Wednesday, October 26, 2011

Occupy Wall Street VIII: Corporate Welfare

While President Obama touts a modest new jobs bill as well as a modest new federal program to assist homeowners in refinancing home loans at lower interest rates, Occupy Wall Street and Professor Steven Ramirez decry these comparatively minor assistance efforts geared toward American citizens when compared to the massive bailouts and major assistance provided to corporations and Wall Street bankers. In fact, the massive corporate bailout continues through a never-ending line of cash provided to banks by the Federal Reserve. Rejecting Corporate Welfare and instead bailing out American citizens seems to be one of the rallying cries of Occupy Wall Street. Despite this cry, U.S. policy seems intent on providing vast Corporate Welfare while simply frittering around the edges of providing genuine assistance to American taxpayers.

And now, in news that will certainly inflame Occupy Wall Street protestors, recent reports indicate that commercial banks are no longer satisfied in simply short selling or foreclosing on American homeowners. Major banks are not only foreclosing on U.S. citizens, they are now, with increasing frequency, suing these foreclosed homeowners for the difference in price between the outstanding loan and the cash gained upon the foreclosure sale. Recently, this “foreclosure hangover” i.e., obtaining deficiency judgments — when the foreclosed home fetches less than what is owed, the bank sues the homeowner for the debt — has been on the upswing. Forty-one states and the District of Columbia allow lenders to add insult to injury, and sue the already-distressed borrowers for the remainder of the loan amount post foreclosure sale.

In Lee County, Florida, foreclosure hangover judgments are up 34% from last year, despite the fact that the number of foreclosures have decreased. With savvy investors lurking in the background and hoping to take advantage of these distressed-debt deals, this foreclosure hangover will continue to linger. With a surefire judgment possible against borrowers when the foreclosure does not clear the debt, banks and investors seemed poised to pounce upon the vulnerable.

Just when borrowers believe they are clear of the loan based on the foreclosure, they are being sued for recovery of the total debt. To be clear, many banks that accepted bailout funds from U.S. taxpayers, are now turning the continuing mortgage crisis to their advantage, by foreclosing, and then suing the taxpayers for the balance of the debt owed. Meanwhile, Corporate Welfare continues with no end in sight. Occupy Wall Street loudly cries for an end to this pattern. Bailout people, not banks.


  1. JesseeB_MemphisLawOctober 27, 2011 at 1:20 AM

    Wow! I just read this TIME article, and what an eye-opener it was. Although written in 1998, the article and problem of Corporate Welfare it describes remains shockingly prevalent, if not even more so, in 2011. Unfortunately, due to a number of factors, I feel that indeed, there is still no end in sight, at least without significant public outcry and effective political action.

    Two years ago, before attending law school, I worked for the Chamber of Commerce of my small hometown in Tennessee. I saw the very real pressures municipal governments and officials were under to recruit new businesses and "do something" to create jobs and alleviate the dismal unemployment rate in our city and county. Competition to woo industry was stiff and encouraged governments to take whatever measures they believed necessary to (presumably) help stimulate the local economy.

    While we would like to demonize corporations and institutions that accept these economic incentives, many of them have a fiduciary duty to do so in order to maximize profits, as the article points out.

    Furthermore, in a reelection campaign, it is easier for politicians to tout splashy incentive plans and cite large, attention-grabbing figures, e.g. the number of jobs they have "created" through Companies X,Y, and Z, rather than to take time explaining the details of less dramatic, albeit more effective, long-term economic solutions. Many of the journalism and campaigns classes I took in college taught me to tailor my message to an 8th grader, the average reading comprehension level of the American public. This is a painful, but real reality we must recognize.

    I can only imagine what these pressures translate to on a state and national level. Without giving the government and policymakers a free pass, we must acknowledge the demands upon them to "fix" all that is very, very wrong with our economy. Where to even begin? Economic incentives to corporations sound good and make sense in theory. However, as the article also points out, these theories fall apart and are actually harmful when we run numbers and examine the overall effect, something policy makers have often failed to do. By pursing these short-sighted goals, we (debatably) gain benefits for few at the cost of many. This was happening at the time the article was written, and continues to happen through corporate and bank bailouts today.

    While I am far from against government intervention, there are appropriate times, places, and methods, and Corporate Welfare is not the answer. We need to closely examine the results of this type of government involvement to see what is working and what is not. However, due to the obstacles discussed above, as well as many others, I fear this will not to be the case.

  2. JesseeB_MemphisLawOctober 27, 2011 at 8:49 PM

    PS: Sorry to get off topic and not directly address the foreclosure issue you discussed. After reading the TIME article and realizing how these corporate bailouts don't really make sense at all, I couldn't help but comment on the issue as a whole.

  3. jessee b:

    insightful comments. thank you for them. suffice it to say, that corporate welfare is not a new practice. indeed, we have been providing welfare to corporations since their origination. it is just that in light of the market crisis of 2008, we have provided corporate giveaways at never-before-seen levels. and for what?

    banks hoard credit, pay themselves massive bonuses, and cut jobs.

  4. I, like most Americans, disagree with many of the actions that banks have taken since they received their government bailouts. However, I think that it is important to understand why they are doing what they are doing. Banks exist to make a profit. Recent legislation has made it more difficult for them to do so along with a trend towards saving rather than borrowing. Overdraft fees were a huge part of bank revenue that has been all but erased. Although I am sure the trend will not last, Americans are saving more and spending less. They are less inclined to take out lines of credit based on equity in their homes (not that there is any equity).

    These factors along with many others have impaired banks' ability to maintain profitability without huge cost-cutting measures (i.e. BOA layoffs). The attempt at recent debit card fees is another example of the desperation with which banks are trying to replace lost income. Suing foreclosed homeowners is another means to an end that the banks are taking advantage of to survive.

    In defense of banks seeking deficiency judgments against foreclosed homeowners, not all foreclosures are the result of job loss or inappropriate home loans. Many are strategic defaults in that homeowners who are perfectly capable of paying the monthly note simply choose to cut their losses and walk away (often times after living rent free for 6+ months in the foreclosed home). Strategic defaulters are no better than the banks in this regard because they are not honoring an obligation that they willfully and knowingly entered.

    All of this is not meant to defend the banking industry or vilify those who go into foreclosure. It is simply meant to point the complexity of the issue. It is very easy to demonize the banks and forget that many homeowners are guilty of contributing to the problem. Like the banks, many homeowners do not want to deal with the consequences of their actions.

  5. I think Randall makes a good point: there is plenty of blame to be passed around here. Although I think a large portion of it can appropriately be levied on banks, we also need to accept part of the responsibility as consumers. Many of the homeowners who have been foreclosed on took out loans that were beyond their means, incentivized by rates that turned on them. They still had a responsibility to be informed about their obligation though, and the various changes it may undergo.
    There is still something very unsettling about these deficiency judgments, however. It seems like a huge deviation from the settled practice of absolving the debtor upon foreclosure. Who changed the rules, and who gave them the authority to do so? I can only hope that the cases in which this is being allowed are those of "strategic defaults" rather than those individuals who simply cannot afford to pay the skyrocketed note on their homes anymore. They have enough to worry about.

  6. Corporate welfare needs to end. Not only because it's a waste of money but because corporate welfare is merely a tool corporations use to gain a competitive advantage over their less politically connected rivals; while politicians shower favored corporations to enhance their election prospects.

    Sadly, with banks corporate welfare has a long history that has encouraged banks to take on more risk while knowing that if the go too far Uncle Sam will be there to pick them up. And such action is not irrational on their part. Since the Peso Crisis and Asian Financial Panic, banks have implicitly known that their failures are public costs while their success are private profits.

    But corporate welfare doesn't end at Wall Street. Solyndra was a favored corporation that was given a five hundred million dollar loan by the federal government shortly before it went bankrupt. That money could have been kept in the private market instead of taken out through government debt and given to an inefficient corporation. The same could be said about the Big Three and their political ties that secured them a bailout.

    The U.S. needs to end corporate welfare and return to a traditional free market. Failing companies should be allowed to fail so new companies can take those resources and use them better.

    "The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U.S. Steel illustrate the same process of industrial mutation... that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in. . . ." ~ Joseph Schumpeter

  7. I agree with the overall theme of the post in that corporate welfare is a lot like putting a Band aid on a bullet hole; it's all pantomime in the grand scheme of correcting our current economic downfall. The bigger problem I see is that states haven't suspended the rules allowing said foreclosure hangover in light of the fact that the banks pursuing these suits allowed such risky loans to be approved in the first place. Perhaps the OWS movements should focus on the politicians and the AG's of these states if reprieve from wrongs is what is truly sought here.

  8. caroline (Memphis Law)November 20, 2011 at 7:44 PM

    I agree with Katie and Randall in their posts that banks are not foreclosing and suing just on the people who can't pay their notes any longer because of job loss or changes in the economy. They are also suing the people who have just decided no longer to pay their note and have their house foreclosed on just to avoid the mortgage any longer. This is just as wrong as banks suing those who have defaulted because of job loss and who in good faith cannot pay their mortgage. Something, if it can, must be adopted to remedy this situation between corporate welfare and the foreclosure hangover. I also agree with Adam that possible the occupy wall street protesters should shift their focus to the states to adopt some rules suspending foreclosure hangover or come to a happy medium between the two.

  9. I'm in agreement with several other posters above in that banks are not in the wrong for suing owners of foreclosed homes. A mortgage is a contractual obligation, and just walking away from one's obligations surely must result in some consequence? Since some number of people "overbuy" in their home purchases, the system can never be fixed if walking away is with little repercussion.

  10. FalenC (Memphis Law)November 27, 2011 at 10:04 PM

    On the one hand, I can see the disagreement with banks suing individuals who have lost their homes due to the economic downfall. However, I do not see anything wrong with the banks suing those individuals who have simply walked away from their mortgage because they were tired of paying, etc. This often arises when people get in over their heads when purchasing. Individuals cannot keep sitting back and blaming the banks for letting them take out the loans. If one bank would not have let the individual take out a loan, more than likely, the individual would have just gone to another bank to obtain the loan. Then if no bank would have let them obtain a loan, they still would have been angry. No one is forcing individuals to take out these loans. At some point, these individuals have to take responsibility for their own actions.

    Suing the individuals for the balance is no difference to me than imposing fines upon individuals in a criminal sanction or ordering that restitution be paid. If we are going to say that the banks do not need to sue for the balance, then it seems to follow that criminal financial sanctions should not be imposed because the convicted criminals can not afford to pay them.

  11. Kirkland (Memphis Law)November 28, 2011 at 6:55 PM

    I agree with Falen, and would like to add that this "top-down" model, issuing corporate bail-outs and allowing banks to sue foreclosed homeowners is logical to me. Starting at the top and providing major bail outs to corporations would allow cash to trickle down to individual Americans, strengthening the overall health of the nation before dealing with citizens on a small-scale basis.

  12. Franklin A (Memphis Law)November 28, 2011 at 9:34 PM

    While many individuals got loans for housing they should have never gotten, others, as stated above simply decided not to pay their mortgage because it was larger than the actual value of the home. I think some of the problem from my first scenario stems from pre-approval on home loans. These pre-approval figures in some sense assume that all the individual's net worth will be in the home. Banks still need to recoup some money from these situations or Banks may incur greater losses.