More Reasons to Hate Big Banks

From the New York Times:

The nation’s biggest banks wrongfully foreclosed on more than 700 military members during the housing crisis and seized homes from roughly two dozen other borrowers who were current on their mortgage payments, findings that eclipse earlier estimates of the improper evictions. 

Bank of America, Citigroup, JPMorgan Chase and Wells Fargo uncovered the foreclosures while analyzing mortgages as part of a multibillion-dollar settlement deal with federal authorities, according to people with direct knowledge of the findings. In January, regulators ordered the banks to identify military members and other borrowers who were evicted in violation of federal law. 

... 

The banks uncovered about 20 borrowers who never missed a single mortgage payment, but lost their homes nonetheless. The properties, according to the people with direct knowledge of the findings, have since been sold.

The Exciting World of Bank Capital

Rarely do we agree with folk from the (Herbert) Hoover Institute, but we like what John Cochrane has to say in the Wall Street Journal:

The central problem, at the core of Anat Admati and Martin Hellwig's "The Bankers' New Clothes," is capital. In order to make $100 of loans, a typical bank borrows $97—from depositors, from money-market funds, from other banks, or from bondholders—and sells $3 of stock, its "capital." So if only 4% of the bank's loans fail, the shareholders are wiped out, and the bank cannot pay its debts. Worse, if there is a rumor that some loans are in trouble, creditors may "run," each trying to get his money out first, and force a needless bankruptcy. Think of Jimmy Stewart in "It's a Wonderful Life."

And:

The solution seems pretty obvious, no? Banks should fund their investments by selling a heck of a lot more stock and borrowing a heck of a lot less, especially in the form of run-prone short-term debt, as most other companies do. Far more value was lost in the 2000 tech bust, for instance, than in the subprime mortgages that sparked the 2008 crisis, but the tech bust did not cause a financial crisis. Why? Tech companies were funded by stocks, not short-term debt. 

OK — we've got a quibble here. Those tech companies weren't financed through the sale of stock. Instead, issuing stock was a way for them to cash in. But Cochrane is correct that the impact of the tech bust was not wide felt, as people who had no money became paper billionaires and then people with no money. It may have sucked to own Pets.com, but they didn't leave a trail of unpaid creditors the way Lehman Brothers has. 

Back to the story:

More capital and less debt would stabilize the financial system in many ways. If a bank wants to rebuild its ratio of capital to assets from 1% to 2% by selling assets, it has to sell half of its assets. Doing so can spark a fire sale, especially if all the other banks are doing the same thing. If the same bank wants to rebuild capital from 49% to 50% of assets, it only has to sell 2% of its assets. That bank will also have a far easier time issuing more stock, rather than selling assets, which is a better way to build equity in the first place.

The U.S. government has instead addressed the risks of banking crises by guaranteeing bank debt. Guaranteeing debts creates perverse incentives, so our government tries to regulate the banks from taking excessive risks: "OK, cousin Louie, I'll cosign the loan for your Las Vegas trip, but no poker this time, and be in bed by 10."

....  

Now pretty much all of the big banks' debt is guaranteed, explicitly or implicitly through the widely held expectation that a big bank's creditors will be bailed out. But our regulators promise that next time, trust them, they really will spot trouble ahead and do something to stop it—even though our massive bank-regulation machinery failed to notice that subprime mortgages might be a bit risky in 2006 and even though, as Ms. Admati and Mr. Hellwig note, Europe's regulators still consider Greek government bonds to be risk-free assets.

Not only that, but the implicit guarantee behind the too-big-too-fail banks means they have artificially low borrowing costs, which encourages more borrowing. We now switch you to a Bloomberg article.

Lately, economists have tried to pin down exactly how much the [implicit government guarantese] lowers big banks’ borrowing costs. In one relatively thorough effort, two researchers -- Kenichi Ueda of the International Monetary Fund and Beatrice Weder di Mauro of the University of Mainz -- put the number at about 0.8 percentage point. The discount applies to all their liabilities, including bonds and customer deposits. 

Small as it might sound, 0.8 percentage point makes a big difference. Multiplied by the total liabilities of the 10 largest U.S. banks by assets, it amounts to a taxpayer subsidy of $83 billion a year. To put the figure in perspective, it’s tantamount to the government giving the banks about 3 cents of every tax dollar collected. 

Let's try that one more time.

To put the figure in perspective, it’s tantamount to the government giving the banks about 3 cents of every tax dollar collected.  

The top five banks -- JPMorgan, Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and Goldman Sachs Group Inc. - - account for $64 billion of the total subsidy, an amount roughly equal to their typical annual profits (see tables for data on individual banks). 

In other words, the banks occupying the commanding heights of the U.S. financial industry -- with almost $9 trillion in assets, more than half the size of the U.S. economy -- would just about break even in the absence of corporate welfare. In large part, the profits they report are essentially transfers from taxpayers to their shareholders. 

Let's do that one again, too.

In large part, the profits they report are essentially transfers from taxpayers to their shareholders. 

Enjoy that while you mull on the sequester.

Regulators can change the game by paring down the subsidy. One option is to make banks fund their activities with more equity from shareholders, a measure that would make them less likely to need bailouts (we recommend $1 of equity for each $5 of assets, far more than the 1-to-33 ratio that new global rules require). Another idea is to shock creditors out of complacency by making some of them take losses when banks run into trouble. 

Hold on — who is that magisterial "we" who recommends a 5:1 ratio?

It's the Bloomberg editors! Not Occupy Wall Street, not Michael Moore, but the editors of America's premier business magazine!

Hello! Is this thing on?

Now, there are a couple of ways out of this problem, which is good — because the banks are going to scream about implementing each one of them. With luck, they'll get hoarse.

First, and most directly would be to require banks to hold more capital. A second method would be to make debt less attractive. As discussed here, debt is deductible from taxes, while equity is not. This means there is a built-in tax preference for using debt (and getting all leveraged up.) Reducing (if not eliminating) the deductibility of debt would help level the playing the field, and make it less expensive for banks to add more capital.

For the third option, we turn to Kevin Drum at Mother Jones:

Split up the banks. If they're too big to fail, and everyone knows it, the only real answer is to make them small enough that they can fail. Creditors would then take care of all the rest.

Splitting up the banks would remove the implicit government guarantee associated with too-big-to-fail. The banks would be small enough to fail without jeopardizing the global financial system, and life would go on.

And that's what one senator proposed last year with the Safe, Accountable, Fair, and Efficient Banking Act of 2012.

Introduced by Senator Sherrod Brown on May 9, 2012, the following bill would place size and leverage limits on big banks.  Specifically it would:

• Impose a 10 percent cap on the share of U.S. deposits that any one bank could hold. This would eliminate loopholes in the existing federal deposit share cap
• Impose a 10 percent cap on the liabilities that any one financial company can take on, relative to the U.S. financial sector. Like the deposit concentration limit, this closes loopholes in existing law.
• Impose a limit on the non-deposit liabilities (including off-balance-sheet exposure) of a bank holding company of 2 percent of GDP.
• Impose a limit on the non-deposit liabilities (including off-balance-sheet exposure) of any non-bank financial institution of 3 percent of GDP.
• Codifies a 10 percent leverage limit for large bank holding companies and selected nonbank financial institutions into law. 

Under the measure, no bank holding company could exceed a size of $1.3 trillion in assets (at current GDP).  If enacted, Bank of America ($2.2 trillion as of 3/31/2012), JP Morgan Chase ($2.3 trillion),  Citigroup ($1.9 trillion), and Wells Fargo ($1.3 trillion) would all have to downsize.

Unfortunately, the bill was never referred out of sub-committee.

Congress Kills No Birds with Two Stones

Kevin Drum notes that the Senate (but not the House) has passed legislation to save the Post Office. As we discussed here, the Post Office is fighting a losing battle against e-mail, so much so that first-class mail now makes up less than 30% of all mail delivered. (The rest -- mostly catalogs and the like -- is sent via standard mail.)


The USPS had suggested a series of sensible changes -- ending Saturday delivery, relaxing delivery times (40% of first-class mail is delivered within one day), and closing a bunch of post offices and postal centers.


We also noted that much of the current "crisis" is fake, as the USPS was forced by (the Republican-controlled) Congress to pre-fund 75 years worth of its employee benefits within a 10-year window. That helped turn the USPS' $1 billion surplus in 2006 into a $5 billion deficit in 2007.


So how did the Senate do? Kevin Drum summarizes (and we editorialize):

Allows USPS to recoup more than $11 billion that it had overpaid into one of its pension funds.	About time.
Provides early retirement incentives for nearly 100,000 USPS workers.	Good one.
Restructures payments to a health benefits fund for future retirees.	Probably a good thing.
Frees up USPS to offer a broader range of services like delivering beer and wine for retailers.	Okay – but we could do more.
Creates a USPS chief innovation officer.	Absolutely pointless.
Halts the immediate closing of up to 252 mail-processing centers and 3,700 post offices.	Not good.
Forces USPS to preserve overnight delivery of mail sent to nearby communities.	More not good.
Forbids USPS from closing a rural post office unless the next-nearest location is no more than 10 miles away.	Still  more not good.
Places a one-year moratorium on closing rural post offices and then requires the mail agency to take rural issues into special consideration.	Oh, Christ.
Prevents USPS from cutting Saturday delivery for two years, until the agency can prove such a cut is needed as a "last resort."	Seriously?
Transitions from door-to-door delivery to curbside delivery in some areas, such as suburban neighborhoods.	Meh.
Strengthens the appeals process for customers opposed to closing a post office.	Bleh.
Caps bonuses and pay for USPS executives.	Pointless.
Forces USPS to wait until after Election Day to close postal facilities in states that permit voting by mail.	Apparently, these states don’t have mailboxes.
Permits USPS to co-locate post offices in government-owned buildings.	Good.

So, Kevin, what do you think?

There's nothing in there about allowing the postal service to increase postal rates. 

This is crazy. 

Take a look at countries around the world that have smaller volumes of mail than us: they all charge higher postage rates. They have to. And as volumes keep declining in America, we're going to need higher rates here too. Right now, a first-class equivalent stamp runs 75¢ in Germany, 72¢ in Britain, 82¢ in France, 98¢ in Switzerland, 97¢ in Belgium, and 63¢ in the Netherlands. There's no way that we can stay at 45¢ as volumes decline and pretend that somehow everything will be hunky-dory. 

Agreed.

And the Senate also failed to consider resurrecting the United States Postal Savings System, which was shut down during the patchouli-scented days of 1967, when we all thought the banking system was safe. Not only would the United States Postal Savings System provide another revenue stream, it would require virtually no start-up costs -- the USPS already engages on certain small-scale financial transactions (money orders) and the post offices themselves are already built and fully staffed.

A revived Unites States Postal System would also provide crucial financial services to a population which increasingly can't afford to use banks. An April 2011 study by the Pew Charitable Trust found 16.4% of all Mississippians didn't have a bank. And it's about to get a lot worse.

The New York Times reports that:

An increasing number of the nation’s large banks — U.S. Bank, Regions Financial and Wells Fargo among them — are aggressively courting low-income customers ... with alternative products that can carry high fees. They are rapidly expanding these offerings partly because the products were largely untouched by recent financial regulations, and also to recoup the billions in lost income from recent limits on debit and credit card fees. 

Banks say that they are offering a valuable service for customers who might not otherwise have access to traditional banking and that they can offer these products at competitive prices. The Consumer Financial Protection Bureau, a new federal agency, said it was examining whether banks ran afoul of consumer protection laws in the marketing of these products. 

In the push for these customers, banks often have an advantage over payday loan companies and other storefront lenders because, even though banks are regulated, they typically are not subject to interest rate limits on payday loans and other alternative products.

For example:

When David Wegner went looking for a checking account in January, he was peppered with offers for low-end financial products, including a prepaid debit card with numerous fees, a short-term emergency loan with steep charges, money wire services and check-cashing options. 

“I may as well have gone to a payday lender,” said Mr. Wegner, a 36-year-old nursing assistant in Minneapolis, who ended up choosing a local branch of U.S. Bank and avoided the payday lenders, pawnshops and check cashers lining his neighborhood. 

Along with a checking account, he selected a $1,000 short-term loan to help pay for his cystic fibrosis medications. The loan cost him $100 in fees, and that will escalate if it goes unpaid. 

And it gets worse:

 Lenders are also joining the prepaid card market. In 2009, consumers held about $29 billion in prepaid cards, according to the Mercator Advisory Group, a payments industry research group. By the end of 2013, the market is expected to reach $90 billion. A big lure for banks is that prepaid cards are not restricted by Dodd-Frank financial regulation law. That exemption means that banks are able to charge high fees when a consumer swipes a prepaid card. 

The companies distributing the cards have drawn criticism for not clearly disclosing fees that can include a charge to activate the card, load money on it and even to call customer service. Customers with a “convenient cash” prepaid card from U.S. Bank, for example, pay a $3 fee to enroll, a $3 monthly maintenance fee, $3 to visit a bank teller and $15 dollars to replace a lost card. 

Capital One charges prepaid card users $1.95 for using an A.T.M. more than once a month, while Wells Fargo charges $1 to speak to a customer service agent more than twice a month.

Banks are evil. The Post Office is not. For more on why the United States Postal Savings System is a good idea, check out our earlier post here.

And, By the Way, Romney Didn't Create Any Jobs

As we discussed in this post on economic stimulus and job creation, hiring people is radically different from creating new jobs. Matt Yglesias goes the extra mile and addresses that point in light of Mitt Romney's job creation record at Bain Capital.

Romney knows very well that he was primarily in the private equity and leveraged buyout industries, and chose very deliberately to emphasize instead Bain's relatively minor venture capital activities. That's because as a matter of affect, it sounds way better to be providing seed capital to new firms than to be adding debt to existing ones and attempting to restructure them to suck more money out of the underlying assets. But I do think it's worth emphasizing that if what you're interested in is the systematic impact on the economy and the labor market there's no particular reason to see venture capital as "creating" jobs while private equity "destroys" them. 

The venture capitalists behind the computer industry, for example, have destroyed many jobs in the typewriter manufacturing sector. They've decimated the ranks of America's type-setters and photographic chemical manufacturers. X-Acto Knives are still for sale, but the market for them has been badly hit by computer innovations. The Internet has been deadly for the encyclopedia industry. That doesn't mean that the pioneers of word processing or desktop publishing are bad people or that word processing has been bad for the American economy. It's simply that significant innovations have wide-ranging consequences for the world. Businesspeople create or manage businesses, but the kind of "job creation" that happens when your product turns out to be really appealing so you need to hire a bunch of people to make and sell it has nothing to do with the kind of "job creation" that increases the overall volume of employment in the economy. A lot of the attacks on private equity are unfair, but the story of Mitt Romney Job Creator doesn't make sense either. 

Even if it were true that Romney's investment in Staples was typical of his business career, the mere fact that a lot of people work at Staples tells us nothing about the systematic impact of Staples on the economy.

But we do know something about that impact.

Dunder Mifflin, the fictional regional paper company at the heart of [The Office], is facing an increasingly competitive marketplace. Like many smaller players, it just can't compete with the low prices charged by big-box rivals like Staples and Office Depot, and it seems to be constantly bleeding corporate customers that are focused on cutting costs themselves. 

Quill.com, an affiliate of Staples, now sells Dunder Mifflin copy paper.

What the Bain Gang Can Teach Us about Corporate Tax Reform

We need to kill the business interest deduction.

As we noted in our discussion about eliminating the mortgage interest deduction, interest has historically been tax deductible. In fact, it wasn't until 1986 that personal interest was not deductible -- thank you, astonishing growth in credit cards and personal debt -- though the mortgage interest deduction was preserved. 

But it's now time to think about whether business interest should be deductible at all, and one of the best arguments against it is courtesy of private equity concerns like Bain Capital.

First, though, how awesome is that picture.

Private equity is a bit of a catch-all term that includes things like venture capital (to get a company off the ground and running), mezzanine capital (providing additional capital to an existing company), and leverage buy-outs (see Gordon Gekko). 

When Romney has been talking about creating jobs, he's been talking about venture capital. When people talk about the companies killed by Bain Capital, they're talking about leveraged buy-outs.

In its simplest form, a leverage buy-out is a like a mortgage, where you use the asset you want to buy to secure the financing necessary to make the purchase. Josh Kosman explains to Mike Konzal:

JK: The whole industry started in the mid-to-late 1970s. The original leveraged buyout firms saw that there were no laws against companies taking out loans to finance their own sales, like a mortgage. So when a private equity firms buys a company and puts 20 percent down, and the company puts down 80 percent, the company is responsible for repaying that.

Now the tax angle is that the company can take the interest it pays on its loans off of taxes. That reduces the tax rate of companies after they are acquired in LBOs by about half. Banks, also realizing this tax effect, were willing to finance these deals. At the time, you could also depreciate the assets of the company you were buying — that’s not true today.

They saw that you could buy a company through a leveraged buyout and radically reduce its tax rate. The company then could use those savings to pay off the increase in its debt loads. For every dollar that the company paid off in debt, your equity value rises by that same dollar, as long as the value of the company remains the same.

MK: So the business model is based on a capital structure and tax arbitrage?

JK: Yes. It’s a transfer of wealth as well. It’s taking the wealth of the company and transferring it to the private equity firm, as long as it can pay down its debt.  It think it is real - the very early firms targeted industries in predictable industries with reliable cash flows in which they by and large could handle this debt. As more went into this industry, it became very hard to speak to the original model. Now firms are taken over in very volatile industries. And they are taking on debts where they have to pay 15 times their cash flow over seven years — they are way over-levered.

MK: The most common argument for why Bain Capital and other private equity firms benefit the economy is that they are pursuing profits. They aren’t in the business of directly “creating jobs” or “benefitting society,” but those effects occur indirectly through the firms making as much money as they can.

But even here, “profits” — how they exist, where they come from, and how they are timed — have a crucial legal and regulatory function. A recent paper from the University of Chicago looking at private equity found that “a reasonable estimate of the value of lower taxes due to increased leverage for the 1980s might be 10 to 20 percent of firm value,” which is value that comes from taxpayers to private equity as a result of the tax code. Can you talk more about this?

JK: That sounds about right. If you took away this deduction, you’d still have takeovers, but you’d have a lot less leverage and the buyer would be forced to really improve the company in order to make profits. I think that would be a great thing.

If you look at the dividends stuff that private equity firms do, and Bain is one of the worst offenders, if you increase the short-term earnings of a company you then use those new earnings to borrow more money. That money goes right back to the private equity firm in dividends, making it quite a quick profit. More importantly, most companies can’t handle that debt load twice. Just as they are in a position to reduce debt, they are getting hit with maximum leverage again. It’s very hard for companies to take that hit twice. 

So leveraged buy-outs aren't about turnaround artists, people who take failing companies, re-organize  them and get them back on track. Instead, it's financial engineering, just taking advantage of the tax code. As James Surowiecki at the New Yorker notes,

The rewards can be extraordinary: when Romney was at Bain, it supposedly earned eighty-eight per cent a year for its investors. But piles of debt also increase the risk that companies will go bust.

And:

[B]etween 2003 and 2007 private-equity funds took more than seventy billion dollars out of their companies. These dividends created no economic value—they just redistributed money from the company to the private-equity investors.

And the business interest deduction is exploited by other industries as well, most notably investment banking. When a bank raises money by selling more equity, it faces a couple of problems. The first is that the previous group of shareholders are generally not happy, as the percentage of their ownership of the bank has gone down. Secondly, when the bank pays dividends, those dividends are not tax deductible, which makes the company less profitable. 

Raising capital by issuing debt solves both those problems. Each shareholder's stake remains the same, and the disbursements to the bond holders get written off the taxes. This led to some of the banks, most notably Lehman Brothers, becoming grossly over-leveraged, by some estimates up to 44:1. This made Lehman Brothers a very profitable company when times were good, but almost insured that it would get pummeled in the (inevitable) event of an economic downturn.

But what does the leverage really mean? Let's walk though an example, using a somewhat higher leverage ratio of 50:1. 

At that ratio, you could put up $2 but would have $100 in purchasing power, with the remaining money being supplied by a bank. If you invested that in stock, and the stock's value went to $101, you'd have a return of 50% -- you initially put up $2, but now have $3. 

But leverage works the other way as well. If the value of the stock drops by 1% -- form $100 to $99 -- you've lost 50% of your equity. And if the stock drops another dollar, your finished. 

(For the sake of comparison, the Federal Reserve limits the leverage you can use to buy stock to 2:1 through Reg T. (although that ratio can increase to 3:1 once the purchase has settled. Still, not so bad.)

The business interest deduction certainly made sense some time ago, but the financial wizards have turned it into a real hazard. Getting rid of this tax break would't prevent leveraged buy-outs or raising capital through debt, but it would re-focus these efforts on making sure the companies themselves did well. Private equity firms, banks and other corporations would have more "skin in the game," and the tax disadvantage of raising capital through equity would disappear.

It's also worth remembering that, despite the crowing about corporate taxes, the percentage of pre-tax corporate income used to pay taxes has fallen dramatically over the last 50 years:

From Kevin Drum and the Federal Reserve of St. Louis.

And corporate tax as a percentage of all US tax revenue has fallen harder.

See page 68 of this 2010 Senate Committee on Finance report. And thank you,  Felix Salmon.

So if we're trying to get the deficit back under control, we should be looking seriously at making corporations pay their fair share as well. Eliminating the business interest deduction would be one step down that path. 

Banks are Evil: Special "Citibank Must Die a Thousand Deaths, Its Wives and Children Scattered to the Corners of the Earth, Its Orchards Burned and Its Fields Plowed with Salt" Edition

... or Return of the Float.

Back in the old days, banks needed a float for check deposits. The float was the time it took your bank to process your check, send it to another bank, and actually get the cash (OK, a wire) to post to your account. If memory serves, local checks typically took three days, and out-of-state took five.

This meant that the banks ended up with several days where they got the use of your money for free.

Technology improved, check clearing went digital and now the float has been reduced to about a day.

But getting money for free is something banks really, really like, and Citibank came up with an ingenious way to do it in the mortgage field. As Felix Salmon reports:

Most salaried Americans ... get paid every two weeks. Which means, to all intents and purposes, that you need to be able to make one mortgage payments out of every two paychecks.

And that in turn raises an intriguing possibility: if you take half of your mortgage payment out of every paycheck, you’re going to end up making 13 mortgage payments a year. Which will pay down your mortgage faster, and could save you thousands of dollars. 

Enter the ever-helpful Citibank, with a product which does just that. It’s called The BiWeekly Advantage Plan®, and it’s essentially an automated mortgage payment, of half your monthly mortgage payment, which comes out of your account every two weeks. Easy.

Except that:

 Payments are remitted to your mortgage company monthly.

As Felix notes:

The payments are made in arrears, of course. You make your half-payment, and then wait two weeks, and you make your second half-payment, and then the two are bundled up and sent off to the mortgage company (which in nearly all cases is CitiMortgage itself) as a single monthly payment.

Which means that for roughly half the year, Citibank is sitting on an amount of money equal to half your mortgage payment. That money has left your account: it’s not yours any more, and Citi can do with it as it pleases. And Citi gets the float from all that money until it gets around to sending it off to pay off the mortgage.

Basically, Citi is getting a big advantage from you making half your mortgage payment two weeks early.

It gets better. Citibank actually charges you to lend them money for free.

There is a one-time non-refundable enrollment fee of $375 and a transaction fee of $1.50 for each draft [or $39 a year]. 

Pure friggin' evil. It's their best idea since:

A Twenty-Eighth Amendment

It’s been a while since we’ve amended the Constitution, so it’s probably time to re-visit the issue.

You may think – we did -- that the last amendment was the Twenty-Sixth, which set the national voting age at 18. This amendment was also the quickest to pass; the amendment was introduced on March 23^rd, 1971 and was adopted on July 1^st of the same year, a scant three months and one week later.

A key driver for the amendment was the inequity in demanding men (and at that time they were only men) to fight, and quite possibly die, for their country when they couldn’t participate in the political process. Forty-two states ratified the amendment – so which states didn’t?

We pause briefly to allow the placing of side bets.

The eight states which never ratified the Twenty-Sixth Amendment are:

1.     Florida

2.     Kentucky

3.     Mississippi

4.     Nevada

5.     New Mexico

6.     North Dakota

7.     South Dakota

8.     Utah

With the exception of New Mexico, I don’t think there are a lot of surprises in that list.

So the quick lesson here is that, in times of crisis, an amendment can get adopted, and get adopted pretty quickly. It’s not some mystical thing that was only possible in days of yore.

But the Twenty-Sixth isn’t the most recent; that title goes to the Twenty-Seventh Amendment, which passed in 1992.

The Twenty-Seventh is kind of a lesser amendment; it basically prevents Congress from voting to give itself raises right now. Instead, any raise would be delayed to the start of the next Congress, imposing a delay of up to two years.

At the end of the day – meh. Congress still votes itself raises, but I don’t think too many people think that the money problem in Congress is salaries. The money problem has to do with lobbyists and campaign contributions. But the amendment doesn’t really have a downside, so there you go.

What is incredibly interesting is that the amendment was passed in significant part due to the efforts of one dude – Gregory Watson. The short version is that Watson, while doing research for a college paper, came across the text of what became the Twenty-Seventh Amendment, which was originally introduced in 1789 – it was part of a package of twelve amendments, ten of which were ratified (and became known as the Bill of Rights). But only seven states passed it, so it was dropped and forgotten about for 200 years. Until Gregory Watson re-discovered it and started a letter-writing campaign to get it passed.

So kudos to Gregory, kudos to letter-writing and kudos to democracy in action! Sometime, it’s easier than you think.

So now that we’ve established that amendments are still a viable form of democracy, what should we be thinking about. Fortunately, this Supreme Court has given us a lot of fodder. And, unlike the Twenty-Seventh, the Twenty-Eighth Amendment can focus on some key inequalities in modern life – just the thing the 99% should get behind.

Here, then, is a draft of my proposal for the Twenty-Eighth Amendment.

            Corporations aren’t people. Chicks are.

The origins for this amendment lie in two places. The first is the decision in Citizens United v. Federal Election Committee, which ruled – and what follows is a very simple summary – that corporations can contribute as much as they want to elections.

That decision rested on two separate ideas.

The first is the idea that restrictions on spending money can be equated with restrictions on speech, a decision the court reached in 1976 in Buckley v. Valeo. The court actually upheld general campaign contributions limits, but voided those which would apply to the candidates themselves.  (It’s worth nothing that the court shied away from the money = speech equation when it applied it to non-rich folk, namely the Hare Krishnas.)

The second is the idea of corporate personhood. While it is obvious that corporations aren’t people, they need to have some legal status – so that contracts can be enforceable and the like. Corporations can do some of things people do, mostly in the economic sphere. They can, as we noted, make payments, issue payments, act negligently and engage in other tortuous behavior. But they can’t get married, settle down together and have kids. Historically, the courts have used an idea of corporate personhood.

The fundamental question is what legal rights and privileges corporations should enjoy, and which should be restricted to natural persons.

But before we get to that discussion, let’s take a look at one of the privileges which corporations enjoy but that humans can’t – namely, limited liability.  If I go into business for myself – as an individual – I am on the hook for all liabilities. But if I create an artificial person – a corporation – my personal liability is limited to the amount of capital I contribute to the corporation. After that, I'm off scot-free.

This is what protects someone like Dick Fuld, the former president and C.E.O. of Lehman Brothers. Fuld had a net worth in excess of $1 billion, most of which was lost when Lehman became the largest bankruptcy case in history. But he retained all the proceeds from all of the sales of Lehman stock he ever made, and that was good enjoy to buy an estate in Connecticut, a Fifth Avenue apartment and Florida pied-à-terre worth $13 million. Plus $20 million in artwork and whatever other investments he made. Because of limited liability, those assets cannot be seized as part of the Lehman bankruptcy, and Fuld remains part of the 1%.

We think, on the whole, limited liability for corporations is a good thing, even though cases like Fuld’s do rankle.

But limited liability – a privilege which no natural person can enjoy – should come at a price. And that price is the loss of all constitutional right and privileges.

This may sound harsh, but remember that no natural person will be affected. Each and every natural person will continue to enjoy the protections of the First, Fifth and Fourteenth Amendments, to name the big ones. It will only be artificial persons – corporations – that are affected. 

If our Twenty-Eighth Amendment were passed, Congress could ban all corporate donations and restrict all corporate speech, including political speech a.k.a. money. This wouldn’t make our political system perfect – Dahlia Lithwick has an excellent article on a whole bunch of other cases that should be of interest to #OWS --but it would remove the distorting impact direct corporate contributions would make. And, if Congress were feeling frisky, it could ban corporate contributions to PACs, which really might have an effect on politics is conducted.

That takes care of the first sentence of the Twenty-Eighth Amendment. But what about the second, which declares, in the colloquial, that women are persons.

While the Equal Rights Amendment would have taken care of this problem, it was never ratified. Here is a list of states which haven't signed on.

1. Alabama
2. Arizona
3. Arkansas
4. Florida
5. Georgia
6. Illinois
7. Louisiana
8. Mississippi
9. Missouri
10. Nevada
11. North Carolina
12. Oklahoma
13. South Carolina
14. Utah
15. Virginia

The states in bold are those which were part of the Confederacy.  In fact, of the eleven Confederate states, only Texas and Tennessee ended up voting for the ERA. Just sayin’.

The relevant part of the Fourteenth Amendment looks pretty straight forward: 

[No] State [may] deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.

But to some Supreme Court Justices, that’s not enough. Antonin Scalia was interviewed by California Lawyer in January of this year, where this exchange took place:

[CaliLawyer:] In 1868, when the 39th Congress was debating and ultimately proposing the 14th Amendment, I don't think anybody would have thought that equal protection applied to sex discrimination, or certainly not to sexual orientation. So does that mean that we've gone off in error by applying the 14th Amendment to both?

[Scalia:]  Yes, yes. Sorry to tell you that.

For those who call themselves originalists, what matters most is what the guys (and it was all guys) who adopted the stuff thought at the time. And Scalia believes that, in 1868, the various elected representatives would not have thought women to be considered people. After all, they had just fought a rather nasty war over whether black people were, you know, people.

And this is how we end up in this mess where a remarkably banal idea – that women are people -- is rejected, while a counter-intuitive one – corporations, while obviously not people, should have the rights and privileges of people (e.g., making political donations) while being afforded protections (limited liability) that no natural person can enjoy.

So our version of the Twenty-Eighth Amendment would fix two problems at once. Corporations can continue to exist, but they don’t get treated like people (even though they think they’re people, which is adorable). And women, a scant 143 years after the passage of the Fourteenth Amendment, would actually be covered by it.

Addendum:

While we strongly support our version of the Twenty-Eighth Amendment as being necessary, pithy and a bit of fun, we should note that Sen. Tom Udall has introduced his own version. His is longer, and a lot more gentle, just allowing federal and state governments to restrict the campaign contributions of both natural and artificial persons. So, while he does nothing to address the treatment of women under the Constitution, he does tackle campaign reform in a more complete way. And his amendment has a total of nine co-sponsors, which is nine co-sponsors more than ours does.

Edited for clarity.