Google
 
Web Osi Speaks!

Monday, October 06, 2008

Al Smith: Crisis Rooted In Bankruptcy Law.

Crisis rooted in bankruptcy law
LENDERS CAUGHT IN TRAP CREDIT INDUSTRY RIGGED FOR CONSUMERS

By Al Smith

Agreeing with House Financial Services Committee Chairman Barney Frank that the current financial turmoil "was brought on by mortgage foreclosures," Kentucky's senior federal bankruptcy judge, Joe Lee of Lexington, also blames a greedy credit industry for selling Congress "a bill of goods" three years ago.

The lenders' lobby is now using the same "scare tactics," pressuring Treasury Secretary Henry Paulson not to allow bankruptcy judges to adjust mortgages to avoid foreclosures, Lee said last week.

While Paulson and the Federal Reserve rain financial get-out-of-jail cards on Wall Street, one group catching little forgiveness is Main Street consumers piled up under credit card debt, bad luck and wrong choices about borrowing for subprime mortgages in an easy-credit market. Their fault? Some of it, sure. But don't they deserve a better break?

While The Wall Street Journal, unsurprisingly, says "no," The New York Times says, "yes," that much of the pain was created by unregulated credit, giving mortgages to less than creditworthy people (meaning "subprime"), and by harsh amendments to the bankruptcy code in 2005. Those amendments have now backfired on banks as foreclosures offset gains.

More than 1,200 new home foreclosures were filed in Kentucky in July, the state climbing to 35th in a distressed national economy producing an estimated 3 million vacated homes on the market for 2007 and 2008.

Bankruptcy court lacks the theatrics of an O.J. Simpson trial, but it can be heartbreaking, and Lee probably knows more about it than almost any living American. Author of a standard textbook and 40 articles on bankruptcy, at age 83, he is among the five most senior of the country's 363 bankruptcy judges and is perhaps the most respected.

Lee has four recommendations for Congress. They begin with a role for judges that Paulson and the financial industry oppose: that is, permitting judges to adjust mortgages to stave off evictions and keep owners in their homes, paying taxes and insurance and managing until the properties regain a realistic value.

The lenders' lobby says that every bankruptcy filing costs each American family a "hidden tax" of $400. Lee says the claim is as "phony this month as when it was advanced in 2005."

But first, more background:

Spending $25 million in campaign donations, including $8 million in the 2004 election that gave President Bush a second term, a coalition of lenders won an eight-year struggle to make it more difficult for borrowers to discharge their debts in bankruptcy.

A so-called reform law that Congress passed in 2005, supported by all the Kentucky members, was supposed to resolve a crisis that didn't exist, Lee says. "The darker purpose was to lower the risk of extending credit to shaky borrowers at high interest rates to enhance profits," Lee says.

Claims that hundreds of thousands of "deadbeats" were dumping their debts in bankruptcy court and walking free were an exaggeration, he insists.

While more than 1 million cases were filed in 1997, the year before the coalition lenders began the crusade against "abuses," Lee says "the rise in bankruptcies simply increased in tandem with the growth of consumer credit. The rate of bankruptcies was constant, continuing at a 30-year rate of about one bankruptcy for each $1 million of consumer credit outstanding."

The principal causes of bankruptcy, says Lee, were job loss, catastrophic illness, divorce, high credit card fees and predatory lending practices, not fraud.

The bankruptcy code of 1978, some of which Lee drafted, was working, he says. Yet the lenders' lobby got their way: The 2005 revised code made it harder for people to walk away from credit card bills. Big players like Washington Mutual Inc., the largest U.S. savings and loan, were happy, but they didn't count on a housing recession.

The new restrictive law they demanded — and have spent $65 million lobbying to protect since 2005 — has helped drive record foreclosures as homeowners default while struggling to pay credit card debts that might have been wiped out under the old code.

The surge in defaults then cut the value of securities backed by mortgages that created the housing boom that became a crash and brought down WaMu and six other financial giants last month.

Lee's other suggested changes to staunch the bleeding include: abolish a punitive means test and cut filing costs to seek bankruptcy, ban predatory lending and, for the credit card business, perhaps most infuriating of all, "enact a national usury law."

As Lee sees it, our credit cards are but tickets to a casino operated by a few invisible mega banks. Like any casino, the fewer the rules, the higher the odds favoring the house.

Al Smith of Lexington is writing a memoir about journalism and politics.

Labels:

0 Comments:

Post a Comment

<< Home