Swimming With the Debt Sharks

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This article is part three of a three-part series on “Our United States of Indebtedness.” Read the first two pieces in the series here and here.

Debt is one of the United States’ most stringently enforced promises.

At least, that’s true for those who cannot afford a high-powered legal team to fight it out in court. It’s also true for the unfortunate many who don’t work alongside revolving-door regulators who write and “enforce” the rules governing their once and future employers. And it’s most true for non-corporate persons who cannot dispatch legions of lobbyists to secure billion-dollar bailouts and rewrite laws.

In the United States, all debtors are not created equal.

The depth of that inequality emerged after the crash of 2008 capsized the American dream. As billions of dollars worth of “promises” suddenly came due, it was quite obvious that the standards of enforcement for the captains of finance differed greatly from those applied to a multitude of drowning deckhands desperately clinging for life as their American dreams went underwater.

Almost immediately, bankruptcy took down the United States’ fourth-largest bank – Lehman Brothers – amid a swirling mess of subprime securities. And a staggering list of financial institutions teetered on the brink of collapse and insolvency. But Uncle Sam rushed to “lend a helping hand” to the people who placed the risky bets that caused the crash in the first place. He even helped “stabilize” the predatory debt sharks who had hedged against their own risky bets because they saw the crash coming.

On the other hand, “average” Americans went begging while the government’s massive bailout sustained AIG, Bank of America and, it seemed, nearly every other bank, fund and investment house under the sun. That’s because the biggest debtors were, according to the biggest debtors, simply too big to sink. This dichotomy left “average” debtors gasping for air as liquidity was siphoned off for the well-connected sharks swimming in their own well-protected tank. Because their unpayable promises were the foundation of the entire financialized system, they – and they alone – got Uncle Sam’s (also known as “taxpayers”) undivided liquidity.

This was the key difference between the housing bubble and the savings and loan crisis. During the savings and loan crisis – when people were quickly losing their savings and, in many cases, their life savings – the Federal Deposit Insurance Corporation (FDIC) was there to cover up to $100,000 worth of losses. It buffered the impact of rampant speculation by the ironically named “thrifts” after deregulation allowed them to play fast and loose with money deposited into their once-staid institutions.

Yet, when this financialized bubble burst there wasn’t an FDIC guarantee to buoy “average” Americans and keep them from going underwater on their mortgages. The FDIC doesn’t do that. Nor does it bail out “average” Americans when they lose their 401(k) retirement dreams or mutual fund investments when the market tanks – like it did during the dotcom crash and after the housing bubble burst.

Nope, “average” Americans lost their wealth and had to keep their debt promises. And many handed over their American dream during the ensuing foreclosure crisis.

It was as if all the “kinks” had finally been worked out of the debt-driven system.

This time, there would be no appetite for prosecutions, no relief for middle- and working-class minnows and no real way to stop the highly leveraged bottom-feeding that, in fact, had finally become the basis of the entire economy. By the time President George W. Bush advocated shopping as a response to 9/11 and proposed the “Ownership Society” as a salve for the widening gash of income inequality, the decades-long financialization of the economy was already complete. And the government’s acquiescence was a fait accompli.

But the perfect storm of wealth removal generated by the housing bubble and subprime economy wasn’t just the result of 30 years of financial deregulation. It was also because, as the Organization for Economic Cooperation and Development (OECD) detailed in its report on financialization, the broadly based economy of “things” had been relentlessly replaced by the narrowly beneficial economy of credit (also known as debt). In that economy, deal-making increasingly reinforces the wealth of deal makers at the expense of GDP and at the expense of income-challenged debtors. Those debtors, in turn, are ever more reliant upon credit (also known as debt) to bridge the gap between income and the “middle-class” lifestyle.

In the post-dotcom, post-9/11 era of uncertainty, the huge majority of debt-addled, yield-hungry Americans sought security. What’s more secure than “owning” a “home” in the hurly-burly age of Homeland Security?

Eager Americans poured wealth into the housing market. That influx stoked a profitable frenzy of mortgage securitization, exotic financialization and derivate deal-making. Even worse, the predatory subprime lending boom had a self-reinforcing effect on the bubble by warping supply through stoking demand and competition for houses. It’s kind of like using low-interest loans for stock buy-backs or Ronald Reagan floating “Morning in America” on the government’s credit card. It’s easy to create the appearance of growth by leveraging debt.

And that’s what the housing bubble was … a debt-driven reach for yield through greater and greater risk-taking built on more and more leverage with a big “credit default swap” cherry on top.

Dinner Is Served

Wall Street had a point. It was “too big to fail.”

When the crash hit, the “hard” economy of things had been shipped overseas. The ability to buy cheap widgets made in China depended upon widely available credit. And the United States’ “wealth” was far more dependent upon market perception than on economic fundamentals. It was an economy built on leverage and a “through the looking glass” view of outstanding debt obligations as valuable, tradable assets.

In 2001, the Federal Reserve flooded the zone with leverage when it lowered its benchmark rate from 6 percent to 1.75 percent in just 11 months. This wave of “credit” – which is really another word for “debt” – artificially fueled spending and speculation even as the fallout from the last bubble – the dotcom bubble – was still being sorted out.

So much for “market forces.”

In 2003, when that leverage fueled looser mortgage lending and the housing bubble was quickly expanding, the “average cardholding household” had “six credit cards with an average credit line of $3,500 on each – for a total of $21,000 in available credit,” according to a study by Demos. The “go-go” financial system was giving average Americans a lot of credit.

By the time then-Fed Chairman Alan Greenspan lowered the rate to 1 percent in 2003, Fannie Mae and Freddie Mac had already issued $1.5 trillion in outstanding debt. Over the next two years, they purchased another $434 billion in securities backed by subprime loans. The policy of loose lending by Freddie and Fannie began (like so many of these financial parlor tricks) at the end of the Clinton administration. But, as Carol D. Leonnig of The Washington Post reported during the crash, the two agencies were further unleashed during the midst of the bubble to “buy-buy-buy” subprime mortgages packaged into securities.

That bubble-blowing policy was compounded in 2004 by a new Securities and Exchange Commission “regulation” that rewarded the five biggest financial sharks – Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns – with an approving stamp of “regulatory compliance” if they radically increased the amount of their securitized “assets” (also known as “debt”) that were backed by mortgages. And they did.

The big five’s desire to “come into compliance” stoked demand for mortgage-backed securities. That, along with Wall Street trading and a push by the Department of Housing and Urban Development to buy up subprime securities, altered supply and demand in the housing market. Instead of just being driven by a demand for houses, the market was also being driven by a demand for packaged mortgages. Those securities fed yield-hungry financial sharks swimming in the gray area between the “free” market and government policy.

In essence, the fix had been in all along.

This bubble was so intertwined with government policy and the revolving door had spun so often between Wall Street and successive administrations that there really wasn’t a snowball’s chance in hell that Uncle Sam wouldn’t cover the risky promises made by unfettered financial wizards. Because they’d transformed home ownership into an exotic financial instrument, there really wasn’t anything to “bail out” when “average” Americans looked for help. Their homes were little more than an electronically transferred bet in an elaborate system of risk commoditization. It wasn’t a federally insured savings account.

Meanwhile, the debt sharks circled the political class in Washington. They said the “entire financial system” was on the brink of collapse. They warned of global turmoil and a second Great Depression. In response, Uncle Sam basically set the table for “too-big-to-fail” behemoths to get even bigger by simply throwing the almost comically named TARP over the whole mess.

Feeding Frenzy

The Troubled Asset Relief Program, also known as TARP, was the Bush administration’s costly response to the 2008 financial crisis. In October of that year, Congress passed the Emergency Economic Stabilization Act of 2008 and it was quickly signed into law. In essence, it was an ex post facto FDIC for the financial speculators who had blown the housing bubble and, in the process, cost millions of people their homes and livelihoods. The Treasury Department was empowered to use TARP to “cover” Wall Street’s losses and restore stability and confidence to markets. It did nothing to cover the losses of the victims of predatory lending or those subjected to the vicissitudes of a manipulated market.

At the start, TARP was supposed to be about $700 billion. But Bloomberg put the grand total of the Fed’s commitment – with bells and whistles, out the door – somewhere closer to $7.77 trillion. It included somewhere north of $1.2 trillion in “secret” loans used by the surviving sharks to preserve themselves and to feed on a banquet of devalued assets – failing banks, mortgage lenders and financial “services” providers – left over from the collapse.

It’s been part of the financialized boom-and-bust cycle since the Supreme Court opened the floodgates of credit (also known as debt) with the Marquette decision in 1978. For those with liquidity and influence, or, even better, the kind of liquidity only influence can buy, each inevitable crash presents profitable opportunities. Insiders know that money is makeable on the boom and the bust. It’s what financialization is all about. It’s not about making widgets in factories or long-term investing in the “hard” economy of things. It’s about short-term “plays” that involve electronic transfers of risk and leveraged takeovers of cut-rate assets.

And that’s exactly what happened.

An array of highly financialized “institutions” not strong enough to weather the post-crash storm got gobbled up by the sharks given the government-backed strength to find value in the chum. As a result, the number of banks declined by 12 percent between 2006 and 2010 and the share of total deposits held by the 10 biggest banks rose from 44 percent to 49 percent, according to a study by the Federal Reserve Bank of St. Louis. But that consolidation was just one part of a post-crash course in asset hoarding. The beneficiaries of the bailout also leveraged government-supplied liquidity into big profits.

Even more opportune was the real estate “play” by private equity firms like the Blackstone Group that exploited 10 million foreclosures left by the burst bubble and sometimes taken through specious, fraudulent practices like “robo-signing.” Blackstone is the world’s largest private equity firm and it quickly became one of the nation’s largest landlords. They, along with other heavyweights like Colony Capital and Cerberus Capital Management, have now moved into the business of floating smaller landlords as they feed upon the super-heated rental market.

As for the “robo-signing” scandal, the biggest abusers put their vast liquidity to work by reaching two deals to make the criminal complaints disappear: a $25 billion settlement between five banks and 49 state attorneys general in 2012 and a $9.3 billion settlement between 13 banks and federal regulators in 2013. In March 2015, JPMorgan Chase paid $50 million to wipe away “perjurious dealings in tens of thousands of mortgages in the aftermath of the mortgage crisis.” It was barely a drop in the bucket for the financial mega-shark.

It now has $253 billion in market capitalization, making JPMorgan Chase one of the 10 biggest companies in the United States, joining a list with bailout beneficiary Wells Fargo and Walmart. Just offshore are Bank of America and Citigroup at the 18th and 20th spots on the list.

But the story couldn’t be any more different for those “average” Americans who got sucked into the subprime tsunami. They didn’t have the liquidity or the connections needed to turn the greatest financial crisis since the Great Depression into a rare, profitable opportunity to feed on competitors or gobble up their neighbors’ cheap assets.

Instead, median household wealth is down 36 percent over the last decade, home ownership dropped to a 48-year low and, amazingly enough, the nightmare still continues for many Americans who lost their dream in the crash.

In October 2014, Reuters reported on the “post-foreclosure hell” still burning holes in the wallets of many Americans. That’s because mortgages can haunt debtors long after they’ve gone underwater and lost their homes. Over the last few years, lenders have used “deficiency judgments” to seek repayment on loans, fees and penalties that accrued up to and during foreclosure. Even as people struggle to rebuild wealth, relentless lenders target their assets and garnish their wages – and not with a sprig of parsley or an orange wedge.

But that’s not the end of the nightmare.

Reuters also reported the rise of “zombie titles” – a monstrous mounting of unpaid debts, fines, fees and assessments that stalked homeowners who had thought they’d “lost” their houses to foreclosure, only to find out later that, for instance, JPMorgan Chase decided it wasn’t worth the trouble to complete the foreclosure after evicting the occupants. Out of nowhere, they found “their wages garnished, their credit destroyed and their tax refunds seized.” And some even faced jail time.

So, while JPMorgan Chase, Bank of America and other bailed-out mega-sharks spent seven years consolidating, hoarding and avoiding even the threat of jail time by forking over tax-deductible penalties to revolving-door regulators, “average” Americans went back to square one in an economy that has one in three Americans teetering on the brink of financial ruin.

In spite of a drop in household debt relative to pre-crash levels, many are still locked into a consumer credit system. A study by Card Hub found that the average household’s credit card balance for the first quarter of 2015 was $7,177. That’s the highest it’s been in six years. And the Federal Reserve reported that Americans added $20.7 billion in debt in June. That brings “total consumer borrowing to a record $3.42 trillion,” according to The Associated Press. Despite a wave of painful post-crash deleveraging, Americans are still swimming into deeper and deeper red ink.

The United States, in Red and Black

“Average” Americans didn’t get floated on a flood of bailout bucks. They didn’t get access to the Fed’s freebies during quantitative easing. Nor did they have the money or connections to wipe away legal obligations by cutting deals to pay tax-deductible fines. But the two-tiered system was, perhaps, most apparent in the fact that they also found themselves restricted by another option open to the United States’ corporate persons – the slate-cleaning option of bankruptcy.

Unlike Lehman and a host of other major companies, most Americans bumped up against new regulations limiting access to a much-needed legal life preserver for individuals sinking in untenable debt. Whether it was just an odd coincidence or, for the more sinister-minded, perfect timing, bankruptcy laws were tightened by Congress just as the debt-driven economy blew the housing bubble to it biggest point.

After “years of intense lobbying” by the credit card industry, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. It regulated access to bankruptcy, sharply raised the cost of filing and instituted a “presumption of abuse clause” for individuals seeking Chapter 7 relief, which eliminates most, if not all, debt. Basically, credit card companies wanted to raise the bar on bankruptcy and make sure “average” Americans were not “abusing” the financial system with a de facto bailout that eliminated bad debts.

To make sure consumers kept their promises, they came up with a formula that compared a filer’s income to the median income of their home state. If they make slightly more than the median, they are “abusing” Chapter 7 and go directly to the three-to-five-year repayment plan built into Chapter 13. So, in stark contrast to years of successive deregulation for the financial industry, Congress decided to clamp down on risk-taking consumers.

But there was an additional irony built into the bankruptcy bill. It may have helped trigger the crash of 2008. At least that’s what two accomplished economists determined in 2009.

According to Michelle J. White and Wenli Li, raising the bar on bankruptcy removed an all-important pressure-relief valve on the United States’ giant steam engine of debt. By blocking distressed borrowers from getting debt relief, congressional credit card cronies doomed those who might’ve otherwise been able to pay their mortgages thanks to bankruptcy protection. Instead, their financial fortunes cratered and they defaulted on their mortgages. Based on their calculations, the bankruptcy “reform” caused an additional 800,000 defaults and 250,000 foreclosures before and after the crash. The kicker is that borrowers who defaulted on mortgages were so bereft that they often ended up filing for bankruptcy, anyway.

But that’s not the only “kicker” found in the bankruptcy bill.

Also buried in the financial industry gift basket was a nifty little provision the made it impossible to discharge a private student loan through bankruptcy, bringing those loans into line with the longstanding inescapability of public student loans.

That’s right. Back in 2005, when total student debt was less than $400 billion and the average student loan was $16,651, Congress suddenly decided to ratchet up regulations on students borrowing money to get a degree at a for-profit “college” or seeking private loans to help buy an education. It wasn’t frivolous borrowing, either. The media and politicians said repeatedly for two decades that all the good-paying jobs required a college degree. It was the only way to compete in the global economy, right?

And while Congress cracked down, predatory mortgage lenders swam freely and easily into deeper and deeper risk. The dichotomy would be comical if it wasn’t so prescient.

That’s because student loan debt is now a $1.2 trillion bubble. Some believe it’s ready to burst and others believe it’s troubling, but manageable. Interestingly enough, the reason why some refuse to say the student loan sky is not falling is the fact that this time, the leading risk-taking financier isn’t a hedge fund or a traveling band of exotic financial instrument players. It’s Uncle Sam.

That’s right, the US government holds approximately $1 trillion of that $1.2 trillion total and, as of 2014, student loan debt comprised 45 percent of federally owned financial assets. One oddity of Uncle Sam’s loan business is that it brings upward of $51 billion into the Treasury – enough, as Forbes noted, to cover “two-thirds of the lifetime cost of the entire F-22 fighter jet program!”

The defense analogy is apt because the rise in student debt is directly tied to the inflating cost of college tuition. A recent study by the Federal Reserve Bank of New York found a direct correlation between the epic 46 percent spike in the cost of college over the last 10 years and the much-discussed rise in student debt. Institutions reacted to the growth in federally subsidized student loans by charging more to go to school – with students acting as a profitable “pass-through” for revenue-hungry colleges. It became a college-industrial complex and it forced entire generations into a bizarre form of indentured servitude.

It’s a familiar model.

Like credit cards, subprime mortgages or any number of debt-driven schemes employed by the financial system, student loans are wealth removal machines widening the gap between those privileged few in the black and the teeming masses stuck in the red. The debt-driven student loan system typifies the nearly four-decade-long process of financialization and indebtedness that began in 1978.

To wit, current graduates are the most indebted generation in history, supplanting grads from the previous year. That means their ability to acquire wealth is inexorably compromised by the anchor of debt weighing them down before they ever get started.

The debt makes it harder to buy a home. Because the rental market is hot in the post-foreclosure crisis United States, there is an intergenerational scrum to secure a place to live in a financialized world of mega-landlords. And, because Congress felt it important to close the one last loophole, many of them cannot find relief through the one bailout “average” Americans relied upon when they leveraged themselves into a corner – bankruptcy.

They are not alone, either.

According to the Government Accountability Office, student debt carried by people 65 and older rose by more than 600 percent between 2005 and 2013. It now stands at $18 billion. Unlike boomers, Gen Xers are the first generation to do less well than their parents, thanks in part to the wealth limitations of student and household debt. Although 82 percent of degree holders “earn more” than their parents, only 30 percent have more actual wealth as a result. Gen Xers’ debt totals – including student loans, medical debt and credit card debt – is six times their parents’ levels at the same age. Americans age 35 to 44 have the fastest growing income gap. And savings and retirement remain woefully out of reach for more and more Gen Xers.

In spite of some painful deleveraging of consumer and mortgage debt (and loss of wealth) after the crash, one survey showed that 48 percent of Gen Xers (age 35 to 48) and boomers (age 49 to 67) use credit cards as “a financial survival tool.” And Gen Xers got on the debt treadmill early. Some 76 percent said they got their first card by age 24 and now carry an average of $144,000 in mortgage debt and $8,000 in average credit card debt. Boomers, by the way, average about $6,000 in credit card debt.

Like everyone else in the 99%, there is no bailout coming for boomers, Gen X, Gen Y or millennials.

The unevenness of “recovery” is much the same.

Aggregate net wealth is now over $81 trillion. It’s surpassed pre-crash levels. But, according to two economists from the London School of Economics, combined wealth of the richest 160,000 equals the combined wealth of the poorest 145 million families. This concentration matches pre-Great Depression levels, thus completing the 40-year paradigm shift away from the New Deal that began with the Marquette decision in 1978.

So, is it déjà vu all over again?

A new tech bubble is growing on Wall Street and the liquidity and leverage needed to profit from it is more exclusive than ever, as is the ability to invest in or own a start-up. As reported by Quartz, that’s the sole legal right of “accredited investors” with a net worth of $1 million or two consecutive years of income exceeding $200,000 per year. So, regulations keep the 99% out of the world of billion-dollar unicorns riding over otherwise deregulated rainbows in search of endless, pre-revenue pots of gold.

Of course, post-crash Dodd-Frank financial regulations remain incomplete. Not one of the biggest predatory lending sharks, subprime financiers or risky derivatives dealers was ever prosecuted, let alone sent to jail. But medical debts remain inescapable for less well-heeled Americans, even as Congress further socialized the risk of the still-expanding derivatives market – putting taxpayers on the hook for a potentially staggering $303 trillion in derivatives thanks to language written by Citibank and inserted into a spending bill.

The reach for yield continues as financialized banks invest in prisons, and big debt collection agencies are empowered by local governments to track down unpaid parking tickets and income-challenged Americans. Some of them actually go deeper into debt by putting rent-to-own tires on their cars because they don’t have the cash to buy a set. In the end, they pay triple what it would’ve been had they just been able to buy tires outright.

While these debts are an anchor for most, debts also fuel rising yachts – either through interest collected from “customers” or through Fed-provided leverage to play the market or through buy-backs that stoke garish 800 to 1 income disparities between “successful” CEO and their workers.

Since financialization took off in the 1980s, working- and middle-class households have incrementally replaced liquidity and wealth with debt and interest. The post-crash United States is the sum total of that process. A new Pew Study found that 7 out 10 of all Americans said debt is a “necessity in their lives” despite the fact that they’d “prefer not to have it.”

The “leaders” of the economy replaced “hard” investments in the actual economy of widgets and things with big government-sanctioned “plays” in credit and leverage. They keep their profits safely offshore. They are loath to invest in hard economic growth that broadly raises incomes or the pool of wealth. And financialization has transformed consumer consumption into a wealth removal machine as corporate profits cycle through distant lands before pooling under snazzy yachts floating in azure seas around the Bahamas.

This process transformed the United States into a “company store” where no matter how hard you work, and how much productivity you achieve or exuberance enjoyed during one of the bubbles, the simple fact is that the debt-driven economy means you’ll always end up owing the house more than you make.

It’s why it makes less and less sense to divide Americans into facile political camps of red and blue. In truth, Americans are far more divided by the bottom line than by political posture or proclivity. Instead, maps of the United States should show that “the many” are stuck bobbing in a tsunami of red ink, while a very few float safely by the shoals of financial crisis on a black sea of government-guaranteed liquidity.