Countervailing Powers

by hilzoy

From the Washington Post:

"Senate leaders won the support of Citigroup, one of the nation's largest banks, for legislation allowing bankruptcy judges to modify the terms of troubled mortgages. (...)

Senators Dick Durbin (D-Ill.), Chris Dodd (D-Conn.) and Charles Schumer (D-N.Y.) called this a breakthrough on the bankruptcy issue and said they will push to add the provision to the economic stimulus package now moving through Congress.

Schumer said the breakthrough came last week, when Lou Kaden, general counsel at Citigroup, called him to propose an agreement on the issue. Today, Schumer said, "an agreement has been reached."

Citigroup's primary demand, Schumer said, was that only existing mortgage-holders would have access to the bankruptcy courts. The bank also has asked for provisions that would require homeowners to contact their banker at least 10 days before filing for bankruptcy in order to give the bank an opportunity for negotiation; and that would bar minor violations of the truth in lending act from voiding the terms of the mortgage.

Citigroup's support for the measure has since spurred "most of the major banks" to call Schumer's office, "wanting to hop on board," Schumer said, adding, "I am so glad the banks are seeing the light.""

Well, I'm glad they've seen the light too. And I'm glad they won't be trying to block the sensible position that mortgage debt should be treated like any other secured debt in bankruptcy, which looks like a very good way to prevent foreclosures while visiting a certain amount of pain on both borrowers and lenders, and all without keeping housing prices in their current still-inflated state. [UPDATE: See this post by Tanta for a discussion of the merits.]

That said, if someone can explain to me why Citi, after taking some $40 billion of our money, is in a position to make "demands" on the US Senate, I'd be fascinated. You'd think they would be happy that we haven't come after them with pitchforks, or at least sufficiently relieved that they've gotten their hands on our money without our requiring any real concessions of them that they'd refrain from asking for more. But noooooo...

The other day, in comments, I noted that I believe in John Kenneth Galbraith's idea of "countervailing powers" -- powers, like unions or large buyers, that can serve as a counterweight to the natural tendency of large corporations to acquire excessive influence. This is an excellent illustration of why they are needed. In the world we live in, Senators have to negotiate with Citibank even when it is at its weakest, and has just had to be rescued. But there are no powerful representatives of people with mortgages; and the Congress, who allegedly represent us all, depend on rich people and lobbyists for campaign contributions.

This has to stop. I have no idea what institutional fixes, if any, would make it the case that members of Congress take it for granted that Citibank's interests are no more than a small part of the common good, which they are supposed to promote. But if they exist, I'm for them. In the meantime, I want more countervailing powers.

Comments

[Observer]

Hilzoy:

Hear, hear.

What's particularly shocking is Schumer's forthright confession that Citi held an effective veto over this legislation. If you want the roster of folks to blame, it's roughly the folks who voted 'Yea' on this roll call back in April. Schumer, somewhat surprisingly, was actually on the right side of this one.

Unfortunately, Hilzoy, it goes beyond power and influence. It's not just lobbyists, PACs, and campaign donations. The extraordinary deference shown to enormous corporations stems from the widespread belief that the business of America is business. That corporate executives speak for the economic well-being of the nation as a whole. Or, to put a modern twist on a classic formulation, that what's bad for Citi is bad for America.

I wasn't in the smoke-filled rooms, but I'd hazard a guess as to what transpired. Remember, Citi and its allies first sank this proposal back in April, long before anyone knew how much trouble they were in. The standard argument they've deployed is that allowing loan modification would be bad for consumers, because it would reward the profligate at the expense of the responsible by forcing banks to raise rates to cover increased costs. There are any number of reasons why this was absurd, but they didn't matter. What did matter was the moralistic view that Republicans, and more than a few conservative Democrats, tend to take of the financial world. Moralistic, as in, the view that success and moral worth are bound together as tightly as failure and sin. Bankruptcy, it follows, is a sign of moral failing. We must not reward these people, above all not at the expense of the virtuous.

The last time this view was seriously challenged was during the Great Depression, when it became abundantly clear that any number of prudent, responsible, virtuous people were going bust because of circumstances beyond their control. When everyone knew some close friend, relative, or intimate acquaintance who had failed, it became impossible to moralize. So we started to pass into law various provisions and programs that recognized the role played by capricious chance in financial failure, and gave people a genuine shot at a fresh start. Then, during the boom years that follow - a boom that came, at least in part, from the renewed sense of security and possibility that these programs fostered - we forgot the lessons of the Great Depression. If there's a slim silver lining to the very dark cloud of the current crisis, it may be that we are again relinquishing the belief that net worth and moral worth are somehow linked. But until we do, the wealthy bankers will still be presumed to know more about the economy than egghead economists, and provisions that benefit the unfortunate won't receive the backing that laws to benefit the fortunate enjoy.

[Yarrow]

I have no idea what institutional fixes, if any, would make it the case that members of Congress take it for granted that Citibank's interests are no more than a small part of the common good, which they are supposed to promote.

Um, socialism.

It's a rather large institutional fix, but we're thinking big these days, right?

But if they exist, I'm for them.

Me too!

[Fraud Guy]

Although I know it is wrong, I hope that the bankruptcy bill passes in slightly different forms in the House and Senate, and that somehow in the reconciliation process someone "adds" a repeal of the Real ID Act and the 2005 Bankruptcy Act, which then gets voted into law.

[Observer]

I just love the irony of 'Fraud Guy' pushing for the repeal of the Real ID Act. I know, it's a terrible piece of legislation; but it's still funny.

[Wagster]

Citigroup's primary demand, Schumer said, was that only existing mortgage-holders would have access to the bankruptcy courts

Even after everything that's happened, Citigroup still feels that it can call Schumer's office and 'demand' anything?

Unbelievable.

[cleek]

if someone can explain to me why Citi, after taking some $40 billion of our money, is in a position to make "demands" on the US Senate, I'd be fascinated

if you're big enough to make that much money, you're big enough to buy some legislators, too.

in other words: the Golden rule. them's that gots the gold makes the rules.

[ThatLeftTurnInABQ]

Observer,

Excellent comment, especially in pointing out the problems with moralizing economic outcomes. For that reason I have a really difficult time sympathizing with the arguments of the Austrian school. They seem too much like demented doctors who secretly wish for their sinful patients to sicken and die rather than get better.

Unfortunately I'm also getting very uncomfortable with Krugman and the other Keynesians pushing for a really large stimulus package right now, without regard to the longer term debt service implications and the potential for triggering a currency crisis (something that has been discussed extensively on Yves Smith's blog and a few other places recently), and fear that stimulus critics such as William Buiter may prove to be prescient.

That said, if someone can explain to me why Citi, after taking some $40 billion of our money, is in a position to make "demands" on the US Senate, I'd be fascinated.

hilzoy,

I think there is a pretty rational (albeit obscene) explanation for this. This is due to the past (and for the most part present) domination of our political system by large donor fundraising - hopefully something that we can start to put behind us now that Dean and Obama have shown that an alternative small-donor focused model can work.

Per Kevin Phillips, the FIRE sector has come to dominate our economy. By mid decade, i.e. the end of W's 1st term, this sector had come to comprise more than 20% of our GDP, and (more ominously) nearly 50% of corporate profits. The latter point is key because legalized bribery, oops I mean campaign contributions, are paid for out of profits, not revenue.

Consequently political donations from the business sector have come to be dominated by FIRE sector firms over the last 1-2 decades. Analogies with the railroads and the notoriously corrupt Senate of the late 19th Cen. are obvious. A Senate seat is a very expensive thing to hold, and up until quite recently there were few proven alternatives to raising that money beyond the standard model of kissing up to big companies and wealthy donors. Hence the deference to companies like Citi.

With luck that will begin to change now, although old habits die hard and I suspect it will take a non-trivial amount of generational turnover in the Senate before lawmakers are not reflexively deferential almost by instinct. You can't overcome years of conditioning overnight, or at least not without suffering through and surviving a catastrophic flood and near death experience (which is literally what happened to Pavlov's dogs).

[Ugh]

if someone can explain to me why Citi, after taking some $40 billion of our money, is in a position to make "demands" on the US Senate, I'd be fascinated

Ok. My explanation is "we" gave them our money without, you know, demanding something in return, like voting control, etc.

Also, it could be that Citi may be in a position to "demand" something by agreeing to waive various defenses it may have to the bankruptcy law changes (taking w/o compensation, contract clause, etc.), but who knows.

In any event, I think the theme of the Bush Administration and the Congress during his tenure is that we are no longer a nation of laws, nor a democracy. That is, the executive can do whatever it wants, and the Congress can be bought.

It may take a while, but we're done.

[d'd'd'dave]

// hopefully something that we can start to put behind us now that Dean and Obama have shown that an alternative [multiple-]small-don[ation by large don}or focused model can work.//

Fixed that for you.

[d'd'd'dave]

Re: Giving Money to Citi, et al.

It's my understanding that TARP money to banks is in the form of loans with five year terms bearing interest at 5% and that the interest rate goes into the 9% range thereafter as an incentive for the banks to pay them off. The loans are classified as equity because existing banking laws classify any debt outstanding longer than 5 years as 'equity'.

The purpose was to keep the banks from being technically insolvent as a result of the mark-to-market rule as applied to illiquid cdo's.

I don't see how we're GIVING money to the banks. Especially when you consider that the Fed loans funds to the banks routinely at 1% or 2%.

[ThatLeftTurnInABQ]

[multiple-]small-don[ation by large don]or

I think you're barking up the wrong tree here by focusing on where the money goes to, and less on the breadcrumb trail connecting it with where it came from, which is necessary to maintaining a quid-pro-quo.

Riddle me this one d'd'd'dave:

If large donors had to break up their donations into smaller segments (which implies that they also had to disguise themselves in order to fit under that pesky $2300 per capita restriction on donations in the POTUS campaign), then later on how do they prove to the candidate that it was really them donating all that money, when the time comes for them to call in the favors that they are "owed"?

Do they have to send in a spreadsheet detailing all the different aliases involved, or is there some sort of code involved, i.e. all the donations which ended in $0.17 were really from me. Honest! Now can I have my favors please?

Because it seems to me that what really gets favors granted is not the money which has already been given, but the threat to not give next time. I'm failing to see how that threat can be made in a credible way if the identity of the donor has been laundered.

Now the issue of "seed money" is a different kettle of fish. Large donors did play a much larger role in the early stages of Obama's campaign for example, so that problem hasn't gone away.

[Brett Bellmore]

"then later on how do they prove to the candidate that it was really them donating all that money, when the time comes for them to call in the favors that they are "owed"?"

Bribery inherently requires that both sides of the transaction presume the other side is exhibiting good faith, since the quid pro quo is legally unenforceable, and both sides are committing crimes which the other side has the ability to expose if they get mad enough to take a fall.

But the proof is pretty simple, especially given even a little communication in advance of the donation: You just provide a list of the card numbers which will be used, or specify that all your fake donors will make their transaction within a very short time frame you state in advance.

BTW, I recall that Obama's campaign excused turning off the default security features on the basis that they had an extensive after the fact system for discovering and dealing with illegal donations. How's that working out in practice? Or end achieved, has the left lost all interest in what means were used to achieve it?

[Gary Farber]

"You just provide a list of the card numbers which will be used, or specify that all your fake donors will make their transaction within a very short time frame you state in advance."

When hundreds of thousands of people were giving every day, how would that work, exactly?

The idea that ordinary small donors weren't giving frequently is simply ridiculous, since just about everyone who voted for Obama knows that most of their friends donated often. I donated, via buying schwag, several times myself, even though I couldn't afford it. The only people who would be unaware of this going on would be folks who don't have lots of friends who voted for Obama.

(And I guess those multiple-times-per-day emails I got were all part of the fake-out, too.)

(In fact, I only unsubscribed yesterday, since Plouffle and co. are still begging for donations, and I got sick of it.)

[cleek]

BTW, I recall that Obama's campaign excused turning off the default security features on the basis that they had an extensive after the fact system for discovering and dealing with illegal donations.

do you recall the same thing about McCain?

you don't? funny how that works.

[russell]

I don't see how we're GIVING money to the banks.

Multi-billion dollar loans at 5% to institutions that would otherwise be bankrupt seems pretty generous to me. Just saying.

The point of the original post, however, was the fact that somehow the US Senate needs to get buy-in from Citi in order to include provisions for renegotiating mortgages in the stimulus package.

I find that outrageous. You should, too.

Regarding your comment about "multiple small donations by large donors", that's baldly laughable in the case of Dean. Here is the list of the 20 largest contributors to Dean's campaign.

U of California tops the list at $85K, out of total campaign contributions of $53M.

Here is the same list for Obama. Once again U of CA tops the list at $1M, out of total campaign contributions of $750M.

PAC contributions were noise for both candidates, $15K for Dean and $1.5K for Obama.

As noted above, if individual contributions were not coded to a "bundler", there's no way the candidate could know that the organization was behind the donation. So if it ain't in the public record, it ain't there.

Better luck next time.

Thanks -

[cleek]

I find that outrageous.

oh sure. me too.

and i bet our great grandparents felt the same way when it happened to them.

[bobbyp]

I don't see how we're GIVING money to the banks.

Yes. TARP funds are technically loans or purchases of under water assets. But just watch the workout and renegotiation in the future. It will be wonderous to behold. Taxpayers will get a haircut, no doubt.

Enough for now. I have to call Chucky Shumer's office on an important demand I need to make. So far, I've had little luck getting past the receptionist. Anybody out there know his cell phone number?

[mckinneytexas]

Uh, leaving aside whether bailing dumb banks out is a good idea, the issue is whether it is good policy to allow a bankruptcy judge to alter the terms of a note used to buy a house. I can't tell from Hilzoy's post whether the terms subject to adjustment go to interest rate adjustments, extending payment terms or reducing principal or all three. If it's the latter--a bankruptcy judge reducing the principal amount owed on a loan--then Citigroup is right to limit a judge's authority to existing mortgages only, for the obvious reason that no sane lender is going to hand out X dollars to someone who can then reduce his/her obligation to Y by filing for protection with the ultimate result that no one can buy or sell a home.

[ThatLeftTurnInABQ]

FYI, last year Tanta at CalculatedRisk wrote a very detailed and helpful post explaining how mortgage cramdowns work (based on pre-2005 law).

I don't know if the proposals now being floated will return us to pre-2005 rules, or something else. I suggest everyone should keep a close eye on the sausage factory, and read the housing focused econ blogs (HousingWire, CalculatedRisk, etc.) for details and analysis.

[Brett Bellmore]

"When hundreds of thousands of people were giving every day, how would that work, exactly?"

You use these new-fangled "electronic brains"; I hear they're quite capable of sorting things like that out.

"do you recall the same thing about McCain?

you don't? funny how that works."

Yeah, it's funny how that works: He didn't turn off the default security features, and strangely enough, we thus don't recall him turning them off. Go figure.

I have no doubt that Obama got a huge number of legit donations. Enough that easing the way for illegitimate ones was rather gratuitous, though in his defense, he probably didn't know in advance that it would be unnecessary.

[Gary Farber]

Sure, Obama's campaign must have been corrupt, because, um... we imagine it must have been, that's it!

[russell]

and i bet our great grandparents felt the same way when it happened to them.

Of mine, one dug ditches, one was a coal mine straw boss, one owned a rural bank, and one was a farmer.

Don't know what they thought of JP Morgan.

But some folks were pissed.

People now talk about "class warfare" in the context of raising the top marginal tax rates a few points. In Morgan's day "class warfare" meant bombs, shooting, and the Palmer Raids.

It'd be great if we could avoid a return to that.

Thanks -

[Gary Farber]

A trivial point of timing, Russell, but I think you may be confusing J. P. Morgan with John D. Rockefeller. Morgan was dead by 1913.

[russell]

Morgan was dead by 1913.

Yeah, they blew up his office and tried to blow up his son, but the old man got away.

My point here was not so much particular to Morgan himself, as to the social unrest that accompanied the unfettered capitalism of the Robber Baron days.

It's not for nothing that folks say FDR saved capitalism.

Thanks -

[cleek]

He didn't turn off the default security features, and strangely enough, we thus don't recall him turning them off.

people were able to contribute to McCain's campaign in the same ways. or maybe Jesus II really did donate seven times, for a total of $851, to McCain's campaign.

It'd be great if we could avoid a return to that.

yeah, i think we will. as bad as this is, it's a hell of a long way from the good ol days.

[russell]

as bad as this is, it's a hell of a long way from the good ol days.

agreed.

Thanks -