Atlas Shrugged: The Mocking

Friday, August 26, 2011

Laws Are For The Weak

Megan McArdle is a work of art. Behold this post, in which she guesstimizes that the Obama Administration won't prosecute mortgage fraud because they need the good will of bankers to get them to accept industry reforms.

Via Outside the Beltway, I see that the administration is pressing New York's attorney general to drop its investigation into dodgy foreclosure practices and settle with the banks.

Dodgy? I think the word McArdle is avoiding is "fraudulent." But she always did refuse to admit any acts of fraud in the financial sector.

Doug Mataconis, who wrote the post, says "I'm sure the large amount of donations coming from the financial sector into the coffers of the Democratic National Committee and Obama For America have nothing to do with this pressure. I also believe the guy who tells me he has a bridge in Brooklyn to sell me."

Once again for your viewing pleasure, the top 20 donations to Obama's election campaign:

University of California $1,648,685
Goldman Sachs $1,013,091
Harvard University $864,654
Microsoft Corp $852,167
Google Inc $814,540
JPMorgan Chase & Co $808,799
Citigroup Inc $736,771
Time Warner $624,618
Sidley Austin LLP $600,298
Stanford University $595,716
National Amusements Inc $563,798
Wilmerhale Llp $550,168
Skadden, Arps et al $543,539
Columbia University $541,002
UBS AG $532,674
IBM Corp $532,372
General Electric $529,855
US Government $517,908
Morgan Stanley $512,232
Latham & Watkins $503,295

McArdle finds it hard to believe that a company that gave hundreds of thousands of dollars to support a friendly candidate actually wants that candidate to be friendly to them. No doubt USB and Citigroup and JP Morgan just like to give away money to people with nice smiles and get nothing in return.

Mataconis also wrote:

The Attorney General of New York has been on the receiving end of what seems like an unusual amount of pressure from Obama Administration officials to accept a settlement with mortgage lender rather than pursue the criminal fraud investigation that he opened several months ago [...].
Naturally McArdle does not quote that part.

I quite agree that the administration should not be intervening, but let me suggest a more charitable explanation, contained within today's edition of the New York Times: "U.S. May Back Refinance Plan for Mortgages". It looks like the administration has convened a working group to explore more aggressive options for dealing with underwater mortgages.
And so the small matter of fraudulent mortgages is swept away, the better to discuss how the taxpayer can best compensate the bankers and mortgage brokers for their fraud and theft.

One proposal would allow millions of homeowners with government-backed mortgages to refinance them at today's lower interest rates, about 4 percent, according to two people briefed on the administration's discussions who asked not to be identified because they were not allowed to talk about the information.

A wave of refinancing could be a strong stimulus to the economy, because it would lower consumers' mortgage bills right away and allow them to spend elsewhere. But such a sweeping change could face opposition from the regulator who oversees Fannie Mae and Freddie Mac, and from investors in government-backed mortgage bonds.

Administration officials said on Wednesday that they were weighing a range of proposals, including changes to its previous refinancing programs to increase the number of homeowners taking part. They are also working on a home rental program that would try to shore up housing prices by preventing hundreds of thousands of foreclosed homes from flooding the market. That program is further along -- the administration requested ideas for execution from the private sector earlier this month.

How much these proposals will actually accomplish seems rather questionable--I doubt lowering interest rates is going to do much to fix the housing market, given how highly correlated default seems to be with a) losing your job and b) the simple fact of being underwater. But leave those concerns aside. If the administration actually wants any of these programs to work, it is going to need the cooperation of the banks.

And no, I do not mean "because they can't move without the okay of their corporate paymasters". I mean that the administration is going to need some active cooperation from the banks that hold and service all these mortgages. Corporate and social reformers tend to get caught up in the notion that with a combination of steely will and brutal intolerance of misbehavior, you can simply force all those twerps in a misbehaving organization to do what you want: the only reason people don't, they believe, is that they have somehow been paid off, or brainwashed, by the twerps.

It's like the legal system doesn't even exist for McArdle. You pass a law, you enforce the law, the bank follows the law. Putting the reality of what is actually happening aside, saying that we must get the banks to agree to follow the law voluntarily is stupid and dishonest, but propaganda usually is stupid and dishonest. In McArdle's little world, liberals are busy-body reformers who just envy and therefore hate rich people, who are successful because they are moral and work very, very hard. Therefore, liberals are driven to punish the banking class with silly, harmful rules and regulations. The government should be willing to give something up in return if they want members of the financial industry to follow the law. For instance, they should give up implementing the law, which is hard and give the banks a sad.


This is why most corporate reorganizations, and social reforms, fail miserably. Not even Stalin or Pol Pot exercised this level of total control over the workers. There are all sorts of way that unwilling people will subvert your efforts.

That's not to say that reforms should be all carrot, no stick. Indeed, sometimes the way to deal with a tricky organizational problem is to fire all the workers. But even this doesn't work as well as you might think. I once spent some time talking to an in a turnaround situation whose solution to a deeply dysfunctional corporate culture at a firm that had been losing money for more than a decade was ultimately a mass firing that axed more than 90% of the staff. Eighteen months later, I asked him whether the old culture had died out, or re-established itself among the new workers.


"Honestly?" he said, "The culture won."


You need some level of buy in; if you don't have it, your reforms won't work unless you can actually fire everyone. And a "clear the decks" approach is not an option the administration has. They cannot fire the owners of these mortgages, nor do I think they'll have much luck forcing the owners to fire their servicers. If they want to do anything serious in the mortgage market, they're going to have to have the active cooperation of the banking industry.
Because Obama refused to prosecute banking and mortgage industry fraud, Missy Megan McArdle can flounce around proclaiming that homeowners will just have to suffer so the poor, innocent financial industry can get back to the hard work of running the world. (See Glenn Greenwald also.)


And that, in turn, means that they have to trade the industry something that they want . . . like a quick settlement in this foreclosure fraud investigation. I don't know that this is the particular quid-pro-quo that led to the administration's pressure. But after three years of covering their economic policymaking, I find it eminently more plausible than the idea that they're doing this because some banker made a well-timed phone call to David Axelrod.

She knows about the revolving door between Goldman, Sachs and other firms and the government and she knows the banks are getting richer while poverty is growing, but she finds it "implausible" that any quid pro quo exists between Wall Street and the White House. She is either hopelessly naive or a lying hack. Or a hopelessly naive lying hack, take your pick.


I frequently disagree with administration policy, but however much you question their priors or analysis, it's always operated within an admirably consistent technocratic framework. The technocratic wonks are shocked because they cannot believe that this is what technocracy actually looks like in the real world: it involves a lot of side-deals to get buy in from the affected parties.
Yes, the dreaded evil Obama Chicago Machine has no idea of side-deals.

That's not to say that I approve of making this deal. I don't. But this is the sort of devil's bargain we accepted when we got the government into the business of guaranteeing mortgages. The problem is not that politicians are making the kind of distasteful backroom agreements that politicians have ever made, and ever will. The problem is that we put the government in the position where these kinds of deals are necessary.
Blame Fannie and Freddie and the poor!

A lying, simpering, scolding hack tells us to ignore theft and ignore the rule of law, because the banks must be appeased. I should have become a conservative and cashed in by screwing over the poor.

Maybe we really do live in the best of all possible times. Was it ever easier to get rich by shovelling manure down the throats of willing dupes?




31 comments:

atat said...

"Dodgy? I think the word McArdle is avoiding is 'fraudulent.' But she always did refuse to admit any acts of fraud in the financial sector."

That, and she has a quota of Britishisms that must be met. I think the rate is meant to be about one misappropriated colloquialism per every 100 words.

Downpuppy said...

This wasn't a work of art. Even by McArdle standards, it was just a mess. In between starting and ending the post by saying she disagrees with the policy, her justifications for it are so lame & muddy that even her fans want to slap her upside the head & tell her to get a grip.

Myles said...

It's hardly like the Obama admin will be enforcing the laws against illegal immigrants going forward, so the charge that they aren't applying the laws is as potent as you think. It's not like "not applying the laws" is just someone for bankers; all favoured constituencies get it, whatever the administration.

Susan of Texas said...

Myles, why would Obama consider the needs of illegal immigrants? They can't vote, and Hispanic citizens don't like ethnic hatred, so they won't vote Republican anyway.

Now, who does support illegal immigration? Bush, for one. Why did he support illegal immigration? Partially, perhaps, because when one grows up in the Southwest one comes to admire the immigrant worth ethic, the good care they take of their children, their willingness to help others. But mostly, since Bush is not really known for his empathy, because they are a source of cheap labor and help depress wages. Hence his lack of enthusiasm for his constituents' desire to build a giant wall around the US to keep foreigners out.

So corporate bankers get their bailouts and mortgage brokers get their immunity and illegal workers get their low-paying jobs. And everyone's happy, except those who are never happy unless they're persecuting someone.

Myles said...

So corporate bankers get their bailouts and mortgage brokers get their immunity and illegal workers get their low-paying jobs. And everyone's happy, except those who are never happy unless they're persecuting someone.

The point here is that "not applying the laws" is just something the administration does when it feels like it. It's not some special banker-only thing. And it's certainly not "laws are for the weak." And I have no clue what Bush's got to do with it.

And note that offspring of illegal immigrants can in fact vote eventually. The post is based on a false premise: that "not applying the laws" is some special thing Obama does for bankers. Well, no. He does it whenever it suits him.

Myles said...

This whole thing is just ridiculous populism in any case. If there is no 50-state resolution re: the mortgage mess, it's just going to drag on forever and nobody's going to be the better off for it.

Schneiderman is just being an asshole basking in his 15 minutes of fame. There's no point in paralyzing the mortgage market any more than it has been already. Of course, to an innumerate moron like Schneiderman, that's incomprehensible; not surprising that he's an AG, then.

Ben said...

'The point here is that "not applying the laws" is just something the administration does when it feels like it. It's not some special banker-only thing.'

The Obama admin. had been cracking down on illegal immigrants trying to stop crime. More people were deported than all the other previous administrations combined.

Then they noticed that crime among illegal immigrants hadn't changed appreciably.

Now they're shifting scarce resources to go after actual criminals rather than casting a wide net and hoping the net catches criminals.

They tried one method of enforcement, it didn't work, so they're trying another. I know it's been so long since we've seen competent governance in action that it's a bit disconcerting.

To call that "not applying the laws" is not only ignorant of how executives administer the enforcement of laws but is to carry so much water that your spine should be telescoping.

On McArdle: I can barely type a response to her stupid little missives because I get so mad I can't think straight. I don't know how you do it.

Lurking Canadian said...

It's kind of like how the government doesn't bother prosecuting drug users, because it's just not an effective way to combat the culture of drug use.

cynic said...

Wow. Never really saw the Myles effect before.

So, he thinks that Schneiderman is 'paralyzing' the mortgage market? really?

The only thing stopping JP Morgan from going out and offering mortgages to all and sundry is that no sane investor will touch MBS anymore unless it comes in a bullet-proof wrapping. JP Morgan cannot provide the bullet-proofing - ergo no mortgage for you.

It has nothing to do with Schneiderman and it never did. Myles is simply either being totally disingenous or totally naive.

(according to SIFMA data - RMBS issuance went from $725 billion in 2006 to 12 billion in 2010) Banks have simply gotten used to taking the risk right out of their balance sheets as soon as a mortgage is issued so they don't issue a mortgage they cannot also sell immediately.

Anonymous said...

Mataconis is without a doubt the worst excuse for a writer joyner could have found to join the otb team outside of red state.

-aws

Myles said...

The only thing stopping JP Morgan from going out and offering mortgages to all and sundry is that no sane investor will touch MBS anymore unless it comes in a bullet-proof wrapping. JP Morgan cannot provide the bullet-proofing - ergo no mortgage for you.

No, what's stopping the mortgage and housing markets from returning to equilibrium is the massive, giant legal liability hanging over everyone's heads. What the DoJ+49 state AG's are trying to do is to basically compartmentalize this massive cloud of legal liability and take it off the banks by settling it once and for all for a fixed penalty (right now the number is $20bil).

What Schneiderman is trying to do is to block that deal to clear up that legal liability cloud once and for all and sue the banks to hell or high water, because he's not happy with $20bil and is really trigger-happy about sending bankers to jail (cool dude, let's freeze the entire fucking mortgage market so you can send a few guys to jail). Which will take forever and a day. In the mean time, the mortgage and housing markets will keep being frozen, because unless and until the legal liability cloud is cleared up nothing will be happening. JPMorgan can't do anything until it has its assed covered on the legal liability front.

I mean, whatever floats the moron's boat I guess.

Susan of Texas said...

So a group of people break the law with abandon while committing fraud and your concern is that someone is holding up the deal to let them get away with it with a small fine.

When everyone is not subject to the law, nobody is. You have no problem with screwing homeowners and letting the rich get away with theft, but the rich go where the money is.

You think that being born upper class means you will stay upper class. You could not be more wrong. When the middle class is gone the ultra-rich will bleed dry the upper classes. That's where the money will be, after all. Do you think they would suddenly stop stealing when the middle class is gone?

Myles said...

So a group of people break the law with abandon while committing fraud and your concern is that someone is holding up the deal to let them get away with it with a small fine.

You can either take this to a court of law and sue the bankers for forever and have the mortgage market keep being frozen until all the litigation is finished, or you can wrap up all the legal liability in one deal and get the mortgage market going again. The average homeowner will be screwed a lot more under the first scenario than the second.

Take your pick. Personally, I think this really shouldn't be a problem as long as Obama is willing to play hardball with Schneiderman (rip his campaign funding, whatever), but we'll see.

cynic said...

No, what's stopping the mortgage and housing markets from returning to equilibrium is the massive, giant legal liability hanging over everyone's heads.

Well, then, what stops the canadian banks - which all have operations here in the US and don't have swords hanging over their heads from taking all that juicy market share?

I have been hearing this BS argument - oh, if only there was no legal liability, they would lend. If lending is so damn profitable why should an existing lawsuit for prior pratices stop future actions? Do companies simply stop all operations everytime someone threatens to sue them? Did Philip Morris suddenly stop making cigarettes once the lawsuits started?

In any case, if lending is so damn profitable, why don't the credit unions - who have no swords over their heads -- lend their heads off?

You must be a Street trader. Only they are capable of such blind faith in the banks' own PR.

Susan of Texas said...

The fradulent mortgage market, with forged documents and massive hidden losses. You want to keep that going. Do you really think that none of this will ever touch you or anyone you care about?

Do you really think that you are God's special little snowflake, who will never suffer the depredations and rapaciousness of the rich?

Do you really think you don't need the rule of law??

Myles said...

Well, then, what stops the canadian banks - which all have operations here in the US and don't have swords hanging over their heads from taking all that juicy market share?

Canadian banks are expanding in American banking. Just not at the speed that you think. They aren't expanding that much because US retail banking is not as profitable as South American banking, where the Canadian banks are extremely dominant.

This is to not counting the giant bling red fact that Canadian banks wouldn't be able to ramp up their operations in the US mortgage market unless they participate on the secondary markets, and as long as Schneiderman keeps the mortgage resolution and thus secondary markets frozen they wouldn't dare participate.

The relevant question here isn't the issuance of new mortgages at all: it's what to do with existing mortgages and how to get them liquid again. As long as there is legal liability they aren't going to trade and the secondary market for mortgage securities will remain seized up.

Do you really think you don't need the rule of law??


The rule of law doesn't exist unless you have the material economic conditions to back it up. There was no rule of law when FDR tried (and luckily failed) to pack the Supreme Court in the midst of the Great Depression.

ifthethunderdontgetya™³²®© said...

You're pulling the most ridiculous crap out of your behind I've seen yet, Myles.

(I'll admit don't follow your postings diligently.)
~

Mandos said...

Fallacy of the excluded middle. Like there's absolutely no alternatives between killing the mortgage market and letting the malfeasant get away with their loot.

Myles said...

Fallacy of the excluded middle.

There is no middle between taking bankers to court regarding the mortgage market and not taking them to court. It's binary. The legal process is by right and necessity lengthy, complicated, and uncertain; and whatever the legal process will necessarily be reflected in the secondary market for mortgages.

Presumably you actually do know economics, Mandos, so it's pretty shameful for you to engage in this kind of populist bullshit.

Mandos said...

I am firmly and ever an economic populist and a critic of the religion of economics. Whether I "know" economics, if there is a single thing to be "known" as a truth, is another matter.

Hint: we don't need the bankers to get people into houses.

Pete said...

Quoth Myles: "The legal process is by right and necessity lengthy, complicated, and uncertain."

This is nonsense.

I am fairly sure that you do not know law, but even so it is pretty shameful for you to indulge in this kind of pseudo-intellectual bullshit.

But on the bright side you do sometimes make me laugh.

Myles said...

Hint: we don't need the bankers to get people into houses.

We do need bankers if people's equity in houses are to be worth anything.

Whatever this "excluded middle" is, Schneiderman surely isn't doing it. He's pretty much provably keeping the secondary market frozen.

Which means he's a moron.

Mandos said...

Alright Myles. I'll play your game. Let's say I concede the point: that arresting banksters would absolutely necessarily freeze up the mortgage market, properties would drop in value, all the creatures of the land will be destroyed in fire and water, and the hell-hounds shall be loosed upon the remnant life. etc, etc.

For so long as a certain large portion of the mortgage market was replete with moral hazard, this was going to happen anyway. These people were in the business of generating fictional confidence, and they had zero incentive to stop. At worst they would get away with their existing loot. The fiction was ending on its own and with catastrophic results.

Better it end in a manner that serves justice as an end it itself.

That assumes that there is no "upside" to serving justice and law in itself. That is the middle you have excluded.

Myles said...

For so long as a certain large portion of the mortgage market was replete with moral hazard, this was going to happen anyway. These people were in the business of generating fictional confidence, and they had zero incentive to stop.

Hey buddy, try to distinguish between illiquidity and insolvency. That moron Schneiderman is creating an illiquidity where one need not exist.

Try again. And try not to use cheap tricks like "moral hazard."

That assumes that there is no "upside" to serving justice and law in itself. That is the middle you have excluded.

You have to be a really perverse and creepy moralist to think it's worth freezing the entire secondary mortgage market and stiffing millions of houseowners out of their equities just to send a few bankers to jail.

Myles said...

(By the way, you literally just spent the entire post talking about the problems relating to an insolvency when the problem here is illiquidity.

Seriously, cut the populist demagoguery bullshit.)

Mandos said...

There were and are other ways to compensate the homeowners themselves, to some extent. Excluded middle fallacy again. But some of the damage has been done. For that damage, caused by banksters, the banksters must be held to account.

In the case of banksters and the mortgage market, the liquidity and solvency issues are closely and very obviously tied---in a sense, attempting to ignore that was the original sin underlying the CDO trouble. Doubly so when fraud is in the mix. If there are no consequences to fraud, then the negative feedback loop continues.

I'm sorry, "moral hazard" in this case is no "cheap trick." Your anger about it cuts to the chase: it is exactly the central issue that you wish vehemently to avoid. The banksters have created a situation in which there are no good outcomes. The least worst solution is to restore the moral balance.

I am very much an economic moralist. There Is No Alternative. Social justice and strictly enforced banker probity.

Mandos said...

In other words, fighting illiquidity at all costs---at the cost of the social contracts that bind together society in a just order---has clearly resulted in ever-increasing insolvency. Yes, fight for liquidity. But not by all means.

Not that keeping these particular bankster enfants constantly gâtés is the only way to maintain liquidity...

But everyone already knew that Myles has a pathological worship of winners. He even once told us on CT that it was wrong to free the slave if it disrupted extant economic relations. That's territory even the stoutest Randroid fears to tread.

Myles said...

In the case of banksters and the mortgage market, the liquidity and solvency issues are closely and very obviously tied---in a sense, attempting to ignore that was the original sin underlying the CDO trouble.

They are only tied for morons who think that the current illiquidity-insolvency link is due to anything other than legal liability. Once you settle legal liability for an one-time sum, the link is gone.

Yes, fight for liquidity. But not by all means.

By your "yeah liquidity NBD" logic we should have just the whole financial system collapse in Sept. 2008. Great idea, buddy.

The banksters have created a situation in which there are no good outcomes. The least worst solution is to restore the moral balance.

The least worst solution is that all home-owners get to walk away with at least some equity in their house. The bullshit "moral balance" whatever is a tiny, minuscule non-problem when considered in comparison with making sure homeowners don't end up with zero.

There were and are other ways to compensate the homeowners themselves, to some extent.

No, as you know full well, there is no quicker, cheaper, more effective, and more comprehensive way of helping homeowners than reviving the secondary market into a decent shape. This is orders of magnitude faster and more comprehensive than principal reductions.

Try again.

Mandos said...


They are only tied for morons who think that the current illiquidity-insolvency link is due to anything other than legal liability. Once you settle legal liability for an one-time sum, the link is gone.


That you believe that the only significant link between illiquidity and insolvency is the one of legal liability is a continuing testament to the paucity of your vision.


No, as you know full well, there is no quicker, cheaper, more effective, and more comprehensive way of helping homeowners than reviving the secondary market into a decent shape. This is orders of magnitude faster and more comprehensive than principal reductions.


Whereafter we will end up in the same place, only worse, because the underlying roots of the insolvency have not been addressed.

Myles said...

Whereafter we will end up in the same place, only worse, because the underlying roots of the insolvency have not been addressed.

Whereas your alternative is one where home-owners don't get any of the benefits of a revived secondary market and end up with zero in their houses.

Try putting that one before the voters, buddy! Thankfully the rest of the world is not as utterly and perversely insane as you are in your moralistic fantasy.

Try again.

Mandos said...


Whereas your alternative is one where home-owners don't get any of the benefits of a revived secondary market and end up with zero in their houses.


Excluded middle. *BOOP*