There’s a lot to deal with in Mark Paul’s well-written article. And in the end it’s difficult to disagree with the general thrust of his argument. However, simply abandoning an examination of the morality of what we the people will permit through our legislature will only require the nation to grapple with future moral problems. I’ll reserve judgment about the morality of what vulture funds actually do. My primary problem with them is that they effectively pay no tax on the billions that they make.
But there’s no need to reserve judgment about Bill Clinton. We’ve had a quarter of a century to assess him and his Presidency. In 2011 wandering free-spirit Bill Clinton came here and told us we needed to clean up our mortgage arrears problem or our economy would stagnate. And Mark Paul says we should have listened to him. Nobody can be blamed for not listening to Bill Clinton. Leave aside that his self-indulgent behavior has left him with no moral authority whatsoever and let’s look instead at what he did when it was just his pen in his hand.
His tenure was characterized by a fuzzy mix of cuddly leftism and hawkish capitalism. That was a deliberate strategy designed to make him all things to all men (and of course women). So in 1995 he re-wrote the Community Investment Act, which put pressure on banks to lend in low-income areas or, to put it another way, American banks were legally required to lend money to people who couldn’t afford to pay it back . This ultimately was one of the primary causes of the sub-prime crisis.
Having doled out the goodies to those at the bottom of the economic pile, Bill’s largesse turned its attention to the titans of Wall Street, those, who could actually make campaign contributions and who, importantly, own the vulture funds we’re talking about now. For them there were two further pieces of legislation enacted by Bill the consequences of which the whole world is still dealing with. First, the Gramm-Leach-Bliley Act repealed the legislation at the centre of Depression-era regulation. You’ll remember that regulating banks once upon a time was a bad thing. Second, the Commodity Futures Modernization Act completely exempted credit-default swaps from regulation. A chain reaction was thus set in motion culminating in the greatest financial crisis since, well the Depression.
And lo it came to pass that free-wheelin’ Bill toured the world telling us that we needed to tighten up on mortgage arrears. Spare me lessons from Bill on morality, economics or economic morality even if he was suggesting debt forgiveness.
So if I don't like the messenger what of the message that if the unresolved debt isn’t dealt with economic recovery would be delayed? Well I could respond in a trite way by saying that we still haven’t dealt it and the economy seems to be doing ok. But that’s akin to Mark Paul saying as he did that we’ve been waiting in fear for waves of home repossessions and that that hasn’t happened. But that’s not correct. Every Circuit Court list in the country has been dealing with repossessions for the last 8 years. He also says that the system is designed to stymie repossessing a home and that’s true for vulture funds too. If that was the case why would any fund be interested in buying a loan the security for which it couldn’t enforce against? The fact is that repossessing a buy-to-let property, which many of the subject PTSB loans are, is not so difficult as you might think.
By contrast it is hard to repossess a family home and there’s good reason for that. Are we to forget that PTSB moved borrowers from their tracker rate mortgages directly resulting in dozens of home repossessions when PTSB faced its own liquidity crisis? If the regulators can’t stop banks behaving badly we at least have a last line of defence in the form of the courts of equity. But why should we care that repossessing a home is difficult anyway? PTSB and every other bank knew that it was difficult to enforce against a family home when it made stupid loans secured by stupidly inflated house prices. And the vulture funds know it when they buy those loans for deflated prices that already have the enforcement costs built in. Stymie away I say.
Mark Paul says “it is a fact that such (vulture) funds bring much needed liquidity to markets that need them.” Happy days. He says we’ve ruled-out having the taxpayer bail out the defaulting borrowers so we’ve no other option but to rely on vulture funds. And it is intellectually dishonest to suggest there is another solution. Really? There’s always another solution or, more accurately, a combination of solutions. And in any one solution there are various nuances a sort of Russian doll of solutions as it were.
Loans like the PTSB loans proposed for sale are bought for a fraction of the debt. If the debt purchase deal was offered to the borrowers themselves there is no doubt that many of the individual borrowers could pay more than the vulture fund to buy their own loan back. If we’re actually interested in liquidity then do that first. Then sell the balance to the vultures if you want to. The reason this doesn’t happen of course is because that’s too much administrative work for the bank. It’s much easier to sell the whole batch as a job lot than individually negotiate discounts with borrowers even if they could recover more on each individual loan. Much more importantly however, if all the borrowers that the vultures can put the squeeze on are taken out of the equation before the sale then there’s no point in the sale as far as they are concerned.
Vulture funds themselves could do a bit more to help their own cause that is if they wanted to which of course they don’t. They could avoid exhaulting in their greed and stop telling us things like that they’re “long term greedy”. They could avoid naming their funds after mythical animals such as Cerberus the three-headed dog guardian of the underworld. They could pay some tax. When enforcing their debts they could get off their contractual moral high horse.
Lastly, thanks to people like Bill Clinton the vultures and their owners have benefitted from lots of legislation that allowed them make billions as the world economy boomed. The world economy having then bust, they are assisted by laissez-faire governments to make billions more cleaning up the mess they helped make. I’m not going to shed a tear that their job is difficult, or that we’re missing an opportunity to get some liquidity injected into the economy, or that finally we’re taking a closer look at what is the vulture funds do and how they do it. Who knows, we might find a another, better solution.