Mojo - February 2010

"Underwater" Crisis Grows

| Wed Feb. 24, 2010 9:11 AM EST

"Underwater": that's a watchword you've probably heard plenty throughout the Great Recession and the still dismal housing crisis. It's people who owe more than than their house in worth, and who essentially have few economic reasons (setting aside their own beliefs and fears) to stay underwater when they could rent more cheaply in a comparable, and sometimes better, home. Well, in a sign that the housing crisis remains bleak, the number of people underwater continues to increase, up to 11.3 million by the close of 2009 compared to 10.7 in 2009's third quarter, according to data from analyst FirstAmerican Core Logic. Another 2.3 million, the analysis says, are approaching negative equity but aren't underwater yet. Nationwide, homeowners are a whopping $800 billion underwater.

The details are even more troubling in states hit hardest by the subprime meltdown. In Nevada, for instance, 70 percent of all mortgage properties are underwater; elsewhere, 51 percent are in Arizona, 48 percent in Florida, 39 percent in Michigan, and 35 percent in California. That so many millions of homeowners are underwater reverberates throughout the economy as well: As real estate expert Brent White of the University of Arizona points out in a recent paper, underwater homes result in decreased consumer spending, the lifeblood of the American economy; and decreased household mobility, which can lead to higher unemployment and less productivity. It's a multi-pronged attack on our economy, dragging down not just the housing market but leading to people buying less and working less.

To blame for this pandemic of underwater homes are lenders, mortgage servicers, the government, and—yes—homeowners. Lenders and mortgage servicers, as myself and others have written, are generally loath to write down principal amounts on a homeowner's loan in, say, a modification setting—they don't want to take the losses, preferring to lower interest rates or extend the loan's term. The government, too, has utterly failed to tackle the negative-equity problem: It's flagship homeowner rescue, the taxpayer-funded Home Affordable Modification Program, doesn't force mortgage servicers to reduce principal balances, which is at the heart of our housing dilemma, and offers cursory, modest solutions; the program also has a ceiling on how far underwater you can be to qualify—125 percent underwater—and if you're in even worse shape than that, well, too bad.

And finally, homeowner are to blame for at least two reasons. First, because they purchased their home, as many did, during the housing bubble when prices were grossly inflated, the only direction their home's value could go was down; the odds were high they'd be underwater to some degree. And second, a lot of homeowners, as White highlights in his paper, remain in their underwater homes when the smartest thing to do—economically, at least—is strategically default, walk away, and start anew. For many of those 11.3 million underwater homeowners, walking away makes perfect sense, you can rent for cheaper, and you can take that extra money from your previous mortgage payment and invest or save it. "The real mystery," White writes, "is not—as media coverage has suggested—why large numbers of homeowners have been walking away, but why, given the percentage of underwater mortgages, more homeowners have not been."

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Health Care Summit: The Sham Before the Storm?

| Wed Feb. 24, 2010 8:47 AM EST

Is Thursday's White House health care summit merely a show? In a word, yes. At PoliticsDaily.com, I explain why:

At the White House daily briefing on Tuesday, press secretary Robert Gibbs said repeatedly the aim is to have an "honest discussion" about the best way to fix the nation's troubled health care system. But hasn't there been a year-long discussion already? It included hours of debate within House and Senate committees, hours of negotiations between Democratic and Republican senators that led to nothing, hours of debate on the House and Senate floor. Obama and the House GOPers covered health care reform during their historic Q&A session at a Republican retreat last month. There have been presidential speeches, scores of op-eds, a cacophony of cable chattering, a blitz of blogs, and maybe a trillion tweets.

Why more discussion? And how honest can it be? On Tuesday, House Republican Whip Eric Cantor called Obama's approach to health care "insanity." And House Republican leader John Boehner accused the president of having "crippled" the summit by releasing earlier this week his proposal, a modified version of the Democratic-backed legislation that was approved in the Senate with 60 votes and no Republican backers. These particular Republicans don't want a conversation; they want to kill the House and Senate bills that have passed. Cantor declared Obama's plan "is a non-starter." Boehner claimed, "The American people have spoken: They want us to scrap the Democrats' health care bill and start over." But a plan based on legislation already approved by a majority of legislators is actually a pretty good starter.

The bottom line:

The time for bipartisanship is done. The Republicans think their opposition to Obamacare is a winning ploy. They're not going to abandon it. And Obama's not going to trash his signature issue. So once the summit concludes, it's back to the real show: power politics. If Obama and the Dems want major health care reform legislation, they will have to run over the not-dead bodies of Republicans. To do so, they will likely need to employ reconciliation, a legislative procedure that allows the House and Senate Democrats to resolve the differences between their already-passed bills on a majority vote (and duck a Republican filibuster). This is a slightly complicated maneuver -- but quite feasible -- and Senate Democratic aides say they are close to rounding up at least 50 D's. But they're not there yet. Consequently, the real challenge for Obama is not conjuring up a last-minute bipartisan breakthrough at this summit, but getting his own party lined up and ready to roll.

Once the summit is done, there will be only one item on the agenda: getting health care through Congress.

You can follow David Corn's postings and media appearances via Twitter.

We're Still at War: Photo of the Day for February 24, 2010

Wed Feb. 24, 2010 7:39 AM EST

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A U.S. Army Soldier patrols with Afghan soldiers to check on conditions in the village of Yawez in Wardak province, Afghanistan, Feb. 17, 2010. Photo via the US Army by Sgt. Russell Gilchrest.

Blackwater Outtakes

| Wed Feb. 24, 2010 5:00 AM EST

When Senator Carl Levin (D-Mich.) and his staff briefed reporters Tuesday on their six-month investigation into Blackwater subsidiary Paravant, ahead of a hearing on the topic scheduled for this morning, the chairman of the armed services committee was asked whether the findings of the probe had given him any ideas about strengthening the contracting "procedures" currently in place. His response didn't make it into my story, but it's worth sharing:

What you need is oversight and hopefully this hearing is going to lead to dramatically better oversight, as well as much more care with who we contract with, looking at backgrounds of contractors before we contract with them, so I would say that the deterrent effect will be forthcoming. I don't see that we need new rules. What we need is an implementation of contract terms. And much more care as to who we contract with.

Corn on Countdown: Will Palin Help the Dems in 2010?

Tue Feb. 23, 2010 11:34 PM EST

David Corn appeared on MSNBC's Countdown with Keith Olbermann to discuss the 2010 midterm elections and how Sarah Palin's endorsements of Tea Party candidates may actually help the Democrats.

 

David Corn is Mother Jones' Washington bureau chief. For more of his stories, click here. He's also on Twitter.

Watchdog Blasts Private Financial Regulators

| Tue Feb. 23, 2010 2:17 PM EST

In a letter sent today to Congress' banking and finance committees, a leading government watchdog has urged House and Senate lawmakers to crack down on the financial-services industry's internal "private self-regulatory organizations," or SROs, a less understood but problematic player in the global financial meltdown. Put simply, an SRO is a regulator within, say, the securities industry tasked with protecting investors, but is often led, in a glaring conflict of interest, by the very same people that regulator is supposed to be overseeing. If that sounds dubious, well, that's because it is. And as the Project on Government Oversight (POGO) contends in its letter, one prominent SRO, the Financial Industry Regulatory Authority (FINRA), has an "abysmal track record," so much that POGO openly questions "whether FINRA can ever be an effective regulator given its cozy relationship with the securities industry."

Despite FINRA's stated commitment to "putting investors first," a look at the regulator's record in the past few calamitous years casts doubt on that claim. FINRA, the POGO letter states, neglected to step in and regulate firms like Lehman Brothers, Bear Stearns, and Merrill Lynch that all collapsed under FINRA's watch, while also failing to spot the massive, multibillion-dollar Ponzi schemes run by Bernie Madoff and Allen Stanford. In Stanford's case, POGO found, an internal FINRA review discovered the regulator missed Stanford's scheme on several occasions; and with Madoff, the private regulator claimed it wasn't at fault for letting the biggest Ponzi scheme in history slip by even though experts said Madoff was under FINRA's purview.

Then again, when you look at FINRA's leadership, it's hardly surprising the regulator failed to spot the likes of Madoff and Merrill, Stanford and Bear Stearns. As POGO's letter says, conflicts of interests are rife within FINRA, to wit: FINRA chairman and CEO Richard Ketchum is a Citigroup alum; the regulator's executive overseeing member regulation came from Charles Schwab; and another executive in charge of enforcement is a former partner at a top law firm representing major financial institutions. Not to mention FINRA's ties to Madoff and Stanford—Shana Madoff, Bernie's niece, was on FINRA's compliance advisory committee until the firm went under, and two top level staffers for Allen Stanford served on other FINRA committees. "FINRA's numerous failures," POGO writes, "should hardly come as a surprise given the incestuous relationship between SROs and the financial services industry."

Yet despite these criticisms, FINRA's Ketchum wants more power for his organization, like overseeing investment advisers as well as securities brokers. Thus the purpose of POGO's letter today is to urge Congress not to let that power grab happen, and even more to encourage House and Senate lawmakers to curtail FINRA's authority. "Effective, independent, and efficient government regulation is the only proper way to safely oversee our markets," the letter concludes. "Our economy is too important to be left in the hands of the very financial industry that brought us to the brink of collapse."

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Shelby Rejoins Financial Talks

| Tue Feb. 23, 2010 12:29 PM EST

The prospects for Sen. Chris Dodd's financial-reform overhaul received a much needed bipartisan boost today, as Sen. Richard Shelby (R-AL), the ranking member on the Senate banking committee, has reportedly rejoined negotiations with Dodd, the committee's chair. Shelby had abandoned the negotiations earlier this month, largely over disagreements on whether Senate's financial-reform bill should include an independent Consumer Financial Protection Agency, a centerpiece of the House's financial-reform bill passed in December. Dodd's had replaced Shelby with Sen. Bob Corker (R-TN) as his Republican counterpart a few weeks ago.

Along with the news of Shelby's return are reports that the release of Sen. Dodd's bill might not occur until next week, a revision of earlier statements by a banking committee spokeswoman, Kirstin Brost, that a draft would come out this week and would be marked up next week. With Shelby now back in the mix, however, the fate of an independent Consumer Financial Protection Agency again hangs in the balance, and the agency could end up being folded into an existing department, like the Treasury, as Republicans like Sen. Corker have previously suggested.

Lawmakers Introduce Contractor Crackdown Bill

| Tue Feb. 23, 2010 11:36 AM EST

If Sen. Bernie Sanders (I-Vt.) and Rep. Jan Schakowsky (D-Ill.) have their way—and, let's be honest, they probably won't—the days of most private security and military contractors operating in Iraq and Afghanistan would be numbered. On Tuesday the lawmakers, who are among the most vocal congressional critics of wartime contractors, introduced the "Stop Outsourcing Security Act" in the House and Senate. The legislation would mandate that diplomatic security, which is largely handled by contractors (with occasionally disastrous results—see Nisour Square, Blackwater; vodka butt shots, ArmorGroup), be performed solely by US government personnel. The bills, which would allow the White House to seek certain exceptions for mission-critical contractors, would also "restore the responsibility" of the US military over a variety of functions that have been outsourced, from training foreign security forces and guarding convoys to performing military intelligence and administering prisons. "The behavior of private contractors has endangered our military, hurt relationships with foreign governments, and undermined our missions overseas,” Schakowsky said today.

Sanders and Schakowsky introduced similar measures in 2007, but the bills never advanced. But here's a bit of interesting trivia. Who was Sanders' sole co-sponsor in the Senate? None other than Hillary Clinton, who on the campaign trail declared, "When I am President I will ask the Joint Chiefs for their help in reducing reliance on armed private military contractors with the goal of ultimately implementing a ban on such contractors." By the time she became Secretary of State, overseeing armies of contractors in Afghanistan and Iraq, she had changed her tune. "Whether we can go all the way to banning, under current circumstances, seems unlikely," she told State Department employees during a townhall meeting last February. Frankly, though, the main circumstance that had changed was that Clinton was no longer running for president.

Given the government's heavy reliance on contractors, the notion of banning them (or even phasing them out in any precipitous way) was just as unrealistic then as it is now. This point was underscored in a recent Congressional Research Service report that noted "many analysts and government officials believe that DOD would be unable to execute its mission without PSCs." The same report also made the point that run-amok contractors are fanning anti-American sentiment and undermining America's foreign policy goals in Iraq and Afghanistan. Given the challenges in Afghanistan and ongoing efforts to hold onto security gains in Iraq, that's really the last thing American troops or diplomats need. But the solution advanced by Sanders and Schakowsky is extremely unlikely to succeed—and could potentially do more harm than good, given that the military is already stretched thin and the State Department's diplomatic security branch has nowhere near the manpower to do what the lawmakers are asking. What's doable—or at least should be doable—is to make sure the right laws, regulations, and oversight is in place to keep contractors accountable, to hold them to the terms of their contracts and, this should go without saying, to the highest standards of conduct when they are representing US interests overseas. Iraq IG Stuart Bowen has an interesting plan for addressing some of the oversight challenges, which I covered today. And Sen. Patrick Leahy (D-Vt.), Sen. Ted Kaufman (D-Del.), and Rep. David Price (D-N.C.) have introduced bills intended to clarify some of the legal uncertainties surrounding contractors working overseas. But in the end, if the Obama administration can't solve its contractor problem, perhaps then it's time to revisit the Sanders/Schakowsky option.

5 Uses for Wall St.'s Bonuses

| Tue Feb. 23, 2010 10:15 AM EST

Bonuses on a resurgent, if not shrunken, Wall Street bounced back to more than $20 billion in 2009, up 17 percent from the year before, according to new data from the New York Comptroller's office. The average bonus was $123,850, and at three of biggest banks on the Street—Goldman Sachs, Morgan Stanley, and JPMorgan Chase, all of which taxpayers bailed out—bonuses jumped even more, up 31 percent from 2008. Mind you, 2009's bonus checks are nowhere near the ludicrously high totals we saw at the peak of the bubble, like the $34 billion in 2006 and $33 billion in 2007. (Who can forget this typical New York Times headline from bonus season in 2004: "That Line at the Ferrari Dealer? It's Bonus Season on Wall Street.") Still, when one in five Americans is "underwater" on their home and nearly one in ten are unemployed, $20 billion in bonuses is a staggering, incomprehensibly large sum that could go a long way if spread out across the rest of the population.

In that spirit, here are five alternative uses for that $20 billion in bonuses that might alleviate our current economic woes:

  1. You could pay the salaries of more than 390,000 public school teachers across the country.
  2. You could close nearly all of California's gaping budget hole.
  3. You could almost cover unemployment-fund shortfalls, now nearing $25 billion, in 25 different states.
  4. You could more than double the amount of Pell Grant funding given to students from low-income backgrounds who might not attend college otherwise.
  5. You could increase the budget of the Small Business Administration by more than 35 times, a much needed boost considering the SBA's coffers had dwindled from $3.5 billion in 1978 to $578 million in 2008.

But really, we'd all rather have a Ferrari anyway, right?

MoJo Announces New CEO and Publisher

Tue Feb. 23, 2010 8:00 AM EST

As some of you know, last November, after 19 years of unflinching commitment to fiercely independent investigative journalism, Jay Harris stepped down as the publisher of Mother Jones. Following a short transition period, earlier this month the Mother Jones board of directors named Madeleine Buckingham chief executive officer, and Steve Katz Mother Jones' new publisher.

See the recent press release for more information. And feel free to offer your congrats/wishes/etc. in the comments!