Bank Lawyer's Blog

Lizzie Warren's Latest Bad Idea

2015-04-19T21:52:00-05:00

Writing in Forbes, Tim Worstall dissects Elizabeth Warren's recent call for a tax on financial transactions and discovers that it's not only cancerous, but DOA.

He first restates Warren's announced purpose for the tax.

Among specific legislative steps Warren wants to see, she said Congress should impose a tax on every financial transaction, a policy embraced in Europe and by some fellow Democrats. She argued such a step would kill high-frequency traders who rely on “gimmicks that add no value to the economy” to turn a profit.

That's a favorite Warren meme: banks and financial markets are rife with "gimmicks," "tricks," and "traps" that only Native American law professors with the intellectual heft of Warren and her fellow elitists-masquerading-as-populists can discern and then devise methods with which they can protect the common people (too fog-brained from their poverty to protect themselves). Those methods always usually involve the gentle ministrations of powerful federal bureaucracies staffed not by what Honore de Balzac once labeled as "pygmies," but by legions of Mother Teresas and Mahatma Ghandis. After all, Lord Acton had it wrong: absolute power only absolutely corrupts the other guy.

Worstall begs to differ.

We’ve had one recent Nobel Laureate in Economics whose Nobel was for the study of taxation systems. That’s Sir John Mirrlees (along with Peter Diamond). And one of the points that they make is that transactions taxes, taxes like the FTT, are a really, really bad idea. It’s entirely fine to try to tax the financial sector more (I don’t know about Diamond but Mirrlees would think it OK) but the way to do that is through a consumption tax (like sales tax, or VAT) not a transactions tax. So, we’ve theory against Warren’s idea.

And then there’s that one single peer reviewed paper I’ve ever done. An early version of which is here:

There are several problems with the tax itself: it won’t reduce volatility, a desired aim, it will increase it. Banks won’t be paying the charge because corporations don’t pay taxes, only people do. The pain and grief it causes to those who will pay it will be more than the revenue raised. But more than all of these, there’s one really large problem that no one seems to have noticed yet – there just won’t be any extra money to spend.

That’s right, we’ve all these people licking their lips at being able to spend more of our money and there just won’t be any more of our money for them to spend: there will be less.

The secret to this comes from the EU Commission’s own attempt to persuade us that tens of billions can be taken out of the system without anyone noticing. They report that such a tax would raise 0.1% of GDP in revenues but would lower GDP by 1.76% while it did so. It’s a reasonable rule of thumb that 40-50% of the marginal changes in GDP consist of tax revenues. So, if we reduce GDP by 1.76%, we reduce tax revenues by 0.7-0.9% of GDP. In return we get tax revenues of 0.1% of GDP.

These are, recall, the EU’s own numbers, not those made up by some neo-liberal (I prefer realist) like me.

This is rather a serious problem for the argument in favour of a new tax. Not only won’t it raise any revenue, nor solve any of the perceived problems that it’s aimed at, but it will actually blow a hole in current tax revenues – leaving us with decidedly less money, not more, to do good things for poor people.

I’m all for the idea that we shaft the people who shaft us through the financial and tax system. But what Elizabeth Warren is proposing is this financial transactions tax. Something that will cost us, the people, more money and also, at the same time, reduce the amount of tax revenues that the government can collect to spend upon us, the people.

Worstall ends with purported wonder as to why, if the tax not only doesn't do what its proponent want it to do, but makes matters worse, Warren would propose it. I know why: because it feeds her public image as an advocate of the common man and it appeals to the envy of that common man who feels (with much justification) that the system is rigged, and that "The Banks" are the dragons who must be slain if the common man is going to get his "fair share" of the economic pie. Tax the "rich." Redistribute the taxes (or what's left of them after feeding the maw of the bureaucracy) to the "common man." Huey ("Every Man a King") Long had quite a run with the theme of wealth redistribution in the 1930s until he was gunned down the day after he announced his run for the White House.

Today, we have The Massachusetts Mohican picking up the same war club and swinging it. No one wishes her the same personal fate as Long, but let's hope that her crackpot ideas continue to shatter on the hard rock of the facts.

CFPB: Zombie Killer

2014-03-18T21:50:00-05:00

Just as nature abhors a vacuum, the CFPB abhors any area of the economy where it's not rooting out evildoers and saving innocent consumers from perils they may not realize endanger them. One of the vacuums that the CFPB is rushing to fill is the land of "Zombie Foreclosures." According to National Mortgage News' Kate Berry, the CFPB sees this as the badlands where straight shooters like the CFPB need to "clean house."

Some borrowers are being harmed when a mortgage servicer starts a foreclosure but then fails to complete it, leaving borrowers on the hook for the mortgage debt, taxes and maintenance even though they may have already moved out, said Laurie Maggiano, the CFPB's servicing and secondary markets program manager.

"The CFPB is beginning to look very closely at abandoned properties and zombie foreclosures," Maggiano said Tuesday at a conference sponsored by the Federal Reserve Bank of Cleveland. "There is direct borrower harm if a borrower believes a foreclosure on their property has been conducted and they are no longer responsible, and months or years later find out that they are, that there was never a foreclosure and they have large financial responsibilities that they never knew about."

These loan servicers! They trick the borrowers into moving out of their unpaid-for homes with threats of foreclosure, and even commencement of foreclosure proceedings, then they "go dark" and, behind the non-paying borrowers' backs, let the houses sit vacant. Why do they do this? Apparently, because, like The Joker in "The Dark Knight," they believe in chaos theory, especially when they're the agent of chaos.

Do I really look like a guy with a plan? You know what I am? I’m a dog chasing cars. I wouldn’t know what to do with one if I caught it. You know, I just… do things.

Consumer advocate Peter Skillern thinks this whole gambit by loan servicers is rotten to the core.

Servicers typically flood defaulted homeowners with as many 250 letters and phone calls telling them their home is going into foreclosure, says Peter Skillern, the executive director of Reinvestment Partners, a Raleigh, N.C., nonprofit. But they usually fail to notify the borrower when the foreclosure is stalled.

"They are pushing the borrower out of the home, which results in abandonment," Skillern says. "Servicers need to make sure they are accurately communicating the status of the foreclosure process to the borrower."

Yes, so the borrowers, who haven't been making their mortgage payments, in some cases for years, can remain in, or return to, the houses "rent free" while continuing not to pay their loans. This assumes that with someone living in the house, the occupant will transform it from what the article alleges is a property with respect to which "the cost to repair a home is more than the property is worth" into a credit to the community. Even if they can't make their mortgage payments, they'll repair it. Honest.

For the last several years, we've been discussing the problem of broken cities blaming lenders for their decades of bad decision-making. The areas where homes are being abandoned by lenders are not areas that got to be in the condition they're in because of "Zombie Foreclosures" initiated by lenders who just mess with borrowers because "they just do things." Moreover, while knowingly or even recklessly initiating foreclosure proceedings or otherwise bombarding borrowers with foreclosure notices and then traveling to Neptune, never to be heard from again, would not fly with etiquette experts, the borrowers are not the only, or even the primary, folks being "inconvenienced." Unless the borrowers suddenly resume paying the freight on their mortgage loans, all that wasted effort is likely to results in costs borne by the owners of the loans (or the securities backed by the loans). If this is a problem worthy of CFPB wrath, then the investors ought to be looking into this major "abuse," as well.

Time Well Spent

2013-11-25T21:34:00-06:00

Having snatched defeat from the jaws of victory in the 2008 presidential election, Sen. John McCain understands two things: (1) you never choose a running mate vetted by Cheech and Chong, and (2) as a RINO, you can never, ever, be too far to the left of center. In his latest bit of political grandstanding, Senator McCain has made some public sputterings about introducing legislation to prevent large banks and other corporations from deducting the massive fines and settlements that are extracted from them by the federal government. Apparently, the thought of Chase writing off the $13 billion the government extorted extracted from it for the sins (mostly) of the broken banks it bought at the behest of the FDIC to save that agency from forking over quadrillions, gave the senator flashbacks to the night Sarah Barracuda told him that she was "Going all rogue, and like, stuff."

The beauty part of this legislation is that it gets some sweet pub for a man who's time has not only passed, but has passed with the speed of a Manny Pacquiao left jab, without having a chance of actually being passed. As the linked article observes, with D.C. in gridlock, Dracula will see the light of day before a piece of populist catnip like this bill will. Therefore, McCain can join hands with Liz Warren, one of his co-sponsors, and sing "Kumbaya," without any actual harm being done. Other than to the image of the Senator, that is. I suppose that when constituents start every conversation with a quizzical look and the query, "Your name again?", any publicity is good publicity.

When they've finished not passing this bill, perhaps the good senators might take up the task of not passing a budget bill.

Many of us have reached the point where we'd seriously consider our own nuclear option for the US Senate, an option that has nothing to do with filibusters.

Federal Judge To Chicago: Nice Try, But No Cigar

2013-09-04T21:51:00-05:00

When the FHFA sued the city of Chicago a couple of years ago over Chicago's constitutionally questionable ordinance that attempts to make lenders responsible for maintaining vacant buildings they do not own, we predicted that the biggest losers would be the taxpayers, of the US (which "owns" the FHFA's charges, FNMA and FHLMC) and of Chicago (which is paying beaucoup legal fees to fight a losing cause). Well, the losers continue to lose.

A federal court decision dealt a serious blow last week to Chicago's ability to revitalize communities hit hard by the foreclosure crisis.

U.S. District Court Judge Thomas Durkin ruled that the city of Chicago cannot enforce its vacant buildings ordinance against banks that service mortgages for Fannie Mae and Freddie Mac, which own or guarantee most home loans in the United States.

[...]

The expanded ordinance requires the property owners or mortgagees to pay a $500 fee to register vacant properties and to maintain them during the foreclosure process, and authorizes $500 to $1,000 fines for noncompliance. Many communities nationwide followed suit by enacting similar ordinances.

The Federal Housing Finance Agency argued that the registration fee, as applied to FHFA as a mortgagee, was an illegal tax on the federal government, and Judge Durkin agreed.

Imagine that: a federal district court judge upholds the US Constitution. Who in the city of Chicago could have predicted such an outrageous outcome?

The author of the linked article, an activist associated with the aptly-named Woodstock Institute, urges Chicago to appeal. I have no doubt that he'll get his wish. When it comes to grandstanding to no useful purpose, regardless of the cost to taxpayers, Chicago pols have a proud history of leading with their chins.

War Without End

2013-06-25T21:52:00-05:00

I have a brother who is sixteen months younger than I am, and when we were growing up, we used to screw with each other in a way that only close siblings understand. We instinctively knew how to annoy one another, and we never hesitated to employ our best efforts to dig at each other, until my father, The Hairy Thunderer, intervened to restore peace and quite to our large, Irish-Catholic household, "peace" being a relative term in a family of five kids with an age span of a mere ten years. I recall my father once telling my brother and me that he if he left us alone with the Pope for five minutes, he'd return to find the Swiss Guards kicking the living crap out of both of us.

I was reminded of that observation while reading the latest back-and-forth between the trade groups representing community banks and credit unions.

[I]n a recent letter to the Senate Finance Committee and the House Ways and Means Committee, the Independent Community Bankers of America urged the government to eliminate the credit unions' tax exemption, arguing the firms are virtually indistinguishable from tax-paying community banks.

But NAFCU released a study suggesting an elimination of the benefit would reduce the credit union market share by 50%.

Brad Thaler, vice president of legislative affairs with NAFCU, said, "Everything found in the study is not only a benefit to credit unions, but it also serves as a check on bank rates. Not only would you loose the money that would go to members, but also bank members would see their rates and fees creep up."

We've heard these same arguments ad nauseum,from both sides. No matter how much I urge it, the two industry segments can't seem to make like the late, great, Rodney King and just "get along." Instead, they are destined to bite and kick each other like two stallions in a fenced pasture until The Second Coming.

And the really telling comment as to the uselessness of this exercise comes from the NAFCU's Thaler.

[D]espite the ICBA’s request, NAFCU's Thaler said that no member of Congress is proposing to eliminate it and the proposal has never gained traction in the past.

He's right. But that won't stop the war, will it? Of course not.

The CU-Bank War Is Getting Ugly

2013-05-05T21:51:00-05:00

Crying "The Time Is Right To Tax," commercial bankers are upping the thermostat on state and federal regulators to "level the playing field" by eliminating the tax exempt status of credit unions. According to the ABA Banking Journal, in a recent panel discussion at the American Bankers Association's 2013 Government Relations Summit, bankers of all stripes, including a CEO of a bank that was once a credit union, took the position that in this time when Congress and just about every state legislature is looking for ways to raise revenues without raising tax rates, the opportunity exists to convince legislators that tax exempt status for the credit union industry is an idea whose time has passed.

Panel member Ken Kies, managing director of the Federal Policy Group lobbying consultancy, spent years in Washington tax-writing roles, and believes banks could pursue a change.
"Frankly," said Kies, who's working with ABA, "I'm not sure that the environment has ever been better than it is today."

Kies indicated that no one should think that "not taxed" means "never to be taxed." History has not only seen many attempts to subject tax-exempt organizations to federal tax, but success in those attempts. Today's congressional urge towards tax reform, even on a revenue-neutral basis, could be the factor that pushes credit union taxation into reality.

In 1986, tax legislation pulled Blue Cross and Blue Shield organizations under the tax umbrella, reflected Kies. And a year later, the TIAA/CREF benefits organization likewise got shifted. And savings institutions lost their tax-favored status decades ago, and remain a viable part of the financial services business.

Mr. Kies also mentions the fact that there's a trillion dollar federal deficit that makes this the best time to press the case. However, he does not mention by how much that deficit would be reduced by taxing credit unions, which ought to show up somewhere in the argument if it's to survive counter attacks.

Meanwhile, In Illinois, the hate-fest between banks and credit unions rages on.

Linda Koch, CEO of the Illinois Bankers Association, wrote an op-ed piece for The State-Journal Register in that state's capitol city, in which she sang the same tune as the ABA panelists.

She took the additional step of citing the CBO to the effect that CU tax exemption costs the federal government $2 billion a year in "lost revenue" and the state of Illinois $25 million. I don 't know what the state of Illinois's budget deficit is, but I do know that $2 billion in additional tax revenue is a drop from an eye dropper in a Pacific ocean of federal spending that, according to the Heritage Foundation, reached $3.6 trillion in 2012 and is expected to reach $5.5 trillion by 2022. To me, contributing such relatively small amounts to the black hole of government spending is an argument that lacks weight. I'd prefer that banks stick to the fact that if credit unions want to be "more like banks" (in other words, make commercial loans), they can pay the same freight that goes with that business model, including income taxes. You want to waddle, quack, and fly like a duck, but be pampered like a golden goose. Sorry, leveling the playing field on the powers side ought to come with a leveling of the playing field on the taxation side. Otherwise, you really are gaining an unfair competitive advantage.

The CEO of the Illinois Credit Union League, Dan Plauda, responded to Ms. Koch with the argument that tax revenues from credit unions in Illinois won't solve Illinois' revenue shortfalls. That's most likely very true. However, he also alleges that taxing credit unions will hurt their members, who rely on deposit rates that are much higher than banks pay and consumer loan rates that are much lower than those charged by banks. To me, that makes the banks' case, that tax exemption gives credit unions an unfair competitive advantage on the same deposits and loans that banks fight for. It seems to weaken the case for credit unions to intrude further into the commercial banks' sacred ground of commercial lending.

Mr. Plauda talks about how credit unions are member owned, "democratically controlled," and manned by volunteers. He also alleges that all "excess revenues" are plowed back into the credit union. By "excess revenues, he means what would otherwise be deemed "profits." I started out my career as a bank lawyer in-house for a large mutual savings bank. The only practical difference between a stock-owned commercial bank and a member-owned mutual is that, by soliciting proxies from members who don't give a rip about anything other than services and rates, management of a mutual is, in many cases, able to "rest easy" from all those pesky shareholders who demand the distribution of "profits" either in the form of higher stock prices, dividends, or both. At the same time, there's not exactly a lot of oversight on salaries and cash bonuses that are deducted from gross revenues before the "excess revenues" are calculated.

Mr. Plauda finished his piece with a flourish.

This “people helping people” approach to financial services helps explain why credit unions have become so popular in recent years. As new bank fees have proliferated, for instance, Americans have moved to credit unions in droves. Last year alone, credit unions nationwide added more than 2 million net new members — the biggest annual net member growth in 15 years.

Today, more than 96 million people belong to credit unions.

If anyone seriously thinks that folks flocked to credit unions because credit union members feel like they are part of a movement of "people helping people," as opposed to the financial incentives of lower loan rates and higher deposit rates, both possible because of CU's tax exempt status, that person needs a reality transplant. It just seems to me that responding to banks' call for the end of credit union tax exempt status by taunting banks with the line "we're stealing your customers by the boxcar-load" is going to make even the densest legislator wake up and smell the coffee, eventually.

Both sides of this debate need to sharpen their arguments. If they're able to do so, that is.

Thanks to a loyal reader from Illinois for links to the Illinois op-ed pieces

Our First Native American President?

2012-09-06T21:48:00-05:00

The American Banker this morning (paid subscription required) reported the enthusiasm displayed by a couple of "unbiased" sources, The Huffington Post and The Washington Post, for Liz ("Fauxcahontas") Warren's barn burner speech last night at the DNC. The Wapo even burbled that Princess Spouting Bull could be in line to be this country's next Big Chief.

"The reaction to Warren in the room made clear that if she winds up in the Senate in 2013, she will immediately become part of the 2016 Democratic presidential conversation," the Post's Chris Cillizza said.

Sure, I know: bankers everywhere just spit up a little in their mouths. Some even started checking into the attractiveness of living in tax-free Belize.

On the other hand, the Christian Science Monitor played the role of party pooper today by reporting that Lie-awatha's speech was interspersed with assertions that have come unraveled when checked against those pesky phenomena known as "facts."

Here’s the way Warren put it Wednesday night: Romney “wants to give tax cuts to millionaires and billionaires. But for middle class families who are hanging by their fingernails? His plans will hammer them with a new tax hike of up to $2,000 dollars.”

[...]

“Democrats base their claim on a study that doesn’t necessarily lead to that conclusion,” says the FactCheck.org site.

Here’s the fuller context: Mitt Romney has promised that if elected he’ll cut tax rates for all while keeping federal government revenue level by eliminating some deductions and broadening the US tax base. He’s added that he won’t raise taxes on the middle class.
But according to an analysis from the Tax Policy Center, he can’t do all those things. There isn’t enough credible base-broadening available to make those numbers work.“In other words, Romney has overpromised. But that’s no reason to assume ... that Romney would choose the course of breaking a promise not to raise middle-income taxes. He could choose, for example, to renege on his promise to cut rates or to keep the amount of revenue neutral rather than violate his promise not to raise taxes on those in the middle,” writes FactCheck.org.

But wait, there's more.

An ABC News fact-check site also dinged Warren for saying that she talks to Massachusetts small business owners all the time, and that “not one of them ... made big bucks from the risky Wall Street bets that brought down our economy.”

Not even one?

“The idea that no one in the Bay State, so close to New York< and Wall Street, benefitted from the bankers’ profligacy is off the mark,” writes ABC’s Gregory Krieg.

In Pocahotmess' defense, she made her claim with respect to those small business people "she talked to." Apparently, she only talked to Ben & Jerry franchisees.

As both the American Banker and CSM point out, Warren first needs to win her Senate race in November before anyone worries about a bid for The White House in 2016. That race is too close to call, although Liz is trailing at the moment and the trends do not appear to be breaking her way.

Independents make up nearly half the Bay State electorate, so their electoral role there is decisive, according to the Democratic-leaning poll firm Public Policy Polling. And many of them may perceive Warren as too strident and harsh. In a late August PPP survey, 50 percent of independents said they were worried that she is “too liberal.” By contrast only 19 percent said they felt Senator Brown is “too conservative.”

Among all voters Brown led Warren by 49 to 44 percent in the survey.

Still, using "Elizabeth Warren" and "President" in the same sentence is always good to generate some buzz among bankers.