Hans Bader

$26 Billion Mortgage Settlement Rips Off Investors to Trim Banks’ Massive Costs of Bailing Out Deadbeat Borrowers

by Hans Bader on February 10, 2012 · 0 comments

in Bailout Watch, Economy, Legal, Politics as Usual, Property Rights, Zeitgeist

The $26 billion mortgage settlement announced yesterday is bad news for “bond investors including pension funds, according to Pacific Investment Management Co.’s Scott Simon,” notes Bloomberg News.  He says that the settlement rips off innocent investors and pension funds in order to reduce the banks’ costs of bailing out delinquent mortgage borrowers and others.  (As we noted earlier, the Justice Department, state attorneys general, and the biggest banks reached an agreement to provide $26 billion to delinquent mortgage borrowers and others, such as left-wing housing counseling similar to ACORN — in what the New York Post calls a “deadbeat bailout”).  As Simon notes,

“They’re using other people’s money to pay for a ton of this. Pension funds, 401(k)s and mutual funds are going to pick up a lot of the load.”

Asset managers are frustrated with the deal because, in addition to the debt the banks own, it gives credit to the lenders for changes to loans they hold no interest in and oversee for investors. That “treats people’s 401(k)s and pensions,” which hold mortgage securities, “like perpetrators as opposed to victims,” Simon said. The deal comes after all 50 states announced a probe into foreclosures in 2010 . . . costing bondholders as liquidations of bad debt were delayed.

“Think about this, you tell your kid, ‘You did something bad, I’m going to fine you $10, but if you can steal $22 from your mom, you can pay me with that,’ ” Simon said yesterday. . .

Laurie Goodman . . . who has advocated for mortgage forgiveness in testimony to Congress, joined him in criticizing the agreement yesterday. . .“There is a difference between principal reductions and giving banks credit for spending others’ people money.”

As we noted earlier, by ripping off mortgage investors, this deal will make investing in mortgages more risky, which will in turn drive up interest rates that homebuyers have to pay in the future.  This deal only covers borrowers at certain banks, not those borrowers who mortgages are held by the government-sponsored mortgage giants Fannie Mae and Freddie Mac, which (unlike the private banks) have never repaid their bailout, and are currently still being bailed out at an ever-increasing tab of $170 billion.

This deal is not the only way that federal and state officials are messing up the housing market.  The Obama administration is forcing banks to make risky loans (in the name of “fair lending”), thus planting the seeds of a future financial crisis. The Justice Department is suing banks that refuse to do so, and forcing them both to award preferential loans based on race, and to cough up money in “settlements,” some of which goes to left-wing “community” groups.

The Obama administration recently launched a multibillion dollar bailout for speculators. Bloomberg News reported that the administration is vastly expanding aid for certain “delinquent homeowners,” paying banks up to 63 cents for every dollar in principal they write off for such homeowners.  Speculators will benefit, because bailout recipients don’t even have to live in a house to get its mortgage principal reduced at taxpayer expense.

Time to Pay Your Neighbor’s Mortgage, Again

by Hans Bader on February 9, 2012 · 1 comment

in Bailout Watch, Economy

The Justice Department, state attorneys general, and the biggest banks have reached an agreement to provide at least $26 billion to delinquent mortgage borrowers and others, such as left-wing housing counseling groups similar to ACORN. But if you were financially responsible, you very likely won’t benefit from this settlement, but may actually be harmed by it. It only benefits a small fraction of people who were foreclosed upon, as well as some underwater borrowers, most of them delinquent, whose mortgages were serviced by certain banks. You likely won’t get any money or principal reduction under this settlement if you paid your mortgage on time, especially if you were thrifty enough to make a large down payment (which usually prevents you from ending up underwater on your mortgage unless there is a huge decline in housing values). Instead, you may suffer, because the settlement may lead to mortgage interest rates rising in the future.  (Politicians’ desire for this settlement was based on voodoo economics).

One feature of the agreement is that some delinquent borrowers who are underwater will see their mortgage principal reduced. But the cost of these principal reductions may be borne heavily by innocent third parties, not just the banks: the banks only retained a fraction of the mortgages they originated, selling the rest to mortgage investors (including some pension funds). So the banks are going to write off mortgage principal that is not wholly theirs, but rather the property of third-party investors, raising serious contractual and property rights issues. The settlement contains provisions which reward the banks for cutting mortgage principal balances through a specified formula, creating a serious conflict of interest between the banks and the investors on whose behalf the banks service the loan.

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Massive Anti-Bullying Law and Bullying Initiatives Were Based on Misleading Publicity

by Hans Bader on February 9, 2012 · 1 comment

in Legal, Personal Liberty, Politics as Usual, Sanctimony, Zeitgeist

“It launched a hundred ‘anti-bullying’ initiatives at all levels of government, but much of what you think you know about” the Tyler Clementi case “is probably wrong,” notes legal commentator Walter Olson at Overlawyered, the world’s oldest law blog. Andrew Sullivan discusses this as well, linking to Ian Parker’s article in The New Yorker.

We wrote earlier about how the current panic over bullying is leading to attacks on free speech, political debate, and free association in the schools; political pandering; dishonest stretching of existing federal laws by federal officials; and violations of basic principles of federalism.

Reason’s Jacob Sullum writes about New Jersey’s massively-long “Anti-Bullying Bill of Rights,” enacted after Clementi’s suicide at New Jersey’s Rutgers University, and how it infringes on free speech and imposes illegal unfunded mandates. When New Jersey passed this incredibly complicated anti-bullying law, which contains 18 pages of “required components,” that gave a huge boost to a burgeoning “anti-bullying” industry that seeks to define bullying as broadly as possible (to include things like “eye-rolling,” or always associating with the same group of friends) in order to create demand for its services. Hundreds of New Jersey schools “snapped up a $1,295 package put together by a consulting firm that includes a 100-page manual.”

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Even Liberal Reporters Sour on Stimulus-Funded California Rail Boondoggle

by Hans Bader on February 8, 2012 · 1 comment

in Economy, Mobility, Politics as Usual, Stimulus to Nowhere, Zeitgeist

Even reporters at the famously-liberal Los Angeles Times have soured on California’s $100 billion-plus rail boondoggle, whose cost will far outstrip whatever the state will get from the $800 billion stimulus package to build it.  But the paper’s editorial board, which supported the stimulus package, continues to back the project, which has ballooned in cost from $33 billion to over $100 billion.  (Managing to see the bright side of even the most pernicious government waste, the paper’s board cited other boondoggles with approval, like Boston’s disastrous Big Dig project, which resulted in motorist fatalities. It praised that infamous project for replacing “what used to be an expressway” with “a downtown park”, despite the fact that it caused “severe delays” for motorists and had a skyrocketing price tag of more than $15 billion.)

But as its own reporter, Steve Lopez, recently noted, there is no telling how much the project will ultimately cost, or when it will actually be completed:

The projected completion date has gone from 2020 to 2033. The anticipated cost has ballooned to as high as $117 billion, and no one seems to have a clue where the bulk of the money would come from. The state auditor and the state Legislative Analyst’s Office have raised serious concerns, and the rail authority’s own peer review group said the project represents “an immense financial risk” to the state. And two weeks ago, the railroad authority’s top executive resigned.To top it off, a poll last fall said nearly two-thirds of registered voters would run this train off the rails if they had a chance to vote again.

The rail project won’t even be useful or economically viable once it’s finished, since travelers will be able to travel more cheaply by road or air than by taking the train.  As syndicated columnist Amy Alkon notes, “this is a totally unnecessary train (and I say that as a train lover). It’s $59 from LA to SF on Southwest if you book in advance,” less than a train ticket will likely cost.  And although the project is misleadingly called a “high-speed” rail project, it turns out that “the train couldn’t really run high speed” after all.

As Tim Cavanaugh noted in Reason, the Los Angeles Times reporter, Steve Lopez, had

the good fortune to answer to the newsroom rather the opinion section, where bullet-train belief still reigns as supremely as it does in Gov. Jerry Brown’s rumpus room. The important thing is that one more prominent Golden State blowhard is sealing the case against the vacant and bankrupt high-speed rail project. . . . In a piece I missed earlier this month entitled “Keeping faith with California’s bullet train,” the ed board praised the High-Speed Rail project because it is similar to Boston’s notorious Big Dig and the building of the pyramids by slaves.

The Obama Administration still supports this boondoggle even though it has been criticized by other liberal newspapers like the Washington Post.  That paper, which has not endorsed a Republican for President since 1952, criticized the project in an editorial entitled “California’s High-Speed Rail System Is Going Nowhere Fast.”

As we noted earlier, the small fraction of the stimulus package that was earmarked for transportation was devoted disproportionately to laying the groundwork for wasteful “high-speed” rail boondoggles that are not actually “high” in speed. These multibillion dollar rail boondoogles would provide work at inflated wages for politically-powerful unions. But these projects are expensive white elephants that would be used by very few travelers at an enormous cost per mile, and not enable trains to go anywhere near as fast as they do in Europe, Japan, or China. (Other union-backed provisions in the stimulus package wiped out jobs in America’s export sector.)

Obama relied on exaggerated claims to push through the stimulus package, claiming it was needed to prevent an “irreversible decline” in the economy,  even though the Congressional Budget Office admitted that the stimulus package would shrink the economy “in the long run.” Even an old-fashioned Keynesian stimulus might have been something that America could not afford at a time of record deficits. The Congressional Budget Office, ignoring various flaws in the stimulus package, argued that it would boost the economy in “the short run.” But even the CBO conceded that the stimulus would shrink economic output in “the long run” by increasing the national debt and thus crowding out private investment.

Liberal Tax Fantasies Punctured

by Hans Bader on February 6, 2012 · 0 comments

in International, Politics as Usual, Zeitgeist

Some liberals have the unrealistic fantasy that by increasing taxes on the top one percent of the population, the government can finance a radically expanded welfare state for the bottom 99 percent. (Never mind that even if we confiscated the entire annual income of the top one percent, it wouldn’t begin to cover the record, trillion-dollar federal budget deficit.) They assume that somewhere in Europe, there is a country that does just that, without harming its economy. Alas, there is no such country, anymore than unicorns exist.

As Veronique de Rugy of the Mercatus Center recently noted, the U.S. already has a more progressive tax code than most European countries:

The richest 10 percent of U.S. households (those making $112,124 or more) contribute a greater share of taxes (45.1 percent of all income taxes) than their counterparts in any other industrialized nation.

Meanwhile, the average tax burden for the top 10 percent of households in OECD countries is 31.6 percent of the revenue collected, well below the percentage in America.

Interestingly, in France, a notorious welfare-state government, only 28 percent of revenue comes from the top 10 percent of income earners. As for the top 1 percent of Americans, their share of federal taxes paid is roughly 30 percent.

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Liberal Justices Complain About American Law Being Too Protective of Civil Liberties and Colorblindness

by Hans Bader on February 6, 2012 · 4 comments

in International, Legal, Personal Liberty

Recently retired Justice John Paul Stevens, who became the leader of the Supreme Court’s liberal bloc in his later years on the Court, complained recently about the 1964 Civil Rights Act, which he claimed was “poorly-considered” because its text literally forbids all racial discrimination — including against white people — and contains no exceptions. Justice Ruth Bader Ginsburg, a sitting Supreme Court Justice appointed by Bill Clinton, recently advised Egypt not to model its constitution on the U.S. Constitution, but rather on documents like the South African Constitution that provide less protection for free speech and civil liberties. “I would not look to the US Constitution if I were drafting a Constitution in the year 2012,” she said.

Justice Stevens’ remarks reflect his discontent with the fact that whites occasionally win racial discrimination cases under the Constitution and civil-rights laws. The Supreme Court initially held that racial discrimination of all kinds was prohibited by the 1964 Civil Rights Act in its unanimous 1976 decision in the McDonald case, which ruled in favor of whites who had been fired; but later on, the Court judicially created an exception to the statute in order to allow some discrimination against whites in its Weber decision, which admitted that creating such an exception contradicted the plain language of the Civil Rights Act, but claimed that doing so would lead to a more egalitarian society. Later, the Supreme Court extended this exception to uphold a college admissions policy that discriminated against both whites and Asians in the name of “diversity,” rejecting legal challenges under both the Constitution and the Civil Rights Act (in the Grutter case). However, over Justice Stevens’ objections, it struck down another college admissions policy that the Court viewed as using race too much and too mechanically (in the Gratz case), and it also invalidated racial discrimination against whites in voting, once again over Justice Stevens’ objections (in Rice v. Cayetano).

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Retaliation Charges Pose Growing Threat to Free Speech

by Hans Bader on February 5, 2012 · 0 comments

in Legal, Nanny State, Personal Liberty

Keeping quiet can seal your fate if you are a professor facing a campus kangaroo court after being wrongly accused of racial or sexual “harassment” based on your classroom speech. Civil-liberties advocates, like the Foundation for Individual Rights in Education, rely heavily on adverse publicity to save wrongly accused professors from being disciplined and fired by campus disciplinary bodies. They put to good use Justice Brandeis’s insight that publicity deters wrongdoing and helps cure social evils. As Brandeis once noted, “Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.”

But as the plight of Lawrence Connell at Widener University School of Law illustrates, if an accused professor speaks up, resulting in possible adverse publicity for his accusers, he increasingly risks being punished for “retaliation” against them, even when harassment charge is baseless. Connell was convicted of “retaliation” because he and his lawyer denounced meritless racial harassment charges against him over his classroom teaching. Retaliation charges have become a growing threat to academic freedom, fueled by court rulings that provide murky and conflicting guidance as to what speech can constitute illegal “retaliation.”

Professor Connell was charged with racial harassment and removed from Widener’s campus because he discussed hypothetical crimes in his criminal law class, including the imaginary killing of the law school dean, Linda Ammons, who happens to be black. (He was also accused of harassment because he “expressed his philosophical concerns about the fairness and utility of hate crime” laws.)

But Connell did not select the dean for use in these hypotheticals because of her race, nor was there any evidence that he had a racist motive for doing so. (Comments are not “racial harassment” unless they target a victim based on her race, and are severe and pervasive, according to Caver v. City of Trenton, a ruling by the Third Circuit Court of Appeals, which has jurisdiction over Widener.) Far from being a racist, Connell had spent 15 years successfully working to save the life of a black man who had been sentenced to die after he was convicted of murder by an all-white jury.

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More Criticism for Obama State of the Union Proposal on Schools

by Hans Bader on February 3, 2012 · 2 comments

in Legal, Nanny State, Personal Liberty, Politics as Usual, Zeitgeist

Syndicated columnist Steve Chapman is criticizing President Obama’s proposal in the State of the Union address to require students to attend high school longer before being allowed to leave. As I noted earlier, the president would like to require students to attend school until they are at least 18, and the National Education Association, one of his biggest supporters, wants to require students to stay in school until age 21.

As Chapman notes, “Most states now allow students to drop out at 16 or 17.” The reason for this is that while most students benefit greatly from staying in high school, “the youngsters who are most likely to drop out are the ones who are least likely to learn if they stay. If they are 1) struggling to pass, 2) unwilling to apply themselves, 3) chronically tardy and absent, or 4) simply not very bright, they won’t learn much from being [in] a classroom—for two extra years.” As Chapman points out, experts are skeptical of Obama’s proposal (skepticism echoed by analysts quoted in the Washington Examiner):

James Heckman, a Nobel laureate economist at the University of Chicago who specializes in education, is skeptical of the proposal. At the college level, he told me, “The returns to people who are not very able or not very motivated are typically quite low.” There is evidence that kids may get some benefit from being required to stay in high school until 16 instead of 15, he says, but “it’s a weak reed to lean on.”

Let’s also not forget that the highest dropout rates are in the worst schools. Even the kids who want an education often graduate from these schools barely able to read. Where does Obama get the idea that the reluctant students, compelled to remain, will reap a rich harvest of learning?

It might be argued that even if there is no benefit from keeping these students around till they turn 18, there can’t be any harm. But think again.

The presence of disruptive, unmotivated kids in a class is a drain on teachers, a distraction to other students, and a daily obstacle to learning. One of the best things you can do for students who want to do the right thing is to remove those who would rather goof off or make trouble.

It’s not clear that laws like this will even work. A 2010 Johns Hopkins University study found that when six states raised the mandatory attendance age, three saw no increase in graduation rates—and one saw a decline. . .

If you want to keep unwilling students in school, you can spend money on truancy enforcement, which means taking money away from the willing students. It would be more rational to use the funds on education improvements so more kids will choose to stay.

A private company—or a private school—whose customers are fleeing has to come up with ways to keep them around. In Obama’s public sector, there is a quicker solution: Lock the exits.

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12 More Law Schools Sued for Defrauding Their Students; Many More Class-Action Lawsuits Expected

by Hans Bader on February 1, 2012 · 0 comments

in Economy, Employment, Labor, Legal, Regulation

The Chronicle of Higher Education reports that a team of eight law firms have just “sued a dozen more law schools across the country, accusing them of luring students with inflated job-placement and salary statistics and leaving graduates ‘burdened with debt and with limited job prospects.’ The lawyers . . . said they planned to file 20 to 25 new lawsuits every few months . . . the lawsuits had been filed on behalf of a total of 51 graduates, and each suit was seeking class-action status. The targets of the latest round of lawsuits” include  “Brooklyn Law School,” “Chicago-Kent College of Law,” “DePaul University College of Law,” “Golden Gate University School of Law,” “Hofstra Law School,” “University of San Francisco School of Law,” “Widener University School of Law,” and several others. As the Chronicle notes, “Disgruntled law-school graduates who can’t find jobs are increasingly taking their complaints to court, asserting that the schools duped them into enrolling with misleading statistics about their chances of landing well-paying jobs when they get out. Last year similar lawsuits were filed against New York Law School, Thomas M. Cooley Law School, and Thomas Jefferson School of Law.”

As I noted earlier, much of what law schools teach their students is useless drivel, and law schools routinely exaggerate their students’ job prospects. Accordingly, there is no reason to require people to attend law school before sitting for the bar exam. As law professor Paul Campos notes, legal education is often a rip-off, since the typical law professor has little real-world experience practicing law, and “knows nothing about being a lawyer.” But since most states require people to attend law school before sitting for the bar exam, law schools have been able to increase tuition by nearly 1,000 percent since 1960 in real terms. For its part, the Obama Education Department has implemented policies that encourage colleges to jack up tuition and charge students even more, even as college students are learning less and less.

States Deliberately Qualify Non-Poor People for Food Stamps to Get Federal Money; Obama Administration Blocks Reforms

by Hans Bader on January 31, 2012 · 2 comments

in Economy, Politics as Usual, Sanctimony, Stimulus to Nowhere, Zeitgeist

As a Bloomberg News commentary notes, large numbers of people who are not poor are getting food stamps, due to perverse incentives that encourage states to deliberately classify people as eligible in order to draw federal money to their state.  People are eligible in some states even if they are not poor at all, but merely received an “informational brochure” for welfare, or a tiny amount of state money that the state deliberately gave them that they didn’t even need, in order to qualify them for food stamps:

As the article notes, food stamp rolls have risen by 29 million people in recent years:

[A] troubling reason for the increase is that state governments have found it easy to get their constituents federal money — that is, money mostly raised from current and future taxpayers in other states — by making more people eligible for food stamps. According to a mid-2010 report from the Government Accountability Office, 35 states have no limit on the amount of assets a food-stamp recipient can possess. More and more states — the count was 36 at the time of the report — are providing “categorical eligibility” for food stamps to anyone who receives welfare services. Merely getting an informational brochure from the Temporary Assistance for Needy Families program counts as receiving a service.

Another way that states and localities can get federal money flowing to them is by providing token amounts of assistance with home heating bills. Even a dollar of energy subsidies can make someone eligible for food stamps, or increase the benefit level for someone already on SNAP. Vermont, for example, sends $5 checks to public-housing residents, even though their subsidized rent already covers heating, to qualify them for food stamps. Liberal activists call this strategy for getting federal money “heat and eat.”

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