Okay, maybe I’m the one who is insane, but did you catch this one, in which (still?!) President Bush cautioned against regulation of the free market? The financial crisis–he said–”was not a failure of the free market system.” Huh?! So the free market works fine? So that $700 billion bailout was not necessary? Or it wasn’t because of the failures of the free market? Riiiight.

My 13-year old daughter is a smart kid, but she’s not exactly schooled in the fine details of the constitutional law. So when she heard the President on the radio utter the above wisdom, she asked if he couldn’t just be through yet. I explained that the new president can’t take office until January 20. (For those who like text citations, or if you want to impress your friends: U.S. Const. Amend. XX, Sec. 1.) She didn’t miss a beat. “Okay, so could it just be January yet?”

I guess he’s got to believe that the free market works, and that regulation is bad. But of course, that raises more questions. If it’s not a problem of inadequate regulation, exactly how did we get into this mess? That’s to say, if it’s not a lack of regulation that allowed the sale of bad mortgages, what exactly was it?

This matters to consumers for the simple reason that we’re left with this mess. We’re paying for it, and last I checked no one provided us with a sweet golden parachute. So since we get the tab, I tend to think that we should write the rules. Because there’s no way we’re going to repeat this train wreck.

If I had the ability to talk to President Bush about all this, I could cover it in four words.  “Man up, Mr. President,” would adequately convey my thoughts on the subject.

David Sugerman

I would be remiss if I didn’t note this New York Times report on prison sentences for former insiders at Milberg Weiss for their roles in the former high-flying class action law firm’s kickback scheme. Interestingly, both former partners, Steven Schulman and David Bershad, reportedly cooperated with federal investigators to provide critical detail on the law firm’s misconduct.

There’s a certain level of sad irony in this. I won’t defend Milberg Weiss. They did wrong, and the take down is the right result. But the sad thing is that their securities work was one of the few thin forms of protection when Wall Street engaged in misconduct.  So I’m hoping that these take downs are just a prelude for the next round. Because I have to imagine that there are some people at AIG, at Bear Stearns, at some of the investment firms and credit rating agencies who did similar or worse.

David Sugerman

At first glance, this prediction bodes well for consumers. As reported here in the Seattle Post-Intelligencer, Congress will move to add Wall Street financiers to the list of those who will be held accountable for funding predatory mortgages.

The technical term is assignee liability. It’s important to understand the underlying concept because it plays a big part of what’s gotten us to the present crisis.  Banks were writing ridiculous and nasty mortgages and lending money to borrowers who had no business taking on mortgage commitments.

The banks and lenders would then group and package the bad loans into large pools, and through a series of sales and transactions, parts of these large groups of stinking bad loans wound up being traded like baseball cards on Wall Street. Actually, that’s a little unfair because for reasons beyond my comprehension, baseball trading cards actually have “value.” But I digress.

For years, the Bush Administration and the Free Marketeers (AKA “The Smartest People in the Room”) opposed rules that would allow asignee liability. To their way of thinking, buyers of the stinking bad loans should never, never, never have to answer to the borrower who may have been duped or otherwise wronged by the predatory loans.

The new rules would allow the borrower to chase the assignee, the Wall Street purchaser of the stinking horrible loans. It makes sense for a number of reasons, not the least of which is that our Wall Street purchasers are the recipients of socialist handouts.  Yes, Senator McCain and Senator Martinez, I used that very word to describe the Wall Street bailout…if you want to accuse your rivals of importing socialism into American life, you best go back and explain that whole bailout thing. Ugh, better have more coffee–or less–as I’m digressing again.

But here’s the real disappointment of the Seattle PI report. This is all about the future and prevention. Not a bad thing to be sure, but it’s a deafening silence about THIS round of problems. The Bush Administration declared class warfare on the middle class when they tried to limit the bailout to Wall Street and banking failures. Consumers were left in the drink without a boat, without a paddle, and without a life jacket.  So you’re talking about assignee liability in the future.  And in the meantime, consumers are supposed to ???

David Sugerman

I’ve been amazed by the one-sided nature of the bail out relief package. The Bush plan that gave $700 billion to bail out Wall Street’s greed mongers failed to provide meaningful relief for homeowners in trouble.

I suppose it’s easy to be critical of consumers who got in over their heads by buying more house than they could afford. But if you’re going to help one side, fairness requires that you help the other.

Finally, this proposal to at least delay foreclosures. Not sure whether it has any real chance of going anywhere. But still. Consumers teetering near the brink should follow this development closely, as it may provide a means of keeping people in their homes.

David Sugerman

I’m not a big fan of the U.S. Chamber of Commerce. For years, they’ve led a concerted effort to bar the courthouse doors for ordinary Americans.  And now we learn that the Chamber is at the center of the deregulation frenzy that led to the Wall Street financial collapse.  Among the many points of interest:

• U.S. Chamber received  some $23 million (through a foundation) paid by AIG to lobby for changes in regulatory oversight
• The same U.S. Chamber champions the $700 billion bailout (Query: How much is that really going to cost us?)
• The U.S. Chamber used “tort reform” as the wolf-in-sheep’s-clothing approach to strip away post-Enron reforms.

Look at this video where the Chamber begs and bullies for the bailout.  Against the backdrop of their responsibility, this is goofy.  Shameless.

David Sugerman

So I was never a huge Who fan, but they had a way of crafting a phrase or a riff that invariably resonated far beyond the tune. The rauccous revolutionary anthem ends the refrain with this staunch declaration, “We don’t get fooled again!” That line sprang to mind as I learned more about the proposed Bush administration bailout of Wall Street.

It’s a short proposal. Text is here, courtesy of the New York Times.  Buried in the middle is this short ditty in Section 8: “Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.”

Seems to me that the very same Secretary who steered the boat into the current ice berg is a poor choice for being the guy who makes “non-reviewable” decisions.  The current administration says we’re in a crisis, but doesn’t want to provide relief to mortgage holders. They claim that immediate and bold action is necessary, but they aren’t willing to consider limits on CEO compensation. And they want no one to question their decisions?

This is the same administration that got us into this mess. It’s the same administration that sent us off to an ill-considered war based on juiced up intelligence. It’s the same one that has presided over the destruction of the Bill of Rights.  The one that corrupted the Department of Justice. They have demonstrated time and again contempt for the rule of law. No wonder they propose no review by Congress or the courts.

With a track record like that, they want no oversight as they spend $700 billion of our money?

The Who had it right. No way.

David Sugerman

Justice Rehnquist–not one of my favorites of the Supremes–once observed in an important U.S. Supreme Court opinion that you, “have to take the bitter with the sweet.” I’m reminded of those words as we’re treated to the sight of former free-marketeers engineering profoundly expensive bailouts.  We’re told that taxpayers have to foot the bill to bailout Wall Street to the tune of hundreds of–pinky to the side of the mouth a la Dr. Evil here–billions of dollars.

We “have to” because we can’t afford to let Wall Street fail. That’s the official story.

Okay gang, here’s the deal. Let us be clear that if you’re using our hundreds of billions to bail out the greedy who were gorging at the trough, they’re going to have to take some serious bitterness with their sweets.

Let’s start with regulation. First, let’s resolve from this day forward that every twit who holds forth about the problems caused by regulation, the beauty of the free market, and the need for less regulation gets this loud retort: “Oink!”

“Oink!” As in, the pigs have been feeding at the trough for years and all we got was this hundreds of billions in payments to bail them out.

Second, any bailout sure as heck better give us the profits when the recipients get back to profitability. Because you better take some serious bitter with the sweet that you’re taking from our pockets. And there is nothing so bitter to you as sharing your profits. Put another way, if we’re going to have corporate socialism when you fail, we’re going to have it when you succeed. You’re paying us back.

And finally, let’s be repaying some of those big hordes of cash that led to happy landings for executives who were piloting these ventures. That golden parachute and fat, fat compensation at Bear Stearns, at Lehman, and at all those sinking ships to come contributed to this mess. If we’re bailing you out, it’s time to cough it up. Give us back our money.

David Sugerman

On the political side, it’s a bit interesting to see President Bush cave and sign the housing rescue bill that he threatened to veto.  The president had little choice.  From what the experts say, if Freddie Mac and Fannie Mae go down, we would be looking at a profound financial crisis.

And of course, this means a taxpayer bailout.  I’ve got precious little math talent, so you should take my rough calculations with a grain of salt. But according to my pencil, when you add this bailout in the cost of the Iraq war and subtract revenue from tax cuts, we’ll be paying for this for…looks like about 407 years.  (Like I say, rough reckoning; you may get different numbers if you check my math.)

The sad truth is that this collision was brought to bear by very simple human forces. The truth is that people tend to be greedy.  And when you have a complex market, that tendency toward greed can go off in different directions. It will motivate lenders to loan money they should never loan. It will push borrowers to sign deals that are too good to be true. It will drive investors to buy junk securities that are nothing more than piles of bad debt. Everyone who gets a cut has an incentive to push and grab.

That’s where regulation comes in.  While market regulation isn’t perfect, it is the best way of controlling unchecked greed that gets you down into the multi-trillion hole that we will now bequeath to our children and grandchildren. I wonder if the president understands this now? Or is this profoundly expensive rescue going to be nothing more than the cost of doing future business?

I’m curious how the free market purists are reacting to this deal. I imagine that most concede that this rescue was inevitable. Regardless of whether they think the rescue was inevitable, I hope that a few have come to understand that unregulated markets don’t work in a complex world.

This issue of unregulated commerce is actually important to the work that I do.  Here’s how.

When a manufacturer sells an unsafe product that causes a profound injury, I have to come try to put the pieces back together.  That’s a claim and/or lawsuit process.

The purpose of that process is to assign responsibility for unlawful conduct and pay the injured person for his or her harms and losses.  Of course, we would all be better off if the injury didn’t happen. Reasonable regulation of product safety is the best way to prevent injury. And for those who really dislike trial lawyers, there is an added incentive: when regulations promote safety and injuries decrease, people like me have less work. That’s an outcome I’m ready to embrace.

I would really like to hear from free market advocates about whether this rescue was essential and whether this costly stain doesn’t undermine the argument that unregulated markets are essential.

David Sugerman

The analysis came from my good friend, Oregon trial lawyer Robert Neuberger. As I was heading down toward a full-on rant over the Bear Stearns rescue, Robert pointed out that we’ve arrived in an era of Wall Street vs. Main Street.

Today’s news couldn’t make the point any better. For full ironic effect, you have to go old school and look at today’s (April 4, 2008) Oregonian (that would be a newspaper with newsprint) D-2. Two articles sit one above the other, and the headlines highlight the Neubergarian point that it’s Wall Street vs. Main Street.

Top article, entitled “Fed chief defends Bear Stearns rescue” is an account of Federal Reserve Chair Bernanke’s appearance in front of the Senate Banking Committee. Just below is “Homeowner aid provision dies,” an account of how the mortgage relief act provides $25 billion in tax relief to businesses but will not give homeowners the ability to restructure mortgages in bankruptcy.

Bear Stearns, we’re told, had to be rescued or we would face grave consequences. Fair enough. So we went with the old government supported bailout. Not necessarily a bad play, given the stakes. But consumers are left to their own devices and will lose their homes to foreclosure.

In the trenches, I hear all the time about choices that consumers made when they signed agreements, when they opted to borrow money, when they took on obligations. No one will rescue the consumer, and it looks like Congress and the current administration isn’t about to start.

My beef with all of this is very simple. If you are going to give corporate welfare to the rich, then consumers should get like-kind relief.

Using cold contract logic, Bear Stearns and its investors made choices and they should suffer the consequences. That’s a little absurd, in that it reduces very complex problems to black and white platitudes. But the same is true of consumers who signed up for horrible mortgages on a wing and a prayer. The deals were bad, but you cannot and should not shove cold contract logic down the throats of consumers if you are unwilling to do the same thing to Bear Stearns and Wall Street.

David Sugerman

Today’s news reports that Senate reached a compromise on the subprime mortgage relief for borrowers. The Senate measure excluded a provision opposed by banks that would have amended the bankruptcy laws to allow borrowers in trouble to stay in their homes.

The Center for Responsible Lending estimates that 20,000 subprime mortgage holders lose their homes every week. That number doesn’t do justice to the impact. Every foreclosed houme is in a neighborhood, and every neighbor loses value when neighborhood homes go into foreclosure. Every foreclosed home is in a community, and every community bears the burden of the added strain on the community safety net when a family loses its home.

But the Senate’s choice is more galling than tragic. The protections that consumers sought are the same ones available to commercial real estate owners and yacht owners who go into bankruptcy. When things go bad for the yachts owner, the loan is restructured in bankruptcy, and the yacht owner keeps the boat and pays the restructured loan. But not so for the subprime mortgage holder.

The last galling piece is the double-standard for failure. When banks make bad loans and get heavily invested in bad, unregulated securities, Wall Street and the federal government ride to the rescue. But subprime mortgage holders are on their own. Seems only fair that if we’re going to bailout one, we should bailout the other.

David Sugerman