The New Untouchables: The Pecora Files
S2:E9 – Ignore at Your Own Peril
September 5, 2021

[00:00:00.000] – Kathleen Engel [intro/music]

I first started noticing what came to be known as predatory lending, and in those days it took a different form than what people think about predatory lending as today. But eventually, it morphed into what became known a subprime lending, which was not quite as bad as predatory lending, but still was really bad and triggered the great financial crisis.

[00:00:29.170] – Mayra Rodriguez Valladares [intro/music]

The idea that you’re going to be taught what a loan is and how interest can affect you, the fact that you need to learn about having a good clean record and a good consumer credit score, all those things are things that are just basically not taught, frankly, in most of America.

[00:00:48.680] – Eric Vaughan [intro/music]

In a world of elite criminals, only people of elite character can protect our system. This is The New Untouchables.

[00:01:03.620] – Patrick Lovell

So welcome back to another episode of The New Untouchables. And it brings me great pleasure to introduce our next guests, Kathleen Engel and Mayra Rodriguez Valladares. And today we’re going to introduce you to some, shall we say, continuity that might maintain the last two decades of really policy and revelations that unfortunately have still yet not to become mainstream understanding.

And I think that these two guests will go a long way to be able to make us understand how the more things change, the more things stay the same. So on that note, let me please start with Kathleen Engel. If you could please introduce yourself to our audience and kind of give us a little bit of insight into who you are.

[00:01:47.160] – Kathleen Engel

Hi. Well, thank you very much for having me on this podcast. I’m a research professor of law at Suffolk University in Boston, and all professors have an area of research that they’re engaged in. And mine has been financial services since about the late 1990s.

And what that means is that I’ve spent my career looking at every element in the chain that goes between a borrower who takes out a loan and the role of investment banks and investors in purchasing various financial instruments that are backed by the loans, that are secured by the loans. And in the mid-1990s, I first started noticing what came to be known as predatory lending, and in those days it took a different form than what people think about predatory lending as today.

But eventually, it morphed into what became known as subprime lending, which was not quite as bad as predatory lending but still was really bad and triggered the great financial crisis. So I’ve spent a lot of time researching, writing, and just thinking about the different steps in the process that led to the financial crisis. And today I spend time thinking about what other forces are at work that could lead to another economic catastrophe.

[00:03:08.440] – Lovell

Well, along those lines too, Kathleen, you’re also somebody who has been deeply involved with consumer financial protection, as well as just I think in general, looking out for people, not just consumers, but anyone on the downside of any type of prediction or abuse, or any manner thereof, that is seemingly a continuity.

We in our series had a great pleasure of working with Dr. Phil Zimbardo, professor emeritus at Stanford University. And it’s amazing. Sometimes when you start to piece together the pieces of the puzzle of what creates a financialized pipeline based on predation, it brings in just this massive amount of psychology.

And while that might not necessarily be your entry point, can you comment about, and I got to explore this with our audience from a standpoint that we have on tap for season two of The Con, an interview with you and your colleague Patricia McCoy where you reveal to us elements of what constituted, shall we say, the arrangement, by way of brokers in Northeast Ohio that constituted what seemingly is an engineered approach to predation.

Can you comment on what you found and when you found it and give us examples of what would be the routine, if you will, of that process?

[00:04:27.500] – Engel

Sure. So Ohio was a prime target for predatory lending for a number of reasons, one particularly Northeast Ohio, but the whole state had been a place where there was a tremendous amount of race discrimination in the purchasing of houses and in getting loans. And the law did not provide much protection against what we call UDP, unfair deceptive practices. So there had been a history of discrimination.

The laws were weak, and there was a lot of pent-up demand for credit and for houses. So what savvy brokers figured out that they could exploit people in this area, and the way they did it was by really old style door-to-door salesmanship. Makes me think about the movie Tin Man if people have ever seen it. So every day at our house, we got either a phone call or a flyer or somebody putting signs, littering signs on the sidewalk, and things like that.

And they picked my house because I happen to live in one of the only naturally integrated suburbs in the United States. So literally, my neighborhood was 50% white, 50% African American. So that meant that the odds that there was pent-up demand for credit was pretty high because it was an area that had been subject to discrimination.

So that was one piece of it. Another piece was that as a way to respond to blockbusting, which was the acts of real estate agents when discrimination became illegal, they would go into white neighborhoods and they’d say, “You better sell quickly because all the Blacks and Jews are going to be moving in here, and you better sell fast.” So what our town did or city was they did a number of things that were really great.

One is that they prohibited “For Sale” signs in front of houses because if people were afraid of integration and half the houses on their blocks had “For Sale” signs, they’d be sure to join the exodus. And the other thing they did is they invested a huge amount of money in schools so that people would be afraid that their kids would lose a chance to get a good education.

That was a very smart move. And the third thing they did is they had imposed rules on the exterior condition of homes in the city. Literally, people came and inspected your house like, I think, it was maybe every 10 years or five years. And whenever there was an inspection they found something wrong.

Like, we would not repair things on the exterior of our house just so we’d give them something easy to cite us for. And whenever there was a citation, it would get recorded down in the City Hall. And the brokers would go down to City Hall, and they’d find the people who had citations for very big-ticket items like you need a new roof or your garage is falling down or something like that.

That would be a big ticket. And the community was very racially diverse and also very economically diverse. You could have a 20 room house with a swimming pool, or you could have a studio apartment, and it had everything in between. So they would drive by, and find the houses that were in bad shape. They would get these citations from City Hall.

And then they’d really target those people with what looked like very sweet terms on the loans. But in fact, it was all a bait and switch. We would see houses that were refinanced as many as 20 times. And of course, by the end, the people would lose their homes. And oftentimes these were homes that had been in their families for generations because people couldn’t get loans so they couldn’t afford to buy houses.

But if a family member had been able to buy a home, it was kept within that family. And they usually didn’t have any debt on it. They owned it outright because it had been in the family for so long. But that meant that with each refinance, the brokers could rip them off more. So they refinance the loan and maybe they’d get $5,000 out of the loan.

But the fees associated with the refinance would be $20,000. You do that enough times, and you’ve destroyed these people’s lives. And that’s what they did. And that was what early predatory lending looked like. It was very targeted in specific places in the country. Parts of Western Pennsylvania were hit really hard. Ohio was hit really hard in particular. And so that’s how it all began.

And then the banks, the big banks, realized, wow, there’s a game here. We want to play this game, too. The brokers and lenders are making money hand over fist. So while this is all happening, my coauthor and I, Pat McCoy, said, “We gotta understand this. It doesn’t make sense. How can people make money if the loans ultimately go into default?” It just didn’t make sense. And so we began a process of trying to just answer that question to what we were seeing in the city of Cleveland.

[00:09:13.230] – Eric Vaughan

So it sounds to me you hear numbers being thrown around about the great financial crisis where, like, I believe it’s something like 65% of the wealth of African American homeowners was destroyed. And I believe it’s like 72% of, for lack of a better term, Latinx wealth was destroyed. Is this the mechanism by which that wealth was destroyed?

[00:09:39.040] – Engel

Yes. Some of it was directly through the loans that we’ve been talking about where people would lose their homes. And the major source of equity for most people, except the very rich, is their homes. And for people of color, it’s even a greater percent of their equity is their homes because they’re less likely to have jobs that give them huge retirement benefits and things like that.

So some of it was direct through home loss. But the other thing that happened is when the great financial crisis hit, people of color were more likely to lose their jobs. And so as a result, in addition to the home loss, they also had this huge decrease in their income. And so that then had another compounding effect on their assets.

[00:10:22.600] – Vaughan

So like in the case of Addie Polk, I believe her friend had mentioned that she needed some work on the porch and on the roof. And quite often, I am not necessarily sure if this is the case with Addie Polk in Akron, but quite often there’s like city ordinances that are involved right where it isn’t just like a matter that you need to get something fixed, but you could actually potentially lose your house to the city if you don’t address certain issues. And so the duress was really there for people. And so that made this even more predatory, wouldn’t you say? Is that accurate?

[00:10:59.740] – Engel

Oh, it’s very accurate because the people who needed a new roof or the porch was falling down or something, in most cases, it was because they didn’t have the money to do it. And then they get cited by the city saying, you got to fix this and they don’t have the money.

Now, some cities did fix these problems themselves, and they would then put the lien on the property so that if somebody was to sell the house, the city would get paid off that money. There were cases where cities would go in and actually foreclose on the property. They put a lien on the property and then foreclose on it to get the money.

I think most of the cities, at least in Northern Ohio, tried to refrain from doing that. But the larger point was, when the broker showed up at the door a week or two or maybe even a day or two after somebody got cited for not having a decent roof, it was like manna from heaven. What the people didn’t understand is that the brokers had figured out that they were desperate and showed up at their door, saying, “We can give you money cheap,” and they would be very sweet to them.

[00:12:08.200] – Lovell

I have to jump in here real quick because this is an incredibly important point. And it stuck with me from the first time that I met you, which is there was also an additional technique involved from them identifying the people. There was a way they could find these people to target them, was there not?

[00:12:24.080] – Engel

Yeah. They would go down to City Hall and they’d find that they had these violations. That’s how they would do it. When they were looking for maybe widows whose husbands had managed all the money and they didn’t know how to manage money, how to deal with house repairs, they’d go after them, too, looking, going through the obituaries.

[00:12:42.490] – Lovell

This turns the entirety of what I think people understood in the aftermath of the great financial crisis on its head, of course. The victims were planned, that people got involved with things that they didn’t know what they were doing. They got in over their head, and it was, of course, they figured out a way to pull some sort of crazy scheme on all of finance.

And I want to turn this considering finance to our other guests. Mayra Rodriguez, you’re an expert at the highest levels. You are a self-made woman. You come from humble, humble roots. Your family migrated here from another country. You’ve climbed your way to the very top of academia, incredible accolades across the board to the point that you wind up being a consultant with some of the most sophisticated financial policy that exists in the world and our country, of course.

Dodd-Frank comes to mind as well as Basel II and now Basel III. They’re frequently written in Forbes and so forth. When you hear what we just heard, can you please give us an echo of why that was so profound?

[00:13:44.910] – Mayra Rodriguez Valladares

Well, of course, I couldn’t agree more with Kathleen. And we really need 500 people more like Kathleen to be devoted to these issues. I think that there’s just so many causes, but this one big causes is, of course, that because of the way that our property taxes work in this country.

If you are working-class or if you’re poor, you end up in towns and villages where your schools are not very good. So the schools barely can manage basic subjects, much less financial literacy. Right. So the idea that you’re going to be taught what a loan is and how interest can affect you, the fact that you need to learn about having a good clean record and a good consumer credit score, all those things are things that are just basically not taught, frankly, in most of America.

And then when you have independent brokers or brokers within banks that come and they are very, very savvy at triggering emotions and saying, “Don’t you want a bigger house? Don’t you think your kids deserve better? Don’t you think you deserve better? And, oh, come on, you worked all your life. If you take out this loan anyway, you’re doing such a nice job keeping the house so pretty. It’s going to go up in value.”

And so there’s a lot of cultural factors they play with. They’re savvy at going to City Hall and getting data about you. And next thing you know, the person is taking a bigger loan than they should. They don’t understand how the interest is going to affect you. How default stays on your credit report for seven years.

And now, not only will you have a really hard time not getting a loan ever if you were to default, now you may not even be able to get a job or be able to buy an apartment because now so many different employers will ask you for your credit score. So you have little financial literacy, little education for a lot of communities, not just people of color.

And then on top of that, you have either very weak bank regulations or supervision. So the regulations now since 2010 after the financial crisis, a lot has improved, but not necessarily the enforcement always. And then you have now a lot of institutions that are not banks, so they’re barely regulated. And so then they can find ways to be lending to new Americans, undocumented workers.

And so it really is a horrifying problem. And unfortunately, not only is it immoral, it really actually is detrimental to the American economy. I mean, there’s trillions and trillions of GDP here that are not being produced – if we had better education, if we had financial literacy, if we had regulations, and if they were properly enforced.

[00:16:31.230] – Steve Grumbine

Absolutely. I just want to thank you both for joining. I guess I want to throw this out there. A lady named Dr. Keeanga-Yamahtta Taylor of Princeton wrote a book recently called “Race for Profit.” And it’s won a lot of awards. It really specifies the predation that occurred immediately after the redlining era and the way that they would lure people in – single moms that didn’t have any money, people that were really easy prey for bad situations.

And they would sell them houses that should have been, quite frankly, condemned. They passed them through. They were allowed to sell these houses, and they couldn’t afford the repairs. And then because they were backstopped by the federal government, they had no problem not only kicking them out, but then returning and selling the exact same house in the exact same condition yet again and again to the point that was made earlier.

And I guess my question to both yourself Mayra, and to you, Kathleen, is does this constitute intent? Is this not the business model? And does this not rise to the level of criminal intent?

[00:17:40.180] – Engel

Well, there’s two kinds of intent, right? There’s civil intent and criminal intent. And trying to get any of these folks criminally charged has been pretty impossible, except for when they’ve engaged in outright fraud. I know less about what was happening in the real estate market, and I hope Mayra knows some of that.

I know more what was happening in the lending market, but that was clearly intentional exploitation. One of the stories, I hate to say it’s my favorite story, but one of the most compelling stories I ever heard was a broker who when he started to work for a company, he was given an appointment to go to a photography studio.

And they took a lot of pictures of him – one was with an elderly couple. He was a white guy. It was with an African American woman and the biracial children. And then another one was with a couple where one of them was in a wheelchair. And he got all of these pictures, and he got him in little wallet-sized photos and then big glossies for his office.

And whenever he went somewhere, if somebody fit one of those profiles, he would open up the billfold and say, if it’s an elderly couple, “Oh, my goodness. Feels so nice just to be with you. You know, my parents were killed in a car accident when I was young, and I was raised by my grandparents. And you’re just reminding me of them. They were so loving and caring to me.”

And then show a picture. And when it came to the closing, the same glossy picture will be on his desk. That kind of stuff happened all the time. That is deliberate exploitation and praying on people based on their emotional vulnerabilities and feelings. And the net result was a tremendous wealth transfer for the people who were the most short on money to the people who had the most money, which ultimately was everybody involved in the securitization of the loans.

[00:19:36.580] – Lovell

Mayra, how does that play out from your vantage point?

[00:19:39.520] – Valladares

You know, Kathleen said the exact word which is securitization. One of the greatest things about the United States is the fact that it is such an incredibly diverse financial sector. We have all kinds of very intricate capital markets, instruments, securitization certainly being one of them.

And so when bankers and other financial institutions, when they are responsible and not praying on people, being truthful, the kind of financial sector that we have and the instruments that we have are incredibly useful for many of us as individuals or as companies to reach financial objectives. However, it’s a double-edged sword.

So banks knew that they could lend money to anybody. They barely did the due diligence on whether people really could repay. And many, many brokers within banks had no problems exaggerating the benefits to taking out a bigger loan with a higher rate and all that because they knew that the bank was not going to keep the loan, it would be selling it.

It would be created into this product called the Securitization Mortgage-Backed Securities. And then you had a huge appetite from around the world for these kinds of instruments. And so bankers will often tell you, “Oh, it’s a risk transfer. We’re transferring our risk. We don’t have the risk.” But what they’re not telling you is that the way that they get people to take out the money to borrow often is in a very, very predatory manner.

The language is complex, even to those of us who are fortunate to be educated. The language is not plainly written in these contracts. So you sign all these loans, the next thing you know, a year later, your interest rate is doubling and you’re starting to have a difficult time paying.

But there’s just not enough political will, frankly, in my view, really often on both sides of the aisle to really make this a focus, to educate people better from the very beginning and to focus on financial literacy and then to have serious enforcement against anybody who’s predatory. And the problem is that so many of the people who are the judges, the lawyers, if they see a banker who is white and well educated and is caught for committing fraud or for predatory lending, often those very people who are supposed to be enforcing the law think, “Well, there for the grace of God go I.”

They feel sorry for the criminal. And so it’s very hard to even bring any kind of enforcement action on any of these brokers, these lenders. And if they finally actually even get to a court, the likelihood that they’re going to be sent to jail or fined or anything like that is incredibly, incredibly low likelihood. And so people are comfortable that they can get away with these things, and they do it because everybody else does.

I often ask people, “Don’t you feel sorry?” Everybody else does it. What’s the big deal? And there are damaging consequences because if you damage the livelihood of one person, now they have absolutely no wealth to transfer. And so that’s why you have generations and generations of people in underserved communities, often people of color, they have nothing to bequeath to anybody else.

So it’s really, very, very difficult to jump from being poor or working class to even being middle class, not to mention being in the wealthy echelons of this country.

[00:23:20.890] – Engel

Just to add something to what Mayra said. I agree with her completely in terms of everything. And all the studies that have been done following the crisis and the high rates of foreclosure have shown, even among people who were middle class when they lost their homes, they have a lot of adverse health consequences.

The children’s educations are disrupted, which we know has a big impact on learning further down the road. And there was a dramatic increase in the number of people in homeless shelters all over the country. So we know that these consequences are not just the home loss, which is a huge consequence in and of itself.

And the other thing is that there is this mantra, I would say, among industry that what they did is they developed complex loan products to be able to give people more options. And one of the examples they would use is, say, somebody’s in the middle of a Neurosurgery Fellowship, and they’re making a hundred thousand dollars a year, but once they finish the fellowship, they’re gonna be making a million.

It’s good to give them a loan that’s for three years fixed rate at a low rate, and then it becomes adjustable, or a loan where they don’t even have to pay interest for the first three years, the interests gets added on to the principal – and that’s their example. Look, we’re giving these people choice who otherwise wouldn’t.

And that if you’re going to give people choice, you have to have products that are complex because the straightforward products of 30 year fixed rate loan aren’t the best option for many people. So what they did instead is they didn’t go after the Neurosurgeons. They went after the people who couldn’t understand the complexity.

And I promise you, if I showed you one of these loans, like a pay option loan with a prepayment penalty and credit life insurance, you would have no way to figure out what this was really costing you in ten years, 30 years, or whatever it would be. And that’s what was being marketed to the most vulnerable people, especially at the beginning of the predatory lending period.

And later on, they moved up in the income levels and went after other people; and that was during the period of loans being made to people who were higher income but low equity, few assets. So the response of industry, it’s just disingenuous to say that people want complexity and that they’re giving people choice.

[00:25:44.950] – Valladares

It’s disingenuous, and it is just so detrimental. When somebody who’s supposed to be educated and who has been trained to talk to somebody about a loan, they spend so much time talking about the great advantages of the loans. They’re not really explaining the risk. They’re not saying “Yes, in three years, when the interest now resets, we could be in an environment where interest rates have gone up a lot.”

And what does that mean in plain English? You Miss Bar have to pay more. And if that person now can’t pay, now you’re talking about defaulting and ruining your consumer credit score. And Kathleen points out something that’s very important. It makes me so upset when I hear bankers say, “Well, yes, banks defaulted,” or “banks had to be rescued by the American government. But the banks repaid everything.”

But the US Treasury didn’t pay those people for all the screaming they did at their kids or the starting to drink too much or doing drugs. In other words, when you are defaulting on your loan and you’re losing your home, there’s a lot of different psychological things. There’s these social ills, and nobody’s put a price on that. What about the kids who grew up in that era terrified that their dad or mom were going to lose their jobs, lose their home, some of them did end up homeless.

[00:27:07.290] – Grumbine

Suicide?

[00:27:08.300] – Valladares

Suicide? Absolutely. What about those people now who have grown up with a father or a mother who committed suicide? I’m not seeing US Treasury, and I’m not seeing banks pay those people. Is there payment for that? And that trauma or even stress, either stress or trauma, then gets passed on to the next generation.

And so these decisions about how to lend, and to whom to lend, at what rate, what kinds of regulations to have, have very serious impact on ordinary people. And so this idea that you have to create complex products, yes, maybe for a big asset manager, but not for the vast amount of Americans who have no idea how detrimental these products can end up being and affect their day-to-day lives.

[00:27:58.320] – Engel

And the conflict products actually made it possible for lenders to market products that had very low initial monthly payments.

[00:28:07.220] – Valladares

Yeah.

[00:28:07.220] – Engel

And so they would sell the monthly payment and what the borrowers wouldn’t realize that in as little time as 90 days, their payment would double.

[00:28:16.680] – Valladares

Yeah.

[00:28:16.680] – Engel

And then the broker was gone. Right? And so that’s what the loans actually facilitated exploitation. And just one other PS to Mayra’s excellent comments is that it’s also what happened to the communities, to the cities. The city of Cleveland had to tear down tens of thousands of houses that were foreclosed upon.

This happened all over the country and the Southwest and parts of Arizona had massive numbers of teardowns. Now, part of it was because the housing stock was getting old, but that’s just one piece of it. The real problem was that these lenders were going in and essentially bulldozing entire communities with these loans. And there’s no way for the cities to get compensated for that.

There are lawyers who have done a very good job trying to recover on behalf of cities. And with very few exceptions, they’ve all been unsuccessful. In Cleveland, there was a lawsuit brought and it was like a hot potato. Every single federal judge who got the case would recuse themselves for some reason until they’d gone through, like, five different judges. Nobody wanted to touch the city’s lawsuits against the investment banks and other commercial banks.

[00:29:33.160] – Valladares

Right. Because then, as a municipality, do you really want to be going around suing any bank when the municipality may have to take out a loan later or might have to issue debt? And banks have an enormous amount of power with municipalities.

And then also, one of the things that you talked a lot about, Kathleen, is all these different lenders, often people don’t understand that the actual person who’s dealing with the explaining to the ordinary American what this mortgage is, often they don’t even work full time for the bank, often they’re subcontractors. Right?

And so banks could often say when they were caught, they’d be like, “Oh, well, that person didn’t work for me.” No, but you subcontracted that team. And so you should be wholly liable for when those brokers lie or misstate anything about the loan.

[00:30:28.380] – Intermission

You are listening to The New Untouchables, a podcast brought to you by a collaboration of the creators of the docuseries, The Con and Real Progressives, a nonprofit organization dedicated to teaching the masses about MMT or Modern Monetary Theory. Please help our efforts and become a monthly donor at PayPal or Patreon, like and follow our pages on Facebook and YouTube, and follow us on Periscope, Twitter, and Instagram.

[00:31:21.160] – Vaughan

So, it’s really interesting what you were saying about how cities are basically in a position of being blackmailed by these investment banks. We actually interviewed a former Mayor of Richmond, California, who was trying to enact a program of eminent domain on some of these houses where they would take them, and then they would go and try to get people back in their home.

I can’t remember exactly which bank it was that they were dealing with, but it became quite clear that they basically said that you need to stop doing this or else you are never going to get another bond again. And there’s no other word for that than blackmail.

Now, the other interesting thing was in this issue of complexity, Bill Black, I think, said very recently in an interview that we did with him that one of the telltale signs of fraud is complexity, because this is a simple transaction – lending money. There’s nothing complex about that at its heart, and so when you start seeing that complexity, that’s a red flag.

And so that was really interesting. And then the other point that you brought up that really struck another chord was in talking about these brokers. So we know that so many of these brokers were chosen precisely because they had zero experience and education in finance or mortgage lending or any of these things.

And so even if they were right there with that pay option, alphabet soup loan, they probably wouldn’t even have the slightest idea what that loan would look like three months down the line. And so it seems like with all these different pieces that they knew what the answer was to get these loans through at every turn.

[00:33:06.880] – Valladares

You’re absolutely correct. I actually had a situation which I think for a lot of people could have been very dangerous. In 2006, I was buying an apartment in New York City. And so when I met the real estate broker from one of the largest banks in the United States, I showed up with all my documentation ready to prove what is it that I want to buy, and can I afford it.

And the broker immediately said to me, “Oh, you don’t need any of those documents.” I’m like, “What do you mean? I’m here to borrow money. So I need to show you my earnings. I need to show you my savings.” He said, “Oh, no, no, you have such a good credit score, we have no income verification loan for you.” Long story short, the rate was good.

Obviously, you all know that this is a bureaucratic process, but I finally signed the mortgage, etcetera, etcetera. And when I knew for sure that everything was kosher, I had signed everything. The loan was mine. I sat down with this young man and gave him a free 30 minutes credit risk class that he never should have lent me the money. Right?

Because, yes, I had a good credit score, which means I had never defaulted, or at least I had not defaulted in seven years. Right? Because that’s what stays on your record. But that report said nothing about my income, nothing about my savings, investments. And I tell you this personal story just to show imagine anybody else who would have been like, oh, this sounds great.

And he was trying to convince me to take out a bigger loan. And I said, “No, I don’t need it.” But a lot of other people would have found themselves roped in – into “You’re right. I’m doing well. I have a job. Let me go ahead and borrow $600,000 as opposed to $400,000, etcetera, etcetera.” And then, like Kathleen said, you’re offered a loan where T for the first year.

The teaser rate, right? Is really low. And next thing you know, you’re taking out more money than you should at a really low, sexy rate that’s about to balloon in a couple of months or a year. And now, by the way, you’ve lost your job because of the systemic risk where when you start to have a downturn, all kinds of people start to lose jobs.

And now you can’t afford it. And you really need to improve not just the regulation, it’s the enforcement. And to actually put people in jail when they commit these kinds of things or to really, really fine them, because otherwise, most people think, hey, this is a numbers game. What’s the likelihood that I’m going to be caught?

And that’s how you start to do this, and you cheat one person. And that may have been tough, but then you do the next one. And next thing you know, this really does become your way of doing business.

[00:35:39.720] – Lovell

Well, and to that point, I want to remind our viewers again, we have two of the most prescient experts from their respective fields that are giving you the inside view from literally the bottom to the very, very top of how this situation operates. And I have to bring this full circle to create a dialogue between the two of you.

Because, Kathleen, another element of our interaction with you that reveals to me that makes the hair on the back of my neck stand up when I think about this. But we think about regulation. We think about policy. We think about like Mayra brought up before political will. And there’s policy baked in across the board to protect the consumer as does laws to protect the citizen.

And in this particular case as it relates to where I’m trying to go with this question to bring it all full circle is that we know that there was HOEPA statutes, Homeowner Equity Protection Act, that the Federal Reserve was responsible to rein in. And we can talk about the low-interest rates.

We could talk about how the fervent action within the markets led to this incredible everybody chasing this gold rush to try to get as much and much into the pipeline because warehouse-like . . . We deconstruct most of that in our series. But what we haven’t been able to get to just yet and we are going to in season two is you guys, because of the information you were able to glean that you and your partner, Patricia McCoy, made clear in your revelations up the food chain.

This got to Ned Graham, like on the board of the Federal Reserve, who went directly to Alan Greenspan, who was where the buck stopped, literally with regards to being able to put an end to this. Can you please put that into perspective for our viewers? And then, Mayra, obviously a lot for you to unpack.

[00:37:25.820] – Engel

When the markets are going well, regulators often sit back. That’s the time to go play golf. And there were signs that this exploitative lending was emerging very early on in the late 1990s. There was testimony before Congress about the predatory loans that were decimating neighborhoods. And there were a number of efforts in Congress.

This is prior to the crash, prior to Dodd-Frank, and all of that to get a bill through to protect consumers. And the Democrats didn’t get past the Republicans and get a bill through. But the good news, bad news is that the Federal Reserve had the power to issue regulations under what’s called their UDAP authority. That was in the law Patrick just discussed HOEPA.

And the interesting thing about this provision in the law, it said that the Federal Reserve shall. It didn’t say can. It was shall issue regulations to protect consumers for unfair and deceptive acts and practices. And Alan Greenspan said, “We will never issue any regulations under this provision.”

So this was an act that passed Congress, the Senate, was signed into law by the President, mandating that the Federal Reserve Board of Governors protect American homeowners from abuses. And Alan Greenspan said, “no, I’m not gonna do it. I’m not going to do it.” So it goes to what Mayra was saying about enforcement.

Here was the agency that had the power to nip this in the bud, and they didn’t. And it wasn’t just Alan Greenspan. At that time there were three different federal bank regulators. And the bank regulation, at least in those days, was pretty confusing, but essentially, banks were subject to different regulators. And those regulators have the job of supervising them.

And the supervision included not just the risk to the bank going under, making bad financial decisions, but also protecting consumers from wrongdoing. And the banks, particularly two of the federal agencies, the Office of the Comptroller of the Currency and Office of Thrift Supervision got into a competition with each other.

The agencies get paid by the banks that they regulate. And each of them always wanted to get more banks because the more banks they regulated, the more money that they made. And so what they did is they fought for banks to change who their regulator was, and banks could do that by a formality involved in changing their charters. And it was a race to the bottom.

They literally were going to banks, especially the Office of Thrift Supervision saying, “Switch your charter to us and we’ll regulate you less.” There’ll be an advantage here. So they were gone. So it was as if it was a period of anti-law. It was the opposite of having a regulatory regime – it’s anti-regulation. And then after there was this huge collapse, Greenspan said he never saw it coming.

[00:40:37.390] – Valladares

Incredible is that a lot of people often have the stereotype that lighter regulation or deregulation happens under a Republican administration. And this is actually going on during the Clinton administration. You had remember Brooksley Born who wanted all of these new, at the time, credit derivatives, other kinds of derivatives which are supposed to be instruments to help lessen the risk for financial institutions or for corporations.

She wanted them regulated. And Mr. Greenspan, Mr. Rubin, let’s not forget him, all were giving her such a hard time. And when she was testifying before Congress, it was this whole idea – no, no, no, we don’t want to lose American competitiveness. We don’t want all this regulation, free markets. And so they raised the Boogieman of if we have all this regulation and the Europeans and the Asians are going to beat us in banking, etc.

And this really caused a tremendous amount of damage. Kathleen is pointing out something that people don’t usually talk about is just the complexity of all of these different financial regulators we have. Right. We have national bank regulators. We have 50 state bank regulators. Then we have the SEC. Then we have the Commodity Futures Trading Commission.

And so often people don’t even know. Well, wait a minute. If I think somebody has made an error related to my credit card or my loan, where do I go? Right. We now a lot due to people like Kathleen and Senator Elizabeth Warren, we have the Consumer Financial Protection Bureau. So now more and more ordinary Americans are finding out that that’s where they can go if they feel that there’s been something predatory, but not in those days in the 90s.

And often part of the problem in those days, especially some of the regulators competed with each other, and so many of them became way too friendly with the banks, with the very people that they were supposed to be regulating. Examiners having drinks with people at a bank after work. No, you don’t do that. You don’t have to make an enemy out of them.

But they’re not your friend. As a regulator, you are there to regulate for the safety and soundness of the banking system and ordinary American people. That’s your job. It’s not going out for drinks with regulators. It’s not competing with these different regulatory entities. And so it really is something that now is better than it was in the 90s, but we still have a long way to go in terms of really educating Americans and having enforcement against those kinds of banks or now the non-banks, the private equity, the hedge funds, all these other institutions.

Ordinary Americans need somebody to really stand up for them, not to be standing up for politicians or the heads of all of these different kinds of financial institutions.

[00:43:23.500] – Vaughan

So you brought up Brooksley Born, and that was when she was ahead of the CFTC, I believe.

[00:43:29.650] – Valladares

Yes. Correct.

[00:43:30.440] – Vaughan

So one of the things that happen during those hearings was Long-Term Capital Management basically going into crisis for exactly the reasons that Brooksley Born was talking about during those hearings. And it was enough to put the dogs at bay briefly. And then I believe it was just a year later that they went in and they completely reversed everything that was briefly won at the end of those hearings. What does that tell you about what we’re up against?

[00:44:03.960] – Valladares

Sorry to have interrupted. Obviously, I get very passionate about these issues because as much as I love finance, as much as I love the many great benefits that we can have in this country because of the diversity of financial institutions that we have. When things work well, they enable individuals and companies to achieve our objectives.

That’s one of the main reasons that the American GDP is so large. However, we have to keep sight that these financial intermediaries really are supposed to be serving people. They’re supposed to be serving companies so that all of us share in financial success and financial pie.

And the Long-Term Capital Management is a great example of an institution that had some of the greatest minds, right, that a Nobel Prize-winning economist there, and it went under in 1998. And they had severely underestimated the level of risk that they had with Russian Treasuries, with other emerging market assets. And guess what?

Long-Term Capital Management was barely regulated because it’s not a bank or an insurance company. The Fed wasn’t responsible. My former bosses from the Fed actually had to go to Connecticut when they found out that there were problems with LTCM. And they were shocked the level of risk that institution had had because, yes, they worked at the Fed, which is where I started my career, but they had never seen that level of risk and leverage because it wasn’t a bank.

It wasn’t under the Federal Reserve. And that’s how you can have an implosion like Archegos now or those kinds of institutions because when they’re not a bank, when they’re not a depository institution, when they’re not an insurance company, they are barely regulated.

And yet their detrimental actions, their excessive risk-taking does come back and haunt ordinary Americans that have absolutely nothing to do with these financial institutions. They’re not being invited to the party, right? They’re only called upon to bail out institutions or they get hurt by the way that some of these institutions transact securitizations, derivatives, etcetera.

[00:46:08.520] – Grumbine

I want to bring this back to the race to the bottom for a minute. So much of our focus at our nonprofit Real Progressives focuses on the role of federal finance, state finance, municipal finance, and the exchanges in between. And we see over and over again states and municipalities making decisions. It may be our very short term with long term horrible consequences, things like asset inflation to get the tax revenue higher, a host of things, and so states have a tremendously heavy burden on them as it is right now.

But I guess what I’m trying to say is we know that the scenario that you laid out so well in this interview so far, you could see the building blocks of intent, the complexity. Regular Jane and Joe Public probably would be absolutely blown away with the complexity as they look at these documents as they enter into agreements that they don’t understand.

And so the predatory nature of this entire scheme end to end can sometimes dazzle people because of all the words that we’re using, all the concepts of the Federal Reserve, the federal government, the local government. But I think the point that I want to draw out of this. There was a study in the UK a few years back that said austerity is social murder and social murder still takes a life, even though it was not done with a gun, it was done via policy, some form of way of making the poors suffer more.

And in this particular case, I see this: why aren’t more people up in arms about it, in the streets about this ready to take this battle on? And I would say it starts with complexity. So let me flip this into simplicity for a minute. These people whose lives have been significantly impacted, whether it be just quality of life or actually loss of life, is there not a case that could be made debt by proxy?

People have committed murder. Could you not make the case based on that social murder concept? That the very act of predation in these cases I feel that there is a strong, compelling case to show that these white-collar crimes are not victimless, that they are, in fact, a form of violence against people that are the most vulnerable and incapable of defending themselves. Can you expound on that?

[00:48:40.220] – Valladares

I’ll let Kathleen handle the law because that’s her field. I’ll make a couple of comments on what you said. One is your question of why aren’t people out there? Why aren’t they up in arms? You know, that’s a great question. I think a lot of us have been educated and trained to think, “oh, revolutions and those kinds of things happen over there, emerging markets, not in a place like the United States.”

I think a lot of us from the womb are told that this is the land of opportunity. Right? And so a lot of people I’ve talked to when I say, “how did this happen? How did you get into these products? How did you end up with this loan?” Often end up blaming themselves. “Well, I didn’t understand. I didn’t get it, etc.” So I think that’s part of the issue.

And I think that you have a lot of Americans who are living paycheck to paycheck, and they’re busy trying to figure out how to feed their kids and how might they get to send their kids to college. And then you have a lot of stress, the less money you have. So there’s all kinds of marital issues and things like that. So who has time to go figure out  Wait a minute? Why did this happen?

I didn’t understand. There was a complexity in a loan. I think that due to the tragedy of Covid, a lot of these issues are now really facing us, and we can’t hide anymore, that there’s a lot of people who have been left behind by the great third technological revolution. There’s a lot of people who are not able to get the job, not able to get the education that they want.

So I think you have, of course, the murder of George Floyd, so all of these racial problems, all these things now are out there. And so we’re not hiding anymore. And so I think it does worry me that the more you have predatory lending or the more you have private equity to barely regulate it, that goes in, loads up companies with loans.

And then those companies fire people. Thousands of people have been fired from private equity-owned or private sponsored companies. And so I think that’s my fear is that now people will be angrier. They will take to the streets. And that’s not what we should be having in the world’s largest economy. We should really be having politicians from both sides who really improve laws where there’s gaps and where judges really enforce the laws, because otherwise what’s the point of a law?

I’ll let Kathleen take it from here. But we need serious enforcement. We need people who don’t feel sorry for white-collar crime. We’ve been trained to be afraid of the brown man or the Black man who might hurt us physically. If you look at everything we ever see, those are the people we’re afraid of.

We’re not told to be afraid of the banker lurking in the dark, ready to push a fraudulent loan on me. And so there’s a lot of psychological issues there. There’s a lot of racial issues, unfortunately. So even if I’m told hey, so and so is committing this much fraud, and it really actually causes serious damage to the economy, most people are not going to lose sleep over that.

They are going to lose sleep over hearing that there’s a criminal out there who might hit me. And the damage is far more when you have people destroying entire towns, like in Kathleen’s example earlier.

[00:51:51.320] – Grumbine

I would say just to this point, that when politicians do not act on behalf of the people, when they take away the chance for peaceful resolution, they make non-peaceful revolution. It’s the voice of the oppressed, and that is what you’re going to end up seeing, I’m afraid, if we don’t take this seriously, and unfortunately, we can’t put this task on the poor to defend themselves.

It’s going to require people who are reasonably comfortable in life to actually step out of their comfort zone, skip brunch and skip the mimosas and actually put themselves on the line to make this happen, because those people, as you said, are living paycheck to paycheck. To ask them to bear the brunt of this industry, while also bearing the brunt of taking it down, I think, is an ask too big for any human being to bear.

[00:52:44.460] – Valladares

Well, I mean violence, begets violence. And so, again, I really do firmly believe that this all begins from educating people from free kindergarten, telling them that they have a responsibility to vote. It’s a privilege to vote. We should be civically engaged, and you need financial literacy. This is not everything we need in this program.

Obviously, we have limited time, but without education, without financial literacy, specifically, it’s hard for people to understand that white-collar crime causes so much more damage to the economy. What does that mean? Those things Kathleen and I have talked about – you lose your home, you’re stressed out.

You now drink more. You do drugs, violence, et cetera. There’s all those issues that have come about from people losing their homes, and that’s not what Wall Street is talking about. And so we need to focus on those issues so that everybody can be part of this great economy, not just that top one or 2%.

[00:53:42.670] – Engel

There’s a more theoretical way to think about it and a more practical way. If you think about what was happening in the financial markets, the investment banks, they knew what they were doing. People who have read Michael Lewis’s book know that they were betting that the market was going to crash, and they were already thinking, how can we get around this?

We know there’s gonna be some regulation imposed on us, and we’re going to be restricted in our gambling that we’re doing with people’s money and welfare. And the hedge funds took off, private equity. Now we have Fintech almost completely unregulated lenders – that was in the works before the crisis happened.

There’s a lot of creativity and a lot of money in the financial world, and they prepare for disasters. And if the disasters don’t happen, that’s okay. The preparation will be good anyway. But we as a society, those of us who are not in Wall Street, we’re victims, and we don’t prepare for it. There hasn’t been, for example, a strong consumer movement, really, since Ralph Nader.

[00:54:47.550] – Valladares

Right. Nader.

[00:54:49.520] – Engel

And full disclosure, I’m on the board of Consumer Reports. And Consumer Reports is the largest consumer organization in the United States and certainly cares deeply about protecting consumers. But it can’t go it alone, and there are other organizations. And so there’s this sort of difference in perspective. We’re running to keep up with what’s happening to us.

We don’t have the money or the time or human power to be able to think about what are we gonna do when all the entities that are financing subprime auto loans that are basically unregulated because they got an exemption in the Dodd-Frank Law because they give money to politicians so they can be safe from regulation, when they start to go belly up, what do we do?

So that’s I think part of the problem. And then the second problem is something that came to, like for me during the Occupy Wall Street movement. A guy who’s a professor at Harvard who teaches political organizing and social change said to me, “I need you to come up with a slogan for what we need to do to address what happened.”

And I would come from things that had words like securitization in it. I mean, I just couldn’t find it. I couldn’t even do it in 10 words. So we need to find a way to mobilize people and find language that’s compelling. Black Lives Matter is a very good example of coming up with a slogan backed by a popular movement that then made the movement even bigger.

And we haven’t done that yet. And unless we do that and get people to really sign on in those ways, we’re not going to be able to anticipate things like this and protect ourselves against them. And hopefully, we will be able to overturn Citizens United through legislation. And that’ll make a big difference.

That’s the lawsuit that allows corporations to give as much money as they want to politicians, which seems counter to every idea of democracy that I was ever taught. But also, we need to be coming together more from diverse groups, all of whom have been ripped off by Wall Street and other large corporations and find that place of commonality and work together.

It’s almost like the Rainbow Coalition came too early. We weren’t ready for it, but maybe we are now. I suffer from a ridiculous amount of optimism, but I’m going to stick with that for now.

[00:57:15.350] – Lovell

I am so grateful that you just brought that up. And I was reminded of a few things while both of you were bringing us to a conclusion of this really enlightening dialogue. So first and foremost, thank you for joining us. The entire purpose of everything that we’re doing is to bring to attention what I believe and what Eric and obviously, Steve believes is central to breaking through what has become, obviously, this fractured polarized insanity that the wheels have fallen off. Right?

And particularly I was watching . . . and I know we were all gobsmacked when we watched the insurrection of the capital, but we also know since then that there was a lot of people from the white working class that might not necessarily be Nazis and that sort of thing, but yet that were impacted by the great financial crisis.

They may have lost their homes, they may have gone bankrupt, may have lost their jobs. That’s one side of the equation. Of course, Black Lives Matter is certainly incredibly complex, particularly when you consider the kind of systemic racism and everything involved with that.

But to your point, that’s why in The Con we start with Addie Polk, a 91-year-old African American widow who was targeted in the way that you so eloquently laid out for us, Miss Engel, and she had no idea what was happening when they came to evict her. So she committed suicide. She shot herself, and she died later. Tragic, tragic.

But we connect her to the collapsed working class, because this entire operation was get as many people in the loans as possible and then sell them around the world to pensions, to people who worked. And, of course, we know anybody who has been associated with the Midwest, particularly that the Golden Goose was wiped out years ago.

We became a service economy and the United States is something completely different through financialization over these years. But in that context, what this entire process is is to create a peoples’ hearing on all the elements that took place that seemingly has not been portrayed to the American people in a concise way, unlike my point here.

But I’m getting to it, which is we believe that we’re creating a civil rights like movement to purge corruption, and that’s all of us to somehow be able to find a way to be informed, to be dynamic, to hold our leaders accountable if we indeed live in a democracy. And I’ll finish with that. No more grandstanding, but I leave it to you guys. Steve, could Miss Engel have nailed that more importantly, given everything that we’re attempting to achieve here?

[00:59:40.160] – Grumbine

Absolutely. She did fantastic. I hope you all know how much I appreciate your time here. I think that from my angle, people don’t take this seriously because they think it happened in 2008 and 2009. They don’t realize it’s happening right here still. And I think a lot of people think it’s someone else that it’s happening to not them.

And so tying together the real life struggle that comes out of this gives a way to make regular people take a moment and say, wow, okay, I see what’s going on there. To me, it’s tying that personal with this monster known as finance.

And there’s got to be a way to tie this anti-corruption movement to where people are, to what matters to them when they’re sitting at the dinner table, when they’re with their kids at the baseball field. And I just want to thank you both very much for being so eloquent in the way you presented the information. Thank you.

[01:00:36.440] – Engel

Thank you.

[01:00:37.370] – Valladares

Thank you for focusing on this – very important.

[01:00:40.920] – Grumbine

Absolutely. Alright, well, with that, thank you all very much. This is another episode of The New Untouchables, and I am thrilled to death that we’re getting this information out there. So thank you, ladies, very much, and hopefully, we can talk to you soon.

[01:00:57.720] – Ending credits

The New Untouchables is produced by Andy Kennedy, descriptive writing by Rose Ann Rabiola Miele, and promotional artwork by Cristina of Paradigms and Revolutions Design Group. The New Untouchables is publicly funded by our Real Progressives Patreon account. If you would like to donate to The New Untouchables, please visit patreon.com/realprogressives.

Mentioned in the podcast:

Kathleen Engel and National Association of Consumer Advocates

Philip Zimbardo

UDAAP

Dodd-Frank Act

Basel II and Basel III

Keeanga-Yamahtta Taylor

HOEPA

Brooksley Born

Long-Term Capital Management

Archegos

Michael Lewis on NPR

Michael Lewis: Inside the Collapse

Fintech

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