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lehman brothers
Why Rudy Giuliani Can Declare Bankruptcy While Homeowners Can’t
Bankruptcy was designed so people could start over, but these days, the only ones starting over are those with enough political clout to shape bankruptcy laws to their liking.
Dec 29, 2023
Within days of a nearly $150 million judgment against former New York Mayor Rudy Giuliani for defaming Ruby Freeman and Shaye Moss, the election workers Giuliani falsely claimed stole the 2020 election in Georgia for President Joe Biden, Giuliani filed for bankruptcy.
He thereby shielded himself from having to surrender his assets to fulfill the judgment, at least in the near term.
The long term may be quite long. Freeman and Moss may not see a penny of that judgment for many years, and when they do, it’s likely to be far less than $150 million.
The prevailing myth that America has a “free market” existing outside and apart from government prevents us from understanding that the very rules by which the market runs—including the basic one about what to do when someone can’t or won’t pay what they owe—are made by lawmakers.
One of the most basic of all questions in a market economy is what to do when someone can’t pay what they owe. The U.S. Constitution (Article I, Section 8, Clause 4) authorizes Congress to enact “uniform Laws on the subject of Bankruptcies throughout the United States.”
Congress has done so repeatedly. In the last few decades, Congress’ changes have reflected the demands of the wealthy, giant corporations, and Wall Street banks, which have made it harder for average people to declare bankruptcy but easier for themselves to do it.
Many people are too broke to go bankrupt. Filing for bankruptcy costs money, as does hiring an attorney (which is the best way to make sure you actually get debt relief). Because attorney fees, like other debts, are wiped out in a bankruptcy, most bankruptcy lawyers require clients to pay in full before filing.
In an economy where nearly half of adults say that if they were hit with an emergency expense of $400, they wouldn’t have the cash on hand to cover it, large numbers of people simply can’t afford those upfront costs.
The 2005 bankruptcy bill pushed by Wall Street worsened the problem. To prevent people from cheating their lenders, the bill put new burdens on debtors and their lawyers. The extent of such abuses was questionable, but the new requirements have driven up attorney fees nationwide by about 50%. The result? Even fewer filings.
Bankruptcy was designed so people could start over. But these days, the only ones starting over are those with enough political clout to shape bankruptcy laws to their liking, and enough money to hire bankruptcy lawyers to use those laws to their full advantage.
On the opening day of Trump Plaza in Atlantic City in 1984, Donald Trump stood in a dark topcoat on the casino floor celebrating his new investment as the “finest building in the city and possibly the nation.”
Thirty years later, after the Trump Plaza folded, Trump was on Twitter praising himself for his “great timing” in getting out of the investment. He got a giant tax write-off, too.
But some 1,000 of his former employees were left holding the bag—without jobs, and with homes worth a fraction of what they paid for them. They couldn’t declare bankruptcy. Chapter 13 of the bankruptcy code—whose drafting was largely the work of the financial industry—prevents homeowners from declaring bankruptcy on mortgage loans for their primary residence.
The Granddaddy of all failures to repay occurred in September 2008 when Lehman Brothers went into the largest bankruptcy in history, with more than $691 billion of assets and far more in liabilities.
Some commentators (including yours truly) urged that the rest of Wall Street should be forced to grapple with their problems in bankruptcy, too.
But Lehman’s bankruptcy so shook the street that Henry Paulson Jr., George W. Bush’s outgoing secretary of the treasury (and, before that, head of Goldman Sachs), persuaded Congress to authorize several hundred billion dollars of funding to protect the other big banks from going bankrupt.
Paulson didn’t explicitly state that big banks were too big to fail. They were, rather, too big to be reorganized under bankruptcy—which would, in Paulson’s view, have threatened the entire financial system.
The real burden of Wall Street’s near meltdown fell on homeowners. As home prices plummeted, many found themselves owing more on their mortgages than their homes were worth and unable to refinance.
Some members of Congress tried to amend the bankruptcy law so distressed homeowners could use bankruptcy, which would have helped prevent the banks from foreclosing on their homes. But the financial industry (among the largest donors to both parties) claimed this would greatly increase the cost of home loans (no convincing evidence showed this to be the case), and the bill died.
Subsequently, more than 5 million people lost their homes.
Another group of debtors who can’t use bankruptcy to renegotiate their loans are former students laden with student debt.
Student loans are now about 10% of all debt in the United States, second only to mortgages and higher than auto loans and credit card debt. But the bankruptcy code doesn’t allow student debts to be worked out under its protection.
If graduates don’t meet their payments, the law allows lenders to garnish their paychecks. If they are still behind on student loan payments by the time they retire, lenders can even garnish their Social Security checks.
The only way graduates can reduce their student debt burdens—according to a provision enacted at the behest of the student loan industry—is to prove that repayment would impose an “undue hardship” on them and their dependents.
This is a stricter standard than bankruptcy courts apply to gamblers trying to reduce their gambling debts.
For years, Purdue Pharma, the maker of the prescription painkiller OxyContin, was entangled in civil lawsuits seeking to hold it accountable for its role in the spiraling opioid crisis.
A major settlement reached last year seemed to end thousands of those cases. It exempted members of the billionaire Sackler family, which once controlled the company, from all civil lawsuits in exchange for billions of dollars toward fighting the epidemic (although aware of OxyContin’s risk for abuse, members of the family had continued to aggressively market it).
Under the deal, the Sacklers do not have to personally declare bankruptcy and are insulated from liability even without the consent of all of those who could potentially sue them. (The Supreme Court has taken up the case.)
The prevailing myth that America has a “free market” existing outside and apart from government prevents us from understanding that the very rules by which the market runs—including the basic one about what to do when someone can’t or won’t pay what they owe—are made by lawmakers.
The real question is whose interests those lawmakers are pursuing. Are they working for the vast majority of Americans, or are they beholden to those at the top? The recent history of bankruptcy—right up to Rudy Giuliani’s use of it last week—provides a clear answer.
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We Need to Topple Wealth Supremacy
This 15th anniversary of Lehman Brothers’ collapse is an opportunity to take a step back and look at the overarching problem here: “financialization.”
Sep 13, 2023
It’s been 15 years since the collapse of Lehman Brothers.
The investment firm’s startling downfall marked the beginning of a historic Wall Street crash that swiftly wiped out over $7 trillion in home equity and $2.8 trillion in retirement portfolios.
Wall Street hasn’t fundamentally changed its behavior. Since then, Big Finance has engineered an even more entrenched system of creating wealth mostly for the ultra-rich while spinning out crisis after crisis for the rest of us.
Recognizing wealth supremacy helps us see our task: to build an economic system designed not for maximum investment returns, but for life to flourish.
That system has led to insecure, low-wage contract jobs replacing stable work, staggering debt mounting for college graduates, and monopolies crushing family businesses. It’s entrenched a political system captured by billionaires and corporations and left society struggling to meet the challenge of climate change.
This anniversary is an opportunity to take a step back and look at the overarching problem here: “financialization.” While we used to have an economy that manufactured stuff, now it manufactures debt.
Before 2008, big banks financialized mortgages. Now they’re financializing houses, buying up single family homes and charging high rents, scrimping on maintenance, and pursuing aggressive evictions.
The same is happening from healthcare to the local news, as private equity firms buy up vital businesses, cut staff and services to pad profits, and then sell their assets for scrap when the businesses predictably fail.
The latest Wall Street game is to turn the planet into a new asset class, creating “natural asset companies” to monetize “ecosystem services” from water, forests, coral reefs, and farms.
What drives financialization is what I call “wealth supremacy”—a bias ingrained in our economic system that tells us wealthy people matter most. It suggests the core aim of our economy should be delivering ever-increasing gains to their investment portfolios.
This bias is embodied in a series of myths. There’s the myth that no amount of wealth is ever enough. Another is that only shareholders and executives should have a say in corporations, while workers are disenfranchised and dispossessed.
Then there’s the myth of the free market, which tells us corporations and capital must be able to move freely throughout the world, while the freedom of people—democracy—must be subordinated.
Recognizing wealth supremacy helps us see our task: to build an economic system designed not for maximum investment returns, but for life to flourish. My organization, the Democracy Collaborative, calls it a “democratic economy”—and it’s rising all around us.
For starters, corporations don’t have to be owned by shareholders or executives. They can be owned by workers themselves.
Already workers in the U.S. own some 6,000 companies. Employees at worker-owned companies like the New York City-based Cooperative Home Care Associates and the San Francisco-based waste disposal and recycling company Recology enjoy more stable jobs and double the retirement savings of employees at conventional firms.
Nor do big banks need to do all the banking.
Roughly 1,000 community development financial institutions provide fair loans to marginalized communities typically shunned by Wall Street banks. For example, River City Credit Union in San Antonio, Texas, helps immigrants set up bank accounts so they don’t have to rely on predatory payday lenders and check-cashing storefronts.
And what if more of us owned our utilities?
Eighty-five percent of Americans already get their water from public utilities instead of for-profit companies. Now there’s a growing movement from Ann Arbor, Michigan, to Maine and New York for publicly and cooperatively owned energy utilities. Such companies could be more willing than for-profit utilities to transition quickly from fossil fuels and make investments to prevent sparking wildfires.
The models and pathways we need exist around us. But making the rapid, systemic change we need requires letting go of the myth that wealth-maximizing capitalism is the only system possible.
It’s not. And if we want to keep our society standing, we need to topple wealth supremacy.
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Economic Shock Therapy for Neoliberals
Neoliberalism has failed yet another test and must finally be replaced by a new economic vision based on new values.
Apr 11, 2022
The fallout from Russia's invasion of Ukraine has reminded us of the unforeseeable disruptions constantly confronting the global economy. We have been taught this lesson many times. No one could have predicted the September 11, 2001, terrorist attacks, and few anticipated the 2008 financial crisis, the COVID-19 pandemic, or Donald Trump's election, which resulted in the United States turning toward protectionism and nationalism. Even those who did anticipate these crises could not have said with any precision when they would occur.
Each of these events has had enormous macroeconomic consequences. The pandemic called our attention to our seemingly robust economies' lack of resilience. America, the superpower, could not even produce simple products like masks and other protective gear, let alone more sophisticated items like tests and ventilators. The crisis reinforced our understanding of economic fragility, reprising one of the lessons of the global financial crisis, when the bankruptcy of just one firm, Lehman Brothers, triggered the near-collapse of the entire global financial system.
Similarly, Russian President Vladimir Putin's war in Ukraine is aggravating an already-worrisome increase in food and energy prices, with potentially severe ramifications for many developing countries and emerging markets, especially those whose debts have soared during the pandemic. Europe, too, is acutely vulnerable, owing to its reliance on Russian gas--a resource from which major economies like Germany cannot quickly or inexpensively wean themselves. Many are rightly worried that such dependence is tempering the response to Russia's egregious actions.
This particular development was foreseeable. More than 15 years ago, in Making Globalization Work, I asked, "Does each country simply accept [security] risks as part of the price we face for a more efficient global economy? Does Europe simply say that if Russia is the cheapest provider of gas, then we should buy from Russia regardless of the implications for its security...?" Unfortunately, Europe's answer was to ignore obvious dangers in the pursuit of short-run profits.
Underlying the current lack of resilience is the fundamental failure of neoliberalism and the policy framework it underpins. Markets on their own are short-sighted, and the financialization of the economy has made them even more so. They do not fully account for key risks--especially those that seem distant--even when the consequences can be enormous. Moreover, market participants know that when risks are systemic--as was the case in all the crises listed above--policymakers cannot idly stand by and watch.
Precisely because markets do not account fully for such risks, there will be too little investment in resilience, and the costs to society end up being even higher. The commonly proposed solution is to "price" risk, by forcing firms to bear more of the consequences of their actions. The same logic also dictates that we price negative externalities like greenhouse-gas emissions. Without a price on carbon, there will be too much pollution, too much fossil-fuel use, and too little green investment and innovation.
But pricing risk is far more difficult than pricing carbon. And while other options--industrial policies and regulations--can move an economy in the right direction, the neoliberal "rules of the game" have made interventions to enhance resilience more difficult. Neoliberalism is predicated on a fanciful vision of rational firms seeking to maximize their long-run profits in a context of perfectly efficient markets. Under the neoliberal globalization regime, firms are supposed to buy from the cheapest source, and if individual firms fail to account appropriately for the risk of being dependent on Russian gas, governments are not supposed to intervene.
True, the World Trade Organization framework includes a national-security exemption that European authorities could have invoked to justify interventions to limit their dependence on Russian gas. But for many years, the German government seemed to be an active promoter of economic interdependence. The charitable interpretation of Germany's position is that it hoped commerce would tame Russia. But there has long been a whiff of corruption, personified by Gerhard Schroder, the German chancellor who presided over critical stages of his country's deepening entanglement with Russia and then went to work for Gazprom, the Russian state-owned gas giant.
The challenge now is to establish appropriate global norms by which to distinguish rank protectionism from legitimate responses to dependency and security concerns, and to develop corresponding systemic domestic policies. This will require multilateral deliberation and careful policy design to prevent bad-faith moves like Trump's use of "national security" concerns to justify tariffs on Canadian automobiles and steel.
But the point is not merely to tweak the neoliberal trade framework. During the pandemic, thousands died unnecessarily because WTO intellectual-property rules inhibited the production of vaccines in many parts of the world. As the virus continued to spread, it acquired new mutations, making it more contagious and resistant to the first generation of vaccines.
Clearly, there has been too much focus on the security of IP, and too little on the security of our economy. We need to start rethinking globalization and its rules. We have paid a high price for the current orthodoxy. Hope now lies in heeding the lessons of this century's big shocks.
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