Where Have All The Rational Voters Gone?
We read daily of events that make us believe we have returned to the prescientific, pre democratic Middle Ages. Angry voters, now large in number, no longer want democracy, they want control. Who are they and what motivates their outrage?
As with any phenomenon, there are a number of causes, but often there is a fundamental cause. That root cause can be seen in a curious aspect of this group: white working class.
Shortly after the January 6 attack on Capitol Hill, Todd Frankel reported in the Washington Post that he analysed the public records of 125 of the rioters. Sixty percent had experienced serious financial difficulties — and that was only from the public records. These people are in financial despair. They were promised hope under Obama, and they believed; but now they see no hope in their future; no hope of a fair paying job, no hope of the ability to own a home and pass its equity to their children.
But — many were once Obama supporters. The key to understanding the switch of the Obama to Trump voters, and their rage, lies ignored, but can be seen beginning in the first two years of the Obama administration when the Democrats had the presidency and both houses of Congress.
If Obama supporters can be patient, they will see how the invisible hand of Wall Street sabotaged his chance to retain the support of the white working class by crippling the program he hoped would give them relief.
As Abraham Maslow so insightfully once pointed out: A hungry man cannot love (of course, today Maslow would’ve said, ‘hungry person’). He also cannot reason. So, financially secure rational people like you dear readers may stand aghast at what they see — and at the inability of reason to have any effect.
In 2009, Obama announced hope for homeowners in his HAMP (Home Affordable Modification Program), promising $28 billion of the $700 billion bailout would go to help 4 million homeowners. Hardly any of that 28 billion trickled down to homeowners. Over the term of his presidency, 72% of applicants were rejected. Only 887,001 were helped while over 6 million were evicted — as bankers continued to collect multimillion-dollar bonuses.
I am not, in this article, claiming that the bailout money need not have gone to the banks. That topic, as the Russians say, is another and grander opera. I am focusing here to show that there was sufficient money allocated to save 4 million homes, but only a fraction was used and that politicians, even presidents understand as little of how the financial system, in this case the mortgage market, works as the average citizen; they rely on experts.
Who Did it?
Obama gave responsibility for implementing HAMP to his Treasury Secretary, Timothy Geithner. We have Neil Barofsky to thank for disclosing what Geithner did. Barofsky was special counsel appointed to oversee the spending of the bailout money. At a meeting with Geithner and Elizabeth Warren, Barofsky relates that Geithner proudly announced that he had successfully slowed the flow of money to the homeowners, letting only enough dribble down to “foam the runway” for the banks.
‘Foaming the runway’ is a bankruptcy term by which the trustee in bankruptcy pays only the necessary expenses to preserve property for secured creditors, who are usually the banks. So the trustee would pay electricity and heating charges on buildings, for example, to give the banks time to organize seizure and sale of the properties.
Geithner added that with the bailout money at his disposal, he could slow the foreclosure process down to allow the banks organize the processing of up to 10 million foreclosures.
And so he did.
How Did He Do It ?
Banks today don’t keep mortgages on their books. They pile them into packages of about $1 billion worth and sell that collection to investors like pension funds. Of course, pension funds can’t run a mortgage business, so the package includes a corporation that does all the administration by collecting the installment payments, deciding when to foreclose and carrying out the foreclosures. These are called Mortgage Servicers. They are either controlled by the banks themselves as subsidiary corporations, or created by bankers who get into this business. No surprise, who understands it better.
These Servicers had massive financial conflicts of interest.
Writing in the Intercept on December 28, 2018, David Dayan explained how using the Servicers necessarily undermined HAMP. Servicers make some of their profit based on a percentage of the principal. If it’s reduced by HAMP, their own commission is reduced. They also are paid more on a foreclosure out of the sale proceeds than seeing a mortgage to its completion. HAMP did a little but not enough to counter these perverse financial incentives.
In a July article in the New York Times, Gretchen Morgenson detailed the tactics that the Servicers used to delay and deny valid applications. In one case that involved the Servicer that Wells Fargo’s incorporated, a court found that it improperly denied the borrower’s loan modification request four times over two years adding $40,000 to the amount he owed.
David Dayen reported in Salon of evidence that many banks’ main objective was using HAMP to the banks’ advantage. Several former Bank of America employees — rare people with a conscience in banking — swore affidavits in support of a class action against that bank. They deposed as to how they were paid bonuses for denials. Bank of America used HAMP as a tool to squeeze as much money as possible out of struggling borrowers before eventually foreclosing on them, these former employees said.
Bank of America was able to prevent this evidence from being heard at a trial, attracting major publicity and having a court decide on the truth of the former employees’ allegations. It moved to dismiss the class action on the basis that technically it did not conform to the requirements to be a class action. A judge agreed and killed the class-action.
Bank of America denied all of what the former employees were saying pointing to how many mortgages it had modified. As there was no trial, you will have to decide whether you believe the denials by the Bank of America or the claims by its former employees.
But there was far greater perversity at work.
It doesn’t take a financial genius to see that if all of these mortgages continued to fall, they would have to be sold at fire sale prices — and there are valuable houses to be seized. A person with the means could scoop them up, evict the homeowners and become an immense corporate landlord.
Of course, that’s exactly what happened. One of those foresightful entrepreneurs was Steve Mnuchin. He founded a company called One West to buy colossal private mortgage lender Indy Mac at the expected fire sale value. Ignoring that the banks created this sludge pile of mortgages by undermining HAMP, the Wall Street Journal praised Mnuchin for stepping up to take on this mess and saving further harm to the economy when no one else would.
With an efficiency that would’ve impressed Henry Ford, Mnuchin set up an assembly-line procedure to evict homeowners earning the title, Foreclosure King.
Mnuchin was not the only shrewd visionary. In March 2021, Business Insider reported that before the 2008 crisis, corporate landlords owned 20% of rental properties, post crisis, that leapt to 50%. The problem is real today, these large firms have piles of cash and are waiting to do the same when the small mom-and-pop landlords are forced to sell their rental properties due to economic downturns like the Covid pandemic.
Biden’s pandemic mortgage relief is also administered by the banks as Servicers. There doesn’t appear to be any awareness of how the Servicers subverted HAMP, nor any safeguards announced to prevent a recurrence of the same. Homeowners in default, usually don’t have means to retain lawyers and are at the mercy of what the Servicers tell them. Will we have a repeat of HAMP and not find out until 10 years later?
There is a bit of hope for applicants who are denied mortgage relief under Biden’s plan at the Consumer Financial Protection Bureau. It knows of the Servicers conflicts of interest and has resources and knowledge of new regulations to help homeowners. But will distressed homeowners learn of it?
Why Did Geithner Do It?
In August, 2012, a Reuters opinion article entitled, Tim Geithner’s principal hypocrisy, repeated how Geithner revealed his rationale: Giving homeowners aid would create a “moral hazard” — it would teach them that they didn’t have to pay their debts.
He was not alone. At the same, the head of the Federal Housing Finance Agency, Ed DeMarco, made the same argument.
There is an inconvenient fact that makes these assumptions completely unsupported. In the response to the Great Depression of the 1930s, FDR’s program gave relief directly to the homeowners not to, or through, the banks. Rather than teaching homeowners that they could default on their debts, the program ushered in decades of a secure mortgage lending system that lasted until 2008, and better economic equality that lasted until the 1970s.
So how could such a brilliant man ignore the only evidence available about giving massive relief to homeowners in a financial crisis? Follow the money.
What Was In It For Geithner
Geithner went to his reward on Wall Street. The private German equity firm Warburg Pincus appointed him managing director in 2014. His take home pay went from a couple of hundred thousand per year to a couple of million.
The message for all government regulators: Wall Street generously rewards all its faithful servants when they leave their former government positions.
How The Hell Did A Guy With These Values Get Into This Position?
Citibank wanted him there.
John Podesta was a co-chairman of the Obama-Biden Transition Project. Michael Froman, an executive of Citibank, sent an email on October 6, 2008 setting out a list of who he wanted in an Obama’s cabinet. He practically selected the cabinet: he got 30 of 33 of his wishes including Timothy Geithner.
Under Geithner’s administration, Citigroup would ultimately become the recipient of the largest bailout from the federal government during the financial crisis.
What Can Be Done
The first step is a reorientation away from condemning the financially insecure as racist, anti-immigrant and such. How do you tell a person who applied for government aid promised to help them that ended up hurting them that they should trust the regular political parties again?
People who have lost any opportunity for a fair paying job can only see immigration and job outsourcing to Mexico and China as the cause of their distress. They can’t see the invisible hand of Wall Street related above. Commentators have long identified the problem, but described it in the mind numbing terms: ‘regulatory capture’ — indicating that the entities subject to regulations, in this case the banks, control the person in the government that regulates them, in this case the Secretary of the Treasury.
This corrupting practice could be ended by prohibiting anyone who takes a cabinet position from ever taking a job, directly or indirectly, from an entity that they regulated after retirement form government.
And yet, surprisingly, no politician has made this a central part of their platform, no media has given this the attention that they would give to the missing Debbie Petitto to make it part of public consciousness.
Why not? Do voters believe it is the unquestionable right of a citizen to use their public office against the good of their country for personal gain? Do they believe that only such self-interested parties are competent; that persons who would be loyal to the government against their own pocketbook can’t be competent?
In fact, there are many competent people who have proven their loyalty to the people of the country over personal advantage. I’ve mentioned only Neil Barofsky above, but there are numerous. Now, the media rarely gives them much attention because they stand up to the interests of the bank-corporate lobby, and the media are generally owned by the wealthy who want to stay in good standing with the banks to get bank loans and bank advertising. Here’s a few that spring to mind that you can search if you don’t recognize their names and their contributions: Bill Black, Brooksley Borne, Carmen Segarra, Christy Romero, Alayne Fleishmann.
The root cause of the increased irrationality is economic. It can only be resolved when Wall Street no longer controls Washington. There is a way.
Author: Jan D. Weir is a trial lawyer who has advised international corporations, banks, accounting firms and Lloyds of London that insured auditors. He has taught business law at the University of Toronto, and is the co-author of The Essential Concepts of Canadian Business Law (available on KOBO). He discuss how the superrich use unrecognized methods for the upward transfer of wealth in the tax, corporate and banking areas on Medium.com and Twitter@JanWeirLaw.