David Axelrod’s Quaint Idea of Middle Class “Security”

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There’s a lot to despise about David Axelrod’s announcement of Obama’s capitulation to the oligarchs on tax cuts, not least that he made this announcement on the same day Obama’s Catfood Commission Chairs started the process of stealing from seniors to “fix” our deficit.

Let yesterday be marked as the day when a nominally Democratic President began to dismantle Democrats’ signature policy achievement, social security, so he could shovel $700 billion to the very rich.

But I was particularly irked by what Axe described as “middle class security.”

“There are concerns,” he added, that Congress will continue to kick the can down the road in the future by passing temporary extensions for the wealthy time and time again. “But I don’t want to trade away security for the middle class in order to make that point.

Here, Axe is defining “security for the middle class” as tax cuts. Not “jobs.” Not “access to health care, not just insurance.” Not “a guarantee a bankster can’t just foreclose on their house with a trumped up piece of paper.” Not “some basic safety net for retirement.” But “tax cuts.”

According to Axe, we have to shovel even more money on the already rich so as to ensure the “security” of the middle class by giving them a tax cut.

And while I agree that raising middle class tax cuts at this point would be bad for the economy, it’s not the worst thing that could happen to the economy.

In fact, the worst thing that could happen to this economy may well be passing legislation that continues to hollow out of the middle class and with it increasing the massive income inequality that continues to subject the American people to the craven demands of a few very rich people. That is, precisely what Axe and Obama have now agreed to do.

These men either don’t know or don’t give a damn about the security of the middle class.

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Mark Warner’s Chocolate Fountain Remorse

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Once upon a time in 2006, a dirty fucking hippie blogger had an opportunity to ask aspiring presidential candidate Mark Warner a few questions. Mark Warner had just dedicated part of a speech to talking about how Iran was the biggest WMD threat. So with her questions, the dirty fucking hippie blogger asked Mark Warner how, if the NIE had said Iran was years away from having nukes whereas Pakistan and its al Qaeda favoring Generals and unstable government already had nukes, Iran could be the biggest WMD threat. Warner then listed three reasons why Iran was the biggest WMD threat: its support of Hezbollah and Hamas, its nutty president, and its aspirations for hegemony in the Middle East. “But none of those things are WMD,” the blogger said.

Matt Bai, who observed the entire exchange, would later blame the dirty fucking hippie’s questions (which, after all, proved correct on several counts and served mostly to highlight to Warner how blindly he had embraced a popular talking point) for single-handedly driving nice moderate Mark Warner from the presidential race and with him potentially the ability to succeed as a party.

The dirty fucking hippie blogger took from that exchange the following: 1) Mark Warner doesn’t have the analytic ability to understand what threatens this country 2) Matt Bai tends to spout stupid centrist ideology even when reality proves him wrong.

More than four years have passed since that exchange. In that time, Warner became a centrist Senator. As a Senator, he has been one of those who claimed no one knew the financial crisis was coming. And he was part of a group of centrist Senators that stripped the too-small stimulus bill in early 2009.

In other words, Warner continues to be unable to identify real threats to this country. It’s in that context–and specifically in the context of picking a time of almost 10% unemployment to cut the deficit–that Mark Warner chose to equate the “far left” of his own party with the TeaBaggers.

But the question will be will the super-left on my party – the MoveOn crowd in my party – and the Tea Party crowd on the other party, you know, they don’t compromise, so you know, I for one am…you know, there were too many times I bit my lip in the first year, or bit my tongue…I’m done…

[snip]

But I think an equal threat to our country’s national security is that we don’t get our balance sheet in order.

Now, Mark Warner and his friends that maintain the deficit as a bigger threat than a stagnant economy are precisely what we dirty fucking hippie bloggers point to as the problem with the last two years. Because these centrists put their own pet theories ahead of real analysis of what our country needed, the legislation they passed failed to do the job. It’s the economy, stupid, and the economy is still so shitty at least partly because deficit scolds like Mark Warner cut the already too-small stimulus package back when it could do some good.

Which is what Matt Bai fails to understand with his piece trying to refute the theory that Democrats failed because they catered to people like Mark Warner.

The theory here, embraced by a lot of the most prominent liberal bloggers and activists, is that centrist Democrats doomed the party when they blocked liberals in Congress from making good on President Obama’s promise of bold change. Specifically, they refused to adopt a more populist stance toward business and opposed greater stimulus spending and a government-run health care plan. As a result, the thinking goes, frustrated voters rejected the party for its timidity.

No, Matt, you misunderstand completely (or simply build another of your favored straw men). The problem is not that “frustrated voters rejected the party for its timidity.” Frustrated voters rejected the party because its watered down legislation didn’t do the job. And the centrists were the ones that watered down that legislation and made it ineffective.

And the biggest problem both Mark Warner and Matt Bai make is in pretending that they’re stuck in an ideology-free zone between two extremist ideologies. Leaving aside the TeaBaggers, whose ideology was very diverse up until the Koch brothers made them a wholy owned but less ideologically consistent subsidiary, this is not about a left ideology and a right ideology and the nice non-ideological centrists in between. Rather, this debate is about progressives who insist that legislation not be compromised by a blindly ideological insistence on things like deficit cutting, all because some think tanker has been paid to claim that issue, like Iran, is a greater threat than millions of Americans losing their jobs and homes. It’s about efficacy versus the flabby centrist ideology that got us into this mess.

What Bai and Warner choose not to understand is that centrism is an ideology even more stubborn than the left or right they love to attack, but an ideology that got us into the mess we’re in now, both fiscally and electorally.

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Tax the Deadbeats, Tax the Banksters

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The narrative the banksters and their enablers have used to fight a foreclosure moratorium focuses on property values. If we put off foreclosures, they argue, it’ll have detrimental effects on the local community, not least by (continuing to) drive down local property values.

Now, the entire premise ignores the fact that the banksters have been sitting on a bunch of shadow inventory for years; the banks have been in no rush to foreclose on these properties and write down the losses, and Treasury has been happy to string out foreclosures to avoid a hit on the housing market.

But there’s another problem with that narrative.

If property values are falling because the properties are falling into disrepair, that’s partly the fault of the banks.

If property values are going down because no one is mowing lawns and preventing squatters, then that’s partly because banks are deadbeat neighbors who are not paying for the upkeep on the houses they own.

And, as this post from Mike Konczal (subbing for Ezra) notes, those deadbeat banks are costing local communities a fortune.

At $20,000 a pop, three vacant, unsecured and abandoned properties is the same as a teacher’s salary.

As Konczal explains, LA recently figured out a way to do something about the deadbeat banksters ruining our communities:

Given the high economic and social costs, the Los Angeles City Council, led by community activists including Alliance of Californians for Community Empowerment and others, as well as city workers who are members of SEIU Local 721 and L.A. Council member Richard Alarcon, did the sensible economic thing: They proposed a tax on abandoned and unkempt properties.

The details: “L.A.’s City Council recently passed a ‘foreclosure registry’ ordinance, requiring lenders to maintain foreclosed properties or be fined $1,000 per day, up to $100,000 a year. Lenders will have 30 days to fix problems before fines set in.”

What a sensible and elegant policy solution. This encourages banks to find suitable negotiations with homeowners to keep people in their homes. It has a serious stick to require banks to actually obey the law when it comes to the destruction of blight in neighborhood.

It works because everyone is well-incentivized to do their jobs; the city will collect money, which it loves to do, if the banks don’t comply. Citizens have a means to report blight, which they want to do to keep their neighborhoods well functioning and safe. In fact, cool online innovations like SEIU’s “Hoodwinked LA” Web page, which allows citizens to track foreclosed properties to report to city officials, have been created to empower people. And banks will avoid destroying neighborhoods out of neglect lest they pay a tax, which they had no incentive to do previously. The thing practically runs itself.

Not only does this policy have important benefits for local communities, not only does it incent everyone to modify loans and prevent foreclosures.

But it highlights the fact that banks are the deadbeats destroying your local community, not individual homeowners.

I hope as other communities follow LA’s example, they call this the “Deadbeat Bank Tax.”

Update: Via Atrios, here’s a heart-breaking story of a young boy who died in a foreclosed home’s pool. When his parents tried to sue for wrongful death, they couldn’t sort out who actually owned the house.

It took months for the family’s attorney, Janet Spence of Pembroke Pines, to sort through the property’s muddied chain of title possessions and transfers. At one point, Spence said, the home had two separate foreclosure actions pending simultaneously.

Spence also has faced some of the same paperwork irregularities that have put the nation’s foreclosure cases on indeterminate hold.

Several documents transferring the mortgage appear to be flawed or possibly fraudulent, with conflicting dates. Two documents show that the mortgage was transferred from one mortgage company to an affiliated company in November 2007 and again in February 2008.

One of the questionable documents was generated by the Florida Default Law Group in Tampa, one of four law firms that are under state investigation for allegedly “fabricating and/or presenting false and misleading documents in foreclosure cases,” according to the Florida Attorney General’s Office.

COMPLEX TRAIL

Because of the confusing paper trail, Spence has named 20 defendants in the case. They include banks that once owned the mortgage, companies that serviced the loan, property maintenance companies and even a company that was holding the mortgage for the banks.

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Obama Sidles Up to the People Not Creating Jobs

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From the Department of reading the wrong message in an election is this news, of Timmeh Geithner meeting with the Chamber of Commerce’s odious Thomas Donohue to talk about international issues (read: “let’s talk about other countries we can ship American jobs to”).

But this week, the Treasury secretary, Timothy F. Geithner, met with the chief executive, Thomas J. Donohue, to discuss international economic issues. In his news conference on Wednesday, Mr. Obama came close to conceding the chamber’s main argument, that American businesses had concluded — wrongly, in Mr. Obama’s view — that his policies were antibusiness.

“I think business took the message that, well, gosh, it seems like we may be always painted as the bad guy,” Mr. Obama told reporters. He acknowledged that a relationship with the business community had not been “managed by me as well as it needed to be.”

[snip]

“I’ve got to take responsibility in terms of making sure that I make clear to the business community as well as to the country that the most important thing we can do is to boost and encourage our business sector, and make sure that they’re hiring,” Mr. Obama said. “We do have specific plans in terms of how we can structure that outreach.”

The outreach includes the meeting this week between Mr. Geithner and Mr. Donohue, according to an administration official briefed on the discussions. The pair talked about the president’s coming Asia trip, including issues relating to the Group of 20 economic meeting, China and South Korea, said the official, who spoke on the condition of anonymity to discuss the private meeting.

Now, on its face, this is about Obama’s renewed push to sign a Free Trade agreement with South Korea, a country with no intention of engaging in Fair Trade with us.

But the Administration appears to want it to symbolize something larger–outreach to the people who have to start creating jobs to get our economy running again.

There’s a problem with that.

First of all, there’s the problem of the national Chamber’s increasing irrelevance to real American businesses. Individual companies are finding the Chamber’s willful ignorance to be detrimental to their business interests and general grounding in reality. Local Chambers are making an explicit point of distinguishing themselves from the national Chamber. And it’s not really clear whether the US Chamber of Commerce represents American companies more generally, or rather foreign business.

So at a time when both local Chambers of Commerce and individual corporations are signaling the national Chamber does not represent their interests, then why choose the Chamber as target for outreach? Why not reach out to those splintering from the Chamber’s explicitly anti-Democratic stance?

Furthermore, the companies whose interests the Chamber largely did boost this election have no interest in hiring. With money so cheap (thanks Helicopter Ben), they’re better off just playing more financial games than actually making something someone wants to buy.

Sure, Obama needs to listen to businesses to learn a little something about what will keep or create jobs in this country. But talking to Thomas Donohue about how to ship jobs away is not the way to do that.

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Neo-Feudalism and the Housing Crisis

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A number of people have linked to the part of this Joseph Stiglitz interview where he says we won’t fix the economy without some good old fashioned prosecutions. But I wanted to highlight where he describes the way our system of debt imposes a kind of indentured servitude on the debtors.

Can we draw a direct line from the outsize influence of the executives and the bankers — because these skewed incentives and penalties out of whack didn’t just arise out of a vacuum. How did we get to where we are?

It’s clearly the influence of campaign contributions and lobbyists. Let me give you another example of where the legal system has gotten very much out of whack, and which contributed to the financial crisis.

In 2005, we passed a bankruptcy reform. It was a reform pushed by the banks. It was designed to allow them to make bad loans to people to who didn’t understand what was going on, and then basically choke them. Squeeze them dry. And we should have called it, “the new indentured servitude law.” Because that’s what it did.

Let me just tell you how bad it is. I don’t think Americans understand how bad it is. It becomes really very difficult for individuals to discharge their debt. The basic principle in the past in America was people should have the right for a fresh start. People make mistakes. Especially when they’re preyed upon. And so you should be able to start afresh again. Get a clean slate. Pay what you can and start again. Now if you do it over and over again that’s a different thing. But at least when there are these lenders preying on you should be able to get a fresh start.

But they [the banks] said, “No, no, you can’t discharge your debt,” or you can’t discharge it very easily. They have a right, now, to take 25% of your before-tax income. Now imagine what that means. Let’s assume that you wound up, as it’s not that hard to do, with a debt equal to 100% of your income. You’re making $40,000, and your debt is $40,000. You have to turn over to the credit card company, to the bank, $10,000 of your before-tax income every year. But, the banks can now charge you 30% interest.

So what does that mean? At the end of the year, you’ve paid the bank $10,000, a quarter of your income. But what you owe the bank has gone from $40,000 to an even larger number because they’re charging you 30%. So you’re debt is larger. So the next year you have to give a quarter of your income again to the bank. And the year after. Until you die.

This is indentured servitude. And we criticize other countries for having indentured servitude of this kind, bonded labor. But in America we instituted this in 2005 with almost no discussion of the consequences. But what it did was encourage the banks to engage in even worse lending practices.

We’ve made it so difficult for individuals to discharge their debt and have this fresh start, and yet it is just taken for granted that a corporation or a company can blow up and then they can file for bankruptcy and then they can start over.

We give rights to corporations that we don’t give to ordinary Americans. One of my proposals in my book Freefall — one of the ways to deal with this foreclosure problem, the fact that one out of four Americans who have a mortgage are underwater: They owe more money on their home than the value of their home. Their home used to be what they used as the reserve for paying their kids college education, for their retirement. Now it’s a liability, not an asset.

So what I’ve argued is, we have these laws called Chapter 11 to give a fresh start to corporations. We say it’s very important to be able to do this quickly, we want to keep jobs, we want to keep the corporation going as an ongoing enterprise.

Families are as important as corporations. Keeping kids in school, not forcing them out of their home, keeping the community together, is certainly as important as keeping a corporation alive.

He calls this indentured servitude, but I call it (because I’m also factoring things in like the privatization of security and decline of the nation-state) neo-feudalism. In either case it’s an observation that people who used to be citizens have been turned into profit centers for the very powerful. Through a variety of means, these very powerful entities have secured the ability to oblige those profit center people to turn over large chunks of their  worldly gain for the foreseeable future, and even though those powerful entities offer little in return, the people bound to them have little hope of escape. Hell, in many states, mortgages serve as a similar kind of legal bind to a piece of territory, one ultimately owned (if they can prove they have the note) by these powerful entities.

And as Stiglitz notes, a key to pulling this shift off is to write the law to favor the powerful entities and disempower the weak. And (as he points out elsewhere in this interview) to make sure that only those powerful entities have access to justice.

Yet, as a recent study made clear, the access to justice for the poor in this country rivals that of Mexico and Croatia.

In January 2008, well before the financial crisis became an emergency, I asked Chuck Schumer why Democrats didn’t repeal the 2005 Bankruptcy Bill Stiglitz addresses above. I pointed out that repealing it might mitigate the problem of foreclosures and with it, stave off a larger crisis.

Schumer responded by saying we did not yet have the votes to make the kind of substantive overhaul that was necessary. We had to wait, he said in January 2008, eight months before foreclosures contributed to the the collapse of financial system, until 2009, when we had a larger majority.

We just lost the majority that Schumer claimed we would use to repeal the bankruptcy bill. During the entire time the Democrats had the majority, families were losing their homes in ever increasing numbers.

And yet Democrats never used their vaunted majority to stem the advance of neo-feudalism in this country.

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Team Auto Never Talked to Team Healthcare Reform

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In Steven Rattner’s book, he describes newly elected Barack Obama asking his advisors “Why can’t [the US automakers] make a Corolla?” Implicitly, of course, he was asking “why can’t they make a Corolla in the United States.” His economic advisors, according to Rattner, admitted they didn’t know: “We wish we knew.”

The correct answer to the question would point to a number of things. Executive stupidity would be one important cause. Legacy costs would be another. Market structure and profitability requirements would be another. Weak branding would be another. You could even–pointing to the Ford Focus–argue that one of “them” can make a Corolla, or something reasonably competitive.

But one of the factors that partially explains why American manufacturers can’t make a Corolla would be healthcare costs. (With Toyota’s move of the Corolla-based Matrix production to Canada, you could even argue that Toyota can’t make a Corolla anymore, not here, anyway, even putting aside the quality problems the Corolla has had of late.)

Now, back on the campaign trail, Obama admitted that healthcare is one of the things that makes our companies less competitive. And in his big address to Congress on healthcare on September 9, 2009, Obama even singled out the auto industry as one which our exorbitant healthcare costs made less competitive internationally.

Then there’s the problem of rising costs. We spend one-and-a-half times more per person on health care than any other country, but we aren’t any healthier for it. This is one of the reasons that insurance premiums have gone up three times faster than wages. It’s why so many employers – especially small businesses – are forcing their employees to pay more for insurance, or are dropping their coverage entirely.

It’s why so many aspiring entrepreneurs cannot afford to open a business in the first place, and why American businesses that compete internationally – like our automakers – are at a huge disadvantage.

Which is why I was surprised to see no discussion about healthcare (as opposed to VEBA, the fund the UAW now uses to pay for retiree healthcare) in Rattner’s entire book.

None.

It seemed odd to me that, at a time when our country was rethinking our healthcare system, and at a time when the government was spending a boatload of money to try to make our auto companies competitive again, the teams pursuing those initiatives wouldn’t at least touch base, to test whether healthcare even addressed the problems that contributed to the automakers difficulties.

So I asked Rattner during the book salon.

emptywheel: Aside from a technical discussion of VEBA (for those not familiar, that’s the fund that the Big 2.5 negotiated with the UAW, which the UAW now uses to pay health benefits for retirees, which was a critical issue during negotiations), there was virtually no discussion of health care costs and the way that contributes to profitability (or lack thereof) for car companies that manufacture in the US, as reflected most obviously in Toyota’s repeated decisions to source from Canada because it offers the best mix of highly skilled workers and affordable health care.

Is that in fact right? No one talked about the burden health care costs put on manufacturing in his country during the bailout? I find that particularly shocking given that the bailout took place at the time when all the policy decisions on health care reform took place, and if anything, health care reform will make manufacturing health care costs worse.

Rattner: I wasn’t involved in the broader discussions about health care reform, nor am I a health care expert. We were certainly aware of the burden that health care costs put on the Detroit 3, but the creation of the VEBA’s solved that problem with respect to the retirees.

emptywheel: Right. But in all your coversations [sic] with Geithner and Summers and Rahm, was there honestly never a discussion about health care? No comment about ways the health care reform could have been formulated to contribute to the success of the bailout (and, more importantly, make sure that the effort ended up keeping the jobs that were saved in the US).

Rattner: No. There simply wasn’t time.

I understand the time constraints of all this. Though one of the parts of healthcare reform that will most directly affect the automaker healthcare costs, in a bad way, is the excise tax, and that wasn’t finalized until months after Rattner left government, which left five months for him to remind his buddies in the White House that their plan for healthcare was not going to bring down costs for US manufacturing companies, and it might well make them higher. Furthermore, it seems like an important enough issue–given the investment in both programs–to make time to address this issue.

Then again, I guess the healthcare team was too busy talking to Pharma to make time to talk to manufacturing.

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Want to Sue the Banksters? Ask WhereIsTheNote

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Remember WhereIsTheNote?

In the face of mounting evidence that the banks foreclosing on homes did not comply with legal requirements during securitization of mortgages and therefore don’t have legal standing to foreclose, the SEIU and some community organizations teamed together last month to create an online tool that anyone can use to ask their mortgage servicer where their note is. By helping homeowners proactively check whether their bank has the right paperwork, it gives them more power in the event of a foreclosure.

The site launched just over three weeks ago. 200,000 people have visited the website; around 15,000 have used the tool to ask their bank for their note (I’ll have a more exact number shortly).

What has happened since gets very interesting. In the first few days, some banks responded quickly and in apparent good faith, some admitting there was a problem, and others sending what they claimed was the note, but was either something else entirely, or clearly did not meet the requirements for transfer.

But as banks realized those first requests were not isolated requests, two things happened. Either banks have sent back a response saying the homeowner had no right to see their note. Or, banks have not responded at all.

Here’s where things get interesting. The WhereIsTheNote-generated letters invoke the Real Estate Settlement Procedures Act (RESPA). Section 6 of RESPA dictates how loan servicers must reply to consumer complaints about their loan.

Section 6 provides borrowers with important consumer protections relating to the servicing of their loans. Under Section 6 of RESPA, borrowers who have a problem with the servicing of their loan (including escrow account questions), should contact their loan servicer in writing, outlining the nature of their complaint. The servicer must acknowledge the complaint in writing within 20 business days of receipt of the complaint. Within 60 business days the servicer must resolve the complaint by correcting the account or giving a statement of the reasons for its position. Until the complaint is resolved, borrowers should continue to make the servicer’s required payment.

A borrower may bring a private law suit, or a group of borrowers may bring a class action suit, within three years, against a servicer who fails to comply with Section 6’s provisions. Borrowers may obtain actual damages, as well as additional damages if there is a pattern of noncompliance. [my emphasis]

In other words, RESPA says that if homeowners write their servicer and say, “I have a problem with the way you’re servicing my loan,” the law requires that the bank acknowledge that the homeowner has written that letter within in 20 days. And it requires that it resolve that complaint within 60 days. If banks don’t do so, homeowners can sue.

So, as I said, just over three weeks after people started using this site, banks have been writing back and either telling homeowners that the complaint basically saying “I have doubts about whether you actually have legal standing to collect my mortgage payments” doesn’t qualify as a “problem” under RESPA. Here’s how IndyMac made such a claim in one response letter.

Although your fax references the response as RESPA Qualified Written Response eligible, your request actually does not qualify. The statute and case law require that the correspondence disputes the servicing of the loan and requires the sender to provide the servicer specific facts that would enable the servicer to investigate and respond. For instance, a dispute may involve a misapplication of a payment or a miscalculation of a monthly escrow amount. The statement that you are concerned about what you may have heard on the news does not qualify as a dispute with the servicing of your loan. Consequently, we are not subject to the response requirements set forth in the Real Estate Settlement Procedures Act.

In other cases–such as Citibank in my case–the bank appears to have simply let the 20-day deadline pass without a response.

Now, the genius of the WhereIsTheNote campaign is twofold. First, for the first time, someone is collecting an independent set of data about whether banks have a right to collect payment on the loan or not (there is privately available data, but it’s very expensive). WhereIsTheNote has already recognized, for example, that Bank of America and its subsidiaries have adopted a uniform claim that RESPA doesn’t apply in this case (of course, Bank of America is one of the most suspect banks for note problems). And WhereIsTheNote is collecting information that will show that not just those houses in foreclosure, but performing loans have note problems, proving that this is not an issue of “deadbeat” homeowners, but rather banks that are playing fast and loose with private property rights.

But more interesting is enforcement. As the section I cited above makes clear, borrowers whose banks refuse to respond to a RESPA request can sue for damages.

And as it happens, the Attorneys General in all 50 states are already investigating whether the banks are engaging in foreclosure fraud to cover up securitization problems. Which means there are already lawyers out there ready to take on the banks that do things–like refusing to respond to homeowner RESPA requests. WhereIsTheNote will be referring these RESPA non-responses to the AGs to respond accordingly.

If you haven’t already done so, I encourage you to ask your servicer WhereIsTheNote. Because–on a day when all else seems hopeless–it may well be a means of holding the banks accountable for the shitpile they made of our nation.

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An Awfully Painful Way to Convince the President Our Economy Is Not Moving

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Remember when Robert Gibbs justified his attack on the professional left by suggesting that they didn’t understand–but the rest of the country did–that Obama had gotten our economy moving again? Remember Recovery Summer, Obama’s effort to convince Americans that the economy had turned around? Well, we’ve already seen that voters don’t take their understanding of our economic state from the same wonky metrics the White House does.

You think the White House is beginning to understand that no matter how many times you repeat the news that the economy is good, voters know better?

Six in 10 voters named the economy as the nation’s No.1 problem. Roughly four in 10 said their family’s financial condition has worsened under Obama. About six in 10 said the country is on the wrong track.

I assume yesterday’s defeat is the kind of metric that will finally make it clear to the White House that the economy sucks and people are pissed about it.

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Citi’s Fear

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I wanted to return to a detail I mentioned in yesterday’s book salon. As I noted, in his book on the auto bailout, Steven Rattner described Citi as being worried during the Chrysler negotiations that retail customers would retaliate if Citi played hard ball.

Bankers for Goldman and Citi had advised [JP Morgan Chase VP and the Chrysler bondholder’s lead negotiator] Jimmy Lee to make the best of a bad situation. Privately they felt his brinksmanship was embarrassing and potentially costly. Citi especially wanted to avoid a liquidation. Its analysis showed it would recover no more than 20 cents on the dollar in that instance. Citi also feared losing business in its branches in states like Michigan and Ohio where consumers might blame it for Chrysler’s demise. (173)

That didn’t make sense to me given that Citi doesn’t have branches in MI and OH; the closest actual branches are in Chicago. Compare that to Chase, which just took over from Comerica as the biggest bank in MI by deposits and was presumably second at the time of the bailout negotiations. Citi should only fear retaliation from consumers elsewhere, in those urban areas that actually have Citi branches, or they should fear retaliation some other way, presumably through their credit card business. I asked Rattner why Citi was worried, but JP Morgan Chase was not, given its much greater involvement in the auto states. He responded, “Yes, they were definitely worried.”

Frankly, I don’t know what to make of this. Given the context of the claim–in which Goldman and Citi are portrayed as talking Jimmy Lee down from a hardass negotiating position–JPMC appears not to have been sufficiently worried to change its behavior. And the Citi claim doesn’t make sense on its face. Perhaps Citi was worried about something else. Perhaps they were just more worried because they were insolvent? There are a few details he pretty clearly got wrong in his book (such as his claim that Nissan’s consideration of a deal with Chrysler was secret), but this seems instead like one of the abundant examples of where Rattner is an unreliable narrator. Rattner chose to portray Citi as worried (and quickly agree the hard-bargaining JPMC was, too), but it’s unclear whether that was really true or just nice spin on the banks.

What Rattner probably didn’t know was that FDL was trying to increase this worry at the time by encouraging people to take their money out of Chase. That was a mostly unsuccessful effort (let me tell you, Chrysler is  no more popular in this country than the big banks) to target the banksters for actions that hurt the communities they’re in.

As unsuccessful as our effort was in terms of numbers, if Rattner-the-unreliable-narrator’s claim has any basis in fact, then our effort to pressure JPMC to behave better worked. Sort of.

Since then, Arianna’s Move Your Money campaign has more successfully advocated for people and institutions to move their money out of the big banks. By April, they claimed $5 billion had been moved. And it does seem like some of the banks are losing market share to smaller banks.

The largest banks in Michigan are losing market share and Chase Bank now has the most deposits in the state, according to new data released Thursday by the Federal Deposit Insurance Corp.

As of June 30, the five biggest banks in Michigan — Chase Bank, Comerica Bank, PNC Bank, Bank of America and Fifth Third Bank — accounted for 55% of all deposits in the state. That’s down from 57.3% on June 30, 2009.

I raise all this because of another interesting discussion about whether consumer action might more effectively target the banks. Via Yves Smith, I found this Playboy article on Edmundo Braverman’s WallStreetOasis.com’s proposal on How to Destroy a Bank (Yup, it appears you have to have a pierced navel and no pubic hair to be a Playboy model these days).

This article set forth a plan for how consumers could destroy one of America’s four largest banks. Customers would deliver a series of escalating threats against Wells Fargo, Bank of America, JPMorgan Chase and Citibank, demanding policy changes. The threats would culminate in a series of flash-mob bank runs that targeted one of the banks.

In a comment in Yves thread, Braverman acknowledged his idea was a thought exercise to take Move Your Money the next step.

The whole thing was inspired by Arianna Huffington’s “Move Your Money” idea. I thought it was a good idea, but not one that would be dramatic enough to produce any changes in the way the banks did business. So I asked myself, “What would have an impact on the banks?” and that’s when I came up with the Tank-A-Bank plan.

It was always just a thought exercise, and never something I advocated.

Yves seems to be thinking more about this; what can consumers do that won’t get them jailed as terrorists but will get us to a point where the finance industry isn’t dragging our country down even while stealing our money in the process?

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FDL Book Salon Welcomes Steven Rattner, Author of Overhaul

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I come to Steven Rattner’s Overhaul: An Insider’s Account of the Obama Administration’s Emergency Rescue of the Auto Industry from a very particular perspective. As a Michigander whose husband still works in the auto industry and whose town has benefited from battery subsidies, I’m a grateful direct beneficiary of the work the Obama Administration did to save the auto industry. But that also means I read this book, which might have been subtitled, “Wall Street gapes at Detroit” from the perspective, “Detroit gapes back at Wall Street.”

The Key to the Bailout: Section 363

There are key parts of the story I was eager to read, particularly the inside details on how Team Auto brought GM and Chrysler through bankruptcy in such short time. The decision–which Rattner traces to a suggestion he made in December 2008–to use Section 363 of the bankruptcy code is what made the whole bailout work. It allowed Team Auto to move the viable parts of Chrysler and GM into new companies, leaving much of the debt and underperforming parts of the companies (like Saturn or Pontiac) behind. As Rattner describes, preparing for 363 took a lot of negotiations with stakeholders–notably the UAW and bondholders–ahead of the actual bankruptcy filings to bring the time they’d spend in BK down from the 6 to 15 months originally projected, to the month or two it ultimately took. Much of the book’s narrative is about the deal-making Rattner himself led. Some interesting details of that deal-making: that Tim Geithner instructed Rattner not to make any special demands of TARP recipients who were also Chrysler bondholders, that Citi feared consumers would take their branch banking in MI and OH elsewhere if it played hardball, and that JPMorgan Chase’s chief negotiator Jimmy Lee,

demanded to know why, if the government thought banks important enough to give them tens of billions in TARP money, it wanted to squeeze them on [the Chrysler] deal.

In additional to this central drama, Rattner provides worthwhile details of what he learned over the course of this intervention. Some of these are details widely known in car country, but dismissed by much of the rest of the country: that GM had closed most of the gap in labor costs with transplants by the beginning of the restructuring, that GM plants really were competitive in terms of productivity, and that trimming the number of dealers was crucial to the success of the restructured companies. Rattner also added to my understanding of why GM needed help: he described the sheer ineptitude of GM CFO Ray Young and what Rattner describes as the ineffectiveness of GM’s chief lobbyist.  And the last chapter, in which Rattner provides a partial explanation for the quick departure of Ed Whitacre, answers some, but not all, of my questions about the transition from GM CEO to CEO over the last two years.

One Missing Detail: Cerberus’ Role

One part of the story I wish Rattner had told more fully is the role of Cerberus in the bailout. There were a number of questions about Cerberus’ role in the initial negotiations with the Bush White House, particularly since that initial loan underfunded Chrysler in comparison to GM. But Rattner tells a story that is very favorable to Cerberus. For example, he rather amusingly attributes Cerberus’ offer–in December 2008–to just hand over Chrysler to the government for a dollar, to patriotism. Rattner makes that claim by neglecting any mention of Cerberus’ own desperate straits at the time. He doesn’t mention, for instance, that Cerberus had limited withdrawals from some funds, citing a desire for liquidity and invoking a “‘perfect storm’ in the auto and housing sectors.” And it’s over a hundred pages after his description of that December 2008 offer before he mentions GMAC’s successful effort to gain bank status and receive TARP funds, a move approved in that same December period and which has been an area of TARP that has come in for particularly sharp criticism. It turns out that private equity guy Steven Rattner tells a story that focuses primarily on the incompetence of manufacturing companies, even though private equity fund Cerberus’ failures and demands for a free ride were very much a part of the story of the auto bailout.

And these areas, where Rattner’s Wall Street perspective displays his own biases, are as interesting as the details about the bailout.

The Cost and Benefits of an Outsider

Take Rattner’s inconsistency over whether appointees overseeing industries should have any expertise in those industries. On page 48, Rattner repeats his complaint about politicians (in this case Debbie Stabenow and Carl Levin) questioning his qualifications for the job. But then, on the very next page, he endorses a view that the Treasury Secretary had to be someone with credibility in the financial world, precisely the equivalent of what Stabenow and Levin were asking for the Auto Czar position.

Essentially, only Larry and Tim had the necessary government experience, along with the credibility vital in the financial world.

This unquestioning endorsement of an insider for the finance world is shortly followed, on page 52, by one of the details that shocked me the most in the book: the report that neither Rattner, nor Geithner, nor Summers were cognizant of the degree to which the auto slowdown would affect (and was already affecting) the suppliers.

Automotive suppliers started to fail, which was how I discovered that the scope of my assignment was much broader than I’d anticipated. GM and Chrysler had dominated the conversations with Tim and Larry. None of us appreciated that, with auto sales down 40 percent, the collateral damage among related businesses would be vast.

Now, the stress the suppliers were (and are) under was a known fact to anyone with a basic understanding of the industry. The Center for Automotive Research (a group Rattner later relied on for industry analysis) produced a widely-cited report on the economic consequences of an auto collapse in November 2008, which projected the dire impact on suppliers in case of an auto contraction. And reports explaining Toyota’s support for a bailout covered the supplier issues as well. Yet, even as an inexperienced Rattner was learning this well-known fact on the job, thousands of supplier employees were already losing their jobs. (Rattner describes a similar rather belated discovery–how the financial collapse had dramatically hurt the auto finance companies, and with them the debt-driven market they supported–on page 145.)

Mind you, Rattner makes a good case in this book for bringing in outsiders to restructure any industry the government bails out, even while the evidence he presents, with this story and a few others like it, hint at the costs of having no one with expertise involved.

Which brings me to the question I’ll end this post with. So, to Steven: You suggest that the unhappiness with the bank bailouts has to do with the absence of the same shared sacrifice the auto bailout demanded. But that’s only half of it: The big problem is that finance is still broken, it’s still dragging the rest of the country down. Putting the question of firing CEOs aside, how did the Obama Administration insist on a complete overhaul for one industry, but status quo for the other? And what could be done, particularly as we learn more about the foreclosure fraud engaged in by top TARP recipients, to undertake the kind of overhaul that has served the auto industry so well?  (Note, Rattner does address some of this in the book. He provides several–to me, unconvincing–explanations for the disparate treatment of the bankers and the auto makers–see pages 115, 216–and states he would have fired the bank CEOs that needed government help.)

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