Would mass suicide affect student loan practices?

May 11, 2010

By J. DeVoy

Earlier this week, 60 Minutes tackled the hard issue of strategic mortgage default.  In these situations, people capable of paying their mortgages despite being badly upside-down on their homes – owing far more than they’re worth – simply walk away from them.  While government loan modification programs are available to those who have lost jobs and suffered other economic hardship, creditors are refusing to offer interest or principal reductions to people who are capable of paying their mortgages.  So far, this latter group has been unable to cause any change in public or private policy on loan modifications, despite the group growing by the day.

In the 2005 Bankruptcy Code revisions, student loans were made non-dischargable in bankruptcy.  Now, as noted in a recent Frontline episode, the government administers all Federal student loans, which were previously available through private banks and lenders.  The episode further explains that Federal loans can be attached to wages and tax returns if not paid, and will follow the borrower everywhere… except into the grave.  Federal loans are discharged upon death.

For graduates returning home to live with their parents, jobless and adrift, one consequence may be depression and long-term psychological effects.  Given the above-average cognitive abilities and self-awareness of college graduates, it seems more likely than not that they would suffer these effects more than the average person.  In one particularly sad story last year, one attorney committed suicide upon learning of his layoff

Suicide is a serious matter that shatters families, ruining the lives of those left behind, and thus it is not invoked lightly.  With graduates from the classes of 2009 and 2010 now entering the worst job market anyone can remember, and competing with people a generation older for entry-level positions, the future clearly is bleak for them.  Coupled with a black swan environmental disaster that has profound implications for the long-term cost of oil and the growing sovereign debt default crisis, the makings of a double-dip recession are moving rapidly into place.

Even with the benefit of programs like Income-Based Repayment, the interest and principal of student loans will continue to grow for recent graduates.  Despite the program’s vaunted 10-year forgiveness feature for government and public interest employment, such jobs are extremely selective or nonexistent as state governments slash and burn various departments with layoffs, furloughs and forced attrition.  The social and egoistic cachet conferred by a college degree may also preclude graduates from seeking work in blue-collar or service fields; some may cite the desire to preserve themselves for a “career-track” position, while others’ pride may come in the way of taking a job that doesn’t make use of their credentials.  Even for those with the humility to seek whatever employment they can, employers may well reject these applicants for being flight risks destined to bolt for the first superior opportunity, or for lacking the requisite skills for the job.

If enough college graduates are pushed to the breaking point and decide life isn’t worth living, will anyone notice?  A governmental response assumes its knowledge, which is difficult if surviving family members refuse to talk about what happened and what they know.  For some families, this devastation may have already visited home for exactly the reason of crushing, inescapable student loan debt and crushed dreams.  But, like a tree falling in the woods, nobody can know a problem exists if it remains a hushed secret — however painful it is to keep.

Hopefully the state of education lending will never come to needing reform because of ended lives.  There are signs that this is already happening across the country, though, and the trend may only accelerate as economic malaise deepens, parental resources diminish, and opportunities for even the smartest among us become increasingly scarce.  Despite the emphasis to attend college from every angle, those who do and have done so are increasingly finding that the credentials they acquired at great expense aren’t as valuable as they were lead to believe.  This is the ultimate betrayal: People who are lionized for their accomplishment and knowledge are left to drop out of society in the most irreversible way possible.  More immediately, the discharge of these loans upon death affects the CDO-like securities stacked upon them; discharges above those actuarially anticipated when creating the instrument would lead to its unwinding, as well as the derivatives and options resting upon it.

As for what these reforms would be, making student loan debt dischargable in bankruptcy wouldn’t solve the whole problem.  It would, however, bring about several other realizations.  First, the cost of education in America has gotten out of control.  Second, the values of a generic college degree are oversold.  Additionally, not all institutions or degrees are created equally, and it is absurd that students from elite schools pay the same interest rate – to the extent undergraduates at elite schools have to take loans – as students from less rigorous institutions.  The same is true of major selection, as the value provided by a degree in biology or chemistry and the opportunities it provides is markedly different from one in communications, psychology or criminal justice.  These would be painful realizations, but ones that do not seem to be arising naturally.

However large or insignificant the problem of loan-induced helplessness is, it can’t be ascertained or addressed without ensuring it can be discussed.  Despite the shame and stigma people feel for not meeting their financial obligations, or the hurt a family may feel for the senseless loss of a loved one, hiding the experience under a bushel basket ensures that nobody can learn from it, potentially helping others and effecting real change.


Alternative paths really do await new law grads

May 10, 2010

By J. DeVoy

In the next two weeks, ABA-accredited law schools will spew forth graduate more than 40,000 newly minted J.D.’s from their doors.  While some are puzzled about how to pursue a legal career, others have realized they do not want one.  Still some, the most rational and mercenary of the bunch, are open to the right non-law opportunity.

Often, the transition from law school to a non-legal career is difficult.  Employers, who have a distorted view of lawyers’ financial upside, can’t believe anyone would forego the riches of law to work for them.  Rightly, others may view recent graduates as a flight risk waiting for a more desirable opportunity — especially in this economy.  There’s also the ultimate issue that a law degree doesn’t confer any definable skill, but is a rough measure of one’s critical thinking and cognitive ability.

Still, for those serious about the transition, there is hope.  One Legal Satyricon reader agreed to share his story by e-mail.  Graduating into the recession of the early 1990s, our humble reader graduated into circumstances not unlike those faced by recent grads, and without the benefit of Above The Law or another conduit for the legal zeitgeist.

His story began like so many graduating 3Ls’.  Eventually, it ended in directing and creating movies.

Following my second year of law school I was a summer associate at a firm I just loved — a decent-sized firm in a secondary legal market, which had other offices in the state.  The firm was well-regarded, but known for its humane atmosphere and treatment of associates.

However, the year that I interned with that firm became the very first year in that firm’s history that it hired none of its summer associates. So, I was out in the cold. Had they offered me a position, I would have jumped at it, and chances are I would have stayed in law. Because they didn’t, however, I was suddenly forced to re-evaluate certain things.

Fortunately, I had also been into writing since college. Eventually I was offered a recurring gig with a niche magazine, mostly writing about movies.  Since I had some friends in LA, I moved there after law school.

When you do enough reporting on movies, you get offered jobs in production — from PR to craft services to being a PA, etc. I took every job I could, and I can honestly say that I’ve done nearly every job there is to do on a set.  I also got into film distribution, where I learned what they were looking for and how much they’d pay.  From there, the logical progression was to begin producing. Then directing.

It’s an interesting path I took.  Some of my law school classmates are wildly successful. Others are in Federal prison.  (Whoops!)  Me, I’m doing exactly what I want.

Law students tend to quickly forget the merits of working one’s way up in an organization, even a law firm.  With humility, hard work, commitment and resourcefulness, anything is possible.  Before blowing up Bear Stearns’s hedge fund and getting charged with Federal Crimes, Matthew Tannin attended the University of San Francisco Law School.  What makes our reader’s story more compelling is that he, too, graduated into a down market with no revival in sight.  Yet, it paid off.

Still, some students would prefer to be lawyers.  After going to law school for three years and presumably beginning bar preparation shortly, it’s an entirely rational decision.  But if the goals of ego aggrandizement, financial security and, most importantly, self-satisfaction, are not wedded to the practice of law, the ways they can be fulfilled are endless.


SEC sues Goldman Sachs [alternative title- :( ]

April 16, 2010

By J. DeVoy

The Securities and Exchange Commission has filed a civil suit against Goldman Sachs and one of its employees, Fabrice Tourre, for securities fraud.  The complaint revolves around Goldman’s alleged misrepresentations about the quality of loans underlying a collateralized debt obligation (CDO).  Paragraph five summarizes the consequences neatly:

The deal closed on April 26, 2007. Paulson paid GS&Co approximately $15 million for structuring and marketing ABACUS 2007-AC1.  By October 24, 2007, 83% of the RMBS in the ABACUS 2007-AC1 portfolio had been downgraded and 17% were on negative watch. By January 29, 2008, 99% of the portfolio had been downgraded.  As a result, investors in the ABACUS 2007-AC1 CDO lost over $1 billion.  Paulson’s opposite CDS positions yielded a profit of approximately $1 billion for Paulson. 

Despite this, though, Moody’s and Standard & Poors rated the class A-1 and A-2 notes for this deal near the top of the reliability spectrum.  This is described in paragraph 58.

ABACUS 2007-AC1 closed on or about April 26, 2007. IKB bought $50 million worth of Class A-1 notes at face value.  The Class A-1 Notes paid a variable interest rate equal to LIBOR plus 85 basis points and were rated Aaa by Moody’s Investors Services, Inc. (“Moody’s”) and AAA by Standard & Poor’s Ratings & Services (“S&P”).  IKB bought $100 million worth of Class A-2 Notes at face value.  The Class A-2 Notes paid a variable interest rate equal to LIBOR plus 110 basis points and were rated Aaa by Moody’s and AAA by S&P. 

Shortly thereafter, the notes became worthless.

Going back to the transaction that instigated this suit, Goldman created and marketed the CDO for $15 million.  A substantial sum of money to be sure, but something that could have easily been foregone by the banking titan.  In the halcyon days of the housing bubble, Goldman’s bonuses to top producers were factors of that sum.

It’s unlikely that Goldman Sachs would have walked into litigation where the SEC seeks disgorgement of profits, fines and an injunction over a relatively measly $15 million.  The sale of shares in the CDO could have resulted in greater upside for Goldman, but this is just one of dozens, if not hundreds, of similar deals being made on Wall Street at the time.

A number of reasons for this action come to mind.  First, collateral estoppel.  If the SEC can get favorable rulings or a fat settlement out of Goldman, it can use them as leverage in future suits against the bank and other financial entities.  The specter of a potential lawsuit will chasten other banks and potentially even bring them to the table to avoid future litigation, especially as this mornings news has already sunk Goldman’s stock price (ticker symbol GS) 10%.  For executives and employees with much of their compensation tied up in stock options, as was the case at Bear Stearns, the fallout from this event poses a significant risk.  There is the rage of populism, which spilled over at yesterday’s nationwide Tea Parties.  Though these people cannot quite articulate what Wall Street and, specifically, Goldman Sachs do, they’re mad as hell to see the financial sector enriched as the traditional economy crumbles.  Though the SEC has more independence than other agencies, the Commission’s actions are ultimately imputed back to the President, and it’s good press to go after The Great Satan of high finance.


Tax day arrives!

April 15, 2010

  

 

I HERD U LIEK TEH TOP MARGINAL RATE!

 

By J. DeVoy

Dear the top 10% of income earners:  Thank you!  Because of your toil as business owners, doctors, lawyers and financial service experts, you are able to subsidize the lifestyles and safety of people like me – somewhat literate, moderately intelligent lifetime students – by paying more than 70% of all Federal income taxes.  My dirty secret is that for all my striving, I’m woefully below average at something — being a taxpayer.  Despite scrupulously filing my taxes every year, I haven’t been able to break median or even come close to it.  I fall into the group that contributes less than 3% of all Federal income taxes.

This disparity arises as a function of our progressive taxation regime, where the highest earners pay the most and lowest earners pay the least.  Indeed, the well-off don’t object to redistributionist policies that keep the poors from trammeling their quality of life, as urchins tend to be more interested in wealthy people’s consumer goods than their liberalism.  When the have-nots have nothing, they get violent.  This extortion arises in part from the underclass’s cognitive limitations, and unfortunately is only one form of tribute required to placate them.  Others range from ceding entire sections of American cities as no man’s land to carrying an emergency $20 in the event of a mugging.

Despite these realities, the one-person, one-vote model persists.  Forty-seven percent of households have no tax burden this year, yet every non-felon adult citizen in them has the right to vote.  This is incomprehensible.  While enduring none of the costs of maintaining the republic, they receive all of the benefits — and likely a disproportionate share.  While haves purchase health insurance, have-nots rely on government assistance.  Haves live in well-off neighborhoods, sometimes gated, and own home security systems; have-nots rely almost exclusively on the police for monitoring their property.  The same can be said of family relationships, where haves will send their children and themselves to the best therapists they can afford, while have-nots will call the police to resolve their domestic disputes once they inevitably explode into violence.

Two potential alternatives to the current system exist, which are held out as being more fair.  The first is a flat tax, which taxes all income at a fixed rate, rather than progressively.  While this would have a regressive effect, as the set rate of taxation would have to be fairly high, it would assure that every citizen contributed an equal component of his or her earnings.  Another alternative is a national sales tax, akin to the United Kingdom’s 17.5% Value-Added Tax (VAT), which is tacked on to every purchase.  Due to the lopsided cycle of spending in America, distorted by winter holidays, a national sales tax may create revenue issues for the national treasury.

We have ignored the wisdom of the ancients and our founding fathers.  Both Plato and Alexis de Tocqueville disliked democracy, with the latter famously saying “[a] democratic government is the only one in which those who vote for a tax can escape the obligation to pay it.”  Thomas Jefferson described democracy as a form of “mob rule.”  While we live in a republic and not a democracy, we pander to the rubes and outwardly consider their positions and opinions, as if the half-thoughts they express in YouTube and Perez Hilton comments can be characterized as such, so that our elected officials can ensconce themselves deeply in their elected positions.  It is a distinction without a difference.

The forefathers were wrong about some things.  Today it is unthinkable that voting would be limited to white men.  They were, however, deadly accurate in limiting voting to landowners.  Restricting the franchise to those with something to lose leads to more prudent government, even if it does have a redistributionist bent.  Rationally, those with property after a lifetime spent acquiring it are less likely to squander it for nothing than those who never had such niceties, and thus cannot appreciate them.  When the bitterness of envy and class resentment is grafted onto this latter group’s ignorance – a seemingly natural consequence of the Dunning-Kruger and Downing effects – reckless decisions become spiteful ones; the destruction of wealth is not born from ignorance, but spawned of malice.

Thus, the choices for creating a legitimate tax model are clear: All must suffer equally, or those who suffer more must be accorded a greater voice.  Allowing the most productive members of society to be stripped of their wealth by sheer force of numbers, even if the fleeced would agree to the payment and its aims, is unjustifiable.  There is no endpoint where the masses can no longer expropriate wealth.  Just as in business and especially Venture Capital, the party bearing the greatest financial burden should be accorded the most say in how its finite resources are used.  After all, this is their property we’re talking about.  Beyond making economic sense, it is loyal to the most important rule of all, the Golden Rule: The one with the gold makes the rules.


Pwned by the mancession? Go east, young man!

March 25, 2010

By J. DeVoy

Gay porn is booming in Prague.  As out-of-work men look for a way to earn a living, more are turning to adult entertainment.  This is especially true for the Czech Republic, which has become one of the largest exporters of this commodity.

Apparently the E.U. is quite accepting of this arrangement:

In many European countries, especially the Czech Republic, the views on sex and sexuality tend to be more liberal than in the U.S.

Also, the majority of gay actors describe themselves as straight, many of whom have girlfriends and wives. They say they are “gay for pay” and do it solely for the money.

And there are market forces to consider.

According to a gender and sexuality expert, there is a big demand among American gay men to see straight men performing in gay porn.

That’s why producers in the Czech Republic prefer working with straight men, especially those who have never done porn or had sex with men before. Producers market their inexperience as an asset and say the feeling and expressions they capture are more real.

With an increasing portion of men out of work relative to women, could this be a trend in the United States?  Specifically, low-skill men who can’t create value without the benefit of someone else’s capital could benefit from going this route.   Based on recent experience, I’d say those people tend to be more attractive than law students during their respective prime porn-making years.  (This is, however, hard to reconcile with the contention that IQ and beauty are positively correlated.)  If this option becomes popular – and it may, as it’s inherently safer than the “oldest” profession – producers may be able to snap up fresh talent at a substantial discount.


Attention J.D. holders and soon-to-be grads: Expatriation information here!

January 3, 2010

By J. DeVoy

One of the things holding recent and soon-to-be law grads back from expatriation — other than the global dearth of jobs — is the constant fear that they’ll be pulled back to the United States and have their lives ruined.  This concern is reasonable, as the U.S. has a very broad global reach.  The IRS can tax your income as a U.S. citizen anywhere in the world.  The U.S. also bombs the shit out of people on the flimsiest of pretexts, so its power is not trifling.  It is not, however, unlimited.

Go for the grey!

This map, pictured above, shows all of the nations the U.S. (purple) has extradition treaties with in blue.  The grey nations have no formal extradition treaties with the U.S.  The full list of nations that have extradition treaties with the U.S. can be found at 18 U.S.C. § 3181.  For simplicity’s sake, Wikipedia has this awesome chart that appears accurate and up to date.

This map isn’t very inspiring.  Is it worth leaving America to live in a failing kleptocracy like Russia?  I’m relieved that our government had the foresight to sign such treaties with the fine, upstanding people of Nigeria, where everyone seems to have some claim to royalty.  Even Lesotho, the ridiculous land-locked country embraced entirely by South Africa (which Invictus shows to be a highly functional nation) is in on the action.

Extradition treaties don’t mean everything, though.  Where they do apply, the language of § 3181 is broad and sweeping, addressing mainly capital crimes, drugs, and parental kidnapping.  Even where they don’t exist, Federal Rule of Civil Procedure 4, allowing for international service of process, may ensnare a debtor on the run in its tendrils.  Whether this can result in garnishment of wages, attachment of property, or other action may depend on other treaties between a target state and the U.S., and will require particularized research too consuming for a blog post.

On balance, though, the risk of extradition is low for student loan evaders.  Whether or not one can be sent home for crimes has little bearing on whether Sallie Mae can chase after an errant grad through civil process, wielding her rolling pin of financial ruin.

To avoid civil penalties, there are other steps a potential ex-pat may take.  First, simply disappear without telling anyone.  When you arrive someplace new, claim to have amnesia.  Taken to unlikely but logical extremes, it can be really interesting.  In the alternative, fake your own death.  Leaving the life insurance implications aside, this plan has substantial literary precedent.  Even Krusty the Clown faked his own death — twice!  Truly, there is hope for us all.


Holiday hangover – all your rights are belong to INTERPOL

December 28, 2009

To the surprise of 20-somethings everywhere, INTERPOL is not just a band.

By J. DeVoy

In a little-publicized move just now being scrutinized over at The Spearhead, Barack Obama has granted the International Criminal Police Organization (INTERPOL) new immunities under US law.  On December 16, 2009, Obama signed an executive order amending Order 12425, signed by Ronald Reagan in 1983.  This new order removes language restricting the immunities enjoyed by INTERPOL under the International Organizations Immunities Act.  Most troubling to civil libertarians is the protection of § 2(c) now extended to INTERPOL, providing that:

Property and assets of international organizations, wherever located and by whomsoever held, shall be immune from search, unless such immunity be expressly waived, and from confiscation. The archives of international organizations shall be inviolable.

ThreatsWatch.org astutely notes that such protection immunizes INTERPOL property and assets held in the US or by US citizens from search and seizure.  This raises difficult questions about the creep of international influences on US sovereignty, as INTERPOL now receives greater protection than agencies subject to the freedom of information act (see the second clause of § 2(c)).  Additionally, INTERPOL’s property is now immune from search and confiscation without regard to how it’s acquired.

If INTERPOL takes individual property in any form and for any reason – say an investigation or other matter – it’s gone.  Kiss it goodbye, because you may no longer have the force of law to recover it.  Even if it was recoverable under Obama’s new order, those “inviolable” records and archives can’t be subpoenaed or otherwise investigated to find out where the property is or what happened to it.

On a mundane and daily level, this won’t affect many people.  However nefarious your web use, the INTERPOLice are unlikely to walk in the door, go full Chris Hansen, and confiscate your laptop; nor are they likely to take your car, furniture or other items.  Property is a broad term, though, and may be most likely applied in taking trade secrets, copyrights and patents that do relate to legitimate INTERPOL activities, such as the investigation of child pornography and human trafficking of children.  Truly, “think of the children” is the universal battle cry of personal liberty’s staunchest enemies.  This form of property is much more valuable than personal property and, due to the intangible nature of it, the danger of this property’s expropriation does not strike fear into the hearts of the uncreative classes, i.e. most people.

Not only can INTERPOL now take what it wants, it seems to be able to do so without compensation – a violation of the Fifth Amendment if done by a sovereign government.  Even skeptics of due process will take issue with this level of power being given to a foreign entity.  Considering the Supreme Court’s flirtation with international law while outwardly rejecting it, though, this erosion of sovereignty hardly is surprising.