POWIP Piece of Work In Progress – Former Abode of Dan Collins

1. 

   Jesse Rogers
   February 21st, 2011 - 13:05

   At least you’re not living in California…pink slips and teaching to the test have left many teachers here fighting to find/keep jobs. And even if you do, our $30,000-50,000 incomes barely make us lower middle class! Good Luck Wisconsin! And a luck for California is much appreciated! :)

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2. 

   Angela
   February 21st, 2011 - 13:13

   This statement is fundamentally incorrect:

   “So, teachers earn about 1.5 times the average household income in Wisconsin when you factor in the benefits, and many of those households are two-income households.”

   Here you are not comparing apples to apples. The “average household income” does not include benefits that are paid on an employee’s behalf: health insurance premiums, pension and/or 401(k) contributions, social security payments, medicare payments, etc.

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   • 

     Dan Collins
     February 21st, 2011 - 13:30

     I quote from my source, which you can look at by clicking on “household income” at the linked page:

     Household income is the sum of money income received in the calendar year by all household members 15 years old and over, including household members not related to the householder, people living alone, and other nonfamily household members. Included in the total are amounts reported separately for wage or salary income; net self-employment income; interest, dividends, or net rental or royalty income or income from estates and trusts; Social Security or Railroad Retirement income; Supplemental Security Income (SSI); public assistance or welfare payments; retirement, survivor, or disability pensions; and all other income.

     It’s not a perfect comparison, but neither is teacher salary considered to include any of those other things.

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     • 

       Angela
       February 21st, 2011 - 14:25

       When you have Social Security or pension income, you are receiving a check for that amount. This is different than what your employer pays into your plans while you are working.

       Same for health insurance and disability premiums. You don’t actually see this money, and it’s not considered income (i.e., you don’t report it on your tax return).

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       • 

         Dan Collins
         February 21st, 2011 - 14:29

         Well, Angela, that’s exactly why I didn’t include benefits in the basic comparison between teachers’ income and average household income, which actually includes all of this besides. If you like, feel free to dig up the numbers, but if they’re available they’ll tend actually to expand the disparity, because most employers match employee contributions to pensions 1:1 nowadays.

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       • 

         Angela
         February 21st, 2011 - 14:33

         So to do a real comparison with the $78,000 amount, you have to compare it against the average household income PLUS the amount in benefits that workers in an average household receive in terms of employer payments to retirement plans, health insurance premiums, etc.

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       • 

         Dan Collins
         February 21st, 2011 - 14:41

         Are you suggesting that the privately employed in the US receive 60% over and above their salaries in various kinds of benefits? Because I think that’s more than a little bit unlikely. If you can find that information with regard to Wisconsin households, I’m certainly willing to recognize it.

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       • 

         Angela
         February 21st, 2011 - 15:20

         Well, I’m not sure where the $78k number comes from, but using the numbers in your post:

         (78k – 52k) / 52k * 100 = 50%

         And I’ll admit that’s high, if it’s true. I’m in the private sector (engineering) and I receive benefits in the amount of 25% of my salary. I pay 10% of my medical insurance premium (13% if you include dental and vision) and nothing toward my pension. I pay 58% of the premiums toward life and disability insurance. In addition, my employer matches part of my 401k contributions. If I were to include reimbursement for graduate classes (which isn’t taxed), I could receive benefits of up to 34% of my salary.

         So my total annual compensation is ~1.3x my salary. I would be curious to find out the additional benefits that teachers and other public employees receive.

         I have a friend who is an employee of UW and not a teacher. I know he doesn’t bring home a lot and would be hit hard by this bill because – according to him – this bill would cut his take-home pay down by 10% effective July. In the long term, I don’t necessarily disagree with requiring WI public employees to contribute more to their retirement and health plans, but it’s hard for someone to take an immediate 10% cut. For the average earners, it’s the difference of about $300 a month, give or take a hundred. At least phase it in or give people a little more time to prepare / find a different job.

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3. 

   Meleah
   February 21st, 2011 - 14:41

   Bob, this is getting a bit old and dreary….here’s your link on rights/privileges: http://www.constitution.org/cmt/right-privilege.htm Must I do all the appropriate documentation?

   No, I don’t mean negotiations. I mean he won’t even answer the phone because “the people sent me with a mandate”-Gov. Walker. Do you know about the legislative process? Let’s just examine SB 13 since that is the focus now. Here’s the link for the legislative process for SB 13: http://legis.wisconsin.gov/2011/data/SB13hst.html. Not only was it 1st introduced on 1/28 and sent to committee on that date, the committee issues such transparent notices…

   http://legis.wisconsin.gov/w3asp/commpages/IndividualCommittee.aspx?COMMITTEE=Labor%2c+Public+Safety%2c+and+Urban+Affairs&HOUSE=Senate

   And finally, here is the complete history of the bill: http://legis.wisconsin.gov//2011/data/SB13hst.html

   Not much there.

   No, I have no interest in overturning any election. It’s about the legislative process. Just because someone is elected to office with a “mandate”. It doesn’t give him the right to ramrod through the legislative process. I think we’ve had this discussion before.

   Let’s look at it from another perspective with the same mandate. The Gov is mandated by the people to balance the budget. Then, he decides to do that by increasing property taxes by 200%. He decides to accomplish this through Executive Session. Do you think the committee or lesislators would pass the bill? NO! Why, because they are directly affected as well as the majority of voters in the state. Additionally, the voices of those directly affected would be heard. Now, contrast that with what has happened. Why has it happened? Not a single person sits on the committee that the bill directly affects. Therefore, it is incumbent on them to notify the people it affects—ALL TEACHERS, ADMINISTRATORS, etc. The committee has had exactly 24 days, INCLUDING weekends and TODAY. I’m not going to keep spoon feeding here.

   As far as the union rules, recertification, transparency, etc. I have my opinions but really don’t want to another issue debate. I appreciate the banter. But in all reality, we don’t see things eye to eye. That’s your right and I honestly, respectfully disagree with your positions (despite my snarky remarks).

   My prayers are with you, your state and especially the teachers.

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   • 

     Bob Reed
     February 21st, 2011 - 22:39

     While very interesting, your link to that exposition on the blurring of the lines of rights and privileges, much like your citation of Federalist 28 doesn’t support the points you seemed to be making; that collecive bargaining is a Constittional right, de facto or otherwise, nor are the Democrats who fled the state rather then engage in the democratic process somehow justified by Hamilton’s discussion of the hypothectical need of the state to resort to force of arms.

     I’m unsure that it means what you think it does Meleah.

     I also reject the assertion that US is subordinated, in point of fact or moral authority, to the UN, through the vehicle of the universal declaration of human rights. And I think you’d be surprised at the number of Americans, I speculate a majority, that would be inclined to reject UN authority over US Constitutional law and US code.

     Walker ran on the platform of reigning in the public employee unions. A majority of WI citizens endorsed that notion by electing him and his Republican colleagues in both houses of the legislature. In a democratic republic, these proxies represent their constituent’s will, which can in this case be rightly interpreted as reigning in the public employees, as promised, as evidenced by the fact that the majority voted to put representatives in place to accomplish this.

     There’s no ram-rodding going on, no acting against the will of the majority of the public, no discourse being avoided-all of that took place prior to the election!, and no one’s “rights” being trampled on.

     The democratic process was satisfied by the election, free and fair. The that process public employeed were made aware of the intent of those subsequently elected, regardless of what boards or committees they “sit” on, as demonstrated by their attempt to cram through new agreements in the lame duck session of the formerly Democrat controlled legislature; but fortunately enough legislator’s consciences couldn’t condone this.

     In fact the only way the process is being subverted right now is through the illegal and unconscionable actions of the Democrat Senators who’ve fled the state in order to prevent the operation of the government; because they know the public rejected the notion of the status quo that they represented.

     Their action is not democracy in action. It’s the minority trying to dictate outcomes and overturn the last election by preventing the operation of the government unless it’s on their terms ; the ones rejected by WI citizens last fall. If the majority wants Walker’s bill that’s the consequence of losing an election . If that doesn’t represent the wishes of the state’s citizens, then in the 2012 elections Democrats can run on the promise to restore the closed shop and full collective bargaining rights to unions and see how popular that makes them.

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     • 

       Meleah
       February 22nd, 2011 - 00:49

       Bob-

       What you state is simply your opinion and not fact or law. Here is the quote you denied was in the Federalist Papers, its found in 16…

       “…if any State should be disaffected to the authority of the Union, it could at any time obstruct the execution of its laws, and bring the matter to the same issue of force, with the necessity of which the opposite scheme is reproached.

       “The pausibility of this objection will vanish the moment we advert to the essential difference between a mere NON-COMPLIANCE and a DIRECT and ACTIVE RESISTANCE. If the interposition of the State legislatures be necessary to give effect to a measure of the Union, they have only NOT TO ACT, or TO ACT EVASIVELY, and the measure is defeated. This neglect of duty may be disguised under affected but unsubstantial provisions, so as not to appear, and of course not to excite any alarm in the people for the safety of the Constitution. The State leaders may even make a merit of their surreptitious invasions of it on the ground of some temporary convenience, exemption, or advantage.” (http://www.constitution.org/fed/federa16.htm)

       Of course the context of the quote is embodied in the entire argument of State vs. Union. However, you only need to replace the word Union with Governor to understand that the same argument holds true for State legislatures vs. the Union as it would with State legislatures vs. Governor. Our Founding Fathers were CONSUMED with the notion of the rights of ALL being equally represented AND that the balance of power never be tilted to favor the weak over the strong or the strong over the weak. Hence, the BEAUTY of The United States Constitution.

       Moreover, the entire premise of the Federalist Papers as well as the US Constitution is that the rights of ALL are protected; not the only majority and/or minority; certainly not only for elections. Our Constitution would be quite short if we only needed to hold elections for a “mandate” to allow politicians to enact laws favorable to their parties desires. Your argument of the democratic process being “satisfied by the election, free and fair” is not only wrong, it would never hold up in a court of law. Here is what your own Wisconsin State Constitution states: (ANNOT. –not my own but published WI. Constitution)

       ‘Article IV, §17 – ANNOT.
       In order for the legislature to create a law, the proposed law must be enacted by bill and be published. For some action to be sufficient to constitute publication, that action must be evaluated in light of the purpose publication seeks to achieve, i.e., was the public provided with sufficient notice of the law that is being enacted or amended. The publication requirement is meant to avoid the situation where the people have their rights sacrificed by the operation of laws that they are bound to know, but have no means of knowing. Milwaukee Journal Sentinel v. DOA, 2009 WI 79, 319 Wis. 2d 439, 768 N.W.2d 700, 07-1160.”

       AND

       “Article IV, §17 – ANNOT.
       In order for the legislature to create a law, the proposed law must be enacted by bill and be published. For some action to be sufficient to constitute publication, that action must be evaluated in light of the purpose publication seeks to achieve, i.e., was the public provided with sufficient notice of the law that is being enacted or amended. The publication requirement is meant to avoid the situation where the people have their rights sacrificed by the operation of laws that they are bound to know, but have no means of knowing. Milwaukee Journal Sentinel v. DOA, 2009 WI 79, 319 Wis. 2d 439, 768 N.W.2d 700, 07-1160.”

       Furthermore, I highly doubt that most Americans would agree that moral law is subordinated by US law. After all, many conservatives take the view of NOT taking God out of our country. You, on the other hand seem to take the opposite view. You treasure the United States laws over God’s laws? Wow! Of course, I certainly could argue this point once again on “natural laws” or constitutional law but I will not beleaguer the point.

       Btw–The Harvard Law Review’s main premise, as is well documented in other searchable venues of constitutional law, is that slowly through court cases, the law has recognized that “rights/privileges” must be interpreted as the same.

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       • 

         Bob Reed
         February 22nd, 2011 - 09:45

         Meleah,
         You’re kidding me, right? I mean, not only does Federalist 16 not have even the remotest bearing on what we’ve been discussing in this thread, but your suggestion that the roles of the Governor and Federal Union are interchangeable is illogical. If that’s the case, then WI Governor = Federal Government! Do you see that flaw in the logic?

         Federalist 16 is part of several essays that together present Hamilton’s critique of the Aricles of Confederation as being inadequately weak to preserve the unity of the nation. It has absolutely no bearing whatsoever, nor does any context exist that would provide it one, on the discussion of collective bargaining as some kind of ersatz “right”.

         Our Constitution would be quite short if we only needed to hold elections for a “mandate” to allow politicians to enact laws favorable to their parties desires. Your argument of the democratic process being “satisfied by the election, free and fair” is not only wrong, it would never hold up in a court of law.

         I don’t even know what to say to this. How isn’t the democratic process satisfied by a free and fair election? When was there ever a court case that declared such a finding? This is a canard that you will have to document to prove to me, and not by citing The Federalist completely out of context or where the subject of the essay doesn’t even apply.

         How exactly are the “rights” of the minority being trampled here? THEY WON’T SHOW UP IN SESSION TO DEBATE OR OTHERWISE, BUT INSTEAD ARE HIDING IN ANOTHER STATE!. Any “rights” that you’re trying to assert they have that are being trampled, they have surely abdicated by choosing to ignore the law, and the traditional practices, by shirking their responsibilities at the behest of their allies in organized labor.

         No one’s rights are being trampled…The bill in question has been sufficiently publicized such that any members of the public who pay attention knew of it being scheduled to come to the floor. Indeed, it is ridiculous to assert that anyone was unaware of it goven the tumult of the last week with the unlawful, de facto, wildcat strike by the teachers-which, by the way, is in violation of the collective bargaining agreement they claim to hold in such high esteem…

         Furthermore, I highly doubt that most Americans would agree that moral law is subordinated by US law. After all, many conservatives take the view of NOT taking God out of our country. You, on the other hand seem to take the opposite view. You treasure the United States laws over God’s laws? Wow! Of course, I certainly could argue this point once again on “natural laws” or constitutional law but I will not beleaguer the point.

         I didn’t say anything about moral law. I said that most Americans would not agree that US law was/should be subordinate to UN law/decree; and that the UN universal declaration of human rights has no bearing on matters inside the US.

         And I resent you either putting words in my mouth, or claiming some absolute moral authority, by claiming that I hold things above God’s laws. Whether I do or not is none of your business, for starters, but more to the point, since we live in a society where freedom of religion is one of our actual “rights”, and there is no “official” state religion, the conversation must be kept on a secular basis; and as Christ told the Pharisees, “Render unto Caesar that which is Caesar’s, and unto God that which is God’s”.

         Un decrees do not “trump” US law, nor the enligtenment concepts of natural rights as professed by Lockw and Hobbes. The UN is influenced far too much by European socialists, which explains them including collective bargaining in their manifesto. It doesn’t apply in the US…

         I don’t particularly care if the Harvard law Review has concluded that privileges = rights; that doesn’t make it a “closed case” or “settled science”. While some of that publications alumni have made noteworthy contribution over time, others leave much to be desired. In fact, our current President, once editor of that publication and widely hailed by his supporters as a Constitutional scholar of sorts, based on his patronage job at University of Chicago, doesn’t impress me much with his pronouncements on that subject matter; both from the time before and since being elected President.

         I appreciate your ardor in persisting in this discussion. But the last few entries have been as much sophistry as content. While we have very different opinions, there is only 1 common set of facts. Those facts aren’t on your side of the discussion, I’m afraid, and no amount of capricious citations, out of context, from unrelated documents will make it so, nor do they in any way add depth or gravitas to your assertions.

         My regards

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4. 

   Meleah
   February 22nd, 2011 - 01:11

   Bob–So sorry I copied and pasted the same Wi Constitutional Article. It’s late, although I’m an hour behind the time submitted on the posts. I’ll let you read it all yourself:

   http://legis.wisconsin.gov/rsb/2wiscon.html

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5. 

   Meleah
   February 22nd, 2011 - 14:20

   You’re right Bob. Federalist 16 has no bearing on anything I’ve been discussing. It’s what YOU were discussing–Dems leaving & you asked for the quote.

   You obviously know everything Bob.

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   • 

     Bob Reed
     February 22nd, 2011 - 16:24

     Nah, there’s a whole lot I don’t know; of that I’m sure :)

     But I’m pretty sure that what Hamilton was getting at in Federalist 16 wasn’t applicable to our discussion. I appeciate that you elucidating your thoughts further.

     I also want to apologize if my tone was sounded aggressive or adversarial; it was not my intent. Now, more than ever in our world, do we all need to be able to disagree without being disagreeable.

     I respect your right to opine, and all of the principals here at POWIP welcome dissenting points of view. We strive to avois any echo-chamber-like epistemtic closure. Of course, with passionate opinions and the limitations of text-bound discussions, devoid of body language signals and clues of intonation, discourse can seem to be heated when in fact it isn’t; or not any more so than any other philisophical discussions.

     In that vein I invite you to feel free to drop back by anytime the subject piques your interest.

     My Regards.

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6. 

   MathIsGood
   February 23rd, 2011 - 13:01

   Maybe I’m missing something, but looking at the XLS files cited in these comments for the $78k figure, it appears that $78k ($77,857.02) is the average administrator salary (Principals, Business Managers, etc*). Teachers on the other hand have an average salary of $50k ($49,093) to be exact.

   The teachers salary listing doesn’t give any benefits information, but the administrator file does assign a value to fringe benefits, an average of $30k ($29,694.40). Even if teachers have an equivalent level of benefits (which is not confirmed by the given documents), that total is would be $68k, and not the cited $78k number.

   So where does the $78k come from?

   *From the second XLS:
   “Administrative staff” is defined, as it is for the School Performance Report, to include:
   District Administrator, Assistant District Administrator, Business Manager, Director of Instruction/Program Supervisor, Principal, Assistant Principal, Director of Human Relations/Multicultural Education/Equity, Director of Special Education and/or Pupil Services, Assistant Director of Special Education, Central Office Administrator, Library Media Supervisor, and District Instructional Technology Coordinator.

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7. 

   Jim
   February 23rd, 2011 - 17:38

   This article is somewhat confusing to me.

   First it says that they earn 78K including benefits.
   But it avoids giving the salary without benefits. Is this because they are afraid of readers seeing the actual salary w/o benefits??

   Then it compares the salaries to the average household salary in Wisconsin but it leaves me wondering if they are comparing the teacher salary to the average salary of households where two wage earners are college educated professionals? Or are they just comparing it to the average of everyone even fast food workers?

   Since the article does not actually give the salary without benefits, I’m assuming because it would look more sympathetic to the teachers, I’d like to say I know people who are programmers, or who work in the gambling industry who have an equivalent amount of education to the teachers but make more than even their salary with benefits.

   It seems to me that the person who wrote this does not value education or think that a teacher is a job worthy of compensation.

   Also missing is how Wisconsins teacher salaries compare to the rest of the nation and is it important to pay better to attract the best teachers?? Also how the average salary of the college educated professional in WI compares with other states.

   It seems to me the composer has a certain point of view and is not willing to give the reader enough statistics to really make a decision whether teachers are overpaid compared to those of similar education, or teachers in other states.

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   • 

     Dan Collins
     February 23rd, 2011 - 17:48

     Assume all you want, but if you click on the link in the appropriate place, you’ll find your answer.

     I think I recall reading that WI teachers are 23rd highest paid in the US.

     Here is a comparison of per pupil spending by state, and how that works out to SAT scores.

     http://www.datamasher.org/mash-ups/spent-student-and-sat-scores

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8. 

   joseph stevens
   February 25th, 2011 - 22:22

   you guys crack me up, red scares went out in the 50′s , hippies were pretty much gone by the mid 70′s . then by the 80′s even the reds were gone. yep tv and the internet are definitely something that the teachers have to contend with , along with standards of learning etc. reading is about to go the way of the dinosaurs, be it newspapers , classics , or even pulp novels. alvin toffler wrote several (3 that i read) telling us what was going to happen. the world changes faster every day, but come to think of it , it has been doing so since the first day. unions were huge in the 40′s and 50′s , now days not so much. it is all about power guys and girls , who has it and wants to keep it and who doesn’t and wants to have it. do the politicians have our best interests at heart ? probably not. do the unions have our best interests at heart? probably not. do the people acting like a mob
   have our or even their best interests at heart? again, probably not.the world changes my friends, get over it and then get on with it.

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9. 

   chris dorf
   March 5th, 2011 - 15:36

   Hmmm, I always like these arguments regarding the race to the bottom that is happening because of the demagoguery of the steering committee (US Govmnt) for the global corporate consortium. They are forcing a neoliberal business model upon the world previewed under Reagan and Thatcher, then blame the small folks as they eliminate the tax base (thier ideology) by causing the wealth gap to grow exponentially.

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10. 

    chris dorf
    March 5th, 2011 - 15:41

    BTW, College education garners 45% more wages for people than non-college educated people.

    Them rich poor gap is widening; so start talking about the REAL issues; don’t play class warfare games that merely serve the trillionaire whom stole the pension and 401 money if fraudulent schemes regarding mortgage backed securities, etc.

    If confused about the casino economy, ask why Sumners,Greenspan, and Reubens fired the hero Brooksley Born when she tried to block Phil Gramms repeal of Glass Stiegel which led to the global Depression.

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    • 

      Dan Collins
      March 5th, 2011 - 16:43

      Wisconsin teachers union has over-reached for years. This is nothing new. If you want to understand the new globalism, understand what Trumka’s saying overseas.

      I agree about the macrofinancial crap. I’ve written about it here. Geithner and Bernanke are no better.

      Glass-Steigel is a part of the problem, but there are a lot of other agencies that deserve firing: FDIC, SEC, OTS, for starters. Then there were Fannie and Freddie, and Dodd (whom strangely you don’t mention) and Frank, to name a few.

      But to come back to the issue at hand, you’d have to know something about the history of the teachers’ unions in Wisconsin to understand just how greedy they are. What the citizens of the state are saying is, sorry, under the present economy, you aren’t worth the money.

      Deal.

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11. 

    chris dorf
    March 5th, 2011 - 20:39

    I am a 50 year old lifelong resident of Wisconsin; Racine to be precise; 25 miles due south of Milwaukee.

    You are either completely blind to, or are a outright deciever, when you refuse to acknowledge the complete ownership of government by corporate interest. One should not even have to mention this to understand it implicitly.

    The teachers are used in this Republican/corporate global wealth redistribution to take all public employee rights away,as in the private sector.

    Taft/Hartley began the assaut; this is the endgame.

    Since there is no ‘invisible hand of the market’, what is a teacher worth?

    Privatise it!

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    • 

      Enoch_Root
      March 5th, 2011 - 21:43

      as a 42 year old resident of wisconsin, I would like to say that I elected Scott Walker and the republican controlled state congress to do precisely this. And further:

      “Since there is no ‘invisible hand of the market’, what is a teacher worth?” misses the point. You are either dumb or invincibly ignorant. A teacher is worth what the street will fetch. And his salary ought to be set to measurable performance. Once the Union Bosses of BIG UNION – you know the ones who completely control the Democrat Party – are gotten out of the way, then we might be able to measure their worth and each according to his own merit will be in competition with the rest… which, one would be an idiot to argue otherwise, is a win-win-win. Win for the kids, win for the taxpayers. Win for those teachers worth their salt.

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12. 

    chris dorf
    March 5th, 2011 - 22:48

    Enoch,
    “You are either dumb or invincibly ignorant” Is not worthy of a response.

    As a person who never saw anything close to union wages and benefits, one might think I would think like you…I don’t.

    You can put the master slave paradigm back in hell.

    As Frick told Carnegie, “we are both going to hell for what we did to employees.”

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13. 

    chris dorf
    March 5th, 2011 - 22:58

    ——————Hitler on Unions——————

    “We must close union offices, confiscate their money and put their leaders in prison. We must reduce workers salaries and take away their right to strike”
    - Adolf Hitler, May 2, 1933.

    ——————————————————–

    “It’s unbelievable that people can’t connect the dots. You know, these pension funds that these state workers have – these were the people who were the victims of this mortgage-backed securities scheme. These were the places where the banks were selling these toxic sub-prime mortgages that eventually blew up. The pension funds lost all their money. Now the states have to pay these pensions and they’re broke, and they’re blaming the teachers, they’re blaming the firemen, they’re blaming the policemen, when in fact they were all defrauded by these banks on Wall Street.”
    –Matt Taibbi

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14. 

    chris dorf
    March 5th, 2011 - 23:11

    A childhood friend of mine from Racine:

    Matthew Stanton is an attorney and Professor of Law at Chicago-Kent

    http://canadiandimension.com/articles/3765/
    —————————————————–
    Wisconsin Death Letter Blues

    Matthew Stanton | March 2nd 2011

    What is unfolding in Wisconsin these last few weeks with tens of thousands protesting the legislature’s plan to gut the state employee’s collective bargaining rights is certainly news; however, the basic storyline is nothing new at all. Scott Walker is the duly elected Governor, but he acts more like the CEO of State of Wisconsin, Inc. His plan to dismantle the public employees union is more than a move to cut the state budget; it is the continuation of a class war that has been going on across the country since the 1930s; and it is war of attrition that labor has lost. Like any political war, this conflict is not one about ideas and beliefs so much as it is a conflict of interests; in this case, a remnant of union-elite workers vs. the state acting on behalf of the corporatist agenda.

    The real story is the elephant in the living room none want to acknowledge, namely, the cuts that humbled union production workers in the 1980s are now moving up the ladder to include the last bastion of union held territory. The schoolmarms and staffers who were content to play the fiddle while blue collar labour was burning, now want solidarity and sympathy from the Wal-Mart generation.

    While I support unionism in general, the war was won by the other side years ago. What we are seeing now is little more than a mopping up action. In other words, what is happening in states like Wisconsin is not the emergence of a new front in the war on labour; but the backside of a prolonged attack on labour that has been going on for decades. Big business fired the first volley with the Taft-Hartley Act of 1947. This is the legislation that Harry Truman once called a “slave-labour bill”; and it blasted holes in the labor protections enacted during the the New Deal. Then in 1981, organized labor was trounced at The Battle of PATCO, when Ronald Reagan broke a strike by firing all 11,359 of the nation’s air traffic controllers. After the formation of the NAFTA alliance—signed into law by Bill Clinton in 1994—labour was doomed. The Telecommunications Act of 1996 enabled the consolidation of media power into fewer and fewer hands, creating a media oligarchy with the unmatched power to frame the debate. Then, lest we forget, there is the most recent corporate triumph in the U.S. Supreme Court, the Citizens United case, which has effectively sealed our political lips and virtually assured labour’s electoral defeat at the polls.

    During this same time, the U.S. government was being transformed from an institution that promoted the common good, into a steering committee for the private corporation, thereby enabling rabid privatization schemes and so-called right-to-work initiatives across the nation. From Clinton era out-sourcing, to the mercenary contractor armies of Bush-Obama, to such things as the sale of the Chicago parking meter system, public wealth and services have steadily been taken over by private capital. Why should it surprise us now that Wisconsin wants to eat its own employees? After all, the job is done. Union power has been emasculated—and the state workers who now find themselves under the gun have been complicit in its demise by looking the other way the whole time. Now it is their turn. Someone has come for them. The question is, are there any left to save them?

    None of this is meant to suggest we give up the fight. But it is essential to take stock of the situation if there be any hope to reverse the tide that has swept away good jobs and imposed a lower quality of life on ours and our children’s future. One can begin by refusing to participate in the lies and deceptions that say all of this is somehow natural, inevitable, and acceptable. Otherwise, it’s a race to the bottom for all of us; everyone that is, except U.S. presidents, the quislings in congress, and a handful of billionaire activists.

    General strike, anyone?

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    • 

      Dan Collins
      March 6th, 2011 - 06:12

      Chris, you and your childhood pal treat all unions and unionism as though they were alike. I don’t want to have to drag out the hoary FDR quotes that everyone on the right has to make my point, but you and your buddy should know better. The 14 Democrat Senators have demonstrated beyond any doubt the power of the teachers union in Wisconsin, by refusing to do the jobs for which they were elected in order to please their masters in the unions. Bought and paid.

      The fact is that they don’t believe that there is any burden the taxpayers shouldn’t have to bear on behalf of the unions. They proved that through their actions in the lame-duck session in January. The gouging that’s been done regarding health insurance premiums to fill the coffers at the expense of non-union households throughout the state reveals just how mercenary they are.

      Complain all you want about how Chrysler, following AMC, pulled out of Racine/Kenosha. When Obama bailed them out with GM, he overturned hundreds of years of contract law to award control of the companies to the unions, shuttering dealerships that had given money to Republican candidates with extreme prejudice. That’s thuggery, pure and simple.

      Although he’s very union friendly, he’s also got his corporate interests lined up, in companies such as GE and Google, not to mention the sweetheart deals that he and his pals have arranged for Goldman Sachs and other financial interests. What about the deals he cut with Big Pharma? Why is it that all the unions who supported his imposition of ObamaCare on an unwilling electorate want waivers now?

      Disgusting. And don’t lecture me about class warfare, dude. Government versus private sector is the new class division par excellence.

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15. 

    Enoch_Root
    March 6th, 2011 - 08:47

    Typical Lefty –

    “You are either completely blind to, or are a outright deciever” – Chris

    “You are either dumb or invincibly ignorant” – Enoch

    “Is not worthy of a response” – Chris

    “What is good for thee…” – Enoch

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16. 

    chris dorf
    March 6th, 2011 - 15:06

    The right puts many words and motivations into people’s mouths.

    My friend and I have always been very critical of both unions AND corporate power alike…what did you fail to read in Mr. Stanton’s history review?

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17. 

    chris dorf
    March 6th, 2011 - 15:10

    Enoch,
    For people to get the TRUTH of what Republicans are doing in Wisconsin, it took a person impersonating a multi-billionaire owner/union buster, a Koch Bro.

    Deception describes the Newt Gingrich’s of the world that Walker represents; and an enabler of the wealth transfer upwards.

    And NO Republican has EVER given me a wage they believe in comensurate with the teaching profession, since there is no comodity market for it.

    Nuff said.

    chris dorf

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18. 

    Enoch_Root
    March 6th, 2011 - 15:20

    Elections… something… consequences.

    http://www.youtube.com/watch?v=BZwuTo7zKM8

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19. 

    chris dorf
    March 6th, 2011 - 20:04

    http://www.dailykos.com/story/2011/02/27/950807/-Top-Ten-Myths-About-Wisconsin-Debunked

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    • 

      Enoch_Root
      March 6th, 2011 - 20:39

      KOS = Stalin = Hitler = Mussolini = Pol Pot = Mao = SEIU.

      I’ll pass. We’ve already got Michael More in Madison. Oh, and Jesse Jackson, too.

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20. 

    chris dorf
    March 6th, 2011 - 21:19

    Hitler: Union Busting Speech: May 2, 1933.

    “We must close union offices, confiscate their money and put their leaders in prison. We must reduce workers salaries and take away their right to strike”
    —Adolf Hitler, May 2, 1933.

    The right of workers to organize is recognized from Solidarity in Poland with Lech Walesa to Egypt, from Iran to the United States.

    Obviosly NOT by anti-union conservatives.

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21. 

    chris dorf
    March 6th, 2011 - 21:25

    Here are the perpetrators of the global economic collapse, global wealth redistribution thru fraud schemes,and whom should ‘feel the pain’, be seant to prison, have assets siezed to pay off the collapse they caused..

    http://ww2.atgf.com/DevFiles/TrustedAdviser/2008/10Oct/PerkinsTalk081010.asp

    The Origins of the Subprime Mortgage Crisis

    by the Honorable Thomas L. Perkins
    U.S. Bakruptcy Judge Central District of Illinois

    The following article is excerpted from Judge Perkins’ presentation at the October 10, 2008, ATG Legal Education, LLC seminar, “America’s Mortgage Crisis: Looking Out for Your Client”
    ————————————————
    ————————————————
    It is a very difficult topic to get your arms around. It is complex, it is convoluted, and sometimes those in positions of power intentionally obscure the truth.
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    Introduction
    I usually speak on my specialty, which is bankruptcy. This topic, the subprime mortgage crisis, may result in a large increase in my business in the future, but it is something that is not directly within my professional expertise. It is a very difficult topic to get your arms around. It is complex, it is convoluted, and sometimes those in positions of power intentionally obscure the truth. It is something that I come at mostly as an observer, a concerned citizen, with a measure of financial expertise in the bankruptcy arena.

    My remarks will focus on the investment banks and the credit rating agencies. There are a lot of ways to come at this very difficult and complex problem: My approach will be from the “big picture” angle. I will not attempt to teach you details about the products that were being used or about the way loan brokers worked. There are a number of details that are contained in the books listed below and in other resources that are important, but not necessarily pertinent to what I am setting out to do—which is to make sure you have an understanding, as I think I do, of the big picture of this crisis. How did we get to this point, and more importantly, why did we get to this point? You will remember, it was George Santayana who said, that he who ignores history is doomed to repeat it. Words to the wise: If we don’t understand how we got to this critical crisis, we run the risk of repeating it in the future. I would like to give you a little background and educate you as I think I have educated myself with regard to this problem.

    Background
    Let me begin with a quote from Australian economics writer Peter Martin: “The most dangerous moment in any financial market boom is the one where the suppliers of funds stop paying attention.” I think that statement captures the essence of the subprime mortgage crisis. The suppliers of funds in the secondary mortgage market in this country—the investors who bought the mortgage backed securities, the Wall Street investment banks, and to a lesser extent Fannie Mae and Freddie Mac—simply stopped paying attention. The question of why they did so is a very interesting one and I would like to shed some light on it. On the one hand, the investors who bought what are called “mortgage backed securities” or MBSs, who are run mostly by professional money managers, were lured into complacency by the yield premium available on the mortgage backed securities that carried high ratings, often AAA investment-grade ratings, which were considered to be a stamp of approval from credit rating agencies. The investment bankers, on the other hand, were seduced by the prospect of unimaginable wealth, personal wealth. In my view, they were overcome by an irrational exuberance, to use one of Alan Greenspan’s terms, for profits that were seemingly unlimited.

    For example, from 1998 through 2002, the investment bank Merrill Lynch averaged $2.1 billion in annual operating profits. From 2003 through 2006, which were the peak years of subprime mortgages, it averaged two and a half times that or $5.2 billion in annual operating profits, almost all of which were paid out in bonuses to employees. In 2007, for example, the top five investment banks paid out $36 billion in bonuses alone, a figure that does not include salaries. I would suggest to you that that kind of money is intoxicating—even addictive—and the pursuit of profits was really a siren song that was absolutely irresistible.

    We now know that that pursuit ended in ruin, for the investment banks and investment banking community is no more. It is gone, simply destroyed. It also spelled ruin for the secondary mortgage market in this country, for the worldwide credit system, and for the stock markets around the world. The US economy is still teetering on the brink of what might be a severe recession. I don’t think any of that is hyperbole.

    In March 2008 a report issued by the President’s working group on financial markets concluded as follows, “The turmoil in financial markets clearly was triggered by a dramatic weakening of underwriting standards for US subprime mortgages beginning in 2004 and extending into early 2007.” The truth of that conclusion is now widely accepted. The question that I hope to answer today is, why did underwriting standards deteriorate, how was that allowed to happen? Before I get to that, let’s look at the size of the problem so you can get an idea of what we are dealing with in terms of scope.

    Understanding the Scope in U.S. Dollars
    >From 2004 through 2007 the total amount of sub prime mortgage loans originated in the United States was $2.4 trillion or one-fifth of all mortgage loans funded during that four-year period. That amounts to between 12 and 15 million mortgage loans that were subprime. With subprime loans that existed before the 2004 era, there are currently about $3 trillion in subprime loans that are currently outstanding. All outstanding US residential mortgage loans together total about $10 trillion, so about 30% of the total outstanding mortgage loans are subprime. By October 2007, about one quarter of all subprime loans were in default. That amounted to about $750 billion worth of face value calculation of loans that were in default. The numbers have increased from there, making the size of the problem simply mind-boggling.

    Enter Fannie and Freddie
    Let’s go back in time and focus on a little history. The Federal National Mortgage Association, nicknamed Fannie Mae, was founded in 1938 as a government agency to facilitate liquidity and stability in the United States mortgage market. In 1968, the government converted Fannie Mae into a government sponsored enterprise (GSE), which meant that although the company was privately owned and operated by shareholders, it was protected financially by the support of the Federal Government. In 1970, the government created the Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, also a GSE. Freddie Mac’s purpose was to compete with Fannie Mae and thus facilitate a more robust and efficient secondary mortgage market. These GSEs have played an integral part in the development of the most successful mortgage market in the world.

    The American Dream: A Wonderful Life
    Why was the secondary market and therefore these GSEs necessary? Before 1980 most home mortgage loans were made by savings and loans, which were in fact successors to buildings and loans, such as in the movie “It’s a Wonderful Life,” a Frank Capra classic that featured the Bailey Building and Loan. In fact, I would suggest to you that maybe the first subprime loan in the history of the world was the one George Bailey made to Ernie Bishop, the cab driver in the movie. Ernie had a very low FICO score as you can imagine. The Bailey Building and Loan was actually very typical: It collected deposits and when it had enough funds, it made mortgage loans. Those loans stayed on its books, they weren’t sold on some secondary market, and they were repaid over thirty years. When it acquired enough money through loan repayments it made more loans. If it didn’t have enough funds it couldn’t make more loans for the lack of liquidity. Simple. Remember the scene in the movie, right after George and Mary got married? It depicted a bank run, which led to a similar run on the Bailey Building and Loan. It was pouring rain outside. The people in the Building and Loan office had worried looks on their faces. Police sirens could be heard from the street outside, and all the depositors were looking at George saying that they wanted their money. What did George say? He said, “You’re thinking of this place all wrong. As if I had the money back in a safe. The money’s not here. Your money’s in Joe’s house . . . right next to yours. And in the Kennedy house…and a hundred others. Why, you’re lending them the money to build, and then, they’re going to pay it back to you as best they can.” And that was true. That description of a building and loan’s lack of liquidity illustrated the problem faced by lenders without a secondary market to sell their mortgages and replenish their funds.

    That scene from Capra’s film depicted the era just before the Great Depression. Fast forward a few years to 1938 when Fannie Mae was formed, then later Freddie Mac. These enterprises were formed to purchase mortgages from lenders to allow lenders to immediately replenish their funds rather than having to keep these mortgages on their books, collect payments for 30 years, and wait until the mortgages were repaid before they could make more loans. The secondary market furthered the Federal Government’s long-time policy of encouraging home ownership. In 1977, when the Community Reinvestment Act was passed (and many occasions since then) there has been a consistent governmental policy through Democratic and Republican administrations alike encouraging home ownership and trying to expand the percentage of Americans who own their homes. But Fannie and Freddie were not doing a great job of providing liquidity to the mortgage lenders. They had strict underwriting standards. There was lots of paperwork involved in order to sell your mortgage to Fannie and Freddie. There really wasn’t at that point, I’m going back now to the 70s and before, a huge unfilled demand for mortgage loans.

    The Birth of Mortgage Backed Securities
    Then in the early1980s, Lewie Ranieri, an investment banker of Salomon Brothers, came up with the idea of securitizing residential mortgages and selling them to investors who were looking for higher yields than treasury bills or municipal bonds offered. The trick was to create a large enough pool of mortgages to be able to predict on an actuarial basis how many of the loans were likely to go bad and go into default, and then account for that risk in how the security was priced. Ranieri was able to convince lenders that it was a good idea to allow Salomon Brothers to securitize the mortgages and convince investors that the securities were a reasonably safe investment. Thus the mortgage backed security or “MBS” was born. Pretty soon all the Wall Street investment banks were securitizing and selling residential mortgages and they were getting paid handsome transactional fees for doing so. The investment banks were now in direct competition with Fannie and Freddie. They were in the business of purchasing mortgages from lenders and it wasn’t long before nearly all the mortgages that were being written were being sold on the secondary market shortly after origination.

    Mortgage Loans and More Mortgage Loans
    At this point, lenders of all types—state banks, national banks, credit unions, etc.—were all heavily involved in mortgage lending. Once the economy picked up in the 80s and interest rates declined, the demand for housing was at an all time high. But throughout the 1980s, for the most part, only prime or conforming mortgages were being made, that is, mortgages that conformed to the underwriting standards used by Fannie Mae and Freddie Mac. These lenders were all regulated by either federal or state regulators. Their loans were audited on an annual basis. They were all subject to safety and soundness standards. If a person came in for a loan to a regular lending institution and they did not qualify for a prime rate loan, they simply got turned down for the loan. That is, until the concept of risk-based pricing became approved.

    Community Reinvestment Act: An End to Redlining
    Earlier in this presentation I referred to the 1977 Community Reinvestment Act, a federal law designed to encourage commercial banks and savings associations to meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods. It was intended to reduce discriminatory credit practices against such neighborhoods, a practice known as “redlining.” Redlining was the process where a bank (usually in an urban community) would have a map of the neighborhoods in its community up on the wall and they would literally take a red marker and draw lines around particular neighborhoods in which they would not make loans. These neighborhoods were populated mostly by lower income people that the banks decided could not afford loans. The 1977 Act, while well-intentioned, simply didn’t work in and of itself because the borrowers who lived in those neighborhoods simply could not qualify under traditional standards. By “traditional standards,” I refer to the underwriting standards that were promulgated by Fannie and Freddie. So, in the early 1990s the regulators approved what is called risk-based pricing.

    Risk-Based Pricing Gives Way to Subprime Lending
    Risk-based pricing allowed banks for the first time to be able to charge a higher interest rate on mortgage loans to less qualified or riskier borrowers. The more risky you were, the higher rate you got charged. In some sense that is counter intuitive because the people who could least afford it were paying the highest rates—but that was the way it had to work to ensure banks maintained their safety standards. This opened the door to subprime lending. It also opened the door to a whole new market of millions of potential borrowers who were previously shut out of the mortgage arena.

    While banks began to make some subprime loans, there was the problem of bank loan officers, who were trained to be conservative and were simply not willing, for the most part, to relax their standards. This led to the rise of the non-bank lenders, which are critical to the understanding of the subprime mortgage crisis.

    Non-Bank Lenders on Every Corner
    Who are the non-bank lenders? Most of them were started by former savings and loan owners, officers, or others who had experience in the savings and loan industry. You will recall that the savings and loan industry collapsed in the late 1980s and early 1990s, which led to a surplus of refugees from that industry who were looking to get back into the finance or mortgage loan business. Many of them found that opportunity in the form of state-chartered loan companies. It is important to recognize that state-chartered loan companies don’t accept deposits, so they are not regulated by the FDIC, are not part of the Federal Reserve System, and there is no federal regulation. The state regulation is really nonexistent with regard to the substance of the transactions in which they are engaged, so it really is a situation where these non-bank lenders are, for all intents and purposes, simply unregulated by any government regulatory agency.

    Warehouse Lines of Credit or Free Money?
    Where did they get capital, these non-banks who don’t accept deposits? Where do they get capital to avoid the Bailey Building and Loan lack of liquidity problem? Well, our old friends the investment bankers heard the call and they answered. They provided what are called warehouse lines of credit to these non-bank lenders. The biggest warehouse lenders were Bear Stearns, Lehman Brothers, and Merrill Lynch. None of whom exists anymore. The non-banks mostly used independent mortgage loan brokers to generate loans. They didn’t have a staff of trained loan officers who were employees. They simply went out and made arrangements contractually with independent loan brokers to market their products, which were mortgages.

    These loan brokers were paid a commission for each acceptable loan generated. They were usually paid out of the points that the borrower paid at closing, so they got paid in full right at the time of closing. It is reported that the best brokers in the peak years of the subprime boom could earn between $1 and $3 million in commissions. The profits (or “yield premiums,” as they are called) in the mortgage backed securities were so large that the investment banks got into hot competition with each other in the race to buy and securitize these subprime mortgages. It got to be so competitive that the investment banks offered to provide warehouse lines of credit to the largest non-bank lenders at a no-cost or on an interest-free basis if the lenders would agree to sell their mortgages to the banks that were providing the credit on an exclusive basis. So that is really what it came down to, that these were so lucrative that the investment banks were simply offering free money, free capital to finance the making of the loans as long as they got the opportunity to securitize these subprime mortgages and sell them on the secondary market.

    The investment banks all had marketing representatives who were out in the field who were really driving the lenders, mostly the non-bank lenders, to make the subprime loans to satisfy what had become an insatiable demand for mortgage backed securities. The subprimes were so profitable that Wall Street began to pay a premium. They would buy, for example, a $100,000 face value mortgage from one of the non-bank originators for $105,000. So the non-bank originator could book immediately a $5,000 profit. That mortgage went off their books. They no longer had any risk of default from that point forward, except for there was about a 60- or 90-day period where these non-banks had to repurchase these loans if they went bad, but 60- or 90-days is nothing in the life of a 30-year mortgage. So really they were enormously profitable for the investment banks, they were enormously profitable for the non-bank lenders. The lenders simply couldn’t make enough of the subprime loans and Wall Street could not buy enough of them. There wasn’t any government regulation on this process.

    Vertical Integration
    Eventually Wall Street would vertically integrate its hold on the market by owning and operating their own retail mortgage lending companies. Lehman Brothers, for example, owned and operated Aurora Loan Services, one of the big non-bank originators of subprime loans. Bear Stearns owned and operated EMC Mortgage. Merrill Lynch first bought a $100 million stake in a California lender, then later started its own in-house mortgage lending group. Then in September of 2006 (fairly late in the game for subprime mortgages) Merrill Lynch bought First Franklin, a non-bank lender that used only independent loan brokers who were paid on commission. These brokers specialized in making loans with adjustable rate mortgages or “ARMs,” with initial low teaser rates (slightly different from conforming ARMs). They also specialized in what are called 80/20 loans where there is an 80% first mortgage that is given to the borrower and then on top of that a 20% second mortgage or deed of trust that is given to the borrower, so the borrower in effect is not making any down payment at all. The borrower is borrowing 100% of the purchase price of the house. So a borrower who was completely broke could now buy a house and get financing for 100% of the price. Is that the American Dream?

    The Perfect Money Machine or The Perfect Storm
    It also was the case that these privately held mortgage originating companies who were owned by the investment banks (and some who were not owned by investment banks) were also large mortgage servicers, so they were also servicing the very mortgages that were issued, securitized, and sold to the investment community. As one commentator put it, Merrill Lynch was “doubling down” on subprime mortgages. Think about it in these terms: Merrill Lynch and the other investment banks were originating the subprime loans as well as buying some from other non-bank originators, to whom they were supplying warehouse lines of credit, they were securitizing those loans in the mortgage backed securities. They were taking the riskier segments of those mortgage backed securities and they were re-securitizing them into what are called collateralized debt obligations, or “CDOs,” which are a form of derivative. They were then selling those mortgage backed securities and those collateralized debt obligations to investors, some of whom bought on credit supplied by those very same investment banks—on top of that, they were servicing those mortgages as well. It was really the perfect money machine.

    The investment banks were making a profit at every step of that entire process. It was a perfectly vertically-integrated market. The investments banks were involved from the origination, to the securitization, to the sale, to the servicing, every step of the way. When you think about it like that, it almost takes your breath away doesn’t it?

    The Role of the Credit Rating Agencies
    The investment banks succeeded in cornering the subprime mortgage market, but they couldn’t have done it alone. They needed the help of the credit rating agencies. Most of these subprime securities were sold to institutional investors, many of whom were foreign investors. That is why we have the global problem that we do today and why we have seen the worldwide credit market seize up like we have. These institutional investors are largely, almost exclusively I would say, conservative institutional investors, managed by professional money managers, whose funds are controlled by these managers. They are pension funds, they are insurance companies, they are banks, they are municipalities, and they are other government entities. They are all subject to strict fiduciary investment standards and guidelines. They simply are not permitted to invest in risky securities or other risky investments. If they do the money managers not only risk losing their jobs, they risk going to prison. So there is a long history of conservative investing on the part of these institutional investors.

    So how was it that these highly conservative institutional investors accumulated such large amounts of what turned out to be the most risky securities out there? That is the $64,000 question. The institutional investors relied in fact on the ratings that were assigned by Standard & Poor’s, Moody’s, and Fitch—the big three credit rating agencies. Let me tell you a little bit about how credit rating works: The principal and the interest that is paid on the pool of mortgage loans is paid out to the investors in a specific order or hierarchy, which is divided up into tranches. “Tranche” is a French word meaning “slice.” Typically a mortgage backed security, as a whole, would receive a certain rating. Take a whole pool of mortgages—it might be 1,000, it might be 5,000, and it might be 10,000 mortgages—that are pooled together in a single large MBS, 80% of the cash flow that was spun off by that security was able to be allocated an AAA rating. That is the highest investment grade rating that there is. AAA rating is tantamount to being as safe as a treasury bill. There is very little difference between treasury bonds and AAA rated bonds. An additional 11% were given an AA rating, just one little step right below that highest rating. An additional 3% were given a BAA rating, a little bit lower; and another 4% were given a B rating, which is the lowest investment grade rating available. There is a 2% equity tranche that was typically of junk bond status; it wasn’t rated and it really wasn’t sold to investors. It was usually held by the originator or maybe sold to a hedge fund. It definitely wasn’t sold to traditional conservative institutional investors.

    Fact: Even Conservative Investors Chase Yield
    The senior AAA tranches of that security are sold with the lowest rate of interest because they are the safest of the securities. The lower the rating the higher the rate of interest paid in order to attract investors. So the more risky or the lower the rating, the higher rate of interest you have to pay in order to get investors to buy that security. It is true that investors, even institutional investors who are conservative by nature, chase yield. That is, the higher rates of interest. The interest rates, as I have said, reflect the risk just like the credit ratings that they were given. But the interest rates can be sliced more finely than the credit ratings can, to hundredths of a basis point. So if you are trying to sell a B-rated tranche for example, the trick is to offer just a slightly higher rate of interest than the other B-rated securities that are out there on the market. That will attract investors to your security because when you are talking about hundreds of millions or maybe even billions of dollars in investments—and that is the kind of dollars these people were investing—the difference of a few hundred basis points is big dollars in the end. So it doesn’t take a whole lot of differentiation between interest rates to attract some of these institutional investors. The investment banks were really quite successful at tweaking or nuancing the structure of the mortgage backed securities in order to maximize the credit ratings while at the same time offering a favorable interest rate within each rating class. That was really what they were trying to do and they were very, very successful.

    The Assumption that Led to the Problem
    How were the investment banks so successful? Residential mortgages were considered one of the safest debt instruments because the underlying real estate almost always appreciates in value. At least that was the assumption that led to this problem. Not since the Great Depression has there been a broad-based substantial decline in residential real estate values in the United States. The default rates on the US residential mortgages have been very consistent over time and very low for a long, long time. They were considered to be very, very predictable. The rating agencies used statistical models to rate these mortgage backed securities and the models rely on historical default rates to predict future default rates. They were using what happened in the past to predict the future with regard to these default rates. The predicted default rate is then plugged into the bond formula to see whether the projected cash flow is sufficient to make the required payments. Even if the expected default occurs, there is a capital reserve that the rating agencies require so that if a default rate exceeds by some percentage, the predicted default rate then there is an equity cushion that will cover the excess default rate so it won’t destroy the bonds entirely. The rating agencies assumed a 1-1.5% default rate on prime mortgages. That has been a historically consistent figure. With regard to subprimes they assumed a 3-5% default rate, which we now know is off by a factor of about 7. Remember that subprimes were a fairly new product and there were many different variations coming into the market rapidly. I mentioned Adjustable Rate Mortgages and 80/20 loans earlier; there were also what were called “Stated Income Loans,” or as they were known in the industry, “liar loans.” I am not making this up.

    Loan Products Gone Wild
    A Stated Income Loan is one where the borrower goes into the bank or the non-bank and applies for a mortgage loan. The loan officer or loan broker asks the borrower how much he makes per year, the borrower says $100,000—and the loan officer or broker accepts that without requiring any documentary substantiation. These borrowers are not required to provide tax returns or wage statements, so as the name implies—the whole deal is done based on stated income. The borrowers state their income, the banks or non-banks accept it as such and require no proof—in the industry those came to be called liar loans. You can guess why.

    In later years, teaser rate loans became very prevalent. Teaser rate loans are ARMs with extremely low introductory rates. While some traditional conforming ARMs come with an “introductory” interest rate for a set period of time, these introductory rates aren’t true teasers, but rather are set according to pricing in the secondary mortgage market. Conforming ARMs were reasonable for some borrowers who knew they would be in their homes for a very short time, although it didn’t work out so well for many borrowers. Teaser rate loans are different in that the introductory rate is usually substantially lower, and lasts only a very short time—maybe even one month. A low teaser rate predisposes an ARM to sustain above-average payment increases. Good for lenders, not so good for borrowers. Both types of ARMs are tied to a financial rating such as the LIBOR or London Interbank Offered Rate, the rate that the largest banks in the world use when they make loans to each other. As the LIBOR rate increases, ARMs reset at higher rates—at certain intervals. With the credit market being seized up right now, that LIBOR rate is at a historical high. So if you have a mortgage loan out there that is at the point of resetting because the time period has come due and it is tied to the LIBOR rate, your mortgage rate will go through the roof. Now, some ARMs have maximum levels that the interest rate can reset by, so there is some protection. However, when you are talking about starting off with a 3% rate and then migrating up to a 6% or 7% rate where your payment will almost double, I’d call that sticker shock at its worst.

    Bond Insurance, Collateralized Debt Obligations, Derivatives
    Because these products were all new, none had a historical track record. The rating agencies were going into unchartered territory when trying to predict the default rates on these subprime loans. The investment banks obtained bond insurance, particularly with subprime loans. Bond insurance provided comfort to the rating agencies and enabled many of the bonds and 80% of the tranches to be given AAA ratings. That was particularly so with regard to collateralized debt obligations. Bond insurance was obtained from companies like AIG, a company that has been in the news a good deal lately, and had to be bailed out.

    Let’s spend a little time on collateralized debt obligations or CDOs. As I said earlier, the structure of these bonds are 80% AAA, then there are the mezzanine tranches, the lower tranches that are anywhere from AA down to B. Those lower rated tranches are harder to sell because they are not considered to be as safe as the AAA tranches, so the investment banks figured out a way to try to make those more attractive. Investment banks would take those tranches of MBSs and pool them together. They would then pool together groups of mezzanine tranches and create a new security called a collateralized debt obligation. The CDO is being secured by the MBS, which is secured by the underlying real estate. So you are now two steps away from the actual collateral, which is why it is called a derivative. The investment banks would take those derivatives, which again were based primarily on mezzanine rate debts, not AAA-rated, to the rating agencies and because of the structure that was created, the rating agencies would actually give a large portion of those new securities AAA ratings. Of course with the bond insurance perhaps the rating agencies were just relying on the insurance back-up without really worrying too much about the complexities of the structure of those CDOs.

    Rating Subprime Mortgage Securities: Lucrative and Competitive
    There is one other important factor in regard to the rating agencies that I need to point out. This has been pointed out by economics writer Roger Lowenstein: The rating agencies are private for-profit companies and they used to make money simply by selling subscriptions to their rating guides. They were very sleepy, unexceptional companies in that regard. In the 1980s and the 1990s they started charging the issuers of the securities that they were rating a fee. However, it was done on a contingent fee basis, if you can believe that. They would only get paid if the deal that they were rating went through. This created an environment of competition, as you might imagine, among the big three rating agencies for what turned out to be the lucrative business of rating subprime mortgage securities. The rating agency could make upwards of $200,000 for rating a single complex bond issuance involving a number of tranches on a subprime mortgage bond. This was less than what the investment banks were making, but still pretty good money.

    Conflict of Interest?
    The investment bankers took advantage of that competitive environment between the rating agencies and they started shopping their business among the three agencies and playing them against each other. So the process of rating the MBSs really became a negotiation between the investment bank and the rating agency, except that all the economic leverage in that negotiation resided with the issuing investment bank, not with the rating agency. If the rating agency wanted the business and the large fees that went along with that, they had to simply capitulate usually to the issuer’s demands for better terms. Normally that involved a reduced capital reserve amount that was to protect against the higher default rate. So they used that as a negotiating basis. For example, instead of keeping 1% or 2% of the face amount of the bonds in reserve, they might cut it down to half of a percent—and that got to be how the game was played with regard to obtaining the rating. So rather than providing what used to be neutral disinterested opinions of risk to investors, the rating agencies were now really selling negotiated concessions to the issuers, to the investment banks. I don’t think it is unfair to characterize the agencies as operating with a significant conflict of interest and that is the conclusion that Lowenstein comes to in his New York Times Magazine article.

    Regulation
    Despite what you may be hearing on TV and in the media, the specific terms of mortgage loans have never been directly regulated. When banks were the only originators of residential mortgages, they followed the underwriting standards used by Fannie Mae and Freddie Mac, and adherence to those standards was approved by the regulators who regulated those banks. The mortgage loans made pursuant to those standards were deemed to be safe and sound, which was the primary concern of those regulators. Basically if the bank wanted to sell a mortgage loan on the secondary market, which was Fannie and Freddie, it better be one that conformed to those underwriting standards. Non-conforming loans early on were simply not able to be sold on the secondary market and they were held on the banks books. The banks simply accepted the risk of default on unsold mortgages. Since the bank held the risk of default there was really a strong disincentive against making risky loans to begin with. With the advent of the private label MBSs, the ones created by the investment banks upon the emergence of non-bank lenders, Fannie and Freddie’s underwriting standards went by the wayside. There ceased to be a limitation on the amount of the non-conforming mortgage loans that were being made and also the extent of the nonconformance that those loans encompassed.

    Devil-May-Care Lending Practices
    The non-bank lenders sold all their loans on the secondary market. They didn’t hold any loans on their own books. They never really had to be concerned about holding bad loans in their own portfolios and accepting any risks of nonpayment in the future. The reality of it was that any loan that an investment bank would accept was a good one, regardless of how exotic the terms of the mortgage were, regardless of how poor the borrower’s credit history was, regardless of how lacking the documentation or the due diligence was, or even what the borrower’s current financial situation was. The underwriting standards came to be looked at as simply a bothersome impediment to the ever increasing demand for mortgage loans. At that point the mortgage loans became nothing more than a commodity. The credit rating agencies, on whom the investment banks depended, really became the only defacto regulator in the system for the entire mortgage market. When the rating agencies’ independence was compromised because of the negotiation with the investment banks, the absence of regulation in this market was complete. So as it turned out, the suppliers of funds and everyone else involved in the mortgage market had simply stopped paying attention.

    Living is Easy with Eyes Closed
    The CEO of Lehman Brothers testified this week before Congress. He said “we never saw this coming.” I don’t doubt that that was true as far as his statement goes. But he never saw it coming because he had his eyes closed. If he had kept his eyes open—paid attention—he would have seen that the real estate bubble that had come about in the value of residential real estate actually burst, we now know, in the spring of 2006 when house prices peaked and then began a steady decline that has continued without interruption since. Even with the decline in the value of real estate, the fast and furious pace with which these MBSs were created and subprime mortgage loans were made continued for another one and a half years. One and a half years after the real estate value bubble burst, we were still seeing the same pace in the creation of subprime loans. The feasibility of subprime mortgages, particularly the high volume of adjustable rate mortgages, is premised on the assumption of ever-rising real estate values, everybody knows that. Falling values renders subprimes simply unworkable. All the institutional players in the secondary market were well aware of that, but when values started to fall, they didn’t or maybe they couldn’t stop making these loans.

    Conclusion
    Thirty years ago investment banks were dominated by a culture that still viewed their role as the guardians of the financial system, the protectors of the integrity of the capital markets and the credit markets. At that time, investment bankers were always known as the masters of the universe, the smartest people in the room. And when it came to finance, they were. Somewhere along the way that culture and those values were lost. The investment banks, in my opinion, became little more than glorified hedge funds. They were chasing profits and their attitude basically was, to hell with everything else. And that is how we got in this mess.

    * * *
    The author suggests the following reading:

    Liar’s Poker by Michael Lewis
    Chain of Blame by Paul Muolo and Matthew Padilla
    Financial Shock by Mark Zandi
    The Subprime Solution by Robert J. Shiller

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22. 

    Meep
    March 7th, 2011 - 04:50

    Guys, do we have a char limit on comments?

    I’m a bit tired of people copy/pasting entire papers in our comment section.

    Link the damn paper, excerpt a few key quotes, and have done. Otherwise it’s all “tl;dr”, and we think you’re a nut. You will convince no one of anything.

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    • 

      snaqwells
      March 7th, 2011 - 11:43

      Yeah, when I see long comments posts, my eyes glaze over and I start thinking about more important things; like whether my airmen think I’m cool or not.

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23. 

    Dan Collins
    March 7th, 2011 - 06:22

    Teachers unions and Democrat legislators proved in the lame duck session that they cannot be trusted to bargain in good faith. Period. In case anyone needed further proof of the proposition that they were abusing the privileges that they enjoyed.

    It’s a little late to claim that that was democracy, but this isn’t. You can bitch all you want, Chris, but that’s what this really boils down to.

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24. 

    chris dorf
    March 7th, 2011 - 13:05

    Dan,
    I know all the right wing talking points; I have followed those talking points for 30 years – Conservatives take their shot at a large power grab in this oligarchy at every chance they can.

    BTW, Walkers supporters father was a founder of the John Birch Society, and the sons reject environmental concerns as fiction.

    Who is crazy; the billionaires or the common folk?

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    • 

      Enoch_Root
      March 7th, 2011 - 13:25

      And by common folk you surely mean those who aren’t at the govt trough, correct?

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    • 

      snaqwells
      March 7th, 2011 - 14:51

      What in the world are you talking about? You’re judging a politician based on a cause once supported by the father of one of his current supporters? Really? That’s a bit draconian and McCarthyish, don’t you think?

      And I won’t be lectured on how to care for people who “are getting screwed.” Your president and his congressional puppets have screwed us all.

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25. 

    chris dorf
    March 7th, 2011 - 13:16

    smakwells and peeps (whatever your names really are,
    I image that whom really brought the world to its knees thru fraud and schemes is irrelevant to you…such the pity.

    I prefer people whom care about my brother and sister in Christ whom are getting screwed..

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    • 

      snaqwells
      March 7th, 2011 - 14:43

      Just curious, what is your first language, because it’s apparently not English and knowing from whence you came will help me to understand you better.

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