Yet Another Example of a Modern American Business Model.

This recent article in The Atlantic gives another great example of how our current economic system is tweaked to serve the few at the cost to the many.

In a nutshell, what happened is the homeowner had a loan with BofA, which he refinanced in 2009. The new, modified terms of the loan allowed him to avoid defaulting on it. Because the loan was insured by FHA, BofA has received the full payment from FHA and transferred the loan to the government agency. FHA then sold this loan, at a deep discount, to a hedge fund. In 2011 that homeowner finds out that the modified terms (and the reduced monthly payments he was paying) are being disputed by the new holder of the mortgage, Oaktree Capital, and that he now actually owes the full back payments (the original payments of the unmodified mortgage) if he wants to avoid foreclosure. Now, before we even move further with the story, I want to dwell on it. There’s too much to unpack here. Yes, yes, I understand this is business, and the businesses are not non-profits, and this is just an unfortunate situation for this one particular guy, and nothing illegal transpired and why don’t we just move along, because the firms that provide credit and liquidity to the markets are the arteries of the economy and let’s not get hung up on the one guy who got caught under the wheels of commerce. But I don’t want to move along. I want to understand why a guy with a mortgage, who follows the rules, is completely defenseless against such turn of events. What recourse does he have if a bank transferred his loan to FHA (a government agency), and FHA, instead of adhering to its principals of building stable communities and promote homeownership, discards this loan, at a discount, to the least scrupulous guys on earth – the hedge funds? What do you expect those hedge funds to do – to help this poor guy figure out how to keep his house? No, helping the guy is what the charity is for; but this is how we make money.

FHA selling loans to hedge funds is indicative of what happens when a government agency is forced to have a bottom line. This loans sales program came about under intense pressure from Congress – a legislative body deeply allergic to any kind of spending. This dysfunctional convergence of forces – legislation that is adamantly against spending, a government agency forced to fend for itself, and vultures looking to profit – as always has to be sorted out by the little guy who played by the rules.

Why and how have we allowed businesses to evolve to such a grotesque form – a form where their bottom line supersedes the rights of the ordinary citizens? The homeowner was doing all the right things, things that are routinely praised as guarantors of success by the conservative and neoliberal cheerleaders – he modified his mortgage terms and was adhering to those new terms. Then, out of the blue, some third party comes in and tells him that those terms are null and void and please pay up now. If this is capitalism, if this is free markets, how can one still insists, with a straight face, that this system is better than socialism? How is it better? What protection an average schmuck has against such unaccountable and wanton market forces? What did he do wrong?

This is a great illustration of how broken this whole system is. The big underlying problem is that to survive one has to cut corners and to make deals, often semi-legal or borderline illegal; or, better yet, to write laws that will make legal what would otherwise be illegal. FHA selling loans to hedge funds and washing its hands off of underwater homeowners were totally legal. Still, wheeling and dealing is a realm of the privileged. If you’re some guy who cuts corners by selling loose cigarettes on the street corner you’re gonna end up dead. But when the suits cut corners then we routinely get a talk about a sacred and untouchable ‘bottom line’, that has somehow evolved into the ultimate argument bludgeon.

And final philosophical point. Guys at Oaktree are not fools, at the end of the day they know what they’re doing. I know the type well – this is the bare-legged, super-fit guy you see running in Central Park during the rain or snowstorm, preparing for a marathon or an Iron Man, because he read in a self-help business book how overcoming obstacles makes one a winner. This is the guy who, when his daughter asks him “Daddy, what do you do?” pauses for a second, and then, snapping out of a momentary embarrassment that he’s not a firefighter or a pilot, explains, mostly to himself, that he’s a little cog that makes the big wheels of finance turning, the efficient mover of capital, the engine of the economy. This is the guy with a self-awareness (today’s hedge funders are all about meditation and mindfulness), but also a void that he can’t fill – neither with marathons, nor with underground fight clubs, nor with ostentatious charity. And it weighs on him. It weighs on him bad. And he can’t find an escape. 20 years from now, when he sits in some new-agey condo on the beach or a high-tech cabin in the Colorado Mountains, wistful and restless, it will dawn on him what a joke his entire life has been. But it will be too late.


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