AnnotatedOpinions.com

. . . But with plummeting housing prices, many [homeowners] have faced a new reality: their home’s value is worth less than the mortgage. Maybe these owners are still employed; maybe they can still make the payments. But why should they? Financial gurus on cable TV are advising them to walk away, leave the keys in the mailbox, bid adieu to the lender – in short, to default. [AO: The reason financial guru’s advise home owners to walk away is not because these gurus have discovered a new way to dispose of a “troubled” home, it is because this is exactly the contract the homeowner and the his lender entered into. When a lender makes a loan, the lender prices into the loan the possibility that the home value will decrease and the lender will be left holding the bag when the homeowner strategically defaults. This is a risk the lender takes on and the lender is paid handsomely for this risk in terms of interest rates that it spreads across all of its borrowers.  

When homeowners choose not to strategically default, they are unilaterally agreeing to a higher interest rate above and beyond the rate the homeowner and lender agreed to. This higher interest rate goes directly into the pockets of bankers who can then pay record setting bonuses.   

Now, I’m not suggesting that every homeowner who can should strategically default. Instead, I am suggesting that homeowners should not allow ethical intimidation, fear or other forms of pressure to be the goad that is used to keep them in a lending contract when there is an out.]  

Strategic defaulters, though, threaten the larger economy. In 2001, 3.9 percent of owners of single-family homes had “negative equity.’’ In 2009, almost 25 percent had negative equity. If even half of those owners defaulted, there would be more depressed neighborhoods, more troubled banks – and, looking not too far into the future, stringent lending standards that would shut the doors of homeownership to the next generation. Lenders calculate risk: adding the risk of “strategic defaults’’ to their calculus would lead to higher down payments and higher borrowing rates. . . [AO: Strategic defaulters who default on their homes still have to live somewhere. They will rent in the same or another community. Think about it this way: if 25 percent of owners of single-family homes strategically defaulted, we’d need that many more rental homes. In other words, the economics is sifted from owning to renting.   

As for troubled banks, homeowners who contracted with banks cannot be expected to unilaterally increase their interest rate so that so-called troubled banks can continue to pay record bonuses. It’s unfair and unethical. Worse, it’s not part of the agreement between the homeowner and lender.  

Again, lenders were well aware that homeowners had the right to strategically default. Indeed, in many tax and finance classes across the country (mine included) professors have been explaining this to students for decades. Moreover, a number of states, including California and Colorado, are non-recourse states meaning lenders were on notice that they couldn’t even come after borrowers who walk away from their homes.   

Think about it this way: If Bank of America owed Citibank and discovered that the loan was underwater, would it continue to pay Citibank because of a concern for depressed neighborhoods, Citiban’s liquidity, or future lending to businesses? Of course not. Why then should John, who has a home loan with Bank of America, or Sue, who has one with Citibank, continue to pay that loan?  

Lenders already add the risk of strategic defaulters into loans. However, they miscalculated during the last housing boom just like they miscalculated the appropriate interest rates and the loan terms more generally. In the future, lenders won’t miscalculate or at a minimum they will try to be less wrong. Lenders will do this no matter what.]

IN A BLATANTLY political move this month, the Labor government of British Prime Minister Gordon Brown imposed a one-time, 50 percent tax on bankers’ bonuses. Yet even though it may spring from Brown’s fear of losing an election next year, the tax is justified on economic grounds and as a matter of social justice. And after France followed suit with its own 50 percent tax on banker bonuses, arguments against a similar tax in the United States lost a key rationale.  

In the past, US banking executives warned that any such taxes would make them less competitive than London or Paris in attracting and keeping “talent.’’  

The profits of US banks during the past year are exceptional because they owe so much to taxpayer bailouts and the government’s interest rate policy. . .  

So a tax on bonuses at US banks would simply give back to taxpayers some of the money they have donated to the banks. . .  

[AO: Taxpayers are rightly concerned by high bonuses paid to bankers. However, levying a 50 percent tax on bankers’ bonuses is unworkable and may be largely ineffective.  

For one, though London and Paris have instituted 50 percent taxes on bankers’ bonus, there really still are other places bankers can move to. The article suggests Zurich, Hong Kong and Singapore. These are viable options. There are others too.  

Moreover, a 50 percent tax on bankers’ bonuses is not advisable because the goal the editorial articulates, giving taxpayers back some of the money they have donated to banks, can be achieved in a better way—by retrieving the funds from the bank.   

A one time 50 percent tax leave room for companies to evade the tax by postponing bonuses or making other arrangements that delay payments or convert those payments to other types of compensation. Such a tax, if not evaded, would also disproportionately affect those who, presumably, contributed most to the economy.  

A better approach may be a one-time tax on banks themselves. Banks would be unable to avoid paying the tax. Moreover, the tax would not disproportionately affect individual employees. Instead, since the American taxpayer lent money directly to the banks, the taxpayer would be getting a refund, directly from the bank, of her donated money.]

If the goal is to reduce the number of huge banks that taxpayers must rescue at any cost, the nation is moving in the wrong direction. The growth of the biggest banks ensures that the next bailout will have to be even bigger. These banks will be more likely to take on excessive
risk because they have the implicit assurance of rescue.  

The White House’s proposal to overhaul financial regulation has ideas for banks that are too big to fail. The House passed a bill last week that would require big banks to have bigger capital cushions to absorb losses. . .  

These provisions still seem vulnerable to being gamed. The Senate, which is unlikely to pass its version of the deal until next year, should explore more direct measures, like banning banks beyond a certain size, measured by their liabilities.  

[AO: America has a problem with banks that are too big to fail. We cannot afford them. On the other hand, there are benefits to large banks. These benefits have been enumerated elsewhere. Yet, we cannot allow pursuit of these benefits to blind us to the significant systemic problem that big failing banks can cause.  

The solution, however, is not hard limits like banning banks larger than a certain size. What we need is a system that allows banks of any size, provided they are not too big to fail. For example, a bank twice the size of our biggest current too-big-to-fail bank may not be too big to fail if it has sufficient reserves to prevent catastrophic results when it fails. That is to say, rather than limiting the size of banks, Congress may pass legislation such as capital reserve requirements tailored to the size of banks so that they are never too big to fail.]

. . . OK then, what’s to be done? Answer: plenty, but how about starting with this – have the federal government take over the rating of securities. Give this function to the SEC or create a new agency, but, in either case, make certain the new entity’s funding is not subject to legislative meddling and that it is staffed by persons talented enough to cut through complexity, spot mutton dressed up as lamb, and not be threatened or penalized for making that call.  

Strip Moody’s, Standard & Poor’s, and Fitch of their power to determine whether a security is a permissible investment for  regulated purchasers and, by rule or statute, transfer this function to the new federally chartered entity. Thank the rating agencies for their diligence, then hire their ablest analysts. . .  

[AO: Credit rating companies, CRAs, are companies that assign credit ratings, a measure of the credit worthiness, to issuers of security instruments. So basically, the writer, Frank Porter Jr., is recommending that the government create an agency to decide  which companies are credit worthy and which are not. This is unnecessary.  

The current system, sans private credit rating firms, can be made to function properly with minor tweaks. What is required is a careful look at the causes of failure in the current system and taking actions to remedy those problems. After all, a government credit rating agency will come with its own share of issues that have to be resolved, the least of which is legislative meddling.   

The current system failed for a number of reasons including (1) competition that created a race to the bottom in terms of rating agencies being willing to boost ratings to gain customers, (2) the pay structure that has clients paying for their own ratings, and (3) rating agencies had no “skin” in the game.  

The first problem, competition for business, can be solved by requiring that securities of certain value obtain ratings from at least three agencies. This will limit or eliminate the destructive competition for customers among top ratings firms. These agencies can still compete for smaller securities work but the big client work that is mostly of concern will be available to at least three agencies. More importantly, I will take the pressure off ratings agencies so that they don’t feel as if theyhave to give a high rating or loose customers. In other words, this gives the rating agencies some breathing room to make ratings without the incredible pressure to give high ratings or loose a customer. Requiring three agencies to rate the same security will also introduce an element of competition for creating the best ratings. The company that continuously produces poor ratings will not be trusted by the public so they will strive to produce the best ratings the can.  

The pay structure problem can be solved by requiring companies that require ratings services to pay into a fund that in turn is used to pay all or part of the fees for rating agencies for certain types of work they do. By disconnecting the fee from the service, or at least making it less direct, the pressure to rate for fees will be taken off.   

The third problem, rating agencies having no skin in the game, can be addressed by imposing fines on rating agencies when their ratings don’t hold up after a certain amount of time. If an agency rates a security AAA that turns out after six months should have been rated CCC, the agency should pay a price.  

These are smaller changes, compared to a government run ratings agency, that will help prevent the problems of 2008 and the years before that from returning. ]

Weighing the benefits of a mammography: Although we all would like to think that public health pronouncements are the unmitigated truth about any issue, rarely is that the case. [LA Times]

Giving thanks in secular, holy ways: At Thanksgiving, the secular and religious impulses, usually taken to be antagonists, salute each other respect. [Boston Globe]

Ft. Hood and the bugaboo of ‘political correctness’: Look deeper at a killer and what do you usually find? An angry, crazy person. [LA Times]

The Church and the Capital: Washington lawmakers should negotiate the language of a same-sex marriage bill with the Catholic archdiocese without selling out same-sex couples. [New York Times]

Free speech: It’s the ACLU’s deal: For Americans liberal and  conservative, the organization continues to support their right to speak. [LA Times]

For American savers, the mattress beckons: Banks pay microscopic interest even as they recover. [Philadelphia Inquirer]

The Phantom Menace: The scare stories from Wall Street seem to be intimidating Washington from doing more to rescue the economy. [New York Times]

What the Pilgrims really sought: Their trip to the New World wasn’t about tolerance or diversity. It was about purity. [USA Today]

Tim DeChristopher’s wild legal ride: He disrupted an oil and gas lease auction last year by posing as a buyer. Now a judge has rejected his last-ditch defense strategy. [LA Times]  

Crunching the numbers on bioenergy rules: The right rules will encourage the development of fast-growing grasses and trees that can greatly increase the amount of carbon absorbed by plants on marginal land. [Boston Globe]

Hot times: As a crucial climate change conference nears, more evidence of a warming globe [Houston Chronicle]

Obama needs to feel the heat: The melting arctic ice is unimpressed with his climate-change efforts. [Washington Post]

A green future for old buildings: Many existing buildings, especially those built before World War II, embody environmental and energy-conscious design. [Boston Globe]  

GPS and Privacy Rights: A federal appeals court in Washington, D.C., should rule that police need a warrant before putting a GPS device on a suspect’s car. [New York Times]

Heal thyself: The slow reaction by the Department of Veterans Affairs to a flawed cancer-treatment program in Philadelphia suggests an agency that would rather forget its mistakes than learn from them. [Philadelphia Inquirer]  

Afghanistan Plan C: Obama tries to think his way around the all-in-or-all-out dilemma. [Washington Post]

In El Salvador, a grim reflection, and a glimmer of hope: The president has bestowed the country’s highest honor on six Jesuit priests massacred 20 years ago, more evidence that peaceful change is possible, if slow to come. [LA Times]

India and us: South Asia is a tar pit filled with failed and dysfunctional states, save for one. [Washington Post]  

Slang from the mouths of babes [Chicago Tribune]

From vinyl to digital, my obsession lives on: Technology has made the pursuit of our pleasures much easier. But in so doing, I often wonder if it has made them less sacred. [Boston Globe]

A Luddite in the library: Search engines are all well and good, but sometimes the best place to find something is a library. [LA Times]  

Muslims, mass murder after Fort Hood. [Chicago Tribune]

Zero tolerance for extremists — regardless of religion: The U.S. response should be zero tolerance for political cultists who try to achieve their goals through violence. [LA Times]

Hasan’s erratic work was a sign: Investigators are looking for ties to Islamist extremists. But the problem may be closer to home. [Boston Globe]

In plain sight? Unheeded red flags surrounding Maj. Nidal M. Hassan. [Washington Post]

Fixing foreign aid: A Cold War-era system with too many agencies and not enough coordination needs an upgrade. [LA Times]

America’s Defining Choice: What’s the best way to spend $100 billion per year? Health reform or troops for Afghanistan? Simple, because lack of insurance kills far more Americans than the Taliban does. [New York Times]

When it comes to healthcare reform, doing nothing does harm. [Philadelphia Inquirer]

An abortion skirmish: Health reform’s negotiating nightmare. [Washington Post]

Vietnam’s lesson for Afghanistan: With memories of Vietnam still in their minds, many in Congress are obsessed with defeat in Afghanistan. But history does not necessarily repeat itself. [Boston Globe]

Vietnam, Afghanistan and learning from history: What can Obama learn from the Vietnam War, and how can he apply it to the war in Afghanistan? [LA Times]

Giving hedge fund investors a full accounting: Congress should require hedge funds, which are largely unregulated, to register with the Securities and Exchange Commission. [LA Times]

More Foreclosures to Come: Unless the Obama antiforeclosure plan is modified, it has little chance of making a meaningful dent in the housing crisis. [New York Times]

The other side of the wall: East Berliners had their advantages as well as their troubles. Now, they have ours. [Philadelphia Inquirer]

Take a Deep Breath: Right now we citizens have quite a lot on our plate and there is no reason to go completely crazy about the least little thing. [New York Times]

Bad start to U.S.-Japan relationship: Both countries should put an end to old habits. [Washington Post]

Mr. Karzai Relents: To ensure that the presidential runoff in Afghanistan is fair and credible, it’s going to take a lot more effort and high-level attention. [New York Times] 

Nobody wins in the Afghan runoff election: No matter how the Nov. 7 vote goes down, it likely will impede the goal of creating an effective, independent government in Kabul. [LA Times]  

Don’t quit on Afghan women: Is the world ready to let them be killed and tortured again by a resurgent Taliban? [Philadelphia Inquirer]  

A matter of trust: The insurance industry may find out that there’s something worse than having to compete with a Medicare-style health plan for working-age Americans. How about yanking its long-standing exemption from federal antitrust laws? [Philadelphia Inquirer]  

What the oligarchs fear: In health insurance and on Wall Street, the bogeyman is a free market. [Washington Post]  

Good Sense on Medical Marijuana: Attorney General Eric Holder Jr. was right to call off prosecutions of patients who use marijuana for medical purposes or those who distribute it to them within the law. [New York Times]  

Medical pot’s highs and lows [USA Today]  

Grass roots effort: The long-haired stoner is no longer the face of the pro-pot lobby. [Washington Post]  

A compounding nightmare: By Jamie Lau Low- and middle-income households with credit card debt owe, on average, $9,827 on their cards. If you make the minimum monthly payment – often 2 percent of the balance or $10 – at 10 percent interest, it will take you more than 26 years to pay off the balance, including $6,812 in interest. [Philadelphia Inquirer]  

Halloween: Trick or stereotype: Major retailers stopped selling some costumes that played on stereotypes of illegal immgrants as Mexicans and space aliens. [Boston Globe]  

Obama’s Sudan policy: ‘incentives and pressure’: The U.S. is seeking to engage Khartoum in efforts to bring peace to Darfur and deny terrorists a haven. [LA Times]  

Balloon caper: Race to the bottom [Chicago Tribune]  

Parenting’s soar spot: The Balloon Boy saga offers a good lesson on when to let go. [Washington Post]  

Policing our cyberstreets: Keeping pace with cyber-threats demands that resources be marshaled. [Boston Globe]  

The year the dominoes fell: Twenty years ago this season, Moscow’s  Eastern European satellites threw off their chains. [Boston Globe]  

The clock is ticking: The White House and Congress can still do right by the Uighurs. [Washington Post]  

Coffee with a geriatric grumbler [Chicago Tribune]  

Democrats and Schools: Education reform is the central front in the war on poverty, the civil rights issue of our time. [New York Times]

To fix financial system, protect consumers first: The Consumer Finance Protection Act being voted on in Barney Frank’s House committee today provides important protections for consumers and investors. [Boston Globe]

What $100 Million? High-risk, high-reward hedge funds have no place on the books of the nation’s too-big-to-fail banks. [New York Times]

It’s not soup yet: A sweeping overhaul of the nation’s health-care system cannot be considered much of a success if it still leaves millions of Americans without health insurance. [Philadelphia Inquirer]

The White House Quartet: The pressure’s on for Obama and his key aides to put their stamp on health reform. [Washington Post]

How to improve health bill: We come from different ends of the political spectrum, but we agree that our health-care system is unsustainable because of costs. Doing nothing would allow future deficits to explode, leaving our children to clean up the mess. [Philadelphia Inquirer]

What Does Snowe Want? How she uses her power could ironically end up advancing progressives’ causes. [Washington Post]

Reform and Your Premiums: The allegations made by a leading industry trade group that the health reform bill would drive up premiums for Americans needs to be addressed head-on. [New York Times]

James Monroe, a president for our times? Like Obama, Monroe had to deal with high unemployment and home foreclosures. His solutions gave the nation its greatest period of prosperity. [LA Times]

Dow crosses 10,000; on the right, crickets chirp [Atlanta Journal-Constitution]

The Tao of Dow 10,000: Through much of this summer and early fall, a chorus of incredulous financial pundits argued that the stock market had risen too far, too fast. With the Dow Jones industrial average closing above 10,000 Wednesday, it is clear that they were wrong. [USA Today]

Miranda’s time limit: Once a suspect asks for a lawyer, police interrogation must stop — but for how long? [LA Times]

What Next in Afghanistan? Obama is wise to take his time, but I worry the waiting could doom the policy. [Washington Post]

Obama’s awkward gift: Giving and getting awkward gifts goes along with being the president. But a Nobel Prize is tricky. You can’t just smile, pretend you like it, and put it away somewhere. [Boston Globe]

Mortgage madness – again [Chicago Tribune]

Hummer: Restore your common sense: The idea of a new, more fuel-efficient Hummer is an oxymoron. [Boston Globe]

Cripple Iran to save it: Millions of the regime’s political opponents would back sanctions that helped remove the ruling clique. [LA Times]

A new role for Turkey: No country’s diplomats are as welcome in both Tehran and Jerusalem, Moscow and Tblisi, Damascus and Cairo. As a Muslim country intimately familiar with the region around it, Turkey can go places, engage partners, and make deals that the United States cannot. [Boston Globe]

The Goldstone fallout: Reaction to the U.N. report on Gaza is not  helping the peace process. [LA Times]

As Baucus bill skimps, health reform suffers: Many young, healthy people will forego insurance and pay the penalty, leaving their families unprotected and depriving the insurance industry of the younger, healthier people it needs in order to accept those with preexisting conditions. It’s a flawed bill that needs to be improved on the Senate floor. [Boston Globe]

Insurers push back: Lawmakers will have to address the issues of policy affordability and penalties for not buying coverage. [LA Times]

Fix Baucus’ health reform Rx: Three big changes Democrats must make for the bill to work [New York Daily News]

Fight obesity by taxing calories: It’s time to fight back against the corn peddlers who are making our children fat. [USA Today]

When in doubt, move fast against terror suspects: The New York police are getting heat for arresting a prominent terrorism suspect before the FBI could unravel all the strands of his plot. But the evidence suggests the police were right to move quickly. [Boston Globe]

Ohio’s botched executions: Lethal injection proves, in several cases, to cross the line into cruel and unusual punishment. [LA Times]

That Promised Financial Reform: For lawmakers to deliver robust financial reform to protect the American public, they must resist the lobbying power of the banking industry. [New York Times]

Who’ll Curb Wall Street? The folks who keep the profits and give us the risk are winning a battle against reform. [Washington Post]

Keeping the aircraft carrier fleet afloat: Before recommending the Navy reduce the number of carriers, the Pentagon should consider the unique contributions they make to national security. [Boston Globe]

President Barack Obama has to decide whether gays and lesbians will be allowed to serve openly in the military. [Chicago Tribune]

Give them a break: Larger VA problems persist [Houston Chronicle]

A Clearer Look at Drilling: The Obama administration must further its promise to take a sensible approach to energy exploration by protecting the Arctic. [New York Times]

Petulance and Peace Prize [Chicago Tribune]

Are women unhappier? Don’t make me laugh: A study says women have become steadily more miserable since 1972, causing some to point a finger at feminism. But the research doesn’t pass the giggle test. [LA Times]

Enough With the Firsts: Elinor Ostrom’s Nobel in economics reminds us how many ceilings have yet to be cracked. [Washington Post]

One Protection for Prisoners: To shackle female prisoners while they give birth is barbaric and may be unconstitutional. [New York Times]

Why too thin isn’t ‘in’ [USA Today]

Author’s pen is mightier than China’s sword: Nurmuhemmet Yasin’s “The Wild Pigeon” is clearly a political allegory, a short story about dignity, integrity, and pride in the face of cultural and territorial erasure. Those who love stories and poems and plays and essays, should urge China to free him. [Boston Globe]

My mother and sister, prisoners of China’s Communist Party: The U.S. must put pressure on Beijing to end its brutal persecution of Falun Gong adherents. [LA Times]

That Karzai conundrum – We’re likely stuck with the Afghan president, but perhaps we can change his behavior: Sometime this week, we may learn who the president of Afghanistan is. Or we may not. Imagine: As President Obama wrestles with whether to send more troops to fight the Afghan Taliban, it’s still unclear whether the sitting president, Hamid Karzai, won the majority required to avoid a runoff. [Philadelphia Inquirer]

Bicoastal constitutional conundrum: California has what New York wants; New York is trying to throw out what California craves. Is it a case of the grass is greener, or are there lessons to be learned here? [LA Times]

Defer pay and disclose salaries at bailed-out Wall Street firms: If another wealth-destroying financial bubble is to be avoided, the system that rewards short-term windfalls at the expense of long-term financial soundness must be changed. [Boston Globe]

By dodging tough choices, Congress invites failure: Opportunism, cowardice threaten historic reform opportunity. [USA Today]

Cover Health Care With a Tax: Deficits will grow unless taxes increase. [Washington Post]

Strike the ban on violent images: A 1999 federal law that bans the creation, sale, and ownership of depictions of violence against animals is overly broad in that it can be used to criminalize all portrayals of illegal animal cruelty — even those that help expose its horrors. [Boston Globe]

Truth in Advertising, Offline or Online: The F.T.C. must continue to closely monitor online advertising and endorsements, but regulators should focus enforcement on the advertising companies rather than individuals. [New York Times]

A Losing Slogan: “I’m With the Taliban Against America” is not likely to do much for Republicans. [Washington Post]

Nobel dust-up not aimed at making peace [Chicago Tribune]

Obama Peace Prize not without merit [USA Today]

Preventing Age Discrimination: Congress must undo the damage done to age discrimination law by a recent Supreme Court ruling, and put the standards for proving such cases back on a level with other bias cases. [New York Times]

U.N. shifts strategy for nuclear arms control: The emphasis used to be on containing the information needed to build a bomb. Now the focus will be on restricting the materials necessary to make a weapon. [LA Times]

Isn’t Good Sense Part of the Curriculum? Over the last 10 years or so, legitimate concern for the safety of children in school has too often led to poorly thought out, rigidly implemented policies that do more harm than good. [New York Times]

Turkey and Armenia: reconciling history – The two countries must get beyond the 1915-1918 genocide because it’s in both of their interests. [LA Times]

Saving the Last Lions: Big cats are in trouble everywhere, and the biggest threat is our own complacency. [Washington Post]