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Dead ends, new beginnings--the industry's twenty-five-year crisis
continues.

Agnostic's what he was, had always been.
He'd never prayed a prayer, confessed a sin.
He's thinking, though, if Martha goes to jail,
On Sundays henceforth he will never fail
To be in church. In fact, forevermore,
He'll be in synagogue the day before.
It's not as if this man's the sort of pill
Who wishes fellow human beings ill.
But he's convinced: If Martha takes the fall,
There is a God in heaven after all.

Outraged at lenders who prey on the poor, activists are striking back.

The capital unscrupulously pumped from poor neighborhoods by way of
predatory loans whizzes along a high-speed financial pipeline to Wall
Street to be used for investment. "It's about creating debt that can be
turned into bonds that can be sold to customers on Wall Street,"
explains Irv Ackelsberg, an attorney with Community Legal Services in
Philadelphia who has been defending clients against foreclosure and
working to restructure onerous loans for twenty-five years.

Household-name companies like Lehman Brothers, Prudential and First
Union are involved in managing the process of bundling loans--including
subprime and predatory--into mortgage-backed securities. They often
provide the initial cash to make the loans, find banks to act as
trustees, pull together the layers of financial and insurance
institutions, and create the "special vehicles"--shades of Enron--that
shield investors from risk.

Four securities-rating agencies--Moody's, Standard & Poor's, Duff
& Phelps and Fitch--provide bond ratings for all of Wall Street;
before assigning the acceptable rating that will draw investors, they
assess the risk firewalls constructed by the securitizing company. It
becomes a complex matrix of financial operations designed to generate
capital and minimize risk for Wall Street with the unwitting help of
borrowers. "This whole business is about providing triple-A bonds to
funds that you or I would invest in," says Ackelsberg. "The poor are
being used to produce this debt--what you have is a glorified
money-laundering scheme."

Ackelsberg and his colleagues frequently find themselves struggling
through a tangle of companies to find a party legally liable for remedy
when a client is in foreclosure due to a bad loan. Often the company
that originated the loan doesn't actually own it but, rather, is acting
as a servicing agent--assuring the cash flow to a securitization trust.
Frequently shifting ownership also complicates attempts to create
accountability: In one case, United Companies Lending, once hired as a
trust by Lehman Brothers, went bankrupt; EMC Mortgage Corporation, a
wholly owned subsidiary of Bear Stearns, placed the highest bid for the
right to service the outstanding loans and collect the servicing fees.

Sheila Canavan, a Berkeley-based attorney who recently won a settlement
that will pay out some $60 million to the plaintiffs in a fraud lawsuit
against First Alliance Mortgage, says, "The industry and lawyers make it
as complicated and arcane as they can so people don't understand." They
also, she adds, want to distance themselves from the frontline predators
who hawk the loans.

Government-sponsored mortgage lenders Fannie Mae (FNMA) and Ginnie Mae
(GNMA) have long bundled conventional loans--in the 8-percent range--to
create mortgage-backed securities. During the mergers and acquisitions
boom in the mid-1990s, when banks began absorbing subprime lenders, Wall
Street caught on to the potential of bunching subprime mortgages,
including predatory loans. "The banks realized that this was a
moneymaker," says Shirley Peoples, a social research analyst for the
Calvert Group, an investment fund specializing in socially responsible
lending. "They put a legitimacy on it, but it still is what it is."

"Wall Street, since it got into securitization, needs product, needs
mortgage loans to pull together," says Canavan. The securities are then
aggressively marketed, she says. "The Wall Streeters go around the
country, pools of loans are sold to institutional investors, pension
plans, universities."

And while it looks as if the lenders themselves set up the difficult
loan terms, Canavan says that Wall Street encourages the gouging
practices. The big financial institutions fronting cash for predatory
loans have information on the loans' interest rates and know very well
what it takes to trap borrowers into those rates. They also build in
incentives for dubious practices: "The loan originators are compensated
with late fees," Canavan says, by way of example. "They're going to make
sure payments don't get there on time, that they get lost or, as the
industry says, 'drawered.'"

It's tough for a mutual fund investor to know whether investment dollars
are going toward supporting a predatory loan scheme. The investor who
knows the names of the biggest offenders may be able to detect them in a
prospectus, but many times the information is not included or the names
of the companies change. Socially responsible funds such as Calvert and
organizations like the Interfaith Center on Corporate Responsibility
have been meeting face to face with banking interests to probe their
policies and positions on bundling the predatory loans. And many in the
industry argue that a rash of bankruptcies and financial failures has
pressured the industry to reform.

But not all consumer advocates buy that.

"These companies come and go," says Ackelsberg, "but the residue of
their abusive activity remains because the mortgage loans are still out
there."

With the Bush Administration too often feeling the pain of its corporate
sponsors, and with the Enron scandal (so far) producing little political
fallout or legislative change on Capitol Hill, advocates of corporate
accountability have cause for frustration. (Martha Stewart is not much
consolation.) But in one area corporate critics can feel encouraged. For
several years, a small group of lawyers and labor advocates has been
trying to hold transnational companies responsible for their actions by
suing them in the United States for abetting and/or benefiting from
human rights abuses overseas. Finally, these corporation-chasers are
beginning to see signs of possible success.

In about a dozen cases, attorneys in the United States, on behalf of
villagers, indigenous people and labor leaders overseas, have filed
legal action against large corporations under the Alien Tort Claims Act
(ATCA), a law passed in 1789 that allowed foreigners to sue one another
in US courts. The law was not much used until 1979, when the family of a
17-year-old boy tortured and killed by a Paraguayan policeman
successfully employed it to sue the officer. Afterward, human rights
lawyers turned to the act as a way to address human rights violations
conducted or enabled by multinational firms.

In 1996, for instance, the Washington-based International Labor Rights
Fund (ILRF) filed an ATCA suit against Unocal, an oil and gas firm,
charging that it knowingly used slave labor to build a pipeline in
Burma. The plaintiffs included villagers who said they were forced at
gunpoint to work on the project. A federal judge dismissed the ATCA
lawsuit, arguing that Unocal did not have direct control over the
Burmese military regime, a partner in the pipeline project. That
decision is under appeal, but, in a legal first, in June a California
state judge ordered Unocal to stand trial. In that trial, in September,
the plaintiffs will argue under state law that partners in a joint
venture can be held responsible for each other's actions. That would be
a blow to Unocal. Evidence in the federal case showed it was well aware
that human rights abuses were committed by the military regime in
relation to the pipeline.

ATCA-wielding lawyers and activists have been going after corporate
malfeasance around the globe. Earlier this year, a case filed against
Shell by EarthRights International and the Center for Constitutional
Rights got a major boost. This lawsuit claims the oil company is liable
for human rights abuses committed by the Nigerian military against the
Ogoni people, who opposed a Shell pipeline. Shell repeatedly filed
motions to dismiss the case, but in February a federal judge denied
these motions and permitted the case to move into the discovery phase.
Now the plaintiffs can take depositions of Shell officials and review
Shell documents.

Texaco was sued in New York by indigenous people of Ecuador, who charged
it with destroying their local environment by dumping a million gallons
of toxic waste into the ecosystem for two decades. The company's
actions, they claim, devastated rainforest areas, caused an increase in
cancer and other diseases and brought several tribes to the brink of
extinction. In March the two sides argued about whether the case should
be dismissed on jurisdictional grounds. The court has not yet ruled. Two
years ago, residents of Bougainville Island in Papua New Guinea filed a
lawsuit in San Francisco against the London-based Rio Tinto mining firm.
The plaintiffs maintained that the corporation, which took over a
company that developed a mine on the island, was in cahoots with a
government that engaged in human rights abuses and destroyed entire
villages in wiping out local resistance to the project. In March a
federal judge dismissed the lawsuit after the State Department argued
that the case could interfere with an ongoing peace process in Papua New
Guinea. But the judge said the Papua New Guinea government would have to
agree to permit the plaintiffs to file a case there.

In addition to the Unocal case, the ILRF is handling ATCA lawsuits
against Coca-Cola (for allegedly using paramilitary forces to
suppress--violently--union activity in Colombia), Del Monte (for
allegedly employing thugs who tortured union leaders in Guatemala),
DynCorp (for allegedly spraying Ecuadorean farmers and villagers with
toxic chemicals that were supposed to be dumped on coca plants in
Colombia) and the Drummond Company, a mining firm (for allegedly hiring
gunmen to torture, kidnap and murder labor leaders in Colombia). In a
case against ExxonMobil, ILRF contends that Mobil, which formed a
joint-venture natural gas project with the Indonesian government, paid
the Indonesian military for security and that these troops committed
human rights atrocities--including murder and torture--against villagers
in the Aceh province.

As these ATCA lawsuits creep forward, corporations here and abroad have
to take notice. A plaintiff's win would compel transnationals to
consider bringing their activities overseas into sync with international
human rights standards. As the Wall Street Journal noted, a
ruling against Unocal--if upheld--"could subject a long list of US
companies to lawsuits in American courts as human rights groups seek to
expand the reach of American tort law to foreign soil." Already the
Street is paying attention. "I've started getting calls from mutual fund
managers," says Terry Collingsworth, ILRF's executive director. "They
tell me that they cannot base stock recommendations on moral
considerations. But if there is a chance a company could be damaged by a
big award in a trial, its business practices overseas become quite
relevant." That is, "the markets" are watching and waiting--to see if
Third World locals screwed by transnationals can find justice in courts
far from their villages.

The camera pans across the room
To see what she has made:
An omelette or a spring bouquet
Or just an inside trade.

Would it be too early to sense a sudden, uncovenanted shift against the corporate ethic, if ethic is the word? I can barely turn the page of a newspaper or magazine without striking across either some damaging admission, or at least some damage-control statement, from the boardroom classes.

Attempts to organize are squelched by a flying column of
unionbusters.

"How many times can you say 'unbelievable'?" my wife asked the other
morning, as I was rattling the newspaper and again exclaiming over the
latest outrageous news from American capitalism. Maybe it was the story
about the CEO of Tyco International, a very wealthy and much admired
titan, being indicted for evading the New York State sales tax on his
art purchases. Perhaps it was the disclosure that the soaring market in
energy trading, a jewel of the new economy, was largely a fabrication
built on phony round-trip trades. Or the accusation that Perot Systems,
after designing California's deregulated energy-trading system, turned
around and showed the energy companies how to blow holes in it (and
generate those soaring electric bills for Californians).

It is unbelievable--what we've learned in the past six or eight
months about the financial system and corporate management. The
systematic deceit and imaginative greed--the sheer chintziness of
personal finagling for more loot--go well beyond the darkest hunches
harbored by resident skeptics like myself. Indeed, the Wall Street
system is now being flayed in the media almost daily by its own leading
tribunes. Listen to this summary of the scandals: "The failures of Wall
Street's compliance efforts are coming under intense scrutiny--part of a
growing awareness of how deeply flawed the US financial markets really
are. The watchdogs charged with keeping the financial world honest have
all lost credibility themselves: outside auditors who bend the rules to
please corporate clients, analysts who shape stock recommendations to
woo investment-banking customers and government regulators too timid or
overwhelmed to keep track of the frenzy." You might have read those
points in The Nation, but these words appeared on the front page
of the Wall Street Journal. A week later, another page-one
Journal story crisply explained the implications for global
investors: "Boasts about world-class corporate disclosure, bookkeeping
and regulation of American financial markets have become laughable in
the wake of Enron and Arthur Andersen scandals."

When radical critique becomes mainstream observation, change may be in
the air. In my view, this is a rare historical moment--conditions are
ripe for reforming and reordering the system, an opportunity unmatched
since World War II. How things really work is on the table, visible to
all in shocking detail, authoritatively documented by the torrent of
disclosures, with more to come. The libertarian ideology that colonized
economic affairs and politics during the past two decades (markets know
best, government is an obstacle, greed is good) has been pulled up
short. The conservative orthodoxy is vulnerable--actually breaking
down--because it has no good explanations for what we now understand to
be routine malpractice in business and finance. Political tinder is
spread all around the landscape, but who will strike the match?

The potential downside of this moment is also palpable and quite
ominous: Nothing will happen, nothing will change--nobody goes to jail,
no significant reforms are enacted. If so, the main result will be
confirmation of an already endemic public cynicism and the further
poisoning of American values. The revelations, instead of provoking a
sea change in political thinking, may be smothered by the alignments of
corporate-financial power, diverted into false reforms and complexified
to the point that media attention and public anger are exhausted. In
that event, the consequences for the country will be less obvious but
profoundly corrosive. The system would go forward in roughly the same
fashion (perhaps tarted up with public-relations rouge), and everyone
would understand that corruption is the system. In markets and in
the popular culture, the message would be: Forget that crap about
ethics--might as well take the low road, since that's how the big boys
get theirs.

The stakes are enormous, and it's much too early to predict the outcome.
But there's already abundant evidence that the business establishment
expects to ride out this storm and is working the usual political levers
to insure it. The politics resemble the S&L debacle in the late
1980s, when Congressional Republocrats put out lots of noise and smoke
but left the high-priced suits unruffled and stuck the public with the
bill. Our current galaxy of scandals is far more grave because it is
systemic. Anyone with courage among the Democratic presidential hopefuls
could seize this moment and reorder the agenda for 2004, but no one so
far has found the guts to break ranks with corporate power. Smoldering
public anger, however, may yet find a way to express itself, perhaps in
the fall elections, and rouse the reluctant politicians.

For now, the best hope seems to be that the bankers and business guys
will react to the fact that financial markets have been severely damaged
by the scandalous revelations, as have the high-flying moguls of
corporate America. Who can trust them? Who wants to pour more good money
after bad? In other words, this scandal stuff is bad for business,
especially bad for the faltering stock market. Henry Paulson Jr., chair
of Goldman Sachs, delivered that message recently in a sober speech
before the National Press Club and endorsed a number of useful reforms.
His remedies are insufficient (even the Journal editorial page
was happy to bless them) but are a fair start. A chorus of high-minded
anguish from elite circles might persuade Washington that this problem
does need fixing.

The scandals of Enron et al., unfortunately, must compete with another
story--the war on terrorism--that's more exciting, and threatening, than
dirty bookkeeping or the looted billions. The two crises are intertwined
in perverse ways. The smug triumphalism of Bush's unilateralist war
policy could be abruptly deflated by economic events--which probably
would be a good thing for world affairs, since Washington couldn't run
roughshod over others, but terrible for US prosperity. The financial
scandals have provided yet another chilling reason to be wary of the US
stock market, and if overseas investors decide to take their money home
in volume, the already declining dollar will fall sharply. Credit would
thus become suddenly scarce, since our debtor-nation economy relies
heavily on capital borrowed from abroad, and such a convergence would
trigger an ugly downdraft in the US economy. In that event, the
fashionable boastfulness about America, the only superpower, would
implode as swiftly as Enron's stock price.

Speech to The Democratic National Committee--Western Caucus
Saturday, May 25, 2002
Seattle, Washington

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