The Price of Inequality: How Today's Divided Society Endangers Our Future (61 page)

12.
See my
Freefall
(New York: Norton, 2010)
for a fuller discussion of the whole variety of bad financial products and the consequences.

13.
Just as the Food and Drug Administration protects consumers against deceptive, dangerous, and ineffective drugs.

14.
Evidenced by the fact that just shortly after European regulators subjected one of Europe’s larger banks to a stress test—to see how well it would do in adverse conditions—and it passed brilliantly, the bank collapsed. Private rating agencies, too, have demonstrated that they are not up to the task.

15.
In the first set of deals, taxpayers got back about 65 cents on the dollar, but in later deals, especially with AIG and Citbank, they got back about 41 cents on the dollar. See Congressional Oversight Panel, “Valuing Treasury’s Acquisitions,” February Oversight Report, February 6, 2009, available at
http://cop.senate.gov/reports/library/report-020609-cop.cfm
. While the legal system is stacked against ordinary citizens, the magnitude of the banks’ bad behavior was so large that there was
some
accountability—though not enough to offset the huge profits they had made in their predatory lending, which was often targeted at poor African Americans and Hispanics. See chapter 3 for a more extensive discussion.

16.
While many mortgages were nonrecourse (that is, creditors could claim only the house—they couldn’t go after the borrower’s other assets), and thus might not be affected by this provision, most of the subprime lending involved second mortgages, which were recourse. The change in the bankruptcy law applied to such loans.

17.
Overdraft fees average between $30 and $35 a transaction and have risen by almost a fifth over the past five years. In 2011 they were estimated to increase bank earnings by $30 billion. Ninety percent of the fees are paid by 10 percent of the customers, mostly low income. The attempt to curb the fees in 2010 failed, partly because customers were misled by the banks. The director of the new consumer agency, Richard Cordray, criticized bank practices designed to ensure that customers did not understand the fees they faced. A
New York Times
editorial described bank practices that “deliberately buried information, requiring consumers to visit three Web pages and scroll through 50 pages of text to find fee information.” “A Further Look at Overdraft Fees,”
New York Times,
February 27, 2012, p. A16 (available at
http://www.nytimes.com/2012/02/27/opinion/a-further-look-at-overdraft-fees.html
, accessed March 4, 2012), citing in part data from Moebs Services, a research company that has conducted studies for both government and some banks. See also FDIC Study of Bank Overdraft Programs, November 2008. Executive Summary available at
http://www.fdic.gov/bank/analytical/overdraft/FDIC138_ExecutiveSummary_v508.pdf
(accessed February 22, 2012).

18.
They call it a regulatory taking. But any change in law that affects contracts or property has redistributive consequences.

19.
See, e.g., “Where the Jobs Are, the Training May Not Be,”
New York Times
, March 2 2012, p. A1. The article reports, “Technical, engineering, and health care expertise are among the few skills in huge demand even in today’s lackluster job market. They are also, unfortunately, some of the most expensive subjects to teach.” As a result, the article, notes seven states have eliminated engineering and computer science departments. It describes a community college in North Carolina—a state with a severe nursing shortage—where “nursing program applicants so outnumber available slots that there is a waiting list just to get on the waiting list.”

20.
In chapter 4 we presented data showing the high level of indebtedness of the two-thirds of students graduating with debts—in excess of $25,000. If parental loans were included, the numbers were more than a third higher. On average, students at these for-profit schools have 45 percent more debt than students at other schools. These average numbers mask the fact that large numbers have extraordinarily high student debts, especially at the for-profit schools. Almost one-quarter of those who received bachelor’s degrees at for-profit schools in 2008 borrowed more than $40,000, compared with 5 percent at public institutions and 14 percent at not-for-profit colleges. Indebtedness has increased markedly over the past decade. Students who earned a bachelor’s degree in 2008 borrowed 50 percent more, in inflation-adjusted dollars, than those who graduated in 1996; for those earning an associate’s degree, indebtedness had doubled. See “Subprime Opportunity: The Unfulfilled Promise of For-Profit Colleges and Universities,” Education Trust, November 2010, available at
http://www.edtrust.org/sites/edtrust.org/files/publications/files/Subprime_report.pdf
; “The Rise of College Student Borrowing,” study of the Pew Research Center, released November 23, 2010, available at
http://www.pewsocialtrends.org/files/2010/11/social-trends-2010-student-borrowing.pdf
(accessed March 4, 2012); and the Project on Student Debt, “Student Debt and the Class of 2010,” November 2011, available at
http://projectonstudentdebt.org/pub_view.php?idx=791
(accessed March 4, 2012). For excellent reporting on these issues, see Tamar Lewin, “Report Finds Low Graduation Rates at For-Profit Colleges,”
New York Times
, November 23, 2010, accessible at
http://www.nytimes.com/2010/11/24/education/24colleges.html
(accessed January 29, 2012); and Tamar Lewin, “College Graduates’ Debt Burden Grew, Yet Again, in 2010,”
New York Times
,
November 2, 2011.

21.
More accurately, it extended nondischargeability to private sector lenders, and that’s where the perverse incentives set in with particular force.

22.
If this part of the education market worked better, reputation effects would exert discipline and provide incentives.
U.S. News
even reports loan default rates for large online-oriented for-profit schools, with Kaplan University scoring a remarkable 17.2 percent (in contrast to the private not-for-profit school average of 4 percent). The University of Phoenix has a 12.9 percent default rate. Yet these numbers don’t seem to deter enrollment, or not enough. See
http://www.usnews.com/education/online-education/articles/2010/09/15/loan-default-rates-at-prominent-online-universities
(accessed March 5, 2012).

23.
Only 22 percent of the first-time, full-time bachelor’s degree students at for-profit colleges graduate within six years, 55 percent at public institutions, and 65 percent at private nonprofit colleges. See “Subprime Opportunity,” Education Trust, 2010.

24.
The schools have not only large drop out rates but, given that, also large default rates. Some 8.8 percent of student loan borrowers who entered repayment in 2009 had defaulted by the end of 2010, up from 7 percent for the previous cohort, with more than half of the increase coming from for-profit schools. See Eric Lichtblau, “With Lobbying Blitz, For-Profit Colleges Diluted New Rules,”
New York Times
,
December 9, 2011, and Project on Student Debt, “Sharp Uptick in Federal Student Loan Default Rates,” September 12, 2011. A
New York Times
editorial (“Fraud and Online Learning,”
October 5, 2011) points out the rampant fraud in the for-profit education sector: “The Department of Education’s Office of the Inspector General claims it has opened 100 investigations since 2005 and is reviewing 49 complaints.”

25.
As a result of legislation signed by President Obama in March 2010, private banks no longer handled federally backed student loans. The CBO (Congressional Budget Office) estimated that the net savings was in excess of $60 billion over a decade—in effect, the amount that taxpayers had handed the banks as a gift. CBO, “Costs and Policy Options for Federal Student Loan Programs,” March 2010, available at
http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/110xx/doc11043/03-25-studentloans.pdf
(accessed February 22, 2012).

26.
High interest rates predictably lead to more risk for several reasons. Only those engaged in high-risk activities are willing to pay the high interest rates (the “selection” effect); to get returns to pay back the loan with interest requires the borrower to undertake highly risky activities (the incentive effect); and lenders, comforted by the high returns they get from those loans that are paid back, may put less effort into screening. See J. E. Stiglitz and A. Weiss, “Credit Rationing in Markets with Imperfect Information,”
American Economic Review
71, no. 3 (June 1981): 393–410. In the United States beginning in 1980, federal laws increasingly preempted state laws that attempted to restrict usury.

27.
See C. K. Prahalad,
The Fortune at the Bottom of the Pyramid: Eradicating Poverty through Profits
(Upper Saddle River, NJ: Prentice Hall, 2005).

28.
The former governor of the Reserve Bank of India explicitly made the link between microcredit in India and America’s subprime lending: Y. V. Reddy
“Microfinance in India Is like Subprime Lending,”
Economic Times
, November 23, 2010, available at
http://articles.economictimes.indiatimes.com/2010-11-23/news/27602978_1_priority
-sector-lending-sks-microfinance-microfinance-industry.

29.
The FBI’s mortgage fraud unit reports that fraud continued to be elevated into 2010. Mortgage fraud–related suspicious activity reports (SARs) rose sixfold from 2003 to 2007. (Of course, with the popping of the housing bubble, buyers were more sensitive to having been deceived.) See FBI Mortgage Fraud Reports, data from 2007 and 2010 reports, available at
http://www.fbi.gov/stats-services/publications/mortgage
-fraud-2010 and
http://www.fbi.gov/stats-services/publications/mortgage-fraud-2007/mortgage
-fraud-2007.

30.
The legal issues this gave rise to are surveyed in Christopher L. Peterson, “Two Faces: Demystifying the Mortgage Electronic Registration System’s Land Title Theory,”
William and Mary Law Review
53, no. 1 (2011): 111–61 (quoted material is from p. 138), available at
http://scholarship.law.wm.edu/wmlr/vol53/iss1
/4 (accessed March 4, 2012).

31.
As the Supreme Court seems to have claimed in the
Citizens United
case.

32.
Phil Angelides, who headed the Financial Crisis Inquiry Commission into the causes of the crisis, noted that “today the rate of federal prosecutions for financial fraud is less than half of what it was” during the savings and loan crisis. He also noted that his budget for investigating the crisis, including the misdeeds of the banks, was $9.8 million—roughly one-seventh of the budget of Oliver Stone’s
Wall Street: Money Never Sleeps
. See “Will Wall Street Ever Face Justice,”
New York Times,
March 2, 2012, available at
http://www.nytimes.com/2012/03/02/opinion/will-wall-street-ever-face-justice.html
(accessed March 6, 2012). See W. K. Black, K. Calavita, and H. N. Pontell, “The Savings and Loan Debacle of the 1980s: White-Collar Crime or Risky Business?,”
Law and Policy
17, no. 1 (1995): 23–55. On our current crisis, see Matt Stoller, “Treat Foreclosure as a Crime Scene,”
Politico
, December 15, 2011. Jamie Galbraith of the University of Texas has been forcefully making the same case. The banks violated other laws as well—with limited prosecution. The Office of the Comptroller of the Currency, the federal national bank regulator, reported in November 2011 that 5,000 active-duty members of the U.S. military may have been unlawfully foreclosed upon (this was in a study of just ten national banks). S. Nasiripour, “US Lenders Review Military Foreclosures,”
Financial Times
, November 28, 2011.

33.
The failure to prosecute the banks is only one aspect of the failure to hold the financial sector accountable. The Financial Inquiry Commission described how Clayton Holdings, hired by more than twenty major financial institutions to do “due diligence” on the mortgages that the banks were handling (ensuring, e.g., that they were not fraudulent and there had been compliance with legal procedures) sampled 2 to 3 percent, and even in this small sample, detected significant numbers of defective loans. But the banks didn’t insist that the other 97 percent be investigated, and didn’t disclose information about defective loans to investors, as required by securities law. Evidently, there is still no prosecution for this aspect of the violation of the law. See Angelides, “Will Wall Street Ever Face Justice.”

34.
It is hard to get precise numbers. At the time of the foreclosure agreement in January 2012, reports put the numbers in foreclosure since the bursting of the housing bubble at nearly 8 million. See D. Kravitz, “Banks’ Agreement to Overhaul Mortgage Industry Sent to States,” Associated Press, January 24, 2012. The New York Fed governor William Dudley suggested that the pace of foreclosures in 2012 and 2013 could increase (technically, real estate transferred into the hands of the banks)—to as high as 1.8 million per year, up from around 1.1 million in 2011 and around 600,000 in 2010. Dudley, “Housing and the Economic Recovery,” Remarks at the New Jersey Bankers Association Economic Forum, Iselin, NJ, available at
http://www.newyorkfed.org/newsevents/speeches/2012/dud120106.html
(accessed January 29, 2012).

35.
Campaign fundraising on judicial elections more than doubled in the last decade—it rose to $206.9 million in 2000–09 from $83.3 million in 1990–99. Chief justices have been defeated by well-monied challengers; “attack ads” have increasingly found their way onto television. See J. Sample, A. Skaggs, J. Blitzer, and L. Casey, “The New Politics of Judicial Elections, 2000–2009: Decade of Change,” Brennan Center for Justice, New York University School of Law. There is also an increasing perception that justice is being bought: while as, expected, citizens fear that “campaign contributions affect the outcome of courtroom decisions,” what is even more striking is that “nearly half of state judges agree.” See the website
http://www.brennancenter.org/content/resource/the_new_politics_of_judicial_elections
/(accessed March 7, 2012).