By Robert Reich
Thirty years later, the Trump Plaza folded, leaving some 1,000
employees without jobs. Trump, meanwhile, was on Twitter claiming he had
“nothing to do with Atlantic City,” and praising himself for his “great timing”
in getting out of the investment.
As I show in my new book, “Saving Capitalism: For the Many, Not
the Few,” people with lots of money can easily avoid the consequences of
bad bets and big losses by cashing out at the first sign of trouble.
Bankruptcy
laws protect them. But workers who move to a place like Atlantic City for a
job, invest in a home there, and build their skills have no such protection.
Jobs vanish, skills are suddenly irrelevant and home values plummet. They’re
stuck with the mess.
Bankruptcy was designed so people could start over. But these
days, the only ones starting over are big corporations, wealthy moguls and Wall
Street bankers, who have had enough political clout to shape bankruptcy laws
(like many other laws) to their needs.
In the last few decades, these changes have reflected the
demands of giant corporations, Wall Street banks, big developers and major
credit card companies who wanted to make it harder for average people to
declare bankruptcy but easier for themselves to do the same.
The granddaddy of all failures to repay what was owed 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 then that the
rest of Wall Street be forced to grapple with their problems in bankruptcy as
well. 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. Yet 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.
When the financial crisis hit, some members of Congress, led by
Illinois Sen. Dick Durbin, tried to amend the code to allow distressed
homeowners to use bankruptcy. That would have given them a powerful bargaining
chip for preventing the banks and others servicing their loans from foreclosing
on their homes.
If the creditors and homeowners couldn’t come to an agreement,
the homeowner’s case would go to a bankruptcy judge who presumably would reduce
the amount to be repaid rather than automatically force people out of their
homes.
The bill passed the House, but when in late April 2009 Durbin
offered his amendment in the Senate, the financial industry—among the largest
donors to both parties—argued it would greatly increase the cost of home loans.
(No convincing evidence showed this to be the case.)
The bill garnered only 45
Senate votes even though Democrats were in the majority. As a result,
distressed homeowners had no bargaining power. Subsequently, more than 5
million 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 percent 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 can’t meet their payments, lenders can garnish
their paychecks. If 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.
Congress and its banking patrons fear that if graduates could
declare bankruptcy on their debts, they might never repay them. But a better
alternative would be to allow former students to use bankruptcy where the terms
of the loans are obviously unreasonable (such as double-digit interest rates),
or if the schools they owed money to had very low post-graduation employment
rates.
State and federal lawmakers once sought to protect vulnerable
borrowers by setting limits on the interest that could be demanded by
creditors. But in recent years, under political pressure from big banks like
Citigroup, many state legislatures have repealed those limits.
It’s not unusual
for borrowers who want an advance on an upcoming paycheck to now pay annualized
rate of 300 percent or more.
Such legal changes helped swell profits at Citigroup, whose
former OneMain Financial unit was one of the leading payday lenders. “There was
simply no need to change the law,” Rick Glazier, a North Carolina Democratic
legislator who opposed raising interest rate limits there, told the New
York Times. “It was one of the most brazen efforts by a special interest
group to increase its own profits that I have ever seen.”
It’s not just changes in the bankruptcy code and interest-rate
regulations that benefit the wealthy. Real estate developers like Trump have
also benefited from a welter of special subsidies and tax breaks squeezed out
of pliant local legislators.
Trump has the unique distinction of being the first developer in
New York to receive a public subsidy for commercial projects under programs
initially reserved for improving slum neighborhoods.
Referring to how he
managed to win a 40-year tax abatement for rebuilding a crumbling hotel at
Grand Central Station—a deal that in the first decade cost taxpayers $60
million—Trump quipped, “Someone said, ‘How come you got 40 years?’ I said,
‘Because I didn’t ask for 50.’”
Trump’s success at getting such deals is better explained by a
1980s study by Newsday, showing Trump had donated more than anyone
else to members of the New York City Board of Estimate, which at the time
approved all land-use development.
Trump sparred with Jeb Bush in the second GOP debate last
Wednesday night over Trump’s alleged lobbying for casino gambling in Florida.
“You wanted it and you didn’t get it because I was opposed to casino gambling
before, during and after,”Bush charged. “I’m not
going to be bought by anybody.” Trump responded: “I promise if I wanted it, I
would have gotten it.”
Indeed, Trump is a poster child for how big money buys the laws
it wants. “As a businessman and a very substantial donor to very important
people, when you give, they do whatever the hell you want them to do,” Trump
told the Wall Street Journal.
“As a businessman, I need that.”
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—from the federal bankruptcy code to state usury
laws to local tax abatements—are made by lawmakers.
And the real issue is whose interests those lawmakers are
pursuing. Are they working for the vast majority of Americans, who are getting
nowhere economically and whose political voices are barely even heard these
days? Or are they beholden to those at the top—CEOs of the biggest corporations
and Wall Street banks, hedge-fund and private-equity moguls and
billionaires—who now own more of the nation’s wealth than the robber barons of
the Gilded Age of the late 19th century, and are using some of that wealth to
further rig the rules to their benefit?
We don’t need Donald Trump to give us the answer.
[This article, which appeared in the September 28
edition ofPolitico Magazine, is drawn from my new book “Saving Capitalism:
For the Many, Not the Few.”]
ROBERT B. REICH, Chancellor’s Professor of
Public Policy at the University of California at Berkeley and Senior Fellow at
the Blum Center for Developing Economies, was Secretary of Labor in the Clinton
administration. Time Magazine named him one of the ten most effective cabinet
secretaries of the twentieth century. He has written fourteen books, including
the best sellers “Aftershock, “The Work of Nations," and"Beyond
Outrage." He is also a founding editor of the American Prospect magazine
and chairman of Common Cause. His film, INEQUALITY FOR ALL is available on
Netflix, iTunes, Amazon. His new book, "SAVING CAPITALISM: For the Many,
Not the Few" is out 9/29.
