Shadows For Sale

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At the end of every seven years you shall grant a remission of debts. “This is the manner of remission: every creditor shall release what he has loaned to his neighbor; he shall not exact it of his neighbor and his brother, because the LORD’S remission has been proclaimed. -Deuteronomy 15:1-2

Debt is often portrayed like this, insurmountable garbage or an overwhelming flood. But for debt buyers, it is a valuable commodity.

A personal goal of mine in writing this blog was to do a somewhat extensive application of all of Marx’s Capital to U.S. law. That goal did not quite materialize as I got caught up in various things, but I recently started an amazing reading group through DSA’s Socialist Feminist Working Group for women and nonbinary people to read through Capital Vol. 1. Since I will be putting time into not only re-reading it but also discussing and learning from my nonbinary and sister comrades, I figure might as well apply that knowledge to the law.

So those who have read Capital know that Marx starts things off with his analysis of what a commodity is and why the nature of commodities leads to commodity fetishism. He famously (or perhaps infamously) uses the example of linen and coats for commodities. He did not pick these commodities at random: coats are a commodity that has near-universal familiarity and linen is one of its components (at least in the 19th century). They also have a clear utility: coats keep us warm and linen can be used to make clothes like coats. And they have a clear root in production through private labor: coats are tailored and linen is weaved. But this first chapter of Capital Vol. 1 is supposed to cover all commodities because of how Marx comes to his definition of the money-form.

Marx begins by describing the two values contained in commodities: use-value, the utility of a commodity in its consumption or use, and exchange value. Exchange value is derived by the relative value between two commodities, with Marx giving the example of 20 yards of linen=1 coat. Marx notes that every commodity has an extensive number of relative values, essentially as many as there are commodities in the marketplace. He explains that these other relative values are needed to really understand the value of a commodity. If, for example, whatever market fluctuations cause the exchange value of linen and coats to go up in the exact same proportion, their relative value will remain the same: 20 yards of linen=1 coat. Throw in a third commodity however and you can understand that the exchange value has gone up, i.e. 20 yards of linen=1 coat= 1 lb. of coffee > 20 yards of linen=1 coat=2 lb. of coffee.

As such, one can craft what Marx calls the general form of value by setting one commodity against all others – “the joint contribution of the whole world of commodities.” And per this relationship, society can come up with a commodity to serve as a universal equivalent. That commodity was gold. And this relationship of “direct and universal exchangeability” made gold into money. Gold’s existence as money then made its relative value towards other commodities the price form.

Now commodity fetishism is the part of this first chapter of Capital Vol. 1 that draws a lot of attention because of how present it still feels in our day-to-day lives. The deduction of money conversely seems a bit archaic: after all, we now have a fiat currency in the United States that does not rely on the gold standard. Is modern money still a commodity? Many would argue that is not: as the economist Georg Friedrich Knapp said, money is a “creature of law” rather than a commodity. It is important to recognize however, as Marxist economist Michael Roberts points out, that Marx is not writing about money throughout existence but rather money in a capitalist-commodity economy.

Roberts also notes that the state being able to create money “out of thin-air” as is done with a fiat currency is not the same thing as creating its value. He uses the example of the Great Recession to indicate that when the value of a national currency collapses that commodities’ demand increases to hoard value.

Note the spike in mid-2007 and then drop in mid-2012.

And I would argue a recent scourge of consumer protection law is also demonstrative of money’s role as a commodity and the importance of rooting the price form in relational values of exchange: the practice of buying consumer debts.

Debt buying regularly comes up in the context of so-called “zombie debt.” This “zombie debt” is debt which has been paid off but the account winds up accidentally getting bundled with a bunch of open debt accounts and sold to debt buyers. Many creditors (and we’re talking big names here like Bank of America and Discover) deal with this problem by indemnifying themselves contractually from any liability, placing the responsibility of weeding out already-paid accounts onto the debt buyers. The debt buyers in turn have little to no incentive to weed out these accounts because (1) there is literally no court in the US where default judgments are not obtained in the majority of consumer debt proceedings, and (2) the main statute protecting consumers, the Fair Debt Collection Practices Act (FDCPA), limits penalties for individual actions to $1,000. That’s less than practically any of the judgments that debt buyers stand to win from filing suit, so it is simply a matter of profit margin.

But how come companies are allowed to buy debt in the first place? People appearing in court, sued by a company they have never heard of like Portfolio Recovery or Calvary SPV, often wonder why they are dealing with some strange company rather than their original creditor. After all, the origin of our ideas of debt are mostly from Judeo-Christian concepts of morality, like the common seven year statute of limitations that can be traced back to Deuteronomy. As in prior to capitalism being the dominant economic paradigm, when the impetus of paying debts came from fearing judgment and sin. It is hard to get across to people in debt from a wide array of backgrounds that this moral system has little to no bearing on their legal proceedings. The judge probably will not, and the plaintiff will certainly not, care if someone has always “done the right thing” or made one mistake. Moral culpability is irrelevant: what matters is contractual obligation.

Debt, and its more appealing twin Credit, developed to allow for the expansion of capitalism for reasons that will be covered further into Capital Vol. 1. For the time being, it just needs to be understood that debt is a contractual money obligation by one party, the debtor, to another party, the creditor. Like any other contract, the rights it instills can generally be assigned to another party. U.C.C. 15-317. But assignment only provides a legal vehicle for the purchase of debt: what is the economic motivation? And more precisely, is debt a commodity despite being nothing other than a money obligation?

While abstracted to an extraordinary degree not even imaginable in Marx’s worst nightmares, debt is very much a commodity under modern capitalism. One element that reveals the debt’s commodity form is the difference between its use value and exchange value. Debt buyers do not purchase debts for the money owed on it. Instead, evaluating several factors (age, type of consumer transaction, attempts at collection), a price is formulated in relation to the necessary labor time needed to produce its value. This necessary labor time consists of administration, compliance, and legal collection. As such the exchange value winds up being pennies on the dollar or even less: it is literally a full-time job to track down people in debt and collect from them while complying with all the appropriate government regulations. And it should be noted that the use value of these debts is not the money owed either: debt buyers are well aware that most of these debts will settle for less than the principal and some (if people like me do their job right) may get discontinued altogether.

The example of purchasing debt shows the power of money as a concept, and particularly the price form. In any other exchange system, it would be difficult if not impossible to calculate the exchange value of a debt as a commodity with such ruthless efficiency. For starters the debt would not be for money but rather for commodities: to use an example we all can hopefully relate to, let’s say Rosa owes Lucy three tacos. Lucy decides she does not actually want the three tacos but wants to come out with something, so she tries to sell this debt to Margaret since she knows Margaret makes amazing pizza. Even assuming there was a generally recognized rate of exchange of one taco for one slice of pizza, why would Margaret risk purchasing this taco debt that she’ll then have to collect on when she could just go to someone with tacos and trade? It’s an intentionally silly example but hopefully it illustrates how complicated these relationships can be without a universal equivalent.

And of course the debt buying process is particularly interesting when we consider the debate of whether money is a commodity. Like money, debt as a contractual obligation is a “creature of law.” The obligations are not natural things but social relations. And most importantly how they relate to people (through their use value, or the collection of the debt) is different from how they relate to other commodities. The minute a price (the exchange value between money and a commodity) is placed on a debt, it relates to the entire world of commodities despite itself being an odd shadow of the very universal equivalent of money that allows this relation.

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The Janet Behind The Curtain

federal-reserve-blogThings are looking worse and worse for the liberal advocates of legalism and reform as direct action continues to win over and over and over again while doing things through the proper channels continues to fail. The latest blow is the resignation of Federal Reserve Board Governor Daniel K. Tarullo. Mr. Tarullo’s term was supposed to continue until 2022 but, for undisclosed reasons, he has left prior to that expiration. Know for his rigorous (or haphazard, at least according to the bankers) stress tests that he conducted against the banks to test how they would weather various economic emergencies, Mr. Tarullo was the closest thing to a public advocate on the Fed. Admittedly not a high bar, but nevertheless with his departure things will likely get worse for the working class.

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US Law And Michael Roberts’s The Long Depression

long20depression20front20coverLast night I finished Michael Roberts’s new book The Long Depressionan epic defense of Marx’s law of political economy that the tendency of the average rate of profit of capital was to fall and an argument that the world is in a long depression, the third economic depression since the rise of capitalism. Readers may recognize the author as I have often cited to the prolific work he has done on his blog, as well as recommending him to all of those who want a solidly Marxist perspective on economics. The book provides an exhaustive computation of the effect of Marx’s law, as well as refutations of a number of alternative explanations (Keynesian, neoclassical, Austrian school, monetarist, Ricardian, etc.) for the economic history of the world from 1873 until the present day. It is a fantastic book not only for Marxists eager to learn more about economics but for Marxists to share with STEM-oriented friends who are more receptive to Roberts’s quantitative focus than to the more sociological arguments for Marxism.

I knew I had to write something promoting this book but I’m at best an amateur economist, so my judgment of Roberts’s argument is not particularly useful. However, I can highlight the arguments of the book by putting forth my own supplement on how the U.S. law correlates to the economic phenomenons that Roberts describes. As the proposal to reinstate the Glass-Steagall Act emerges from the shadows it has lingered in for over a decade, it is crucial to understand how a capitalist economy works and what effect the laws have on them.

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The End of Dodd-Frank Part 2: But Who Will Save OLA?

This post is part of my ongoing series on provisions of the Dodd-Frank Act which have been under attack by conservative, and some liberal, forces. For Part 1 on the Volcker Rule, click here.


Fox News, depicting another kind of orderly liquidation of a bank.

Who Should Break Up The Banks?

As I mentioned in a blog post outside of this series, the presidential campaign of Bernie Sanders has given this topic a lot of media coverage. Some of that has been good: it has reignited public interest in bringing back the Glass-Steagall Act, and despite what opponent Hillary Clinton says, the Dodd-Frank Act’s Volcker Rule is no replacement for that act. But other parts have not been so great: after all, the Dodd-Frank Act is a complicated piece of legislation that became an even more complicated mess of regulatory rules from multiple government agencies and conflicting case law by various different district courts.  The one major success the finance industry had with it was to force compromises that had even more strength in the confusion they add than the actual loopholes they create. And as I talked about in that blog post, Bernie Sanders’s campaign has stated that it wants to use the Mitigation of risks to financial stability provision, 12 U.S.C. § 5331, to break up the “too big to fail” banks in his first year. As I mentioned, that is pretty much politically impossible given the legislative requirements and just how many banks qualify as “too big to fail.”

This post is going to look at another provision: Orderly Liquidation Authority (OLA) as laid out in Subchapter II, Chapter 53 of Title 12 of the U.S.C. Interestingly, Hillary Clinton in the debates has hinted that she would use this authority, specifically to go after disreputable or insolvent financial institutions. While I certainly am aware of how friendly Clinton is with the captains of finance, it is a fairly risky move on her part: OLA is largely despised by even the more liberal economists. The usual “doom and gloom” narratives (funny how they’re never about the things that actually cause recessions) have been put forth by orthodox economists of all stripes. Stephen J. Lubben, Seton Hall University School of Law corporate apologist and neo-colonialist, wrote in his piece for the New York Times “The Flaws in the New Liquidation Authority” that OLA “…is apt to destroy going concern value and result in greater market disruption…There are no easy solutions, and probably failure avoidance is a better aim than any of the proposed resolution mechanisms.” In other words, Lubben wants the market to be allowed to “self-regulate” (shocking I know). As Lubben mentions, others like the Hoover Institute want to utilize some form of bankruptcy proceeding instead of OLA. But before we delve into the alternatives, let’s look at a basic outline of what OLA is.

Previously, when a financial institution was on its way to failing, it would be handled in a fairly similar way to any company failing: through a bankruptcy proceeding. But the government, in a rare moment of clarity that only a major economic downturn can bring, realized that institutions like Lehman Brothers would not conduct themselves properly and that, rather than file for bankruptcy in a timely manner, would postpone it through accounting fraud, misinformation, and perjury. So, Congress decided to create the OLA provision of Dodd-Frank to ensure that major financial institutions would not be allowed to put themselves in the same kind of situation that Lehman Brothers was in. The process was taken out of the Bankruptcy Courts, modified to take away power from financial institutions, and handed over to the Federal Deposit Insurance Corporation (FDIC), an independent agency of the government whose whole purpose is to insure the deposits that people make at the banks they govern (I am going to stay out of the broker-dealer provisions, which are governed by the Securities Investor Protection Corporation). This change of venue is already upsetting to the finance industry: the priorities of a Bankruptcy Court have increasingly been to garner whatever capital possible for financial institutions, whereas the FDIC is looking out for the consumers (note: for many reasons, this is not the same as looking out for communities or the public, but it is an interest often in opposition with that of the major finance companies).

The FDIC’s Ten Step Programme

An orderly liquidation is a 10-step process:

  1. The Secretary of the Treasury, after an investigation, finds that a financial institution is at risk and contacts the FDIC and the financial institution to request that the FDIC be appointed the receiver of the institution. The institution has two options: accept, which takes it to step 4, or oppose.
  2. If the financial institution opposes the request, the Secretary petitions a federal district court to force the financial institution to accept the receivership of the FDIC. There is a closed, confidential hearing where the court evaluates whether or not the Secretary’s determination of the institution as at or dangerously close to default is “arbitrary or capricious.” Capricious means prone to sudden changes in mood or behavior.
  3. The court has 24 hours to deliberate. If it fails to make a determination, the FDIC will automatically be granted receivership. Otherwise, however the court rules, it can be appealed by either the Secretary or the financial institution to first the Court of Appeals for the DC Circuit and after the Supreme Court.
  4. If the financial institution accepts the initial request for receivership, the court fails to make a decision within 24 hours, or the court and any further appeals rule in favor of the Secretary , then the FDIC is granted receivership of the financial institution for three years, with two possible extensions of an additional year each.
  5. The FDIC as receiver now has six major responsibilities: (1) to prioritize the stability of US financial markets over the continuance of the financial institution (2) ensure that shareholders of the institution are the very last to get paid (3) ensure that unsecured creditors bear some of the losses (4) ensure that the management responsible for the condition of the institution are removed (5) ensure that members of the board of directors who contributed to the condition of the institution are removed (6) not take any equity interest in the institution.
  6. If you could not guess from that list, the FDIC now has near-complete control of the financial institution, and may conduct it in anyway that the normal management lawfully would.
  7. But unlike the normal management, the FDIC will be focused mostly on the complete liquidation of the financial institution by selling off some of its assets and transferring others to a “bridge company.”
  8. A “bridge company” would be an entity created by the FDIC through their receivership. It would be created in a similar manner and operate in a similar way as any corporation, with the Board of Directors being appointed by the FDIC.
  9. Once enough of the assets have been sold or transferred to bridge companies to avoid applicable antitrust law, the FDIC may choose to merge the rest of the institution with another financial institution upon that institution’s consent.
  10. However it may be partitioned out, the assets will be completely liquidated within 3 – 5 years without any costs being borne by the taxpayer. Think of it like leftovers that are about to spoil in a house of four people: you might eat some, give some to your roommates, reincorporate it into a new dish (leftover rice and beans always winds up becoming a burrito for me), and probably throw some of it away.

So What Does It All Mean?

If you think this is complicated, this is actually a major simplification of the enormity of particular limitations and additional regulations, judicial and other agency oversight of the process from beginning to end, and rules for handling outstanding lawsuits and other obligations against the financial institution.

But it does not require that comprehensive of an understanding to see that OLA actually has a fair amount of power within it. So does this makes Hillary Clinton’s preference for it more radical, or at least realistic, than Bernie Sanders’s congressional-led bank dissolution? Not necessarily. While the 24 hour default on judicial judgment is one of the strongest regulations in the sector, there are two major stumbling blocks to the process: prior to receivership, the evaluation of risk, and during receivership, the creation of bridge companies.

Risk Is The Game

As I have stated before, risk is the foundation of the finance industry. Capitalism is full of contradictions, or perhaps seventeen major ones as David Harvey divides it, and as Harvey writes one of the clever schemes of capitalism is the ability to utilize these very contradictions for the purpose of capital accumulation. A government beholden to capitalism, as ours is, will always have two interests: to mitigate risk to forestall or manipulate recession and to allow and facilitate a certain amount of risk in the markets. One of the beauties of OLA is that it provides a window for how the government views the relation between the risks of individual corporations and the systemic risk of the finance market.

This is reflected in 12 U.S.C. § 5383, which stipulates the following factors for systemic risk evaluation:

(1) an evaluation of whether the financial company is in default or in danger of default;
(2) a description of the effect that the default of the financial company would have on financial stability in the United States;
(3) a description of the effect that the default of the financial company would have on economic conditions or financial stability for low income, minority, or underserved communities;
(4) a recommendation regarding the nature and the extent of actions to be taken under this subchapter regarding the financial company;
(5) an evaluation of the likelihood of a private sector alternative to prevent the default of the financial company;
(6) an evaluation of why a case under the Bankruptcy Code is not appropriate for the financial company;
(7) an evaluation of the effects on creditors, counterparties, and shareholders of the financial company and other market participants; and
(8) an evaluation of whether the company satisfies the definition of a financial company
Currently, we can to a certain extent  expect Secretary of the Treasury Jacob Lew, as unsavory as he is, to be a good Neo-Keynsian and enforce these provisions with good faith. However, some of them will vary in their enforcement: for example, a Republican Secretary may assert that things like payday loans are beneficial to the economic conditions or financial stability for low income, minority, or underserved communities.
But one provision that is trouble regardless of who is Secretary is (6). This provision, contrary to what the laissez-faire proponents will tell you, is actually meant to give the Secretary leeway to not use OLA and to employ Lubben’s “let the market decide” principle. But the very conditions that gave birth to Dodd-Frank show the danger in trusting that private solutions should be looked at first: whether rumor or based on actual statements, several banks were thought to be the ones to buyout Lehman Brothers to prevent its bankruptcy. When you allow the Secretary to make evaluations based on private solutions, there is a high risk of this happening again, since the management of banks is by its nature “capricious.” It is not that private institutions may not be able to solve every systemic risk, it is that private institutions will never be able to solve many systemic risks. They are beholden to their corporation alone, and while some smarter players in the sector fight to prevent systemic risks, these exceptions can hardly outbalance those who will watch the fire burn it down as long as they can collect on the insurance. This provision needs to be amended out: the finance industry has plenty of cheerleaders, and the Secretary of Treasury being one in any instance is a major conflict of interest. Unfortunately that may be inevitable given, as I have previously state, that the Secretary has for the past few decades always been a finance insider.
Bridge Burner
I actually agree, at least as a short-term intermediary matter, that the creation of bridge companies is a good means to avoid the liquidation triggering antitrust violations. However, I disagree strongly that they should be regular private corporations. Rather, I think it is best for them to be independent agencies modeled on the FDIC. Transferring, or even selling, the assets will not necessarily decrease systemic risk in and of itself (sorry Bernie and Hillary, breaking up the “too big to fail” banks is not good enough). Many of these assets, as most clearly seen in the mortgage foreclosure crisis which was a whole mess of bad faith tainted assets, are toxic. A private corporation could likely continue or even exacerbate the damage of these assets: after all, their goal is to make money, not to prevent systemic risk, even though that is the very motive that gave birth to them. Instead, independent agencies could take the time necessary (and unavailable to the FDIC under receivership) to gradually detox assets with a priority given to prevent both systemic risk and harm to the individuals caught up in the assets. These priorities may be difficult to balance: preventing systemic risk would usually be aided by action as quickly and comprehensively as possible, but such action could intentionally, recklessly, or negligently harm people, especially the low income communities that are so often exploited by such assets.
The End Of Orderly Liquidation Authority
So those are the short term problems and remedies, what is the future of Orderly Liquidation Authority? OLA is a prime example in public policy where a good offense will be far better than a defense at protecting it. People remember what went wrong far more than what went right, so the OLA is already at a disadvantage. However, the banks are the bane, if not outright enemy, of most people and they would love to see a very public execution. The Treasury Department talks big about how important OLA is, but so far this in theory far more than in practice.
There are plenty of targets. The Treasury Department needs to show, publicly and vigorously, that OLA can work, and they need to do it soon or there could be devastating consequences.