Author Archives: nottoobigtofail.org
“The well-intended federal government is no better a lender to Americans than the private sector. In fact, you could argue that with inability to discharge federal student loans in bankruptcy…
…and the government’s ability to garnish wages, they are worse. Doesn’t this destroy the crisis era narrative (from the Left and mainstream media) of predatory private sector mortgage lenders? I think so. P.S. I also think you could make an argument that the Obama Administration wanted everyone in school (and used this borrowing to facilitate it) to keep the unemployment rates (especially among the young) artificially lower post-crisis.”, Mike Perry, former Chairman and CEO, IndyMac Bank, April 24, 2017
Josh Mitchell, April 24, 2017, The Wall Street Journal
The U.S. Makes It Easy for Parents to Get College Loans—Repaying Them Is Another Story
The federal Parent Plus loan program has millions of borrowers, many with subprime credit ratings; its default rate exceeds the rate for U.S. mortgages at the peak of the housing crisis
Rebecca McEvoy, a retired public-school teacher coping with multiple sclerosis, borrowed $84,000 through Parent Plus to help her oldest son through an art and design college. PHOTO: MADDIE MCGARVEY FOR THE WALL STREET JOURNAL
By Josh Mitchell
Millions of U.S. parents have taken out loans from the government to help their children pay for college. Now a crushing bill is coming due.
Hundreds of thousands have tumbled into delinquency and default. In the process, many have delayed retirement, put off health expenses and lost portions of Social Security checks and tax refunds to their lender, the federal government.
Student loans made through parents come from an Education Department program called Parent Plus, which has loans outstanding to more than three million Americans. The problem is the government asks almost nothing about its borrowers’ incomes, existing debts, savings, credit scores or ability to repay. Then it extends loans that are nearly impossible to extinguish in bankruptcy if borrowers fall on hard times.
As of September 2015, more than 330,000 people, or 11% of borrowers, had gone at least a year without making a payment on a Parent Plus loan, according to the Government Accountability Office. That exceeds the default rate on U.S. mortgages at the peak of the housing crisis. More recent Education Department data show another 180,000 of the loans were at least a month delinquent as of May 2016.
“This credit is being extended on terms that specifically, willfully ignore their ability to repay,” says Toby Merrill of Harvard Law School’s Legal Services Center. “You can’t avoid that we’re targeting high-cost, high-dollar-amount loans to people who we know can’t afford to repay them.”
Parent Plus is one thread in a web of higher education loan programs that have come to resemble the subprime mortgage industry a decade ago, given the shaky quality of many of the loans.
The number of Americans with federal student loans, including through programs for undergraduates, parents and graduate students, grew by 14 million to 42 million in the decade through last year. Overall student debt, most of it issued by the federal government, more than doubled to $1.3 trillion over that period.
The financing fueled a surge in college enrollment. Between 2005 and 2010, enrollment grew 20%, the biggest increase since the 1970s. The Obama administration supported such lending in an effort to widen access to college education.
Nearly four in 10 student loans—the vast majority of them federal ones—went to borrowers with credit scores below the subprime threshold of 620, indicating they were at the highest risk of defaulting, according to a Wall Street Journal analysis of data from credit-rating firm Equifax Inc. That figure excludes borrowers, such as many 18-year-old freshmen, who lacked scores because of shallow credit histories. By comparison, subprime mortgages peaked at nearly 20% of all mortgage originations in 2006.
Roughly eight million Americans owing $137 billion are at least 360 days delinquent on federal student loans, nearly the number of homeowners who lost their homes because of the housing crisis. More than three million others owing $88 billion have fallen at least a month behind or have been granted temporary reprieves on payments because of financial distress. New research from Federal Reserve economists shows that most student-loan defaults are among borrowers who had weak credit.
Consumer advocates say defaults will continue to mount as loans taken out after the recession enter the repayment cycle.
An Education Department spokesman said the agency is reviewing Parent Plus and all other programs “to determine how best they can fit into the administration’s goals of helping students and taxpayers, while promoting excellence in education.”
President Donald Trump pledged during his campaign to ease families’ student-debt burdens, and his campaign at one point suggested privatizing federal student loans. Senate Republicans plan to study whether to restrict access to Parent Plus as part of a broader higher-education bill expected to be debated as early as this year.
Parent Plus, created by Congress in 1980, allows parents to borrow to cover tuition and living expenses—often after their children borrow the maximum in undergraduate federal loans, capped by law at $5,500 a year for freshmen, $6,500 for sophomores and $7,500 for juniors and seniors. There is no limit to how much parents can borrow. Supporters say the program ensures students can go to schools of their choice.
Rebecca McEvoy, 53 years old, had been a retired public-school teacher for several years, coping with multiple sclerosis, when she turned to Parent Plus in 2010. She borrowed $84,000 to help her oldest son through an art and design college.
After he graduated, she successfully appealed to the government to have the debt expunged under a federal law that forgives balances for borrowers deemed permanently disabled.
Three years ago, she and her husband, Dave, 64, also a retired schoolteacher, turned to Parent Plus again to help their younger son, Alex, cover costs at Ohio University. Dave McEvoy took out the loans under his name. They borrowed $40,000 over the past several years and expect to borrow another $10,000 for his senior year.
Ms. McEvoy shows a photo of herself with her sons. After she obtained a Parent Plus loan for one son, her husband got one for their other son. PHOTO: MADDIE MCGARVEY FOR THE WALL STREET JOURNAL
The McEvoys’ finances likely would have raised red flags with private lenders: They are living off modest pensions and have existing debts that eat up much of their income. “I have nothing left by the time I do my mortgage, the car, food and medical,” Ms. McEvoy says.
She says they have started paying down the debt and plan to continue, but they likely won’t be able to cover the full monthly payment once her son graduates in 2018.
Valerie Miller, Ohio University’s director of student financial aid, says she can’t comment on individual borrowers. She says the school counsels parents on all their options and on whether they will be able to make payments under Parent Plus.
Alex McEvoy, 20, says he plans to work in the tech industry and pay off his parents’ loans. “I’m like, ‘Mom don’t worry about it. It’s going to be fine,’” he says.
Obama administration officials, worried Parent Plus was heaping debt on high-risk borrowers, put in place tighter restrictions in 2011. But after schools argued stiffer underwriting would prevent many students from covering tuition, thus reducing college access for minorities and poor students, the administration rolled back the new rules.
“Without this program, our fear is that many of these families would be getting private loans at less-favorable terms or less-favorable repayment options,” or they wouldn’t be able to cover tuition at all, says Cheryl Smith, head of government affairs for the United Negro College Fund.
Research shows that restricting access to loans based on credit scores leads to lower college enrollment.
Enrollment in Parent Plus has grown quickly since the early 2000s. When the recession hit, private lenders tightened underwriting and many families saw savings and access to other forms of credit wiped out.
The number of families enrolled in Parent Plus jumped more than 60% since 2005, to 3.5 million as of Jan. 1. They owed roughly $77.5 billion—an average $22,000 per borrower, Education Department figures show.
Many borrowers are poor and older. More than one-third of such loans in recent years have gone to households that also received Pell grants, a student-aid program for families typically earning below $30,000 a year, federal data show. Other research suggests about one-third were single parents and a similar share lacked college degrees themselves.
The program checks only a borrower’s past five years of credit for major blemishes such as bankruptcy or foreclosure, and the past two years for delinquency on debts of more than $2,085.
Consumer counselors are hearing from borrowers who make as little as minimum wage but borrowed tens of thousands of dollars and now can’t repay. Some expected their children to get good jobs and pay off the loans for them. In many cases, their balances have grown with interest—most Parent Plus loans issued over the past decade carried rates of between 6% and 8%—and thousands of dollars in fees the government charges when borrowers default.
Federal law prohibits borrowers from discharging student loans in bankruptcy, except in extremely rare circumstances. Instead, the government reduces tax refunds and Social Security checks of borrowers, leaving some with below-poverty incomes, the GAO reported in December.
“If Bank of America did that, Sen. [Elizabeth] Warren would have them in the biggest hearing you’ve ever seen,” says Betsy Mayotte, a consumer advocate and student-loan expert.
The number of Americans who had wages, tax refunds or Social Security checks reduced because of unpaid student debt increased 71% between September 2010 and September 2015, according to the GAO. About 41,000 Parent Plus borrowers were among one million student-loan recipients who had checks garnished in the 2015 fiscal year. The government garnished the Social Security checks of 173,000 borrowers from student-loan programs in 2015, up from 36,000 in 2002.
Other borrowers are seeking relief through plans that cut their monthly payments and ultimately forgive some debt. Enrollment in the plans, known as income-driven repayment, has more than doubled in the last three years. The government doesn’t publish data on parent participation.
“At some point, we’re going to have to realize that a bunch of loans that have been made are not going to be repaid,” says James Kvaal, former President Barack Obama’s top education adviser.
The GAO estimates taxpayers ultimately will forgive $108 billion on student loans made through the current fiscal year. By comparison, the savings-and-loan crisis of the 1980s cost the federal government roughly $181 billion, in today’s dollars, according to the Federal Deposit Insurance Corp.
Sherry McPherson took out Parent Plus debt in 2006 so her son could enroll in a seven-month certificate program at a Seattle for-profit school that teaches commercial diving. She was an unemployed single mother with thousands of dollars in credit-card debt, a car loan and a subprime credit score. She had just retired from the Army after suffering an injury in Iraq.
James Kvaal, former President Barack Obama’s top education adviser, says that “at some point, we’re going to have to realize that a bunch of loans that have been made are not going to be repaid.” PHOTO: CHARLES VOTAW/AMERICAN EDUCATIONAL RESEARCH ASSOCIATION
The school, the Divers Institute of Technology, told Ms. McPherson she needed to borrow nearly $16,000 to cover remaining tuition after her son maxed out on undergraduate federal loans, she recalls.
Ms. McPherson, now 50, remembers telling the school’s financial-aid administrator she wouldn’t be approved because of her shaky credit and unemployment.
“She looked at me and said, ‘Look, all we need is your Social Security number,’ ” recalls Ms. McPherson. “They approved me in three minutes.”
She hasn’t worked since, partly because she attended college and graduate school herself. Her Parent Plus balance has more than doubled. Combined with her own student loans, she now owes more than $100,000 to the federal government.
Ms. McPherson has refinanced into an income-driven plan, which sets her payments at zero while she is unemployed.
She and her son plan to start a commercial-diving company that she hopes will allow her to pay off the debt. But when she applied for a $60,000 loan to start the company, a private lender approved her for $20,000, at a nearly 16% rate, because of her student debt.
John Paul Johnston, executive director at the Divers Institute, says the financial-aid officer who dealt with Ms. McPherson has left the school, and that he couldn’t confirm her account. The current financial-aid director, Caycee Clark, says the school informs parents of all their options, and that often Parent Plus is the only alternative for families with no savings. The school charges $26,000 tuition for a seven-month course.
As of late 2015, nearly two-thirds of borrowers with Parent Plus debt were between ages 50 and 64, the GAO said. Nearly four in 10 Americans age 60 and above with student debt—most of whom borrowed for children or grandchildren—reported skipping health-care needs in 2014, according to an analysis of survey data from the Consumer Financial Protection Bureau. That compares with 25% of above-60 Americans without student debt who said they went without such needs.
Harry Hagan, 66, of Syracuse, N.Y., delayed retirement to repay debt. He owes about $130,000 in Parent Plus debt after helping four children through college over the past decade, including a son still in school. He estimates the debt will rise to $175,000 once he graduates.
Mr. Hagan also owes about $60,000 to $70,000 in credit-card debt and a mortgage, and has a subprime credit score. He has no savings and receives a small pension from a previous employer.
A couple of years ago, he says, he called the company that services the loans and said there was no way he would be able to make the roughly $1,200 a month payment they were expecting. The company suggested he refinance into a 30-year plan.
“I said, ‘Listen, I’m 64 years old. In 30 years, God willing, I’ll be 94. There’s a very good chance I’m not going to make it. What happens?’” Mr. Hagan recalls asking.
“They said, ‘If you die before the loan goes up, it goes away.’ I said, ‘Good, let’s do that.’”
Appeared in the Apr. 25, 2017, print edition as ‘Parents Are Drowning in College-Loan Debt.’
“Chevron is a widely cited precedent, and precedents should never be casually overturned. But Chevron deprives Americans of their right to have judges who exercise their own independent judgment without systematic bias. Chevron is thus grossly unconstitutional — not least, a persistent denial of the due process of law…
…Judges have a duty to reject Chevron with candor and clarity. Judge Gorsuch has done this. Rather than be berated for it, he should be congratulated.” Excerpt from, “Gorsuch’s Collision Course with The Administrative State”, Philip Hamburger, The New York Times, March 20, 2017. (“It might seem a highly technical legal issue, until you as an individual American citizen get sued by these federal government bureaucracies, like I was by the Obama Administration’s FDIC and SEC, who both falsely accused me of violating their laws/regulations when my bank failed during the 2008 financial crisis……and your attorneys tell you that as a result of a terrible Supreme Court ruling called Chevron, the courts are required to defer to the federal bureaucracy and its often arbitrary and/or biased interpretation of its own laws and regulations, rather than give you a fair and independent review by a federal judge. That is clearly Unamerican and clearly Unconstitutional….but our judicial system has allowed this to exist for years, and harm individual Americans like me and American institutions!”, Mike Perry, former Chairman and CEO, IndyMac Bank
Philip Hamburger, March 20, 2017, The New York Times
The Opinion Pages | Op-Ed Contributor
Gorsuch’s Collision Course With the Administrative State
By PHILIP HAMBURGER
Neil Gorsuch on Capitol Hill in February. Credit Gabriella Demczuk for The New York Times
A major point of contention facing Judge Neil M. Gorsuch in his Senate confirmation hearings this week is likely to be his view on a landmark 1984 Supreme Court decision concerning rule-making by federal agencies. This may seem like a dispute about administrative power, but more basically, it is about civil liberties.
The case, Chevron U.S.A. v. Natural Resources Defense Council, involved the Environmental Protection Agency’s authority to issue a rule under the Clean Air Act. Congress can expressly authorize agencies to make rules on one topic or another under current Supreme Court doctrine. Yet even when Congress does not expressly authorize rule making, agencies often make rules to clarify ambiguities or silences in laws in order to enforce them. They do this by interpreting the language used by Congress.
In such circumstances, according to Chevron, judges must defer to an agency’s interpretation, at least if it is within the range of permissible interpretations. In that way, agencies can make binding rules — essentially, can make law — on the theory that they are merely interpreting statutes, and under Chevron, judges generally cannot second-guess agency interpretations. In the case itself, the court found the E.P.A.’s interpretation of the law reasonable and upheld the rule.
The constitutional questions about Chevron focused for decades on the problem of separation of powers. But the debate has turned to deeper concerns about judicial independence and bias.
Judges have a duty to exercise their own independent judgment. Some academics and judges, including Justice Clarence Thomas and Judge Gorsuch, have therefore worried that Chevron requires judges to give up their independence in interpreting the law. As Judge Gorsuch explained while on the United States Court of Appeals for the 10th Circuit, courts have a “duty to exercise their independent judgment.”
Long ago, in Marbury v. Madison, Chief Justice John Marshall declared: “It is emphatically the province and duty of the judicial department to say what the law is. Those who apply the rule to particular cases, must of necessity expound and interpret that rule.” Judges cannot give up making their own judgments about statutes, as required by Chevron, without sacrificing their very duty as judges.
Even worse, Chevron establishes judicial bias. Judge Gorsuch has been silent on this problem. But where the government is a party to a case, Chevron requires judges to defer to the agency’s interpretation. This amounts to a precommitment to the government’s legal position. Chevron, in other words, forces judges to engage in systematic bias favoring one party — the most powerful of parties — in violation of the Fifth Amendment’s due process of law. Chevron deference is thus Chevron bias.
Of course, judges regularly defer to precedent, but that is deference to the judgment of another judge. It is quite another thing, and clearly unconstitutional, for them to defer to the judgment of one of the parties — indeed, to favor its legal position whenever it comes into court.
Chevron therefore cannot be reduced merely to the separation-of-powers concern — important as that is. Chevron bias also raises serious civil liberties issues, because each party has a constitutional right to an impartial judicial proceeding.
Although the Supreme Court has carefully avoided any resolution of the civil liberties questions, it has already been quietly backing away from Chevron. The only difference with Judge Gorsuch on the court is that, in light of the views he has expressed on the 10th Circuit, he would probably reject Chevron openly.
As might be expected, there are countervailing legal arguments in favor of Chevron. One is that, without Chevron, judges will have to attribute meaning to highly ambiguous statutes and will therefore have to make law — indeed, will have to make law on technical matters in which they lack competence. This is a reasonable concern, but entirely misplaced.
Judges should not make heroic efforts to find statutory meaning. Where a statute is ambiguous or silent on an issue, judges can use familiar interpretive techniques to discern its meaning. If they still cannot find its meaning, they should just stop. This is not to say they must hold such a statute unconstitutionally vague, but rather that they should avoid making law and therefore should recognize that the statute has nothing more to say. Once judges conclude as much, Congress can easily correct the ambiguity.
Attempts to rally around Chevron respond to fears for recent agency policies that rely on Chevron, such as the Clean Power Plan. Many agencies have used (and sometimes abused) Chevron to make expansive rules without express or even tacit statutory authorization, and such rules will be at risk. But these rules will be at risk long before Chevron hits the dust, because any new president can use Chevron to alter rules imposed by predecessors. The fate of such rules does not depend on the fate of Chevron.
Might a renunciation of Chevron hobble the administrative state? The administrative state thrived long before 1984, and for better or worse, it will not disappear with Chevron. The only structural change will be that agencies will not be able to act without express and clear congressional authorization for their rules. And if they cannot get such authorization, perhaps they ought not be making rules.
Chevron is a widely cited precedent, and precedents should never be casually overturned. But Chevron deprives Americans of their right to have judges who exercise their own independent judgment without systematic bias. Chevron is thus grossly unconstitutional — not least, a persistent denial of the due process of law.
Judges have a duty to reject Chevron with candor and clarity. Judge Gorsuch has done this. Rather than be berated for it, he should be congratulated.
A version of this op-ed appears in print on March 20, 2017, on Page A23 of the New York edition with the headline: Gorsuch and the Administrative State
…Tesla’s business model ten years out is more proven today than years ago (they almost failed during the financial crisis), but they also have a LOT more competition today and still aren’t making money, still investing in new and speculative ventures, and constantly having to go back to investors for more capital, to cover their serious cash flow shortages. One mistake or the capital markets closing for firms like this could mean doom for them. Here’s the point, do we want companies to take risks, risks that could cause them to fail or not? You know, there is a lot of risk associated with “doing nothing” too, think Kodak, Xerox, Yahoo, so many more than the Googles, Facebooks, Amazons, and maybe Tesla…..With that said, most entrepreneurs and investors would not take those risks, if they knew they were going to be personally sued and held liable for losses arising from their business judgements, that in hindsight, don’t work out. That is the purpose of the Limited Liability corporation and The Business Judgment Rule, yet in California, federal courts have ruled that corporate officers are not protected by The Business Judgment Rule….that they could be sued for Ordinary Negligence, a very low bar and highly subjective. Think about it, isn’t running a business for ten years, that is reliant on continued funding from the capital markets, because it hasn’t achieved profitability/positive cash flow….negligent? And further, buying other companies (like your relative’s failing solar firm) and investing in new technologies, as opposed to finishing your small car and achieving positive cash flow asap….isn’t that negligent? Just saying….either we want people to take risks with Other People’s Money or we don’t? I think we do, but the California legal system sure doesn’t. How can any good lawyer, for a company like Tesla, allow their officers to place themselves and their families at risk, by being headquartered in California, where the federal courts have ruled they are not protected by The Business Judgment Rule?”, Mike Perry, former Chairman and CEO, IndyMac Bank
John D. Stoll, March 15, 2017, The Wall Street Journal
Tesla Raises Additional Funds for Model 3 Debut
Tesla is offering $250 million in common stock and $750 million in convertible notes due in 2022
Tesla Inc. shares rose 2.3% in after-hours trading. PHOTO: NICOLAS LAMBERT/ZUMA PRESS
By John D. Stoll
Tesla Inc. said it is on track to launch a more affordable car this year, but it needs to raise $1 billion to make sure it happens.
The Silicon Valley electric-vehicle maker said Wednesday it is offering $250 million in common stock and $750 million in convertible notes to strengthen a fragile balance sheet amid a risky ramp-up of Model 3 production. Billed as a cheaper offering by a company known for pricey super cars, the Model 3 is intended to sell in much higher volumes than the current models and compete with more mainstream brands.
Tesla shares gained 2.3% to $261.50 in after-hours trading. Analysts had expected Tesla to seek as much as $2.5 billion in the near-term, citing its inflated market value (which is near Ford Motor Co.’s market capitalization).
Tesla is a perennial money loser, however, notching two profitable quarters since going public early in the decade. Deeply indebted and planning to increase production capacity, the company needs a cushion to move ahead in the capital-intensive auto industry.
Tesla has more than $2 billion due in 2018—a year during which Tesla aims to sell significantly more vehicles than last year. It also plans to continue investing heavily in overhead and product creation in coming years.
The company plans to make 500,000 cars a year by the end of 2018 and 1 million vehicles in 2020. It is a long way off from that mark. Last year, Tesla produced nearly 84,000 vehicles.
Chief Executive Officer Elon Musk signaled the need for more financing last month, a move his company has made several times in recent years even as it has consistently notched year-over-year quarterly revenue increases. Already Tesla’s largest shareholder, Mr. Musk intends to buy about 10% of the common stock Tesla will issue in the public offering.
Mr. Musk has laid out plans for more electric models, including heavier-use products, such as a bus-like vehicle, and a pickup truck. With last year’s acquisition of SolarCity Corp., he is laying the groundwork to turn Tesla into a sustainable energy company offering solar power, batteries and electric vehicles.
The Model 3 project has been in the works for several years. The car is expected to debut with a price tag under $40,000 and achieve far more than 200 miles on a charge, and will compete most directly with General Motors Co.’s Chevrolet Bolt.
Appeared in the Mar. 16, 2017, print edition as ‘Tesla Cash Call: $1 Billion.’
“NY’s Sen. Schumer’s 2008 public attack on IndyMac Bank and its management was also unwarranted and a fraud.”, Mike Perry, former Chairman and CEO IndyMac Bank
Chuck Schumer Knows His Attack on Neil Gorsuch Is a Fraud
Gorsuch on Capitol HIll, February 2, 2017. (Reuters photo: Yuri Gripas)
Supreme Court justices aren’t politicians or legislators — they’re to consider the law as it stands, not angle for their preferred policy outcomes.
Charles E. Schumer, besides being minority leader of the U.S. Senate, is a graduate of Harvard Law School, Class of 1974, so it seems reasonable to think that, between the two, he has at least glanced at the oath required of Supreme Court justices:
I, _________, do solemnly swear (or affirm) that I will administer justice without respect to persons, and do equal right to the poor and to the rich, and that I will faithfully and impartially discharge and perform all the duties incumbent upon me as _________ under the Constitution and laws of the United States. So help me God.
Then again, perhaps not. On Wednesday morning, Senator Schumer and his Democratic colleagues held a press conference on Capitol Hill, featuring — in the words of a press release announcing the event — “people harmed by Judge Gorsuch decisions,” who “raise serious concerns about [Gorsuch’s] record of siding against working Americans, for the powerful few.”
This is, as Senator Schumer surely recognizes, a stupid way to think about constitutional law.
Of course, it happens to be the way many people — not least Senate Democrats and their confreres in the media and elsewhere — think about constitutional law these days. To accompany Schumer’s presser, the New York Times published an exposé touting Gorsuch’s “web of ties to [a] secretive billionaire.” The “secretive” billionaire in question is oil-and-gas magnate Philip F. Anschutz, who is so “secretive” that he owns The Weekly Standard, financed the Walden Pictures film The Chronicles of Narnia: The Lion, the Witch and the Wardrobe, helped to found Major League Soccer, and is the namesake of the Anschutz Library and Anschutz Sports Pavilion at the University of Kansas. Gorsuch’s nefarious tie to Anschutz is that, while working for a prominent D.C.-area law firm, Gorsuch, who is from Colorado, helped represent the Anschutz Company, which is headquartered in Denver.
Nevertheless, Democrats have chosen their line: In Schumer’s words, Gorsuch has repeatedly sided “with the powerful against the powerless.”
Or maybe he has simply sided with . . . the law. Ironically, the three cases Senate Democrats highlighted on Wednesday show precisely that.
Patricia Caplinger brought a lawsuit against medical-device company Medtronic in 2012, alleging that the company violated the Medical Device Amendments (MDA) to the Federal Food, Drug, and Cosmetics Act. Caplinger suffered complications after having a Medtronic bone-growth product surgically implanted, and she accused Medtronic of concealing pertinent medical information. Gorsuch, writing for the 2–1 majority, sided with the district court against Caplinger. The final paragraph of the decision read:
Not everyone may agree with how Congress [by means of the MDA] balanced the competing interests it faced in this sensitive and difficult area. We can surely imagine a different statute embodying a different judgment. But strike a balance Congress had to and did, and it is not for this court to revise it by beating a new path around preemption nowhere authorized in the text of the statute and nowhere recognized in any of the Supreme Court’s many forays into this field.
In other words, Gorsuch applied the law as written to the facts of the case at hand.
He took the same approach in the case of the late Grace Hwang. In 2009, Hwang, a professor at Kansas State University, was diagnosed with cancer. She received a six-month paid leave of absence, in accordance with the school’s policy. Toward the end of that period, in early 2010, she applied for the university’s long-term disability benefits, which required her to resign. After trying to negotiate a different arrangement, Hwang accepted, but she subsequently sued the university for violating the 1973 Rehabilitation Act, which prohibits recipients of federal funds from discriminating on the basis of disability. Gorsuch, writing for the 3–0 majority and again affirming the lower court, explained:
Ms. Hwang’s is a terrible problem, one in no way of her own making, but it’s a problem other forms of social security aim to address. The Rehabilitation Act seeks to prevent employers from callously denying reasonable accommodations that permit otherwise qualified disabled persons to work — not to turn employers into safety net providers for those who cannot work.
By Ms. Hwang’s own admission, he notes, she was incapable of working. Continued Gorsuch:
It perhaps goes without saying that an employee who isn’t capable of working for so long isn’t an employee capable of performing a job’s essential functions — and that requiring an employer to keep a job open for so long doesn’t qualify as a reasonable accommodation. After all, reasonable accommodations — typically things like adding ramps or allowing more flexible working hours — are all about enabling employees to work, not to not work.
This is not “heartless.” (Hwang’s family’s description of Gorsuch in an op-ed published in the San Francisco Chronicle on Wednesday; her daughter, Katherine, was present for Schumer’s press conference.) It’s an application of the law to the facts of the case. It’s worth noting that the two other judges on the Tenth Circuit agreed that Hwang had insufficient legal grounds for her complaint.
Finally, there is Alphonse Maddin. Maddin was fired by TransAm Trucking in January 2009 for abandoning the trailer of his truck; when the trailer’s brakes froze in subzero temperatures, and after he had waited several hours for assistance, he unhitched his truck and drove away, leaving the trailer behind. In fact, the Tenth Circuit majority decided for Maddin. He was apparently “harmed” by Gorsuch’s dissent in the case.
Writing against the two-judge majority, Gorsuch demonstrated that his fellow judges and the Department of Labor (which backed Maddin’s claim) had misconstrued the statute — the Surface Transportation Assistance Act — that Maddin claimed TransAm Trucking had violated:
It might be fair to ask whether TransAm’s decision was a wise or kind one. But it’s not our job to answer questions like that. Our only task is to decide whether the decision was an illegal one. . . . The trucker was fired only after he declined the statutorily protected option (refuse to operate) and chose instead to operate his vehicle in a manner he thought wise but his employer did not. And there’s simply no law anyone has pointed us to giving employees the right to operate their vehicles in ways their employers forbid. Maybe the Department would like such a law, maybe someday Congress will adorn our federal statute books with such a law. But it isn’t there yet. And it isn’t our job to write one — or to allow the Department to write one in Congress’s place.
Again, there is no hostility to Maddin here. (In fact, as Ed Whelan suggests, Gorsuch’s presentation of the case’s facts is more sympathetic to Maddin than the majority’s.) There is a dispassionate application of existing law — and a steadfast refusal to go beyond the law and conjure up an accommodation, even for someone who was in a tough spot. Democrats are happy to blur the line between Supreme Court justices and politicians, when it’s to their advantage.
Given the above, it’s worth asking: Do Senate Democrats want a Supreme Court justice who will apply the law as written? Or do they want a justice who will manufacture outcomes to benefit “sympathetic” petitioners?
Alas, the answer is clear. As they have done now for a number of years, Democrats are happy to blur the line between Supreme Court justices and politicians, when it’s to their advantage. When Senator Schumer uses cases like the above to suggest that Gorsuch will promote a “pro-corporate agenda,” he is not only misrepresenting Gorsuch’s record; he is misrepresenting the role of judges. Legislators and governors and presidents have agendas. Supreme Court justices have the Constitution and the statutes passed by Congress, which they are to consider impartially, without fretting about the “negative real-life implications for working Americans.” Senator Schumer doesn’t want a judge who will read and apply the law dispassionately. He wants an activist in a robe.
Neil Gorsuch is not that. Gorsuch is a judge who has time and again demonstrated his fidelity to the letter of the law, and his lack of concern with whether the outcome of his ruling is “conservative” or “liberal.” This is no small part of the reason that not one of the 200-plus opinions he has authored during his decade on the Tenth Circuit Court of Appeals has been reversed by the Supreme Court; and why, since his nomination to the High Court, legal analysts on both sides of the aisle have unreservedly praised him; and why even the famously left-leaning American Bar Association has declared Gorsuch “well qualified” (its highest rating) to sit on the Court.
Senate Democrats, despite their braying, are well aware that the “victims” paraded in front of the cameras on Wednesday are not the result of Judge Gorsuch’s malice, but of his consistent application of the law.
Gorsuch doesn’t side “with corporations” or “against corporations.” As one would want from a Supreme Court justice, he sides with the law. It says a great deal that Democrats are alarmed by that.
— Ian Tuttle is the Thomas L. Rhodes Fellow at the National Review Institute.
““If we’re not bringing a certain kind of case, it’s because the evidence is not there — pure and simple,” Mr. Bharara said in 2014 in a wide-ranging interview with Worth magazine about why he never prosecuted a bank C.E.O…
…In that article — which is quite revealing and worth rereading — he offered some advice to the Greek chorus of politicians, pundits and others who suggested that he and other prosecutors had abdicated their responsibility by not pressing charges against the big banks or their top executives. “I would suggest that some of these critics should go to law school and apply themselves and become prosecutors, and make the case that they think we should be making,” Mr. Bharara said. “Sometimes there’s frustration, because the things that have happened don’t rise to the level of criminal conduct. People are being jerks and stupid and greedy and negligent, but you can’t pin a criminal case on them.”….If you think back to the immediate years following the financial crisis of 2008, Mr. Bharara, who took office in 2009, was pilloried for coming down far too lightly on bankers. He was accused of letting Wall Street off the hook for misdeeds that helped lead to the crisis, and he was frequently forced to defend the fact that no senior banker of note was prosecuted, let alone convicted, for the actions they took that brought the economy to its knees.”, Excerpt from, “Preet Bhara: Sherrif of Wall Street or Pragmatic Showman?”, Andrew Ross Sorkin, The New York Times, March 14, 2017
“Preet Bharara was President Obama’s appointee to U.S. Attorney of NY and Senator Schumer’s protégé. He is a liberal Democrat with a big ego and his eye on higher political offices, who would have loved to have prosecuted bankers for crimes for the 2008 financial crisis and yet he makes clear there were none. He does say there was bad behavior and negligence and yet while the government sued many and settled with many, where did anyone admit behavior that caused the financial crisis or where did the government prove it in court? As far as I am aware, nowhere…because I don’t believe it was true. If there weren’t systemic problems with government and its regulation of banking….why did capital levels have to more than double and other regulation dramatically increase? In other words, if it was individual bad or negligent behaviors, why did there have to be systemic (not just in the U.S., but globally!!!!) changes in finance, banking, mortgage lending, rating agencies, the Fed, etc? I’ll tell you why, because the liberal narrative that individual greedy and reckless bankers caused the financial crisis was and is a false narrative, an absolute Red Herring. And continued calls and complaints for crisis-era banker prosecutions and jailings, by liberal politicians like Bernie, Warren, Phil Angelides, etc….is modern day McCarthyism.”, Mike Perry, former Chairman and CEO, IndyMac Bank
Preet Bharara: ‘Sheriff of Wall Street’ or Pragmatic Showman?
Preet Bharara, left, then the United States attorney for the Southern District of New York, with the police commissioner at the time, William J. Bratton, at a news conference in June. Mr. Bharara was accused of being both too soft and too hard on Wall Street. Credit Louis Lanzano for The New York Times
When it comes to policing Wall Street, there are two distinct narratives about Preet Bharara’s tenure as the United States attorney for the Southern District of New York.
If you think back to the immediate years following the financial crisis of 2008, Mr. Bharara, who took office in 2009, was pilloried for coming down far too lightly on bankers. He was accused of letting Wall Street off the hook for misdeeds that helped lead to the crisis, and he was frequently forced to defend the fact that no senior banker of note was prosecuted, let alone convicted, for the actions they took that brought the economy to its knees.
Several years later, another story line emerged: Mr. Bharara had turned into the “Sheriff of Wall Street” by aggressively prosecuting hedge fund managers for insider trading. The New Yorker magazine called him “The Man Who Terrifies Wall Street.” But critics contended that this reputation was, in part, the result of overreaching: As evidence, they pointed to a federal appeals court that overturned two of Mr. Bharara’s most prominent insider trading convictions.
Both narratives, which are at odds with each other, misunderstand Mr. Bharara.
He is, at his core, a pragmatist — one with a proclivity for publicity.
“If we’re not bringing a certain kind of case, it’s because the evidence is not there — pure and simple,” Mr. Bharara said in 2014 in a wide-ranging interview with Worth magazine about why he never prosecuted a bank C.E.O.
In that article — which is quite revealing and worth rereading — he offered some advice to the Greek chorus of politicians, pundits and others who suggested that he and other prosecutors had abdicated their responsibility by not pressing charges against the big banks or their top executives.
“I would suggest that some of these critics should go to law school and apply themselves and become prosecutors, and make the case that they think we should be making,” Mr. Bharara said. “Sometimes there’s frustration, because the things that have happened don’t rise to the level of criminal conduct. People are being jerks and stupid and greedy and negligent, but you can’t pin a criminal case on them.”
His line of thinking was not popular then, nor is it now. A New York Times/CBS News poll in 2013 showed that nearly eight in 10 Americans felt that “not enough bankers and employees of financial institutions were prosecuted in their roles in the financial crisis.”
That’s not to say that Mr. Bharara did not want to be popular or seek out publicity. He very much did — as evidenced by the firestorm he created over the weekend by announcing on Twitter that he had been fired.
A subsequent tweet he posted — “Now I know what the Moreland Commission must have felt like” — was a reference to the New York State anticorruption commission that was disbanded when it focused on Gov. Andrew M. Cuomo. That tweet raised questions about whether Mr. Bharara was hinting that he had an investigation underway into President Trump. Or, to some who read it, perhaps it related to Mr. Cuomo.
Others speculated that Mr. Bharara, once accused in a court filing of being a “petulant rooster,” might be making provocative statements to test the waters for a run for governor of New York.
On Monday, Mr. Bharara left his office in what seemed like a staged procession with staff members and others applauding him, as television cameras captured it all.
Whatever the case, Mr. Bharara’s publicity efforts have always seemed to be part of a larger strategy.
In the many insider trading cases he brought, which were often heralded with news releases, his goal wasn’t just to win in court, but to scare Wall Street.
“Our efforts are bound to have a substantial deterrent effect on insider trading specifically, and perhaps on corporate corruption generally,” he said in a speech in 2011.
Indeed, much of the trading community has lived in fear of Mr. Bharara and his office. While it is hard to quantify the effect of his campaign, anecdotally, many firms have tightened up their compliance programs.
Steven A. Cohen, the billionaire hedge fund manager at the center of many of Mr. Bharara’s investigations, was never prosecuted, but did pay a record $1.2 billion penalty.
Still, some said Mr. Bharara went too far with the cases he brought. An appeals court overturned two insider trading cases, forcing him to seek the dismissals of seven similar convictions, and said his office was using a “doctrinal novelty” to prosecute the cases.
David Ganek, a hedge fund manager whose firm closed after an F.B.I. raid, took the unprecedented step of suing the Justice Department and naming Mr. Bharara as a defendant, saying the warrant used “falsely represented” that Mr. Ganek was involved in insider trading. The case is still being heard.
Whatever dent his reputation took for the reversal of the insider trading cases, Mr. Bharara seemed to make up for it by pursuing public corruption cases against Sheldon Silver, the former Democratic State Assembly speaker, and an investigation of Mayor Bill de Blasio.
Still, critics have suggested he went after small bore. “Hedge funds are safer targets,” Jesse Eisinger, a ProPublica reporter, wrote over the weekend. “Insider trading cases are relatively easy to win and don’t address systemic abuses that helped bring down the financial system.”
Maybe Mr. Bharara was just being pragmatic, with his deep understanding and appreciation for what would make news. In the Worth interview, he said: “I have never said that insider trading is the crime of the century. It has not been my personal focus. It’s the focus of the press because there are a lot of wealthy people that like the reporting of it.”
A version of this article appears in print on March 14, 2017, on Page B1 of the New York edition with the headline: ‘Sheriff of Wall Street’ or Showy Pragmatist?.
“In this 3.12.17 article, an uber-liberal NY Times biz reporter documents how the Obama Administration likely lied about the reason they changed the financial terms of Fannie/Freddie’s conservatorship…
…She says it wasn’t to “protect taxpayers from further loss”, it was because they were told that Fannie and Freddie would soon return to profitability and they didn’t want private shareholders to have these profits. This reporter further documents that the Obama Administration has gone to great lengths…fighting legal subpoenas for emails and other documents…to prevent the truth from being revealed. Whatever the merits of the government’s position here…I agree with the NY Times reporter here…the government likely lied and has worked hard (to prevent documents that would prove that they lied) from becoming public. To me, this is no different than the Obama Administration, the Obama-appointed Democrats, who controlled the Financial Crisis Inquiry Commission (FCIC), and the liberal Democrats in Congress and throughout Obama’s Administration from lying about the real, root-causes of the 2008 financial crisis, so they could maintain their false narrative that greedy and reckless bankers, Wall Street, and mortgage lenders caused the crisis. This is the primary reason why I have continued my blog, after I resolved all of my civil litigation. Don’t believe me? Read this blog. Here’s two examples: 1) not a single crisis era banker or Wall Street executive was indicted or convicted of any crisis era act and none of them admitted to even being negligent. And 2) Years after IndyMac Bank was seized by the FDIC, I filed a FOIA request (and appeal) with the OCC to obtain and make public IndyMac’s last pre-crisis safety and soundness regulatory exam and was denied.”, Mike Perry, former Chairman and CEO, IndyMac Bank
Gretchen Morgenson, March 10, 2017, The New York Times
Trump’s Plan on Fannie and Freddie? Clues May Emerge Soon
The Trump administration will have to decide what happens to the $10 billion in earnings that Fannie Mae and Freddie Mac together generated in the most recent quarter, as well as the release of documents withheld from shareholders in a recent lawsuit. Credit J. David Ake/Associated Press
Fixing Fannie Mae and Freddie Mac, the mortgage finance giants that still operate under government supervision, is nowhere near the top of the Trump administration’s to-do list. Since the election, administration officials, includingSteven T. Mnuchin, the United States Treasury secretary, have said little about their plans for the companies.
But we will know a lot more in the coming weeks as circumstances compel Trump officials to show their hand. In essence, their action or inaction on two important matters will demonstrate whether they intend to follow the Obama administration’s approach to the companies — which was to keep them in federal conservatorship and drain them of capital — or take a different path, perhaps toward privatization.
One of the two action items on the horizon involves what should happen to the $10 billion in earnings that Fannie and Freddie together generated in the most recent quarter.
The other matter involves a court ruling last Tuesday ordering the government to produce thousands of documents it has been withholding from Fannie and Freddie shareholders, who have sued for their piece of the companies’ profits that the government has taken in recent years.
Let’s begin with the $10 billion in combined earnings that Fannie and Freddie generated in the fourth quarter of 2016. That money is supposed to be delivered to the Treasury on March 31, under a change to the taxpayer rescue made by the Obama administration back in 2012. That change required Fannie and Freddie to deliver essentially every nickel they make to the Treasury’s general fund each quarter; previously, they had been required to pay a percentage of the $187 billion they received in the taxpayer bailout that kept the companies afloat during the financial crisis.
The government has argued that it changed the terms of the 2008 rescue almost five years ago because Fannie and Freddie were in a death spiral and taxpayers needed to be protected from additional losses. But this stance was undercut last year by the release of documents in a shareholder suit showing that the profit sweep came after Obama administration officials had been advised that Fannie and Freddie were about to become profitable again. If President Trump wants to continue the previous administration’s practice of seizing all of Fannie’s and Freddie’s profits, his administration will allow that $10 billion to be swept, on schedule, into the Treasury’s general fund at the end of this month. If the administration does not want to follow this path, it can hit the pause button and let those earnings remain at the companies as capital.
Diverting Fannie’s and Freddie’s profits has been a bonanza for Treasury; if the last quarter’s payment goes through, the companies will have delivered $78 billion more to the government than they received during the financial crisis.
That’s one luscious honey pot. But there are a few reasons a new administration may want to stop dipping into it.
First, the quarterly payments have left Fannie and Freddie dangerously undercapitalized, with the thinnest of cushions to protect against future losses. Investors have sued the government over the profit sweep, contending that it was a breach of contract and an improper taking of private property without just compensation. Both of these legal arguments are moving forward through various courts.
But an even more compelling reason Mr. Mnuchin may want to let Fannie and Freddie hang on to their earnings has to do with Mr. Trump’s promise to big business to lower corporate tax rates steeply. If the plan he has outlined goes through, the value of certain assets held on Fannie’s and Freddie’s balance sheets would decline significantly.
In the face of such a drop, the companies would have to write down the assets. And given that the companies have almost no capital cushion, they would have to draw money from Treasury to cover the losses associated with the write-downs.
Steven T. Mnuchin, the United States Treasury secretary, has said little about plans for Fannie Mae and Freddie Mac. Credit Al Drago/The New York Times
The assets that could be subject to a write-down came about during the mortgage crisis, when Fannie and Freddie were generating losses. Under accounting rules, when money-losing companies become profitable again — as both Fannie and Freddie did in 2013 — they are allowed to use past losses to reduce taxable income in the future. Losses that can be used in such a way become deferred tax assets.
As of September 2016, the value of both companies’ deferred tax assets stood at $53.8 billion. But under a lower corporate tax rate, the value of those deferred tax assets declines, as Fitch Ratings noted in a report dated last Tuesday. If corporate tax rates fell to 20 percent from the current 35 percent, for example, the companies would have to write down the value of those assets by $23 billion, Fitch said, creating the need for a taxpayer draw to cover those losses.
Needless to say, this would not be desirable. And it would certainly seem to be something the Trump administration would not want to occur on its watch, especially since it had nothing to do with creating the profit sweep.
I asked the Treasury if it might be considering allowing Fannie and Freddie to hold on to their earnings from the fourth quarter and subsequent quarters to protect against a taxpayer draw. A spokeswoman did not respond to a request for comment.
This brings me to the second decision the Trump administration must soon make regarding Fannie and Freddie: Will its Justice Department continue to fight the investor lawsuits as aggressively as the department did under Mr. Obama? Or will the new administration throw in the towel, deciding these are battles it’s not keen to keep waging?
We will most likely know the answers to those questions by April 17. That’s the deadline the government has just been given to produce thousands of documents it has been withholding from plaintiffs in one of the shareholder cases.
In a ruling Tuesday, Margaret M. Sweeney, the judge hearing the case in the Court of Federal Claims in Washington, ordered the government to produce documents relating to the 2012 profit sweep. The main plaintiff, the mutual fund company Fairholme Funds, argues that the government improperly seized private property when it started diverting the profits.
In litigating the matter, Mr. Obama’s Justice Department requested extreme secrecy. It withheld more than 11,000 documents from plaintiffs relating to the profit decision, arguing that the material was subject to various claims of privilege, including those covering deliberative process and presidential communication.
If Mr. Trump wants to continue the fight taken up by his predecessor, his Justice Department will battle Judge Sweeney’s order. If he has no appetite for such a skirmish, the documents may finally emerge.
Privilege logs provided to the court show that these materials consist of emails about the profit sweep, internal government memos and confidential briefing documents among high-ranking officials at the White House, Treasury and the Federal Housing Finance Agency, which oversees Fannie and Freddie.
It is not clear, of course, what the documents contain. But it’s a good guess they might provide further confirmation that the government knew the companies were about to become profitable when it changed the terms of the rescue, gaining access to Fannie’s and Freddie’s earnings to pay for something or other.
I asked the Justice Department how it planned to respond to Judge Sweeney’s order to produce the documents.
A spokeswoman there declined to comment. But we’ll know soon enough.
A version of this article appears in print on March 12, 2017, on Page BU1 of the New York edition with the headline: Dueling Ideas for 2 Giants of Housing
“Ask yourself, when you read this recent article about Spain’s housing bubble and bust (which also mentions Ireland’s), how does the uber-liberal…Bernie-Warren Democrat’s view (not a single Republican signed onto Obama’s Financial Crisis Inquiry Commission’s Democratic-majorities findings) that reckless and greedy American bankers, Wall Street, and mortgage lenders, FORCED(!) and/or deceived Americans into taking out risky homes loans…
…and fraudulently sold these loans in publicly-registered securities to the most sophisticated institutional investors in the world, and were the primary cause of the 2008 financial crisis. How does that liberal narrative of the crisis hold up, when you see these bubbles and busts in all these other developed countries, where American bankers, Wall Street, and mortgage lenders did not operate? And wouldn’t it make more sense that all these housing bubbles and busts, were caused by something else? Something they all had in common, say central bankers, like The Fed, manipulating money and rates? I’m not saying government central bankers are the sole cause, because in the U.S. there’s a myriad of causes, but I am saying the liberal Democrat view that greedy and reckless bankers, Wall Street, and mortgage lenders caused the crisis is a false narrative, a Red Herring…”, Mike Perry, former Chairman and CEO, IndyMac Bank
Art Patnaude, The Wall Street Journal, March 7, 2017
A Spanish Builder Preps for IPO Amid a Glut of Unsold Homes
Housing market shows signs of recovery, with demand up in major cities like Madrid and Barcelona
Unfinished modern low-rise apartments sit behind barriers during construction in Madrid. PHOTO: ANGEL NAVARRETE/BLOOMBERG NEWS
By Art Patnaude
Empty homes are scattered across Spain, relics of the 2008 financial crisis. But at least one Spanish home builder is gearing up to go public, hoping investors will bet there is appetite for even more new homes.
Neinor Homes, owned by U.S. private-equity firm Lone Star Funds LP, is planning an initial public offering in Spain, the group announced Monday. The IPO is expected by the end of this month, according to Juan Velayos, Neinor’s chief executive.
The offering comes amid a recovery for the Spanish housing market, which suffered a huge bust during the biggest financial crisis in generations.
Much of Spain still suffers from empty houses left over from the boom. There were nearly 390,000 unsold new homes in Spain last year, according to lender Banco Santander. Spanish housing transactions are just 40% of their 2007 peak, according to Fitch Ratings.
But there are signs of a recovery, spurred on by a growing economy, improving employment levels and a greater availability of mortgages, analysts said.
Spanish home prices rose 4% in the third quarter of 2016 from a year earlier, according to the most recent data from the European Union’s statistics agency. The number of residential transactions last year is estimated to total around 450,000, up from 300,000 in 2013, according to Banco Santander.
“Housing demand is on the rise,” said Andrew Currie, an analyst at Fitch Ratings.
More than a decade ago, cheap mortgage lending helped drive construction booms in countries such as Spain and Ireland. The market in Spain, clogged with new homes, started to collapse in 2008.
Even now, as recovery takes hold, some housing markets in Spain are still struggling. In central Spain, for example, any recovery remains a way off, analysts said.
Demand for homes has been strongest in areas at the forefront of the country’s economic recovery: major cities such as Madrid and Barcelona, and tourist hot spots along the coast. Residential construction there has started to pick up, although not at a pace matching demand, analysts said.
Abandoned homes in Andalucia. The housing market is beginning to pick up, but much of Spain still suffers from empty homes. PHOTO: DE AGOSTINI/GETTY IMAGES
U.S. private-equity firms such as Lone Star and Värde Partners LP invested years ago in Spanish house-building companies. Dallas-based Lone Star hopes to sell around half of its stake in Neinor Home’s IPO, which is aiming to raise €600 million to €800 million ($635 million to $847 million). Lone Star bought Neinor Homes in 2014 from Spanish lender Kutxabank for €930 million.
International funds like Lone Star have been able to enter the market during the downturn because “traditional home builders in Spain are not in a healthy financial situation to build new properties,” according to Santander, which was hired to work on the Neinor Homes IPO.
Spain’s housing construction market is fragmented, with small regional developers responsible for the bulk of construction. Lone Star and Värde are aiming to create firms that operate on a national scale akin to companies in the U.K. or U.S.
“We’re alone. We’re a first mover,” said Neinor’s Mr. Velayos. Neinor, which built 2,000 homes last year, met with institutional investors from the U.S., the U.K., France and Spain this year ahead of the IPO.
Investors were wary at first because of the longstanding image of empty homes in the middle of nowhere, Mr. Velayos said. But the demand in certain areas and the improving economy have won them over, he said.
‘Housing demand is on the rise. ’
Minneapolis-based Värde last week bought Spanish property developer Vía Célere for €90 million. The company will be merged with a developer that Värde already owns. An IPO for the new group is a possibility, said Tim Mooney, global co-head of real estate at Värde.
Värde has experience with floating European house builders. The firm bought U.K. group Crest Nicholson Holdings PLC in 2011, which was listed on the London Stock Exchange in 2013.
Värde is considering an IPO for Vía Célere but hasn’t hired banks to facilitate the process, Mr. Mooney said. A private sale is another viable exit strategy, he said.
“The IPO market is fickle. It’s not open every day of the year,” said Mr. Mooney at Värde. “We’re getting the company in a position where we could do an IPO. But it’s not our only option.”
The overall IPO market around Europe was slow last year. For real estate, there were just $1.7 billion of IPOs in 2016, the lowest level since 2012, according to Dealogic.
“This WSJ OpEd by Minn. Fed President Kashkari proves, as Greenspan also said in his “Crisis” paper, that The Fed and other central banks deliberately, in favor of lending/economic activity, set bank capital levels too low (70% chance of bank bailout every 100 years, even today),…
…even after bank capital levels, post crisis, were roughly doubled! In other words, the government, who controls this most important bank risk factor, was massively wrong pre-crisis and according to Mr. Kashkari, remains wrong even today. p.s. Read Mr. Kashkari’s complaints about the mortgage lending process below, being post-crisis being form not substance…”lacks common sense”. He’s right about that. He may or may not be right about 20% capital (the banks are already struggling to earn adequate returns on capital), but he certainly is wrong about mortgage borrowers having to have 20% down! I think the average purchase mortgage has less than 10% down, because of government and private mortgage insurance. FHA requires only 3.5% down, for even subprime borrowers. VA requires zero down, even for borrowers refinancing and pulling 100% of their equity out of their homes!”, Mike Perry, former Chairman and CEO, IndyMac Bank
“Capital is the best defense against bailouts. Although capital standards are higher than before the last crisis, they are not nearly high enough. The odds of a bailout in the next century are still nearly 70%. Large banks need to be able to withstand around a 20% loss on their assets to protect against taxpayer bailouts in a downturn like the Great Recession, according to a 2015 analysis by the Federal Reserve. Unfortunately, regulators have taken it easy on the large banks, which today have only about half of the equity they need. There is a simple and fair solution to the too-big-to-fail problem. Banks ask us to put 20% down when buying our homes to protect them in case we run into trouble. Similarly, taxpayers should make large banks put 20% down in the form of equity to prevent bailouts in case the financial system runs into trouble. Higher capital for large banks and streamlined regulation for small banks would minimize frustration for borrowers. If 20% down is reasonable to ask of us, it is reasonable to ask of the banks.”, Neel Kashkari, “Make Banks Put 20% down…Just Like Homebuyers Do”, The Wall Street Journal Editorial Page, February 21, 2017
Make Big Banks Put 20% Down—Just Like Home Buyers Do
Financial CEOs say capital requirements are already too high, but the facts suggest otherwise.
By Neel Kashkari
There’s a straightforward way to help prevent the next financial crisis, fix the too-big-to-fail problem, and still relax regulations on community lenders: increase capital requirements for the largest banks. In November, the Federal Reserve Bank of Minneapolis, which I lead, announced a draft proposal to do precisely that. Our plan would increase capital requirements on the biggest banks—those with assets over $250 billion—to at least 23.5%. It would reduce the risk of a taxpayer bailout to less than 10% over the next century.
Alarmingly, there has been recent public discussion of moving in the opposite direction. Several large-bank CEOs have suggested that their capital requirements are already too high and are holding back lending. As this newspaper reported, Bank of America CEO Brian Moynihan recently asked, “Do we have [to hold] an extra $20 billion in capital? Which doesn’t sound like a lot, but that’s $200 billion in loans we could make.”
It is true that some regulations implemented after the 2008 financial crisis are imposing undue burdens, especially on small banks, without actually making the financial system safer. But the assertion that capital requirements are holding back lending is demonstrably false.
PHOTO: ISTOCK/GETTY IMAGES
How can I prove it? Simple: Borrowing costs for homeowners and businesses are near record lows. If loans were scarce, borrowers would be competing for them, driving up costs. That isn’t happening. Nor do other indicators suggest a lack of loans. Bank credit has grown 23% over the past three years, about twice as much as nominal gross domestic product. Only 4% of small businesses surveyed by the National Federation of Independent Business report not having their credit needs met.
If capital standards are relaxed, banks will almost certainly use the newly freed money to buy back their stock and increase dividends. The goal for large banks won’t be to increase lending, but to boost their stock prices. Let’s not forget: That’s the job of a bank CEO. It isn’t to protect taxpayers.
So if capital requirements aren’t the problem, why does it feel so hard to get a loan today? I can speak from firsthand experience. Last year my wife and I decided to buy a house. We applied for a loan with a bank where I have been a customer for many years. I assumed that my long record with the bank and our good credit would make it easy. With the required 20% down payment, we were prequalified for a mortgage with a rate of 3.375% fixed for the first 10 years. That was an attractive rate, suggesting capital was not holding back lending.
The prequalification was easy. Then the frustration began. The mortgage banker asked for myriad documents: bank statements, 401(k) statements, brokerage statements, tax returns, W-2s, insurance records and so on. That all seemed reasonable, but as the weeks rolled on, the requests for more documentation kept coming. After a month or so, I couldn’t believe what I was being asked for. Despite having all the records of my on-time monthly rental payments in my checking account, the bank demanded a copy of my lease and to speak with my landlord.
The banker called me to apologize, admitting that the requests were ridiculous but saying that there was no reasoning with the underwriting department. As we waited, we began to wonder if we wanted to buy the house at all. Wouldn’t continuing to rent be so much easier?
In the end, the bank funded the loan. I felt bad for the underwriters, who seemed unable to exercise judgment or use common sense. The impression I got was that people at the bank were simply paralyzed by fear—that they might make a mistake, that regulators would be breathing down their necks.
I have spoken to many borrowers at other banks, and they tell me similar stories. It has become needlessly difficult for qualified borrowers to get loans. But again, the problem isn’t the capital requirements—it’s everything else.
Capital is the best defense against bailouts. Although capital standards are higher than before the last crisis, they are not nearly high enough. The odds of a bailout in the next century are still nearly 70%. Large banks need to be able to withstand around a 20% loss on their assets to protect against taxpayer bailouts in a downturn like the Great Recession, according to a 2015 analysis by the Federal Reserve. Unfortunately, regulators have taken it easy on the large banks, which today have only about half of the equity they need.
There is a simple and fair solution to the too-big-to-fail problem. Banks ask us to put 20% down when buying our homes to protect them in case we run into trouble. Similarly, taxpayers should make large banks put 20% down in the form of equity to prevent bailouts in case the financial system runs into trouble. Higher capital for large banks and streamlined regulation for small banks would minimize frustration for borrowers. If 20% down is reasonable to ask of us, it is reasonable to ask of the banks.
Mr. Kashkari is president of the Federal Reserve Bank of Minneapolis and a participant in the Federal Open Market Committee.
“Economic forecasts on the eve of the credit crunch and the Great Recession were, he says, “not just wrong but spectacularly so.” The overall trajectory of precrisis forecasts was upward; the reality was a brutally deep capital V…
…The reason this poses a deep intellectual crisis for macroeconomics is that the entire point of the field, as it has developed since the work of John Maynard Keynes in the 1930s, is to prevent just this sort of severe downturn. Uniquely in the social sciences and humanities, macroeconomics was developed with a specific, real-world purpose, and a negative purpose to boot: to stop anything like the Great Depression from ever happening again. Given this goal — to avert systemic crises and downturns — the credit crunch and the Great Recession were, for macroeconomics, an intellectual disaster. In retrospect, the failure of the discipline to predict and prevent the crisis was based on deep conceptual faults. One of these concerned a mysterious refusal to engage with the role of the banking and finance system in the economy. Another was the assumption that the discipline makes about individual motivations, assuming that individuals “optimize” their decision-making to behave, in economic terms, rationally. This is a convenient intellectual shortcut for building models, but it is also a fiction, as we know not just from our own human experience but even from within economics itself, where microeconomics has recently made exciting progress in the study of human irrationality, bias and cognitive error. It is a matter of provable fact that our decision-making is not entirely rational. Economic models built on the premise of our rationality will always have a creaky underpinning. The omission of finance and the role of money from economic models is the biggest weakness in the field, Romer believes. It is hard for noneconomists to get our heads around the fact that the dominant macroeconomic models (including the ones used by central banks) made no allowance for how money works — especially not for fluctuations in how much of it is around. Such an oversight seems weird, and entirely counterintuitive. But that’s what happened, and it played a big role in macroeconomists’ ability to, as Romer puts it, “dismiss mere facts.” Maybe, like physics in the 20th century, macroeconomics is about to have a heroic period. If it does, it will begin in the work of people like Romer and Haldane, who are unflinchingly willing to talk about its huge recent failures.”, Excerpt from “The Major Blind Spots in Macroeconomics”, John Lanchester, The New York Times Magazine, February 12, 2017
“Here again, the truth is revealed. Pre and post crisis macroeconomic models do not take into account money and banking (!!!), nor the irrationality of human decision making!!! So why then do we allow the central planners at The Federal Reserve, who use these terribly flawed models, to set our supply and price (rates) of money? It makes absolutely no sense. Same goes for government bank regulators and other government economic planners.”, Mike Perry, former Chairman and CEO, IndyMac Bank
The Major Blind Spots in Macroeconomics
By JOHN LANCHESTER
Credit Illustration by Tim Enthoven
There was an unusual degree of consensus among economists about what would happen if Britain voted for Brexit in the referendum on June 23 last year. The language used by the International Monetary Fund was typical: It expressed fears of an “abrupt reaction,” adding that this “may have already begun.” The head of the organization, Christine Lagarde, said that the consequences of Brexit would range from “pretty bad to very, very bad.” The Bank of England warned of a recession, a contraction in gross domestic product and an increase in unemployment. The Organization for Economic Cooperation and Development published a paper called “The Economic Consequences of Brexit,” predicting a “major negative shock to the U.K. economy.” Even pro-Brexit economists expected an immediate downturn: Gerard Lyons, former economic adviser to the prominent Brexiter Boris Johnson, said that the trajectory would resemble the “Nike swoosh” — down then up.
What happened instead was that Britain enjoyed the best growth of any major advanced economy in 2016. The doomsayers have been quick to point out that Brexit hasn’t actually happened yet, so all the promised shock has been postponed rather than averted — which, for the record, is what I think, too. Still, it’s all a bit embarrassing for everyone who made those overconfident forecasts. Andy Haldane, the chief economist for the Bank of England, which was one of the sources of those doomy prognostications, agrees. He compared the pitfalls of economic prediction to the single most famously wrong weather forecast in British history, made on the BBC on Oct. 15, 1987. A woman had called the BBC to say she was worried there was a hurricane on the way. “Don’t worry, there isn’t,” the weatherman responded. That night, 22 people died amid hurricane-force winds.
Maybe, like physics in the 20th century, macroeconomics is about to have a heroic period.
This isn’t the first time Haldane has been critical of the current state of macroeconomics — that’s the big-picture, whole-economy side of the profession. Last fall he gave an important, broad-ranging speech with the elegant title “The Dappled World,” in which he argued that the unexpected global downturn that began in late 2007 has left behind “a crisis in the economics and finance profession.” Economic forecasts on the eve of the credit crunch and the Great Recession were, he says, “not just wrong but spectacularly so.” The overall trajectory of precrisis forecasts was upward; the reality was a brutally deep capital V.
The reason this poses a deep intellectual crisis for macroeconomics is that the entire point of the field, as it has developed since the work of John Maynard Keynes in the 1930s, is to prevent just this sort of severe downturn. Keynes once spoke of a future in which economists would be “humble, competent people on a level with dentists,” while the brilliant up-and-coming French economist Esther Duflo recently gave an admired I.M.F. lecture called “The Economist as Plumber.” It seems to me, though, that what macroeconomists do is really most like bomb disposal. Uniquely in the social sciences and humanities, macroeconomics was developed with a specific, real-world purpose, and a negative purpose to boot: to stop anything like the Great Depression from ever happening again. Given this goal — to avert systemic crises and downturns — the credit crunch and the Great Recession were, for macroeconomics, an intellectual disaster.
In retrospect, the failure of the discipline to predict and prevent the crisis was based on deep conceptual faults. One of these concerned a mysterious refusal to engage with the role of the banking and finance system in the economy. Another was the assumption that the discipline makes about individual motivations, assuming that individuals “optimize” their decision-making to behave, in economic terms, rationally. This is a convenient intellectual shortcut for building models, but it is also a fiction, as we know not just from our own human experience but even from within economics itself, where microeconomics has recently made exciting progress in the study of human irrationality, bias and cognitive error. It is a matter of provable fact that our decision-making is not entirely rational. Economic models built on the premise of our rationality will always have a creaky underpinning.
Credit Illustration by Tim Enthoven
The focus of Haldane’s speech is on this second point. He talks about the need for macroeconomics to learn from other disciplines in both the natural and social sciences in order to seek “a different perspective on individual behavior and systemwide dynamics.” He argues that the profession has “borrowed too little from other disciplines” and become “a methodological monoculture,” with the associated risk that everybody in the field can be wrong in the same way and at the same time. He finds compelling evidence in a survey of American professors of social science, who were asked whether “interdisciplinary” knowledge was better than knowledge “obtained by a single discipline.” Most social scientists sensibly thought that the answer was yes, by overwhelming margins. But 57 percent of economists disagreed or strongly disagreed. Economists literally think they have nothing to learn from anyone else. The field also suffers from its rigid hierarchies and its lack of gender and racial diversity. As Haldane puts it, “It is difficult to escape the conclusion that economics remains an insular, self-referential discipline.”
Haldane’s proposed solution to the problem lies in an emerging new field called agent-based modeling, in which large amounts of computer power are used to build models where individual actors have their own motives and their own agency. These agents collide and overlap and interact and generate predictions through a messy process more akin to real life than the clean models of old-fashioned macroeconomics. Agent-based modeling has been shown to have promise in other fields, especially physics — and also in modeling real-world problems like the tendency for Brazil nuts to levitate toward the top of the mixed-nut package. (That might sound kooky, but Haldane points out that the nut research “has since found real-world applications in industries such as pharmaceuticals and manufacturing.”)
Haldane isn’t the only prominent nonacademic economist to think there are profound problems in macroeconomics. Paul Romer is a highly regarded macroeconomist who recently became chief economist at the World Bank. (It was Romer who is credited with having coined, in 2004, the famous slogan that “a crisis is a terrible thing to waste.”) Last winter he, too, issued a lacerating critique of his field, titled “The Trouble With Macroeconomics.” His argument focuses on the question of “identification,” which is shorthand in the field for how economists identify the cause of an event. Identification is a huge deal for economics, because if you can’t tell if x, y or z caused something, you don’t know which of those variables to study or measure or change. The omission of finance and the role of money from economic models is the biggest weakness in the field, Romer believes. It is hard for noneconomists to get our heads around the fact that the dominant macroeconomic models (including the ones used by central banks) made no allowance for how money works — especially not for fluctuations in how much of it is around. Such an oversight seems weird, and entirely counterintuitive. But that’s what happened, and it played a big role in macroeconomists’ ability to, as Romer puts it, “dismiss mere facts.”
The Bank of England and the World Bank are two of the most important noncommercial banks in the world. It is striking, and exhilarating and scary too, that the chief economists of these two institutions each thinks that their trade is in crisis. Not so long ago, leading macroeconomists thought that the main part of their work was basically over. The Nobel winner Robert Lucas claimed as much in his presidential address to the American Economic Association in 2003. Macroeconomics, he said, “has succeeded: Its central problem of depression prevention has been solved.” That now looks wildly hubristic. Maybe the field is roughly where physics was at the end of the 19th century, when some scientists thought that their own field’s main problems had been solved, within a Newtonian framework that is now known to be inadequate to describe reality. Maybe, like physics in the 20th century, macroeconomics is about to have a heroic period. If it does, it will begin in the work of people like Romer and Haldane, who are unflinchingly willing to talk about its huge recent failures. A crisis is a terrible thing to waste.
John Lanchester has written eight books, including the novel “Capital” and, most recently, “How to Speak Money: What the Money People Say — and What It Really Means.”
A version of this article appears in print on February 12, 2017, on Page MM14 of the Sunday Magazine with the headline: The Major Blind Spots in Macroeconomics.
“I don’t believe in settling cases,” Trump told me yesterday. “I’m not Jamie Dimon, who pays $13 billion to settle a case and then pays $11 billion to settle a case and who I think is the worst banker in the United States.”…
…Trump says it is “horrible” that Dimon is settling instead of fighting the (federal government) litigation. “What happened to the days when you actually go to trial?” he asks. “I’m from the old school.”, Excerpt from October 23, 2013 Bloomberg article
“I recently found out (see February 2017 excerpt from National Review article below) about this 2013 Bloomberg article where now President Trump criticizes JP Morgan Chairman and CEO Jamie Dimon for caving in to government pressure, from the liberal Obama Administration, to settle untrue government allegations about JP Morgan’s mortgage lending practices and other activities.”, Mike Perry, former Chairman and CEO, IndyMac Bank
“And the president is picking his opponents astutely. He will eat some of Wall Street’s free fiscal lunch, but give with the other hand as he dismantles the moronic regulatory excess of Sarbanes-Oxley. A group of bankers was in to see him last week, including former ostentatious Democrat Jamie Dimon of JPMorgan Chase, who was rewarded for his fervent support of Obama with a $13 billion fine over his handling of the (government-created) mortgage bubble. Dimon is now a Trump supporter, although Trump publicly criticized him for caving to the Justice Department without a fight. Black’s NR 2/7/17 National Review article…
“Trump once called Dimon “the worst banker in the United States.” Trump criticized Dimon in 2013 for reaching a $13 billion settlement with the U.S. government over the sale of toxic mortgages instead of fighting the case.” excerpt from January 17, 2017 CNBC article