A High Water Mark For American Lawyers

Some great news for the American public was revealed recently: there is now one lawyer for every 257 Americans. I sure hope my 257 Americans can afford my hourly rate. As Edward Tan at Findlaw’s Greedy Associates Blog opines, “If you’re looking to hire an attorney, it’s definitely a buyer’s market.”

Why so many shysters attorneys, you ask? Tan has a likely answer: Big Law (not to be confused with Big Love). “A combination of ‘inept management and the weakness of the partnership model’ were crucial factors in inflating the legal market, Bloomberg News reports.”

Starting in the 1960s, big law firms grew bigger and along with the growth in numbers came a growth in hourly rates.

[F]rom 1985 to 2010, hourly rates began to skyrocket, especially in the top 50 law firms. Normal combined revenue for these firms based on the rate of inflation at the time should’ve been $6.9 billion. Instead they earned $48.4 billion.

Big law firms became big pyramid schemes, with a small number of partners at the top leveraging a larger number of (relatively) low paid associates. Of course, a starting salary of up to $160,000 per year plus a bonus and benefits may not seem like a pauper’s wage to most Americans. Thus, law school admissions soared, and young people with the intellectual firepower to do a number of useful things for society instead decided to grab for the brass ring via treading the law firm gerbil wheel. Law schools became money-makers for many universities, and they were only too happy to keep up the charade that the good times in the private practice of law would roll on, in the same way that for many of us, residential real estate values would never head in any direction than straight up.

Unfortunately (for Big Law), big law firms have big fixed overhead costs, including those large associate salaries. When the economy took a tumble in recent years, that fixed overhead (and the inability to adjust quickly enough due to size and the conservative nature of many lawyers, among other factors) became an millstone around the neck of many big law firms. In addition, partners who are imbued with an “I-got-mine” mentality are not receptive to taking one for the team, so quickly imposing a shared sacrifice survival plan on a group of self-centered large egos is a hard task to accomplish. Tan mentions a half-dozen failed Mastodons, and more are on the way.

Over the long haul, “creative destruction” is good for any “business” or “profession.” At least, that’s what free market theorists tell us. In the interim, the lawyers (and would-be lawyers) being “creatively destroyed” are in for a lot of pain.

My wife always tells me it’s better to be lucky than smart (although being both is occupying the sweet spot). In that case, I’m lucky that almost exactly twenty years ago, I decided that the big firm business model made no sense to me and I went in a different direction. While–believe or not–I feel sorry for many of the people strapped to the outside of this crushing wheel as it rolls forward (especially the young people), I also feel something else entirely for more mature folks who are bright enough to have seen something like this coming and, because they were too busy milking a cash cow, chose to do nothing.

We may never return to the ratio of 1:709 we had in 1950, but 1:257 seems to me to be the “high water mark,” and there’s nowhere to go from here but down.

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Let Me Just Clarify That Point

My post of the day before yesterday, concerning a “warranty” offered by Greenway Solutions that would cover a portion of losses suffered by a bank’s business customer by reason of an online account takeover (provided the customer uses an approved online security product from a third-party vendor), caused Jon Meyer of Greenway Solutions to reach out to me. Jon wanted to discuss some points I raised in my story and to provide some clarification. After a very pleasant telephone conversation, I offered to supplement my previous post with additional information and clarification.

As to my question about the fees paid by the customer and the bank to Greenway Solutions, Chartis, and the security software providers, Jon informed me that Greenway Solutions will launch this solution with $24.95 per-month “all-in” pricing. In other words, the cost of the service is a total of $24.95 a month. The customer would pay that cost to Greenway Solutions, and that would be the only cost paid. Of course, the customer’s bank could decide to pay that cost, if it wished to do so, for competitive reasons.

Jon also wanted to emphasize that business customers do not have the equivalent protection afforded to consumers by Regulation E (no liability for unauthorized funds transfers provided the customer reports the unauthorized nature of the transfer within time limits established by Regulation E). He also made the point that Article 4A, Section 202, of the Uniform Commercial Code provides little practical protection for unauthorized “payment orders,” because in the vast majority of cases of account takeover, (1) the customer has expressly agreed in writing with the bank to be bound by any payment order, whether or not authorized, issued in its name and accepted by the bank in compliance with a security procedure chosen by the customer, which, under the Code, makes the security procedure “commercially reasonable”; and (2) the unauthorized payment order is usually made in compliance with such security procedure because the crooks have penetrated the customer’s computer system and gained access to the information needed to compromise those security procedures. You’ll continue to have lawsuits brought by victimized customers that allege that the security procedures of the bank were not “commercially reasonable,” notwithstanding the terms of the applicable account agreement (perhaps because the security procedures do not comply with the mutli-factor authentication guidance of the FFIEC), but  that fight is in most cases an uphill battle for the customer. Counting on banks to settle in order to avoid reputational risk is cold comfort. Therefore, I agree that there is value in “incentivizing” business customers to add additional software security solutions and to cover at least some of the financial risk with “insurance.” Although I’m not endorsing Greenway Solutions’ specific product, I’m in favor of exploring creative answers to a problem is that is not going to be resolved anytime soon.

As to my wisecrack about vendor’s collecting fees and denying liability, Jon wanted me to point out that this stance is not unusual in the software security vendor “space” given the “price point” ($24.95 a month). I agree that it’s not unusual. Technology service providers, especially those that collect relatively low monthly fees for providing a standardized product, will generally provide indemnification against intellectual property infringement claims that arise out of the use of their technology within the limitations on use contained in their license agreement, but generally aren’t going to take on additional liability for indemnifcation that could result in the vendor incurring “bet-the-company” damages. Whether or not this is a reasonable position to take, my intent was to point out to banks that because of it, they need to make certain they aren’t going to be on the hook for liability caused by the acts or omissions of the vendor or its product.

Plus, I was going for the cheap laugh. It’s what I do.

I hope I’ve now clarified the pertinent points and can return tomorrow to my customary menu of ill-considered snark and off-the-cuff, half-baked opinions of inconsequentiality that my readers have come to expect from this blog.

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Barney And The Spitz Make My Day

As I watched ABC’s “This Week With George Stephanopoulos” yesterday morning, I assumed that most of the press attention would be given to Barney Frank’s meltdown against Tennessee Republican Marsha Blackburn, and I think that expectation was verified by today’s frequent postings online of the video of that session. I loved the way Barney accused Blackburn of filibustering him when it was obvious that he did 90% of the filibustering and didn’t shut up until they literally cut him off and went to a commercial. Man, that guy makes for some great theater! If you’ve got the stomach for it, here’s the link: http://abcnews.go.com/watch/this-week/SH559082/VD55202126/this-week-0513-rep-barney-frank-and-rep-marsha-blackburn.

For me, however, the biggest treat was the way that The Comeback Kid, Eliot Mess, handled himself during the round table session, alternating between some reasonable observations and absolute moonbattery. Of the latter, my favorites include this exchange with Republican Hit-Woman Mary Matalin about Mitt Romney’s economic policy:

SPITZER: They want to go back to medieval medicine, the blood-letting, leeches. They want to go back to the very crazy economics that brought us over –

MATALIN: What are you talking about, Eliot?

SPITZER: — the cliff and created a cataclysm.

I’m sure The Spitz wanted to add “and they want to go back to using the Mann Act to persecute boys who just wanna’ have fun.” Matalin looked at him like he’d just consumed one of her children. I assume that when married women sit next to Spitzer and the word “leech” comes to mind, the image that accompanies it is not going to be Mitt’s but Eliot’s.

The always trenchant George Will was a off the panel for the day, and Ralph Reed of the Faith and Freedom Coalition was filling in, which was a strange insert from the bench, but it’s major network television news, so someone must have thought the two were interchangeable parts. Reed tried to make a point about the current state of unemployment, but Eliot Mess cut him short with more of the same “cataclysmic” hyperbole.

REED: — 15 percent of college graduates can’t find a job.

SPITZER: Ralph, Ralph, you simply ignore the reality that the economic model that Romney wants to bring back gave us the cataclysm of a — wait, it’s deregulation. It’s lower taxes for the wealthy, higher deficits, cutting infrastructure investment, making us less competitive, giving up our competitiveness to foreign nations, unilateral trade failure that does not serve the American public well.

You can see that when he used the tern “cataclysm,” Matalin and Reed reacted poorly. Spitz also alleged that Keynesian economics has been working well for 70 years and “it will work in the next 100 years.” No, I’m not making that up.

Concerning Chase’s $2 billion “hedging” faux pas, Spitzer claimed that the Volcker Rule, even if finalized, would not have prevented this loss because Chase desires to commit suicide so that the federal government can rescue it again. I suppose Spitzer is accusing Jamie Dimon of being possessed by an adolescent “rescue fantasy.”

SPITZER: Of course, the regulations as put in place after JPMorgan lobbied to eviscerate would not have precluded this because JPMorgan wants to be able to lose all the money it can so we can bail them out again. That’s the problem. The incentive structure here is perverse. They can gamble with a federal backstop.

Matalin, obviously suffering from too many years in proximity to James Carville, made some interesting rejoinders, despite her insistence on giving Barney first billing over Chris.

MATALIN: This also reraised how ineffective Frank-Dodd (sic) is. As Barney said, the Volcker rule, which is still being formulated, they want to enforce something that hasn’t been formulated and they don’t even know when it would come into effect, as is the case with all of Frank-Dodd.

What’s absent from Frank-Dodd (sic) is the — what financial institutions need and they want. And they can’t function without it. It is clarity, uniformity, cohesion, coherence, enforceability that’s predictable. And none of that has happened.

“Clarity, uniformity, cohesion, coherence, enforceability that’s predictable.” Yes, that would be acceptable if we can’t have the alternative: setting fire to the whole thing and burning it down to the ground.

Hilary Rosen, the political operative who claimed that Ann Romeny never worked a day in her life and was disowned by The White House, then claimed Matalin didn’t want any regulation of the banks, and Spitzer revisited how great Glass-Steagall was, how he’s a “true capitalist” (ignoring the cognitive dissonance of his love for Keynesian economics), his repeated beatings on federal preemption by the OCC, and just about everything other than the fact that Joel Steinberg put tacks in his seat in his third grade classroom and was never properly punished for that crime.

It’s not that the Sunday morning network news shows are totally useless. It’s just that they seem to devolve into sound-bite shouting matches, where distortions, glaring omissions, and outright lies are often countered with the same, where the parties engage in loud “crosstalk” that cancels one another out, and where the host eventually drills down on a critical issue by prefacing it with “We’ve got only 10 seconds left.”

If we want to have a decent, serious discussion of critical issues, we need something akin to the format of the late Bill Buckley’s “Firing Line,” where, for example, Buckley and Keynesian economist John Kenneth Galbraith, a close personal friend of Buckley’s whose political and economic views were the polar opposite of Buckley’s, would sit side-by-side in swivel chairs and discuss and debate an issue for a solid hour, with no commercial interruptions. They also attempted to treat each other with courtesy and respect because they realized that a difference in ideas does not necessarily equate to a difference in character. As far as I know, neither of them knew a woman named Ashley Dupre.

Given the average viewer’s typically short attention span, I assume such a show would garner a rating that might not be measurable. Nevertheless, it would come as a pleasant change of pace from what passes for serious discussion on network television (or cable television, for that matter) in the current age.

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Filling A Gap With "Insurance"

It’s tough enough, on a daily basis, to make sense of what a portion of the trade press has to say about banking legal issues, but it’s doubly tough when they cite section numbers and laws that don’t exist. A story last week in The American Banker (paid subscription required) made a very valid point, and one I’ve harped on previously: commercial bank customers don’t have the same protections that are afforded consumers by Regulation E when it comes to unauthorized transfers from their accounts. The reporter for The American Banker asserts that commercial customers don’t have protection in excess of the basic requirements of “the universal commercial code’s section 404 2A, which specifies that banks must supply a basic level of security for their commercial clients.” I think he intended to refer to Section 4A-202 of the Uniform Commercial Code, and I expect that a lawyer he interviewed mentioned the correct section but something was lost in translation between ear and written notes. It happens.

Nonetheless, the article offers insight about how some customers (on their own or through their banks) are trying to add a measure of protection for unauthorized hacking of their bank accounts through a “warranty” product called EFTGuard, offered by Greenway Solutions and backed by insurance company Chartis. The warranty will cover up to $100,000 in losses from an individual account (with an aggregate limit of $500,000) as long as the bank’s customer adopts “at least one of a handful of preapproved third-party security products.” The companies listed in the article are IronKey, SafeCentral, Trusteer and Webroot. The banks pay $15/month per customer for the product, presumably to Greeway Solutions or the service provider, although the article doesn’t state who receives that fee. The article also does not enlighten the reader as to what, if anything, the customer pays Greenway Solutions and/or Chartis and/or the service provider.

Whatever fees are paid and to whomever they are paid, here’s a tip for banks deploying these third-party security products: whatever service the service provider provides, (1) test it before you deploy it widely, and (2) make sure your account agreements with your customer protect you from any liability arising out of or related to the customer’s installation and use of the vendor’s product. In one case I read about, a security product (NOTE: not one offered by one of the four companies listed above) that was designed to set up a secure “tunnel” between customer and bank for each online banking session, reportedly interfaced poorly with commonly used off-the-shelf software found on some customers’ systems, causing “crashes” and other problems for those customers. As to the second point, my personal experience is that most vendors in this space are not willing to indemnify the bank from claims by its customers that use of the product damaged them in some respect (see the immediately preceding sentence) or that it simply doesn’t work as advertised. A recent negotiation with one such vendor (again, not one the four listed above) went something like this:

Bank:  “Please provide us with an obligation to hold harmless, defend, and indemnify the bank from such risks.”

Vendor:  “Here’s a bucket of sand. Here’s a croquet mallet. Start pounding.”

As is typical of technology service vendors, once the salespeople stop gushing about how their product will not only ensure world peace, but will actually raise the dead, the risk management people tell you that they’ll consider taking on indemnification obligations that have actual substance exactly two hours after the commencement of The Second Coming. Therefore, make sure the bank’s contract with those of its customers who employ this product relieve the bank of risk. If the customers squawk, you can remind them that if they’d actually read any of the “boilerplate” license agreements they’d “clicked through” and used on their computer systems, they’d understand that the technology service business model is like the insurance company business model: collect fees, deny liability.

Of course, savvy customers will point out that in many cases, that seems to be the business model of banking. At which point, we can all have a good laugh and get on with seeing how long it takes cybercrooks to bust these latest “solutions.”

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The Silver Lining Of Overdraft Fees

“I’m 1/32 ‘Elizabeth Warren’ and it’s that small sliver of me that compulsively exaggerates.” Dennis Miller, via Twitter, May 10, 2012

Shannon Phillips, Deputy General Counsel of the Independent Bankers of Texas, wrote a blog post recently for Christopher Williston’s The Missing Linc blog, entitled “Lies, Damned Lies and Statistics.” With that title, you just know it has to be about the CFPB.

Phillips is concerned about the CFPB cherry-picking statistics from a 2008 study conducted by the FDIC on overdraft programs and interpreting them for negative effect. Now, accusing the CFPB of distorting the findings of the FDIC on overdrafts might strike some as akin to accusing Goebbels of having taken Hitler out of context when quoting “Mein Kampf”. Of course, I wouldn’t be one of those people because I’m always fair and balanced.

Shannon’s beef is with the spin the CFPB, and its Reichsführer Director, “Recess Richie” Cordray, have been putting on a finding by the FDIC that 9% of overdraft users bear 84% of overdraft fees.Cordray described that 84% as “whopping.” I assume he wasn’t issuing a racial epithet, but was indicating that this was a “disproportionate” percentage in some respect. Although neither Cordray or Shannon made the allegation, the next logical step in the group-think that dominates the current crowd in power in D.C. is that the 9% being “whopped” are likely to be racial minorities and, therefore, overdraft programs as designed and administered by banks have a disproportionately negative affect on minorities, and…voila!…are discriminatory, unfair, or abusive. Then again, perhaps I’m merely leaping ahead of myself in a power-burst fueled by rampant cynicism.

Phillips suggests that there’s another way to approach the lessons revealed by the FDIC’s study.

While that statistic is true, that means that conversely approximately 91% of accountholders bore only approximately 16% of overdraft-related fees.

He also quotes from a comment letter to the CFPB from the IBAT.

According to the FDIC’s own statistics, we have an overdraft protection system in the United States that is working for nearly 90% of customer accounts.  Instead of dismantling, overhauling or punishing banks for having a huge majority of customers with fewer than four overdrafts per year, the answer lies in the educating and providing clear disclosures to consumers – especially the 13.9% of customer accounts who overdraft their accounts five or more times per year.  Once the dual goals of education and disclosure are accomplished, neither the CFPB nor the banks should meddle paternalistically in the lives of bank customers.

“Meddling paternalistically” is the life force of large federal bureaucracies. Without such meddling, they’d have no reason to exist.

Shannon notes that the comment period on the CFPB’s recent solicitation of comments regarding overdraft programs ends June 29, 2012 and urges interested bankers to add their voices to a chorus of folks (including the 90% of responsible users of overdraft programs) before that deadline passes. Your guess is as good as mine as to whether the true believers in “behavioral economics,” who think they know better how to protect consumers than do consumers themselves because the bureaucrats understand the unconscious motivations of consumers that diabolical banks exploit, will be receptive to considering bankers’ viewpoints based upon the facts, but it’s always worth a shot. Moreover, if you can get in a nice turn of phrase like “meddling paternalistically,” you’ll feel better, even if you don’t exert an ounce of ultimate influence.

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Off The Rails

Cadwalader recently published a client memorandum that discussed why Dodd-Frank’s been a bust when it comes to setting the world on fire as a template for financial reform, despite being advertised as the Platonic ideal of financial institution reform legislation when it was crammed down our throats passed by the US Congress. Rather than  bering a model of how it’s done right, Cadwalader claims that foreign financial institutions find the law as popular as the Pope is to Richard Dawkins.

The memo states three principal reasons the law’s been greeted with disdain:

1.    Very little consideration was given by the authors to the effect on international and cross-border finance;

2.    It’s impact on foreign financial institutions “is even worse” than it’s effect on domestic institutions (which is bad); and

3.    The act “ignores the legitimate governmental authority of non-U.S. financial regulators domestic institutions.”

Describing eleven examples of how foreign financial institutions are negatively affected by Dodd-Frank, Cadwalader states that these examples are only a “few” of those negative affects. It may be cold comfort to US financial institutions groaning under the weight of Dodd-Frank’s heavy burdens, but your foreign cousins feel your pain.

For the sake of the world, not merely our slice of it (hefty as that slice might be), let’s keep this in mind when we take to the voting booths in November. Dismantling this monstrosity, or at least its worst features, isn’t going to stand a chance without a major power shift in D.C.

Speaking of busts (nice segue, huh), I guess The Mother Of All Monstrosities (i.e., Lizzie Warren) just can’t help digging a hole for herself over her past claims of being “Native American.” According to the Washington Post (a Warren-loving publication, by the way), Liz has been running off the rails on this issue.

Asked if she regretted self-identifying as Native American given all the grief she’s gotten over the past week, Warren gave a long, rambling response.

“I have lived in a family that has talked about Native America, talked about tribes, since I’ve been a little girl,” she said. “I still have a picture on my mantle at home, and it’s a picture of my mother’s dad, a picture of my grandfather, and my Aunt Bee has walked by that picture at least a 1000 times, remarked that her father, my Pappa, had high cheekbones, like all of the Indians do, because that’s how she saw it, and your mother got those same great cheekbones, and I didn’t. And she though this was the bad deal she had gotten in life. Being Native American has been a part of my story, I guess since the day I was born, I don’t know any other way to describe it.”

[...]

That kind of convoluted answer, filled with odd details, is exactly how not to respond to an attack. Instead of a short and to the point response about why she claimed Native American heritage on some law documents, Warren instead launched on a personal reflection that gives her political opponents plenty of fodder. (High cheekbones!)

The linked story includes an embedded video clip of Warren’s ramble. It’s worth a view.

Hey Liz: Ann Romney’s got high cheekbones. I guess that makes her a Ute princess, eh?

There was an expected counterattack from Warren supporters, who rounded up spokespeople from every law school where Liz taught. They asserted that notwithstanding the fact that Liz claimed minority status, that wasn’t the reason they hired her. I guess that defense consists of the argument that it’s acceptable to lie as long as you can claim “no harm, no foul.”

On an unrelated note, I was very sorry to see Australian Aborigine ballroom dancer Kym Johnson voted off Dancing With the Stars this week. There just aren’t enough “Native Australian” dancers left on television. While her official biography does not mention her aboriginal ancestry, it’s obvious from her high cheekbones. Noted Welsh actress and 1/32nd Bantu Catherine Zeta-Jones confirmed the inerrancy of this facial-feature-racial-marker in a recent private telephone conversation.

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Tales Of Wells Fargo

Wells Fargo just can’t catch a break. Not only has the US Department of Justice told the bank that it might file a fair lending action against it for its allegedly discriminatory practices with respect to maintenance of REO, but the morons at MoveOn.org have decided to stage a public protest against Wells Fargo solely because they can’t find Bank of America to kick around.

As for the DOJ claims, they appear to be based upon consumer advocates’ claims that the bank takes better care of foreclosed-upon real estate it owns in neighborhoods where white people live than it does in areas where minorities live. I suspect that the bank will assert that (a) any rational real estate owner is only going to invest money in a piece of real estate where the owner has a realistic chance of recouping that investment through a higher sales price, (b) that such recoupment decisions are made on a property-by-property basis based upon objective data like recent comparable sales prices and fair market valuations, (c) that the economic reality-driven facts of life are that many more such properties are located in majority-white neighborhoods than in minority neighborhoods, and (d) there has been no intent to discriminate, merely to minimize losses, will fall on deaf ears. As we’ve previously noted, the DOJ is on a jihad against lenders based upon “disparate impact” theories that the DOJ knows, in its heart-of-hearts, are highly fragile when exposed to the light of logic, the kind of logic applied by the US Supreme Court. Justice will likely pursue Wells Fargo and try to squeeze some dough out of it before the highest court eventually shuts down this racket.

What’s really bad news, though, is that Wells Fargo is having the Occupy fellow-travelers occupying its Denver downtown branch (deliciously ensconced in a high rise known as “The Cash Register Building,” a landmark where the author of this blog once labored) as part of a protest against one of Wells Fargo’s rivals, Bank of America. That protest is enough to confound even Occupy sympathizers like Denver Business Journal reporter Heather Draper, who’s a self-confessed big bank hater.

This member of the media is confused. You want to draw my attention to BofA’s shameless practices by protesting Wells Fargo? No wonder the message of the 99 percent gets muddled.

Don’t get me wrong. It’s not that I’m on the side of the banks. I’m squarely in the “99 percent” and I understand and agree with the need to draw attention to corporate wrongdoing.

But in this case, I’d say a BofA protest at an entirely different bank is confounding, at best.

Why, you may ask with good reason, is MoveOn.org picking on Wells Fargo for the conduct of Bank of America? I’m glad you asked.

In the way of explanation, the MoveOn.org email said: “While Bank of America’s CEO and shareholders meet in Charlotte, N.C., tomorrow, the 99 percent is taking to the streets across the nation to protest BofA. As the economy declined, BofA made millions in profits by dodging taxes and foreclosing on homes, which hit communities of color especially hard. Bad publicity is like kryptonite to big corporations — that’s why thousands of people are protesting, marching, and raising our voices in solidarity to draw the media’s attention to BofA’s shameless practices.”

[...]

“Since there is no BofA branch in Denver, we will rally again at Wells Fargo, the major tax dodging, home-foreclosing, job-outsourcing bank in Denver,” said the email from MoveOn.org.

That explanation caused Ms. Draper to “laugh out loud.” It caused me to wonder why MoveOn.org just doesn’t move on down the road…into a ditch or, better yet, off a cliff.

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Callousness Looms Large

The ICBA’s CEO, Cam Fine, isn’t happy about the most recent Bank Fail Friday Bloodbath. He calls it a sad day for main street. He also discloses a portion of an email he received from someone with inside knowledge of the way the FDIC takeover team treated the employees of the Bank of Eastern Shore, the only one of the five “too-small-to-save” community banks for which the FDIC did not find a buyer. Cam thinks that the email “speaks volumes about the kind of unequal justice under law and lack of respect that ICBA speaks out against when comparing the treatment of Main Street institutions and their management and staffs with Wall Street, too-big-to-fail institutions and their managements and staffs.” I’ll let readers draw their own conclusions on that point.

I wish I could share Cam’s sense of outrage. After 37 years of witnessing the truth of P.J. O’Rourke’s maxim that “giving money and power to government is like giving whiskey and car keys to teenage boys,” I’d be shocked if bureaucrats didn’t act like what many (but not all) of them are: the folks the jocks in high school stuffed in their lockers and the cool crowd wouldn’t talk to, finally getting their payback by using the power of a governmental position to treat others the way they’d been treated during their Wonder Years. Frankly, the only sane inmates seem to be those that escape the asylum. Many of those who become “careerists” support the astuteness of one of Dennis Prager’s observations:

The larger the state, the more callous it becomes… the colder its heart. It is also true that the bigger the corporation, the more callous its heart. But unlike the state, corporations have competition and have no police powers.

On the other hand, Prager’s assertion regarding corporations always being subject to competition is becoming uncomfortably questionable with respect to the big banks that the Occupy movements love to vilify. In today’s Housing Wire, Christopher Whalen criticizes the Obama administration’s proposed Homeowner Bill of Rights, and in the course of his critique, has some sobering words about what has become of “competition” among banks, at least with respect to the residential mortgage lending business.

The mortgage industry is comprised of a cartel of the four largest banks, which happen to be the largest loan servicers, as well as the owners of most second liens. Federal bank regulations reinforce the cartel structure of the secondary market for loans by allowing large banks to treat servicer and tax balances as core deposits.

This expanded balance sheet enables the large banks to hold equally big portfolios of mortgage servicing rights and also gives the top four banks — JPMorganChase, Bank America, Wells Fargo and Citigroup — a competitive advantage in dealing with the various federal housing agencies in the creation of mortgage-backed securities.

Thus, when a small bank wants to sell a loan into a securitization with a wrap from Fannie Mae or Freddie Mac, it typically sells the loan for as much as half the origination spread or more to one of the large banks.

The big bank then structures the RMBS that issues bonds to investors and retains the mortgage servicing rights. The large banks control the entire process, yet the Homeowner Bill of Rights does nothing to change this situation. Now you know why large banks seem to be more profitable than smaller banks.

Big government is callous, but so is big business. I think we’ve plenty to fear from both. Concentrating most of the mortgage business in the mitts of the Gang of Four cannot be a good thing for consumers over the long haul. Beyond the mortgage lending arena, in the banking business generally, the trend seems to be toward concentration in fewer, larger entities. To lovers of big government and big business, that’s all fine and dandy, I suppose. To the rest of us, however, that trend is troubling.

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