John Edwards: corporate executive

According to today’s WSJ:

As a presidential candidate, Democrat John Edwards has regularly attacked subprime lenders, particularly those that have filed foreclosure suits against victims of Hurricane Katrina. But as an investor, Mr. Edwards has ties to lenders foreclosing on Katrina victims.

That would be the Nationstar and Green Tree units of Fortress Investment Group LLC. Indeed:

Near the close of the poverty tour, Mr. Edwards traveled to a Cleveland neighborhood that has a high foreclosure rate. "This is wrong. This is not complicated, it is wrong," he said, as he walked along. "These people have been taken advantage of."

Records show the county Sheriff's Office has scheduled three foreclosure auctions at the behest of Nationstar in August and one for Green Tree. The Wall Street Journal has identified 34 New Orleans homes whose owners have faced foreclosure suits from subprime-lending units of Fortress Investment Group LLC.

How close are Edwards’ ties to Fortress?

• $479,512 in 2006 for part-time work
• About half of his net worth [$16 million] in Fortress funds
• Fortress employees are the largest class of contributors to Edwards' presidential campaign -- more than $150,000 in the first six months of this year.

But

The candidate has said he had no involvement in Fortress units' subprime lending when he worked for the private-equity firm and wasn't aware of it at the time. He has said his job at Fortress was to provide information about what he saw happening economically in the U.S. and overseas. He has also said he was there "primarily to learn" about finance. In the interview yesterday, Mr. Edwards said that when he first joined Fortress, "I made clear that I didn't want to have anything I was investing in to be antilabor or involved in predatory lending practices." But he added that he didn't fully understand the firm's complex operations, saying: "They're diverse. They're very diverse."

I'm not going to get too down on the guy for hypocrisy.  Hey, I'm happy at least a little capitalism is rubbing off on Edwards. For example:

Edwards aides, while apologetic for the foreclosures, defended subprime lending in general. They pointed out the distinctions between subprime loans, which are extended to people with less-than-stellar credit, and "predatory" loans, which often target the same consumers but employ pressure sales tactics and punitive covenants that can strip equity from home buyers and tie them to onerous payments. Subprime loans, defenders note, can benefit many lower-income people previously locked out of home ownership.

The latter point is one that I've made. But then it gets a little sticky, because what exactly is the difference between a “predatory” loan and a “subprime” loan? The WSJ sources Thomas Lawler, formerly of Fannie Mae, with the observations that predatory loans carry high interest rates, their rates go up but you can’t refi when rates go down, no escrows so the mortgage looks misleadingly cheap. The article notes that "a review of some courthouse records in Louisiana shows that Green Tree and Nationstar mortgages carry many of those attributes."

This isn’t surprising: subprime loans carry the highest risks, so you’d expect the lender would get paid more. The loan terms and features could be more transparent, but so could a lot of other products. Still, I’d rather have Edwards conflicted about capitalism than totally against it.

What bothers me is Edwards’ ignorance cop-out. True, he was far from a top executive at the company. But he did have high visibility – sort of like, say, Ken Lay's role at Enron. Fortress wanted Edwards for political cover, and they were willing to pay him royally for the service. If Edwards is going to get this kind of loot to vet Fortress’s acceptability, shouldn’t he have to take at least political responsibility?  He'd still be getting off a lot lighter than other high-paid executives under SOX – the law that Edwards helped write.

Comments

[outside the beltway]

General Electric (GE) has subprime holdings.

all americans who own a mutual fund have ties to subprime loans

[M. Hodak]

I felt that the point of this article should have been that it IS complicated. Business is complicated. Relationships of all sorts are complicated. That is why we need certain hard and fast rules in life, like: if I agree to something, I should be held to it.

The market is all about sorting through incredibly complex trade-offs, the kind that don't lend themselves to the black-and-white judgments of politicians who trade outrage based on such judgments.

When politicians like Edwards complain that certain people have been "taken advantage of," they're really just accusing those people of being incompetent as an excuse to bring them under greater government control. They do this, of course, by pretending that it's just the big companies that are being regulated. This may be another case where perhaps the greatest victims of costly regulations (the poor) are to blame, but I'm not as cold as your average politician when it comes to cutting off opportunities for others.