Michael W. Hudson

Bankers Are Using the Eurozone Crisis to Wage Warfare on Working People and Seize Control of Governments

*This piece was first published in Frankfurter Allgemeine Zeitung

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How Bank of America Covered Up Fraud by Silencing Whistleblowers

In the summer of 2007, a team of corporate investigators sifted through mounds of paper pulled from shred bins at Countrywide Financial Corp. mortgage shops in and around Boston.

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The Finance Industry Has Fleeced the Government Throughout the History of the Republic

Present discussions of the mortgage mess are lapsing into an unreal world. Advocates of the $700 bailout are now rounding up a choir of voices to proclaim that the problem is simply a lack of liquidity. This kind of problem, we are told, can be solved “cleanly” (that is, with no Congressional add-ons to protect anyone except the major Bush Administration campaign contributors) by the Federal reserve “pumping credit” into the system by buying securities that have no market when “liquidity dries up.”

What is wrong with this picture? The reality is that there is much too much liquidity in the system. That is why the yield on U.S. Treasury bills has fallen to just 0.16 percent – just one sixth of one percent! This is what happens when there is a flight to safety. By liquid investors. Many of which are now fleeing abroad, as shown by the dollar’s 3% plunge against the euro yesterday (Monday, Sept. 22).

The question that the media avoid asking is what people are trying to be safe from? The answer should be obvious to anyone who has been reading about the junk mortgage problem. Investors – especially in Germany, whose banks have been badly burned – are seeking to be safe from fraud and misrepresentation. U.S. banks and firms have lost the trust of large institutional investors here and abroad, because of year after year of misrepresentation as to the quality of the mortgages and other debts they were selling. This is Enron-style accounting with an exclamation point – fraud on an unparalleled scale.

How many tears should we shed for the victims? The Wall Street firms and banks stuck with junk mortgages are in the position of fences who believed that they had bought bona fide stolen money (“fallen off a truck”) from a bank-robbing gang, only to find that the bills they bought are counterfeit – with their serial numbers registered with the T-men to make spending the loot difficult. Their problem now is how to get this junk off their hands. The answer is to strike a deal with the T-men themselves, who helped them rob the bank in the first place.

There is a long pedigree for this kind of behavior. And it always seems to involve a partnership between kleptocratic insiders and the Treasury. Today’s twist is that the banksters have lined up complicit accomplices from the accounting industry and bond-rating companies as well. The gang’s all here.

In view of the mass media these days calling Henry Paulson the most powerful Treasury Secretary since Alexander Hamilton, I think it is relevant to look at two leading acts of Mr. Hamilton that represent remarkable precursors of Mr. Paulson’s present $800 billion “cash for trash” deal with the Bush Administration’s major Wall Street campaign contributors.

The two most appropriate parallels are the government’s redemption of “continentals” – paper money issued by the colonies during the Revolutionary War – and the Yazoo land grants. During the Revolution, states had issued paper currency to pay the troops and meet other basic expenses. These paper notes had depreciated, hence the term “not worth a continental” (not least because of large-scale counterfeiting by the British to cause economic disruption here). In the crisis, men with hard cash went around buying continentals at a great discount. In one of the most notorious and debated acts of the Constitutional  Convention, the new United States Government redeemed this depreciated paper currency at par.

It was like the Treasury today buying junk mortgages at face value. But it is in the ensuing Yazoo scandal that we find a perfect combination of financial and real estate fraud on a magnitude that helped establish some of America’s great founding fortunes, creating dynastic wealth that has survived down to the present day.

The Yazoo land fraud in Bourbon County, Georgia is one of the most notorious incidents of our early Republic. In January 1795 the state sold 35 million acres to four land companies for less than 1½¢ an acre. This was the result of bribery arranged by James Wilson – whom George Washington subsequently rewarded by naming him to the Supreme Court. (Moral: Crime pays.) To add insult to injury, the state was paid in depreciated currency, the “continentals.” So great was the outcry that a new state legislature was elected, and revoked the sale in February 1796, accusing its beneficiaries of “improper influence.”

But a month before this new legislature was convened, one of the companies (the Georgia Mississippi Land Company) sold over 10 million acres, nominally at 10¢ cents an acre, to the New England Mississippi Land Company, which was quickly organized for just this purpose by some eminent Bostonian speculators, headed by William Wetmore. Only part of the money actually was paid in cash, and the transaction was largely a paper one. The company quickly hired agents to began selling shares to the public. Widespread speculation ensued in many states, each new investor becoming a partisan urging the national and state governments go along with the original fraud.

New fraudsters jumped on board. Patrick Henry (“Give me liberty, or give me death”) headed up the Virginia Yazoo Company, which made a deal with Virginia Governor Telfair to buy twenty million acres of land at a penny an acre – paid for with the worthless continentals. The public was furious, but the “free marketers” of the day asked, what was wealth, anyway, but a reward for risk-taking.

After the Yazoo land was turned over to the federal government in 1803, a series of Congressional investigations reported that the Boston company actually had paid little if any of the purchase price. (This is now called debt leveraging.) But the company sued, and lobbied Congress for over a decade to get compensation for its paper losses – that is, its lost opportunity to profit from the transaction. In 1814, in the turbulent aftermath of the War of 1812, Congress passed an indemnification act compensating them and other Yazoo investors with $8 million of public funds.

This settlement helped establish a fateful legal precedent known as the doctrine of innocent purchasers possessing certain vested rights. The ruling was steered through the Supreme Court by James Wilson, who in 1782 (along with Robert Morris as the bank’s president, and Gouverneur Morris) had obtained from Pennsylvania’s legislature a charter for the Bank of North America on terms similar to those of the Yazoo land claim.

As Charles Beard has pointed out in his classic Economic Interpretation of the Constitution, James Wilson, the two Morrises, and two other bank directors (Thomas Fitzsimmons and George Clymer) acted as delegates to the Constitutional Convention, where they shaped America's laws so as to facilitate their de-accessioning of public property and obtained special rights and charters for banks and other monopolies. (The word “privatization” would take nearly two centuries to enter the lexicon.) After the Bank of North America was so mismanaged that a money panic ensued, Pennsylvania revoked it's charter. Wilson sued, arguing “that the original act was a grant of a VESTED RIGHT. That the charter could not be repealed without ‘IMPAIRING VESTED RIGHTS, and the rights of innocent parties.’ The legislature yielded, and in 1787 it reincorporated the bank. Thus originated the clause that Wilson had inserted in the present constitution forbidding any state to pass legislation impairing the obligation of a contract. And out of it has come Supreme Court decisions that have given this country the blackest record of validated land frauds and bribery known in history,” for it blocked state legislatures and Congress from undoing the results of overt bribery. (The story is told in Thomas L. Brunk, American Lordships, or A Brief Insight into the Suppressed History of Land Sharks and Their Control Over Government and Industry (Sioux City, Iowa, 1927, p. 84).

The Supreme Court had ruled (in response to John Marshall’s pleading the Fairfax land-fraud case in Virginia) that what mattered was not the methods used to obtain a grant or contract, but the fact that innocent purchasers would be injured by repealing such contracts once they had been entered into (Chandler 1945:74,390). Even outright frauds were held irrevocable by subsequent legislation, on the ground that once a business claim was sold to an innocent purchaser, undoing the deal would be unfair. The unwitting buyer would be left holding the proverbial bag. Myers (1936:217) finds this to be “the first of a long line of court decisions validating grants and franchises of all kinds secured by bribery and fraud.”

The new doctrine provided a motive for privatizers to cash in quickly by selling out shares of fraudulent transactions to speculators and other buyers, who could then ask the state to “make them whole” for having injured them in revoking their wrongful purchase! Likewise today, polluters and real-estate holders are suing the government to be compensated for public laws that prevent them from making money by violating ecological and other real-estate regulations. Their demand is to be made whole for gains they allegedly would have been able to make had such public laws not been passed!

The “innocent purchaser” and “vested interest” doctrines made it hard to undo fraud, if only because the alternative was to restore the misappropriated asset from the stock-buying public to the state. The Supreme Court ruled it preferable to let the first thief legitimize his fraud, leaving the “innocent buyers” in possession of the stolen property. Possession became, ipso facto, nine-tenths of the law. The moral of this story was that once you obtain public assets, even through bribery, it is yours, at least if you make the transaction complicated enough and involve enough “innocent parties” to make any restoration of the status quo ante hopelessly complicated.

The Yazoo incident is only exceptional for its size and the fact that it became a precedent for future practices. In 1835 the Senate Committee on Lands reported: “The first step necessary to the success of every scheme of speculation in the public lands, is to corrupt the land officers, by a secret understanding between the parties that they are to receive a certain portion of the profits.” Sixty years later, in 1895, Iowa's Governor William Larrabee wrote on how the system had been perfected (largely by the railroad robber barons): “Outright bribery is probably the means least often employed by corporations to carry their measures. ... It is the policy of the political corruption committees of corporations to ascertain the weakness and wants of every man whose services they are likely to need, and to attack him, if his surrender should be essential to their victory, at his weakest point. Men with political ambition are encouraged to aspire to preferment, and are assured of corporate support to bring it about. Briefless lawyers are promised corporate business or salaried attorneyships. Those in financial straits are accommodated with loans. Vain men are flattered and given newspaper notoriety. Others are given passes for their families and their friends. Shippers are given advantage in rates over their competitors. The idea is that every legislator shall receive for is vote and influence some compensation which combines the maximum of desirability to him with the minimum of violence to his self-respect. … The lobby which represents the railroad companies at legislative sessions is usually the largest, the most sagacious and the most unscrupulous of all. … Telegrams pour in upon the unsuspecting members. … Another powerful reinforcement of the railroad lobby is not infrequently a subsidized press and its correspondents.”

Gustavus Myers’ History of the Great American Fortunes (1936, pp. 218ff.) gives the details of this and other frauds that have shaped American history. The moral is that great gifts to insiders have effects that will last centuries. That is what is being threatened today with Mr. Paulson’s “clean” giveaway to his Wall Street clients.

The moral is that there is a great danger in having a Treasury Secretary represent insider financial interests rather than the national interest.

Driven to Misery

Addie Coleman had some blemishes on her credit history when she went in to buy a car from Beaman Pontiac in Nashville. The dealership faxed her loan application to General Motors Acceptance Corp. GMAC weighed the information and came back with a decision: Coleman qualified for an annual percentage rate of 18.25. But that's not the APR the dealership wrote into the contract it presented to her. Instead, it boosted the already steep rate approved by GMAC by another 2.5 points, to 20.75.

It was, according to Coleman's attorneys, a secret markup that over the life of the loan would cost her an extra $809 in finance charges. And her experience wasn't an isolated one. According to a federal class-action lawsuit, other GMAC customers around Nashville were secretly assessed finance-charge markups of $5,501, $6,018, even $8,600. The lawsuit claimed these borrowers and many thousands like them were victims of a shady, lucrative arrangement between GMAC and dealers that soaks African American and Hispanic borrowers with covert costs that have nothing to do with their creditworthiness.

Profits and Ingenuity

Most people understand that buying a car is an enterprise fraught with perils. But few realize that the all-too-common traps and rip-offs of the car business are no longer simply the folkways of a decentralized assortment of local or fly-by-night operators. The industry's unwholesome habits have become, instead, institutionalized practices fueled by top-down market forces and corporate ingenuity.

GMAC, for example, is one of a plethora of name-brand financiers that have been accused of working with auto dealers to gouge millions of minority car buyers. Others include units of Nissan, Toyota, Ford and Honda. Industry officials deny wrongdoing is pervasive. "We're in a dangerous place when we start using behavior of a few people to implicate an entire industry," Marianne McInerney, president of the American International Automobile Dealers Association, told the Associated Press. She says the vast majority of dealers are reputable and honest and that surveys show consumers are "over 90 percent satisfied" when they buy new vehicles. GMAC has agreed to a settlement of the nationwide class action over its loan-markup policies. But it, too, denies wrongdoing and says it "adheres to a zero-tolerance policy on racial discrimination." Industry denials are undermined, however, by a growing body of evidence that discrimination and fraud are systematic -- and driven by some of America's biggest companies.

A new study by the Consumer Federation of America concludes major banks and automakers' finance units use hidden interest markups to fleece consumers out of as much as $1 billion a year. Virtually all of the nation's top auto lenders engage in this practice, the study says. A study by another national consumer advocacy group, Public Citizen, provides an even wider window on the industry's unsavory deportment: "Customers in California, Florida and at least 37 other states have been defrauded by what the Minnesota Attorney General's Office has called "industry-wide practices‚ ranging from inflating the cost of warranties to contract stuffing and racial discrimination."

The report says little-noticed "extra" charges are tacked on at every stage of the sale, producing little value to the consumer but enriching dealers to the tune "of millions, and even perhaps billions, of additional dollars industry-wide." Given the car industry's predilections, all consumers -- rich or poor, black or white, good credit or bad -- should be wary when they step onto an automobile lot. But the evidence shows the worst abuses are usually targeted at African American, Hispanic, elderly, blue collar, or credit-impaired customers. Many dealers and lenders perceive these consumers as having fewer options, less financial experience, and a diminished sense of marketplace entitlement, thus making them more likely to be desperate or susceptible when it comes time to close the deal.

And the deals that are being closed on most car lots are not pretty ones. Disadvantaged car buyers often pay interest rates between 17 and 25 percent on auto loans, compared to single-digit rates for borrowers with good credit and strong bargaining skills -- a difference that can mean $3,000, $4,000 or more in extra finance charges on a $10,000 used-car loan. These customers are also more likely to be targeted by dealers and lenders for an array of overpriced extras: credit insurance, roadside assistance plans, extended warranties, service contracts.

Big and Bad

In step with the Wall Street-fueled growth of high-cost auto financing has come the dominance of what Ward's Dealer Business magazine calls "megadealer" groups -- vast, often publicly traded chains of dealerships that sway market trends and set the tone for ground-level sales practices. The nation's three largest megachains -- AutoNation, UnitedAuto Group, and Sonic Automotive -- posted $34 billion in sales in 2002, almost one-third of combined sales for the Ward's top 100 dealer list. The big three's growth and profits have been accompanied by lawsuits, government investigations, even criminal prosecutions. AutoNation, UnitedAuto, and Sonic have been flogged by allegations that they use deceptive practices to overcharge customers on financing, insurance, and other items.

Sonic has been the target of a Florida attorney general's probe, a Dateline NBC expose and an onslaught of private litigation. Lawsuits have alleged Sonic executives supervised a scheme to falsify credit applications, sell overpriced warranties, and forge customers‚ signatures. One customer, Mac Williams Jr., told Tampa's WFLA-TV, "On one of the documents they had even misspelled my name, which sort of upset me. If you're gonna forge my name, at least spell it right."

A Florida class action lawsuit involving an estimated 10,000 to 25,000 customers alleges that overcharges and other misdeeds are standard procedures at Sonic -- a pattern of conduct perpetrated by local salespeople and managers but choreographed by high-level corporate officials. The suit claims that Sonic executives controlled lower-level employees with top-down specificity, fostering predatory conduct through a system of bonuses and kickbacks coupled with the threat of firing, demotion, or transfer for managers who didn't comply.

The suit says executives demanded weekly "penetration reports" on sales of insurance add-ons, and set a goal that finance managers pack on $800 of "back-end" products such as anti-theft insurance onto each sale-a benchmark the lawsuit says Sonic executives knew "could only be achieved through fraudulent sales practices."

When Enrique and Virginia Galura purchased a new Toyota Spyder, the suits says, Sonic's Clearwater Toyota charged them $562 for an anti-theft insurance policy whose real price was $30. The $562 was not disclosed on the insurance form, the suit says, but was handwritten in after the couple drove off the lot. Another Sonic customer, Ana Diaz-Albertini of Palm Harbor, Fla., was charged $1,140 for the insurance -- which paid only $1,000 in the event of theft and damage and $2,500 in the event of theft and total loss. Sonic officials said they investigated allegations of misconduct and found just one infraction, which they responded to by firing the employee in question. A company spokesman told the Associated Press that Sonic was committed to "operating our business with the utmost integrity" and taking prompt action whenever "inappropriate conduct" is brought to its attention.

The No. 1 megadealer, Fort Lauderdale, Fla.-headquartered AutoNation, was forced to make similar denials of wrongdoing in the wake of a scandal at its El Monte, Calif., Chevrolet dealership. AutoNation agreed to pay more than $5 million to settle a private class action and a California Department of Motor Vehicles lawsuit accusing the dealership of defrauding more than 1,500 customers through a variety of sharp practices, such as selling used cars as new and charging for security systems that were never installed. Seven employees were convicted of crimes in the case. AutoNation blamed any violations on a handful of unprincipled employees. "You've got human beings who are going to act like human beings act," a spokesman said. "Some guys break the rules and these guys did."

UnitedAuto Group, meanwhile, was the target of a lawsuit in Memphis that accused a UAG Toyota dealership of preying on women and minorities by secretly marking up their finance charges beyond the interest rates quoted by lenders. The state judge who approved class action status for the case wrote that the so-called "dealer-reserve fee" results "in higher interest rates, higher monthly payments and higher total finance charges to the customer and is not disclosed to the customer at any time." Company officials recently told CBS's 60 Minutes that they had reached a tentative settlement of the lawsuit.

Target Practice

The dealer-reserve hustle works this way: The dealer takes the customer's application, submits it to a lender, and the lender comes back with its "buy rate." For someone with a mediocre credit history, the lender's rate might be, for example, 9 percent. But the dealership doesn't tell the customer that. Instead, it quotes a much higher rate -- say 12 percent. The difference is the finance "markup." On a $14,000 used-car loan, hiking the rate from 9 to 12 could cost the consumer more than $1,200. Critics call it a kickback -- the lenders' way of enticing dealers to steer loans in their direction.

Experts hired by the National Consumer Law Center and private consumer attorneys have found hard evidence that minority borrowers often bear the brunt of these charges.

One study looked at 1.5 million GMAC loan transactions and found 53.4 percent of blacks paid markups, compared to just over 28 percent of whites. The disparity couldn't be explained by differences in creditworthiness. On average, African Americans paid more than two times the markup as whites -- with a markup of $656 for blacks and $242 for whites. Similar patterns emerged in a study of 300,000-plus Nissan Motor Acceptance Corporation loans. Black Nissan borrowers paid an average markup of $970, compared to $462 for whites. Nissan called that statistical analysis "junk science." However, the company agreed to pay a $7.6 million settlement covering attorneys‚ fees, contributions to consumer education, and $60,000 divided among 10 main plaintiffs. It also promised to make 675,000 no-markup loans to Latino and African-American car buyers. Michael Terry, a Nashville consumer attorney who has helped lead the legal attack on markups, says discriminatory intent by the dealers and lenders is the only explanation for the disparities. Victims include black lawyers and doctors.

"When they get out of the car with a black face ... they become a target," Terry says. "We've talked to dealers and they tell us it's true. They joke about them having a target on their backs."

Michael Hudson is investigative editor for Southern Exposure.

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