Open Season on the Poor

Every time anyone talks about raising taxes on the rich, people like Rush Limbaugh and Ann Coulter start screaming "class warfare" at the top of their lungs. The thing is, the rich have been waging class warfare on the poor for years. Here's the latest example of the trend, which has the distinct possibility of blowing up like the housing bubble.

A recent story in the LA Times reports on a chain of used car dealerships called "Buy Here Pay Here." They specialize in selling junker cars to poor people at exorbitant interest rates. Until recently, responsible investors wouldn't touch these outfits with a ten-foot pole: a quarter of the loans go into default. But in May the private equity firm Altamount Capital Partners in Palo Alto bought the J. D. Byrider chain of used car dealerships for $50 million.

Private equity firms in California used to invest in computer companies, bio-tech firms, Internet startups and other high-tech ventures that would create completely new industries and more jobs. But they've moved on to greener pastures. From the LA Times article:

The dealerships make an average profit of 38% on each sale, according to the National Alliance of Buy Here Pay Here Dealers. That's more than double the profit margin of conventional retail car chains like AutoNation Inc. 

"The amount of return from these loans you can't get on Wall Street. You can't get it anywhere," said Michael Diaz, national sales manager for Small Dealers Assistance Inc. in Atlanta, which buys loans originated by Buy Here Pay Here dealers. "It's the gift that keeps giving."

Although they're backed mainly by installment contracts signed by people who can't even qualify for a credit card, most of these bonds have been rated investment grade. Many have received the highest rating: AAA.

That's because rating firms believe that with tens of thousands of loans lumped together, the securities are safe even if some of the loans prove worthless.

Where have we heard this scam before?

Buy Here Pay Here is also being boosted by one of the sophisticated financial strategies that drove the nation's recent housing boom and bust: securitization. Loans on decade-old clunkers are being bundled into securities, just as subprime mortgages were a few years ago. In the last two years, investors have bought more than $15 billion in subprime auto securities.

So, just like at the beginning of the housing bubble, we have big banks and investors figuring out a new way to take money away from people who don't have any and then passing the bad loans on to someone else. But this scam is even worse, because the interest rates on these loans can be just about anything. For example, one Buy Here Pay Here dealership charges 14.9% interest.

Now, that's a really high interest rate. You can generally get home mortgages -- if you can qualify -- for 2.5 to 4%. For comparison, if you get a certificate of deposit from a bank a typical return is currently 1% for one-year CD to 2.5% for a five-year CD. But Buy Here Pay Car Lots doesn't shrink from the fact that they're screwing you. They brag about it:

So, are interest rates high at buy here pay here car lots? Well, what do you call high? We charge 14.9%. That’s more than you’ll pay on your mortgage–if you can still get one. It’s very likely what you’ll pay on a credit card balance–with one huge difference. The card issuer would love to see you stretch out payments forever. Any buy here pay here dealer that I know wants you to pay off in a couple of years at most. What’s that mean? Well, compare the following two loans. 

 $5,000 credit card balance at 14.9% over 10 years. 

Payment = $80.36 a month, but total interest paid over the life of the loan is $4,643.39. 

$5,000 car loan at 14.9% over 2 years. 

Payment = $242.20 a month, but total interest paid over the life of the loan is $812.70.

Seriously. Who is really milking the consumer here, you[r] local car dealer, or Citibank?

Of course they can't stretch the loan out over 10 years. The junkers they sell don't last 10 years, so they have to pry the money out of your hands right now or they'll wind up repoing a useless heap when it breaks down and you stop repaying them.

What these Buy Here Pay Here companies don't tell you is that if your credit rating is good enough to get the right kind of credit card, you can pay off your balance in two years or one year, or six months, or one month, with no penalty and even no interest. But they neglect to mention that their car loan contracts usually have prepayment penalties.

Their rationale for charging high interest rates is essentially: "The big banks are screwing you, so we're going to screw you too. We're just screwing you faster: instead of a long, leisurely weekend dalliance, we give you quickie in the backseat of your car."

You can just see how this will play out when this house of cards collapses and some big bank goes bust when these "AAA" securities fail. Limbaugh and Coulter will blame those worthless scumbags and leeches for taking out loans that they can't pay, and the rest of us have to suffer for it. But the real leeches are the loan sharks making loans to poor people that they fully expect will default on the loan?

In the olden days the local used car dealer or loan shark profited from your misery. Now that these BHPH dealerships are being bought up as by venture capitalists and their loans are being repackaged as Wall Street investment instruments, Citibank or some other giant out-of-state investment firm is getting your money. That raises another issue: out-of-state banks don't have to abide by state interest rate limits.

Many states used to have limits on interest rates (in Minnesota's case it was 12%). Marquette National Bank of Minneapolis sued First National of Omaha when FNO started offering cards in Minnesota at a higher interest rate. In 1978 the Supreme Court decided against Marquette, preventing states from imposing interest rate limits on national banks. Which is why so many banks moved their credit card operations to North Dakota, and interest rates have often been as high as 18 and 21%.

What about states' rights? Local control? Christians should be outraged by this: usury is condemned by the Bible as immoral. The First Council of Nicaea and subsequent ecumenical councils forbade usury and charging interest greater than 1% per month. If we want our state to abide by Christian precepts dating back to the founding of the Church, the big bad federal government steps in and stops us.

This is just one more example where more and more money is flowing into fewer and fewer hands, most notably the hands of Wall Street bankers. The people who can least afford it wind up paying more for everything: from cashing their paychecks, to buying groceries, to car loans, to furniture, the poor wind up paying more money for less value in every instance. They can't even put their money into a bank because of the fees.

This is why the poor can't pull themselves up by their bootstraps. The ways rich or middle-class people save money are unavailable to the poor. As the old saw goes, it takes money to make money. How much money can you save if your life consists of working three part-time minimum wage jobs 60 hours a week for $25K a year, driving a BHPH-financed junker that keeps breaking down, living in an overpriced and underheated roach-infested apartment, getting your kids' beds and the living room couch and the TV from the RentaCenter down the street for three times their actual value, buying the kids Fruit Loops at the the local convenience store for twice what the Publix in the suburbs charges, having to pay a couple hundred bucks out of pocket (because you've got no health insurance) every time your kids start puking their guts out or screaming bloody murder because of an ear infection?

If the poor were getting hammered by just one of these problems they might be able to find a way out. But every way they turn they're getting nickeled and dimed to death by people who make a lot more money than they do. What's worse, more and more middle class people are losing their jobs, and they're being pushed down the same hole that the working poor have been living in for decades. And the guys at the top keep raking more and more money in, concentrating it in fewer and fewer hands.

Nope, Limbaugh and Coulter are right when they say they aren't engaging in class warfare. Warfare implies some kind of roughly symmetrical conflict. The wealthy have simply declared open season the poor.