Archive for the ‘Predatory Lending’ Category

Preying on the Military

Thursday, October 23rd, 2014

militarylendingReincorporating in foreign countries with lower tax rates is not the only way large corporations put profit before patriotism. A front-page story in the New York Times points out that predatory lenders continue to target members of the U.S. military. Despite much business talk about supporting the troops, these unscrupulous firms exploit the precarious financial condition of many members of the armed services.

The vulnerability of service members to predatory lending is not a new story. The federal Military Lending Act of 2007 was passed with the intention of barring the most exploitative practices, but it did not go far enough. The Obama Administration is now seeking sweeping changes to the law to eliminate its many loopholes and to expand its applicability to the many new kinds of predatory “services” that the infinitely creative consumer finance industry has created in the past seven years.

At the same time, the Consumer Financial Protection Bureau has brought enforcement actions against predators that have been violating the law. Last year the bureau got payday lender Cash America to pay $19 million to settle charges relating to abusive practices such as charging more than the 36 percent interest cap established by the Military Lending Act. In May, Sallie Mae and its former loan servicing unit Navient had to pay $60 million to settle federal allegations that they charged servicemembers excessive interest rates and fees on student loans. And in July, a company called Rome Finance had to pay $92 million to settle accusations that it exploited military purchasers of consumer electronics. CFPB Director Richard Cordray told reporters at the time: “Rome Finance’s business model was built on fleecing servicemembers.”

Faced with these obstacles, the predatory lenders have been looking for relief at the state level. The Times points out that states such as Kentucky, Arizona, Missouri, Indiana and Florida have eased their financial regulation, but it gives special attention to North Carolina, where a 2011 push by financial services lobbyists to ease interest rate restrictions was so brazen that it prompted military commanders from Fort Bragg and Camp Lejeune to warn the changes could harm their troops. Last year the industry tried again and succeeded, thanks in part to a decision by the commanders not to get involved again.

The issue is playing a role in this year’s U.S. Senate race in the Tarheel State. Republican candidate Thom Tillis, the state Speaker, supported the easing of restrictions on military lending and has reaped large campaign contributions from the financial services industry. The Times asked his campaign manager Jordan Shaw about this and was told that that the donations did not influence his voting record. Yet Shaw stated that Tillis “wanted to make sure that people still have these loans as an option.”

Conservative politicians such as Tillis have bought into the self-serving ideology of predatory lenders – that consumers should have the freedom to choose exploitative borrowing arrangements. It’s bad enough when this mindset is applied to the general public. Extending it to those who risk their life for their country is breathtakingly cynical and a reminder that corporations are loyal to nothing other than their own enrichment.

 

Payday Predators Become the Prey

Thursday, August 14th, 2014

shark-week-cover2Every industry has its faults, but there are only a few for which it can be said that society would be better off if they did not exist at all. One member of that special group is payday lending, the business of providing short-term cash advances to desperate people at unconscionably high interest rates with the expectation that they will not be able to repay the money and thereby get caught in an ever-worsening debt trap.

National People’s Action and other groups fighting predatory lending are highlighting this problem with their Shark Week Campaign. An NPA fact sheet does a good job of summarizing what’s wrong with payday lending and links to some of the best research on the subject, including a 2013 report by the Center for Responsible Lending that makes the case for stronger federal regulation. The issue was also the focus of a brilliant segment on John Oliver’s HBO show that included a mock public service ad narrated by Sarah Silverman arguing that the best alternative to payday loans is “anything else.”

While stricter rules are clearly needed, the good news is that the sharks are no longer operating with total impunity. The Dodd-Frank Act opened the door to federal action on payday lending, and the Consumer Financial Protection Bureau is starting to act on that authority. Last November, the agency ordered Cash America International, one of the largest predators, to pay $19 million ($5 million in fines and $14 million in refunds to customers) for using illegal robo-signing in preparing court documents in debt collection lawsuits. The company was also charged with violating special rules involving lending to military families. In addition, Cash America was accused of destroying documents relevant to the agency’s investigation of its practices.

In the wake of that case, the CFPB took its first action against an online payday lender, suing CashCall Inc. for engaging in “unfair, deceptive, and abusive practices, including debiting consumer checking accounts for loans that were void.” In July, the bureau announced that Ace Cash Express would pay $10 million to settle charges that it engaged in “illegal debt collections tactics — including harassment and false threats of lawsuits or criminal prosecution — to pressure overdue borrowers into taking out additional loans they could not afford.”

Last March, the bureau held a field hearing on payday lending and issued a report finding that more than 80 percent of loans by the industry are rolled over or followed by another loan. The Justice Department is reported to be carrying out an investigation of the role of banks in financing payday lenders.

The sharks are also under attack at the state and local level. Manhattan District Attorney Cyrus Vance Jr. just announced the criminal indictment of a group of online payday lenders and the individuals who control them. The case is an effort to get at companies that use complicated corporate structures and offshore registration to get around the interest rate caps that states such as New York have adopted.

In June, officials in Maryland announced that South Dakota-based Western Sky Financial and CashCall would pay about $2 million to settle charges that they engaged in “abusive payday lending and collections activities” that included loans with annual interest rates of more than 1,800 percent. The settlement also permanently barred the companies from doing any business in the state that required licensing.

Last October, five payday lending companies had to pay $300,000 to settle charges brought by the New York State attorney general, and the year before Sure Advance had to hand over $760,000 to settle allegations that it charged illegal rates as high as 1,564 percent.

Payday lenders have also been targeted in class action lawsuits. Cash America agreed to pay up to $36 million to settle one such case that had been brought under Georgia’s usury and racketeering laws.

Faced with a dwindling number of states in which they can operate as they please, along with tighter federal rules, some of the payday companies are giving up. For example, giant Cash America is reportedly planning to spin off its payday lending operations and focus instead on the supposedly more reputable business of pawn shops.

Most stories about attempts to control abusive commercial practices end up with corporations finding a way to prevail. Payday lending may turn out to be that rare case in which the predators lose.

JPMorgan Chase in the Sewer

Thursday, May 9th, 2013

dimonThe business news has been full of speculation on whether JPMorgan Chase Jamie Dimon will go on serving as both CEO and chairman of the big bank, in light of a shareholder campaign to strip him of the latter post. The effort to bring Dimon down a notch—and to oust three members of the board—is hardly the work of a “lynch mob,” as Jeffrey Sonnenfeld of Yale suggested in a New York Times op-ed.

That’s not to say that a corporate lynching is not in order. JPMorgan’s behavior has been outrageous in many respects. The latest evidence has just come to light in a lawsuit filed by California Attorney General Kamala Harris, who accuses the bank of engaging in “fraudulent and unlawful debt-collection practices” against tens of thousands of residents of her state.

In charges reminiscent of the scandals involving improper foreclosures by the likes of JPMorgan, the complaint describes gross violations of proper legal procedures in the course of filing vast numbers of lawsuits against borrowers, including:

  • Robo-signing of court filings without proper review of relevant files and bank records;
  • Failing to properly serve notice on customers—a practice known as “sewer service”; and
  • Failing to redact personal information from court filings, potentially exposing customers to identity theft.

JPMorgan got so carried away with what the complaint calls its “debt collection mill,” that on a single day in 2010 it filed 469 lawsuits.

The accusations come amid reports of ongoing screw-ups in the process of providing compensation to victims of the foreclosure abuses. For JPMorgan, the California charges also bring to mind its own dismal record when it comes to respecting the rights of credit card customers.

In January 2001, just before it was taken over by what was then J.P. Morgan, Chase Manhattan had to pay at least $22 million to settle lawsuits asserting that its credit card customers were charged illegitimate late fees.

In July 2012 JPMorgan Chase agreed to pay $100 million to settle a class action lawsuit charging it with improperly increasing the minimum monthly payments charged to credit card customers.

The credit card abuses are only part of a broad pattern of misconduct by JPMorgan. In the past year alone, its track record includes the following:

In October 2012 New York State Attorney General Eric Schneiderman, acting on behalf of the U.S. Justice Department’s federal mortgage task force, sued JPMorgan, alleging that its Bear Stearns unit had fraudulently misled investors in the sale of residential mortgage-backed securities.  The following month, the SEC announced that JPMorgan would pay $296.9 million to settle similar charges.

In January 2013 JPMorgan was one of ten major lenders that agreed to pay a total of $8.5 billion to resolve charges relating to foreclosure abuses. That same month, bank regulators ordered JPMorgan to take corrective action to address risk management shortcomings that caused massive trading losses in the London Whale scandal. It was also ordered to strengthen its efforts to prevent money laundering. In a move that was interpreted as a signal to regulators, JPMorgan’s board of directors cut the compensation of Dimon by 50 percent.

JPMorgan’s image was further tarnished by an internal probe of the big trading losses that found widespread failures in the bank’s risk management system. Investigations of the losses by the FBI and other federal agencies continue.

In February 2013 documents came to light indicating JPMorgan had altered the results of an outside analysis showing deficiencies in thousands of home mortgages that the bank had bundled into securities that turned out to be toxic.

In March 2013 the Senate Permanent Committee on Investigation released a 300-page report that charged the bank with ignoring internal controls and misleading regulators and shareholders about the scope of losses associated with the London Whale fiasco.

In an article in late March, the New York Times reported that the bank was facing investigations by at least eight federal agencies. Last week, the newspaper revealed a new investigation of JPMorgan by the Federal Energy Regulatory Commission, which was said to have assembled evidence that the bank used “manipulative schemes” to transform money-losing power plants into “powerful profit centers.”

You know a bank is in big trouble when the coverage of its activities includes phrases like “lynch mob,” “sewer service” and “manipulative schemes.“

Removing the Burden of Student Loans

Thursday, November 17th, 2011

Undeterred by its eviction from public parks in numerous cities, the Occupy movement is looking to other venues, among them college campuses.

Occupying universities is not just a matter of finding new encampment sites. It is also a means of asserting the connection between the current protests and the student activism of the 1960s, which in many ways paved the way for the current upheaval.

Those historical links have been in full view in Berkeley, where Occupy forces have been struggling to maintain an encampment at the University of California on the very spot where the Free Speech Movement was born nearly a half century ago. The call by that movement’s leader, Mario Savio, for students to throw their “bodies upon the gears” of the capitalist/military machine is echoed in the speeches in today’s Occupy general assemblies.

Berkeley also serves as a reminder that the universities are not that far removed from Wall Street. A 1998 agreement by UC-Berkeley to put its biotechnology research under the control of drug company Novartis (later Syngenta) was a key event in the corporatization of academia and was prominently featured in Jennifer Washburn’s 2005 book University Inc.: The Corporate Corruption of Higher Education.

But perhaps the most compelling reason for Occupy efforts on college campuses is that they are the scene of the crime for the abuse that perhaps more than any other animates the current movement: the burden of student debt.

For many young Occupiers, who have never had a chance to take out a home mortgage on which to be foreclosed, their main relationship to Wall Street is through what they owe banks on the loans they amassed for their education. It is thus no surprise that some of the more common Occupy protest signs are those that say something like: “I have $80,000 in student loan debt. How can I ever pay that back?”

Occupiers are starting to move from simply bemoaning their student loans to rejecting the idea that those obligations have to be met. We’re seeing the emergence of a movement for student loan debt abolition.

To put this movement in context, it’s helpful to recall the modern history of higher education in the United States. Once the province of the upper class, colleges were transformed in the post-World War II era into a system for preparing a workforce that was becoming increasingly white-collar. The GI Bill and later the candidly named National Defense Student Loans were not social programs as much as they were indirect training subsidies for the private sector. The Basic Educational Opportunity Grants (later renamed Pell Grants) created in the 1970s brought young people from the country’s poorest families into the training system.

It was precisely this sense that they were being processed for an industrial machine that motivated many of the student protesters of the 1960s. As with many of today’s Occupiers, they ended up questioning the entire way of life that had been programmed for them.

Those challenges eventually ebbed, and the powers that be then pulled a cruel trick on young people. Once a college education had become all but essential for survival in society, students were forced to start shouldering much more of its cost. During the 1980s, the Reagan Administration slashed federal grant programs, compelling students to make up the difference through borrowing. As early as 1986, a Congressional report was warning that student loans were “overburdening a generation.”

Over the past 25 years, that burden has become increasingly onerous. Both Republican and Democratic Administrations exacerbated the problem by cracking down on borrowers who could not keep up with their payments, while at the same time giving the profit-maximizing private sector greater control over the system. That control was intensified by the privatization of the Student Loan Marketing Association (Sallie Mae) in the late 1990s and by the refusal of Congress for years to heed calls to get private banks out of the student loan business.

It was not until March 2010 that Congress, at the urging of the Obama Administration, eliminated the private parasites and converted billions in bank subsidies into funds for the expansion of the Pell Grant program. This was a remarkable step that will reduce future debt burdens, but by the time it occurred a great deal of damage had already been done.

During the past two decades, student loan debt has skyrocketed. Last year new loans surpassed $100 billion for the first time, and total loans outstanding are soon expected to exceed $1 trillion. According to the College Board, the typical recipient of a bachelor’s degree now owes $22,000 upon graduation. These numbers are all the more daunting in light of the dismal job prospects for graduates, millions of whom are unemployed or underemployed.

Given this history, young people are justified in viewing their student debts as akin to the unsustainable mortgages foisted on low-income home buyers by predatory lenders. President Obama recently announced some administrative adjustments to student loan obligations, but that will make only a small dent in the problem.

Even before the Occupy movement began, there was talk of a student loan debt abolition movement. Much of this talk was inspired by the writings of George Caffentzis, including a widely circulated article in the journal Reclamations. Caffentzis acknowledges the challenges to such a movement stemming from the fact that student loans are not repayable while borrowers are still in school: “Student loans are time bombs, constructed to detonate when the debtor is away from campus and the collectivity college provides is left behind.”

The advent of the Occupy movement is creating a new collectivity and a new way of thinking that addresses the call by Caffentzis for a “political house cleaning to dispel the smell of sanctity and rationality surrounding debt repayment regardless of the conditions in which it has been contracted and the ability of the debtor to do so.” Occupiers are also apt to be more receptive to Caffentzis’s argument that student debt should be seen not as consumer debt but in the context of education as an adjunct to the labor market.

A decade ago, many U.S. activists were building a Jubilee campaign for third world debt cancellation. We now need a similar effort here at home to liberate young people from the consequences of an educational financing system that has gone terribly wrong.

The (Investment) House Always Wins

Thursday, April 22nd, 2010

Goldman Sachs, which has long prided itself on being one of the smartest operators on Wall Street, has apparently decided that the best way to defend itself against federal fraud charges is to plead incompetence. The firm is taking the position that it is not guilty of misleading investors in a 2007 issue of mortgage securities because it allegedly lost money – more than $90 million, it claims – on its own stake in the deal.

In fact, Goldman would have us believe that it took a bath in the overall mortgage security arena. This story line is a far cry from the one put forth a couple of years ago, when the firm was being celebrated for anticipating the collapse in the mortgage market and shielding itself – though not its clients. In a November 2007 front-page article headlined “Goldman Sachs Rakes in Profit in Credit Crisis,” the New York Times reported that the firm “continued to package risky mortgages to sell to investors” while it reduced its own holdings in such securities and bought “expensive insurance as protection against further losses.” In 2007 Goldman posted a profit of $11.6 billion (up from $9.5 billion the year before), and CEO Lloyd Blankfein took home $70 million in compensation (not counting another $45 million in value he realized upon the vesting of previously granted stock awards). Some bath.

Goldman is not the only one rewriting financial history. Many of the firm’s mainstream critics are talking as if it is unheard of for an investment bank to act contrary to the interests of its clients, as Goldman is accused of doing by failing to disclose that it allowed hedge fund operator John Paulson to choose a set of particularly toxic mortgage securities for Goldman to peddle while Paulson was betting heavily that those securities would tank.

In fact, the history of Wall Street is filled with examples in which investment houses sought to hoodwink investors. Rampant stock manipulation, conflicts of interest and other fraudulent practices exposed by the Pecora Commission prompted the regulatory reforms of the 1930s. Those reforms reduced but did not eliminate shady practices. The 1950s and early 1960s saw a series of scandals involving firms on the American Stock Exchange that in 1964 inspired Congress to impose stricter disclosure requirements for over-the-counter securities.

The corporate takeover frenzy of the 1980s brought with it a wave of insider trading scandals. The culprits in these cases involved not only independent speculators such as Ivan Boesky, but also executives at prominent investment houses, above all Michael Milken of Drexel Burnham. Also caught in the net was Robert Freeman, head of risk arbitrage at Goldman, who in 1989 pleaded guilty to criminal charges. When players such as Freeman and Milken traded on inside information, they were profiting at the expense of other investors, including their own clients, who were not privy to that information.

During the past decade, various major banks were accused of helping crooked companies deceive investors. For example, in 2004 Citigroup agreed to pay $2.7 billion to settle such charges brought in connection with WorldCom and later paid $1.7 billion to former Enron investors. In 2005 Goldman and three other banks paid $100 million to settle charges in connection with WorldCom.

In other words, the allegation that Goldman was acting contrary to the interest of its clients in the sale of synthetic collateralized debt obligations was hardly unprecedented.

What’s not getting much attention during the current scandal is that in late 2007 Goldman had found another way to profit by exploiting its clients, though in this case the clients were not investors but homeowners.

Goldman quietly purchased a company called Litton Loan Servicing, a leading player in the business of servicing subprime (and frequently predatory) home mortgages. “Servicing” in this case means collecting payments from homeowners who frequently fall behind in payments and are at risk of foreclosure. As I wrote in 2008, Litton is “a type of collection agency dealing with those in the most vulnerable and desperate financial circumstances.” At the end of 2009, Litton was the 4th largest subprime servicer, with a portfolio of some $52 billion (National Mortgage News 4/5/2010).

Litton has frequently been charged with engaging in abusive practices, including the imposition of onerous late fees that allegedly violate the Real Estate Settlement Procedures Act. It has also been accused of being overly aggressive in pushing homeowners into foreclosure when they can’t make their payments.

Many of these complaints have ended up in court. According to the Justia database, Litton has been sued more than 300 times in federal court since the beginning of 2007. That year a federal judge in California granted class-action status to a group of plaintiffs, but the court later limited the scope of the potential damages, resulting in a settlement in which Litton agreed to pay out $500,000.

Meanwhile, individual lawsuits continue to be filed. Many of the more recent ones involve disputes over loan modifications. Complaints in this area persist even though Litton is participating in the Obama Administration’s Home Affordable Modification Program and is thus eligible for incentive payments through an extension of the Toxic Assets Relief Program.

There seems to be no end to the ways that Goldman manages to make money from toxic assets.  On Wall Street, as in Las Vegas, the house always wins.

BONUS FEATURE: Federal regulation of business leaves a lot to be desired, but it is worth knowing where to find information on those enforcement activities that are occurring. The Dirt Diggers Digest can help with our new Enforcement page, which has links to online enforcement data from a wide range of federal agencies. The page also includes links to inspection data, product recall announcements and lists of companies debarred from doing business with the federal government.

Pecora Weeps

Friday, January 15th, 2010

After J.P. Morgan was questioned by Congressional investigator Ferdinand Pecora during a 1930s investigation of the causes of the Great Crash, the legendary financier complained that Pecora (photo) had “the manners of a prosecuting attorney who is trying to convict a horse thief.” Morgan was also embarrassed when a Ringling Bros. publicity agent placed a diminutive circus performer on his lap in the middle of the proceedings.

At this week’s public hearing of the Financial Crisis Inquiry Commission, the nation’s most powerful bankers were, unfortunately, treated with a lot more deference. Sure, there was one satisfying exchange between FCIC Chairman Phil Angelides and Goldman Sachs CEO Lloyd Blankfein in which Angelides likened the firm’s practice of betting against the very securities it was peddling to clients to that of selling someone a car with faulty brakes and then buying an insurance policy on the buyer.

But those moments were rare. For the most part, the bankers came away unscathed. Most of the ten commissioners treated them not as suspected criminals whose misdeeds needed to be probed, but rather as experts whose opinions on the causes of the crisis were being solicited. This gave the bankers abundant opportunities to pontificate about industry and regulatory practices while avoiding any incriminating admissions about their own firm’s behavior.

For example, Commissioner Heather Murren, CEO of the Nevada Cancer Institute, asked Blankfein whether there should be “more supervision of the kinds of activities that are undertaken by investment banks?” This allowed him to babble on about the “sociology…of our regulation before and after becoming a bank holding company.”

The bankers seemed to have expected tougher questioning. Their opening statements sought to soften the interrogation by conceding some general culpability, though it was done in a mostly generic way. Jamie Dimon of JP Morgan Chase admitted that “new and poorly underwritten mortgage products helped fuel housing price appreciation, excessive speculation and core higher credit losses.” John Mack of Morgan Stanley acknowledged that “there is no doubt that we as an industry made mistakes.” And Brian Moynihan, the new CEO of Bank of America, noted: “Over the course of the crisis, we, as an industry, caused a lot of damage.”

But much too little time was spent by the commissioners exploring how the giant firms represented on the panel contributed to that damage. A search of the transcript of the hearing produced by CQ Transcriptions and posted on the database service Factiva indicates that the word “predatory” was not used once during the time the four top bankers were testifying.

The commissioners failed to challenge most of the self-serving statements made by the bankers to give the impression that, despite whatever vague transgressions were going on in the industry, their own firms were squeaky clean. Even Angelides failed to pin them down. When he asked Blankfein to state “the two most significant instances of negligent, improper and bad behavior in which your firm engaged and for which you would apologize” the Goldman CEO admitted only to contributing to “elements of froth in the market.” Angelides asked whether that included anything “negligent or improper.” Blankfein again evaded the question and the Chairman gave up.

The bankers also went unchallenged in making statements that were incomplete if not outright erroneous. When Blankfein, for example, claimed that Goldman deals only with institutional investors and “high-net-worth individuals,” no one pointed out the firm’s ties to Litton Loan Servicing, which has handled large numbers of subprime and often predatory home mortgages.

The Goldman chief also made much of the fact that he and other top executives of the firm took no bonuses in 2008. That’s true, but he failed to mention that, according to Goldman’s proxy statement, he alone became more than $25 million richer that year when previously granted stock awards vested.

The bankers were at their slipperiest when it came to the few questions about the issue of being too big to fail. They would not, of course, admit to being too big, but in spite of every indication that the federal government would never allow another Lehman Brothers-type collapse to occur, they labored mightily to argue that they could conceivably go under. This notwithstanding the fact that a couple of them had just thanked U.S. taxpayers for the financial assistance their firms had received.

I suppose it’s possible that the Commission is saving its best shots for later stages of the investigation and its final report, but its handling of the banker hearing deprived the public of a chance to see some of the prime villains of the current crisis get a much-deserved tongue-lashing.

CIT: R.I.P.?

Thursday, July 16th, 2009

cit1When CIT Group realized it was in really big trouble, the commercial finance company apparently thought it could count on Uncle Sam to come to the rescue. About a week ago, it leaked the news that it was considering bankruptcy and waited for the Treasury Department to respond to dire warnings about the consequences for the small and medium businesses that make up most of the company’s customer base.

After all, CIT had already received $2.3 billion in TARP money last year after converting itself to a bank holding company. Other struggling TARP recipients, like Citigroup, had been able to come back for additional infusions as Tim Geithner showed himself to be a soft touch for large financial institutions.

To the surprise of CIT, it got rebuffed by the Obama Administration and will now have to file for Chapter 11 unless some deep-pocketed investors step in. CIT, with assets of about $75 billion, is a large but not a giant institution. It thus does not seem to meet the Geithner standard: it is not too big to fail.

While it is possible to understand CIT’s frustration, the company does not deserve too much sympathy. Putting size aside, there are reasons why CIT was not exactly a worthy candidate for a taxpayer handout. This is a case in which perhaps the right question to ask was whether the company in need was  too flawed to save.

For decades, CIT played a useful function in the business system with services such as commercial lending, factoring and equipment leasing. But in 1980 it developed an identity crisis as it was acquired by RCA in the first of what would be a long series of ownership changes. Two decades later it came under the control of Tyco International, the shady conglomerate headed by Dennis Kozlowski, who would later be convicted of misappropriation of corporate funds and become infamous for the extravagant lifestyle–including a $6,000 shower curtain–he enjoyed with those funds.

CIT split from Tyco in 2002 and sought to make a new name for itself. Unfortunately, the way it did that was to get into two very sleazy businesses. In 2005 it entered the student loan market. Within two years, CIT’s Student Loan Xpress was being investigated by New York Attorney General Andrew Cuomo for paying kickbacks to university officials who steered students into predatory loans. Faced with a scandal, CIT agreed in May 2007 to sign a code of ethical conduct drawn up by Cuomo. It then booted out the president of Student Loan Xpress and later exited the business.

The other new endeavor was subprime home mortgages. For a while this dubious business boosted CIT’s earnings, but when the subprime market turned sour, the company took a big hit. In 2007–shortly after telling Investment Dealers Digest that “our subprime profile is strong”–it started posting losses and was forced to write down the value of its subprime portfolio by $765 million. It ended up leaving this field as well. CIT lost some $633 million in 2008.

CIT’s reputation was also tarnished in 2005, when it and two other leasing companies agreed to a $24 million settlement of charges brought in two dozen states about their links to the crooked telecom services company NorVergence.

In recent years, CIT has promoted itself using an advertising campaign based on the tag line Capital Redefined. Apparently, the new definition of capital is to engage in unethical business practices and then expect the federal government to come to your assistance when market conditions turn against you. Large or small, that kind of company is not worth saving.

Adding New Floors to the Bailout House of Cards

Wednesday, November 26th, 2008

Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke have added a few more floors to their ever-expanding bailout house of cards. Their two agencies kicked in another $800 billion in the latest frantic effort to ward off financial collapse. The Fed is putting up $600 billion to buy mortgage-backed securities and mortgages held by Fannie Mae and Freddie Mac. This seems, at least initially, to have brought down mortgage rates—assuming anyone is in a position these days to buy a house.

The plan for the other $200 billion is more dubious. Treasury and the Fed are going to use those funds to make loans to consumer finance companies, which in turn would be in a position to provide more auto loans, student loans and credit cards. Yet, as with the bailout of the banks, there seems to be no actual requirement that the finance companies use their new liquidity to open the spigots to consumers. We are apparently supposed to take it on faith that these lenders will in fact lend, even though it’s now clear that many of the banks used their federal assistance for other purposes.

Another questionable assumption in the plan is that consumers are aching to borrow more money. With unemployment soaring and the value of retirement savings dwindling, most people are opting for austerity, not seeking to add to their already heavy debt load. Creating more jobs and boosting household income are more urgent than allowing people to go further into hock.

And finally, it is worth recalling that many of the consumer finance companies have been as predatory in their lending as the unscrupulous subprime mortgage lenders. Nowhere is this truer than in the credit card business. These are the companies that, thanks to deregulation in their industry, have been gouging consumers with usurious interest rates and punishing fees.

The idea that bailing out these firms is the way to help consumers is yet another indication of the warped thinking of Paulson and Bernanke. It does not occur to them that the solution might be to lessen the hold that the card companies have on consumers—through measures such as interest rate reductions—rather than intensifying it. But what can you expect from what has become a government of the financial institutions, by the financial institutions and for the financial institutions.

Consumers Beware: Henry Paulson is Coming to Your Rescue

Thursday, November 13th, 2008

Treasury Secretary Henry Paulson is once again trying to pull off a sleight of hand in his execution of the financial crisis, but he’s a lousy magician. His first trick—trying to depict the existing rescue plan as a success—fell flat. While Paulson tried to take credit yesterday for a “major accomplishment,” there is growing consensus that Treasury’s use of some $300 billion in federal funds to invest in a variety of banks has done little to achieve its intended purpose of stimulating home mortgage and business lending.

The ineffectiveness of the plan may be traced in part to a lack of oversight. As the Washington Post points out today, Treasury has so far taken no formal action to implement the safeguards that Congress included in the legislation authorizing the original bailout plan. Absent those provisions, Paulson found it easy to completely transform the plan that had been steamrolled through Congress—the federal purchase of toxic securities from banks. Yesterday, Paulson formally acknowledged what had become apparent in recent weeks: that he had abandoned the asset-purchase scheme in favor of a complete focus on capital infusions.

For his next trick, the Great Paulson is applying that same technique to the consumer finance sector. Using language similar to his scare talk in September about the housing and business finance sectors, Paulson yesterday warned that consumer finance “is currently in distress, costs of funding have skyrocketed and new issue activity has come to a halt. Today, the illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards.”

No doubt that is all true, but Paulson’s apparent plan to address the crisis is more of the same. Rather than helping consumers directly, he intends to provide capital infusions to the corporations that are supposed to provide those loans. In other words, he is applying the same dubious logic as with the bank investments: Prop up the balance sheets of the lenders and the loans will start flowing again.

Keep in mind that the consumer finance industry followed the same path as home lending in recent years. Shaky and often predatory loans were pushed on struggling borrowers and then repackaged as asset-backed securities that are now in precarious condition. Paulson’s infusions will go to the same companies that perpetuated that abusive system.

And even if we are willing to forgive the consumer finance companies for their transgressions, why should we expect that they will respond any differently to the Treasury investments than the commercial banks did? Given Paulson’s aversion to putting any significant strings on the federal investments, it’s likely that the consumer finance firms will follow banks in using the money to fund acquisitions and dividends rather than opening up the spigot for consumers.

What Paulson can’t seem to understand is that lenders of all kinds are spooked by the weakness of the economy. Credit is based on the faith that the borrower can repay the loan, and for now almost no one looks trustworthy. Until significant steps are taken to boost employment and household income, all the federal investments in the financial sector serve as nothing more than corporate handouts. Maybe that’s Paulson’s real sleight of hand.

Goldman Sachs’s Dirty Little Secret

Tuesday, October 21st, 2008

Last week the American News Project put a human face on the economic crisis with a moving video report about a woman named Jocelyn Voltaire facing foreclosure on her home in Queens, New York after she fell victim to a predatory lending scheme. The report mentioned that the foreclosure was being pursued by Litton Loan Servicing, a company tied to Goldman Sachs. Given that much of the economic policy of the United States is being carried out these days by former Goldman executives, including Treasury Secretary Henry Paulson, I was curious to find out more about this firm.

It turns out that Houston-based Litton is a leading player in a field known as subprime servicing. These firms specialize in the handling of subprime (frequently predatory) mortgages in which the homeowner has fallen behind in payments and is at risk of foreclosure. In other words, they are a type of collection agency dealing with those in the most vulnerable and most desperate financial circumstances. Litton services some $54 billion in such loans.

Subprime servicers such as Litton claim their mission is to help homeowners put their mortgage back in good standing. Yet, Litton has frequently been accused of engaging in abusive practices. According to the Justia database, the company has been sued more than 100 times in federal court since the beginning of 2004. In 2007 a federal judge in California granted class-action status to a group of plaintiffs who charged that the company’s late-fee practices violated the Real Estate Settlement Procedures Act. The case is pending. Meanwhile, individual suits continue to be filed. For example, in June homeowner James J. Portley Sr. sued Litton in federal court in Philadelphia for using “false, deceptive, misleading and evasive practices” in violation of the Fair Debt Collection Practices Act (case 08-CV-02799).

Litton has also been accused of being overly aggressive in pressing for foreclosure when a homeowner has difficulty catching up. Last year the Houston Press described the controversies surrounding the company by focusing on one of Litton’s own employees who alleged that the firm had unfairly forced her into foreclosure.

Litton was founded in 1988 by Larry B. Litton Sr., who still runs the firm despite several changes in ownership. In December 2007 Goldman Sachs bought the company for $428 million, plus repayment of $916 million of outstanding Litton debt obligations. The deal was covered in the mortgage trade press, though Goldman, which may not have wanted the wider world to know of its investment, never issued even a routine press release.

Goldman is not the only major bank with direct involvement in subprime servicing (Bank of America’s Countrywide Financial is at the top of the rankings), but the movement of its executives into top federal policymaking positions raises serious questions. Is Hank Paulson’s resistance to measures that would directly help struggling homeowners a conscious or unconscious effort to help Goldman’s Litton operation?

Sunday’s New York Times business section reported that the role of Goldman alumni in handling the current economic crisis has prompted a new nickname for the firm: Government Sachs. Its involvement in the dubious business of subprime servicing suggests that another sobriquet may be in order: Bloodsucker Sachs.