FT129: “You can safely criticize and fire a white man for doing a poor job without being accused of discrimination.” -Old Pithy

Posted by PITHOCRATES - August 3rd, 2012

Fundamental Truth

It takes Two to Flirt but Only One to Sexually Harass

Today when you hire into a new company chances are they are going to sit you down and make you watch a video on sexual harassment.  Even if you’re not in a supervisory position.  But you will watch a video where some man will be making an uncomfortable workplace for a woman he supervises.  During the Eighties when the military was trying to get more women into the officer corps they taught officer candidates appropriate man-woman touching.  Resting a hand on a near shoulder while looking over her work was okay.  But placing a hand on a far shoulder was sexual harassment.

People like to socialize in the workplace.  And men especially like to socialize with attractive women in the workplace.  Which can create a minefield for an employer.  Even if they have all employees sit through sexual harassment training.   For there is a fine line between flirting and sexual harassment.  Social chatter often goes into subjects inappropriate for the workplace.  An employer may have some midlevel men that begin to spend too much time around the reception desk.  Men responsible for sales or maintaining customer relationships.  Who have become important cogs in the machine.  Even though they may cruise the single bars after work.  But as long as their personal life didn’t interfere with the workplace their personal life was their personal life.  Until, that is, they start flirting with the pretty women in the workplace.

Flirting is a two-way street.  It takes two to flirt.  But it only takes one to sexually harass.  An employer may like to hire a new receptionist who flirts less because it would be easier to hire a new receptionist than hire a new important cog.  This would be the easiest change to prevent flirting from escalating into harassment.  But doing that will require a lot of documentation of disciplinary actions against the receptionist.  Creating an uncomfortable workplace.  And the inevitable lawsuit for wrongful dismissal.  If the employer doesn’t act fast enough this innocent flirting can escalate to an unwelcomed grope in the supply closet.  Then it’s too late.  Now the employer has a lawsuit to deal with.  As well as having to fire the man responsible for the groping.  Causing an even more unpleasant atmosphere in the workplace.  A business disruption.  And an embarrassing task of explaining it to your customers.  At least those affected by the loss of this individual.

Not every Employee may have been the Best Candidate for their Job when the Labor Department encourages Diversity

This is a problem when you mix men and women in the workplace.  Most of the time there are no problems.  People do their jobs and go home to their families.  But problems happen.  Few will make it through their working career without working at a place without some kind of incident.  And it’s rare for a business owner not to have at least one incident in their business life.  Or to know someone who has.  Still, it doesn’t stop them from hiring women.  Not if they’re the best candidate for a position.  And the best candidates typically are those employees that just want to do their jobs and go home to their families.

But not every employee was the best candidate for their job.  Not when the labor department monitors a business’ diversity in hiring. Some businesses are in such a narrow niche market that there aren’t a lot of employees with the requisite skills to choose from.  When the pool of candidates is small chances are the there isn’t a lot of diversity in that pool.  New technologies are sometimes so new that few even know of them.  And the educational system is still playing catch-up.  But anyone ever audited by the government for diversity compliance (typically when federal money is involved) can attest that it is better to be diverse than to be audited.  So you hire people that may not be the best but you hope that with a lot of on-the-job training they will become an important cog in the machine.

Then you have people who just game the system.  Contractors who want to work in big cities have to meet a plethora of requirements just to bid on a project.  Especially when there is federal money involved.  Included in some of these requirements are diversity requirements.  And residency requirements.  They want to award these projects to city-based companies whose workers live in the city.  A noble goal if you’re trying to revitalize the local economy.  But a difficult requirement to meet in some new technologies.  Where they may have only a few companies qualified to do the work to begin with.  But if there is only one who meets the residency requirement this company is going to be at a distinct advantage.  Who can even underbid the project to seal the deal.  And once they have the project they can then bury the city with additional charges and delay the project until they get what they want.

Anyone who Dares to Criticize President Obama and his Policies is Quickly Labeled a Racist

I once sat in some meetings with such a contractor.  He was a smart guy.  He knew the new technology in the project like few others.  Which gave him an advantage in those meetings.  He went on about design mistakes and omissions but it was Greek to everyone at the table.  And nothing ever got done without a fight over additional money.  This guy used the system to delay the project and get the owner to capitulate and pay his additional claims.  Especially when they threatened to replace him with another contractor.  None of which he knew met the residency requirement.  And he said off-the-record to someone that if they did remove him from the project he would sue for discrimination.  Don’t know if that was true but everyone in those meetings acted as if it were.  This guy gave ulcers to everyone on the management team.  But they were always guarded with their comments.  Except for one.  Who let go a verbal barrage in one meeting that stunned everyone.  Saying what everyone wanted to say but didn’t.  Out of fear of being accused of racism.  For criticizing a black man.  So why did this one man speak his mind?  Two reasons.  When he sat in those meetings he was the smartest one in the room.  He didn’t hear Greek.  He just heard a lot of BS.  And he had no problem criticizing a black man.  For he, too, was a black man.

This is why some people like hiring white men.  Because they can criticize them.  And fire them for doing a poor job.  With the least amount of fear that someone will charge them for wrongful dismissal.  Or charge them with discrimination.  Having the ability to easily fire bad (or less than stellar) employees makes business easier.  And less costly.  So an employer has many considerations in the hiring process.  When it comes to older candidates with proven experience it typically is a pure meritocracy.  They hire the best qualified candidate.  For younger inexperienced candidates it may be less a meritocracy than hedging their risk.  Meet any diversity requirements first.  Then maybe hire people that they’ll be able to fire easier if they don’t work out.

It can be risky business criticizing a black man.  Or trying to fire one.  Consider President Obama.  Any objective analysis of his economic policies shows them to be an abject failure.  The official unemployment rate (U-3) hasn’t been below 8% since he’s been president.  The real unemployment rate that counts the underemployed and those who’ve quit looking for work (the U-6 unemployment rate) is just north of 15%.  Which is little better than it was during the Great Depression.  His Keynesian policies are doing no better than the Keynesian policies of Jimmy Carter.  His regulatory zeal has punished business.  It’s even putting the domestic coal and oil industries out of business.  And Obamacare has paralyzed small business with the fear of the unknown.  With no idea what the total cost will be to them they are not hiring anyone unless they absolutely have to.  After an objective economic analysis (leaving the politics out of it) there can be but one conclusion.  President Obama is not good for the American economy.  But anyone who dares criticize him and his policies is quickly labeled a racist.  Which begs the question what would they label those who criticize the president if President Obama was white?

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Bill Clinton created the Subprime Mortgage Crisis with his Policy Statement on Discrimination in Lending

Posted by PITHOCRATES - November 6th, 2011

Week in Review

The proof is in the pudding.  And that pudding is the Federal Register.  Or as some would say the smoking gun in the subprime mortgage crisis (see Smoking-Gun Document Ties Policy To Housing Crisis by PAUL SPERRY posted 10/31/2011 on Investors.com).

At President Clinton’s direction, no fewer than 10 federal agencies issued a chilling ultimatum to banks and mortgage lenders to ease credit for lower-income minorities or face investigations for lending discrimination and suffer the related adverse publicity. They also were threatened with denial of access to the all-important secondary mortgage market and stiff fines, along with other penalties.

The threat was codified in a 20-page “Policy Statement on Discrimination in Lending” and entered into the Federal Register on April 15, 1994, by the Interagency Task Force on Fair Lending. Clinton set up the little-known body to coordinate an unprecedented crackdown on alleged bank redlining.

The edict — completely overlooked by the Financial Crisis Inquiry Commission and the mainstream media — was signed by then-HUD Secretary Henry Cisneros, Attorney General Janet Reno, Comptroller of the Currency Eugene Ludwig and Federal Reserve Chairman Alan Greenspan, along with the heads of six other financial regulatory agencies.

“The agencies will not tolerate lending discrimination in any form,” the document warned financial institutions.

So this is where it all started.  In 1994.  When the government pressured lenders to qualify the unqualified.  To put people into houses they couldn’t afford.  Or else.

The unusual full-court press was predicated on a Boston Fed study showing mortgage lenders rejecting blacks and Hispanics in greater proportion than whites. The author of the 1992 study, hired by the Clinton White House, claimed it was racial “discrimination.” But it was simply good underwriting.

It took private analysts, as well as at least one FDIC economist, little time to determine the Boston Fed study was terminally flawed. In addition to finding embarrassing mistakes in the data, they concluded that more relevant measures of a borrower’s credit history — such as past delinquencies and whether the borrower met lenders credit standards — explained the gap in lending between whites and blacks, who on average had poorer credit and higher defaults.

The study did not take into account a host of other relevant data factoring into denials, including applicants’ net worth, debt burden and employment record. Other variables, such as the size of down payments and the amount of the loans sought to the value of the property being bought, also were left out of the analysis. It also failed to consider whether the borrower submitted information that could not be verified, the presence of a cosigner and even the loan amount.

When these missing data were factored in, it became clear that the rejection rates were based on legitimate business decisions, not racism.

Still, the study was used to support a wholesale abandonment of traditional underwriting standards — the root cause of the mortgage crisis.

So there was no racism.  No redlining.  Just good mortgage lending practices.  But good mortgage lending practices don’t buy you votes.  Or get you kickbacks from mortgage lenders.

Confronted with the combined force of 10 federal regulators, lenders naturally toed the line, and were soon aggressively marketing subprime mortgages in urban areas. The marching orders threw such a scare into the industry that the American Bankers Association issued a “fair-lending tool kit” to every member. The Mortgage Bankers Association of America signed a “fair-lending” contract with HUD. So did Countrywide.

HUD also pushed Fannie and Freddie, which in effect set industry underwriting standards, to buy subprime mortgages, freeing lenders to originate even more high-risk loans.

So how do you qualify the unqualified and avoid the wrath of the federal government?  That’s easy.  You create the subprime mortgage market.  And then you get Fannie Mae and Freddie Mac to buy these toxic mortgages and pass them on to unsuspecting investors.  Freeing up the mortgage lenders to make more bad loans.  And putting the world on a course to financial calamity.

All in a day’s work for an activist, corrupt, Big Government.

Clinton’s task force survived the Bush administration, during which it produced fair-lending brochures in Spanish for immigrant home-loan applicants.

And it’s still alive today. Obama is building on the fair-lending infrastructure Clinton put in place.

As IBD first reported in July, Attorney General Eric Holder has launched a witch hunt vs. “racist” banks.

“It’s a more aggressive fair-lending enforcement approach now,” said Washington lawyer Andrew Sandler of Buckley Sandler LLP in a recent interview. “It is well beyond anything we saw during the Clinton administration.”

Guess we haven’t learned the lessons of the subprime mortgage crisis.  Or we have and just don’t care.  Because buying votes and getting kickbacks from mortgage lenders is more important than preventing another subprime mortgage crisis.

All of this, of course, means that Wall Street didn’t cause the mess we’re in now.  Bill Clinton did.  And his racist lending policies.  To correct for a racism in mortgage lending that wasn’t there.  By qualifying the unqualified.  And putting them into houses they couldn’t afford.  Which the Obama administration appears to be doubling down on.

Boy.  I’d hate to be in our shoes.

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LESSONS LEARNED #45: “The bluest of cities in the bluest of states have the most activist governments, the deepest recessions and the most abject poverty.” -Old Pithy

Posted by PITHOCRATES - December 23rd, 2010

Detroit – The Motor of the World

Detroit.  Do I need say more? 

If you want to see the ultimate destination of liberalism, go to Detroit.  The Motor City.  The birthplace of the assembly line.  Mass production.  The veritable axle of the Industrial Revolution redux.  Detroit put the nation in motion.  In cars.  And in diesel-electric trains.  If it was big and powerful and moved the world, it came from Detroit.  The Arsenal of Democracy.  Detroit could mass produce trucks and tanks and airplanes to win world wars.  And did.  There was nothing Detroit couldn’t do.

Henry Ford.  Thomas Edison.   Albert Kahn.  Some of the greatest names in science and industry called Detroit home.  That place you can point to on your hand.  With pride.  The city grew and became one of the greatest and grandest cities in the nation.

And look at it now. 

Detroit and Government Grow Big

The population of Detroit grew up to and through the 1950s.  That changed in the 1960s.  When Big Government arrived.

Mayor Jerome P. Cavanaugh started it.  He implemented the city income tax in 1964.  The spirit of government spending was in the air.  The Great Society would follow at the federal level.  Government spending upon government spending.  Translation?  High taxes in the city of Detroit.

Then there was all the social engineering.  Lots of rules and regulations.  Some of it good.  But all of it complex.  And costly to business.  Compliance costs and taxes.  Not things that attract businesses.  Not a big deal when the Big Three rule the automobile world.  But that would change.  In fact, that would change because of the compliance costs and taxes.  The Japanese entered the market.  And they were selling better cars for less.  Add all of this together and you get the 1970s.

The Fall of Detroit

Detroit grew to be business unfriendly.  So business left.  And then the people left, following the jobs out of Detroit.  Then some of the social engineering made others leave the city.  School bussing, for one.  Families choose their houses based on the school district the house is in.  Of course, poor families can’t afford to live in those nice neighborhoods with the nice schools.  And Big Government thinks this is just not fair.    So they bussed the poor kids to the nice schools.  And bussed the kids from the nice schools to the not so nice schools.  Thus encouraging the people from the nice neighborhoods to leave Detroit.

They call it white-flight.  A lot of jobs and affluent people left Detroit.  Leaving behind the less affluent in the not so nice neighborhoods with no jobs.  Not good for any city.  Government services grew to help care for the poor.  The Great Society offered Aid to Dependent Children.  Which, according to noted economist Thomas Sowell, destroyed the black family.  Fathers ran away from their responsibilities.  And the state stepped in to raise their children.

Add all this together and you get a lot of people with no money and a lot of idle time on their hands living in rundown neighborhoods wanting for the basic necessities of life.  And that’s never good.  Detroit became infamous.  Crime and drug problems.  Devil’s night arson.  Street gangs.  Murder capital of America.  Crime and drug infested public housing.  Decrepit schools.  Truancy.  Low graduation rates.  And to solve these problems caused by Big Government, one man turned to Big Government.

Culture of Corruption

Coleman A. Young was mayor forever.  From 1974 to 1993.  And he was a Big Government guy.  He took the city from bad to worse.  And he fixed the racism problem.  By implementing racist policies.  After the white-flight, the city was predominately black.  And so would their police, fire department, public sector employees, etc.  They based hiring on color.  Not merit.  This accelerated the white-flight.  And set up a culture of corruption.  Which usually happens when you hire people based on who they know or who they are rather than on merit.

Young was hostile to the suburbs surrounding the city.  He called them hostile suburbs.  Why?  Well, that’s the problem you have with socialism (Young was an admitted socialist).  It just doesn’t work in an open society.  If the tax and compliance costs are too great in Detroit, people can move out of Detroit.  And they did.  Even the city cops didn’t want to live in the city.  They moved out if they could (by concealing their actual residency).  Or they lived clustered together in the city.  The real estate community called one such cluster Copper Alley.  It was near one of those hostile suburbs.  And it was one of the good areas in Detroit to live in.  Young hated this.  And the suburbs that offered safe sanctuary from oppressive, socialist policies.

Detroit was one of the most corrupt cities during Mayor Young’s tenure.  It was crony capitalism at its worst.  Everyone was corrupt.  Even the authorities were forever investigating the mayor.  (A later mayor was doing a lot of the same.  And he went to jail.)  It was during the Young administration that a couple of humorous slogans started to appear on T-shirts.  “Welcome to Detroit.  Now get the hell out.”  And “Detroit.  Where the weak are killed and eaten.”  High praise indeed for the Murder Capital of America.

Detroit’s Future – Returning to the Plow

So what happens after a city suffers at the hands of Big Government for a few decades?  Well, the population declines.  Because no one wants to live in the city.  About a million people have left Detroit since its peak in the 1950s.  And if that ain’t a repudiation of Big Government, I don’t know what is.

So what is the current mayor doing?  Well, the city is broke.  City services are in shambles.  So they’re going to move people out of sparsely populated neighborhoods.  Pack them closer together.   And abandon large tracts of land.  Just let the land return to nature.  Or plow it into farmland.  If anyone wants to buy it.

Ironic, really.  The city that made the world move forward is moving backward.  A sad ending indeed for the Motor City.

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LESSONS LEARNED #35: “Not only is ignorance bliss, but it’s a godsend to Big Government.” -Old Pithy

Posted by PITHOCRATES - October 14th, 2010

If Jefferson Could Talk from the Grave He’d Be Hoarse from Shouting by Now

Politicians.  They’re all the same.  Well, most of them.  They enter politics for one thing.  For a career.  And what do people want from a career?  Great success.  Great prestige.  Great wealth.  Great power.  And a little revenge.  The pencil-neck, computer-nerd geek takes great pleasure in seeing a jock from his high school days emptying his trash while boarding his private jet. “Those wedgies and swirlies were a bitch but look at us now.”  It’s true.  The best revenge is living well.

But some people lack any talent or ability.  Some of them will never amount to anything.  They’ll never know the joy of looking down on people better than them with sweet condescension.  So these people go into politics.  Where people with no talent or ability can live well.  It’s a simple formula.  Sell your soul.  Whore yourself out.  Shake down businesses with taxation and regulation (and get even with all those people who have far more talent and ability than you ever had).  Collect tribute.  Consolidate power.  Hold those you serve in contempt.

Lord Acton wrote in 1887, “Power tends to corrupt, and absolute power corrupts absolutely.”  A century earlier, Thomas Jefferson fought tirelessly to prevent great money and federal power from conjoining.  The Old World capitals consolidated money and power.  And this concentrated the money and power into fewer and fewer hands.  Kings ruled by whim.  And oppressed their hapless subjects.  It’s a story as old as time.  And is still true today.  To the great chagrin of Jefferson.

Go West, Young Man

The transcontinental railroad was making poor progress during the Civil War.  Because it was starved for capital.  No one would invest.  Few doubted that they could build it.  Even if they could, few doubted it would ever make money.  The West was mostly raw, unsettled land.  There was nothing to transport.  Nothing to earn revenue.  It was a huge investment with a huge risk.  Investors are smart when it comes to money.  And they saw the transcontinental railroad as a one-way road that their money would go down and never return.  They needed something.  Big Government.

When it comes to throwing money away on a losing investment there is but one place to go.  Uncle Sam.  With the power to tax, the federal government has huge piles of money to play with.  So here’s what happened to build that railroad.  Union Pacific (UP) created a shell company called Crédit Mobilier (CM) to finance and build the railroad.  These companies were one and the same.  Without getting too complicated, UP sold their ‘worthless’ stock to CM at par.  Now, CM being a finance and construction company, a train never had to run over the road they were building to make a profit.  Union Pacific, on the other hand, needed trains running on that new track.  They were a transportation company.  They earned a profit from transporting goods on their trains.  This meant it could take years before UP could even hope to earn a profit on the new transcontinental railroad.  CM, on the other hand, could start earning a profit with the first invoice they submitted for construction.  And they did.

CM had strong revenues.  They submitted grossly inflated construction invoices to UP.  UP added a small construction management fee and submitted them to the government.  The government paid UP.  UP paid CM.  With revenues far exceeding their costs, CM made obscene profits.  CM stock took off into the stratosphere.  Some of which was sold to Congressmen at a deep discount who in turn realized obscene capital gains if they sold their stock.  Or collected obscene dividends if they held onto their stock.  In return for this sweetheart deal, they approved all cost overruns.  Killed any legislation unfavorable to UP/CM.  Provided lucrative incentives to build track on the worst ground in the most indirect path (to maximize the railroad’s mineral rights).  Provided little to no oversight on the construction of the road (some track was built on ice, with cheap steel and flimsy wooden trestles wherever possible).  When east met west the different railroads kept on building, parallel to each other to keep billing Uncle Sam.  All paid by the public treasury.  By the taxpayer.  The little guy.  Being raped and pillaged by their own representatives.

Affordable Housing for Those Who Vote Democrat

Politicians buy votes.  Pad the federal payroll.  Steal from the treasury.  Break the law.  Violate our trust.  You know, politician stuff.  Because of the inconvenience of elections, they can’t be too blatant about their rape and pillage.  So they do things that are in the best interest of the public.  Or so they say.  Like affordable housing.  You see, the Left buys the votes of the poor and minorities by throwing bones to them.  And there are a lot of minorities in the inner cities of the bluest of blue cities.  So they threw big bones to them.  Houses.

Despite their War on Poverty, the Left just can’t help these people.  The truth is, of course, that they don’t want to help them.  If they’re poor and dependent on the government, the Left can count on their vote.  If they escape poverty and don’t need Big Government to provide for them, these people are of no use to the Left.  Ergo, they never escape poverty.

Of course, the problem of remaining in abject poverty is that you can’t qualify for a mortgage.  Banks are funny that way.  They only loan money to people who can pay them back.  So they declined a lot of mortgages to these poor inner city minorities.  Well, this was just too good for Big Government to pass up.  A large group of minorities (i.e., a large Democrat voting bloc) being denied mortgages?  Why, that’s racism.  So they drafted a lot of legislation and unleashed their justice department with extreme prejudice.  The message?  Approve these loans.  Or face the consequences (revoking a bank’s charter, a federal lawsuit, a public demonstration headed by Jesse Jackson, Charlie Rangel, et al, etc.).  So they found creative ways to approve loans.  And they got a little help from Uncle Sam.

The Subprime Mortgage Crisis is a Lot Like the Crédit Mobilier Scandal

By a little I mean a lot.  Uncle Sam screwed the mortgage bankers by making them approve extremely risky loans.  So, to help the mortgage bankers, Uncle Sam screwed the American people.  They guaranteed those highly risky mortgages, thus transferring the risk from them to us, the taxpayer.  And to further mitigate the bankers’ risks, they purchased a lot of those highly risky mortgages to remove them from the banks’ balance sheets.  It’s called the secondary mortgage market.  And the primary players are none other than Fannie Mae and Freddie Mac, ground zero of the subprime mortgage crisis.

Once upon a time, a mortgage was one of the safest investments.  People saved up to pay a 20% down payment.  With their life savings invested, people paid their mortgage payment and they paid them on time.  And if you could afford a 20% down payment, mortgage bankers had a lot of confidence that you would be able to service your mortgage.  But in the day of 5%, 3% and 0% down, a person doesn’t have a whole lot to lose.  This makes the first few years of these mortgages especially risky.  The introduction of ‘no documentation’ mortgages meant people could lie about their income (or include overtime earnings).  Add to that the Adjustable Rate Mortgage (ARM) and the interest-only mortgage and you just made these especially risky mortgages even more risky.  Sure, these will get almost anyone into a home, but they get in by the skin of their teeth.  But if they lose their overtime due to a weakened economy, if their interest rate on their ARM resets at a higher rate or a balloon payment is due on their interest-only loan, guess what?  That stream of mortgage payments could very well stop.

Now that would be a BIG problem.  Because of what Freddie and Fannie did with those mortgages they bought.  They sliced them up and built creative investment vehicles.  Derivatives.  Mortgage backed securities called collateralized debt obligations.  Wall Street repackaged all these risky mortgages into highly profitable investments.  Everybody bought them.  Pension funds.  Trust funds.  In America.  And throughout the world.  Big gains with a low risk.  Or so it would seem.  You see, they never eliminated the risk.  They only transferred it to someone else.  And once people couldn’t pay their mortgage payments anymore, the house of cards came crashing down.  We call it the subprime mortgage crisis of 2008.  It caused a worldwide recession.  And cost the American taxpayer dearly.  Even those not born yet.

Yes We Can…Screw the American Taxpayer

The subprime mortgage crisis of 2008 is a government creation.  Their quest of affordable housing to buy votes put more and more people into houses they couldn’t afford.  They created legislation akin to extortion of the banking industry.  They used the Justice Department to apply the muscle for that extortion.  They had their friends in the media and the activists for racial equality to further pressure the banking industry.  Their lack of oversight of Fannie and Freddie (thank you Barney Frank and Chris Dodd) let them make extremely risky loans.  And their policies of buying extremely risky mortgages ultimately transferred all risk to the taxpayer.  Why?  Because like all good government scandals, the seekers of favors rewarded our representatives well for their complicity with sweetheart mortgage deals, vacation junkets, fat contributions to their campaign war chests, etc.  In other words, politics as usual.  But on a grand scale.

Why do they do it?  Because they can.  They count on you being ignorant of history.  And accepting every lie they tell you.  Because they hold you in contempt.  They look down on you with sweet condescension.  These pencil-neck geeks who could never amount to anything on their own merit or ability.  But some sold souls later and they have finally gotten even with those who were better than them.  And here they are.  Still living well.  Even during the worst recession since the Great Depression.

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LESSONS LEARNED #24: “You cannot lobby a politician unless he or she is for sale.” -Old Pithy

Posted by PITHOCRATES - July 29th, 2010

BUILDING A RAILROAD ain’t cheap.  It needs dump trucks of money.  Especially if it’s transcontinental.  And that’s what the Union Pacific and the Central Pacific were building.  Starting during the Civil War in 1863 (the year Vicksburg fell and Lee retreated from Gettysburg).  The Union Pacific was building west from Iowa.  And the Central pacific was building east from California. 

For the most part, Protestant, English-speaking Americans settled Texas.  Mexico had encouraged the American colonists to settle this region.  Because few Mexicans were moving north to do so.   The deal was that the colonists conduct official business in Spanish and convert to Catholicism.  They didn’t.  These and other issues soured relations between Mexico and the American Texans.  The Republic of Texas proclaimed their independence from Mexico.  America annexed Texas.  Mexico tried to get it back.  The Mexican-American War followed.  America won.  Texas became a state in 1845.  And that other Spanish/Mexican territory that America was especially interested in, California, became a state in 1850.  Hence the desire for a transcontinental railroad.

The U.S. government was very eager to connect the new state of California to the rest of America.  So they acted aggressively.  They would provide the dump trucks of money.  As America expanded, the U.S. government became the owner of more and more public land.  The sale of new lands provided a large amount of revenue for the federal government.  (Other forms of taxation (income taxes, excise taxes, etc.) grew as the amount of public lands to sell decreased.)  Land is valuable.  So they would grant the railroad companies some 44 million acres of land (i.e., land grants) for their use.  The railroad companies, then, would sell the land to raise the capital to build their railroads.  The government also provided some $60 million in federal loans.

But it didn’t end there.  The federal government came up with incentives to speed things up.  They based the amount of loans upon the miles of track laid.  The more difficult the ground, the more cash.  So, what you got from these incentives was the wrong incentive.  To lay as much track as possible on the most difficult ground they could find.  And then there were mineral rights.  The railroad would own the property they built on.  And any minerals located underneath.  So the tracks wandered and meandered to maximize these benefits.  And speed was key.  Not longevity.  Wherever possible they used wood instead of masonry.  The used the cheapest iron for track.  They even laid track on ice.   (They had to rebuild large chunks of the line before any trains would roll.)  And when the Union Pacific and Central Pacific met, they kept building, parallel to each other.  To lay more miles of track.  And get more cash from the government.

PAR FOR THE COURSE.  When government gets involved they can really mess things up.  But it gets worse.  Not only was government throwing dump trucks of American money down the toilet, they were also profiting from this hemorrhaging of public money.  As shareholders in Crédit Mobilier.

Thomas Durant of Union Pacific concocted the Crédit Mobilier Scandal.  As part of the government requirements to build the transcontinental railroad, Union Pacific had to sell stock at $100 per share.  Problem was, few believed the railroad could be built.  So there were few takers to buy the stock at $100 per share.  So he created Crédit Mobilier to buy that stock.  Once they did, they then resold the stock on the open market at prevailing market prices.  Which were well below $100 per share.  Union Pacific met the government requirements thanks to the willingness of Crédit Mobilier to buy their stock.  The only thing was, both companies had the same stockholders.  Crédit Mobilier was a sham company.  Union Pacific WAS Crédit Mobilier.  And it gets worse.

Union Pacific chose Crédit Mobilier to build their railroad.  Crédit Mobilier submitted highly inflated bills to Union Pacific who promptly paid them.  They then submitted the bills to the federal government (plus a small administration fee) for reimbursement.  Which the federal government promptly paid.  Crédit Mobilier proved to be highly profitable.  This pleased their shareholders.  Which included members of Congress who approved the overbillings as wells as additional funding for cost overruns.  No doubt Union Pacific/Crédit Mobilier had very good friends in Washington.  Including members of the Grant administration.  Until the party ended.  The press exposed the scandal during the 1872 presidential campaign.  Outraged, the federal government conducted an investigation.  But when you investigate yourself for wrongdoing you can guess the outcome.  Oh, there were some slaps on the wrists, but government came out relatively unscathed.  But the public money was gone.  As is usually the case with political graft.  Politicians get rich while the public pays the bill.

(Incidentally, the investigation did not implicate Ulysses Grant.  However, because members of his administration were implicated, this scandal tarnished his presidency.  Grant, though, was not corrupt.  He was a great general.  But not a shrewd politician.  Where there was a code of honor in the military, he found no such code in politics.  Friends used his political naivety for personal profit.  If you read Grant’s personal memoirs you can get a sense of Grant’s character.  Many consider his memoirs among the finest ever written.  He was honest and humble.  A man of integrity.  An expert horseman, he was reduced to riding in a horse and buggy in his later years.  Once, while president, he was stopped for speeding through the streets of Washington.  When the young policeman saw who he had pulled over, he apologized profusely to the president and let him go.  Grant told the young man to write him the ticket.  Because it was his job.  And the right thing to do.  For no man, even the president, was above the law.)

THE FINANCIAL WORLD fell apart in 2007.  And this happened because someone changed the definition of the American Dream from individual liberty to owning a house.  Even if you couldn’t afford to buy one.  Even if you couldn’t qualify for a mortgage.  Even, if you should get a mortgage, you had no chance in hell of making your payments.

Home ownership would be the key to American prosperity.  Per the American government.  Build homes and grow the economy.   That was the official mantra.  So Washington designed American policy accordingly.  Lenders came up with clever financing schemes to put ever more people into new homes.  And they were clever.  But left out were the poorest of the poor.  Even a small down payment on the most modest of homes was out of their range.  Proponents of these poor said this was discriminatory.  Many of the inner city poor in the biggest of cities were minority.  People cried racism in mortgage lending.  Government heard.  They pressured lenders to lend to these poor people.  Or else.  Lenders were reluctant.  With no money for down payments and questionable employment to service these mortgages, they saw great financial risk.  So the government said not to worry.  We’ll take that risk.  Fannie Mae and Freddie Mac would guarantee certain ‘risky’ loans as long as they met minimum criteria.  And they would also buy risky mortgages and get them off their books.  Well, with no risk, the lenders would lend to anyone.  They made NINJA loans (loans to people with No Income, No Job, and no Assets).  And why not?  If any loan was likely to default it was a NINJA loan.  But if Freddie or Fannie bought before the default, what did a lender care?  And even they defaulted before, Fannie and Freddie guaranteed the loan.  How could a lender lose?

Once upon a time, there was no safer loan than a home mortgage.  Why?  Because it would take someone’s lifesavings to pay for the down payment (20% of the home price in the common conventional mortgage).  And people lived in these houses.  In other words, these new home owners had a vested interested to service those mortgages.  Someone who doesn’t put up that 20% down payment with their own money, though, has less incentive to service that mortgage.  They can walk away with little financial loss.

ARE YOU GETTING the picture?  With this easy lending there was a housing boom.  Then a bubble.  With such easy money, housing demand went up.  As did prices.  So housing values soared.  Some poor people were buying these homes with creative financing (used to make the unqualified qualify for a mortgage).  We call these subprime mortgages.  They include Adjustable Rate Mortgages (ARMs).  These have adjustable interest rates.  This removes the risk of inflation.  So they have lower interest rates than fixed-rate mortgages.  If there is inflation (and interest rates go up), they adjust the interest rate on the mortgage up.  Other clever financing included interest only mortgages.  These include a balloon payment at the end of a set term of the full principal.  These and other clever instruments put people into houses who could only afford the smallest of monthly payments.  The idea was that they would refinance after an ‘introductory’ period.  And it would work as long as interest rates did not go up.  But they went up.  And house prices fell.  The bubble burst.  Mortgages went underwater (people owed more than the houses were worth).  Some people struggled to make their payments and simply couldn’t.  Others with little of their own money invested simply walked away.  The subprime industry imploded.  So what happened, then, to all those subprime mortgages?

Fannie and Freddie bought these risky mortgages.  And securitized them.  They chopped and diced them and created investment devices called Collateralized Debt Obligations (CDOs).  These are fancy bonds backed by those ‘safe’ home mortgages.  Especially safe with those Fannie and Freddie guarantees.  They were as safe as government bonds but more profitable.  As long as people kept making their mortgage payments.

But risk is a funny thing.  You can manage it.  But you can’t get rid of it.  Interest rates went up.  The ARMs reset their interest rates.  People defaulted.  The value of the subprime mortgages that backed those CDOs collapsed, making the value of the CDOs collapse.  And everyone who bought those CDOs took a hit.  Investors around the globe shared those losses. 

Those subprime loans were very risky.  Lenders would not make the loans unless someone else took that risk.  The government took that risk in the guise of Fannie and Freddie.  Who passed on that risk to the investors buying what they thought were safe investments.  Who saw large chunks of their investment portfolios go ‘puff’ into thin air.

SO WHAT ARE Freddie and Fannie exactly?  They are government-sponsored enterprises (GSEs).  They key word here is government.  Once again, you put huge piles of money and government together and the results are predictable.  In an effort to extend the ‘American Dream’ to as many Americans as possible, the federal oversight body for Freddie and Fannie lowered the minimum criteria for making those risky loans.  Even excluding an applicant’s credit worthiness from the application process (so called ‘no-doc’ loans were loans made without any documentation to prove the credit worthiness of the applicant.)  To encourage further reckless lending.  Ultimately causing the worst financial crisis since the Great Depression. 

And, of course, members of Congress did well during the good times of the subprime boom.  They got large campaign contributions.  Some sweetheart mortgagee deals.  A grateful voting bloc.  And other largess from the profitable subprime industry.  Government did well.  Just as they did during the Crédit Mobilier Scandal.  And the American taxpayer gets to pay the bill.  Some things never change.  Government created both of these scandals.  As government is wont to do whenever around huge piles of money.  For when it comes to stealing from the government, someone in the government has to let it happen.  For it takes a nod and a wink from someone in power to let such massive fraud to take place. 

www.PITHOCRATES.com

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