From the global financial crisis to the Flash Crash, it's not hard to find reasons why people are increasingly disgusted with Wall Street and the world of finance generally. It's also not hard to sympathize. Michael J. Casey, an editor and columnist for Dow Jones Newswires, has a new book, The Unfair Trade: How Our Broken Global Financial System Destroys The Middle Class, that is a guided tour of the many ways the global financial system is letting us all down. You might call it a Dante's Inferno of Wall Street. But there's hope in the book, too, hope that we're not all doomed to an existence of being perpetually abused by global financiers. This excerpt shows how one man won a small victory against the system. -- Mark Gongloff
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For Joe Bonadio, the years surrounding the U.S. financial crisis might best be described as the era of telephone battles.
For most of the 53-year-old professional drummer's adult life, his home phone was a useful appliance. It was the conduit through which he would be informed of his next gig or advertising jingle contract. "Most of the time, it always seemed like the work just came on its own, through recommendations and people wanting to use me," Bonadio said. "It came from the telephone and it seemed like the phone always provided."
But all that came to an abrupt halt in late September 2008, two weeks after the collapse of Lehman Brothers, after he returned to New York from a recording job in Los Angeles.
"I came home and there were no calls. The phone had just stopped," Bonadio said.
The lull extended into weeks and then months. In the meantime, Bonadio, assuming that the work would come back, continued with the lifestyle he'd been accustomed to, funding it with credit card debt.
Then, just over a year later, the phone started ringing again, relentlessly.
The callers were not musicians or advertising executives. They were debt collectors, and with a mix of recorded and personal messages they were urging him in increasingly strident tones to make a minimum payment on one of his three overdue credit cards. He had racked up a total of $50,000 in debts and there was no way of repaying them.
Advised by a debt counseling firm, Consumer Recovery Network, Bonadio had decided that his only escape was to seek a settlement with his creditors. Not only was his credit card debt expanding exponentially due to late fees and compound interest, but the exotic, interest-only mortgage that a Merrill Lynch advisor had talked him into three years earlier was ballooning out of control. Meanwhile, the real estate collapse had halved the value of his home. In deciding to go through what proved to be an exhausting settlement process, he was given a window into the ruthless debt-collecting methods of the same financial institutions whose reckless and often predatory lending practices had fueled the financial crisis that stripped him of his livelihood. And it all played out via the telephone.
As Bonadio quickly learned, a customer who falls behind on a credit card payment soon gets a phone call. At first it is a friendly reminder that the account is overdue. If that doesn't prompt a payment, there will soon be more calls, occurring more frequently. Bonadio says that at one point he was receiving between forty and fifty calls a day from his three banks. Typically the calls are recorded messages, but if the recipient responds, a human being jumps on the line to suggest that the minimum payment be made. If the customer says he or she won't or can't make the payment, the bank representative will warn about a deteriorated credit rating and the perils of bankruptcy. At that moment, many debtors relent. In so doing they hand the bank a victory at their expense.
Here's why the banks win: Based on the universally applied 29.9% default rate that Bonadio was paying on his credit card debt, it would have taken forty-four years of minimum monthly repayments to pay back the $54,000 total. By then he would have paid an additional $130,000 in interest.
In contrast, because of the front-loading effect of the interest paid when the loan was at its largest, the banks would have earned back the entire amount in just three and half years. What the bank desperately wants to avoid is a six-month cut-off date. If payments aren't received by then, it must write off the entire loan on its balance sheet, recognize the loss, and then fight with other unsecured creditors over what could be a measly payout from a drawn-out bankruptcy. That's why it resorts to the telephone equivalent of saturation bombing during the first ninety days.
"They know what's going to drive you nuts and that you are going to give them $60 just to shut the phone up," said Bonadio. If just one of those calls hits its target and prompts a minimum payment, the clock kicks back to six months and the bank is in the clear. But if the customer reaches the fourth month with no payment, the game changes. Out of the blue, a settlement letter will arrive from the bank, offering to accept perhaps 50 or 60 cents on the dollar. The savvy debtor will politely demand something more generous. And the bank, weighing the cost of a lower settlement against that of a charge-off, will routinely concede. In Bonadio's case, he settled with Citibank, JPMorgan Chase, and Bank of America for an average 31 percent of the total, a saving of $37,379. And while his course of action initially trashed his credit rating, the subsequent improvement in his overall finances later prompted it to rise.
Most debtors aren't like Bonadio, though. Most cave in to the banks' phone calls and make their overdue payments. Indeed, according to the moral code by which most of us live by, that should be the right thing to do.
But the financial crisis makes the ethics less clear cut.
Just like Joe Bonadio, it left millions trapped by ballooning mortgages sold to them by the same creditors who were demanding these payments. Banks had used complex, confusing and poorly explained financial products to exploit vulnerable people. This, along with the fact that the crisis that left so many of them out of work was clearly generated by the same banks' zealous risk-taking, raises questions about the fairness of the interest penalties on their credit cards.
But even beyond the morality issue, there was a simple point of pragmatism. With so many Americans at that time buried in debt, to force them to perpetuate loans they could never repay was to prolong the chance of a recovery in the U.S. economy. And that meant that the banks themselves were unable to get back on their feet and revive a healthy, constructive business of credit creation.
Bonadio is one of the few who outwitted the system. Why? Not because of his steely resolve, but thanks to a device that the Consumer Recovery Network advised him to purchase: a caller ID machine with ring controller. With that little box, he could program the phone not to ring whenever calls came from a number associated with one of the banks' debt collectors. The machine, he says, kept him sane. It also gave him the detachment and time to watch how the banks approached problems such as his.
The machine's call log captured the entire combative process through which the banks fight to get an insolvent debtor to make a payment until it can't afford to play that cynical game any longer. That perspective embittered Bonadio.
"I'm not a religious person," he said, "but it is as if Satan said, 'I want to be on earth,' and God asked him, 'What are you going to be?' And he said, 'I'm going to be a bank.' "
(Adapted from The Unfair Trade: How Our Broken Financial System Destroys the Middle Class. Copyright © 2012 by Michael Casey. Published by Crown Business, a division of Random House, Inc.)