Posts Tagged ‘The Divide’

A predatory business model based on lawbreaking

August 28, 2014

Predatory local governments are emerging in the USA, which get a large part of their revenues from fines and confiscations.   The law allows confiscation of property used in drug crime even if the property is not owned by the criminal and nobody has been convicted of a crime.  Other local governments make a practice extracting money from poor and vulnerable people for trivial offenses.  Evidently Ferguson, Missouri, is one of them.

They have a parallel in predatory corporations.   Credit card issuers, for example, get more profit from fees and penalties than they do from straight interest, event though interest rates are high.  The problem with this, as with predatory law enforcement, is that it is impossible to do this on a mass basis, and still follow due process of law.  If this was done, the courts would be overwhelmed.

The law says that if somebody owes you money, you have to get a judgement from a judge before you have the right to collect.  Before you get a judgment, you have to let your debtor know you’re going to court so they can present their side of the case.

If credit card companies and debt collection agencies actually did that, courts would be overwhelmed.   So they usually don’t.

The.Divide.Matt.TaibbiMatt Taibbi described the process in a chapter in his book, The Divide: American Injustice in the Age of the Wealth Gap.  It is a counterpoint to his chapter on mass arrests of young black men on New York City, another high-volume business that would overwhelm the courts if police and prosecutors followed the law.

Most credit card companies, after a certain point, sell their bad debts to collection agencies for a few cents on the dollar.  The debt includes not only accumulated interest, but fees and penalties for late payment, and an extra penalty payment to the collection agency for its trouble.  But this only works if the collection agency can keep its expenses down.

Commonly collection agncies use “gutter service”.  Or they mail a postcard to an old address than may or may not be valid.  The going rate for process servers is $4 a notice, so they can’t be expected to put in much effort to track down the person.

It doesn’t matter to them if the notice is properly served or not.  If the debtor doesn’t appear in court, the creditor gets a default judgment.  Once the judgment is served, the collection agency has free rein to attach the person’s wages, seize their property and so on.

Taibbi’s chapter on credit card debt told a remarkable story about JP Morgan Chase’s sale of 23,000 court judgments to collection agencies.  A debt in which a court judgment already has been made is more valuable than just an IOU.  All the owner of the judgment has to do is to find you, and then collect.

The problem was that a lot of alleged judgments that weren’t valid—the judgment had been made, but later reversed, or the decision was pending, or, in a couple of cases, the court had ruled in favor of the debtor.  It’s Chase’s duty to have responsible bank officers check the documents and sign notarized statements that all is in order, but this wasn’t done.  Chase assigned hourly employees as “robo-signers” and they were later notarized by people who hadn’t witnessed the signing.

A compliance officer named Linda Almonte fired when she called this to management’s attention.  She was ignored when she called the problem to the attention of the SEC.   The judgments were sold to a company called DebtOne and went to courts all over the USA to be executed.

Only one judge, Philip Straniere of the Richmond County (NY) Civil Court on Staten Island (a Republican, by the way) bothered to look at the papers to make sure they were in order.   He vacated the 133 judgments, not because he was aware of any of the basic problems, but simply because the paperwork was so sloppy that it was impossible to tell whether they were valid or not.

Taibbi wrote that there are three ways a credit card collection case can turn out.   (1)  The debtor doesn’t respond, and the judgment is executed.  (2)  The debt admits the debt and pays it.  (3)  The debtor challenges the debt, in which case the collection agency usually backs off.  It is rate that the collection agency has the documentation to prove its case, or that the case is worth going to court to win.

I think credit card companies should cease promiscuously distributing credit cards to everyone and his dog (credit cards have been issued to dogs) and restrict them to borrowers who are solvent and good credit risks.  But if they’re not willing to do this, they should write off minor credit card losses as a cost of doing business.

Why don’t they do that?  Because the biggest profits to credit card companies come not from interest, but from fees and penalties.  A poor credit risk may generate more profit than a good credit risk.  Even if the debt is sold in the end for a few cents on the dollar, it will have generated a lot of profit in the meantime.

It is common to speak of abuse of government power and abuse of corporate power as if they were two different kinds of things.  Not so.  Abuse of government power for monetary gain, and abuse of corporate power backed by government, are two examples of the same thing.


The incentives to ignore due process of law

August 12, 2014

Matt Taibbi said he started researching his new book, The Divide: American Injustice in the Age of the Wealth Gap, in order to discover the solution to a mystery:

Why is it that, during the past 30 or so years in the United States, poverty went up, crime went down and the prison population doubled?

What his book reveals is that the rising number of arrests and jail sentences are responses not to crime, but to political and financial incentives.

The primary job of police in New York City (and no doubt other places) no longer is to respond to reports of crime.  Their job is to maximize arrests.  They have arrest quotas.

us-incarceration-and-crime-ratesThey go around looking for people to arrest.  Taibbi reported a woman going home from work who was charged with soliciting for prostitution because she allegedly makes eye contact with undercover police in a van.  He reported two young black men arrested on suspicion of being drug dealers because they were in an expensive car.

He told how police vans cruise poor, majority-black or majority-Hispanic neighborhoods, arresting people more or less at random.  Some turn out to have outstanding warrants.   Some turn out to have drugs [1] or weapons in their possession.  But many are innocent of anything that any reasonable person would regard as a crime.

Rather than admit a mistake and let them go, police often charge the others with loitering or obstructing traffic (which can consist of standing on a street corner) or failing to obey the lawful order of a police officer (which can consist of talking back or being too slow to obey).

They’re held overnight, and, if they can’t post bail—and many are too poor to post a small amount of bail—they’re kept in jail for trail.  Prosecutors ask for a guilty plea in return for a sentence limited to time served.  Which sounds like a good deal at that point, but then they have permanent criminal records.

Although there are quotas for making arrests, there are no penalties for false arrests, according to Taibbi.  Even if the City of New York is successfully sued for false arrest, the police officer who makes the arrest is not penalized, and may not even know about the lawsuit.

The more the rate of serious crime—killing, assault, rape, theft—goes down, the more effort New York police have to devote to finding reasons to arrest other reasons to arrest people.

The system of stop-and-frisk and mass arrests can only work because most people caught up in it waive their constitutional right to a fair trial.   If they ever stopped doing this, the system would grind to a halt, and police and prosecutors would have to focus on serious crime.

[Note 9/22/14.  This may be out of date so far as New York City is concerned.]

[Note 10/10/14.  Or maybe not.] 


Matt Taibbi on impunity for rich criminals

August 11, 2014

I can tell you, just from forty thousand feet, that some of the most damaging behavior on Wall Street, some of the least ethical behavior on Wall Street, wasn’t illegal.  That’s exactly why we have to change the laws.
        ==President Barack Obama, in 2011

Financial crimes are not victimless crimes.   Subprime mortgage fraud affected the financial solvency of thousands of municipalities and pension funds.   Many an American is paying higher taxes or facing retirement without a pension because of criminal activity on Wall Street.

Fraud is not necessarily something that is subtle or mysterious.   When someone misrepresents the value of what they sell, when they falsify financial documents, when they pledge the same collateral to several different lenders, you don’t need a law degree to understand that this is a crime.

Matt Taibbi

Matt Taibbi

Matt Taibbi, in his new book, The Divide, has a chapter about how all these things were done by Lehman Brothers, yet nobody in Lehman has ever been prosecuted.

Why don’t we prosecute financial crime?  Part of the reason is social.  Crooked Wall Street bankers come from the same social class as judges.

It is hard for judges to imagine people who might be their friends and neighbors as criminals, or to throw them into prison with violent common criminals.  But there are other, systemic reasons as well.

One is the doctrine of “collateral consequences,” first promulagated in a memo by Eric Holder, while a low-level Justice Department in the Clinton administration.  It is the principle that when deciding whether to prosecute corporations, you should take into consideration the side effects on innocent employees and the economy as a whole.

As an example, the accounting firm of Arthur Anderson Inc. was charged criminally by the Bush administration for helping Enron falsify its books.   Immediately afterward the company collapsed, and 28,000 jobs people, most of whom had done nothing wrong, were thrown out work.  That was sad, but the blame rests not with prosecutors, but with the dishonest Anderson management.

monopoly16The solution to such cases, it seems to Taibbi and also to me, is to prosecute individuals and not the corporation.  Justice would be served, the corporation itself would continue to exist and innocent individuals would not suffer.   Anyhow if a company really is too big to prosecute without damage to the economy as a whole, that is a reason to enforce the anti-trust laws and break it up.

Attorney-General Eric Holder and other members of the Obama administration don’t do this.  They content themselves with levying billion-dollar fines, which seem large to people like me and probably you, but are really small in relation to the overall size of the companies.  Prison is the real deterrent, and nobody in the “criminal rich class” (Theodore Roosevelt’s words) goes to prison anymore.

Another deterrent to prosecution, Taibbi says, is the fact that the largest companies have the best legal talent, and it is possible to have a good case and still lose by making some minor mistake.  The Obama administration is highly risk-averse and concentrates on cases they are sure they can win, which cases against smaller companies.  This is an explicit policy.  Taibbi quotes a Justice Department memo to this effect.

The problem is not only that rich criminals go free.  It is that honest bankers and financiers are penalized.  In a well-ordered capitalist system, the purpose of banking and finance is to turn savings into capital, to be invested in ways that contribute to the wealth and well-being of individuals and society as a whole.

Instead of rescuing banks and investment firms from the follies and crimes of their managers, the  government should indict criminals for their crimes, liquidate failed companies instead of bailing them out, and sell their assets at bargain rates to firms with honest and competent management.


But, as Taibbi wrote, the problem is not just leniency for high-level crime.  It is the contrast between the administration of justice to people at the top of society and those at the bottom.   This will be the subject of my next post.


Above the law and below it in the USA

August 11, 2014

To no one will we sell, to no one deny or delay right or justice.
==The Magna Carta

The basic principle of a free society is the rule of law.  That is the principle that laws are the same for everybody.   Nobody, however rich or powerful, is above obedience to the law.  Nobody, however poor or humble is below protection of the law.

The.Divide.Matt.TaibbiI recently finished reading a new book, THE DIVIDE: American Injustice in the Age of the Wealth Gap by Matt Taibbi which shows how far the United States has gotten from that ideal.  There is a class of powerful rich people who can commit financial crimes with impunity, and there are classes of people—poor young black men in big cities, unauthorized immigrants, welfare recipients—for whom due process of law does not exist.

Taibbi is a smart and fearless investigator, a brilliant and readable writer and, above all, a great explainer.   His specialty has been reporting on finance for Rolling Stone magazine.  In this book he combines accounts of high-level crime and low-level injustice, and the combination will make any normal person’s blood boil.

In New York City, under the stop-and-frisk policy, police stop young black men and ask them to turn out their pockets, ostensibly in search of illegal handguns [1].  It is legal to have a small amount of marijuana in your pocket provided you aren’t trying to sell it.  But the minute you take it out of your pocket, you are in violation.  Thousands of harmless people are charged in this way every year.

Taibbi told the story of a hardworking, law-abiding black man who was arrested for “obstructing pedestrian traffic” by standing in the doorway of his own apartment building at 1 o’clock in the morning when nobody else was on the street.

It wasn’t the first time this particular person was arrested for virtually nothing.  He in fact had a hard time figuring out what to do in order not to be arrested.  But in this case, he decided to fight the case.  What’s striking is how nobody involved in the process—prosecutor, public defender, judge—could get their minds around the idea that somebody would plead “not guilty” simply because they were, in fact, not guilty.

They were all annoyed with the defendant, not with the police officer who’d made a false charge.

The attitude of judges was exactly the opposite in the case of real criminals—a cabal of financial speculators who conspired to destroy a company, by means not only of spreading false information, but harassing the company officers and clients on the telephone and even, in one case, actually committing burglary, in order to make money by short sales of the company’s stock (essentially a bet the company’s stock price would fall.)

But when the victims brought a lawsuit, the judge dismissed the case, on the grounds that it was brought in New Jersey and not in New York.

Taibbi told the story of a law-abiding young musician who stopped on the street to roll some tobacco into a cigarette, and was, without warning, assaulted by strangers in leather jackets.  He thought he was being mugged until he was handcuffed and thrown in jail with a lot of desperate characters.

He found he had been charged with a drug offense, later reduced to a tampering-with-evidence offense.  Presumably the police thought he was smoking marijuana, and were doubly suspicious because he was white in a predominantly-black neighbor.   These may have been reasonable grounds for suspicion, but the point is that they didn’t bother to stop and see if their suspicions had any basis.

In contrast, HSBC, the large international bank, ran a money-laundering operation for the Mexican drug cartels.  The bank even had special windows in some of their branches for processing of large amounts of cash.   They served the interest of some of the world’s most brutal and murderous criminals, known for dismembering victims with chain saws.   But HSBC was let off with a fine, which was less than the profit earned from criminal activities.  Unlike with the musician, nobody spent any time in jail.

 Taibbi’s book is full of stories like this, true stories that make my blood boil, stories about a justice system that is harsh and merciless to harmless poor poor people, while granting every consideration to what Theodore Roosevelt called “the criminal rich class.”

Click on TruthOut to read an excerpt from Matt Taibbi’s The Divide.

Click on Democracy Now for an interview with Matt Taibbi.

[1]  This is an aspect of gun control that liberals should think about.

Matt Taibbi’s The Divide is the newest addition to my Books I Recommend page, which is a short list of readable books that provide a good understanding of current issues.

[Added 8/28/14]

Here are some of my other posts on Matt Taibbi’s The Divide

Matt Taibbi on impunity for rich criminals

The incentives to ignore due process of law

A predatory business model based on lawbreaking