Of banksters and debtors’ prison

Last week, American public television’s Frontline aired its new documentary, The Untouchables, which revisits the question of why the Department of Justice failed to indict a single senior Wall Street executive responsible for engineering the mortgage securitisation industry that was “rotten to the core”, and at the heart of the 2008 financial meltdown from which ninety percent of Americans have yet to recover.

In the film, reporter Martin Smith presses Lanny Breuer, the head of the criminal division within the Department of Justice, on why he did not pursue criminal charges of the senior officials in Wall Street, in spite of ample evidence of fraud that the episode’s researchers – along with other journalists, documentarians and lawyers – had been able to find with just a bit of digging.

Breuer responded: “I am personally offended by much of what I’ve seen. I think there was a level of greed, a level of excessive risk taking, that I find abominable and I find very upsetting. But that is not what creates a criminal case. What makes a criminal case is that I can prove beyond a reasonable doubt every element of a crime.”

Breuer insists that he was unable to prove criminal intent and thus could not bring a criminal trial against the banksters.

Unfair differences

Given that what occurred in Wall Street’s executive board rooms may well be the crime of our time with scores of victims who are unlikely to recover, Breuer’s excessive caution and lawyerly reluctance to take a case he might have lost, appears deeply negligent rather than judicious.

Compare the generous slack cut to the senior executives of Wall Street who -by accounts from whistleblowers, former employees, and even FBI investigators – committed acts of fraud, to how our present law treats current and future student debtors – that is, as presumed criminals.

Student debt, unlike every other kind of debt, cannot be discharged (except in the case of the nebulously defined and rarely granted, “undue hardship“). It began to acquire this exceptional status in 1976, when legislators invoked the false threat of student debt cheaters, then hyping up the need to create protections against them.

At the time of the debate, Democratic House Representative James O’Hara insisted that to remove the possibility of bankruptcy from student debtors, Congress would not only be treating them in a different manner than all other consumer debtors, but would be treating them as criminals: “No other legitimately contracted consumer loan, applied to a legitimate undertaken [sic], is subjected to the assumption of criminality which this provision applies to every educational loan.”

Indeed, in law professor John AE Pottow’s “The Search for a Theory” for why the US was persuaded to make student loans immune from bankruptcy, he lays out six possible theories as to why the US came to treat student debt “extraordinarily”. In reviewing court decisions and politicians’ rhetoric, he concludes that students were persuasively cast as “opportunistic debtors” who would “softy defraud the system” if given the chance.

In fact, this presumption of criminal intent in those who seek out student loans was entirely unfounded. In 1977, the Government Accountability Office conducted a study that found that less than one percent of all student debtors had applied for bankruptcy; the average annual income of those who did file for bankruptcy was $6,378; the most common job of those seeking relief through bankruptcy was that of teacher.

Today, approximately 37 million Americans hold an average of $24,301 in student debt for a combined total of one trillion dollars. Of those, an average of 13.4 percent have defaulted within the first three years of payments, a record high that surely reflects the miserable economic reality that most Americans face.

Last week, a handful of senators co-sponsored the Fairness for Struggling Students Act of 2013, a reincarnation of legislation that Senator Dick Durbin introduced last year that would allow private (not federal) student loans to be discharged, in an attempt to roll back the exceptionalism student loans have acquired over the last forty years. While the bill is a welcome gesture, it does not go nearly far enough to alleviate the untenable debt burden held by hundreds of thousands of people.

The proposal

A more robust proposal to reform student law appeared in the pages of the Harvard Law Review at the end of 2012, one that adequately and comprehensively addresses the crisis of student debt that plagues both freshly minted graduates as well as those who have been attempting to pay down loans for over a quarter of a century.

The proposal recommends restoring dischargeability to all student debt – including federal loans that represent 85 percent of student debt – and applying this retroactively so that those suffering under the burden of untenable loans right now will have a chance of relief.

Perhaps the article’s most profound recommendation is that federal student lending programmes adopt some form of risk-rating which, in short, would make their loans more difficult to obtain and thus curb the spiraling cost of education which is, in part, enabled by indiscriminate lending practices. 

In other words, the article advocates that student lenders stop talking out of two sides of their mouths: pretending to provide a social service by equalising access to education while racking up profits in a system rigged to their advantage.

This inconsistency is succinctly captured in the House Report to the Bankruptcy Reform Act of 1978, written as Congress debated the law that would dramatically change the treatment of student debt: “It is inappropriate to view the programme as social legislation when granting the loans, but strictly as business when attempting to collect. Such inconsistency does not square with general bankruptcy policy.”

Of course it only makes sense that hapless, hopeful, or misled young people who took out loans for education should be like every other debtor: permitted to have crushing burdens discharged so they may live lives not defined by squalor, anxiety or the inability to fully participate in society – or even just buy stuff. But it must also be remembered that the underlying ideology of student lending perpetuates the myth that education can serve as a great social and economic equaliser.

In the landscape of stark and rising economic inequality that our rapacious and unhinged capitalist economy has created – where most jobs being created earn less than $14 an hour  – access to higher education is meaningless for all but a few. Over the past twenty years, the rise in student debt has paralleled the widening gap in wealth.

The US is now one of the most unequal societies among the OECD countries. New data compiled and recently published by the Economic Policy Institute has found that the top one percent of Americans have seen an 8.2 percent increase in their earnings from 2009 to 2011, while the wages of the bottom 90 percent have continued their sharp decline.

In fact, study after study find that children born into low-income households are more likely to remain in low-income households than prior to 1980, forcing even the Congressional Research Service (CRS) to conclude that we are indeed a “comparatively immobile society”. Hammered: final nail in coffin of the myth of the American Dream.

As the one percenters rebound with gusto, thousands less fortunate continue to languish in the debtors’ prison created by student loans and their usurious terms of repayment. Banksters have never paid for duping the world; students have never stopped paying for being duped.

Charlotte Silver is a journalist based in San Francisco and the West Bank. She is a graduate of Stanford University. 

Follow her on Twitter: @CharEsilver