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How to Stop the Insiders and Activists Who Are Exploiting the Financial Crisis to Control Our Lives and Our Fortunes
By JAY W. RICHARDS
McGraw-Hill EducationCopyright © 2013 Jay W. Richards
All rights reserved.
THE EDGE OF THE ECONOMY
In April of 2005, Jim and Annie Everhardt, a couple in their midthirties with three kids, moved the almost 5,000 miles from Hawaii to North Carolina. A career marine, Jim was between tours of duty in Afghanistan and had been posted to Camp Lejeune in Jacksonville, North Carolina. The family had barely stepped down from the moving van when the vehicle suddenly caught fire and blew up in their driveway. It happened so fast, they could only stand and watch as everything they owned was consumed by flames.
In their extremity, they appealed to the military relief agency responsible for emergency loans. There, they learned that this wasn't actually an emergency since insurance would (eventually) cover the loss. The relief agent encouraged the Everhardts instead to apply for an installment loan, which a borrower repays in a fixed number of payments over a specific period of time. The military had long sanctioned these small loans for its members, not only for emergency stopgaps but also as a way to build good credit.
Because they moved often to new military assignments, the Everhardts had been turned down previously for loans from ordinary banks. But in this case the installment lender took the time to gather all the information about their specific situation and determined that they were not a serious credit risk. With the loan approved and money in hand, the Everhardts were able to move into their new home. While they were waiting for the insurance money, they could quickly purchase furniture, clothes, and school-books for the kids.
Because of the fire, the Everhardts had suddenly been pushed perilously close to the edge of the economy. This is the critical border area between organized economic life and the streets. Experienced by millions of Americans every year, it is the transitional region between home and homelessness, between solvency and destitution, between work and welfare, between stable family relations and family breakdown, and between children raised at home and children assigned to the often cold comforts of family court and foster care.
Though the welfare system can be bountiful for its qualified beneficiaries and long-term dependents (mostly unmarried and unemployed), its slow bureaucratic processes make it inept at dealing with sudden exigencies and crises of independent workers and families. With its mazes of rules, forms, and investigatory routines, government services simply cannot deal quickly with intact families facing a fire, flood, sickness, or other emergency.
For the Everhardts, welfare or even military relief was not an appropriate option. They did not want or need long-term support; Jim had a good job. They wanted emergency money, and they got it quickly and easily from a private installment lender. This type of loan is often the best form of credit available for those who need cash quickly and have maxed out credit cards or prefer not to use them.
Outside of North Carolina, a nonmilitary family in need of quick cash might have acquired the needed funds from a so-called payday lender at one of the neon-signed corner stores offering advance funds in exchange for a fee and a postdated check. These short-term loans, totaling some $40 billion a year in the United States as of 2012, have proved a valuable backstop for millions of families stricken by emergencies. A University of Chicago researcher, Adair Morse, conducted an elaborate statistical study of the payday loan phenomenon in California, which provided a kind of "natural experiment" of the effects of the availability versus the unavailability of emergency finance. California is a state with hundreds of mudslides, wildfires, and other natural disruptions. Morse found that different zip codes in the state showed drastic differences in the availability of payday loans. Comparing the incidence of death rates, drug and alcohol treatments, foreclosures, and petty larcenies in areas with and without these financial services—and correcting for an array of social indexes—she managed to separate the impact of loan availability from other factors that might differentiate the communities. She concluded that by all four measures the payday loans conferred significant benefits on their communities. For example, she notes that "natural disasters induce an increase in foreclosures by 72 percent, but the existence of payday lenders significantly offsets half of this increase, [preventing] 1.22 foreclosures per 1,000 homes." She found that natural disasters increase petty larcenies—such as shoplifting—by 13 percent. "Access to credit, however, mitigates 2.67 larcenies per 1,000 households, or 30 percent of the effect of the natural disaster."
Pointing out that roughly two-thirds of all payday loans are taken in emergencies, she wrote that her findings about communities could be extended to apply to individuals who experience a disaster in their personal lives, such as the Everhardts. While financial institutions other than payday lenders were beneficial to communities, she determined that banks and other institutional forms of credit were no substitute for payday loan products. Other established financial institutions failed to supply finance to individuals in distress as swiftly and reliably as payday lenders did.
Nonetheless, in 2006, payday loans were effectively banned in North Carolina after a "consumer advocate" group had led a series of campaigns to outlaw them for alleged usury (excessive interest rates) and allegedly preying on the poor. Fortunately for families like the Everhardts, small-dollar installment lenders had survived. Installment lenders had been in the state for decades, meeting qualified customers' need for small-dollar loans. With the Everhardts they had two more happy customers.
These small-dollar lending institutions, pejoratively labeled by some as "fringe finance," give loans to many middle-income people in all sorts of circumstances across the United States, but one of their most valuable contributions is to serve people in crises for whom bank loans are not an option. They are also an important stopgap to help keep some families from a life on welfare and the nightmare of family breakdown and dependency. Nimble specialists in "edge" loans, small-dollar lenders often shore up precarious families in trouble. They came through for the Everhardts. With the money from their installment loan, the family managed to make it through their bad stretch and within a short time had paid off the loan. They moved back several giant steps from the edge of the economy where financial catastrophe is a constant danger. Potential nightmare averted. This was a classic use of a traditional installment loan—to protect the household budget and a family's lifestyle while dealing with life's uncertainties.
But it turned out that the Everhardts' ordeal was not over. They would later find themselves in the crossfire of a national struggle over U.S. financial policy.
THE "FORBIDDEN" SATURDAY NIGHT LIVE BAILOUT PRESS CONFERENCE
More than three years passed. During this span, much of the nation's financial system plunged over the edge, and thousands of people needed emergency loans to carry them through the crisis. On October 3, 2008, the $700 million bank bailout called the Troubled Asset Relief Program (TARP) became law, and Wells Fargo bought North Carolina's leading bank, Wachovia, for pennies on the dollar. The next evening, Saturday Night Live ran a sketch titled "Bailout Press Conference." It not only offered a drastically different perspective on edge finance, but it also provoked responses that would play a part in a later bizarre turn in the Everhardt saga.
Taking over the "press conference" from George W. Bush in the Saturday Night Live skit, the Speaker of the House, Nancy Pelosi (played by comedienne Kristin Wiig), intones: "Behind every home foreclosure, there is a story of real suffering by real Americans. And, today, we'd like to introduce you to some of them." First up are a pair of rotund twenty-somethings. The white one ("Michael McCune, deadbeat" says the C-SPAN caption) explains his situation as the black one (whom the caption more cautiously identifies as "Jerome Gant, non-credit-worthy person") chimes in. "I still don't understand how this happened. I mean, I've got all the requirements for a subprime mortgage: no credit history (Gant: "Same here!"), no job ("Me, neither!"), minor criminal record ("Dit-to!"), dishonorable discharge from the army (Gant slaps his palm with a piece of paper: "Yeah, I got mine right here!"), drug problems ("Me, too!"), alcohol problems ("Guilty as charged!"), gambling addiction! ("Yeah!"), pregnant girlfriend—actually, two pregnant girlfriends! ("Just the one!" says Gant jovially.)
"You could say I'm a double victim, since I've never had a job, and now I don't have a home!" concludes McCune.
"Well, I'm a triple victim," chuckles Gant, "'cause I've also been charged with arson, for allegedly setting fire to the house they evicted me from."
Nancy Pelosi manages to interject, "You are both in our thoughts," as she brings the next pair to the microphone, a slim couple in their midthirties (the wife played by guest actress Anne Hathaway). As the screen identifies them as "Greg & Judy Phillips, Acquisitive Yuppies," they explain that they can't make their mortgage payment on their 12 timeshare condos "without selling the boat ... or putting off essential cosmetic surgery."
The sketch, as it appeared on the NBC website in the first week in October, ends with Pelosi and Barney Frank (then the House Financial Services Committee leader) fawning over George Soros—"Multi-Billionaire Hedge Fund Manager and Owner, Democratic Party." Meanwhile, Soros bosses George W. Bush around in a measured, sonorous voice: "So, what became of that $700 billion? Well, basically, it belongs to me now. And it's not even American dollars anymore, but Swiss francs, since I have taken a short position against the dollar."
As the show originally ran on October 4, 2008, however, another couple came to the microphone before "Soros": a business-suited husband with wire-rimmed glasses and gray hair, with his well-made-up wife dressed in a prim cardigan. Nancy Pelosi asks for their story.
HERBERT SANDLER: My wife and I had a company which aggressively marketed subprime mortgages, and then bundled them as securities to sell to banks such as Wachovia. Today, our portfolio's worth almost nothing, though, at one point, it was worth close to $19 billion.
NANCY PELOSI: My God, I am so sorry! Were you able to sell it for anything?
HERBERT SANDLER: Yes! For $24 billion!
[The C-SPAN caption pops up: "Herbert & Marion Sandler, People who should be shot."]
NANCY PELOSI: I see. So, in that sense ... you're not here to speak as actual victims?
HERBERT SANDLER [chuckles]: No, no, no! That would be Wachovia Bank!
The Sandlers, as it turns out, are real people, who really did sell their company, with its time-bomb-like loans, to Wachovia at the height of the bubble. And—unlike the politicians or George Soros—they were litigiously hypersensitive to the confrontational clowning of Saturday Night Live. (The next year they would fight the New York Times tooth and nail over an article initially titled "Once Trusted Mortgage Pioneers, Now Pariahs.")
By Monday, NBC had pulled the "Bailout Press Conference" from its website, explaining that "upon review, we caught certain elements in the sketch that didn't meet our standards. We took it down and made some minor changes." After SNL edited the skit to NBC's austere standards—which simply meant removing the Sandlers—they reposted the video. Later it disappeared into the digital abyss, along with the comments complaining that it had been yanked.
Before the Sandlers sold their company to Wachovia, and long before they achieved SNL stardom, they began their careers as philanthropists. One of the causes closest to their hearts was a nonprofit they had conceived and helped found in 2002. This organization forms a fascinating thread between activists agitating against small-dollar and mortgage lenders and the politicians at the heart of the postcrisis government financial regulatory apparatus.
Called the Center for Responsible Lending (CRL), this organization was a spearhead of the forces mobilizing to transform the U.S. financial system, root and branch, in the wake of the crisis. CRL's tendrils would even reach in an unexpected way into the lives and finances of Jim and Annie Everhardt.
In the spring of 2011, Jim was serving his third tour in Afghanistan. Annie, at home, was fighting a different battle—against breast cancer—while working part time and raising their three kids. She heard more and more stories in the press vilifying installment lenders, with talk of usury and "predatory lending." The same group of consumer advocates who had managed to get payday loans banned—led by the Sandler-backed Center for Responsible Lending—were marshaling their considerable firepower against installment loans.
After 28 years with no change in rates for these traditional loans, an upcoming bill had proposed a slight loosening of the rules in North Carolina. It proposed minor changes, including a modest late fee, which would encourage borrowers to repay their loans in a timely way. But the consumer advocates had transformed the public discussion over the bill into a forum on whether these installment loans should exist at all. An opponent of the bill, State Representative Rick Glazier, had scheduled a press conference for April 28, 2011, at the pressroom of the Legislative Building in Raleigh. Annie Everhardt felt strongly enough about it that she decided to make the four-and-a-half-hour round trip to the capital from Camp Lejeune.
Little did she know that she was entering the path of a national political and philanthropic juggernaut. For this movement, consumer lending reforms were only a step on the way to an effective nationalization of the entire U.S. financial and banking systems—from the heart of the economy to its fingertips. Embodying this agenda was a massive hunk of legislation that had passed the previous July, called the Dodd-Frank Wall Street Reform and Consumer Protection Act, and the creation of a new federal bureaucracy named the Consumer Financial Protection Bureau.
Representing the movement at this press conference were people from the Center for Responsible Lending and the North Carolina Justice Center (with backup from the support command for the local marine bases). The spokesmen for the two centers, Chris Kukla and Al Ripley, had spent their careers trying, in their view, to defend people like the Everhardts from the temptations of "edge" finance. To Annie, this meant they wanted to stop her family from being able to get the type of loan that had helped them in a crisis.
On the surface, this bill—North Carolina House Bill 810—was an especially unlikely one to fire up the consumer advocates. Traditional installment lenders in North Carolina had been regulated to the point of suffocation for decades. The bill merely gave them a little more elbowroom. (For instance, it would have allowed them to increase their fees for a $1,500 loan by $1.37 per month.) The Everhardts were among thousands of satisfied customers of installment lenders. The consumer advocates' argument against the bill was going to be hard to make.
So the trio of advocates who appeared at the press conference did what most people do when losing an argument: change the subject.
When representatives of the installment loan industry arrived at the April 28 press conference, they found an empty pressroom. Combing the building, they eventually found a small group of reporters gathered around Al Ripley in the rotunda. Ripley glared at the arriving group as if they had crashed a private party and, in a sense, they had. The original press conference had been abruptly canceled, and Ripley had seized the moment by arranging an impromptu substitute. Oddly, State Representative Rick Glazier was nowhere to be found. It appeared that the advocates were proceeding without the presence of a state representative, which was required for a press conference in the building.
Also odd, it seemed that Ripley had told the military and local news stations that the press conference—and, by inference, the new bill—was about bringing the outlawed payday loans back to North Carolina. When a representative for the installment loan industry asked him to clarify, Ripley's hands started shaking. "Same as! Same as!" he exclaimed with a concussive blast.
The next question seemed to upset Ripley even more: Why had he orchestrated a press conference bait-and-switch? Skipping the usual pleasantries, he abruptly indicated that a military representative, Mike Archer, was there to speak to the press.
Excerpted from INFILTRATED by JAY W. RICHARDS. Copyright © 2013 Jay W. Richards. Excerpted by permission of McGraw-Hill Education.
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