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Barbarians at the Gates

Are “Strategic Defaulters” Barbarians at the Gates of Rome?

Are people who are “strategically” defaulting on their home mortgages akin to barbarians looting Rome? Does the fact that more people are defaulting result in a weakening of the rule of law in our society? Justice Litle writes convincingly that the rise of strategic defaults means our country is on the road to ruin. But I would argue that it is not the strategic defaulters who are greasing our descent into hell. They’re just minor bit players in an overall drama.

This Happened because of Accounting Regulations

The changes to the accounting regulations governing how banks and other financial institutions report the value of their speculative holdings have done the real damage to our economy. Strategic defaults are merely an inevitable consequence of that change. Specifically, before March of 2009, banks were required to mark their investments to market. “Marking to market” means that a company holding assets must periodically reassign values to its assets for book-keeping purposes.

An example of that would be a stock market account. Every night-and actually at all times during the day-you can look at your stock market account and get an up to the minute idea of the value of the stocks you hold. That is easy for stocks, which are priced by the market on a continual basis, but much harder for more complicated assets. Marking to the market means that the company must attempt to determine the current market value of its assets at certain intervals. And in the case of the banks, the values of these assets can determine whether the bank is insolvent or running afoul of reserve requirements.

When mortgage backed securities (mbses) became “troubled” banks and investment firms were being forced to show large losses of capital, losses which in fact revealed that years of wild speculation had left the banks in a precarious position. Rather than allow the market to sort things out and deep-six some of the largest banks in existence, several bail-outs were instituted.

The most important of the bail-outs was perhaps least publicized: the dropping of the mark to market requirement. Under the new FASB regulations, banks are permitted to assign “historical” values to their investments. If they paid a dollar for mbses, they could carry the mbses as assets worth a dollar even though they had become worthless. This equally applies to home mortgages themselves. Many people call this “mark to make-believe.” Notice that the banks balance sheets then lost any relationship to reality, and any investor relying on the supposed strength of the underlying business was defrauded.

With a stroke of that pen, the banks became “solvent” again, the banking crisis was over, and the 2009 “bull market” began. Well. It sounded good, anyway. But the changes actually were an early abandonment of the “transparency” Obama claimed to want to restore to government and a wholesale adoption of fraudulent accounting within the very heart of our economy. The “bull market” that followed, and all the claims of “economic recovery,” have rested on the deception permitted by that regulatory change. And the rosy condition of the largest banks is a deception. Despite the regulatory changes, banks have been shut down at historic rates this year, and many of them are holding mbses which they have valued for their book-keeping purposes as 100% or more in excess of their actual value.

Banks with their Hands Tied

Of critical importance to the strategic home mortgage defaulters, however, is the fact that the banks are maintaining mortgages at their “historic” rather than (much smaller) actual value. Foreclosing is a historical event that would force a revaluation of the assets under the regulations.

That means the banks cannot foreclose on mortgages without revealing their actual financial condition, and since their actual condition is insolvency, their hands are tied. Accordingly, the banks have adopted a policy of “extend and pretend.” They are extending the loans and pretending they were not in default. But this has left observant, savvy people free to stop paying their mortgages but still remain in their houses, and naturally more of them are doing so as they see others doing it.

Blaming Banks for the Problems they Caused

Has it occurred to you that all or most of your problems were caused by the very bank that is now suing you or that the debt collector purchased the debt from and is now suing you for? Some people argue that you could use that as a defense against their claims against you.

It will not.

Blaming the banks is a kind of “unclean hands” argument, and as far as I’m concerned, it is absolutely justified in a moral sense. The courts won’t see it that way, though.

Proximate Cause

The problem with arguing that “the banks” caused your problems is “proximate cause.” Proximate cause means the “specific problem” must be linked to specific actions by a specific entity. Viewed in that light, how can you argue that, say, Capital One, by extending credit cards and maintaining their policies, has really “caused” anything to happen in society? Many people may believe that the banks, collectively, caused big problems that resulted in raising taxes and sucking resources away from regular people, but how can you assign a specific role in that to Capital One?

Likewise, how do you prove that Capital One caused you problems that you could not have, and should not have, overcome? If we were truly in a capitalistic society the argument simply could not be made: the fact that you did not overcome the problem would be proof that you should not have done so. But we live in an age of bailouts and government interference, of course.

Tell that to the judge, a life-time public employee wielding far-reaching government power every day of his or her professional life.

And then the final zinger: how do you prove what specific action by your specific bank caused some specific injury to you?

Cigarette Litigation

This whole complex of proximate cause issues prevented anyone from winning cigarette litigation for decades. What finally allowed people to get through and win some of the cases was very strong evidence of conspiracy to hide specific facts that the companies knew and had a duty to disclose. There may be evidence of banking conspiracy – there is in some cases – but unlike a cigarette plaintiff who died of lung cancer, you will be hard pressed to show how your injury came from the banks’ action unless there are more specific grounds for applying the doctrine of unclean hands.

Cutting Edge Arguments and a Warning

As I say, I have my sympathies for the position that banks should not be permitted to profit from disasters they themselves caused. And many arguments that end up winning started out as sounding a little far-fetched. So you could consider it. On the other hand, the courts sometimes punish what they consider to be “frivolous” arguments and disputes. Arguments talking about banks and banking, like arguments claiming that our monetary system is completely corrupt live on the edge of “frivolousness” from the point of view of the courts. It would be possible that they could make you pay for taking that position.

 

Blaming the Victims

Blaming the Victims – Defending Banks by Ridiculing Consumers

Debt collectors often ridicule consumers who got in over their heads, but the banks themselves have set up their business models to encourage debt and debt troubles. Don’t fall for debt collector false morality – fight back.

 

 

Blaming the Banks for the Problems they Caused

Has it occurred to you that all or most of your problems were caused by the very bank that is now suing you or that the debt collector purchased the debt from and is now suing you for? Would that work as a defense against their claims?

My feeling about saying the banks caused all the problems with their various practices -either by lending to you when you were a bad credit risk or by crashing the economy in general – is that it will not work. It’s a kind of “unclean hands” argument, but I believe the concept of “proximate cause” will prevent the argument from working. The people who argue that this argument will work in court have my sympathy, and everybody knows that I do believe the banks caused many of the difficulties people have in paying their bills. The argument has or may have some effect as a social-movement type force, but legally… very iffy. In my opinion it should not work – which is not to say that it never will, of course, so you must make your own judgment.

Proximate Cause

The problem with arguing that “the banks” caused your problems is “proximate cause.” Proximate cause means the “specific problem” must be linked to specific actions by a specific entity. Viewed in that light, how can you argue that, say, Capital One, by extending credit cards and maintaining their policies, has really “caused” anything to happen in society? Many people may believe that the banks, collectively, caused big problems that resulted in raising taxes and sucking resources away from regular people, but how can you assign a specific role in that to Capital One?

Likewise, how do you prove that Capital One caused you problems that you could not have, and should not have, overcome? If we were truly in a capitalistic society the argument simply could not be made: the fact that you did not overcome the problem would be proof that you should not have done so. But we live in an age of bailouts and government interference, of course.

Tell that to the judge, a life-time public employee wielding far-reaching government power every day of his or her professional life.

And then the final zinger: how do you prove what specific action by your specific bank caused some specific injury to you?

Cigarette Litigation

This whole complex of proximate cause issues prevented anyone from winning cigarette litigation for decades. What finally allowed people to get through and win some of the cases was very strong evidence of conspiracy to hide specific facts that the companies knew and had a duty to disclose. There may be evidence of banking conspiracy – there is in some cases – but unlike a cigarette plaintiff who died of lung cancer, you will be hard pressed to show how your injury came from the banks’ action unless there are more specific grounds for applying the doctrine of unclean hands.

Cutting Edge Arguments and a Warning

As I say, I have my sympathies for the position that banks should not be permitted to profit from disasters they themselves caused. And many arguments that end up winning started out as sounding a little far-fetched. So you could consider it. On the other hand, the courts sometimes punish what they consider to be “frivolous” arguments and disputes. Arguments talking about banks and banking, like arguments claiming that our monetary system is completely corrupt live on the edge of “frivolousness” from the point of view of the courts. It would be possible that they could make you pay for taking that position.

Practical Defense

If you are actually defending yourself from a debt collector or defending against a foreclosure, there are weapons available for you to use against the banks, but you will probably not win by arguing the broader social issues or “justice.” You will need to take the practical steps you can.