Case in point–are we turning around the financial crisis? Or not?

Recapping a Reuters Television appearance today of the outgoing Morgan Stanley John Mack, CNBC posted the headline, “Worst Over for World Economy: Morgan Stanley CEO.” And here’s a Sept. 15 clip of Fed Reserve Chairman Ben Bernanke saying he thinks the recession “has very likely” bottomed out. More optimism is borne out in the equities market, with one CNBC account mentioning “the meteoric run-up” of the current stock rally while a CNN piece says “Stocks flirt with new highs.”

But more headlines today paint a darker picture for folks needing jobs, with Bloomberg’s saying two states hit record levels of unemployment, CNBC’s saying three hit record levels and CNN’s take that five states breached the 12 per cent mark.

Bloomberg says: “Unemployment rose in 27 U.S. states in August, with California and Nevada reaching record levels of joblessness.

“Rhode Island rounded out the list of states with the highest level of unemployment since data began in 1976, the Labor Department reported today in Washington.

“California’s unemployment rate reached 12.2 percent and Nevada’s climbed to 13.2 percent.”

Despite their differing headlines, the CNBC report pretty much agrees with the Bloomberg view, adding that overall the rate “. . . rose from July in 27 states and the District of Columbia, declined in 16 states and was unchanged in seven others, according to the Labor Department.” CNN agreed with CNBC about the record levels in three states, chipped in that five states “posted jobless rates above 12% in August,” and summarized the states with best unemployment news: “North Dakota posted the lowest jobless rate in August, at 4.3%. It was followed by South Dakota, at 4.9%; Nebraska, with 5%; Utah, at 6%, and Virginia, at 6.5%.”

CNN also included an explanation by way of an econmist at Wachovia. “The losses tend to be heavy in states that have a high concentration of manufacturing jobs or were hit hard by the housing bust,” said Mark Vitner, economist at Wachovia. “The states with the lowest rates tend to have fewer metropolitan areas,” . . . Vitner said.

“When you consider how a city like Las Vegas dominates Nevada’s economy, you can see how that weakness could devastate a state.”

So all that kinda makes sense. To be fair, when Bernanke told the Brookings Institution, “From a technical perspective, the recession is very likely over at this point,” he also cautioned that new economic growth will not keep unemployment from rising.

And when Mack said in Russia that “The good news is that I believe the economic fear, the crisis is over,” he also was paraphrased by CNBC as saying “the capital markets [are] open and all asset classes now [have] liquid markets except for securities backed by commercial real estate assets and residential mortgage-backed securities.”

It does seem a little odd that lack of liquidity for the latter two asset groups is not so much a problem, given the blame laid directly on the hearths of millions of troubled households that got swept up into dizzying arrays of securitized “tranches.” But I suppose they’re both saying Our Fat Lady of  the Crisis has sung, so now we wait and wade through the aftermath of the lag-effect and hope that our clients and bosses and contractors start hiring again.

What I still don’t get is the myriad views of how we got here and why U.S. consumers don’t have some legal whiz cueing up for a class-action lawsuit to the tune of Big Tobacco Got Slammed–Why Can’t We do Some Slamming, Too?.

For example, I read “The Failure of Bankruptcy Reform” in a Sept. 15 “Business” post at The Atlantic and wonder how on Earth the U.S. screwball Senate gets away with refusing to go along with the move to fix the Bankruptcy reform act of 2005.

As  Mike Konczal writes: “The goals of the controversial 2005 Bankruptcy Reform were to both lower the number of those filing bankruptcy and also to increase the amount recovered post bankruptcy by forcing consumers into Chapter 13 bankruptcies. Seeing the latest data, it is clear that both of these goals have been failures–however the unique way in which they have failed is worth investigating.”

Part of the credit-card industry’s message was that w-a-a-y too many shiftless plebes were abusing the Bankruptcy Code by filing Chapter 7 petitions and thereby skipping merrily lah-de-dah into the guilt-free twilight for yet another round of consumer excess–oh, and, uh…also stiffing the erstwhile credit card companies who were simply doing their patriotic best to provide retail-level liquidity. How do we spell “moral hazard”?

As Bankruptcy Corner readers know, the number of recent Chapter 7 filings has astounded and confounded experts. But what I’m only now learning is the stated goals of the act may not have been the actual goals. (I know–dumbfounding, right?)

As Konczal explains, if the metrics were such that the credit-card industry were paying its lobbyists to reduce bankruptcy filings overall and to steer the remainder toward Chapter 13 filings, why then it’s pretty obvious that it’s been a dismal failure. In that light, he asks, “Since lobbying is costly, if you were the CEO of a credit card or financial company, would you have fired the team responsible for writing this bill for Congress?”

And the surprsing answer?

“Actually no,” writes Konczal, “you’d give that team a giant raise.”

Huh?

Well, it turns out that actual goal may have simply been to string out consumers, to put hurdles in the bankruptcy filing process.

Again, Konczal: “Many of the features of the bill–including ‘credit counseling’, raising filing fees, debt-relief agencies, etc.–are designed to raise the time barrier between financial distress and the act of filing a bankruptcy. And what happens during that time? The person in question is paying triggered high-interest rates on credit card loans.”

And where is Konczal coming up with these crazy notions? From Ronald J. Mann, an award-winning author, scholar and professor of law, who wrote a little essay back in 2006 called “Bankruptcy Reform and the ‘Sweat Box’ of Credit Card Debt,” which you can read here or here.

Now, just to be clear, Mann does not seem anti-credit card, at least not in a Dave Ramsey sort of way. Indeed, in Mann’s conclusion, he says straight up: “The credit card is perhaps the most important financial innovation of the twentieth century; it introduced substantial efficiencies in both payment and borrowing markets.”

However, that insight is immediately followed by this (numerals indicate his footnotes): “The credit card, however, is associated with increases in spending, borrowing, and financial distress.117 It is not clear why that is the case, although academics have suggested it may be due to cognitive impairments, compulsive behavior, unfair advertising, or fraudulent contracting practices. Reform-minded governments around the world currently are struggling with how to respond to the problems with credit cards without undermining the efficiency of payment and lending markets.119″ Some responses focus on the payment functionality. Because credit cards might encourage consumers to spend too much, and perhaps more than they can repay out of monthly incomes, credit card use can lead to unplanned debt.”

A few lines following he writes, “Because the credit card is so easy to use (that is, the transaction costs of credit card lending are so low), borrowers underestimate the risks associated with future revenue streams. The response is to intervene in the market for consumer lending or adjust the types of relief available in bankruptcy.121

Although policymakers around the world are loosening the rigor of their consumer bankruptcy systems—in large part due to the introduction of American-style consumer credit—the legislative desire to protect the credit card’s unique place in the U.S. economy was one of the most important motivations for the bankruptcy reform statute. Oddly enough, the credit card industry successfully convinced bipartisan majorities in both the House and Senate that there were serious deficiencies in the American bankruptcy system within which the card has had its phenomenal success. Thus, the central idea behind the ‘fresh start’—the complete liquidation of all debts—has shifted towards a presumption in favor of repayment.”

Now here’s Konczal’s take on the Mann essay: “I’ve written about how the extremely high interest rates can’t be justified on financial engineering risk-measurement quantifications, and are more likely either a way to force consumers to pay off their loans immediately or soak them for what they are worth. Mann runs a quick number experiment (p. 18): Picture a distressed consumer with $2,000 in a credit card. If the cost of funds is 3%/year, interest is 18% for the first 3 months, 24% next three months, and 30% onward, minimum monthly payment is 2%, 2%+$50, and 2.5%+$50, for those time periods, and the borrower has a $40 fee every other month for whatever reason starting in the seventh month. Typical right? If the consumer pays this off for 2 years, the balance on the credit card is still $1,270, but if you look at the economic total (from the cost of capital) the loan has been paid off with $6 to spare. I replicate this in a google spreadsheet here.

“This is why keeping consumers paying off high fees and high interest for an extra year or two can be so profitable, and why it is worth all the lobbyist money even though the stated goals got lost in the shuffle somewhere. Stringing consumers along for another 2 years+ is a great business improvement, even if it doesn’t change a single other thing under equilibrium. And sure enough, it looks like the two years it has taken to get back to the previous numbers is reflective of this newfound, incredibly profitable, lag.”

In our various explorations concerning how we got in this mess, we’ ve learned that mortgage companies have plenty to answer for, especially why they seem so balky-mule resistant to renegotiating outrageous loan terms when–yet the mortgage industry is rabidly opposed to new legislation that would allow bankruptcy judges to modify loans for primary residences. Now we see that the credit-card industry may also be using the new bankruptcy act to soak its least fiscally able customers.

If Our Fat Lady of the Crisis has finished her aria, when do we get to hear the Phat Lady warming up?

[Editor's Note: Next installment of Mike Hinshaw's coverage will return to Adam Levitin's work, first posted here, expounded upon here and revisited here.]

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It’s true that the bankruptcy reform act of 2005 changed many aspects of the law for those needing protection and also for attorneys who practice bankruptcy law. If you’re considering filing for bankruptcy, it’s important to receive counsel from not only trained bankruptcy attorneys but also from experienced bankruptcy attorneys. Bankruptcy offers many consumers powerful tools for starting over, but it can be a complex process–and timing the submission of your petition can be crucial to your ongoing success, for years to come. We have background information available as well as a simple form that will get you started today. Please notice some terms seem similar on your first reading, so don’t hesitate to click back and forth to get a feel for the terminology and the distinctions between different programs.

Perhaps debt elimination is best for you. Start here.

Maybe debt consolidation is better for you: In that case, start here.

If you already have exhausted the preceding information, you may be ready to consider invoking protection from the bankruptcy code–if so, read here.

If you need immediate help, you can complete a short form here.

In an astoundingly overt display of contempt for those facing foreclosure–and for their neighbors as well–the U.S. Senate voted 51-45 April 30 against a housing bill amendment that would have granted power to bankruptcy judges to modify terms of loans on primary residences.

Washingtontimes.com called it a “rare congressional setback” for President Obama in this report but also noted “Critics [who] said Mr. Obama failed to use any muscle to preserve the ‘cram-down’ provision,” while “the president’s allies in the Democrat-led Congress blamed lobbying by the banking industry for killing the bill.”

However, in the House, “lawmakers overwhelmingly passed a bill that imposes new rules on credit card companies and protects consumers from sudden interest rate increases on existing balances.”

Of course, that may be a temporary victory: the House also passed its version of the bankruptcy-relief measure in March. So even though Senate Democrats are crowing about their numbers–bolstered by Arlen Specter’s bolt from the GOP–the defeat of the bankruptcy measure shows the banking and mortgage-lending lobby is plenty strong enough to overcome any sense of party unity, not to mention common decency or logic.

Senate Majority Whip Dick Durbin (D-Ill) is credited with supporting the bankruptcy provision for the past couple of years; recognizing the lack of support for the measure as a stand-alone item, he spearheaded the move to attach it as an amendment to broader housing legislation and, after the vote, seemed determined to not let the idea die.

” ‘At some point, the senators in this chamber will decide that the bankers shouldn’t write the agenda for the United States Senate,’ [Durbin] said, arguing that the measure would save about 1.7 million homeowners from foreclosure.”

Opposing the idea to let bankruptcy judges help people save their homes came from a dozen banking industry associations, including the Mortgage Banking Association (MBA) and the American Bankers’ Association (ABA). Here’s a clip of from the MBA’s “National Policy Conference,” April 29-30, showing an ebullient group of fellas basking in anticipatory preglow of the “third defeat of the measure in two years.”

Among those shown in the clip are David Kittle, identified as MBA chairman, who addresses attendees thusly: “The cramdown vote may come tomorrow. And wouldn’t it be beautiful for it to go down to defeat while we’re up on the Hill?

“The timing just couldn’t be better–maybe a rainbow will come out tomorrow at the same time.”

In the clip, Kittle is followed by Steve O’ Connor, who ever so preciously quips, “The media’s in the room, so I might change my remarks just little bit because that wasn’t part of the plan.” O’Connor is identified as the MBA VP of Government Affairs. One wonders what he might have said without media presence.

Stephen Labaton, writing in The New York Times, says, “Bank lobbyists had maintained that the legislation, if adopted, would have resulted in higher rates for all mortgage holders. A letter signed by 12 industry organizations this week to senators warned that the legislation would ‘have the unintended consequence of further destabilizing the markets.

‘Though interest rates today are at all-time lows, this legislation would result in higher costs for future borrowers,’ the letter said.”

At consumeraffairs.com, its report says, “The American Bankers’ Association said it produced 12,450 letters from its members stating their strong opposition. In addition, the ABA said it was able to jam switchboards in senators’ offices and flood their inboxes with email. The measure failed on a 51-45 vote.

‘We have consistently maintained that allowing bankruptcy judges to arbitrarily rewrite the terms of a mortgage contract — including allowing them to reduce . . . the amount owed on a mortgage, change interest rates, or stretch out the terms of the loan – would bring additional risk and uncertainty to an already volatile mortgage market and would make home loans more expensive and less available for consumers,’ said Floyd E. Stoner, the ABA’s executive director, congressional relations & public policy.”

Strangely enough, no one seems to be talking about the House version that passed in March, which contained language that would limit the so-called cramdown powers such that new mortgages would not be affected. In other words, there’s a way to make sure that mortgage lenders can not use cramdown as an excuse to raise interest rates for everybody.

And of course critics don’t want to talk about the possible unintended effects of defeating the measure. For example, defeat of cramdown almost assuredly will spur further bankruptcy filings because hard-pressed homeowners may have no other viable alternative. If cramdown powers were allowed on primary residences, mortgage lenders would be motivated to bring real offers to the table, meaningful renegotiation that could avert foreclosure and save family homes and head off further erosion of property value in neighborhoods across America.

Still, even the jubilant-for-now MBA recognizes that Senator Durbin and his allies have not thrown in the towel. At the end the clip from the MBS conference, Kittle resorts to a sports analogy:

“So tomorrow if we win, which would be the third win,” Kittle says, “we kinda’ have to consider this like the NCAA bracket: We’re not to the championship again, ’cause it’s coming back.

“So we need to keep fighting it. We need to keep giving to the PAC,” he emphasizes, “on a regular basis–this fight’s coming back.”

Let’s hope so–the law would be an efficient method to clear up the mess caused by the derivative-based mortgages that has the world’s head spinning and massive numbers of U.S. homeowners heading to bankruptcy court for protection. For example, San Diego bankruptcy filings are up nearly 80 per cent from 2007.

In her April 20 “Realty Check” column, Olick leads off with this: “Despite the fact that the press representative in Senator Dick Durbin’s (D-IL) office tells me ‘negotiations are still underway,’ several outlets are reporting that the Senate version of the so-called bankruptcy ‘cramdown’ bill is imminent. The house passed legislation in March allowing bankruptcy judges to modify home loans, with a couple of caveats, the main one being that the borrower had to have exhausted all possibilities for modification with his/her lender.”

UPI supports Olick’s account, at least partially; in an April 18 posting, UPI traces the optimism for passage to financial “industry sources” who “told the Washington publication The Hill Friday that backers of the so-called cramdown legislation — which seeks to aid homeowners who owe more on their homes than their market value — are looking to overcome vociferous opposition from the banking industry and have a measure ready for a vote by Tuesday,” which would have been April 21.

The House bill, described here, was passed March 5, 234-91 and would allow bankruptcy judges to do what they already can with such luxuries as vacation homes, snowmobiles and even yachts–namely, modify the terms of the loan. Since 1979, these judges have had their hands tied via legislation prompted by mortgage lending lobby.

Not surprising to anyone who follows Olick, she also says, “Now we’ve already discussed ad nauseam the main argument against the idea, which is that it would throw into question the value of all mortgages, and therefore raise the cost of a mortgage for everyone else.”

Where she gets such ideas is anybody’s guess. The mortgage lending lobby, again? Regardless, the House version contained language limiting the judges’ powers such that new mortgages would not be subject to the so-called “cram-down.” Presumably, the Senate version would be at least as restrictive.

However, she also points out that it’s a bad idea to judge the president’s programs too early: “The administration’s Making Homes Affordable program is well underway, with banks supposedly doing their all to modify home loans by reducing monthly payments under a certain formula. Let me emphasize that the program is barely a month old, so it may not be fair to judge it on its merits just yet.”

But then, with ear-to-ground and finger-on-pulse sagacity, Olick gives us her verison of an insider’s view: “Banks/servicers are overwhelmed, borrowers are getting the serious run around, investors are mounting new offensives over who will take the losses on these modified loans, and many borrowers who are getting through to the right lines are being turned down. If judges are allowed to modify loans, then investors would likely take all the losses because they’d have no legal recourse against servicers for breaking any contracts. Servicers would be following judicial orders.”

Regardless, Durbin’s office is sticking to its story that no breakthrough is imminent: “We don’t have a deal, and there is not a deadline,” Durbin spokesman Max Gleischman told UPI.

As for the confusion, well–who knew? Kidding aside, anyone who’s contemplating bankruptcy or who has been trying to get help from their loan servicers is all too aware of what it’s like trying to make contact, much less get a straight answer. That’s because of the nature of these derivative-driven, pooled-and-tranched financial instruments–they’re often promulgated as trusts, administered by loan servicers who can make more money if a property goes into foreclosure than they can if it doesn’t. Plus, as the law now stands, they can be sued by investors (as Olick alludes) if they help a homeowner with new terms. That’s explained here.

In San Diego, even more overwhelm-ed-ness is being reported, but not from a variety of sources. In a brief for the San Diego Business Journal, Heather Chambers says, “The sheer volume of bankruptcy filings in San Diego County by individuals and businesses has reached levels unseen since 1999, county and city officials said last week.

“Aside from an unusually high number of bankruptcies filed in 2005, before a major change in the law made it more difficult to file for personal bankruptcy, there hasn’t been a busier time for bankruptcy.”

Chambers says more than 13,000 “local debtors” filed for either Chapter 7 or Chapter 13 protection, “up 78 percent over 2007.”

What continues to buck the norm–at least as projected by the credit-card industry-driven “reform” of 2005–is the number of Chapter 7 filings. Credit card companies pushed the reform as a way to stop what they viewed as abuse of the bankruptcy code by forcing more filers toward the Chapter 13 queue because Chapter 13 requires debt repayment (even if it’s lowered amounts) over three to five years.

Yet, Chambers says Chapter 7 filings have increased 91 per cent from 2007 levels, while Chapter 13 filings are up 30 per cent in the same period.

Perhaps Senator Durbin is sandbagging for a reason and The Hill’s sources are right: if so, maybe the reluctant Senate will soon do the right thing and follow the House’s example. U.S. homeowners surely need the legislation if lenders won’t come to the table with realistic offers.