Wednesday, September 24, 2014

Raking In On Rents: The Housing Crisis Begins Anew

This was originally published on

Wall Street wrecked the economy in 2007 due to dealing in shady mortgage securities that were given dubious triple-A ratings and put the entire global economy on the brink.  Do you think those big banksters learned their lesson and decided not to dabble in overly complex financial instruments and to stop deceiving people? The answer is of course, a resounding no. Not only have the bankers not received virtually any punishments for nearly destroying the economy, they are now involving themselves in the rental arena and may create another financial crisis in the process.

The situation began when the Federal Housing Finance Agency Real-Estate Owned (REO) initiative program launched in late February 2012. The purpose of the program was to allow “qualified investors to purchase pools of foreclosed properties with the requirement to rent the purchased properties for a specified number of years.” The thinking behind the program was that it “could provide relief for local housing markets that continue to be depressed by the volume of foreclosed properties, and provide additional rental options to certain markets.” The initial phase involved allowing companies to purchase large amounts of foreclosed properties from Fannie Mae and Freddie Mac, given that in a couple of years the properties would be converted into rental housing.

It must be noted, however, that in a August 10, 2011 information request regarding the then-upcoming REO Program, it was stated that a specific goal was to “solicit ideas from market participants that would maximize the economic value that may arise from pooling the single-family REO properties in specified geographic areas.” Now, this makes sense in that you need information from corporations who can deal in the REO business on a large scale, but it also allows for these very same corporations to have influence in what occurs and to potentially steer the program in a direction that would be to their benefit.

Once this program was open, companies began snapping up properties quickly and then securitizing them, called REO-to-rental securitization. The first company to do this was Blackstone which “[packaged] rental income from single-family homes it owns into a pass-through security, similar to a mortgaged-backed security.” While some economists argued that this could aid the hardest hit areas of the housing crash, others worried that “these new investors could face big challenges managing large portfolios of dispersed rental houses.”

Investor companies such as Blackstone wanted to get into this new business as it had the potential to net returns that were much higher than either investing in Treasury securities or stock dividends. For example, “While a 10-year Treasury note yields little more than 2%, economists at Goldman Sachs calculate that rental property investments yield more than 6% on average, nationwide.”

From the very beginning of this new venture, there were already alarms raised about the situation. While Moody’s was allegedly giving such securitizations a triple-A rating, Fitch Ratings saw a major problem with this, namely that there was “limited performance data for the sector and individual property management firms.” This meant that people didn’t really know what they were getting themselves into as this was a new market and thus the situation was quite risky. Earlier this year, Standard & Poor’s warned that rental security bonds didn’t deserve triple-A status due to their “operational infancy,” disagreeing with other rating agencies such as Moody’s, Krolls, and Morningstar.

Rent securitization has the potential to have some serious effects. Daniel Indiviglio, a columnist at Reuters, argued that the lack of data on securitization presents a number of challenges. The securities “may require an entirely new infrastructure for appraising how rentable a home is and at what price. And the faults that the crisis exposed in securitization reinforce how crucial a good crop of historical information is on rental trends.” Without having any long-term historical data, investors and rating agencies will be forced “to make assumptions on new stats like vacancy rates, tenant turnover costs and property management fees.”

Another factor is that potential bond purchasers will want to demand serious compensation for ponying up the money to buy these vacant houses as one cannot assume that the property is stable unless tenants have lived there for quite some time or signed a medium or long-term lease, which is quite rare for renters who are just moving in. “And with foreclosures focused in a few key regions and resulting rentals appealing to specific segments of the population, concentration risk is likely to be magnified.” This all raises the possibility that rental securitization may cost more than it is actually worth.

In addition to the actual financial risk for investors, there is also the possibility that rental bonds could possibly be increasing rents. In January 2014 it was reported that Congressional Representative Mark Takano (D-Calif.) “sent a letter to House Financial Services Committee Chairman Jeb Hensarling and Rep. Maxine Waters, D-Calif., asking for an investigation into rental-backed securities deals” as he was saw that rental prices were increasing and that “a surplus of investors in rentals -- along with new rental-backed securities deals -- could have the effect of artificially raising rental prices, making housing even more costly in parts of California.”

To back up his case, Takano cited a 2013 Federal Reserve report which stated, with regards to companies buying up houses and renting them out, that without proper oversight “investor activity may pose risks to local housing markets if investors have difficulties managing such large stocks of rental properties or fail to adequately maintain their homes” and that “Such behavior could lower the quality of the neighborhoods in which investors own rental properties.”

But, we can safely assume that Congress already has laws to oversee rent securitization…right? It isn’t as if they would just go and let a situation similar to what just occurred go without being properly regulated….right? Well, it seems that there is no legislation overseeing rent securitization whatsoever. Representative Takano for Congressional hearings in January 2014 to look into the issue and so far it seems that nothing has happened.

While the situation is bad in Congress, it is even worse for people who live in houses that are owned by these corporations. Mindy Culpepper lived on the outskirts of Atlanta in a home which was consistently inundated with the stench of raw sewage and while she and her husband paid $1,225 a month to live in the three-bedroom house, her landlord in the form of Colony American Homes completely ignored her complaints. This isn’t a recent problem either; the Culpeppers have had to live with that stench from the first day they moved in.

Speaking of Atlanta, on April 15, 2014 the organization Occupy Our Homes Atlanta released a report entitled Blackstone: Atlanta’s Newest Landlord in which it was found that: (1) Tenants wishing to stay in their homes can face automatic rent increases as much as 20% annually. (2) Survey participants living in Invitation Homes pay nearly $300 more in rent than the Metro Atlanta median. (3) 45% of survey participants pay more than 30% of their income on rent, by definition making the rent unaffordable. (4) Tenants face high fees, including a $200 late fee for rental payments. (5) 78% of the surveyed tenants do not have consistent or reliable access to the landlord or property manager.

Furthermore, it was reported in July 2014 that while the company Invitation Homes “claims to have spent $25,000 per home to bring them up to standards, 46 percent of respondents reported plumbing problems, 39 percent found roaches or other insects, and around one in five had issues with air conditioning or mold or leaky roofs.” Thus, we can see that these corporations only care about making money rather than taking care of tenants.

All of this has a major impact on the working-class as they already spend more than half of their income on rent but with rent securitization, the economic problems begin even before people have entered the door. The organization Homes For All, released a report focusing on the Los Angeles rent securitization scene and found that “A major barrier to rental accessibility, especially for low-income renters, is the required deposit amount. In Los Angeles, the average deposit amount equated to 157 percent of respondents’ monthly rent amount. The highest deposit required as a percentage of monthly rent was 281 percent, and the lowest was 53 percent.” With regards to amount spent on rent, the report found that “67 percent of [the] respondents had unaffordable housing, and 47 percent were severely cost-burdened.”

There are other problems as well. In New York City, where private equity firms are buying up apartment buildings which are rent-controlled, companies are pushing long-term residents out of their apartments in order to redo the dwellings and sell them at market prices. These firms are often engaging in illegal tactics such as “mailing fake eviction notices, cutting off the heat or water, and allowing vermin infestations to take hold.” Serious money is on the table for these companies. For example, in 2005, Rockpoint Group “bought a complex of apartment buildings in Harlem known as the Riverton Houses. To justify the whopping $225 million mortgage, the company projected that it would be able to more than triple the rental income from $5.2 million to $23.6 million by forcing out half of the rent-regulated tenants within five years.”

Rent securitization is a major problem, not only because it mirrors the mortgage crisis that just occurred, but also because of the human impact it has. People who are already in difficult conditions, living in rent-controlled apartments are being forced out and those who are purchasing these corporate-owned apartments are living in wretched conditions and rarely to get any service whatsoever. We need to say no to this new scheme because if not, it may allow for the mortgage crisis to become a rent crisis.

Friday, September 12, 2014

The Power of the People: Battle In Kingsbridge

The following is the transcript of a recent interview I had with Álvaro Franco, a member of the People’s Power Movement which is working with residents of Kingsbridge Heights in the Bronx to battle against gentrification and rent hikes.

1. How did the situation in Kingsbridge start? What was the context for the gentrification and increase in rent? What is the make-up of the Kingsbridge community?

The City and a nonprofit called NWBCC created a Community Benefits Agreement (CBA) that would redevelop the Kingsbridge Armory into the world's biggest ice skating center; in return, the majority of the workforce for this new center would come from Kingsbridge. Since then, many property owners hoping to capitalize on the redevelopment have started raising rent for merchants and tenants.

I forgot to mention KARA: the Kingsbridge Armory Redevelopment Alliance. KARA is/was a coalition of 27 community groups and business owners that, for 15+ years, heard proposals from various developers about the future of the Armory. I'm not too sure about the exact year, but I would say about 3-4 years ago the majority of KARA voted on a CBA that allowed an ice skating center w/ 8 rinks inside, as long as Kingsbridge residents constitute the majority of the workforce. However, after that CBA was made, the KARA meetings became private, and the community groups that had voted against the Ice Center were shut out of the conversation.

Working-class Dominican and black residents make up the majority of Kingsbridge; it is a primarily low-income neighborhood, and a great many of the business owners live there instead of elsewhere.

2. What was the tipping point(s) for many in the community? When did you all start to get together and organize?

For the tenants, the tipping point was when the landlord applied for an MCI rent increase on the basis of external repairs, when the cost of repairs should come out of his pocket; for the merchants, it was when the new landlord neglected to renew their leases and instead doubled their rent.

3. What activities are people in Kingsbridge engaging in to resist gentrification and rent increases?

The tenants in one particular building on University Ave created their first tenants' association in 10 years, and together they are organizing to block the rent hikes. The members of the Merchants Association on Kingsbridge Road are meeting separately w/ the landlord to negotiate terms for staying a little longer; others are willing to fight harder and raise more public awareness about the economic injustice.

4. In what manner are the tenants organized?

The Tenants' Association of 2800 University Ave elected a President, Vice President, and Secretary during their first meeting in July; no backlash from the landlord so far. The body of leadership is primarily working-class women of color, and they are deciding whether to elect captains for each side of the building: North, South, and Center.

Right now PPM is revising its list of demands for the tenants, so we can't really publish that information right now, but the goal is for the list to match one of the immediate demands from our group: "Institute a massive program of quality, affordable public housing for all, under tenant management.  Roll back rents. End gentrification. The New York City Rent Control Board to be popularly elected."

5. Are you all looking at the situation from a perspective of reform or something more? Is the situation being examined as a short-term goal or are you going for the long haul? 

We are looking at it from the perspective of fundamental social change, in for the long haul. We are currently working on our list of demands for tenants.

6. How much and what kind of support have the movement achieved? 

Part of the support the tenants received was news coverage by the Riverdale Press and Manhattan Neighborhood Network (MNN); the merchants' story was covered on News 12, the Bronx.

7. Are there future plans to link up with other communities that are facing the same problems?

For now, future plans involve reaching out to other buildings within University Ave and Kingsbridge Road to see if they also received an MCI rent increase; when our capacity increases, then we can link up with other neighborhoods in the Bronx, or even Crown Heights in Brooklyn.

8. How can people get in touch with and support the movement?

They can email us at

Follow us on Facebook at 

On Tumblr at 

On Twitter at

Wednesday, September 10, 2014

Exploring The Graveyard (Part 2)

Image Courtesy of A State Anthem 20th Century Russian History Blog

Exploring The Graveyard

Part 2: Bloodshed

See Part 1 here

After Daoud Khan ascended to power, the situation in Afghanistan seemed rather stable, however on the ground; problems had begun to brew in past years, problems which would ultimately play a major role in shaping not only Afghanistan, but ultimately the larger geopolitics of the region.

The People's Democratic Party of Afghanistan

Before Daoud Khan’s coup, there were talks of forming a new constitution and due to this the number of political groups became increasingly active after 1963. The People's Democratic Party of Afghanistan (aka the Afghan Communist Party) formed in 1965. It was during this decade that the country “underwent political polarization in the mid-1960s, with factions on the extreme left and right gaining strength.”[1]  The Parcham faction was led by Babrak Karmal, the “son of a well-connected army general, Karmal became involved in Marxist political activities while a student at Kabul University in the 1950s and was imprisoned for five years as a result.”[2]  After being released from prison, he served in the army and attained a law degree. The Khalq faction was led by Nur Mohammad Taraki, a man with a rural background who had clawed his way up to being an appointed attaché at the Afghan embassy in Washington, D.C. and continued to be involved in politics.

The Parcham were “drawn mainly from the non-Pushtun, Dari-speaking elite centered in the capital”[3]  and “enlisted followers mainly among Dari-speaking Kabuli intellectuals”[4]  as well as pro-Soviet moderates, whereas the Khalq were “a nationalistic, grassroots party dominated by the Pushtuns”[5]  and popular in rural areas. The Communists split into two factions, the Parcham and Khalq in 1967, due to disputes over policy.

Yet, there was more than just the PDPA that was politically active; there were also a student movements and Islamist groups.

Political Movement and the Saur Revolution

Student movements were a fairly recent occurrence in Afghanistan, such as in 1950, when a student union attempted to form but ultimately failed due to differences between pro- and anti-government factions.

In the 1960s, students were actively exposed to politics as many in high school would read leftist literature that had been snuck in from Iran and India. College students were in environments that “favored political debates, which soon resulted in the formation of discussion groups that later coagulated into political parties” and they “were actively involved in the campaign for both parliamentary elections in the 1960s.”[6]  This large-scale involvement helped to change Afghan political parties as some of them had their roots in the university.

However, there were also Islamists in the university as well, many of them were influenced by the Muslim Brotherhood and “comprised mainly of university professors who had studied at al-Azhar in Cairo,”[7]  with the student wing of Islamist movement eventually evolving into a full-fledged organization.

So what we see is that there was a large amount of political organizing going on, among a variety of sectors in society. However, the landscape would soon change.

Quickly after July 1973, when Daoud Khan came back to power in a coup, he began a war against not only the splinter parties of the PDPA, but more broadly against groups that opposed him. Khan removed PDPA members from positions of importance, “closed down the independent press, which led to the publication of underground, antigovernment leaflets by the left and the religious right” and initiated “a crackdown on fundamentalist Muslim groups in 1974” and “sent a small number of fundamentalists into exile in Pakistan.”[8]  Yet, this only caused political instability, with a number of assassinations taking place in late 1977 and early 1978.

The attack caused the Parcham and Khalq factions to put aside their differences in favor of fighting their common enemy in Daoud Khan. The arrest of leftist leader in April 1978 was the final nail in the coffin. On April 27th, with the aid of Marxist-influenced military officers, the PDPA took power and immediately began to attack members of the former regime.

Afghan Communist Rule

The new regime has led by Nur Mohammad Taraki of the Khalq faction of the PDPA. He moved quickly to transform the country, embarking on a campaign that “challenged not only traditional Afghan political sentiments, but also the new Islamist movement.”[9]  Taraki “introduced a series of radical reforms, beginning with the replacement of the traditional Islamic green flag of Afghanistan with a red one, [which] collectively amounted to a declaration of war on traditional Afghan society.”[10]  Instability soon began to show, with an army unit revolting in March 1979, but even before then, in October of 1978, large armed rebellions occurred in eastern Afghanistan and began to spread.

Yet, the new Communist regime did not take these rebellions sitting down. They responded to the rebellion with extremely brutality, strafing rural villages and setting fire to crops in rebel areas.[11]  This only increased anti-Communist sentiment and by 1979, the new regime was being seriously threatened.

The Afghan Communist government had contacted the Soviets in March 1979 to ask for assistance, but was rebuffed. Yet in December of that year, the Soviets invaded Afghanistan in order to prop up their fledgling Communist government.

However, there were a number of countries interested in the new Afghan government.


The Pakistani’s had always been interested in Afghanistan, however, with Russia’s invasion of their neighbor, the politics of the situation drastically changed. Now the country was faced with Soviet troops everywhere among the Afghan-Pakistani border and on top of that, Afghan refugees were regularly flooding over the border. In addition to this, Soviet aircraft would “periodically [violate] Pakistani airspace, occasionally "buzzing" refugee camps well within its borders.”[12]

The question of Baluchistan also came up. Some saw the Soviet invasion as a plan to “penetrate Baluchistan and advance to the Arabian Sea.” Many were concerned about ethnic tensions in Pakistan and thus “were wary of Soviet and Afghan efforts to organize Baluch dissidents, resentful that Baluchistan was not being given its due recognition as a full-fledged province of Pakistan."[13]

Saudi Arabia

Saudi Arabia, too, had interests in what was going on in Afghanistan as they saw the country “as a buffer state that helped prevent Soviet expansion toward the Gulf.”[14] 

They were glad to join the US in an effort to take out the Soviet Union, but war in Afghanistan also served as “an outlet as radical as that of the Iranian revolution, though distinct from it, for all the Sunni Islamist militants who dreamed of striking a blow at the impious” and let the Saudi government “[shield] their American ally- which supported the holy war- against the wrath of Sunni activists,”[15]  as the Islamists distrusted both the US and the USSR and had no qualms about attacking either country. Saudi Arabia actively supported the Sunni Islamists as a way to thwart Iran’s influence that was moving increasingly westward.

In Afghanistan, the Saudis teamed up with the Muslim Brotherhood and the Pakistani Jam’at-i-Islami (Islamic Party) to “promote the more radical Islamist parties among the Afghan fighters, check Iranian influence, and prevent Western cultural influences from spreading among refugees and the mujahideen,” with “the first two objectives [having] the full support of the Pakistani Inter-Services Intelligence and the CIA.”[16]

The US also had interests in Afghanistan and would go quite far to ensure those interests were met.

The United States

During the Saur Revolution, while the US was concerned that the country had gone Communist, they still maintained diplomatic relations with Afghanistan. That quickly changed when, on February 14, 1979, “the U.S. ambassador in Kabul, Adolph Dubs, was kidnapped by terrorists and later died under circumstances that have never been completely explained.”[17]  After this incident, the US did not assign an ambassador.

The US would have its revenge though, as President Carter quickly signed a presidential finding, initiating Operation Cyclone, which would supply anti-Communist Afghan fighters with lethal aid via Pakistan. It must be noted that this finding was signed in July 1979 and the Soviet invasion took place in December 1979.  Carter’s administration knew that arming Afghan fighters would encourage the Soviets to militarily intervene. “In fact, Carter's National Security Advisor, Zbigniew Brzezinski, informed the president that 'this aid was going to induce a Soviet military intervention'. He told a French reporter: 'We didn't push the Russians to intervene, but we knowingly increased the probability that they would. The secret operation ... had the effect of drawing the Russians into the Afghan trap."[18]  (emphasis added) The US did this in order to weaken the USSR, but also to get revenge for the Soviets aiding the North Vietnamese just several years earlier.

The US soon aided the Afghan fighters with Stinger anti-aircraft missiles; however the situation did not go over as smoothly as portrayed. In 1983, US Ambassador to Pakistan, Ronald Spiers, say the value of the Stinger missile and the impact it could make on the Afghan war theater. Due to the missiles being in short supply, he contacted undersecretary of state Lawrence Eagleburger and “[urged] that ‘serious consideration’ be given to supplying the rebels via Pakistan with Stingers, ‘when they're available.’"[19] 

However, most of the Reagan administration was opposed to arming the rebels, with Reagan not wanting them to get their hands on hi-tech weaponry and there was a large amount of opposition in the CIA. Many at the CIA “claimed the unsophisticated rebels could not handle a weapon like the Stinger, citing the rebels' past failure to shoot down planes with the Soviet SA-7 missile.”[20] 

Then-Director of Intelligence, Robert Gates, joined the fray as well, arguing that “’the Soviets would have to consider more seriously more dramatic action,’ if the U.S. were to increase aid significantly.”[21]  The State Department stood against further arming the rebels, worried that doing so could potentially disrupt issues where the US and USSR formerly cooperated and where Soviet cooperation was needed, such as with arms control.

The situation shifted when Senator Michael Pillsbury was assigned to covert programs in Sept. 1984. He was forced into supporting giving Stinger missiles as other weapons were inadequate for fulfilling the task of downing Soviet aircraft. People’s attitudes also began to change when attacks against the rebels and their Pakistani weapons pipeline sharply increased, which put all of Operation Cyclone at risk, and when Congress began publicly pushing for increased aid to the Afghan rebels. In January 1985, “a Congressional Task Force on Afghanistan was established and began holding hearings to showcase the purportedly desperate plight of the Mujahedin.”[22]  With the signing of National Security Decision Directive 166 by Reagan in March 1985 which stated that the US would “improve the military effectiveness of the Afghan resistance,”[23]  it assured that the aid would get to the Afghans.

By next year, the rebels were getting Stingers.

There is still one country, not often talked about, that was also heavily involved in Afghanistan during this time period: China.


Before delving into China’s involvement in Afghanistan during this time period, it would first be pertinent to include a brief overview of China’s interaction with Afghanistan overall.

China shares about a 60 mile border with Afghanistan. From the very start, China didn’t regard Afghanistan as a threat to its geopolitical interests and generally didn’t see themselves as having a strategically important border with Afghanistan.

That changed once the Soviets invaded. Due to the Sino-Soviet split in which China and the USSR called it quits on their relationship, the Chinese became “were concerned about the military activity near the Badakhshan (including Wakhan) province of Afghanistan, which was connected to the China border.”[24]  The Chinese thought that this was a serious security threat, with the Chinese Ministry of Foreign Affairs sending a message to the Soviet ambassador on the last day of 1979, stating that “‘Afghanistan is China’s neighbor … and therefore the Soviet armed invasion of that country poses a threat to China’s security. This cannot but arouse the grave concern of the Chinese people.’”[25]

China quickly moved to establish contacts with Pakistan and Iran on a deeper level and began to give financial and military aid to Afghan rebel fighters. Aid was given to Pakistan as well in order to counter the Soviet encirclement of China and avoid a direct military confrontation with the superpower.

Finally, there were massive shifts in Chinese policy as China “also stepped up its diplomatic and political offensives against the hegemony of the Soviet social imperialism by cultivating better relations with the USA.”[26]  Thus a series of de-facto alliances formed against the Soviet Union, which resulted in the failure of their military campaign and the war fully ending on February 15, 1989.

While Afghanistan had survived the Soviet Union, there will still a number of problems and concerns. In the next decade radical Islamists, allied with a even more radical group, would take over the country. But we must first pause and ask ourselves three questions:

1.    What is the Taliban?

2.    What is Al Qaeda?

3.    Who exactly is Osama bin Laden?


1: Michael W. Reisman and James Silk, "Which Law Applies to the Afghan Conflict?" (1988). Faculty Scholarship Series. Paper 752., pg 467

2: Encyclopedia Brittanica, Babrak Karmal,

3: Selig S. Harrison, “A Breakthrough in Afghanistan?” Foreign Policy, Summer 1983, pg 9

4: K. Wafadar, “Afghanistan in 1980: The Struggle Continues,” Asian Survey 21:2 (1981), pg 173

5: Harrison, pg 9

6: Antonio Giustozzi, Between Patronage and Rebellion: Student Politics in Afghanistan, Afghanistan Research and Evaluation Unit, (February 2010), pg 2

7: Thomas Ruttig, Islamists, Leftists and A Void in the Center. Afghanistan's Political Parties and Where They Come From (1902-2006), Konrad-Adenauer-Stiftung,

8: Reisman, Silk, pg 468

9: Charles C. Cogan, “Partners In Time: The CIA and Afghanistan Since 1979,” World Policy Journal, Summer 1993, pg 75

10: Alexander Alexiev, The United States and the War in Afghanistan, Defense Technical Information Center,  (January 1988)

11: David Gibbs, “Does the USSR Have a 'Grand Strategy'? Reinterpreting the Invasion of Afghanistan,” Journal of Peace Research 24:365 (1987), pg 372

12: W. Howard Wiggins, “Pakistan's Search for a Foreign Policy After the Invasion of Afghanistan,” Pacific Affairs 57:2 (1984), pg 285

13: Wiggins, pg 287

14: William B. Quandt, Saudi Arabia In the 1980s: Foreign Policy, Security, and Oil (Washington D.C., Maryland: Brookings Institution Press, 1981), pg 41

15: Gilles Kepel, Jihad: The Trail of Political Islam (London, UK: I.B. Tauris, 2006), pg 137

16: Rachel Bronson, Thicker than Oil: American’s Uneasy Partnership with Saudi Arabia (New York, NY: Oxford University Press, 2006), pg 170

17: Cogan, pg 75

18: Andrew Hartman, “The Red Template: US Policy in Soviet-Occupied Afghanistan,” Third World Quarterly 23:3 (2002), pg 470

19: Alan J. Kuperman, “The Stinger Missile and US Intervention in Afghanistan,” Political Science Quarterly 114:2 (1999), pg 222

20: Hartman, pg 223

21: Ibid

22: Hartman, pg 228

23: Ronald Reagan Presidential Library and Museum, National Security Decision Directive 166,

24: A.Z. Hilali, “China’s Response to the Soviet Invasion of Afghanistan,” Central Asian Survey 20:3 (2001), pg 327

25: Ibid

26: Hilali, pg 323

Wednesday, September 3, 2014

The Quiet War On Students

Image Courtesy of

College students and graduates around the nation are buried in debt and trying to succeed in an extremely difficult and competitive economic environment. Many people are graduating only to find out that they are unable to get the jobs they want, whether it be due to the small amount of available jobs or (more usually) the problem of ‘experience,’ and thus are reduced to having to work menial jobs while paying back exorbitant loans. So far very little legislation has been passed to aid students in paying back their loans and many are blaming politicians for this. However, the situation goes deeper and in part lies at the feet of a little known institution called the American Bankers Association.

The American Bankers Association, according to their website, is “the voice of the nation’s $14 trillion banking industry, which is composed of small, regional and large banks that together employ more than 2 million people, safeguard $11 trillion in deposits and extend nearly $8 trillion in loans” and believes that “Laws and regulations should be tailored to correspond to a bank’s charter, business model, geography and risk profile.” While it is quite obvious that the ABA is an organization that works in the interest of the bankers, they have an interesting history with regards to student loans and how they have actively fought against the interest of students.

The ABA’s war against students started in the mid-1960s with the rise of the Johnson administration. Johnson ordered the formation of a task force to examine the role of the federal government in higher education, specifically student aid, to be headed by John W. Gardener. In its report, the task forced noted that “Of the students who did not attend college and who had families who could contribute only $300 or less to their education, about 75 percent of the men and 55 percent of the women indicated that they would have attended college if they had had more money available.” Johnson saw this as a loss of human capital and wanted to remedy this, ultimately signing the Higher Education Opportunity Act of 1965 into law. The law included many suggestions from the Gardner taskforce, such as that the government should aid students monetarily via grants and loans, as well as creating special programs for college-aspiring low-income students.

However, this was a major problem for the ABA. The organization was worried about government encroachment on their business, specifically loans and argued that “the federal government could not replicate the working relationships that locally-owned financial institutions had with state and private non-profit guarantee programs” and “the federal government would end up taking over the industry because there would be little incentive for the state and private non-profit agencies to establish their own programs.” In order to placate the bankers, the Johnson administration told them that the government would be the ultimate loan guarantor if no one else was available.

Yet, in the present-day, the ABA is without a doubt waging a quiet war on students by actively combating virtually any legislation that would ease their debt burden. With regards to being able to get rid of student loans in bankruptcy, the ABA stated in 2012 that, if allowed to go into effect, it “would tempt students to rack up big debt that they won't repay [and that] ‘The bankruptcy system would be opened to abuse.’” This is rather ironic, accusing that students will engage in irresponsible lending, even though the banks themselves engaged in massive amounts of the exact same activity by giving mortgage loans to people they knew couldn’t repay the amount. 

The assumption that students would just borrow money and they declare bankruptcy is rather ridiculous as filing for bankruptcy has severe negative effects such as “negatively affect your credit and future ability to use money” and can “prevent you from obtaining new lines of credit and may even cause problems when you apply for jobs.” Yet, due to the bankers and other groups fighting against being able to get rid of student loans in bankruptcy, the only other option is default, which works quite well for the banks. When a person defaults on their student loans, a number of effects:
  1. Your entire loan balance will be due in full, immediately. 
  2. Collection fees can be added to your outstanding balance. 
  3. Up to 15% of your paychecks can be taken. 
  4. Your Social Security, disability income, and state and federal tax refunds can be seized.
  5. You will lose eligibility for federal aid, including Pell grants. 
  6. You will lose deferment or forbearance options. 
  7. Outstanding fees and unpaid interest can be capitalized (added) onto your principal balance. (emphasis added)

While numbers 1, 2, 3, 4, and 7 are horrible for the borrower, they work quite well for the banks as it allows them to get their money back no matter the cost to you in the immediate aftermath or the future. So your entire economic future has pretty much been destroyed? Well, that’s just the cost of doing business.

The ABA has recently fought against efforts to not have the interest rate on student loans double from 3.4% to 6.8%. The bill in question was Senate Bill 2343, also known as the “Stop The Student Loan Interest Rate Hike of 2012.” 

Democrats wanted to finance the bill by closing a tax loophole in which “wealthy individuals and large corporations [would] often file using ‘subchapter S’ companies to dodge paying employment taxes.” The ABA and other business groups such as the US Chamber of Commerce financing of the bill on the grounds that it “would make tax collection ‘less enforceable than current law and will do little to increase compliance.’” Republicans with some Democratic support effectively shut down the bill and thus student loan rates have now doubled.

While many have accused the ABA of having a major sway with Republicans, a report from the organization Campaign For America’s future entitled Moneychangers In The Senate noted that “six Democratic senators—Blanche Lincoln, D-Ark.; Mark Warner, D-Va.; Tom Carper, D-Del.; Ben Nelson, D-Neb.; Bill Nelson, D-Fla., and Jim Webb, D-Va.—sent a letter to Senate Majority Leader Harry Reid to make him ‘aware of our concern’ about reform efforts [to aid students] and urging consideration of ‘potential alternative legislative proposals.’” 

Essentially Democrats who had been bought and paid for by lending companies were urging that Harry Reid abandon legislation that could aid students and instead look for supposed alternatives which would not harm the banks. Yet, what is interesting is that student loan companies all have close ties to each of these senators, such as Blanche Lincoln’s former chief of staff working as a lobbyist for the student loan industry and Ben Nelson’s former legislative director being a lobbyist for Nelnet, a major student lender.

It must be noted that this campaign against student loan reform has massive amounts of money on the line. From the previously cited report, it was stated that in 2009 Nelnet posted profits of $139 million and that in “In May 2008, the student lenders were bailed out by the Ensuring Continued Access to Student Loans Act (ECASLA), which gave the banks further federal subsidies. The bill allowed lenders like Sallie Mae to sell loans back to the Department o Education through a number of loan-purchase programs.” This allows lenders to make even more money. The Congressional Budget Office estimated that the government would save over $68 billion over ten years if they switched over to direct lending, however, now that $68 billion will “subsidize private lenders like Sallie Mae to pay their executives exorbitant salaries and bonuses,” such as Sallie Mae chairman Albert Lord who raked in over $225 million during his tenure at Sallie Mae which ended in 2013.

The situation does not end there, however. The Senate has proposed the “Protecting Aid for Students Act for 2014” and its House counterpart is entitled the “Curbing Abusive Marketing Practices with University Student Debit Cards Act,” or the CAMPUS Debit Cards Act. Each of these bills is meant to “protect students from unfair banking practices involving campus-sponsored financial products, including debit cards.” More specifically, the bills would “remove conflicts of interest and end kickbacks between financial institutions and schools, give students control of their financial aid and banking products, and provide transparency over campus-sponsored financial product.” 

Yet, this is a problem for the Ken Clayton, Chief Counsel of the ABA. He stated that this legislation “would limit financial choices for students and parents, and raise costs for everybody” and that “Attempts to vilify financial institutions and require free services will limit consumer choice, increase costs for students and universities, and stifle innovation that has helped modernize higher education financing.” Apparently eliminating conflicts of interests and kickbacks between colleges and banks as well as giving students control of their finances, is a problem.

While we cannot get rid of the American Bankers Association as an institution, we can actively fight against them by organizing ourselves and demanding that we be treated as human beings, not just an investment. Politicians and colleges will not have our backs, we must do this on our own, we must fight ourselves.