December 21, 2011

Obama's Popguns of Singapore

From the NYT:
Countrywide Will Settle a Bias Suit 
WASHINGTON — The Justice Department on Wednesday announced the largest residential fair-lending settlement in history, saying that Bank of America had agreed to pay $335 million to settle allegations that its Countrywide Financial unit discriminated against black and Hispanic borrowers during the housing boom. 

The British defense of Singapore after Pearl Harbor is famously (although not necessarily all that accurately) said to have suffered from the long-held assumption that Singapore's big guns must point out to sea to defeat an attack by an enemy navy. Yet, the Japanese army, not the navy, came by way of the Malaysian mainland.

Similarly, for decades, the conventional political wisdom was that the main problem with the mortgage business was its irrational refusal to do enough business with blacks and Hispanics. Thus, the government laboriously constructed legal and political guns to pound down this intractable problem.

Over time, the more politically nimble sort of lenders, such as Angelo Mozilo of Countrywide, came around to the government's point of view that they were leaving money on the table. In 2003, Mozilo trumpeted in a Harvard address that Countrywide was going to lend $600 billion (with a b) to minorities and low income communities. And then in early 2005, Mozilo upped the commitment to a trillion bucks, with Countrywide's board member Henry Cisneros (Clinton Administration HUD secretary) delegated to advise him upon it.

When the mortgage system went into the ditch in the Sand States in 2007-2008, however, it  turned out that the problem was largely one of lenders lending too much to minorities, which had driven up home prices to unsustainable levels.

Here we are in late 2011, and the Obama Administration has just fired one of its guns at the most notorious symbol of mortgage mania: Countrywide. Of course, its guns are still pointing in the wrong direction. More amusingly, the big gun turns out to be popguns.
A department investigation concluded that Countrywide loan officers and brokers charged higher fees and rates to more than 200,000 minority borrowers across the country than to white borrowers who posed the same credit risk. Countrywide also steered more than 10,000 minority borrowers into costly subprime mortgages when white borrowers with similar credit profiles received regular loans, it found.

Let's do some math: $335 million divided by 200,000 minority mortgage borrowers equals a $1,675.00 payout per victim of racism. That's out of 2.5 million mortgages examined, according to Business Insider. Hhmmhmmmhmm ... Keep that in mind as you read onward.
Attorney General Eric H. Holder Jr. said the settlement showed that the Justice Department would “vigorously pursue those who would take advantage of certain Americans because of their race, national origin, gender or disability,” adding: “Such conduct undercuts the notion of a level playing field for all consumers.  It betrays the promise of equal opportunity that is enshrined in our Constitution and our legal framework.” 
The settlement is subject to approval by a federal judge in California; according to the proposed consent order filed Wednesday, Countrywide denied all of the department’s allegations. 
Dan Frahm, a Bank of America spokesman, stressed that the allegations were focused on Countrywide’s conduct from the years 2004 to 2008, before Bank of America purchased it. ...
The problems stemmed from a Countrywide policy that gave loan officers and brokers the discretion to alter the terms for which a particular applicant qualified without setting up any system to comply with fair-lending rules, the department said. Lending data showed that Countrywide ended up charging Hispanics and African-Americans more, on average, than white applicants with similar credit histories.

So, if you are Asian or white and you got cheated by Countrywide's boiler room operation into paying higher fees on your mortgage than you should have, you are out of luck because you are the wrong race?

Basically, Countrywide and independent mortgage brokers were running high pressure boiler rooms during the peak of the housing bubble. To up commissions, their salesmen often stuck a bunch of extra fees in the fine print. Moreover, they talked about 5% (10,000 out of 200,000 minority borrowers who extra fees) into getting subprime loans with higher interest rates who would have qualified for prime loans.
In 2007, for example, Countrywide employees charged Hispanic applicants in Los Angeles an average of $545 more in fees for a $200,000 loan than they charged non-Hispanic white applicants with similar credit histories. 

Of course, the joke is that $545 in rip-off fees is a pittance compared to how much was lost on these loans on average.

Of course, it's not as if Countrywide tried to keep secret that they were going after minority borrowers.

For salesmen whose commissions pay off when fees are paid at closing, not when the borrowers write their monthly checks, being told to rope in marginal minority customers is like telling hyenas to eat raw meat. Countrywide's office in high-IQ Santa Monica was notoriously hard to make money at, but their Inglewood office in the 'hood brought in huge margins.

This is highly reminiscent of the argument between Malcolm Gladwell versus Judge Richard A. Posner and myself about whether or not car salesmen consciously exploit blacks and Hispanics. As Gladwell wrote in 2006:
One of the most bizarre reactions that I received from reviewers of Blink is an absolute inability to accept the notion of unconscious prejudice. Here is an example from a fairly well known writer named Steve Sailer. Sailer, in turns, quotes from a very hostile review of Blink in The New Republic by Richard Posner.

Posner and I said that of course car salesmen rip off blacks and Latinos consciously. While Gladwell claimed that the car salesmen who charge blacks and Latinos higher prices are, when you stop and think about it, the real victims. If only they had read Blink and realized that they were unconsciously assuming that blacks and Latinos were easier to rip off than, say, Armenians or Koreans, then they would have stopped doing it, and the car salesmen would have made more money!
Independent brokers processing applications for a Countrywide loan charged Hispanics $1,195 more, the department said. ...

Of course, a much higher fraction of the independent brokers exploiting Hispanics were Hispanics themselves. This shouldn't be a surprise: Countrywide issued many press releases over the years patting itself on the back for all its hiring of Hispanic salesmen and its efforts to find independent Hispanic brokers. The mortgage meltdown has some of the attributes of a classic affinity scam, like Mormons getting suckered by a Mormon conman.
“Chances are, the victims had no idea they were being victimized,” said Thomas E. Perez, the Justice Department’s assistant attorney general for civil rights. “It was discrimination with a smile.” 
In addition, from 2004 to 2007 — the peak of Wall Street firms’ demand for subprime loans that they purchased, bundled and resold as securities, a major cause of the ensuing financial crisis ...

And Fannie Mae and Freddie Mac's peak demand, too, or that was more like 2005-2008. Countrywide was famously in bed with Fannie.
...— Countrywide allowed its brokers and employees to steer applicants who qualified for regular mortgages into a riskier and more expensive subprime loan. 
The odds of a minority applicant being steered into such a loan were more than twice as high as those for a non-Hispanic white borrower with a similar credit rating, the department said. About two-thirds of the victims were Hispanic and one-third were black, the department said.

Oddly enough, steering into a subprime loan apparently only happened to about 5% of these minority victims of higher fees, and to only about 0.4% of all Countrywide borrowers examined by the Justice Dept. I'm surprised that percentage isn't higher. We've been hearing for years about how the foreclosure crisis was caused by minorities getting forced into subprime loans, but with notorious Countrywide, it was quite rare.

Now the Justice Department quantifies the discrimination and comes up with a price tag of $1,675 each -- a distinct anti-climax. I mean $335,000,000 is about Angelo Mozillo's compensation during the last decade even after his SEC mini-fine.
If a judge approves the settlement, victims will receive between several hundred and several thousand dollars, with larger amounts going to those who were steered into subprime mortgages despite qualifying for regular loans.

Let's repeat that: "several hundred and several thousand dollars:" not exactly a home run for Eric Holder's theory of what caused the meltdown; more like a foul tip.
... Under federal civil rights laws — including the Fair Housing and Equal Credit Opportunity acts — a lending practice is illegal if it has a disparate impact on minority borrowers. Against the backdrop of the foreclosure crisis, the Obama administration has made a major effort to step up the laws’ enforcement.

So, it's a disparate impact case. I guess that's why white and Asian victims of being cheated by Countrywide can't get any compensation. The blacks and Hispanics are evidently getting paid the difference between what they paid in points and other mortgage fees and the average of what whites paid, not the difference between what they paid and what an honest broker would have charged them. What Countrywide should have done was rip off whites and Asians even more so then the Obama Justice Dept. wouldn't have a complaint.
In early 2010, the division created a unit to focus exclusively on banks and mortgage brokers suspected of discriminating against minority mortgage applicants, a type of litigation that requires extensive and complex analysis of data.

While they were crunching the numbers, perhaps they could have calculated the default rates on these loans. My guess is that even with the surplus origination fees Countrywide / Bank of America came out the loser in the long run due to defaults. (Of course, other losers include Fannie and the public.) To have had these risky mortgages make sense as paying propositions, Countrywide would have had to charge vastly higher fees.
Working with bank regulatory agencies and the Department of Housing and Urban Development, the unit has reached settlements or filed complaints in 10 cases accusing a lender of engaging in a pattern or practice of discrimination. 
The Federal Reserve first detected statistical discrepancies in the loans Countrywide was making and referred the matter to the Justice Department in early 2007, according to a court filing disclosed in 2010 as part of a civil fraud case brought by the Securities and Exchange Commission against Angelo R. Mozilo, the former chief executive of Countrywide.

In other words, the normal federal regulatory system noticed this disparate impact problem in early 2007, well before Countrywide cratered in 2008. Good to know that the Feds were on the watch against the really important mortgage lending problem!

In summary, there's a general problem with rip-off sales practices, whether in mortgage lending or auto sales. Experience, however, shows that fighting rip-offs by focusing on discrimination is a losing proposition. What happens is that clever people rip off not clever people, which has disparate impact on blacks and Hispanics.

But the problem can't be explained that way, because then it leads to the inference that blacks and Hispanics are less clever on average. So, enforcement tapers off because the whole subject becomes too embarrassing.

Clearly, the anti-discrimination method of regulating mortgage lenders turned out to be extremely bad as a way to prevent boiler room fraud and excess. It was not uncommon for lenders to respond to complaints about predatory lending to minorities by saying, "Okay, we'll lend more to minorities. (Fannie is buying!) And we'll hire some of your NGO's foot soldiers as loan counselors. And maybe make a donation to your fine organization. After all, we all have to do our part in fighting racist redlining."

We need instead to say that the clever shouldn't rip off the clueless, and it doesn't matter what races the clever and the clueless belong to. We all get clueless in the end.

"Nature's Tory"

In Taki's Magazine, I offer an assessment, mostly appreciative, of Christopher Hitchens' literary criticism:
There wouldn’t seem to be much left to say about the late Christopher Hitchens after the countless tributes paid by other journalists about the night (or afternoon or morning) they got drunk with Hitch. Still, I want to call admiring attention to his taste in English literature. 
Unable to boast of having downed a few with Hitchens myself, I tended to find much of his voluminous output over the last decade reminiscent of the legendary Private Eye reporter Phil Space. Yet in at least one venue, Hitchens demonstrated distinction. Just before 9/11, Benjamin Schwarz hired Hitchens to write a long monthly literary column for The Atlantic that showcased Hitchens’s combination of panache, pedantry, and lifelong conservatism. 

Read the whole thing there.

December 20, 2011

New News!

A reader writes:
Today's New York Times has a prominent article essentially transcribing an attack on Ron Paul by James Kirchick (Marty Peretz's boy toy) that just appeared in the Weekly Standard (which was itself a rewrite of an old piece from the New Republic). Funny how publications of the left (the Times), the center (TNR) and the right (the Standard) all find common ground when someone like Paul emerges ...

Here's the News Story that was splashed heavily at the top of last night: 
New Focus on Incendiary Words in Paul’s Newsletters 
Emerging as a real Republican contender in Iowa, Representative Ron Paul of Texas is receiving new focus for decades-old unbylined columns in his political newsletters that included racist, anti-gay and anti-Israel passages that he has since disavowed. 
The latest issue of The Weekly Standard, a leading conservative publication, reprised reports of incendiary language in Mr. Paul’s newsletters that were published about 20 years ago. 
A 1992 passage from the Ron Paul Political Report about the Los Angeles riots

which largely stopped on May 1, 1992
read, “Order was only restored in L.A. when it came time for the blacks to pick up their welfare checks.” 

Disrespect toward looters and race rioters  is beyond the pale!
A passage in another newsletter asserted that people with AIDS should not be allowed to eat in restaurants because “AIDS can be transmitted by saliva”; 

When everybody knows (or at least has been told, over and over) that AIDS can be transmitted by heterosexual sex as easily as by homosexual practices. What, do you think the HIV virus discriminates? To say that would be insensitive toward the HIV virus, libeling it by making it sound like Ron Paul.
in 1990 one of his publications criticized Ronald Reagan for having gone along with the creation of the federal holiday honoring the Rev. Dr. Martin Luther King Jr., which it called “Hate Whitey Day.”

In contrast to December 1st, International AIDS Day, which the press celebrates annually as Hate Ronnie Day because Ronald Reagan caused the AIDS epidemic. (If you have doubts that it was Reagan's fault, then who are you going to blame? Gays? I don't think so.)

Here's the good part of New York Times article:
The magazine article largely matched a similar report in The New Republic in 2008, and it was written by the same author, James Kirchick.

Hey, I've got some four year old articles I'd like to recycle, too! Can I republish them in the Weekly Standard and then get them hyped in the NYT?
The passages were plucked from a variety of newsletters that Mr. Paul’s consulting business published during his years out of Congress, all of them featuring his name: Ron Paul Political Report, Ron Paul’s Freedom Report, Ron Paul Survival Report and Ron Paul Investment Letter. 
Mr. Paul did not respond to an interview request, but repudiated the writings in 2008. Likening himself to a major news publisher, he said he did not vet every article that was featured in his newsletters. “I absolutely, honestly do not know who wrote those things,” Mr. Paul said in an interview on CNN at the time, adding that he did not monitor the publications closely because he was busy with a medical practice and “speeches around the country.”

December 19, 2011

DSK: "La danse de joie"

Here's Sofitel security camera video from the day of Dominique Strauss-Kahn's arrest last May. It was broadcast on France's BFM-TV. Starting a little after 3:00 minutes into the video, you can see what BFM calls "The Dance of Joy:" after Sofitel management calls the NYPD to have the IMF supremo / French presidential frontrunner arrested, two burly Sofitel employees in suits who had been escorting the complainant maid step into a back room and celebrate. The big black guy wraps the big white guy in a bear hug, lifts him into the air, spins him around, and then does what looks like either an NFL touchdown dance or the Charleston.

The Daily Beast reports:
The two employees said they couldn’t recall the exact reason for their fleeting celebratory behavior but that they believed it may have involved sports, which they frequently talked about, the source said.

Okay, well that clears that up. Glad we won't have to listen to conspiracy nuts yammering on about their crazy conspiracy theories. Amy Davidson at The New Yorker in "A Dance to the Music of Conspiracy" finds the sports talk explanation more plausible than the suspicion that DSK might have been set-up:
Once you’ve accounted for the jerkiness of the video, it doesn’t seem outlandish, given the sorts of things men do in New York, particularly when talking about sports. 

A commenter at The New Yorker adds that Edward Jay Epstein, who brought up the dance of joy in a New York Review of Books article, is a conspiracy theorist:
Many years ago, Mr. Epstein had written about the diamond industry. I knew a top adviser for De Beers,who couldn't believe how Mr. Epstein had invented so many details to support his claims. The adviser decided then that he would never again read anything written by this conspiracy theorist. He called Epstein a "sensationalist". I myself wonder why the NYRB would publish an article that had nothing to do with books.

If you can't trust "a top adviser for De Beers," who can you trust? Certainly not a wacko investigative journalist like Epstein who published some nutty theory in The Atlantic Monthly in 1982 that De Beers was a giant conspiracy to prop up the price of diamonds via a global diamond cartel. After all, the reason De Beers top executives never set foot in America during the second half of the 20th Century is, well,  you know, just one of those things. I can't recall the exact reason for De Beers executives' fleeting behavior of avoiding anywhere they could have been served with a subpoena for Sherman Anti-Trust Act violations, but I believe it may have involved sports.

P.S., a commenter points out that Epstein's website has more videos that allow you to better evaluate the competing theories.

Somebody else finally picks up the Indian PISA score story

Last week, the Australian Council for Education Research put out a glossy, voluminous report updating the 2009 PISA school achievement test conducted by the deep-pocketed OECD. ACER reported on ten more "economies," including two middling Indian states, which came in next to last out of 74 countries or regions.

Since I've been interested in China v. India for years, that struck me as pretty big news (so I blogged about it at length here), but it didn't impress the rest of the Internet, apparently. Finally today, according to Google News, somebody else mentioned it. Here's an editorial from an Indian publication called LiveMint that draws an appropriate lesson: India needs to get its act together.
There are few urban legends about India quite as destructive as the one that leads us to believe that the education system is doing a good job of educating our children. Coming on the heels of a comprehensive study, which exposed how poorly our kids were doing in some of the country’s best schools, is an international study that evaluates 15-year-olds’ skills in reading and mathematical and scientific literacy on a comparative basis—and India didn’t do any better here. 
... In India, only two states, Himachal Pradesh and Tamil Nadu, were part of the survey. Now, these are both states that are thought to offer the best educational infrastructure to schoolchildren in the country. But the results on a global scale are abysmal, with Himachal Pradesh recording the lowest reading score in PISA 2009 and 2009+, on a par with Kyrgyzstan. Tamil Nadu did slightly better with its overall score, which was nonetheless lower than any other country’s, besides Kyrgyzstan. One shudders to think of the results in states with worse general indicators than these two, such as Rajasthan or Bihar. 
... A lot of success stories we hear are despite the system, not because of it, and the sooner we recognize that, the better the chances that we’ll do something to fix the status quo. 
The current state of affairs will lead to a future where we will have let down millions of young Indians, who will be shut out of the job market because they were failed by the state. The demographic dividend we keep talking about— the one that’s going to give us an edge over China in the decades to come—is going to be more of a demographic disaster if we cannot equip our young people with the skills required in this new global economy. The government must make school education a priority if it is to arrest the decline of this most valuable of institutions.

My vague impression is that Indians tend to make more sophisticated marketers than Chinese do. One American consultant said that the typical Chinese factory owner's idea of marketing is: "Real cheap! You buy now!" But it's important for Indians not to fall for their own marketing. India needs less spin and more China-like grim determination if it's going to improve its fundamental institutions.

By the way, all the talk in the press about Indian benefiting from a "demographic dividend" of a rapidly growing population is respectable Davos Man craziness at its craziest.

More generally, India conforms to the Davos model of elite advancement while not talking about the masses because we, uh, don't want to hurt their feelings. In contrast, Dengist China conforms more to old-fashioned nationalism -- the kind of thing that worked in Japan, Taiwan, South Korea, Singapore, Germany, and, perhaps most of all, in pre-1846 England and in pre-1960s USA.

December 18, 2011

PISA: What about the rest of China?

The news that two states in India took the PISA test of 15-year-olds' school achievement in 2009 and bombed raises the question once again of China. As everybody remembers from a year ago, 2009 scores from Shanghai were released and they were higher than any country in the world. But what about the rest of China? Obviously, Shanghai is a dazzling place, but a lot of China is still stuck knee-deep in rice paddies. What about them? 

I stumbled upon this year-old blog post by Anatoly Karlin of Sublime Oblivion, which relays a big hint:
As regular blog readers know, I think that educational capital and more broadly average IQ levels are one of the key – and frequently under-appreciated due to political correctness – determinants of economic development and whether or not convergence to developed country levels is even possible. Its much higher educational capital is one of the key reasons why I think China will continue doing much better than India in development, regardless of its “democratic deficit.” However, many people argue that China’s human capital must actually be quite low, because it doesn’t spend much on education, resources are bare in the provinces, statistical fudging under unaccountable governors, etc. 
The recent results from the international standardized PISA tests in math, reading and science will make this an increasingly untenable position. Shanghai got by far the best results out of all the OECD countries (never mind the developing ones). . Now while you might (rightly) argue Shanghai draws much of the elite of the Yangtze river delta, the Financial Times has more: “Citing further, as-yet unpublished OECD research, Mr Schleicher said: “We have actually done Pisa in 12 of the provinces in China. Even in some of the very poor areas you get performance close to the OECD average.”” 
Since countries like the US and France get scores “close to the OECD average”, this means that the workforces soon to be entering China’s economy, even from its poorest regions, will be no less skilled than those of leading Western economies (note too that the numbers of Chinese university graduates are soaring). And with China’s massive population, four times bigger than America’s, its road to superpowerdom must be all but guaranteed.

Okay, there are a few leaps of faith there, but that's still news worth knowing. At minimum, it reduces the chances that the Shanghai numbers were a con job. At median, it suggests that we check twice before reflexively equating China and India. At maximum, it suggests, as Karlin says, that "resource constraints" are going to be perhaps the big issue of the 21st Century. It's a little hard to be certain what "Even in some of the very poor areas you get performance close to the OECD average" means, but it sounds pretty good.

The logic of using international test scores to predict future wealth is not that the causation runs only in one direction, from high test scores to wealth. Obviously, it runs in both directions. (For example, affluent Chinese have traditionally hired tutors to raise their children's test results.) But, if there are a whole bunch of poor farm kids in inland China who are scoring like kids in Europe and North America right now, well, that's worth knowing.