Part IV of IV
The quest for a culprit in the financial mess continues to occupy the press and financial analysts. "How," they ask again and again, "Could America have gotten itself into this mess?" Much attention has focused on the institutions and CEOs who are at the center of the current crisis.The feeling is growing that providing bailouts to financial giants and CEOs such as Citi and Sandy Weill is to reward those who engaged questionable and even illegal behavior.
The Inability of Fines to Stem the Practice
The previous three essays laid out the case that the mortgage crisis began with discriminatory lending and redlining during the post World War II housing boom. What was one of the greatest mass social movements in history, one that made home ownership a reality for millions of Americans, unfortunately came with a heavy price,for it shut out people of color.
Wide swaths of America were segregated by race. This was not merely due to the prejudices of local home builders or lending institutions but came from the FHA and the federal government. It was a national policy. In systems terms people of color faced two restrictions that served to reinforce each other--they could not move from where they were which left them at the mercy of those who controlled both lending and real estate and they had no access to the government programs that were available to whites and when they did they found the price was often too high.
This influenced the growth of loansharking or what people have relabeled predatory lending or subprime lending. Which terms you use does not really matter because the results were the same: people of color faced exorbitant terms, shady practices such as Sandy Weill's tactic of coupling insurance with loans and "closed book" closings, and finally just old-fashioned ripoffs.
We have seen in the history of loan sharking that many of these firms paid fines for their illegal practices, but the threat of fines apparently did little to stem the practice. In many cases the fines were so small that corporations easily paid them off. In other cases they became part of the balance sheet of doing business. Sandy Weill, for example, bought a company that already had been fined for deceptive lending and yet instead of ceasing such practices Weill continued them into the next decade culominating with the huge fine levied against Citi in 1999. Other companies were undaunted by the fine levied against Citi and continued to engage in loansharking resulting in this year's judgment against Bank of America which will far surpass the fine levied against Citi.
A Civil Rights Issue
Given that racial discrimination lies at the heart of these illegal practices, perhaps a heavier stick is needed to curb them.
South Carolina Representative James Clyburn, one of the deans of the Black Caucus, has testified:
We must now begin to address predatory lending practices that overwhelmingly affect blacks by instituting laws that will make what are already unethical practices illegal. If not, the government will continue to be a partner in yet another tragic black land takings saga.
Section 804b of the Fair Housing Act states:
It shall be unlawful to discriminate against any person in the terms, conditions, or privileges of sale or rental of a dwelling, or in the provision of services or facilities in connection therewith, because of race, color, religion, sex, familial status, or national origin.
Section 805 begins:
It shall be unlawful for any person or other entity whose business includes engaging in residential real estate-related transactions to discriminate against any person in making available such a transaction, or in the terms or conditions of such a transaction, because of race, color, religion, sex, handicap, familial status, or national origin.
While the Act provides only monetary civil penalties, thus far those have been used mainly against organizations and not individuals. But what if the individuals who sanctioned such acts were prosecuted?
There needs to be in inquiry into who took part in loansharking, but not merely for financial misdeeds but also for violation of Civil Rights laws. If a Sandy Weill or some other CEO or former CEO could be indicted on a civil rights violation it would send a clear message about the roots of this crisis.
It is interesting that the way our current Civil Rights laws are written, someone can go to jail for burning a cross in someone's front yard, but not for predatory lending that has the impact of stealing that front yard from the homeowner. Also it is criminal to lie on a loan application but not to lie about the loan itself (i.e. "closed folder" closings). The National Consumer Law Center has drafted model legislation aimed at the business of predatory "payday loans," but what it says in the final paragraph of the model legislation could just as easily be applied to home mortgages:
Criminal penalties are an important deterrent to lender abuse. Any knowing violation of the act is a misdemeanor and subjects the violator to a $1,000 fine or imprisonment not to exceed six months or both.
A few states have begun to institute criminal penalties for predatory lending. Last year my home state of Minnesota passed a bill prohibiting what it termed "residential mortgage fraud." It provided:
Whoever violates this section shall be sentenced as provided in section 609.52, subdivision 3, based on the aggregate economic loss suffered by any person as a result of the violation. However, the maximum sentence of imprisonment for the offense may not exceed two years. A person convicted of a violation of this section shall be ordered to pay restitution to persons aggrieved by the violation. Restitution shall be ordered in addition to a fine or imprisonment but not in lieu of a fine or imprisonment.
Yet there still is no similar federal statute. Until there is the people involved will have the fines paid by their corporations and retire on their golden parachutes. Sandy Weill is leading a comfortable retirement. Before he retired, Forbes ranked the man who owes his fortune to predatory lending at 377th in its survey of the richest people in the world and 162nd in the United States. Today he is worth around $1.5 billion and owns a $42 million dollar penthouse that includes more than 2,000 square feet of terraces.
Zeroing in on Glass-Steagall
Another remedy is that no one associated with the repeal of Glass-Steagall shall have a role in the upcoming administration. For many Americans, Barack Obama represents a new hope that business as usual will end. Having someone involved with the repeal of Glass-Steagall in his administration will send the wrong message.
The answer to the question "How did we get into this?" is quite simple. The warning signs were there as long as a decade ago in reports and investigations by people like Hudson, the Woodstock Institute and others. But then the subprime crisis was primarily a problem for people of color and like many problems for people of color this one was ignored or downplayed.
You would have thought that Katrina would have taught us the error--if not the immorality--of such thinking, but it did not. As long as whites and the high rollers still believed the playing field was level for them they did not care about the unlevel playing field that had existed for half a century and more in communities of color.
The fatal mistake came with the repeal of Glass-Steagall, for suddenly formerly segregated loans became all mixed up as loansharking morphed into the more respectable-sounding euphemism of subprime. Financial threads became so entangled that no one could unravel them, not even the so-called wise men such as Robert Rubin, who continued to provide Citi with advice even as it expanded its loansharking operations.
The repeal of Glass-Steagall ironically accomplished what people of color had been attempting since before Dr. Martin Luther King served time in that Birmingham jail--it irrevocably tied the fates of white and black America together. The last time that happened on such a scale is when a grizzled old Southern firebrand named Edmund Ruffin had the honor of lighting the fuse on the first cannon that fired on Fort Sumter.
There are already more proposals on the table to solve the current crisis than the already fragile legs of the table can hold. We've had a so-called bailout which some banks used to buy other banks and continue business a usual. Three banks are in violation of federal law prohibiting them from controlling more than 10% of the market. We've even heard proposals for mortgage relief, but those have been met by cries that if people got themselves into a mess it's their own fault and they should not expect any help.
The Final Judgment
According to State of the Dream by United for Fair Housing, in the quarter century from 1970-2006, white home ownership increased from 65.4% to 75.8% while African American home ownership increased only from 41.6% to 48.4%--or less than half the white rate. This is not merely a national embarrassment but an indictment of American social policy. It is the single greatest policy failure of the post World War II era.
From it stem a host of interrelated problems that definitively prove that discrimination rots the very foundation of democracy--the idea of the level playing field. According to a report released in 2004 by the Corporation for Enterprise Development, the government spends $335 billion on asset-building policies that:
Disproportionately benefit those who already have assets. Analysis of the largest spending categories shows that over a third of the benefits go to the wealthiest 1% of Americans—those who typically earn over $1 million per year. In contrast, less than 5% of the benefits go to the bottom 60% of taxpayers.
In his last book, Dr. Martin Luther King, jr. wrote:
Now we realize that dislocations in the market operation of our economy and the prevalence of discrimination thrust people into idleness and bind them in constant or frequent unemployment against their will.
A case cited by Mike Hudson provides an illustration. It involves an elderly African America woman with a sixth grade education whose vision was so bad she could hardly see the documents. The company's attorney asked her:
“Did you tell him that you couldn’t understand basic sentences in the English language well enough to make decisions about it?” She acknowledged she hadn’t, but said the loan officer should have explained things better. “He should have did right,” she said.
"He should have did right." Those words now echo across America not merely in the concrete canyons of the inner city but in cul-de-sacs in neighborhoods that sport "For Sale" signs among the crabgrass that is reclaiming what used to be golf-course lawns. Just as no one wants to talk about the elephant in the room, no one wants to talk about the solutions.
The financial crisis grew from redlining and racial discrimination and only when redlining and its evil stepchild, loansharking, are suspended will we have rooted out the cause of the crisis. Right now what the experts are proposing is a bit like trying to rid a lawn of dandelions by pulling on their tops. These solutions may get rid of the visible problem, but not the roots. Until we dig them out for good we can expect that after some time the weeds will grow back--only this time they will be more resistant because the roots will have grown deeper.
So the solution is quite simple: the time has come to put home ownership on a level playing field. That does not mean valuing an inner city home the same as a suburban McMansion or not applying the same qualifying standards to everyone. It does mean no more "closed folder closings," no more 40% APRs, no more ingeniously-worded contracts, no more unnecessary insurance or other costs and no more redlining.
This series began with a painting of the signing of the Constitution. While many of the gentlemen whose names are on that document were unrepentant slave holders, the words they wrote and the government they created have endured precisely because they have transcended the human frailties of those who founded this nation.
They may not have fully honored the ringing preamble with its immortal words:
We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.
Yet the words are still there--especially "establish justice." As America prepares to inaugurate its first African American President we need to remember that when he takes the oath of office to uphold and defend the Constitution, he does so on behalf of all of us. For we are not a dictatorship but a democracy and in a democracy all of us must see to it that those words mean what they say.
Ralph Brauer's blog is The Strange Death of Liberal America.
Labels: Ralph Brauer
Unknown on 12/19/2008 9:16 PM:
Ralph, thanks again for bringing this excellent series here -- I've really enjoyed it. A couple of comments: it seems to me that the two hurdles you have to overcome are 1) proving that the mortgage companies actually engaged in racism, rather than just taking advantage of African-Americans in order to make more money; and 2) proving that law, rather than cultural change, will be sufficient to fix the problem. I think the ACORN report you linked in Part III makes the case sufficiently for the first one, but I'm not convinced of the second. Certainly we need Glass-Steagall back, but will it really be the panacea you're hoping for? Don't we need some kind of housing affirmative action, along with a cultural education program to change people's views on race?
Ralph Brauer on 12/21/2008 1:16 AM:
As I believe Thurgood Marshall said during oral arguments on Brown, you cannot prove prejudice, but you can show discriminatory practices. I believe all those reports make the case pretty well that there was--and given the recent settlement against Bank of America--still is persistent discrimination in housing for people of color.
It matters not whether this is economic, cultural or something else. The only thing that matters--as Marshall recognized-- is justice.
In a systemic sense without justice all the rest is meaningless. We have had an entire generation grow up with MLK Days, school programs designed to wipe away racism, and even so-called affirmative action. I must admit I did not enter into this investigation expecting to find that this evil had not merely persisted but become worse, that after Brown, and the Fair Housing Act, and after court case after court case, fine after fine, and investigation after investigation the problem was not merely still there but that the largest civil settlement in history over predatory lending was not somewhere in the dim past, but this year!
You are right that bringing back Glass-Steagall is not a panacea. Greed and racism have always been with us. But at least we can right the wrong that came with Glass-Steagall's repeal. I also do not think that bringing back Glass-Steagall verbatim is the answer. Glass-Steagall was written for an economy that no longer exists. Certain provisions: the prohibition against interlocking directorates, Glass' insistence that banking and activities such as trading in derivatives do not mix--are relevant, but we need a new Glass-Steagall for the realities of this economy. Carter Glass never even heard of derivatives or tranches.
I also do not think I said that reinstating Glass-Steagall is all that is needed. Discrimination occurred before the repeal of Glass-Steagall. Repealing it only made discrimination and predatory lending easier and more profitable. That is why my first recommendation is that housing discrimination be made a criminal activity, not merely a civil violation.
In summary what I found appalled me as much as anything save work I did on Nazi medicine many years ago. This democracy will not survive if this injustice is not remedied. Lincoln spoke of a house divided, what we have is housing divided and Lincoln's words are as true now as they were when he spoke them.
Unknown on 12/22/2008 2:35 AM:
I had a similar reaction, which is why I asked the question. Didn't mean to imply you were discounting the cultural aspect -- I was just trying to identify what parts of the problem are cultural and what parts can be fixed through legislation. You've convinced me that re-chartering Glass-Steagall is a crucial first step.
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