There's gold in them thar (over the) hills

I couldn't just retweet @Dmacc502's mention of this Miami Herald article Reverse mortgage scam targeted seniors- I had to take some time to shout out that it's only going to get worse.

Big Target

The baby boomer generation is well-documented as the wealthiest generation in American history. It is simply a function of human nature and supply and demand that, where there is so much money, there will also be a proliferation of those motivated to try to get their hands on their own ill-gotten pieces of it.

The magnifying glass that sets fire to this whole pile of kindling is that the fears and health-related challenges of aging will create all kinds of opportunities for a well-crafted scam to drive a wedge of separation between people and their money.

It is to be kept in mind that, while the generation is the wealthiest, it doesn't mean every retiree is a millionaire, or that their net worth is liquid cash in a bank account somewhere. As large a group as they are, they are quite diverse, and there are plenty of people who worked long and hard, own property and a toy or two, and are just a scheme away from losing it all.

Whom can  you trust?

One key problem is that the threats are hard to detect. A "con" (short for "confidence") is a particularly creative enterprise because it requires that the perpetrator appear trustworthy. That takes investments in time and tools, it takes patience to set up and execute. Because we expect a crook to operate under cloak of darkness, unidentified, and move quickly to get in and get out, the crook who walks right up to us in broad daylight with a smile and a firm handshake and isn't in any hurry just can't be a crook, too. Right? Wrong.

A good con also depends upon the willingness of the victim to trust the perpetrator for the scheme to succeed. Greedy victims make greedy con artists rich, and also assuage their sense of guilt (if they actually had any) by being able to point out that the scam could only work if the victims weren't pure to begin with.

Surely though, I'm not suggesting that the victim is to blame, especially since there will also be growing numbers of opportunistic, unscrupulous "professionals," people in positions of trust who provide advise a layperson will be in no position to question.  It's not so much that people necessarily trust doctors or lawyers or accountants or judges or government agencies...it's that we haven't the knowledge to correct them when they start leading us down the primrose path.

Historic perspective on the new segment

For what seems like "forever", marketers have focused on the 18-39 segment. However, any business or industry that speaks to the needs of the Baby Boomers has a big pie from which to cut its slice. As fast food exploded in the 60s, real estate and the minivan in the 80s,  and new age gurus in the 90s, whatever the Baby Boomers need now is where money should be invested.

Like other industries (real estate, finance), “normal” has been dictated by the Baby Boomers for the last 50 years, which covers an incredibly long period of time in the minds of those who’ve been responding to the Baby Boomer demand profile for education, jobs, goods, housing, cars, investments, etc. The sheer size of this profile, with its demand power coupled with its heightened intra-competition, has driven growth at an incredible rate.

My jaw dropped in shock when venerable investment houses such as Bear Stears and other Wall Street institutions collapsed. Especially having gained a peek inside Bear Stearns culture from reading Alan Greenberg's Memos from the Chairman, I was convinced their stability was sure. The simple explanation is that the Baby Boomers had moved through their investing phase and are now in their wind-down phase – their demand is no longer there and their evacuation of the investment demand space literally pulled the rug out from under Wall Street. Left holding the bag, several firms that had been called institutions are now gone.

The same can be said for real estate. Double digit interest rates are a relic of the 80s, during the buying phase of the Baby Boomers. Their size flooded the demand pool, sending interest rates skyrocketing to try and temper the demand until the downturn of the early 90s.

Whether legitimate business or scam, there's will continue to be a whole lot of action in the Baby Boomer space.

The growing gap of income inequality

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Search for terms such as "income inequality" or "wealth gap" will turn up some interesting reading. One series of articles I've actually read is by Timothy Noah for Slate called The United States of Inequality: Introducing The Great Divergence. There's good reason this topic is blipping more radars these days.

A block of quotes from Mr. Noah's introduction quickly puts things in perspective:

• In 1915, University of Wisconsin statistician Willford King published The Wealth and Income of the People of the United States;

• he was troubled to find that the richest 1 percent possessed approximately 15 percent of the nation's income (it was likely closer to 18 percent);

• modern income tax was created in part to ostensibly prevent disparities in wealth turn the United Sates into a European-style aristocracy;

• there had never been a time when class warfare seemed more imminent;

• that was when the richest 1 percent accounted for approximately 18 percent of the nation's income. Today, the richest 1 percent account for 24 percent of the nation's income.

How did this happen? Thus begins Mr. Noah's examination of a host of possible factors. It's a fascinating and recommended read which arrives at the unambiguous conclusion: this is a problem that needs to be fixed.

To say "I'm Canadian" is of little comfort, because the problem is not hemmed in to the 48 contiguous United States. As Canada's largest trading partner, we suffer if they are unable to meet their demand for our exports; we also suffer for the imports that we buy from the US that fall in availability or quality. And, to the degree that our media is dominated by our neighbours to the south, we are not altogether separate in ideologies, health care and gun control not withstanding.

We've all heard the term "the rich get richer" and at no time in history the history of the United States has this been more true than today. Granted, those stats in 1915 surely didn't factor in all the people who had no income at all - thus the disparity is of income inequality, not socio-economic inequality, which must surely have been worse then than now, especially since social programs have raised the floor for seniors or those who are unable to work.

And this may be the very pivot upon which the gap could have been allowed to expand. Back in the 1930s when the New Deal was forged, society's most destitute really did live in squalor, and poverty was plain to the naked eye. Today, social programs raise the floor and allow most people a standard of living above that of a Hoovervilleshantytown, so that there's less attention on the topic of poverty.

There's also the manner in which we, as a society, glorify wealth. We watch Lifestyles of the Rich and Famous, and covet the materials we associate with success. We idolize the athletes and entertainers who put on a good show for us and take billions of dollars at the box office and the arena gate, as well as advertising proceeds from the spots during the movies, television shows and sporting events that sponge up increasing portions of the money supply.

Of course, unlike the feudal system of that feared European aristocracy, we don't need to be born into royalty for an opportunity to "succeed" - we can roll up our sleeves, work hard and achieve success for ourselves in this free society. Yet, the numbers Mr. Noah parses shows that many other nations - Canada included - enjoy better average quality of life and higher real social mobility...for now.

Some may quip that America is becoming a third world country. But that shouldn't be a shocking statement. Some may recognize that third world countries are often rendered as such through colonialism and exploitation by first world countries, especially those with in-demand natural resources that are plundered instead of being fairly traded. The American middle-class has been/is being plundered - it only takes a stroll down through history to see what becomes of a group of people after whatever it is they have to offer has been plundered.

What resource did the middle class have that was worth being plundered? Labor.  It was labor that created the middle class in the first place (consider Henry Ford's initiatives to ensure that his workers had a decent house to live in, and could afford to buy what they built) , lifting the poor up from destitution to a dignified living, so it is only fitting that the plunder of  labor wipe out that same middle class it created (if that word seems out of place, consider the modern use of the term "dead peasants" with respect to corporate-owned life insurance policies).

And in this plunder, the rich get richer, and the gap grows, exceeding levels not seen since before the Great Depression.

We Westerners are quick to spew the status quo argument that "unions" are a problem.  Mr. Noah's discussion of the effects of the Taft-Hartley Act as well as Reaganomics actions such as busting the air-traffic controllers' union, slashing top income-tax rates; and stagnating minimum wage at $3.32/hr for his two terms, halting a yearly increase process, when compared to the labor-supportive social democracies such as Sweden and Germany, seem to indicate that "smashing unions" as the UK and US did (two nations who historically have enjoyed high-value currency, by the way) eventually resulted in smashing the industrial base of both nations.

Revisiting minimum wage for a moment, after Mr. Reagan left the White House, his vice-president Mr. George H. W. Bush held a term, followed by Mr. William J. "Bill" Clinton for two terms. During these three presidential terms, the minimum wage increase process was restored and rose to $5.15 by the time Mr. George. W. Bush took office. He again halted minimum wage adjustments for the duration of his two terms, at the end of which time the American dollar had reached a 51-year low in buying power.

Granted, Mr. Noah does examine, and dismiss, the notion that we can "blame the Republicans" for the income gap, conceding that what might be more indicative of the problem is how government works these days. The amount of money invested in lobby groups in Washington D.C. has grown exponentially (again, read his article for the numbers nitty-gritty), and while party powers ebb and flow into and out of Washington D. C. the lobbyists remain.

I can't prescribe "the solution to this problem." The Ought Thought here is that we have a problem, and if we can raise awareness that we have a problem, we can focus some attention on how to fix it.

Banks have it backwards

The concept that a corporation is a "separate legal entity" requires a closer look. These two articles provide the context for the problem:

• Abolish corporate tax, wrote The Globe and Mail's Doug Saunders (here's the original, at least until it disappears behind a paywall);

• Bank of America to create troubled loans unit, wrote Nelson D. Schwartz at the New York Times (here's the original, at least until it disappears behind a paywall).

From the first article, let's look a little closer at a couple of assumptions. First, Mr. Saunders writes "There is another strong argument against corporate tax: it gives businesses far too much power in politics, law and society. As 'taxpayers,' corporations are given citizen-like rights in court and legislatures; as financiers of state, they are given far too much lobbying power and influence over legislation - almost obligatory given their large taxpaying role." As far as I understand:

• corporations who don't pay taxes have just as much power in politics, law and society, and have many avenues for investing their money without paying taxes. Abolishing corporate tax in no way severs the tentacles corporations have penetrating into politics. In fact, it would just avail more money for lobbyists, fat cat junkets, back room deals, and all the other perks that influence decision-makers;

• corporations have not bought citizen-like rights through paying taxes, because paying taxes is not a fee for citizenship. Society is full of citizens who, for various reasons, do not pay taxes;

• "financiers of state"? Earlier in the article, he talks about how big business manages to reduce its tax burden so that it's the middle class who end up carrying the burden. So, if they are avoiding paying taxes, how are they the "financiers of state"?

• "obligatory" that they have power because they are required to pay taxes? This may be the most ridiculous of all these silly statements. Paying taxes does not oblige a government to favour one citizen over another. At the end of the day, each "citizen" of voting age gets one vote, and corporations, no matter their citizen-like status (which is not the same as citizen status), have no vote in electing government officials. There just no connection between paying taxes and exercising a citizen's right to vote.

The Saunders article, on abolishing corporate tax, is not what this post is about. But, when I read it, I was reminded of the second article from a few months before. I found the Saunders article interesting because of his associating paying taxes with "citizen-like status." The thing is, corporations enjoy the benefits of being a "separate legal entity" for reasons that have little to do with avoiding paying taxes.And that's the segue into the Schwartz article on Bank of America.

There are (or, at least were, up until the LLC designation was spawned) three basic forms of business organization: the sole proprietorship, the partnership, and the incorporation. Each has its strength and weakness (or cost/benefit):

• a sole proprietorship is a person who is doing business as him- or herself. It's great that the books and financial performance are private, but it's not so great that the proprietor retains full liability - if the business acquires debt, the proprietor's personal property can be liquidated to pay it if the business runs out of cash.

• a partnership is a get-together of sole proprietors who share equally in the business. It's great, again, that these organizations are private, but it's not so great that not only is a partner's personal assets exposed to liability if the partnership incurs debt, but if a partner runs up company debt other partners did not know about, their personal property can be liquidated to pay it if the business runs out of cash.

In both forms of organization above, the owner(s) is/are responsible for their business decisions because the business and the owner(s) is/are one and the same.

A corporation, on the other hand, is a different animal altogether:

• a corporation is a separate legal entity that, as such, enjoys limited liability. That means if the business runs up debt, the corporation alone is responsible for that debt, and the personal property of employees cannot be pursued to pay any debt in excess of the corporation's assets. That's great. What's not so great is that a corporation is, essentially, a public company, meaning its financial performance must be made available to public scrutiny. That's not so good...but there are ways around that.

In other words, a corporation — not the human being executives who actually made the bad decisions, but the corporation itself — is now responsible for its own bad decisions. Some will argue that this is necessary to unlock creativity and allow businesses to take risks without fear, to drive growth, productivity and progress, an argument not without merit. Whatever the case, the issue here is that a corporation is responsible for its bad decisions, and assets in the corporation are liable to be liquidated to satisfy its debts.

This bring us to the second article on the Bank of America. Mr. Schwartz talks about how Bank of America is creating a new company into which they are moving their toxic assets so as not to hold down Bank of America. Here's a couple of juicy quotes:

• "Bank of America said...that it would create a unit to handle 1.3 million soured mortgages as Brian T. Moynihan, the bank’s chief executive, tried to distance the company from the fallout of the mortgage crisis";

• The entity, known as Legacy Asset Servicing, will become the repository for tens of billions of dollars in troubled assets, including many subprime products that are no longer offered by Bank of America but continue to hang over the company;

• "Ever since the 'good bank, bad bank' concept was introduced by Mellon Bank in the late 1980s to cope with a raft of troubled real estate and corporate loans, dividing a financial institution has become a fairly routine part of the Wall Street playbook".

Bank of America is trying to "distance itself from...troubled assets that...continue to hang over the company." Unbelievable. Bank of America is a corporation, a separate legal entity, which is responsible for its decisions. The billions of dollars of troubled assets hang over it because it made decisions from which the mess directly precipitated. That's what the organizational structure is about. How do they get around it? Why, they go ahead and make another company, and dump the toxic assets into it.

Follow me here. The executives, human beings, who made bad decisions, created the concept of a separate legal entity corporation they could blame, independent of them. Having that in place, it didn't provide enough of a buffer; so, they create yet another separate company to further distance themselves, and this has now become a "fairly routine part of the Wall Street playbook". Routine?

So, they keep making mistakes, keep creating clouds of trouble over their heads, and keep avoiding accountability by pushing the problem further away from themselves to the corporations they run, to new corporations across or down the street...they've become accustomed to doing this as a matter of routine. What, then, happens to accountability? Who pays for the bad decisions?

The curious and patently absurd notion that a corporation, as a "separate legal entity" absolves the liability of the real human beings who made bad decisions (as though bricks and dry wall can make stupid decisions) was one thing. But, having been established that this separate legal entity is liable for decisions that humans made while under its employ, the Ought Thought here is that these liable corporations should not be allowed to "spin off" the financial albatrosses of their bad decisions, while that corporation, still sporting the bad-decision-making human executives, can continue sans liability.

There's also a religious connection to make here. On the Jewish calendar, there's a holiday called Yom Kippur - the cleansing of the sanctuary, the day of atonement, judgment day. Back in ancient Israel, throughout the year, sinners would approach the sanctuary, confess their sins at the altar of burnt offering, and a lamb would be sacrificed their at the altar, symbolically dying in place of the sinner. Then, the priest, by sprinkling the blood of the animal, symbolically "transfer" the sinner's sins from the altar into the sanctuary. This would go on daily, throughout the year. Once per year, on the day of Atonement, the high priest would enter into the most holy place of the sanctuary, and sprinkle blood from inside back out into the courtyard where the altar of burnt offering was, and then sprinkle blood on a scapegoat which would be released out into the wilderness, symbolically taking with it all the sin that had been in the sanctuary all year, ridding the sanctuary and the camp of the sins, cleansing the sanctuary and, by removing the stain or the mark of sin, judging Israel.

The scape goat was designated as being "for Azazel", meaning "one sent away" or "strong one against God". The idea that would come from this is that sin had been transferred upon the head of the strong one against God, or the demon himself, who was responsible for sin in the first place.

Transferring of responsibility is about returning responsibility to the one who is responsible. What these banks are doing as a matter of routine is transferring their responsibility further and further away from themselves. They've got this backwards.

Perhaps, then, I should propose a new Ought Thought - like the transfer process in the spiritual economy of ancient Israel, the path by which sin finds its way back unto the head of those responsible, is convoluted...but it gets there eventually.

In the meantime, g'mar chatimah tovah.