Wednesday, June 1, 2016

Alabama Redux

Old times there are not forgotten. . . .

— Dixie’s Land, — A song from 1859

In early April this space was devoted to a discussion of the assorted political adversities that were being inflicted on those seeking to govern the state of Alabama, going from the Governor of the state, to the Chief Justice of the Alabama Supreme Court, and finally to the Alabama Speaker of the House. It has, however, been more than two months since those events were described and it is time for an update, if for no other reason than to reassure my readers that Donald Trump is not the only clown in town. The following events occurred within days of each other during the merry month of May.

Starting at the top, readers will recall that Governor Robert Bentley admitted making what were described as “inappropriate and sexually charged remarks” to one of his female aides. It was hinted that the behavior might have included more than just sexually charged remarks. In Alabama, where perceived sexual misbehavior is taken seriously, news of the Governor’s behavior shocked his constituents and their elected representatives, even though the governor insisted there had been no sexual improprieties between him and his aide. Following the revelations there was talk of impeaching the Governor. As of this writing those proceedings have not been initiated. However, at the end of March, the state auditor of Alabama filed an ethics violations report against the Governor. In that report he said he was investigating the “misuse of state property” by the Governor, an allegation that may have been, in part, the result of a recording in which the Governor is heard to say, presumably to his paramour, that “If we’re gonna do what we did the other day, we’re gonna have to start locking the door.” If what they did the other day is what it sounds like, and if it took place in the Governor’s office it would, of course, clearly be a misuse of state property. In his report the auditor said: “The Governor continues to disgrace the state of Alabama. . . .” (The auditor is also concerned with whether the paramour is a public official or a lobbyist, although that would probably not affect the propriety of using the Governor’s office for what they may have been doing in it.) The auditor issued an order to the Governor that he appear in the auditor’s office on May 2, 2016 to produce documents. The Governor did not appear and the auditor said that, as a result of the failure, he would file proceedings with the state court ordering the Governor to appear or face contempt charges. There is no word on whether or not the proceedings have been filed.

From the Governor we go to Roy Moore, the now-suspended Chief Justice of the Alabama Supreme Court. Chief Justice Moore is, in all likelihood, the first Chief Justice of the Alabama Supreme Court to have been removed from office for refusing to follow a federal judge’s order. That occurred in 2003 when a federal judge ordered him to remove a monument of the Ten Commandments that he had commissioned and had installed in the Alabama Judicial Building. He refused to remove the monument and, as a result, the Alabama Court of the Judiciary removed him from his position as Chief Justice of the Alabama Supreme Court. In 2012 he ran for the same position, was once again elected Chief Justice and, once again engaged in conduct that has caused him to be suspended. On May 27, 2016, the Judicial Inquiry Commission suspended him for, among other things, not respecting a federal court order authorizing gay marriage by telling the state’s probate judges not to issue marriage licenses to same sex couples. Since the Chief Justice does not want to be remembered as the only Alabama Chief Justice to be removed from office two times, on May 27, 2016, he filed suit alleging that the state law that authorizes his suspension is unconstitutional. The entire state eagerly awaits the outcome of those proceedings. From the Chief Justice we go to the Speaker of the House.

Mike Hubbard is the Speaker of the House. It was he who led the Republicans in their takeover of the Alabama legislature in 2010, the first time they had had control since Reconstruction. Following that success, Mr. Hubbard wrote a book entitled: “Storming the Statehouse” in which he said that “Ethics was a subject that set Republicans apart from the Democrats,” the setting apart being a result of pre-election indictments and scandals involving Democrats. On June 1, 2016, Mr. Hubbard’s criminal trial began. He faces trial on 23 felony ethics charges as a result of his conduct while Speaker of the House.

For the casual observer it is intriguing to speculate on what will happen next in Alabama. Will the governor be impeached? Will the Chief Justice be removed from the Alabama Supreme Court? Will Mike Hubbard go to prison? Stay tuned!


Thursday, May 12, 2016

A Quiz

It was as true as turnips is . . . It was as true . . . as taxes is. And nothing is truer than them.
—Charles Dickens, David Copperfield

This week’s column is a quiz. For purposes of the quiz, assume that you are in charge of running a business. Your business makes money by providing services to your customers for which the customers are expected to pay. Most of your customers pay as they are billed but, as in almost all businesses, there are a few people, known as deadbeats, who do not want to pay, and sometimes there are customers who need help in understanding how to calculate what they owe. One of your tasks is to decide how to deal with people who don’t pay for services they have received and as you analyze the situation, you realize that you have two choices.

Choice number one is to turn over the accounts of people who owe you money to a collection agency. It agrees to keep one-third of all the amounts it collects and to turn over the rest to you. Choice number two is to hire additional employees whose job is to collect the money your customers owe. Although you have to pay salaries to those employees, you keep all the money they collect and their salaries are not affected by their success rate. You know from past experience that for every dollar you invest in the in house collection process, your return is almost $5.00. What do you do?

Now an additional element is added to the quiz. Some years ago you hired an outside collection agency to collect the money you were owed. You were owed $1.4 billion. The collection agency led you to believe it would be able to collect that entire amount. Instead, it collected only $49 million, missing the goal you had set for it by $900,551,000. Do you keep working with the collection agency or bring the business in house?

Here is the next question. When the board of directors reviews the foregoing statistic one member of the board says: “the real choice is whether we use private collection agencies or let these tax debts go uncollected. I hope we don’t take an enormous step backward in our efforts to close the tax gap by eliminating a program that’s working.” Do you ask the board member what he means by “working” or do you just ignore him?

Now we introduce another factor. A majority of your board agrees that debt collection should remain in house and should not be farmed out to outside firms because of the very poor performance by the outside firm used in the past. But some members of the board are unhappy with a high ranking employee.That employee has tenure and has engaged in some activities that have nothing to do with the company’s collection efforts since they do not fall under the disliked employee’s jurisdiction. Since you lack the ability to fire the employee described above, do you express your displeasure with the activities of that employee by cutting funding for the collection department?

Here are your last two questions. Because the product you are selling is complicated, similar to, for example, a furniture product sold by Ikea, those dealing with your product frequently have questions as to how to assemble the information they have to provide you so you can tell them the cost of the services they have received. In order to make the process simpler you have historically hired people to answer questions on the telephone. In a typical year you got as many as 110 million calls from people wanting to pay their bills and needing help. Some of your board members are still unhappy with the above described employee. Do you reduce funding for the collection department so it can only answer 43 percent of the calls you receive each year? That is the end of the quiz. Here are the answers according to the Center on Budget and Policy Priorities:

“The Internal Revenue Service (IRS) budget has been cut by 17 percent since 2010, after adjusting for inflation, forcing the IRS to reduce its workforce, severely scale back employee training, and delay much-needed upgrades to information technology systems.  These steps, in turn, have weakened the IRS’s ability to enforce the nation’s tax laws and serve taxpayers efficiently . . . . As seven former IRS commissioners from both Republican and Democratic administrations have written:  “Over the last fifty years, none of us has ever witnessed anything like what has happened to the IRS appropriations over the last five years and the impact these appropriations reductions are having on our tax system.” Here is an additional bit of information: ignoring past experience Congress has decided that in some circumstances the IRS can once again use private debt collection agencies. Go figure.


Thursday, May 5, 2016

Blessed Are The Poor

Worm or beetle-drought or tempest-on a
Farmer’s land may fall,
Each is loaded full o’ ruin,
But a mortgage beats ‘em all. — Will Carleton, The Tramp’s Story

Houses are the gifts that keep on giving to rich and poor alike. Just ask Dan Sparks-or the poor. The gift for Mr. Sparks is the opportunity to increase his wealth and the gift for the poor is shelter. Years ago that was accomplished by selling a house to the less fortunate using the subprime mortgage, and today it is accomplished by selling the same house to the same people using the contract for deed.

Until a recent New York Times story and editorial once again brought him to our attention, Mr. Sparks was remembered, if at all, for his last years at Goldman Sachs during 2007 and 2008. Mr. Sparks is not remembered for the Goldman Sachs activities that were brought to mind in April 2016, when Goldman Sachs agreed to pay $5.1 billion as a civil settlement because of its participation in the subprime mortgage market. During that period Goldman Sachs was bundling and selling securities that had been created by companies that specialized in converting subprime loans into bonds and selling them to unsuspecting investors. When the loans went bad, Goldman Sachs was left holding the money it had received from the sale of the bonds, purchasers of the bonds were left holding the bag, and former homeowners went from owning homes to becoming renters or homeless. Mr. Sparks, however, was remembered for something else.

During his last 1 ½ years at Goldman Sachs, Mr. Sparks was involved in creating something called a “synthetic collateralized debt obligation.” Unlike the securities Goldman Sachs sold to unsuspecting investors, the debt obligations Mr. Sparks helped create did not include actual bonds but, instead, instruments whose value was based on the the performance of sets of junk bonds. Those instruments were sold to unsuspecting investors by Goldman Sachs knowing they were worthless. (For those who would like more detail than is provided by the foregoing, that practice is described in some detail in a report on Mr. Sparks’ testimony before Congress) What both activities had in common, however, was that both were part and parcel of the financial collapse that took place in 2007-2008. As a result, in hundreds of thousands of cases, buyers defaulted on their mortgages and lost their homes. And that brings us to the present.

Many companies have been formed that are buying up houses that were foreclosed on during the housing crisis. Those houses are being sold to investors in bulk at distressed prices, and the investors, in turn, sell them to people too poor to qualify for mortgages. One of the companies that has been formed to buy and then resell these houses is Shelter Growth Capital Partners, a company founded by Mr. Sparks and two of his former colleagues at Goldman Sachs. That firm was founded in 2014. The word “shelter” in its name, describes the product it is buying and selling. The word “growth” refers to the increased wealth Mr. Sparks and his colleagues hope to enjoy from their new business. Shelter Growth has bought more than 200 distressed homes and resold them to low income buyers. Since subprime mortgages have fallen out of favor, the homes are sold by Shelter Growth using contracts for deed. Unlike a mortgage, the contract for deed is a better vehicle for getting rich quick than was the mortgage. A contract for deed does not offer the protection for the buyer that a mortgage provides. Whereas a mortgage requires certain legal proceedings to be followed before an owner can be forced out of the house, and there is some supervision by a court in most cases, contracts for deeds offer no such protections and the seller can not only charge a high rate of interest, but is not encumbered by the need to go to court in order to retake possession of the house and force the buyer out. That, from the seller’s perspective, is a big advantage. It is less of an advantage for the buyer. And here is a curious coincidence.

The house Mr. Sparks is now selling pursuant to a contract for deed, is almost certainly one of the millions of houses that were foreclosed on during the heyday of foreclosures that took place because of the subprime crisis that was caused by Mr. Sparks and his fellow bankers. Indeed, it might even be one of the houses whose mortgage was part of a worthless bundle of mortgages sold by Goldman Sachs to unsuspecting investors. And now that house is once again being used to enhance the wealth of Mr. Sparks and his colleagues and to provide shelter to the less fortunate. Here is another part of the same coincidence.

If a buyer defaults on the terms of the contract, the people at Shelter Growth who kick the buyer out of the house, are the same people whose subprime mortgage activities caused there to be lots of cheap houses available for Shelter Growth to buy and resell. And Shelter Growth may very well be selling those houses to the same people who lost them in foreclosures 10 years ago. Were that to happen it would merit an entry in Ripley’s Believe It Or Not!