The 1999 law repealed parts of the Glass-Steagall Act, which was passed in 1933 to rein in the financial industry excesses that helped cause the Great Depression. Glass-Steagall had worked just fine for decades, but banks hated it because it barred them from selling stocks and mutual funds. Gramm hated it because he said it interfered with the free market. “Government is not the answer,” he said after Glass-Steagall was repealed. “We have learned that freedom and competition are the answers. We have learned that we promote economic growth and we promote stability by having competition and freedom.”
Along with two laws passed in the early 1980s that would later open the door for exotic mortgages and other lending instruments, the Gramm legislation gave a powerful boost to the deregulation movement in financial services and mortgage lending. The law came along at a time when the mortgage industry was being transformed. Whereas in the past a lender who provided a mortgage held on to the loan and collected interest from the homeowner, now an independent broker arranged the loan, collected a fee, and passed the loan on to someone who bundled it with other mortgages for sale to investors, just as if the mortgages were bonds that guaranteed a solid return.
Before the mortgage industry was deregulated, a lender was careful to make sure the homeowner could repay the loan; otherwise, he’d be stuck with a foreclosed house. But in the new world made possible by Congress, the loan originator didn’t care. He got his cut off the top and passed the liability down the line. What did the mortgage broker care if the loan he’d arranged went bad? He’d already been paid.
This change in the way the business operated opened the door to untold abuses by the financial cowboys and hucksters who gravitated to the field. Fraudulent credit reports, hidden interest charges, usurious loan rates—all of these were by-products of the gold rush to generate more and more loans. The more loans, the more fees. This frenetic activity helped power an entirely new market in so-called subprime mortgages—loans to homeowners with below-par credit or few assets were charged higher rates of interest for their loans, which then generated much larger fees for the lenders. By the time Gramm’s bill was passed, the subprime market had grown to $150 billion—a 600 percent increase in just five years. In the next decade, it would grow ten times more.
So in 1999, at a time when the industry needed more oversight than ever by federal regulators, the message out of Congress couldn’t have been clearer: allow Wall Street, banks, the financiers, and everyone else connected with this go-go industry to continue conducting their business without any interference.
Legal aid lawyers and consumer groups saw clearly what was happening and warned Congress that the run-up in subprime lending and other abuses in the mortgage field were paving the way for an impending collapse, but the industry poured millions of dollars into campaign contributions to lawmakers to deflect opposition. Among the recipients of the industry’s largesse was Bob Ney, a Republican congressman from Ohio, who was chairman of the House Financial Services Committee’s housing subcommittee. Ney, a figure in the Jack Abramoff lobbying scandal, later went to jail after pleading guilty to charges of conspiring to defraud the federal government and falsifying financial disclosure forms.
The lenders, in the best Washington tradition, created a lobbying committee with a friendly-sounding name—Coalition for Fair and Affordable Lending. It had little to do with fairness, but a lot to do with bad loans. Its membership was loaded with subprime loan companies, and they had just the right lobbyist: Wright Andrews Jr., a former senatorial aide who, as one commentator later put it, had “developed a niche representing some of the least sympathetic and most predatory players in the financial industry.” From 2003 through 2007, the Coalition spent $6.7 million lobbying, with $3.2 million going to Andrews’s law firm.
Every attempt by consumer groups and lawyers for mortgage victims to amend the law and impose more stringent regulations on lenders failed.
The rest is history. Since 2007, an estimated 12 million home foreclosures have been filed; at least 4 million Americans have lost their homes, and millions more are in danger of losing theirs; the average price for existing homes in the United States has dropped more than 20 percent, and more than $5 trillion in home equity has vaporized.
WRECKING LIVES
It is possible to see how financial deregulation is playing out up close in the real world in a one-story stucco building just off busy Del Prado Boulevard in Cape Coral, Florida. Tucked into the center of a row of storefronts is the headquarters of the Invest in America’s Veterans Foundation of Cape Coral. Started in 2009, it was sparked by the work of a group of veterans organized by Ralph Santillo, a veteran from New Jersey who relocated to Cape Coral decades ago. A home builder, Santillo had been driven out of business by the collapse of Florida real estate. While fighting his own financial demons, he kept running into other veterans who were also increasingly desperate. They had lost jobs as well as their savings and feared they were about to lose their homes. “The stories were heartbreaking,” he said.
Together with other veterans, including Donald Graf, a retired advertising man from New York, they formed the foundation as a service agency for veterans in southwest Florida. In the beginning, Santillo operated out of his home or the trunk of his car until grants from local businesses enabled the foundation to lease the office on Del Prado. Since then, the place has quickly become a magnet for troubled veterans in Cape Coral and the surrounding area.
On any given day, the office is buzzing as veterans come in seeking counseling and volunteers answer a steady stream of phone calls from other former service personnel in need. A disproportionate number of former military personnel—an estimated 60,000—have settled in the area. It has two attractions: a climate beneficial to those with service-related ailments and affordability.
Santillo said the foundation soon found that it has to deal with a whole catalog of ills—veterans who can’t navigate Veterans Administration (VA) procedures to claim benefits, others who don’t even know they are entitled to VA assistance, and still others who are desperate to find work. The lack of jobs is especially traumatic for younger veterans, many of whom served multiple tours in Iraq or Afghanistan only to return home and find there’s no work for them.
“This is a lost generation for jobs,” said Graf. “These kids are not being hired, and everything politically is being done to stop that because some states are using expanded child labor laws to use teenagers without having to compensate them for their work. And they want seniors to work longer. So all the jobs veterans would get are not there for them.”
As grim as things are for young veterans, foundation volunteers realized that some older veterans were in even more trouble. With service dating as far back as the Korean War, some veterans were on the verge of losing their houses. They became victims of predatory mortgage practices—a by-product of deregulation. Santillo recalled that most of those who refinanced or took out home equity loans were just trying to get money to survive.
“They’re living on a fixed income, usually just Social Security, sometimes a little pension,” he said. “All their costs are going up—insurance, taxes. Most times when people refinanced they used that money just to keep up with their bills and pay their mortgage. So there was no real benefit. It was not like people were going to get rich and live off the money.”
Many didn’t realize the potential ramifications of the loans they were assuming. “There was stuff out there like no-interest loans or loans where you paid 1 percent interest,” Santillo said. “Then all of a sudden you find out two years down the road you are paying $5,000 a month. Some of these were usurious. They would have put you in jail for that years ago.”
But thanks to deregulation, nobody went to jail. Nobody broke any rules because that’s what deregulation means: there are no rules to break. Instead, mortgage brokers and banks were rewarded with lucrative fees in the new mortgage industry that was playing out in Cape Coral and a thousand other places like it across America.
/> In Florida the process was exacerbated when thousands of ex-cons looking for a way to make a quick buck surged into the Florida mortgage industry and began writing mortgages. A Miami Herald investigation in 2009 found that 10,529 persons with criminal records worked in Florida’s mortgage industry from 2000 to 2007. Of those brokers, 4,065 had committed major crimes—fraud, bank robbery, racketeering, or extortion.
Despite widespread evidence that the foreclosure crisis was in part a result of runaway greed by an out-of-control, unregulated industry, Congress and Washington pundits have since contended that the crisis was caused by the federal government’s overzealous attempt to promote homeownership. Under this theory, by easing up on the rules for granting mortgages, the government allowed people who didn’t really have the income or assets to buy their first homes. It’s a convenient way to shift the blame away from Washington and Wall Street, which caused the calamity to the victims who paid the price.
Most of the victims facing foreclosure who have talked with Santillo, Graf, and other foundation volunteers in Cape Coral are not first-time homeowners. Many had owned homes for years, but found themselves in financial trouble after unscrupulous salesmen signed them up for exotic mortgages with hidden interest clauses that were ticking time bombs. When the interest rate shot up, many lost their home.
John Aguiar is a veteran of the Gulf War, a former intelligence analyst for the Army who took part in Operation Desert Storm in 1990. After graduating from high school in Chicago, he trained at the U.S. Army’s legendary intelligence training post at Fort Huachuca, the secretive enclave in remote southern Arizona, where he learned the intricacies of signal intelligence and mapping. After Saddam Hussein invaded Kuwait, John was deployed to Iraq to provide reconnaissance for the infantry.
When his tour of duty ended, he returned to Chicago and married Syrena, his high school sweetheart. They bought a house in suburban Chicago, where their daughter and son were born. In 2002, with John concerned that his job might not be secure, they moved to Cape Coral, where Syrena’s parents lived. John was a midlevel manager in the trucking industry, a field that had become chronically unstable after Congress deregulated the industry in 1980. Only months after he and his family moved to Florida, his former employer—Consolidated Freightways, one of the nation’s oldest long-haul truckers—filed for bankruptcy and went out of business.
In Cape Coral the Aguiars bought a lot and built a house that reflected their values and their way of life. It was nothing fancy: a one-story Cape rancher with three bedrooms, two baths, and a two-car garage. There were no granite countertops, no Jacuzzi—just the basics, in keeping with what they could afford. “We didn’t do lavish things,” said Syrena, “but we sank everything into the place. This was the home we had always wanted.” It was where they planned to raise their kids and retire. To support the family, John landed a job with a building materials company.
Their troubles began when the city of Cape Coral hit them with an unexpected bill for $20,000 to connect to the city’s water and sewer system. When they built their house, they had been led to believe that city water and sewer were years away, so they had spent $22,000 to drill a well and build a septic system. To come up with $20,000 more, they were forced to refinance.
Their original mortgage was a 6 percent fixed-rate loan, but this time the mortgage company substituted an adjustable rate. “I didn’t know it was an adjustable-rate mortgage until it was a done deal,” said Syrena. “Then it was too late.” At first they were able to handle the new monthly payment, which rose from $1,100 a month to $1,400.
But the interest rate on the new mortgage continued to climb just as the Florida economy began to falter. Worried that his job in a housing-related field might not be safe, John began moonlighting twenty to twenty-five hours a week on nights and weekends at a Home Depot. Then his company closed its office in his area and he lost his day job.
John and Syrena scraped to pay the mortgage, cutting back on expenses and depleting their savings and retirement accounts. Their monthly mortgage payment soared to $2,000. “The mortgage payment just kept getting higher,” said John, “and we kept sending out one more payment, one more payment, one more payment, until we could figure out what we were going to do.” They tried to negotiate with their mortgage company to lower the interest rate, “but they didn’t want anything to do with us,” said Syrena.
The Aguiars were swept aside by one of the powerful forces driving foreclosures: the company servicing the mortgage did not own the loan and thus had no incentive to offer the family an arrangement that might let them stay in their home until they got back on their feet financially. In 2009, with their mortgage company turning a deaf ear, the Aguiars could no longer come up with the ever-higher monthly mortgage payments and were facing foreclosure. Just before they were to appear in foreclosure court, the mortgage company gave them permission to short-sell their house. It sold fairly quickly—at a loss—and the family moved in with Syrena’s parents.
Unable to find work in Florida, John took a job in shipping with a trucking company in Chicago. Syrena and their daughter and son remained in Florida, where the children attended schools that both parents said provided them an excellent education. Meghan, fourteen, hoped to become a veterinarian; eleven-year-old Jacob’s goal was to be a robotic engineer. John couldn’t visit them for nearly a year after he took the Chicago job, in part because of unexpected medical problems that included a hospital stay for complications from diabetes. So when the family wanted to get together, it usually had to be by phone.
When they had their house in Cape Coral, Syrena recalled, she and John felt like they had everything:
“We had our family. We had good jobs, we had a nice house that we built, we had a dog, we had a cat, and we were happy. And then one day we woke up and everything started going backward on us. We just want to get our lives back together.”
In an earlier time, things would have been different. After World War II and the Korean War, the federal government oversaw housing programs that did not permit the kinds of financial gimmickry by Wall Street, banks, and investors that have proven so destructive to the Aguiars, other veterans, and millions of other middle-class Americans.
“We had the American dream,” said Syrena, “and it was taken from us.”
CHAPTER 8
GLOBALIZATION SHANGHAIED
American politicians are always talking about creating jobs. So why is it they are always killing jobs?
A look at two industries reveals a pattern. Rose growing and circuit board manufacture could hardly seem more different, but what happened to them was the same. How it happened and why it happened is a story often repeated in America, and the tale almost always ends badly.
A generation ago, greenhouses that grew long-stemmed roses flourished in American communities from coast to coast, supplying florists with abundant homegrown bouquets on Valentine’s Day, Mother’s Day, and other special occasions. Many greenhouses had been owned by the same families for generations, and some towns, like Madison, New Jersey, which called itself “The Rose City,” proudly defined themselves by the industry.
Today almost all the greenhouses are gone. More than 90 percent of the roses sold in America are imported, mostly from Colombia. They are grown on the high plateau near Bogota and harvested by peasants, then loaded into jumbo jets for flights to Miami. The most common explanation as to why this happened is that American growers couldn’t compete because of cheap labor and ideal growing conditions in the Andes. Those were certainly factors, but there’s a more important reason. The U.S. government helped drive the American rose industry out of business.
Starting in the 1960s, the U.S. Agency for International Development (USAID), the arm of the State Department that encourages economic growth in poor nations, gave Colombia financial assistance to spur the growth of its flower-export industry. U.S.-funded technicians helped Colombian growers cultivate their crops and create a distribution network to get their flowers to market
. In so doing, U.S. taxpayers helped pay the start-up costs for an industry that eventually would destroy one of America’s own.
Once Colombia’s flower industry was firmly established, producing ever-greater quantities for export, the federal government, no doubt at the urging of the State Department, allowed the flowers to be imported into the United States without facing high tariffs. Colombia’s first flower exports, carnations, quickly overwhelmed American carnation growers. Roses, a much more lucrative crop, came next.
As rose imports quickly cut into the domestic industry, rose growers turned to the U.S. government for help, starting in the 1980s. They didn’t get it. Almost every time they lodged a complaint with U.S. trade authorities concerning unfair trading practices, government officials sided with Colombian growers and against U.S. companies.
This has been the pattern for years in scores of U.S. industries: domestic producers plead for help only to encounter indifference and denial about what is happening to their companies. In response to an impassioned plea from domestic rose growers in 1984, the U.S. International Trade Commission issued this adamant refusal to intervene:
Imports of fresh-cut roses from Colombia have had no material impact on the domestic industry.... The domestic industry is in a healthy condition; domestic production, shipments, profits and productivity have all increased....
Potential increases in imports from Colombia present no threat of material injury to the domestic industry because the industry has exhibited the strength to withstand import competition, and the projected increase in imports is small relative to the domestic market and past increases.
The Betrayal of the American Dream Page 18