Supercapitalism

by Jeff Sovern

I recently finished Robert B. Reich's fascinating book Supercapitalism.  Reich, who served in the Clinton cabinet, pulls together a number of themes into a coherent, and depressing, whole.  He argues that the marketplace is far more competitive than it once was, as a result of which corporations constantly try to offer the best product they can at the lowest possible price--to attract consumers--and to pay the highest possible return on investments--to attract investors.  So far, so good.  But the need to compete forces corporations to ignore all other values other than making profits, so that they can't, for example, as they once did, attend to the needs of other stakeholders, such as employees, the communities (or countries) in which they are located, or goals of consumers other than those that will cause consumers to buy their products.  The result is outsourcing, loss of jobs, and numerous other ills.  Reich argues that to the extent corporations do focus on other goals, they will increase their costs--thus driving consumers to other products--and reduce their profits--thus causing investors to put their money elsewhere.  That happens in part because other corporations which attend only to the bottom line will step in to steal the sales of corporations with more generous hearts, but higher costs.  Reich points out that as consumers and investors, people benefit from this, but as employees and citizens, they suffer.

Reich's view is that corporations are entitled to do all this as long as they follow the rules, and that government should act as a check on inappropriate behavior.  Corporations, he believes, cannot and should not be expected to assume government's responsibilty to pursue public goals.  Their job is to make money for shareholders.  But, he goes on to say, businesses affect the rules under which they operate by making campaign contributions, lobbying, etc.  Legislators competing for contributions can't afford to alienate these contributors, and so write the rules in ways that aid business.  To create the illusion that they are cracking down on improper corporate behavior, legislators hold hearings and scold corporate malefactors--but don't enact, or even introduce, legislation that would change the rules in such a way as to cause businesses to behave differently. 

Reich gives numerous examples of this behavior and traces its historical development.  He also offers policy prescriptions for dealing with it.  It's a terrific book, and one that sheds considerable light on many of the problems with the marketplace and society today.  And at the end of the day, it raises an important question: do voters want changes that will cause consumers to pay more and investors to accept less in pursuit of other goals or would we rather have things as they are?

Due Diligence Disregarded

Scott Reckard of the LA Times just wrote an excellent investigative report on due diligence, or the absence of it, in the securitization of subprime mortgages. He interviewed former employees of Clayton Holdings and Bohan Group, companies hired by securities firms to scrutinize subprime loan files on behalf of investors. While the pressure to originate and securitize led to the suppression of loan problems by reviewers, the article also notes that Wall Street investors increasingly relied on higher interest rates and prepayment penalties to substitute for careful mortgage underwriting.

From the Consumerist: "Credit Card Victims Muzzled"

On Friday, Alan White posted here about Congress's unusual demand that four consumers waive their rights to privacy in their financial histories before being allowed to testify before the House Financial Services Committee on the abusive credit card practices that they experienced. The testimony was to be given in conjunction with Congress's consideration of pending legislation known as the the Credit Cardholders' Bill of Rights. The consumers were not willing to sign the waiver and so did not testify. The Consumerist now has posted this discussion of the topic, including the written testimony that one of the consumers would have given had he not declined to testify. The post also includes a synopsis of the pending legislation.

What Happened to the Arbitration Clauses in the Subprime Litigation?

Last week, Alan blogged here about the Navigant Consulting Report on suits by consumers, among others, against subprime lenders.  The Times covered the report today in an article here.  I'm wondering how borrowers have been able to file these suits.  Did the loan agreements not include arbitration clauses?  If they did, how have the borrowers managed to get around them?  Or is it just that the lenders haven't yet moved to dismiss on the ground that the matter should be heard by an arbitrator?  Anyone know?

Shmuel Becher Papers on Consumer Contracts

Shmuel I. Becher has two papers on consumer contracts.  One is Behavioral Science and Consumer Standard Form Contracts, 68 Louisiana Law Review, available at http://ssrn.com/abstract=1016002. Here's the abstract:

Asymmetric information is a serious threat to the market of consumer standard form contracts. Yet, legislatures, courts, and market-forces do not provide an adequate solution to this threat. This Article argues that a considerable part of this failure is due to the fact that important and relevant social science insights regarding consumers' behavior is widely overlooked. This gap results in the prevalence of unfair or inefficient consumer form contract provisions. More profoundly, it entails that current approaches towards consumer contracts are fundamentally flawed and bound to reach erratic and sometimes unjust conclusions.

Cognitive biases and consumers' actual behavioral patterns should have an important role - descriptively and normatively - in the law of consumer contracts. This Article explains how psychological phenomena contribute (i) to consumers' tendency not to read form contracts even when by doing so they fail to maximize their utility; (ii) to consumers' inability to evaluate correctly contract terms once they do read them; and as a result (iii) to sellers' capability of manipulating consumers.

The end point of this discussion is twofold: First, it seeks to expand our understanding regarding the inadequacy of current approaches to consumer contracts and the harm that consumers are exposed to when actual behavioral patterns are ignored. Secondly, it provides policy makers with better insights as to the way in which contract law should design the alternative approach to consumer contracts.

Richard "Dickie" Scruggs Pleads Guilty To Federal Crime

  Well-known Mississippi plaintiffs' lawyer Richard "Dickie" Scruggs has pleaded guilty to a federal crime arising from a November 2007 indictment alleging that Scruggs bribed a state court judge. The Jackson, Mississippi Clarion-Ledger reports on the story here.  Here's the plea agreement.

Frank proposes FHA short refi bill

Congressman Barney Frank, Chair of the House Financial Services Committee, has announced a mortgage rescue plan: a bill to permit FHA to insure refinance mortgages. The discussion draft is available here. FHA would insure new mortgages for up to 90% of the current home value, on condition that the existing mortgage holders agree to write down the existing mortgage debt to that amount. Eligible homeowners would be owner-occupants financially unable to make payments on their current mortgage(s), and may be delinquent on their current mortgage. An intriguing new auction process would allow existing mortgage holders to bid for refinance guarantees for a reduced principal payoff. The bill separately authorizes grants and loans to states for purchasing foreclosed homes, to prop up the housing market and deal with housing abandonment.

While the Bush administration has opposed bailouts, the proposal is conceptually similar to the one being offered by John Reich, director of the Office of Thrift Supervision.

New HUD Mortgage Disclosure Rule Out

HUD published its long-awaited RESPA mortgage disclosure rule in today's Federal Register. The proposed rule includes new model forms to be provided to consumers buying or refinancing a home. This proposal, in the works for years, aims to provide mortgage shoppers with more accurate and understandable disclosures about the terms of the mortgage for which they are applying. It overlaps, to a considerable degree, the Federal Reserve's proposal to amend TILA disclosure rules for mortgages. Hopefully, HUD and the Fed can coordinate their efforts and come closer to the ideal of an early, free, binding, clear and comprehensive price offer for mortgages.

Times Articles on Subprime Crisis, Debt Collection, the CPSC Bills, Reverse Mortgages, and Online Privacy

I've accumulated a huge backlog of recent Times articles on consumer law issues, so here goes an attempt to reduce the backlog.

Many of the articles involve the mortgage crisis and plans to do something about it.  For example, the lead article in today's Times is headlined "White House Offers Plan to Ward Off Credit Crisis."  Here's an excerpt:

The plan, which relies primarily on state regulators and private industry to tighten their oversight of financial markets, calls on states to issue nationwide licensing standards for mortgage brokers.

The plan would also require lenders to make more complete disclosures about payment terms to home buyers. And it would curtail possible conflicts of interest at companies that assign levels of risk to packages of mortgages that are sold to investors.

* * *

But in many ways, the plan relies on the same market participants — from mortgage brokers to credit-rating agencies and Wall Street firms — that government officials and other experts blame for the current crisis.

Congress abuses consumers' privacy

Many CL&P readers no doubt read Credit Slips regularly, but those who don't should read this post by Professor Warren. At a House Subcommittee hearing on credit card abuses and the credit card holder's bill of rights legislation, four consumers were unable to testify. Their elected representatives and the credit card companies had worked out an extraordinary set of conditions on their appearance. The four consumers were asked to sign releases so that the credit card companies could publicy disclose anything and everything about their credit card accounts, in the interest of "fairness."