advice of people/authority figures/experts who only know what you told them is, in itself, a kind of stupid. They don't, and can't, have access to all the information you have about your life to assess the second-order, third-order, etc., risks, much less all the subjective factors that go into determining if you would think that a risk is worth taking.
(And in many cases it might not even have been stupid. If you can afford to eat the downside, sometimes a high-risk investment is worth making. If you can't afford to, sometimes you shouldn't go with even a low-risk one. Even if our hypothetical lender offered the assurance that the risk was minimal because the housing market would keep doing what it had been doing consistently thus far, you should not need professional advice to understand that there aren't certainties and you shouldn't gamble with anything you aren't prepared to lose. That's just basic freakin' life skills.
Even if sometimes, like myself, you have to learn 'em the hard way.)
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It's difficult to call what she did "stupid" if she was being taken advantage of and... not even lied to, although of course people were lying to her. If the people in charge of giving her decent advice were giving her shitty advice.
It's very important to remember; mortgage underwriters back in the bubble were DESPERATE for mortgages, because they immediately sold those mortgage on to other financial institutions to be bundled into other financial instruments. They had a grasping need for them... and they'd do anything to get them.
You reference NINJA loans. NINJA loans took off because mortgage lenders wanted more mortgage and there wasn't enough good credit sloshing around for them to fulfill that desire. The solution? Offer loans to immensely risky people by telling them that they WEREN'T risky, by sitting them down and saying "You want to get ahead in life by flipping some houses? Sure, it sounds like an exciting career! And now you can afford to do that, yes, even you!" Very few people are going to take a loan if you look them in the eye and say "We don't think you're capable of paying this back, and you know what? We don't give a shit." They're going to find that very suspicious.
And it's worth noting that this encompassed very few people. One can argue that folks looking to make a career out of flipping homes were undertaking risk and deserved to get screwed, although I would point out that our economy is immensely reliant on people taking the risk of new careers. But that wasn't most people. Most people wanted to buy ONE home, and they wanted to buy it to live in it with their family.
So lenders lied like rugs. Because hey, their job is to manage risk, and from their perspective they're doing that just fine; they get the mortgage, they sell it six hours later, now it is somebody elses problem.
Those people are scum. The person who was told they could house their family who finds out they were lied to is a victim, not a co-conspirator.
No. They're absolutely not. That's not what a favor is.
A person might lend you money as a favor. If a friend fronts you twenty bucks for dinner and you repay them next week, you've done them a favor, especially since they've taken a tiny loss. But a lending institution only ever lends you money for one reason; because they think they're gonna get more money back from you. This is not a favor. This is a business transaction. It is, in fact, in many ways predatory; you can't spend five years saving up for a car, or thirty years saving up for a house, because you need the car RIGHT NOW to earn money, and you need the house RIGHT NOW to, you know... live in. But they have the money right now, and in exchange for doing jack shit on their part but assuming the risk of fronting it to you, they get it back plus a HUGE WHACKTON more. And make no mistake, a lending institution profits immensely on the loan they issued you; a thirty-year mortgage, even after you adjust it for inflation, has something like a 2x rate of return over the entire term. That's jaw-droppingly high.
This is not a favor. This is a business transaction, and it's a business transaction between two entities of vastly unequal power, one of which is going to realize much larger gains over the other.
No, you can't. It is impossible to stiff them unless you do something like literally destroy the collateral, go completely broke, and then declare bankruptcy. They either get the money, or they get the collateral. You've fulfilled your obligation under the agreement signed, which stated, in bald terms, "either you give us the money, or you give us the collateral." That cannot be construed in any way as "stiffing" them; they got their pound of flesh. In fact, lenders often use their power to demand the collateral as a THREAT. In most circumstances, "we will take the house" is a weapon wielded against the debtor, not the creditor. But somehow when it gets turned around, in the corner case where for once the little guy has it as a weapon, it is a problem?
You make a big deal over having "voluntarily" accepted the deal. Well, the lender also voluntarily accepted the deal, the deal which said "we are obligated to accept the collateral as a form of repayment. You can quibble over how voluntary this is on their party, since they by law cannot offer different terms, but if we're going to walk down this road very little that anyone does is strictly voluntary; laws in fact exist to compel behavior.
And you know what? Laws compelling the behavior of "you can't put someone on the hook forever regardless of their circumstances. Therefore, we will compare the behavior of lenders, which are powerful, to only offer loans under terms which allow the individual, who is not, to not be saddled with life-ruining debt if things go south. The lender retains power in that they may establish strict underwriting standards to weed out bad risks" seem like pretty good laws to me.
Right now, in the states, if you take out a mortgage to house yourself and your family, if you lose your job ten years later, you fork over the house and all accumulated equity when you can no longer make the cash payments. This is at least vaguely equitable; it is certainly much more equitable than "you fork over the house, all your equity, AND you still owe the remaining twenty years of payments." The later situation will almost certainly compel a bankruptcy. That's bad. The former will not, and that's good.
The Trump comparison isn't apropos; Trump actually breached his agreements regularly and got super-duper sued for it. Like, he didn't just commit some moral calumnies, he was in legal breach as well.
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…okay, well, on second thoughts, maybe a few people do need that advice, given the number of investment advertisements that feature a disclaimer pointing out that they can go down as well as up. That said, we also live in a world in which laser printers come with a warning not to expose them to open flame, curling tongs are labeled "not for internal use", and pool-coaster purchasers are solemnly informed not to use them as life-saving devices.
But you can't build a functioning society worth living in around the capabilities of the future stars of America's Dumbest Litigants. We can't assume that everyone has the specialized knowledge of an investment banker, lawyer, climate scientist, engineer, etc., etc., certainly, but there's broad middle ground between there and assuming that everyone's so incompetent they can't weigh the information they get from experts and manage their own affairs accordingly, and with a reasonable degree of care.
Side comment: Man, I am the worst elitist cynic that I know, so how the hell do I always end up arguing that people aren't ignorant, hapless puppets?
Saying that a bank is doing you a favor for lending you money is akin to saying McDonalds is doing me a favor by selling me a hamburger. In both cases they are selling me a service to make money. The bank is going to make money from loaning me money and the only reason they do not do it all over the place is that that there is a risk that some may not pay it back which is why they are supposed to do a risk assessment on who the loan money to.
Toys R Us was making money. IF they did not do a leveraged buy out a while back they would have been fine for a long time. Sadly when it comes to leveraged buy outs you see this a lot. A set of groups buy out a traded company and takes a lot of debt doing it however the ones who buy the company do not get the debt the company being bought does so then those folks who buy the company often find ways to drain all the money from the company by cutting costs and if the company fails it does not matter to them since the company has the debt not them. You can find lots of examples of companies that have had this happen to them it is pretty sad.
I was whining about this recently. Depressed to know it's true...
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Stipulated: massive fraud during the housing bubble. I'll get back to this later.
My reference for this sort of thing, from personal experience:
When I was in the early stages of being underwater, back in the day, I talked to a financial advisor - at the recommendation of a colleague who later turned out to be pretty damn shady himself - whose pitch amounted to, "sure, we can refinance you with one of these loans, which just requires you to state your income and doesn't require proof; so if we state it as $X" - which was well above my actual income of $Y - "they'll approve it".
I wasn't dumb enough to take that pitch, or listen further to that advisor, because you do not in any way need financial expertise to see that that's going to end badly. That wasn't even a NINJA loan, because I had an income, job, and assets, albeit inadequate to the task. And if I had taken it, then I would be a co-conspirator, 'cause I'd be the one lying my ass off about my income, which is obviously fraud no matter who tells you to do it.
And if you are a NINJA and someone comes up to you and offers you money - well, ffs, people, how do you not notice that you have absolutely no way to pay it back? You're poor, you're not mentally crippled. You have to know how this is going to end. But --
Here's the thing: the way many grifts tend to work is via the consent or active collaboration of the victim, who often can't report being conned because they've compromised themselves in some way; the grifter relies on the willingness-through-greed of the "victim" to take a shady deal that's too good to be true, or at least too good to be straight, and pay no attention to the obvious dodgy parts.
If you took out a NINJA loan, damn straight you're a co-conspirator. You're the dude who gets caught in a raid on a speakeasy who is shocked, shocked to discover that there's drinking going on here, and even more shocked to discover that there's whisky in the glass he's holding.
You've correctly identified the major villains in the housing crash, but if you want to look for victims, there's only one set [1]: the hapless taxpayers, who were left holding the hook for various banks deemed "too big to fail". Just like the people whose careful inattention or incredible stupidity made them borrow on a garbage contract, the banks who failed abjectly to do any due diligence and bought the other end of the scam are also effective co-conspirators, and should have been left to crash and burn. "In certain older civilized cultures, when a bank has failed as completely as you have..."
[1] Notwithstanding the actual fraud: the Well Fargo et. al. robosigning scandal, for example, and the foreclosure on homes for which there was no actual note in hand, which should both have been prosecuted far more harshly than they were.
Perhaps badly phrased. I withdraw the term. Nevertheless: they are helping you. That they are helping you for money does not change the fact that your ass got helped.
Predatory, my foot. They're enabling you to do something that you couldn't otherwise do. If that's predatory, hospitals are preying on sick people, schools are preying on the ignorant, and computers are preying on Internet shitposters.
And of course they expect to make a profit on it. They're shouldering the market risk in your place (in the US, since you're only effective liable up to the equity, not the principal), plus the risk of you (unlike your friend who knows you, where you live, and gets paid in reputational capital, this is bigger for them), plus the time-value of money and inflation. And, y'know, they're lending you $100,000, not $20, and over 30 years, not a week. If I borrow 100 grand from a mate for 30 years, I wouldn't expect them to ask for just the principal back on a handshake, that being staggeringly inequitable and highly risky.
Feh. In the absence of actual fraud, voluntary transactions only occur when both sides think the game is worth the candle. If you didn't think it was a good deal at the time, why would you have taken it?
(Since I'm discussing ethics and you're discussing law, I shall skip the rest.)