How About The Food Insecurity Scam?

Perhaps you think I was a little over the top and harsh yesterday in writing about the poverty scam.  The government's "anti-poverty" efforts can't just be completely designed to fail intentionally and deceive the public, can they?  Really, our government would never do such a thing.  Would they?

Well, if you still have your doubts, consider the related topic of "food insecurity."  The government just came out with its latest annual report on that subject a couple of days ago.  The report was covered in an op-ed by James Bovard in the Wall Street Journal yesterday.  While poverty is a big and potentially complicated subject, "food insecurity" is very discrete and focused.  It's like the Rick Perry prosecution -- there's nothing about it that you can't understand in about 10 minutes.

The "food insecurity" scam starts with an annual survey conducted by the Department of Agriculture (DOA).  The survey has multiple questions, but the heart of the matter is question 1:

“We worried whether our food would run out before we got money to buy more.” Was that often, sometimes, or never true for you in the last 12 months?

Notice that the question asks only whether you "worried" about running out of food and does not ask whether you were ever "hungry" and if so for how long.  Actually I myself was hungry today (it was a few hours ago, right before dinner).  But anyway, if you respond that you ever "worried" about running out of food, you are classified as having been "food insecure."

This survey began back in 1995, in the Clinton administration, although it had some predecessors going back a little farther.  Why then?  Here is a history of the survey from an advocacy organization (FRAC).  The reason they give?  "[M]any communities across the country experienced an enormous increase in demand for emergency food, often among families with children."  My take:  There was a new Republican Congress, and the government and advocacy groups became desperately worried that someone was going to declare that the food stamp program and other government food programs (WIC, CNP) had ended the problem of hunger in the United States.  A metric was needed that could be somehow vaguely associated with hunger and yet would be impervious to decrease no matter how much food aid and assistance might be provided by the government.  Take a look at that survey question, and you will see that it is perfectly designed for this purpose.  And they were right:  it turns out that year in and year out, in good times and bad, and no matter how much food aid is provided by the government and in what form, somewhere between one person in ten and one in seven gives a positive response to the question of whether they ever "worried" about running out of food.  You can make your own decision as to whether this food insecurity thing was totally dishonest from the get-go, as opposed to only partially dishonest.  I go with totally dishonest.

But even if there was some honesty in devising the metric, there isn't even a hint of honesty in its use.  In his WSJ article, Bovard quotes several Democratic party sources, up to and including President Obama, as taking the "food insecurity" number and immediately equating it, falsely, with "hunger."  Obama (relying on a 2009 "food insecurity" survey): "hunger rose significantly last year" and promis[ing] to reverse "the trend of rising hunger."  The Washington Post (relying on the "food insecurity" survey):  "Hunger a growing problem in America, USDA reports."  The New York Times (also relying on the same survey): "Hunger in U.S. at a 14-Year High."

Bovard notes that in 2006 the National Academy of Sciences, in a half-hearted stab at honesty, urged the DOA to explicitly state that the "food insecurity" numbers are not an estimate of nationwide hunger.

The [DOA] responded by dropping any mention of "hunger" in the survey's response categories. Nevertheless, the survey's results continue to be pervasively misrepresented as an accurate measure of hunger in America.

They dropped any mention of "hunger," but they completely knew that the whole purpose of this study is to allow its results to be misrepresented far and wide as a measure of hunger.  Bovard doesn't quote them, but literally every advocacy organization in the "hunger" space uses the "food insecurity" survey to claim a crisis of hunger in the United States.  Feeding America: 

In many ways, America is the land of plenty. But for 1 in 6 people in the United States, hunger is a very real struggle. . . .   Right now, millions of Americans are at risk of hunger. 

No Kid Hungry:

Hunger prevents kids from reaching their full potential.  It's an epidemic that's threatening America's future. . . .  More than 16 million kids in America live in households that struggle to put food on the table.

worldhunger.org

The financial and economic crisis that erupted in 2008 caused a dramatic increase in hunger in the United States.  This high level of hunger continued in 2012, according to the latest government report [citing the food insecurity report].

And there are many, many more along the same lines.  Bovard concludes by calling it "paradoxical" that food insecurity may actually increase as participation in government food programs increases:

A 2007 Journal of Nutrition study concluded that families receiving food stamps are over 50% more likely to be "food insecure" than similar households not on food stamps. In 2010, the Government Accountability Office reported that food-stamp participants "tend to be more food insecure" compared with eligible nonparticipants. A 2013 Harvard School of Public Health study also found that enrolling in the food-stamp program failed to significantly boost participants' food security or dietary quality.

Wow, is that an overly nice way to characterize something that is a scam from top to bottom.  There is nothing "paradoxical" about this.  The whole idea of using "food insecurity" as the metric is to have something that is completely impervious to going down no matter how much is spent to solve the problem.  Oh, it actually goes up???  Even better!!!!  Yes, the whole design of the food stamp program is that it forces poor people, who may not be the most together people in the world, to manage a monthly budget and make it last to the end of the month.  Of course they are going to feel "food insecure" at some point!  You could double, or triple, or quadruple the spending on food stamps, and this would still be true.

What I find remarkable is that it's the same organization, the DOA, that both runs the food stamp program and puts out the "food insecurity" surveys.  Don't you think they would be ashamed that their massive $80 billion per year program of food distribution (food stamps, aka SNAP) didn't ever make a dent in the problem they claimed to be trying to solve, namely "food insecurity"?  Shouldn't they be saying, "OK, we blew it.  It's time for somebody else to take over with a new approach"?  It's just incredible that in the world of government total failure is in fact the best advocacy tool for yet more money to go back and fail again.  They design their measurement metric to be absolutely sure that they will always be found to have totally failed.

Now, of course, the government could design an honest "hunger" survey.  Such a survey would ask questions like, "During the year, were you ever hungry for as long as a full day due to having insufficient resources to buy food?" followed by "Did you participate in the food stamp program?  If not, why not?" and "Did you visit a local food pantry or soup kitchen?  If not, why not?"  These questions are highly likely to come up with the result that the number of Americans experiencing actual serious "hunger" during a year is a very small fraction of those currently reported as experiencing "food insecurity."  Could it be as much as 2% of the population?  (Remember, in America today, the poor consume well more calories than the affluent and have a far higher rate of obesity.)  Whatever the results, they wouldn't be much use for selling the public on increasing the food program spending.  So you can be sure that this survey will never be conducted.  We will never actually find out how many Americans experience real hunger in a year.  

Shouldn't We Be Getting Angry About The Poverty Scam?

Close to one trillion dollars of annual "anti-poverty" spending at all levels of government, and yet the so-called poverty rate never goes down, not even by a little.  In the latest reports from the Census Bureau the poverty rate continues to hover right around 15%, pretty much right where it was when the War on Poverty began in 1964, more than $20 trillion of "anti-poverty" spending ago.  But since the population has grown over that 50 year period, the number of people in government-defined "poverty" has actually increased, from under 30 million people to almost 50 million people.

How is it even possible to spend that much money and not alleviate "poverty" even by a little?  And particularly, how is it possible given that "poverty" by the government's definition is entirely an issue of money income, and could, if the government chose, be completely ended in a day simply by passing out enough of the "anti-poverty" spending in cash to cure the problem -- and the amount of cash that it would take is less than a third of the current "anti-poverty" spending?

The answer is, it takes a lot of work to keep up the facade that "poverty" has not gone down despite all the spending.    New and costly "anti-poverty" programs must be carefully designed and implemented to be sure that none of the spending will be counted to reduce measured poverty even by a little.  Clever arguments must be devised to somehow make it seem plausible that even handouts nearly indistinguishable from cash, like food stamps and the EITC, should not be counted in determining poverty status.  Data to be released must be carefully edited and formatted so as to bury and conceal the existence of millions of people deemed in "poverty" by government measures whom no one would consider poor, such as twenty-somethings from affluent families looking for their first job, students, early retirees, and business owners having a losing year. 

What is not possible is to keep up the facade of never-declining poverty and also do it honestly.  If they just went through the motions and let the numbers turn out as they may, there would be no way to keep that trillion of annual spending from making poverty go down, and by a lot.  The so-called "poverty rate" of necessity is a reverse-engineered number: they decide first approximately what "poverty rate" to achieve in order to sell the public on more "anti-poverty" spending, and then they back into the series of decisions about program design and what to count and not count in order to achieve that level.  We have reached the point where the published "poverty rate" has long since ceased to bear any relationship to whatever real poverty -- physical deprivation poverty -- may persist, with no way to tell from the data which part of the poverty is real (physical deprivation) and which part is completely contrived by cynical government functionaries manipulating the definitions, the program design, the decisions on what to count, the survey questions, and the like.

The problem is that the game has gone on so long, and so far, that it is way beyond being hidden any more.  What I can't understand is the level of good will that the people show toward the government operatives who continue to practice deception, or attempted deception, with numbers that obviously on their face cannot possibly be honest.  It's like a Ponzi scheme, a Madoff-type scam, that has long since blown up, and yet everyone keeps pretending that nothing is wrong.    Shouldn't people be angry -- really angry -- that the government takes a trillion dollars of their money every year and yet can't spend any of it in a way that even slightly addresses the problem as defined, won't give any honest information on how the problem as defined is being addressed or fixed, and uses obviously dishonest numbers to advocate for yet more of the same useless waste?  And yet, with the government presenting numbers that are obviously fake on their face, the reaction of almost all of the public seems to be, well, it's the government so it must be right.

If you would like to read a piece of sheer idiocy on this subject, check out "What Makes People Poor?" by Thomas Edsall in the New York Times on September 2.  Edsall has an appalling ignorance of what the term "poverty" means in the government definition, and his article is pervaded by the fallacy that what the government calls "poverty" has some resemblance to the usual understanding of the term, namely physical deprivation.  Edsall bemoans the divide between left and right in their thinking about the causes of poverty, and thinks he has come up with a synthesis that can unite the views of both sides, and thereby come up with "programs" to solve the problems of poverty and inequality:

The emergence of a rough ideological consensus on the causes of poverty and inequality would increase the likelihood of, but by no means guarantee, agreement on such initiatives as raising the minimum wage, increasing and expanding the scope of the earned-income tax credit, programs promoting marriage and paternal involvement, as well as stronger efforts to improve the quality of education, especially in poor neighborhoods.

Is it possible to be this ignorant?  Let's take these one at a time:

• Raising the minimum wage.  This is almost certain to increase, rather than decrease, measured poverty and inequality.  The reason is that people who actually work full time at the minimum wage for the whole year make enough to exceed the poverty thresholds in nearly all cases, so raising the minimum wage does not remove them from "poverty."  (The poverty population consists almost entirely of people who don't work, or work only a little.)  To the extent that raising the minimum wage increases unemployment, it increases the number of zero earners, and that increases measured poverty and inequality.  You may think that raising the minimum wage has little effect in increasing unemployment, but that only means that raising the minimum wage increases poverty only a little.  There is no scenario in which raising the minimum wage decreases measured poverty.
• Expanding the EITC.  Could it be possible that Edsall does not know that the EITC does not count in the measure of poverty?  Check out this from left-wing site vox: "Everyone's favorite anti-poverty program doesn't reduce the poverty rate."  The failure to count the EITC in the measure of poverty is one of the most despicable elements of the poverty scam. 
• Programs promoting marriage and paternal involvement.  "Paternal involvement" has absolutely no impact on measured "poverty."  Suppose the unmarried dad gives the girlfriend and kids $50,000 per year to support them?  It doesn't count!  That's gifts, and not "cash income."  Marriage?  That would count.  Kindly explain to me what exactly these "programs supporting marriage" are supposed to be, in the face of massive handouts of apartments and Medicaid and food stamps and cell phones that are only available if the woman and kids show little or no "cash income," in other words, stay unmarried.  No "program" is going to have the slightest impact in the face of the hundreds of billions of dollars of handouts that are available in return for staying unmarried.
• Efforts to improve the quality of education.  Tom, "poverty" turns only on "cash income" in the current year.  Better education may have some impact on cash income -- 20 years from now when today's kids are in the labor force. 

No these are the proposals of the left, indeed not all of the left, but the ignorant left.  I don't think the right will be coming together with them on any of this any time soon.  

Catching Up With The Manhattan Contrarian

Please note that the cover story in the current issue of The Economist of London is titled "The World's Biggest Shakedown?  The Criminalisation Of American Business."  It is behind their pay wall, unfortunately, but I highly recommend it.  Note that this subject has been covered by the Manhattan Contrarian in articles on August 24, 2014, August 19, 2014, July 13, 2014, September 24, 2013, July 25, 2013, and July 1, 2013, among others.  My first article on the subject was in 1999 and published in the Federalist Society journal Engage. 

Glad to see at least someone else is starting to pay attention.  How about you, New York Times?  Prediction:  as loyal shills for the Democratic Party, they will get on the bandwagon only when it is a Republican occupying a high-level prosecutor's office and conducting an indefensible prosecution.

Thomas Piketty And The Economics Of Jealousy

It seems like only yesterday the big crisis in the U.S. economy was our very low rate of personal savings.  In a complex economy requiring more and more capital to produce a dollar of GDP, how can we expect to stay successful if nobody saves?  The rate of personal savings in the U.S. hit a low of only 1.5% in 2005, and since has recovered some, to 3.9% by 2012 and then to just over 5% today.  But still that compares to rates of over 10% in many European countries and much higher in Asia.  A study from the People's Bank of China in 2013 put the personal savings rate in China close to 50%, at least in some months.

As recently as 2013 you could still find articles talking about this personal savings crisis.  Here is one from Leslie Kramer of CNBC in May 2013.

Many economists and fund industry experts say that unless Americans change their spending habits and learn how to save, we will soon be facing a full blown retirement crisis and it may be turn out to be a deeper and more harrowing experience than many have already envisioned. 

Back then (barely more than a year ago) people analyzing why our savings rate was so low often pointed to the very poor incentives to save, starting with the Fed's near-zero interest rate policy, followed by high taxes on interest, dividends, and capital gains.  With interest rates on bank savings and money market funds well less than 1%, and even that 1% taxed as ordinary income, and with at least some inflation, however minimal, it is clear that cash and near cash investments have been earning negative returns for years.  Longer term fixed income investments may earn barely positive returns after taxes and inflation, but those could well get wiped out by principal declines when interest rates start to rise.  You can buy higher interest "junk" bonds, but at your peril -- they can default and wipe out your investment at any time.  Equities have earned strong returns over long periods, but subject to periodic sharp and sickening declines, such as the decline of over 50% that occurred in 2008 - 09.  And if you do have long-held equity investments that have appreciated substantially, then when you sell them you must pay capital gains tax on all the appreciation, most of which will be inflation rather than real gain.  In short, if you save and invest in the U.S., between Fed policy, taxes, and wide market swings, you could as easily lose as gain.  No wonder the savings rate is low.

Then earlier this year came out the translation of Thomas Piketty's book "Capital in the Twenty-First Century."  I haven't seen anything about the crisis of low personal savings since.  Is it coincidence?

I will not claim to have read Piketty's book from end to end (I'm not sure that's even possible).  However, I have bought it and looked through it for highlights.  On the kindle, where after you buy a book they can track of how much of it you have read, this has been declared the least-read book of the year -- less read than even Hillary Clinton's "Hard Choices," if you can imagine that.  Still, if you are left-wing economist you are seemingly required to declare this one of the greatest economics books of all time.  Gushingly favorable notices have come from the likes of Nobel Prize winners Robert Solow, Joseph Stiglitz and, of course, Official Manhattan Contrarian Worst Economics Writer Paul Krugman.  In the New York Review of Books Krugman calls "Capital" a "magnificent, sweeping meditation on inequality."

Piketty asserts that inequality is high and increasing and that he has identified the key to understanding why.  It is that r > g.  r is the rate of return on capital; g is the rate of growth of the economy.  If the rate of return on existing capital exceeds the rate of economic growth, then, asserts Piketty, the owners of existing wealth get richer faster than anyone else can catch up with them.  In other words, the rich get richer and the poor get poorer.  From page 377:

We have also learned that the relative movements of the return on capital and the rate of growth of the economy, and therefore of the difference between them, r - g, can explain many of the observed changes, including the logic of accumulation that accounts for the very high concentration of wealth that we see throughout much of human history.

Aha!  Now you tell us that all you have to do is save some and you are on the ineluctable path to becoming a plutocrat!  The former crisis of low personal savings does not fit with this and is no longer part of the narrative.  

But wait:  is r really greater than g when the government has been running for years a zero interest rate policy specifically to make it so that nobody can earn any positive return on savings?  I can't seem to find the answer to that here.  I do find this on the same page 377:

In all likelihood, inheritance will again play a significant role in the twenty-first century, comparable to its role in the past. . . .  Whenever the rate of return on capital is significantly and durably higher than the growth rate of the economy, it is all but inevitable that inheritance (of fortunes accumulated in the past) predominates over saving (wealth accumulated in the present). . . .  The inequality r > g in one sense implies that the past tends to devour the future: wealth originating in the past automatically grows more rapidly, even without labor, than wealth stemming from work, which can be saved.  Almost inevitably, this tends to give lasting disproportionate importance to inequalities created in the past, and therefore to inheritance.

That sounds a lot more like a prediction for the future than an explanation of why we supposedly have too much inequality today.  And what basis does Piketty have to predict that inherited wealth will come to dominate in the future?  Got me.  Even if you grant that r is greater than g, or has been for some substantial periods in the past, if that meant that inherited wealth would dominate, shouldn't we now be dominated by the heirs of the Vanderbilts, the Fords, the Carnegies, the Morgans, and so forth.  Instead, as Jonah Goldberg points out in Commentary, most large fortunes in the United States seem to dissipate or get eclipsed quickly, while almost all the largest fortunes today have been made in the current generation:

Fewer than 1 in 10 of the 400 wealthiest Americans on the Forbes list in 1982 were still there in 2012. (Lawrence Summers notes that if Piketty was right about the stable return on capital, they should have all stayed on the list.) Of the 20 biggest fortunes on the Forbes list in 2013, 17 (85 percent) were self-made. Of the three remaining entries, only one—the Mars candy family—goes back three generations. 

Oh well.  Maybe it doesn't really matter if any of this is true or not.  You need to get way toward the back of the book (past page 500) before you get to the really important point:  we must take the wealth away from those who have gotten too rich!  And thus we find proposals for much higher marginal income tax rates and for a global wealth tax to prevent anyone from getting too rich.  And how rich is too rich?

A[n income tax] rate of 80 percent applied to incomes above $500,000 or $1 million a year would not bring the government much in the way of revenue, because it would quickly fulfill its objective: to drastically reduce remuneration at this level but without reducing the productivity of the US economy, so that pay would rise at lower levels. 

Up to this point in the book I thought that the problem was the accumulation of wealth in the hands of a few and the passing of that wealth by inheritance; now all of a sudden the problem is current income above a certain level.  Piketty is explicit that his desire for this tax is not to raise revenue (to his credit he admits that it won't raise much) but rather to punish anyone who dares to be too successful.  And is it just my cynicism, or is that level of "$500,000 or $1 million a year" picked to be just above the level that an academic economist with a modestly successful book can expect to earn?  Somehow, all the proposals for punitive action against the evil "one percent" always seem to come from people in percents 2 and 3.  Those people are themselves very affluent, but somehow consumed by jealousy.  That's not much of a basis for economic policy.  

Left Behind In Salisbury, CT -- Or Not

President Obama's discussion of young urban black men getting "left behind" by the modern economy prompted a response from Selena Zito of Real Clear Politics, pointing out that it's not just young blacks.  Zito travels to the northwest Ohio town of Van Wert, "a farming and manufacturing community," and finds, quoting a local, that "Van Wert is very much a town that has been left behind."  Though neither urban nor very black, Van Wert has suffered from the closing of many of its businesses and the opening of a nearby Wal-Mart that has left many vacancies in the otherwise charming downtown.  Citing Walter Russell Mead, Zito bemoans the decline of America's "core institutions, ideas and expectations" that "shaped American life for 60 years after the New Deal," an "old system" where "both blue-collar and white-collar workers held stable jobs, and living standards for all social classes steadily rose." 

I often enjoy the writing of both Zito and Mead, but I think they just have a fundamental mis-perception of the supposedly "good old days" and of the processes of creative destruction that were at work then just as much as now.

First, let's consider Salisbury, Connecticut, the town where I'm hanging out this week.  It is the most northwest town in Connecticut, bordering both New York and Massachusetts.  If the decline of manufacturing and agriculture makes a town "left behind," then Salisbury has to be the most left behind town in the whole country.  In this town, manufacturing and agriculture have declined from total dominance right down to the vanishing point.  

At the Salisbury Association on Main Street, they have this week an exhibit on Salisbury during the Civil War.  The exhibit begins with a description of Salisbury and its economy as the war opened in 1861:

In 1861 Salisbury was a bustling industrial and farming town of 3000 people.  Along the brook flowing from Mount Riga to Salisbury center stood two forges, a tannery, the Washinee Woolen mill, a grist mill, hattery, and two additional forge and trip hammer shops.  The great mine at Ore Hill provided tons of rich iron ore, while local charcoal burners produced mountains of fuel to power the furnaces and forges belonging to Landon & Company, Oliver Ames, and Barnum and Richardson in Amesville and Lime Rock.  In addition to the heavy industries, many Salisbury businesses flourished.  Lakeville was home to a brass and tin shop, the Welch & Seymour firm that made surgical splints, as well as the highly successful cutlery factory operated by A.H. Holley.  Outside the village centers, scores of substantial farms supplied meats, grain, fruit and dairy products to a wide range of near and distant consumers.

Today?  It's literally all gone.  In the intervening 153 years, the population has crept up to 3,747 (while the population of the U.S. has multiplied by more than 10 times in the same period), but the "bustling industrial and farming" economy has almost completely disappeared.  The iron businesses that once defined Salisbury have been gone for a good century.  As to other manufacturing, I can't find a single factory of any kind today in this town.   The closest possibility is a very small ITW facility in the Lakeville section of town, but I don't detect them actually making anything there.  A site that has compiled some census data for the town has a big 1.66% of its workforce engaged in "production, transportation and material moving" -- but there is a company in this town that provides school bus transportation that could account for pretty much all of that.  

Agriculture?  There are still a few farms, but if there's a story to be told about agriculture around here it's that even the tiny amount of remaining agriculture is still declining.  One of the most popular posts on this blog continues to be one of the very first, called the "Defunct Agriculture Tour," with pictures of recently abandoned farms in this area where the land has been leaving agriculture and reverting to forest for a good century and a half.  The census data show all of 0.63% of the workforce engaged in "farming, fishing, forestry."  That would be fewer than 25 people, and some of them are in the firewood business.

So therefore we've been left really, really behind, right?  Well, actually not.  The fact is that in the modern international economy there are thousands upon thousands of types of goods and services that can be sold on a world market.  Without actually making any tangible things to speak of, this is a very upscale town.  

So what do they do?  The two largest businesses are private boarding schools, Hotchkiss and the Salisbury School.    Hotchkiss charges like the most expensive colleges, with annual tuition, room board and fees coming to $52,430.   The buzz is that starting next year they plan to fill the place up in the summers, and charging top dollar, with students from China looking to learn English.  Also in Salisbury is sports car racing mecca Lime Rock Park, made famous by frequent visits from Paul Newman while he was alive.  A regional bank, Salisbury Bank, has its headquarters here.  Ascendant Compliance Management is a consulting firm that advises the securities industry on regulatory compliance.  And I could go on.  The side roads are dotted with beautiful houses, many of them second homes of people from New York or Boston.  The unemployment rate is 4.6%, well below the national average, and median household income is reported at $65,625, well above the national average.  The loss of all the manufacturing and almost all the agriculture did not "leave the town behind," but rather was the impetus to move on to new and better opportunities.

And that, by the way, has always been the deal in the United States as far as I can tell.  This business from Mead and Zito that there was once an "old system" where everybody had a stable job and incomes just rose naturally and steadily -- that's a pure fiction.  The real big picture story of the U.S. economy from the 1800s through close to the present is the vast involuntary exit of virtually everybody from agriculture -- forced out by inexorable market pressures, mechanization decreasing the need for labor, painfully low incomes, backbreaking work for little pay, crop failures, bankruptcies and foreclosures.

Below is a chart from Department of Agriculture data of the decline of the percent of jobs in agriculture in the United States from 1790 to 2000, going from 90% of all jobs down to just 2.6%.  Even if you assume that  Mead's "old system" only refers to the period immediately after World War II, that period started with about 17% of U.S. employment in agriculture.  There was plenty of pain in the loss of those last 10 million or so agricultural jobs in the 1950s, 60s and 70s..  But that's how the modern economy was created. 

The idea that there was some kind of more humane "old system" in the post-war period is just an illusion resulting from diverting our gaze from the vast dislocation out of agriculture during that period, and focusing instead on the world of large-scale manufacturing that then was on the ascendancy and provided for what seemed like stability and security.  Today, such large-scale manufacturing is no longer the future in the United States.  We can look upon that change as creating people and towns that are "left behind," or alternatively we can look upon it as giving people the chance, with a strong push from behind and with a vastly expanded international economy, to pursue new and better opportunities.  The same principle applies to the young black men who are the focus of President Obama's attention.

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More On The Latest Bank of America Shakedown

Following up on my recent post about big time shakedown prosecutions, I thought I would look in a little more depth at the latest settlement of the government with Bank of America, just announced a few days ago.   The headline number is that Bank of America will pay close to $17 billion to some combination of the federal government, six states that joined in the settlement, and a "consumer relief" fund.  Is the settlement a bona fide resolution of legitimate claims, reasonably related to the claims settled, or is it just a shakedown, in other words an extortion of a large arbitrary number by threats to abuse government power?

My verdict:  shakedown.  I'll lay out my reasons, but by all means you should read some of the stuff they have released and form your own conclusions.  Here is a link to the Justice Department page announcing the settlement.  That page contains several other links with additional information.  The most important are the Settlement Agreement and the so-called "Statement of Facts" that accompanies the settlement.

If you think this settlement must have something to do with advantage-taking committed against low-income and subprime borrowers, you are wrong.  That alleged conduct has been the subject of multiple other investigations and proceedings, but not this one.  This one is supposedly about "fraud" and "misrepresentations" committed against purchasers of mortgage-backed securities.  Weren't those purchasers largely sophisticated mutual funds and hedge funds that are very capable of looking out for themselves?  Yes -- but why would you think that just because the settlement is a recovery for wrongs allegedly done to those sophisticated investors, that those investors will benefit in any way from it?   In fact, as far as I can tell there is no effort at all to tie the recovery to losses actually suffered by anyone, and furthermore none of the money is going to any of the supposed "victims" here.  A better way of looking at this is that those investors are just the excuse for Holder and a group of state AGs to get their name in the papers attached to a big number.

The "Statement of Fact" is 30 pages long, and excruciating reading, but actually relatively short for this kind of thing.  Of the various items discussed, all but a couple relate to the activities of either Merrill Lynch or Countrywide, entities that the government pressured BofA into taking over as the financial crisis got going.  I'll give you a few exemplars of the conduct the government thinks warrants this kind of settlement.  As the first example, from one of the few instances relating to BofA itself, on page 2:

Bank of America did not have third-party, loan-level due diligence conducted on the specific mortgage loans collateralizing the BOAMS 2008-A securitization. This was contrary to its past practice. . . .   Bank of America did not disclose in the BOAMS 2008-A offering documents that third-party, loan-level due diligence was not conducted on the loans collateralizing BOAMS 2008-A. 

Or try this from page 11 (conduct of Countrywide):

During the period from August 2005 to 2007, Countrywide received information regarding the performance and characteristics of loans that it originated under various products and programs and securitized into RMBS. That information suggested that certain products had the potential to perform poorly, particularly in a challenging economic environment. 

Imagine that!  Or from page 16 (again conduct of Countrywide):

Although Countrywide disclosed in certain of its SEC filings (i) the attributes of Pay-Option ARMs that were held by CB and (ii) the increasing volume and dollar amount of loans that were experiencing negative amortization, the Offering Documents did not disclose that certain Pay-Option ARM loans included as collateral were loans that CB had elected not to hold for its own investment portfolio because they had risk characteristics that CFC management had identified as inappropriate for CB.  

And believe me, I'm not cherry-picking here.  It's one pile of nothing after another.  They even quote from several emails.  You would think that after subpoenaing what must have been millions of emails they would have at least a few dozen embarrassing admissions to throw back at BofA, but again they have literally nothing.

So who gets the money from this settlement?  Go through the Settlement Agreement, and you find that of the $17 billion, about $10 billion goes to some combination of the federal government and the six participating states.  There's no specification of what office or fund gets the money to spend.  So is it just a slush fund to spend on whatever pet project Justice may want to have free from any oversight?  Sure looks like it.  Then there's $7 billion for what they call "consumer relief."  Wait a minute -- I thought this settlement had nothing to do with injured consumers.   And what does "consumer relief" consist of?  Supposedly there's a description in "Annex 2", but when you go there you find that the whole thing consists of this one cryptic paragraph:

Eligibility: The Consumer Relief eligibility criteria shall reflect only the terms set forth below and the following principles and conditions: (1) Consumer Relief will not be implemented through any policy that violates the Fair Housing Act or the Equal Credit Opportunity Act; (2) Consumer Relief will not be conditioned on a waiver or release by a borrower, provided that waivers and releases shall be permitted in the case of a contested claim where the borrower would not otherwise have received as favorable terms or consideration; and (3) Eligible modifications may be made under the Making Home Affordable Program (including the Home Affordable Modification Program and the Housing Finance Agency Hardest Hit Fund) and any proprietary or other modification program. Nothing herein shall preclude the implementation of pilot programs in particular geographic areas that do not violate the Fair Housing Act, the Equal Opportunity Credit Act, or any other federal or state civil rights law.  

A guy named Eric Green is appointed to "monitor" the consumer relief.  He's a fairly prominent guy in the mediation business, and maybe even a man of integrity.  But is there any chance that this $7 billion will not end up being another slush fund going most or all to Democratic party activists of one form or another?

A couple more issues.  There's no mention whatsoever in the Settlement Agreement or Statement of Facts that most of the indentures for mortgage backed securitizations contain provisions whereby when a loan is found not meeting the underwriting criteria of this trust, that loan can be put back to the issuer who then must substitute a conforming loan.  The existence of such a provision would completely undermine the significance (if there otherwise would be any) of essentially all of the allegations of wrongdoing in the Statement of Fact.  So what if BofA did inadequate due diligence on the loans that went in here if it has a duty to substitute a conforming loan on request?  Now, I don't specifically know that all BofA indentures at issue here had this provision; but I am in this business, and all the indentures I have seen have them.  Indeed, there is a huge amount of civil litigation going on around the country right now where buyers and trustees have sued issuers to force substitution of conforming loans.  And suppose that some, or even many, of the BofA/Merrill Lynch/Countrywide indentures lacked this provision.  Still, we know from the prevalence of the provision throughout the industry that the sophisticated buyers were able to demand it when they wanted it.  The failure in the Settlement Agreement and Statement of Facts to address this issue is frankly an insult to the intelligence of public readers of the document.  How can you ask us to evaluate whether this is a bona fide settlement versus a shakedown if you won't even tell us whether the supposedly defrauded buyers had the usual right to put back non-conforming loans for substitution?  The fact that they don't mention the issue tells you all you need to know.

The federal government is getting about $9 billion out of the approximately $10 billion going to government entities.  What's the theory that they deserve this money?  Perhaps because Fannie and Freddie lost money guaranteeing many of these mortgages?  Well, first, they don't say how many of these mortgages were guaranteed by Fan and Fred; and to the extent the mortgages were so guaranteed, that would mean that the MBS bonds were good, and would be inconsistent with the theory of the case that the buyers were defrauded.  And didn't Fan and Fred have the complete ability to audit to their hearts' content any loans that they were guaranteeing?  Well then, I can't think of any reason at all why the federal government should get a dime of this money.  Oh, unless it's a shakedown. 

Actually, Fan and Fred, egged on by Congresspersons led by Barney Frank and Mel Watt, were the prime sources pushing BofA, Merrill and Countrywide to make all these iffy subprime loans in the first place.  And where are these players today?  Fan and Fred are bigger than ever in dominating the mortgage guarantee and securitization business.  No prosecutions there.  Barney Frank has mercifully sailed off into the sunset.  And Mel Watt?  He's now the head of F/F's so-called "regulator," the FHFA.  And hard at work pushing for another round of untenable subprime mortgage lending.

Then there are the six states participating in the settlement:  California, Delaware, Kentucky, Maryland, New York, North Carolina.  Did I mention that the AGs of all six are Democrats?  Kudos to the Republican AGs of this country for not joining in on this pile on.

At Bloomberg News they're treating the settlement like some kind of important accomplishment for the government, and quoting the government spokesman without the slightest inkling that he is blowing smoke:

The government said Bank of America and its Merrill Lynch and Countrywide Financial units sold billions of dollars of mortgage securities backed by toxic loans and misrepresented the risks to investors.  “It’s kind of like going to your neighborhood grocery store to buy milk advertised as fresh, only to discover that store employees knew the milk you were buying had been left out on the loading dock, unrefrigerated, the entire day before, yet they never told you,” Associate Attorney General Tony West said during the press conference.

If you think that's embarrassing, try the New York Times, where the entire angle is whether BofA may get away with paying less than the entire $17 billion (because some of it will be tax deductible, and some of the "consumer relief" may never come to pass).  The article is larded with quotes from their activist buddies from places like the Urban Justice Institute and the Neighborhood Assistance Corporation of America.

Does anyone in the press actually look at whether this matter involves any actual wrongdoing or whether it makes any sense?  Try Holder The Shakedown Artist at IBD.

Little by little the prosecutors of this country are forfeiting all the credibility that they ever had with that part of the public that pays attention.

Full disclosure:  Willkie Farr represents Bank of America in some matters, although not in this matter.