Keeping the Heat On

Sometimes when organizing, a few small actions can be useful to let people know that our efforts are not going to die out and just go away. Today I was part of one of those kinds of small actions as part of the 10% Is Enough campaign. The two banks that we are focusing on most in North Carolina are Bank of America and Wachovia/Wells Fargo.

In meetings with Wachovia executives so far, we have made our case and carried on some helpful conversations. However, they remain fairly intent on ignoring the primary issue we are bringing to them: usury. We are insisting that there comes a point when interest rates are too high and therefore predatory. There is a form of lending practice that becomes debt-sharecropping, dragging people into a permanent debtor status.

I sent the following report to the folks in Durham who are working on economic issues as part of Durham CAN.

Hey, folks,

Today members of the Economy Action Team handed out information about the 10% Is Enough campaign along the sidewalks outside the Wachovia Bank branch at the corner of Ninth Street and Main Street.

Because of the cold weather, not many people were out walking. Most of the information was handed to people leaving the bank parking lot when they would roll down their windows to briefly talk with us. There were a few longer conversations with people walking down the sidewalk. Dan Rhodes and Denise Rowson even managed to get some people to fill out the petition cards and give them back to turn in. Jennifer Suggs did a great job of getting people to stop and converse with her.

We can discuss the details and evaluate the action at a later time. For now, we are glad to have given out information to probably a hundred or more people in a way that brought attention to our ongoing efforts to hold banks accountable to their communities.

Watch for news concerning a meeting with the City Manager concerning stimulus funds. In January we will support the Clergy Caucus and Strategy Team in next steps to build momentum in the 10% Is Enough Campaign. Kohar and I attended a strategy and planning meeting in Baltimore earlier this week, and our progress with the large banks shows we have their attention. Our next moves will have to make them see that we are not merely a minor annoyance, a passing fad, or a clanging cymbal.

Bailout 9: Will Obama's Advisers Learn from Their Own Mistakes?

The New York Times printed a good editorial expressing the reservations I share with many people about the President-Elect's chosen economic advisers. Larry Summers helped to craft the deregulation of derivatives. Timothy Geithner played a role in scheming the strange and problematic bailouts of financial institutions in the past couple of months. Neither one of them gave early warning of the housing bubble that has caused our current crisis. Will they do better next time? We must make sure our representatives know we are concerned, and let Mr. Obama know that he needs to be listening to more than the same people who were architects of a building in ruins.

Obama's critics jumped all over a phrase he used in a conversation with a plumber's assistant in Ohio. He remarked that everyone in financial difficulty, from top to bottom, would benefit together if we "spread the wealth around." Dean Baker points out that Secretary Paulson, Chairman Bernanke, and the Bailout planners are busy with their own plans to "spread the wealth around." Who is using government to transfer wealth from some citizens to others? Wells Fargo, a beneficiary of the bailout (announced that ten top executives of Wachovia) the bank they were able to buy because of the bailout, would be eligible to receive an average of $10 million each for severance. That money is coming from somewhere. I thought the banks were out of funds. Oh, yeah--taxpayers have to pay it. Talk to your representatives.

Bailout 5: How the House of Cards Began to Tumble

According to some new information, Wells Fargo analysts and others have come to conclude that Wachovia's mortgage-based securities are probably worth 85¢ on the dollar, with a few of the worst ones worth 74¢ on the dollar. That is lower than earlier estimates that I had read, but not so low as the market was pricing them. No wonder Wells Fargo was willing to pay much more than Citigroup had offered to buy out Wachovia. I reiterate that the mortgage losses in real dollars are not nearly so bad as what the market would make it seem. Citigroup was very angry that someone called them on their extreme low-ball offer and sued Wells Fargo. Now they are fighting it out over who buys Wachovia. If the market stabilizes, who knows if someone else will even offer a better price.

On the other hand, the market in loans between banks and in commercial paper (short-term loans to large businesses to keep their cash flowing day to day) got into a serious crisis over the past months and weeks. I got a tip to listen to an outstanding description of just why this crisis came to be seen as so serious. I was surprised to find out that it was on the public radio program This American Life, usually known more for its quirkiness than for hard-hitting financial reporting. I don't mean they never tackle hard topics--their work on school reform is also some of the best I have ever heard. So if you have about an hour to listen and learn, you won't be disappointed by listening to Another Frightening Show About the Economy. If you want to dig a little deeper, another hour will allow you to hear about the housing bubble and unorthodox mortgage practices which laid the groundwork for this recent crisis in the show called The Giant Pool of Money.

Finally, the point that the people of the U. S. who are being asked to bail out these businesses need to get a share of the profit from their recovery. Another Frightening Show will explain the idea of making sure the government takes an ownership share through preferred stock in whatever companies it bails out. A growing swell of voices are asking for this. It is written as an option into the bill that Congress finally passed, but not because Paulson or Bush were advocating it. So if you want to know what to say to your representatives and senators, then ask them to support this way of dealing with the money our taxes will make available. Here is how one economist describes it.

Bailout 2: Bailout or Feeding Frenzy?

Bailout or feeding frenzy?

The failure to pass today's bill promising a solution to the credit crisis should not be a big surprise. Numerous members of Congress were reporting contacts from constituents opposing the Bush/Paulson plan at ratios between 100/1 and 1000/1. This weekend's Citigroup acquisition of Wachovia Bank should give us a clue into the anger and opposition of the populace. Citigroup swooped in and acquired an enormous range of financial resources at fire sale prices. This is exactly the kind of profiteering, even racketeering, that the average person suspects is going to happen.

Citigroup, it is said, has tried without success to build a consumer banking business for many years. Raking in money in other ways, they were among the financial institutions not overwhelmed by the mortgage crisis. (What happens when this morphs into a consumer credit card debt crisis, is yet to be seen.) Bad decisions by First Union, which renamed itself Wachovia when it acquired the previously well-managed bank, included buying the mortgage company which specialized in one of the now-despised mortage innovations, option adjustible-rate mortgages. These are the ones that let the borrower take the option of not making a payment now and then (and adding it on the end of the loan period). Now they own too many bad mortgages.

The strange thing about this crisis of "securitized" mortgages is that they are really worth much more than the market is saying. Around 2.5% of mortgages are in foreclosure. Many of those have been processed into interest-bearing securities, or bonds. So on average, it might be that the value of such a bond, in real terms of how much it would pay out, may have dropped to around 97.5 cents on a dollar. But let's estimate that the mortgage bonds are worse off than that because they are encumbered by additional mortgages which are not yet in foreclosure, but in danger. And let's say that these securitized mortgages have a larger share of the bad mortgages from the recent frenzy of bad financing than the 2.5% rate would indicate. So maybe these interest-bearing bonds may pay out 90 to 95% of their face value. Maybe a few would be even lower, or much lower. But that would not cause such a crash. What causes the crash is that since no one wants to buy these securities, their price drops way below their adjusted value. Then the holders may find themselves with a cash-flow problem. They need to sell some securities, but they can't get a buyer at a fair price. When this infects the whole market, the financial institutions start to treat these securities as if they are worth almost nothing. As a side effect, a powerful and wealthy institution like Wachovia finds its stock dropping to pennies. But buying them at a low price is a great idea if you don't have to worry about cash flow. The government has time to see them pay off, and maybe at a good profit.

In walks Citigroup, with the help of the FDIC, to pay a measly $1 per share to buy one of the largest banks in the world with assets galore. Buying at a fire sale lets them reap a huge reward. Just like Bank of America bought Countrywide and Merrill Lynch. Just like J. P. Morgan Chase bought Washington Mutual. After all this hoop and holler about a financial crisis, the US is left with three financial giants who have an even greater ability to dominate the financial business and exercise a joint monopoly over setting interest rates and fees.

This so-called bailout had nothing to say about the concentrated power of wealth in the hands of the few. And its fatal flaw was that it did nothing to help the other people caught in the mess of bad mortgages. The bailout plan had no provisions to help refinance mortgages for common people, homeowners who are facing foreclosure in a weak economy. It was suggested that by buying these mortgage-based securities, the government would be able to refinance mortgages for homeowners. But owning the security is not the same as owning the actual mortgage. These remain in the hands of banks, savings and loans, and other mortgage institutions all over the place. This plan does not offer any relief to them. It offers relief to large financial instutitions who have questionable securities.

So an additional provision to assist homeowners might have been enough to win a few more votes. The provision to deny "golden parachutes" are a gesture toward the common borrower, but not much more than that. Real help to homeowners is what was needed. The long and heated meetings about bailing out the economy could not muster the compassion and courage to do what was right. The proposal allows the same feeding frenzy to go on. As one commentator said today (I can't remember who), the homeowners who endure foreclosure faces the greatest crisis. They can't go back to their neighborhoods. They lose the bedrooms and kitchens where they lived. They no longer live where their ball teams or other social connections had been built up.

The Neighborhood Assistance Corporation of America released the following comments:

There is one reason for the financial crisis – Foreclosures.
There is only one solution – Restructure mortgages to make them affordable.
Who would benefit – Everyone.

This seems to me to sum up the shortcomings of the proposed bailout.

Thanks to reports on NPR's Morning Addition, AP news reporting by Sara Lepro, and the insights of my friend Steve Bumgardner for helping me think abou this issue. Any erroneous reporting and reasoning is mine.