The judges based their ruling strictly on Massachusetts law issues, and did not opine on the New York trust law issues we have highlighted. The ruling emphasized the horrible job the banks did in protecting and documenting their ownership interest and the overall carelessness of the securitization process. Massachusetts. law is somewhat unique in requiring that not only the note (the borrower IOU) be assigned correctly, but also that the lien (the so-called mortgage, or deed of trust) also be conveyed properly.

Effectively this shows the shortcomings of the fundamental design of the securitization process, of developing a one-size-fits-all process when some states have long-standing law (real estate is very well settled) that is idiosyncratic. How, in this case, could you design a securitiztion process that did NOT account for the need to handle the assignment of the mortgage, as Massachusetts requires?

As the ruling describes, one of the issues raised in the lower court case was “whether the plaintiffs were legally entitled to foreclose on the properties where the assignments of the mortgages to the plaintiffs were neither executed nor recorded in the registry of deeds until after the foreclosure sales.” Note that “out of time” assignments are common, often coming well after the timeframe required in the securitization documents, and even, as this case demonstrates, after foreclosure proceedings have commenced. At a hearing, the plaintiffs agreed that the documents they presented showed the transfer took place too late, but claimed they had other documents that would confirm that the transfer took place earlier. These documents, for the most part, were the original pooling and servicing related documents. In effect the argument was that there was an intent to transfer, and money had changed hands, which is a position the ASF and bank lobbyists have made repeatedly.

If you read the decision, you will see the judges recite the history of the two mortgages at issue and how they describe the language of the PSA and its requirements, how the banks did not adhere to its requirements, and how the documents the banks provided fail to link the properties in question specifically to the securitizations (meaning you can’t look at the closing documents and see clear evidence that the loans in question were even intended to be in these pools).

This is the key sentence from the decision, that the use of a securitization does not alter or reduce the requirements that apply to transfers and ownership of the loans and the related property:

Where, as here, mortgage loans are pooled together in a trust and converted into mortgage-backed securities, the underlying promissory notes serve as financial instruments generating a potential income stream for investors, but the mortgages securing these notes are still legal title to someone’s home or farm and must be treated as such.

Here is the decision:

Ibanez Decision

Further commentary from Bloomberg. Note the market reaction. This ruling increases the odds that more borrowers will sue bank servicers and trustees for wrongful foreclosures.

US Bancorp and Wells Fargo & Co. lost a foreclosure case in Massachusetts’s highest court that will guide lower courts in that state and may influence others in the clash between bank practices and state real estate law. The ruling drove down bank stocks.

The state Supreme Judicial Court today upheld a judge’s decision saying two foreclosures were invalid because the banks didn’t prove they owned the mortgages, which he said were improperly transferred into two mortgage-backed trusts….

The 24-company KBW Bank Index fell as much as 2.2 percent after the decision was handed down.

There’s a section of my forthcoming book about the rule of law which examines the direct causal line between the vast number of Wall Street officials in key administration positions and the full-scale exemption from accountability which financial elites enjoy even for the most egregious lawbreaking.  When you compile all of those appointments in one place, the absolute stranglehold large-scale corporate interests exert over virtually all realms of government policy is quite striking.  But it's nothing more than what the economist Nouriel Roubini meant when he told the makers of the 2010 documentary “Inside Job” that Wall Street has “captured the political system” on “the Democratic and the Republican side” alike, or what Simon Johnson describes as “The Quiet Coup”:  "The government seems helpless, or unwilling, to act against" elite business interests. 

Shipping in a JP Morgan executive to be White House Chief of Staff isn't a cause of any of this; it's just a nice symbol for what our political culture is, more than ever in the Era of Change.  It's the other side of the revolving door that sent Peter Orszag to his multi-million-dollar a year reward at Citigroup for his 18 months in an administration which lavished that bank will all sorts of gifts.  Getting exercised about Bill Daley's empowerment is like going to the beach and being angry that it's full of sand:  this appointment is the inevitable by-product of the essence of Washington and of the Obama presidency.  It's what they do and who they are.  As Matt Stoller suggested, the most surprising thing about the Daley pick is that he has no Goldman Sachs experience.

But I do find the angry reaction from some progressives to be somewhat perplexing (even though I agree with the substance of their critique and am glad they're voicing it).  On one level — the most superficial one — the Daley appointment seems very strange.  Think about this: leading progressive voices — including MoveOn and, in a very hard-hitting segment last night, Rachel Maddow (video below) — have vociferously condemned the Daley choice.  By contrast, the most enthusiastic reactions came from JP Morgan Chairman Jamie Dimon (who first suggested Daley), the Chamber of Commerce, the Third Way, and Karl Rove.  Beyond that, Daley was an outspoken opponent — in public — of two of Obama's most prominent legislative items:  health care reform and the financial regulation bill's consumer protection agency.  Why, angry progressives seem to be asking, would Obama ignore the views of his so-called "progressive base" while seeking to please those who are his political adversaries?

But it's perfectly rational for Obama to do exactly that.  There's a fundamental distinction between progressives and groups that wield actual power in Washington:  namely, the latter are willing (by definition) to use their resources and energies to punish politicians who do not accommodate their views, while the former unconditionally support the Democratic Party and their leaders no matter what they do.  The groups which Obama cares about pleasing — Wall Street, corporate interests, conservative Democrats, the establishment media, independent voters — all have one thing in common:  they will support only those politicians who advance their agenda, but will vigorously oppose those who do not.  Similarly, the GOP began caring about the Tea Party only once that movement proved it will bring down GOP incumbents even if it means losing a few elections to Democrats.

That is exactly what progressives will never do.  They do the opposite; they proudly announce:  we’ll probably be angry a lot, and we’ll be over here doing a lot complaining, but don't worry:  no matter what, when you need us to stay in power (or to acquire it), we’re going to be there to give you our full and cheering support.  That is the message conveyed over and over again by progressives, no more so than when much of the House Progressive Caucus vowed that they would never, ever support a health care bill that had no robust public option, only to turn around at the end and abandon that vow by dutifully voting for Obama's public-option-free health care bill.  That's just a microcosm of what happens in the more general sense:  progressives constantly object when their values and priorities are trampled upon, only to make clear that they will not only vote for, but work hard on behalf of and give their money to, the Democratic Party when election time comes around.

I'm not arguing here with that decision.  Progressives who do this will tell you that this unconditional Party support is necessary and justifiable because no matter how bad Democrats are, the GOP is worse.  That's a different debate.  The point here is that — whether justified or not — telling politicians that you will do everything possible to work for their re-election no matter how much they scorn you, ignore your political priorities, and trample on your political values is a guaranteed ticket to irrelevance and impotence.  Any self-interested, rational politician — meaning one motivated by a desire to maintain power rather than by ideology or principle — will ignore those who behave this way every time and instead care only about those whose support is conditional.  And they're well-advised to do exactly that. 

It is probably the case that a lack of enthusiasm on the part of the Democratic base contributed to the Democrats' defeat in the 2010 midterm election.  But what Obama cares about is getting re-elected in 2012, and he knows full well that come March or April of that year — if not earlier — most of the progressives who are now continuously complaining about him will be at the front of the line waving their Obama banners, pulling out their checkbooks and whipping into line anyone who is not similarly supportive.  By contrast, corporate institutions and Wall Street tycoons will pour their money into Obama's defeat if he does not show them the proper level of deference and accommodate their policy demands, but will support him (as they did in 2008) if he pleases them.  Resource disparities between those factions are significant, but it's also due in part to their own choices that Wall Street is empowered, and progressives are irrelevant.

If someone wants to lend unconditional support to Obama and the Democrats, there's a cogent (if not persuasive) rationale to justify it.  But what I find baffling is that those who make that choice — and who make clear that this is their choice — then express surprise, anger and scorn in situations like the Daley appointment when the White House so blatantly ignores what they want.  Given the posture of progressives, why would the White House possibly do anything other than ignore them (except when they're deliberately attacking them in order to appear more centrist)?  What motive does the White House have for doing anything other than that?  None that I can see.

Goldman Sachs is investing $450 million of its own money in Facebook, at a valuation that implies the social networking company is now worth $50 billion.  Goldman is also apparently launching a fund that will bring its own high net worth clients in as investors for Facebook.

On the face of it, this might just seem like the financial sector doing what it is supposed to – channeling funds into productive enterprise.  The SEC is apparently looking at the way private investors will be involved, but there are some more deeply unsettling factors at work here.

Remember that Goldman Sachs is now a bank holding company – a status it received in September 2008, at the height of the financial crisis, in order to avoid collapse (for the details, see Andrew Ross Sorkin’s blow-by-blow account in Too Big To Fail.)  This means that it has essentially unfettered access to the Federal Reserve’s discount window, i.e., it can borrow against all kinds of assets in its portfolio, effective ensuring it has government-provided liquidity at any time.

Any financial institution with such access to such government support is likely to take on excessive risk – this is the heart of what is commonly referred to as the problem of “moral hazard.”  If you are fully insured against adverse events, you will be less careful.

Goldman Sachs is undoubtedly too big to fail – in the sense that if it were on the brink of failure now or in the near future, it would receive extraordinary government support and its creditors (at the very least) would be fully protected.  In all likelihood, under the current administration and its foreseeable successors, shareholders, executives, and traders would also receive generous help at the moment of duress.  No one wants to experience another “Lehman moment.”

This means that cost of funding to Goldman Sachs is cheaper than it would be otherwise – because creditors feel that they have substantial “downside protection” from the government.  How much cheaper is a matter of some controversy, but estimates made by my co-author James Kwak (in a paper presented at a Fordham Law School conference last February) put this at around 50 basis points (0.5 percentage points), for banks with over $100 billion in total assets.

In private, I have suggested to leading people in the Obama administration and in Congress that the “too big to fail” subsidy be studied and measured more officially and in a transparent manner that is open to public scrutiny, for example as a key parameter to be monitored by the newly established Financial Stability Oversight Council.  Unfortunately, so far they have declined to take up this approach.

However, there is consensus that the implicit government backing afforded to Fannie Mae and Freddie Mac in recent decades allowed them to borrow at least 25 basis points (0.25 percent) below what they would otherwise have had to pay; this is a significant difference in modern financial markets.  In 13 Bankers we refuted the view that these Government Sponsored Enterprises were the primary drivers of subprime lending and the 2007-08 financial crisis – that debacle was much more about extreme deregulation and private sector financial institutions seeking to take on crazy risks.  But it is still the case that Fannie and Freddie were badly mismanaged – and followed the market in 2005-07 with bad bets based on excessive leverage – in large part because they had an implicit government subsidy.  Those institutions should be euthanized as soon as possible.

Goldman Sachs now enjoys exactly the same kind of unfair, nontransparent, and dangerous subsidy; it has effectively become a new form of Government Sponsored Enterprise.  Goldman is not a venture capital fund or primarily an equity-financed investment fund.  It is a highly leveraged bank, meaning that it borrows through the capital markets most of the money that it puts to work. 

As Anat Admati (of Stanford University) and her colleagues tirelessly point out, the central vulnerability in our modern financial system is excessive reliance on borrowed money, particularly by the biggest players.

Goldman Sachs is a perfect example.  Most of this firm’s operations could be funded with equity – after all, it is not in the retail deposit business.  But issuing debt is attractive to shareholders because of the subsidies associated with debt funding for banks, and compelling to bank executives whose compensation is based on return on equity – as measured, this increases with leverage.  If they have more debt relative to equity, that increases the potential upside for investors.  It also increases the probability that the firm could fail – unless you believe, as the market does, that Goldman is too big to fail.

Social networking firms should be able to attract risk capital and compete intensely.  They do not need subsidies in the form of cheaper funding (seen today as a more favorable valuation for Facebook) or in any other form.

Social networking is a bubble in the sense that email was a bubble.  The technology will without doubt change forever how we communicate with each other, and this may have profound effects on the nature of our society.  But investors will get carried away, valuations will become too high, and some people will lose a lot of money.

If those losses are entirely equity-financed, there may be negative effects but they will likely be small – in the revised data after the 2001 dotcom crash, there isn’t even a recession (i.e., there were not two consecutive negative quarters for GDP).

But if the losses follow the broader Goldman Sachs structure and are largely debt-financed, then the US taxpayer will have helped create another major financial crisis.

And if you think that sophisticated investors at the heart of our financial system can’t get carried away and lose money on Internet-related investments, read up on Webvan:

“During the dot-com bubble, Goldman invested about $100 million in Webvan, the online grocer that never got off the ground and eventually collapsed in bankruptcy.”

An edited version of this post appears today on the NYT’s Economix blog; it is used here with permission.  If you would like to reproduce the entire post, please contact the New York Times.

The Federal Reserve is pushing a new mortgage regulation that would effectively eliminate the most powerful federal remedy for predatory lending.

The regulation would severely limit a practice called “rescission,” used to strike down demonstrably-illegal or fraudulent loan contracts and void a bank’s ill-gotten gains from such predatory lending practices. When a mortgage borrower wins a rescission case in court, the bank loses the right to foreclose, and has to give up all profits from interest and fees on the loan. The borrower still has to repay the principal — the original amount of money extended by the bank — but can’t be kicked out of the house.

Under the Fed’s new proposal, however, borrowers would be required to pay off the balance of the loan before the bank loses its right to foreclose — that means borrowers could still lose their homes, even in cases where banks have broken the law.

What gets interesting is how recission plays into the securitization model. The borrower is still on the hook for the principal, but with no ability to foreclose, it’s hard to compel the borrower to repay. And remember from our previous discussions of securitization, that “banks”, meaning servicers, are keen to foreclose because they get to repay themselves for fees (including junk fees and foreclosure-related charges) and principal and interest advances (remember they keep advancing principal and interest even when the borrower has quit paying, in theory they could stop once the loan is severely impaired, in practice pretty much no one does). The investors get whatever is left.

So the banks’ argument no doubt includes the need to alleviate the impact of recission on servicers. But there are far more surgical approaches (addressing how to deal with servicer fees and advances in cases of recession, probably with different treatment when the servicer is independent versus when it is under the same corporate umbrella as the originator that created the fraudulent loan). But it’s much easier to opt for simple seeming solutions that give the banksters what they want.

Last week I wrote about President Obama and losing poorly, about how he loses in a way that doesn’t build toward long-term liberal goals, that leaves his enemies stronger and in control of the narrative while splitting his supporters. I want to talk about this argument and financial reform, specifically how the progressive community was able to overcome it.  I would argue that the progressive community fought financial reform well for two key reasons.

A Community of Experts

The first is that Americans for Financial Reform (AFR), Roosevelt Institute, the financial blogosphere and many others found a large number of experts, built them up and deployed them in ways that pushed for stronger concrete changes. On Roosevelt’s end alone, our Make Markets Be Markets conference and Will It Work? How Will We Know? conferences took experts working in a variety of different places and on a number of individual topics and brought them together.

These were experts in their fields who had a different, stronger vision of how the financial sector should be regulated than what was proposed by Treasury.  They made strong recommendation, markers for what serious reform would look like.  This builds us for the long run, as there are now experts with a strong vision who have been tested in the public sphere, experts that wonks, media, lawmaker and regulators can call on for expertise in the future.  That’s building a community.

(It was also fun!  Frustrating, hard-work, a complete pain-in-the-ass, disappointing at times, but fun.  Matt Stoller pointed that out to me, that this kind of political community building should be fun, along with the smart insight that financial reform battles that are lost need to be lost in a way that builds coalitions. How many liberal groups had a fun 2010?)

Up until this point only regulators and deregulation-minded Washington insiders spoke about these topics. The financial reform effort allowed us to build for the long-run, and these new experts will be deployed again at the next financial crisis and on the next financial issues.

Fighting the Politics

The second is getting serious about the politics. There was a period in the beginning of 2010 where everyone, myself most of all, thought that the Senate financial reform bill would be weak, so weak that it wouldn’t be worth writing about or fighting for.  By the time it was over it was surprisingly strong given where it started – very surprising to others as well.  Edmund L. Andrews and Katherine Reynolds Lewis:

Bulked Up, Not Watered Down

Industry lobbyists are stunned that the bill became tougher rather than weaker as it progressed through the Senate…Scott E. Talbott, a top lobbyist for the Financial Services Roundtable, which has adamantly fought against many provisions in the Senate bill, sounded almost shell-shocked by the bill’s breadth…

The bill is a major victory for President Obama and a valedictory for retiring Senate Banking Committee Chairman Christopher J. Dodd, D-Conn. Dodd was the guiding force who overcame strong opposition from many Republicans and some Democrats and skillfully navigated past numerous procedural barriers.

There are two specific days on which this changed.

March 11th, 2010: The first was Chris Dodd’s decision to go it alone and release his own bill rather than water it down to get Republican support in committee. This watering down process between Dodd and the Republicans on his committee sent me in a serious depression over the prospects of financial reform. Shelby had walked away from the debate, Corker was trying to play the role to get a bill out, and then Dodd decided to go on his own. He also called for a vote immediately to get it out of conference without calling any amendments. And rejecting fake bipartisanship turned out to be the right decision.

The bill then went to the amendment process in the Senate. Many, including myself, are disappointed that not enough important amendments got a vote in the Senate. But it is important to remember that there was a moment where there weren’t going to be any votes on any amendments. And it’s only through progressive senators demanding votes on amendments that they went to the floor. And only by demanding votes, and forcing Republicans and Democrats to vote for or against Wall Street, was progress able to be made.

April 16th, 2010: Blanche Lincoln had written a derivatives bill that sent everyone scrambling. Everyone. On the second date, April 16th, everything changed because of the derivatives language that was introduced into this bill.

Especially the Section 106/716 language, which would spin out the dealers from commercial banks. Noam Scheiber got this dynamic perfect, noting that all the lobbyist energy had suddenly turned to scrapping this very specific derivatives language, and even with huge opinions against it, it got out of the Senate. This left little time to attack other things.  Suddenly progressives were the ones running the clock, not the lobbyists.

What’s important here is that Senator Lincoln didn’t decide to do it randomly. She did it because she had a primary challenger in Arkansas — Lt. Governor Bill Halter, who deserves a lot of credit for stepping up and risking his political career to challenge an entrenched incumbent. Halter was recruited and supported by many local Arkansas Democrats, Glenn Greenwald and Jane Hamsher of Accountability Now, the hundreds of thousands of members of the Progressive Change Campaign Committee, Markos Moulitsas-Zuniga and the Dailykos community, the millions of members of Moveon, and the millions of members of the SEIU and the AFL-CIO.  The other team was mobilized as well. The bank-dominated US Chamber of Commerce, was advertised on her behalf in the race.

But it was the people-powered groups that had more power in the primary. Lincoln knew that if she watered down her derivatives language, it would be known and that information would be given to voters. Special thanks are owed to these groups, who deserve a central place at the story for why this Senate bill is so strong, but so far I’ve seen very little attention given to them.

This synergy will continue.  It did after the bill with the PCCC and others campaigning to get Warren to the CFPB.

Is the final financial reform bill perfect?  No.   Is it stronger because of these items?  Yes.  And what I value the most is that the coalition of financial experts who have a stronger vision of how regulation should work in the financial sector is much more organized that before this crisis hit.   We’ll continue to build them for the future, and I hope you’ll help us any way you can.

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One often hears complaints about the use of anonymity on the internet, usually from people in the mainstream media who worry about people using anonymity irresponsibly, to say things they wouldn’t be willing to say in their own name. Abuse of anonymity, it is often assumed, is one of the things that make the internet such a toxic, uncivil place, and therefore allowing its use is highly questionable.

What I’d like to argue here is that allowing the use of real names in internet discourse is equally questionable if not moreso. To get at why this is true, let’s look at the difference in reactions to an anonymous commenter who makes a racist remark and the recent racist remarks of Hayley Barbour. In the case of the anonymous commenter, people will likely pile on, call him a racist, etc. In the case of Barbour, everyone notices that he’s an influential and powerful person and therefore assumes that he just slipped up and can’t possibly be a racist. In fact, everyone is afraid to come out and call Barbour a racist precisely because being a “racist” is regarded as an extremely bad thing, hence an insult, hence a personal attack — which then winds up rebounding on the accuser and making them look bad.

Similar dynamics abound. For instance, the kinds of things John Yoo advocated are absolutely dispicable and inhuman — but when you then think of John Yoo as a person, who presumably has his own needs and desires and loves his family, etc., suddenly appelations like “war criminal” and “worthy of death” seem somehow disproportionate.

Why should people engaged in public debate be able to abuse their status as particular human beings like this? It’s precisely these spurious appeals to our shared humanity that keep us from having a viable public sphere. The solution is precisely to disallow the use of real names and instead require consistent pseudonyms, so that all names in the public sphere of the internet are the names of discourses rather than human beings. If someone insists on using their real name, let it be treated as a pseudonym as well.

Filed under: bullshit, How's that working out for you — being clever?

The difference, it seems to me, can be found in a simple truism: money is power. All things being equal, having more money makes you more powerful. Social Security gives direct cash payments to retirees, and even though in practice they are constrained as to how they can spend it (needing food, etc.), they are in principle free to spend it however they wish — so it increases their power. Medicare, by contrast, gives money to doctors, hospitals, and pharmaceutical companies (and also private insurance companies through subcontracting, subsidies, etc.), increasing the power of corporations and the wealthy elites.

Similarly, why is export-driven growth such a big article of faith under neoliberalism? Why not promote domestic consumption instead? After all, the money spends no matter who your customers are, and it might even be cheaper to sell to locals than to ship everything to developed nations. The answer: in order to promote domestic consumption, you need to make it so that the local population has more money and therefore more power. Hence China, an authoritarian regime, opts for export-driven growth — and international organizations centered in the developed world preach the gospel of export-driven growth because it puts developing nations in a position of permanent dependency.

Another question: why would anyone object to extending unemployment benefits when it’s obvious there are no jobs? Wouldn’t removing further money from the system just make things worse? The answer: in a world where uninsurance benefits are relatively generous, the employer has less control over the worker. In a world where they’re stingy, the employer only has to keep working conditions 1% better than “dying on the street.” Productivity gains galore!

It’s become something of a cliche to reverse the traditional Republican denunciation of “class warfare” by saying that actually it’s the rich who are at war with everyone else — but I think the spuriousness of the original claim tends to make us underplay its reversal. This really is a “total war.”

It’s not a war where someone has invaded another country and the goal is to push back to the previous boundaries. Instead, it’s a war of conquest where the goal is to reduce the target population to a position of utter servitude and submission. The ruling classes ideally want to have all the power and for everyone else to have none. They can’t really achieve that, as they depend on everyone else for workers and customers, but they distribute power to the lower levels grudgingly but strategically, always looking for ways to minimize the expenditure and carefully target it so as to maximize the dynamic of dependency.

As for what everyone else can do to change this, I don’t know.

Filed under: economics, politics

Michael Hudson is a highly-regarded economist. He is a Distinguished Research Professor at the University of Missouri, Kansas City, who has advised the U.S., Canadian, Mexican and Latvian governments as well as the United Nations Institute for Training and Research. He is a former Wall Street economist at Chase Manhattan Bank who also helped establish the world’s first sovereign debt fund.

Yesterday, Hudson said:

Take any stock in the United States. The average time in which you hold a stock is–it’s gone up from 20 seconds to 22 seconds in the last year. Most trades are computerized. Most trades are short-term. The average foreign currency investment lasts–it’s up now to 30 seconds, up from 28 seconds last month.

via www.nakedcapitalism.com

Despite the party line that philosopy begins in wonder or theology begins in awe before the majesty of the divine, I suspect I’m not alone. In fact, I suspect I’m part of a significant majority.

Filed under: philosophy

Arkansas officials stumped as birds fall from sky Reuters. Eeew. Expedia stops selling American tickets Financial Times Rare panda cow born on farm near Campion Loveland Reporter Herald (hat tip reader Michael T) “Internet a very large-scale spying m…

I’ve said that the efforts to clean up mortgage abuses will not have gone far enough until we see some foreclosure mill attorneys disbarred, and better yet fined and/or put in jail. And that is harder than it ought to be.

One of the frustrating issues in trying to rein in fraud is the way that essential accessories, namely, accounting firms and law firms, are close to beyond the reach of the law. For instance, if a law firm clearly permitted perjury or engaged in document fabrication that led someone to have their house foreclosed upon when they were actually current on their mortgage, the wronged homeowner could not sue the law firm. It could only sue the party that was the plaintiff in the suit (presumably a trust). Perversely, the only parties to a transaction that can sue banks and accountants are their clients, even when those firms were integral actors in scams. As we described in ECONNED:

Legislators also need to restore secondary liability. Attentive readers may recall that a Supreme Court decision in 1994 disallowed suits against advisors like accountants and lawyers for aiding and abetting frauds. In other words, a plaintiff could only file a claim against the party that had fleeced him; he could not seek recourse against those who had made the fraud possible, say, accounting firms that prepared misleading financial statements. That 1994 decision flew in the face of sixty years of court decisions, practices in criminal law (the guy who drives the car for a bank robber is an accessory), and common sense. Reinstituting secondary liability would make it more difficult to engage in shoddy practices.

The net effect is that if the clients themselves don’t sue (and they have plenty of reasons not to, starting with not wanting to air dirty linen and potentially open up privileged communications), the only recourse is sanctions by bar associations or prosecution. But state bar associations typically focus their policing efforts on solo practitioners. Bigger firms are often active in the bar association, and not surprisingly, the officialdom is seldom inclined to act against social acquaintances, particularly ones at concerns that also pay a lot in the way of dues.

Florida illustrates the difficulties prosecutors have (at least in some states) in bringing down miscreant firms. (One firm, the Default Law Group, had already been under investigation when the probe was extended last August to three other firms, Shapiro & Fishman, the Law Offices of David J. Stern and the Law Offices of Marshall C. Watson; at least two other firms were added in December).

Admittedly, the state attorney general’s probes of the leading foreclosure mils in the state has already done damage to those firms as they have lost important clients. But the effort has already hit a significant procedural obstacle. A subpoena by the attorney general was successfully opposed at the lower court level, with the ruling being that any regulation of the practice of law was under the authority of the Florida bar and the Florida courts.. The state attorney general has appealed, arguing that the Florida Deceptive and Unfair Trade Practices Act allows the AG to investigate “any trade or business”and establishes the AG as the enforcement agent. Hat tip Lisa Epstein for these court filings:

Petition Writ Certorari – State of Florida v. Shapiro & Fishman

The response, effectively, is that law is not a trade or business:

Response Petition Certiorari – State of Florida v. Shapiro & Fishman

Now this all may seem a wee bit circular, at least if you read this as I do, that the state AG is fighting an uphill battle. How can you get lawyers to adhere to professional standards if its own enforcement body sits on its hands, the courts have not taken action, and the AG faces constitutional hurdles in stepping in? In some other states, the AG and the courts appear to work far more fist in glove in enforcement. For instance, in South Carolina, the AG loves getting lawyers disbarred over botched real estate closings (the theory being if an attorney can’t even do something as simple as a real estate closing correctly he has no business practicing law). For instance, in this South Carolina Supreme Court case, an attorney was disbarred and and the matter was brought by the state attorney general for the Office of Disciplinary Counsel, which is the arm of the court that rides herd on lawyers. I’m not clear on the procedures, but one can infer that the AG and the ODC work together actively.

No doubt how this particular conflict will play out will vary by state. I would imagine one major variable is to what degree the courts have been packed with business friendly judges. It would be very helpful to get reader insight into this topic.

“She died in 1995, yet her signature later appeared on thousands of affidavits submitted by Portfolio Recovery” — WSJ

RSS Is Dying, and You Should Be Very Worried — Camen Design

Countdown to Ocwen’s pointless evictions — Shame the Banks

Wooing the Hesitant Cyclist — Streetsblog

Venezuela to Devalue Currency — WSJ

Academic Economists to Consider Ethics Code — NYT

“Our platform (and the project to build it) is called GANJA. It’s not what you think” — Gawker

Erik Sherman finds the scandalous contract for Forbes contributors — BNet

David Kotok on why Build America Bonds were a good idea, and should be reinstated — Cumber

As a holiday gift to myself, I’ve actually been reading a real book, on paper — The Worldly Philosophers, by Robert Heilbroner. The book itself was not a gift to myself; I have my sister’s old copy, which is the 1980 edition. The book is a traditional intellectual history of some of the main figures in economics. As the original was written in 1953, it focuses less on the mathematical line of economics, from Walras and Marshall through Arrow-Debreu to the present, and more on what used to be called political economy: Smith, Ricardo, Mill, Marx, Keynes, etc. It’s not a way to learn economics, but a way to learn something about the historical conditions that helped give rise to some important economic ideas.

But some passages seem oddly relevant today. Discussing the conventional economic wisdom of the early nineteenth century (pp. 121-22):

“They lived in a world that was not only harsh and cruel but that rationalized its cruelty under the guise of economic law… . It was the world that was cruel, not the people in it. For the world was run by economic laws, and economic laws were nothing with which one could or should trifle; they were simply there, and to rail about whatever injustices might be tossed up as an unfortunate consequence of their working was as foolish as to lament the ebb and flow of the tides.”

And on the conventional economic wisdom of the late nineteenth-century Gilded Age (p. 215):

“Indeed, the world was so scrubbed as to be unrecognizable. One might read such leading texts as John Bates Clark’s Distribution of Wealth and never know that American was a land of millionaires; one might peruse F.H. Taussig’s Economics and never come across a rigged stock market. If one looked into Professor Laughlin’s articles in the Atlantic Monthly he would learn that ‘sacrifice, exertion, and skill’ were responsible for the great fortunes.”

The hero of that chapter is Thorstein Veblen, who argued that the so-called captains of industry were not the sources of technological progress and economic development, but a parasitic class engaged in financial games to divert excessive profits to themselves: “The bold game of financial chicanery certainly served as much to disturb the flow of goods as to promote it” (p. 235). For Heilbroner, writing and rewriting during the thirty years of postwar prosperity, this was a problem of the past; Veblen did not see the ability of capitalism to evolve into a more efficient, more socially beneficial form.

For us, however, that progress seems less certain, and the financial engineering of the past decade seems little removed from the exploits of the nineteenth-century robber barons. And conventional economic wisdom — not the stuff taught in Ph.D. programs, but the thin veneer of economism that dominates public discourse (raise the minimum wage and unemployment will go up; increase regulations on banks and capital will contract and unemployment will go up; increase the estate tax and business owners will work less hard and unemployment will go up) — has hardly changed, either.

The people who do actual work at the university, by contrast, are the salt of the earth, some of the most brilliant and dedicated human beings I expect to meet in my life. I’m a (very low-level) member of that club, so I’m not exactly unbiased, but my admiration for the vocation is the reason I’m part of it (despite the chance of actually achieving gainful employment being somewhere between really bad and negligible). And by the way, next time you hear anyone ragging on the American college student for being lazy or selfish, tell them Aaron Bady says to go to hell. I’ve spent a lot of time in the classroom over the last few years, and I’ve come to take for granted that my students will turn out to be pretty amazing human beings, and it’s an honor and a privilege to be their teacher.

Needed to get that out of the way. Feel free to disagree with me, or even to suggest that being a university employee, I’m just talking about how great university employees are and badmouthing the bosses like disgruntled labor since time immemorial. I won’t argue. I’m not trying to convince you. I’m just laying my cards on the table.

Then read this and tell me I’m not right. The story was first broken by the SF Chronicle but since it was ably summarized and commentated by Chris Newfield, I’ll hand you over to him in a second. But first, it would be good to have in mind some context: all university employees just had their pensions substantially cut. There are all sorts of reasons for why this is happening (starting with Sacramento’s bipartisan effort to drown the state in Grover Norquist’s bathtub and ending with the idiot scoundrels that run the UC’s finances; see this account). But the effect it has had on the people at the top is really telling: when a wave of cutbacks hits everyone, from top to bottom, the thirty-six richest people in the system lost their shit and threatened to sue.

Chris Newfield:

Today’s San Francisco Chronicle headline reads, “Highest-paid UC execs demand millions in benefits.” This refers to a demand by 36 senior executives that the Regents authorize UC to “calculate [their] retirement benefits as a percentage of their entire salaries, instead of the federally instituted limit of $245,000. The difference would be significant for the more than 200 UC employees who currently earn more than $245,000.” The salaries and the payouts are explained in this graphic. A $400,000 salary with the cap yields a pension of about $184,000 a year, but is bumped to $300,000 a year without….

The symbolism of the pension spike is way beyond the actual money: UC’s top officials, the ones who set the policies that affect the state, display selfish greed, total oblivion to the public mission, and a tight focus on lining their already bulging pockets. It confirms the majority suspicion that universities like UC care much more about the “bottom line” than about education (Question 6).  People don’t see anything in this kind of effort that universities are supposed to be about.  There is in the background a sense of the university’s abandonment of the state’s suffering middle class, and of course nothing for the poor who still want to send their kids to college. Tuition has tripled over the decade, debt goes up incessantly, public pensions are under attack exactly because of $300,000 payouts,  thousands of students show up to UC every quarter with nothing but borrowed petty cash, and yet what they see senior executives spending their time on is maximizing their personal take…

You can read the letter of the 36 to judge for yourself whether they have a legal case. My own reading is that their real argument is what they term the “ethical” one: in 1999 the Regents said they would remove the cap on salary eligible for pension accural if the IRS allowed it, people decided to stay at UC for that reason, the IRS granted the request, and now they are owed extra back pension. President Yudof, in contrast, defines UC’s position as saying that the 1999 resolution was never implemented and the cap on the contribution level was not eliminated.  Both of these statements seem to be factually true.  The other argument of the 36 is that UC needs to pay market-level salaries and benefits, and this will only happen if UC removes the cap.

This latter argument is factually false.  UC has been proving for years that it doesn’t has to pay market rates, and does so by paying sub-market wages to most of its faculty and staff.  More importantly, this argument displays an ignorance about the status of a public university that drives many people nuts. The 36 want market-level salaries, i.e., a top-end salary at a wealthy private-sector institution.   They at the same time want public-sector defined-benefit pensions, which historically developed to protect employees who made much less than their private-sector counterparts.   Public-sector pensions were never meant to support private-sector executive lifestyles.  The public has absolutely no obligation to pay for them. Hence the logic of the $245,000 cap.

There’s a deeper stupidity in all this, which is the energy of this letter on behalf of a tiny group of executives that they have never directed at political and business leaders who’ve let the University go to hell.  They threaten to depose former Regents and UC Presidents.  When did they ever threaten the Schwarzenegger administration during their endless rounds of fee hikes and general fund cuts?   The 36 are brilliant, passionate advocates for themselves. With one known exception they have done no public advocacy for the university.  All 36 signers are non-instructional executives, and at least half are non-academic, but this is no excuse.  For much of the public, a University still stands for collective betterment, mutual development, enlightenment, progress for all, solidarity, and some kind of common life of knowledge. The wage and benefit inequalities deepened by this pension spike suggest an executive class that is comfortable with the inequalities that are damaging millions of individual lives and the future of the state as a whole. When they stand for the university, the university stands for nothing.

Though it’s yet to be seen what kind of governor Jerry Brown will be on education, he says the right things here. If you’re not a Californian, comfort yourself with the knowledge that something very much like this is happening, will happen, or has happened to the public universities near wherever you are.

A few weeks ago Jonathan Bernstein asked liberals “As the 111th Congress winds down, what’s your biggest disappointment of the things you expected to happen?”

Bad at Losing

I expected Obama to be a better loser, specifically to be better at losing. There were a lot of items on the table, a lot of them weren’t going to happen, but it was important for the new future of liberalism that the Obama team lost them well. And that hasn’t happened.

By losing well, I mean losing in a way that builds a coalition, demonstrates to your allies that you are serious, takes a pound of flesh from your opponents and leaves them with the blame, and convinces those on the fence that it is an important issue for which you have the answers. Lose for the long run; lose in a way that leaves liberal institutions and infrastructure stronger, able to be deployed again at a later date.

Let’s take an example of a lose: immigration. The assimilation of Hispanics into a central part of the United States is a long-term project, one that will go on beyond this Congress and any bill it may have passed.  Securing Hispanic votes is central to any theory of an emerging Democratic majority.  And it was going to be possible that any bill wouldn’t pass, given how difficult immigration bills were to move in the Bush years.

So this should have been something that was lost well. Here’s my major memory of the Obama administration on immigration:

Whenever Rep. Luis V. Gutierrez (D-Ill.) and other immigrant-rights advocates asked President Obama how a Democratic administration could preside over the greatest number of deportations in any two-year period in the nation’s history, Obama’s answer was always the same.

Deporting almost 800,000 illegal immigrants might antagonize some Democrats and Latino voters, Obama’s skeptical supporters said the president told them, but stepped-up enforcement was the only way to buy credibility with Republicans and generate bipartisan support for an overhaul of the nation’s immigration laws.

On Saturday, that strategy was in ruins after Senate Democrats could muster only 55 votes in support of the Development, Relief and Education for Alien Minors (DREAM) Act…

This is losing poorly. It makes major concessions without getting anything in return, conceding both pieces of flesh and the larger narrative to the other side. This unnecessarily splits those who support the Democrats on whether or not to support these actions. It doesn’t name the opponents of the effort to figure out ways of deploying pressure to change things. Without an obvious fight it’s not signaled that it was a priority. And the ultimate problem is that it doesn’t leave the coalition in better shape for the next battle.

This is true of many issues, ranging from unions fighting for the ability to unionize easier to the technology groups fighting for Net Neutrality.   Why should these groups be happier with the past two years, even if they thought on day one that they wouldn’t win anything?  How are either stronger for the next battle?

Candidate Obama’s chief blogger, Sam Graham-Felsen, recently asked Why is Obama leaving the grass roots on the sidelines? by not engaging those on the unprecedented email list Obama was able to create. I’d go further and ask where are the newer and/or stronger liberal groups that have emerged in the past two years? So many seem demoralized and confused and few new ones seem to exist at all, which is disturbing given the volume of people Democrats had in Congress going into this session.

This is a problem regardless of whether or not you think Obama is a progressive boxed in by failed institutions, a centrist Democratic in awe of Rubinomics who accidently stumbled into the largest downturn since the Great Depression, or a political neophyte who never fought a battle and, as an old-school liberal told Bill Greider “”was rolled by the bankers, then he was rolled by the generals, then he was rolled by the Blue Dogs and other Democrats who had no interest in going along with what he proposed.” Regardless of where the Democrats want to go they need people and institutions to help them get there, and it’s not clear that we are any closer to getting those in place.

In my book, this matters.  As Ziad Munson’s ethnography of the Pro-Life movement argued “mobilization occurs when people are drawn into activism through organizational and relational ties, not when they form strong beliefs about abortion.” People aren’t simply acting out unconscious political codes and rules like a processor, and people aren’t simply rational consumers maximizing a matrix of orthogonal political preferences by choosing among competing parties. Politics is a process, and a person’s political habitus is created by engagement in institutions based on their views that in turn change those views and push on the institutions themselves.  If we want a dominate liberalism, institutions to engage people need to be grown and nurtured.

The Other Surprise Disappointments

As for specific issues: In 100 years the thing that will matter the most is our failure to get started on combating global warming and carbon in the atmosphere. Oceans will acidify, the Earth will heat, hopefully it won’t become a cascading process that feeds itself, and by that time change will be much harder. Ryan Lizza’s New Yorker piece on the bill failing in the Senate is excellent at showing why it’s difficult to get a 60th vote, as well as the executive branch stumbling over any hopes of this bill in some major ways (giving away off-shoring drilling, which Senators were hoping to trade for votes, for instance).  Like immigration, the plan seemed to be “hoping Lindsey Graham is a decent guy” rather than planning out for the next decade of what will need to be done.

My biggest disappointment was the continuation of the Bush-era policies regarding the Unitary Executive, expanded powers regarding detention and other civil libertarian issues.  I look at it from the point of view of people working on the front lines and in the middle offices.  You can have good or bad people, conscientious versus authoritarian people, but they largely work within a framework they inherit. If the framework and institutions are corrupt, then the final practices they produce will be as well.

Imagine a military analyst who joins in 2001 at age 25, perhaps in response to 9/11. If Obama goes a second-term, that analyst will be around 41 when the next President comes, and our current policies of black sites, wiretapping, etc. will just be “the way things are.” We’ll have a generation of military and information bureaucrats  that has entered into that atmosphere that won’t know anything different and that will then continue to perpetrate that apparatus, regardless of who is in charge.  This worries me more than any specific transgression (though the specific ones do worry me).  Hence why a cleansing of policies was necessary, and we didn’t get it.