The Fine Print: How Big Companies Use "Plain English" to Rob You Blind (26 page)

Black has a phrase to describe what happens when the head of a corporation runs it not for profit, but plunder. He calls it “control fraud.” That’s essentially what the Mafia does when it takes over a business from someone in too deep with loan sharks. The mob orders all the supplies it can to be delivered as quickly as possible, carts them out the back door and then the torches the place. The vendors never get paid. Crooked bankers just use accounting rules to mask their crimes and then either put the business into bankruptcy or get the government to rescue it with taxpayer money.

The Chicago School economists and other promoters of the idea of regulation that favors corporations all insist that control frauds are rare and thus not significant. That position remains plausible as long as officials insist that no one saw, or could have seen, the 2008 collapse coming; as long as law enforcement is kept busy not looking for criminal conduct. But achieving this requires blinders, what we might call wishful denial of obvious facts.

One set of those blinders was applied to the usually prying eyes of the FBI by the Mortgage Bankers Association (MBA). In 2004 the FBI announced that it had identified mortgage fraud as an epidemic. It identified two kinds of mortgage fraud. One involved people who borrowed money to buy a house they could not afford, hoping they could flip it for a profit before their inability to pay became apparent. The other involved people borrowing to live in a house they could not afford until they were evicted. The FBI also announced that its partner in identifying such frauds was the Mortgage Bankers Association.

What the FBI missed was that it was banks that were creating the frauds, including some members of the MBA. The fox got the watchdog to look at the eggs instead of watching the chickens, which were being eaten by the fox family. Bank agents were helping buyers fabricate loan
documents. At Countrywide Financial in suburban Los Angeles, the largest source of fraudulent mortgage loans in the country, people fabricated documents to justify loans, making up wage and business profit statements. Loan officers put people with solid credit into mortgages that would force them to make big future interest payments because selling such toxic mortgages paid the officers three times the normal fee.

Why would any bank make loans it knew could not be paid back? They would not—unless it did not matter to the bank whether the loan was paid back. Thanks to Gramm and other politicians, reward (fees and stock options) had been separated from responsibility to make sure borrowers repaid the loans. Once a loan was issued, it was sold in a package with thousands of other loans to Goldman Sachs and other Wall Street firms, which then sliced and diced the loans and sold them to investors as investments. Among the biggest buyers were state and local government pension funds, which were told the mortgage loans were all top rated and sure to be paid back. When that proved false, the resultant losses to the public employee pension funds meant higher taxes to make up for the money lost to Wall Street.

The two institutions that resisted the easy profits in packing and selling off these loans were Freddie Mac and Fannie Mae, the two government-sponsored mortgage agencies that right-wing Republicans and Rupert Murdoch’s
Wall Street Journal
try to blame for the housing crisis. In 2006, as the coming collapse should have been obvious to anyone in banking regulation, the two loan giants were under pressure from Wall Street stock and bond rating analysts plus politicians in both parties to stop being stodgy and get in while the getting was good. Fannie Mae and Freddie Mac did, but with so little and so late that their loan loss rates were much smaller than Wall Street firms like Goldman Sachs.

Alan Greenspan, the Ayn Rand acolyte (he was executor of her estate) who headed the Federal Reserve during the years when the bubble was inflating, insisted he never saw a housing bubble forming. Greenspan is famous for poring over financial and economic data, often in his bathtub, yet like Claude Rains’s Captain Renault in
Casablanca
, he claimed to be unaware there was gambling going on.

Many people saw the housing bubble forming, including me. And if I could see it, how could Greenspan not? Even though real estate was not my beat, I wrote two articles in the
New York Times
in 2004 to have a record I could cite when the collapse took place. Housing prices were growing faster than economic conditions could justify by 2002. Way back in 1993 George Akerloff, who won the Nobel Prize in Economics in
2001, and Paul Romer wrote a seminal paper after the savings and loan crisis titled “Looting: The Economic Underworld of Bankruptcy for Profit.” Anyone who read it could see the pattern that arose in the housing market starting in the late 1990s.

Criminologist Bill Black, who is now a professor of law and economics at the University of Missouri–Kansas City, testified widely about how the lessons of the savings and loan crisis should be applied to the housing bubble. Black gave speeches, promoted his book
The Best Way to Rob a Bank Is to Own One
and appeared on national television. He did everything he could except yell
Thief!
in a crowded bank. But hardly anyone listened. The White House, the Justice Department, and the banking regulators all failed to seek his counsel.

Instead of the thousands of prosecutions we saw after the savings and loan debacle, there have been less than a handful of prosecutions of bankers in the mortgage frauds. Angelo Mozilo, who made more than $600 million as head of Countrywide, escaped not only prosecution, but also civil liability. His $47 million in fines—modest compared to the costs Countrywide imposed on society—was paid mostly by insurance companies. Mozilo insists he did nothing wrong. So do the prosecutors and regulators who settled with him. Mozilo is another example of how thoroughly those at the top are insulated from accountability while those at the bottom are pursued in modern America.

14.
Barbara Keeton’s old
blue truck started leaking so much oil she knew she needed a new set of wheels, fast. Keeton lives in the nation’s capital with its modern subway and plentiful bus routes, but the system is designed to serve office workers, not people like Keeton, a former army cook who drives a school bus. She must get to the bus barn by six in the morning, just a half hour after the subway starts running, too little time for her to bundle up her little ones and get them to day care.

So one July day in 2005, the army veteran stuffed some pay stubs in her purse and drove across the Potomac River to one of seventeen used-car lots run by Easterns Automotive Group, which advertised heavily on television. Their commercials convinced Keeton she could count on a fair deal on an affordable car.

Keeton figured she could handle a $200 car payment. The Easterns salesman convinced her that she needed a better car than $200 a month would buy. Easterns put her into a four-year-old Mazda Tribute, a sport utility vehicle priced at $19,955 plus taxes and fees. Wells Fargo Bank financed the deal with a six-year loan at $389 a month for a total cost of more than $28,000.

Before long the Tribute stopped dead in traffic. The ignition system, one of those modern ones with electronic coding in the keys, had failed. Easterns fixed it, replacing the keys. Then the ignition failed again. Soon
numerous other flaws became apparent. Between towing bills, repair bills and a car payment nearly twice what she had budgeted for, Keeton knew she was falling behind. Then she was placed on temporary disability, which meant her income dropped.

“My doctor put me out of work because I was forty-two and pregnant,” Keeton recalled. Knowing she could not make more payments, Keeton said she “asked them to take the car back, but they refused. So I went to my credit union because I knew you could refinance a car, and when the credit union said it was only worth $8,800 my heart sank.”

Wells Fargo repossessed the car and sold it—for $6,100, less than a third of what Easterns had charged Keeton for it. Then Wells Fargo called Keeton and demanded $13,368.95, the difference between what it got for the car and the loan balance.

Keeton said that from the first call, the Wells Fargo collection agent was menacing. “She was very belligerent,” Keeton recalled. “She said ‘How much can you pay?’ and I said a hundred dollars a month, and she said, ‘We will come back for an increase in three months,’ and when I said I could not pay more, she said, ‘Fine, Wells Fargo will take your house.’”

Terrified that Wells Fargo, a Warren Buffett bank, would take her home, Keeton began a frantic search for help. She found her way to a legal clinic run by the law school at American University. The first students on her case took the car dealer and Wells Fargo to court. That was a mistake. The judge dismissed their case with prejudice, meaning no further action could be filed on Keeton’s behalf. The judge did so because Keeton’s purchase contract said she agreed she could not sue over any dispute, but must instead go to arbitration.

Unless you are one of the working poor, this may not seem like a case that matters much to you. Maybe you know how to negotiate the price of a car and you have a decent credit score. If you pay cash for your cars, this may seem like just another tale of a gullible single mother who didn’t stand up for her own best interests, but let a salesman sweet talk her into a clunker of a car at a premium price.

What happened to Keeton, however, shows how Congress and the Supreme Court are systematically destroying a crucial tenet of commercial law. The process encourages inflated prices and shoddy goods, and leaves consumers with little or no recourse. The lesson is broader than you may realize: bad law makes for bad conduct. And I’m not talking about Barbara Keeton’s.

ARE YOU AT RISK, TOO?

As the law now stands, you are at risk every time you buy a car, an appliance, furniture or many other goods. Open a bank account, deposit funds with a stockbroker or open a credit line and you could end up in the same jam that Keeton found herself in. The reason is that all of these transactions, and many others, are done using boilerplate contracts with a clause, often buried deep in the contract, requiring that any dispute regarding the contract be resolved through arbitration, not through the courts.

The beginnings date to a 1925 law, the Federal Arbitration Act. Congress enacted it so that disputes between corporations in different states, with their different laws, could be resolved quickly through binding arbitration. The record from 1925 shows no intention to apply the law to consumers and workers, only to corporations that negotiated mandatory arbitration clauses for their mutual benefit. Despite this limited purpose, the courts have now stretched the law into a parody of its original intent. In doing so they have encouraged misconduct by all businesses, but especially those with unscrupulous owners and managers.

This trend is encouraged by the refusal of Congress to increase the number of federal judges to keep pace with the demands of a larger, richer and more complex society. Not having enough judges makes those who sit on the bench eager to find ways to shed cases. Enforcing contracts that deny access to the courts and require private arbitration of disputes is an easy way for overworked judges to get rid of cases without considering their merits.

In arbitration a panel of private individuals, who may lack training, decide a case and their decisions, generally, cannot be appealed to the courts.

As reinvented by the Supreme Court in a series of decisions, the 1925 arbitration law now applies not just to disputes between corporations, but to consumers and workers. Worse, the courts have applied it in ways that eliminate consumer and employment rights in favor of business interests; impose costly barriers to obtaining redress; and ignore the Constitutional right to jury trial in civil disputes, all without any knowing consent by consumers and workers.

Margaret L. Moses, who teaches at Chicago’s Loyola University School of Law, has studied how courts have perverted this law. She wrote that if a bill that included today’s court interpretation had been placed before Congress in 1925, it probably would not have garnered a single vote.

Keeton’s path to the threat of the loss of her home began with the contract she signed for that overpriced Mazda.

Sales agents routinely present us with “standard form” contracts. “Initial here and sign there,” they say, and often we do as we are told without bothering to read the fine print. One of the greatest legal minds of our time, Judge Richard Posner of the federal appeals court in Chicago, told a 2010 legal conference that when he took out a home-equity loan, he was shown innumerable pages of documentation. “I didn’t read, I just signed,” Posner said.

Lawyers call these “contracts of adhesion.” The term means that the contracts are one-sided in favor of the company that presents the contract to you. Typically, the contract will require of the company few obligations beyond delivering the house or mortgage or whatever else you bought or rented. In law, the contract generally stands as valid unless its terms are found to be so unfairly one-sided that it shocks the conscience. But even the doctrine of the unconscionable is under judicial attack.

You, the weaker party, must adhere to the terms of such contracts. If all goes well, as it usually does, this is an efficient way to do business. For example, if you join a car-rental frequent driver plan, you can pick up a rental car by just showing your driver’s license. But if something goes awry, you will find yourself at a severe disadvantage because virtually all contracts of adhesion require you to give up your right to sue. Instead, they require that disputes go to binding arbitration. In arbitration you will not have the same rights you would in a court of law to make the other side reveal evidence, especially evidence that may show you were wronged.

In arbitration you will have to pay fees to file, and the arbitrator may require you to travel to another city or state for his convenience. The arbitrators may not even be lawyers, who understand legal principles, but former executives of the industry. Then you must pay half the cost of the arbitrator, who may charge $400 per hour. Then again, maybe you will pay more than half.