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
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
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
Outraged at lenders who prey on the poor, activists are striking back.
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.
Dead ends, new beginnings--the industry's twenty-five-year crisis
The Africa trip of Treasury Secretary Paul O'Neill and Irish rock star
Bono produced a bumper harvest of photo ops and articles about aid to
Africa. Unfortunately, media coverage was mired in the perennial and
stale aid debate: Should we give more? Does it work?
If the O'Neill-Bono safari resulted in Washington finally paying more of
its proper share for global health, education and clean water, that
would be cause for applause. But any real change requires shifting the
terms of debate. Indeed, the term "aid" itself carries the patronizing
connotation of charity and a division of the world into "donors" and
At the late June meeting in Canada of the rich countries known as the
G8, aid to Africa will be high on the agenda. But behind the rhetoric,
there is little new money--as evidenced by the just-announced paltry sum
of US funding for AIDS--and even less new thinking. Despite the new
mantra of "partnership," the current aid system, in which agencies like
the World Bank and the US Treasury decide what is good for the poor,
reflects the system of global apartheid that is itself the problem.
There is an urgent need to pay for such global public needs as the
battles against AIDS and poverty by increasing the flow of real
resources from rich to poor. But the old rationales and the old aid
system will not do. Granted, some individuals and programs within that
system make real contributions. But they are undermined by the negative
effects of top-down aid and the policies imposed with it.
For a real partnership, the concept of "aid" should be replaced by a
common obligation to finance international public investment for common
needs. Rich countries should pay their fair share based on their
privileged place in the world economy. At the global level, just as
within societies, stacked economic rules unjustly reward some and punish
others, making compensatory public action essential. Reparations to
repair the damage from five centuries of exploitation, racism and
violence are long overdue. Even for those who dismiss such reasoning as
moralizing, the argument of self-interest should be enough. There will
be no security for the rich unless the fruits of the global economy are
shared more equitably.
As former World Bank official Joseph Stiglitz recently remarked in the
New York Review of Books, it is "a peculiar world, in which the
poor countries are in effect subsidizing the richest country, which
happens, at the same time, to be among the stingiest in giving
assistance in the world."
One prerequisite for new thinking about questions like "Does aid work?"
is a correct definition of the term itself. Funds from US Agency for
International Development, or the World Bank often go not for economic
development but to prop up clients, dispose of agricultural surpluses,
impose right-wing economic policies mislabeled "reform" or simply to
recycle old debts. Why should money transfers like these be counted as
aid? This kind of "aid" undermines development and promotes repression
and violence in poor countries.
Money aimed at reaching agreed development goals like health, education
and agricultural development could more accurately be called
"international public investment." Of course, such investment should be
monitored to make sure that it achieves results and is not mismanaged or
siphoned off by corrupt officials. But mechanisms to do this must break
with the vertical donor-recipient dichotomy. Monitoring should not be
monopolized by the US Treasury or the World Bank. Instead, the primary
responsibility should be lodged with vigilant elected representatives,
civil society and media in countries where the money is spent, aided by
greater transparency among the "development partners."
One well-established example of what is possible is the UN's Capital
Development Fund, which is highly rated for its effective support for
local public investment backed by participatory governance. Another is
the new Global Fund to Fight AIDS, Tuberculosis & Malaria, which has
already demonstrated the potential for opening up decision-making to
public scrutiny. Its governing board includes both "donor" and
"recipient" countries, as well as representatives of affected groups. A
lively online debate among activists feeds into the official
Funding for agencies like these is now by "voluntary" donor
contributions. This must change. Transfers from rich to poor should be
institutionalized within what should ultimately be a redistributive tax
system that functions across national boundaries, like payments within
the European Union.
There is no immediate prospect for applying such a system worldwide.
Activists can make a start, however, by setting up standards that rich
countries should meet. AIDS activists, for example, have calculated the
fair contribution each country should make to the Global AIDS Fund (see
Initiatives like the Global AIDS Fund show that alternatives are
possible. Procedures for defining objectives and reviewing results
should be built from the bottom up and opened up to democratic scrutiny.
Instead of abstract debates about whether "aid" works, rich countries
should come up with the money now for real needs. That's not "aid," it's
just a common-sense public investment.
Attempts to organize are squelched by a flying column of
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.
The camera pans across the room
To see what she has made:
An omelette or a spring bouquet
Or just an inside trade.
"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
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.
Labor-backed politicians are being asked to return the favor in union fights.