Sunday, December 18, 2022

Sam Bankman-Fried and the Crypto Scandal: Lessons for Average Americans

Sam Bankman-Fried, founder of FTX, a cryptocurrency exchange, was once worth billions of dollars. Today he is sitting in a Bahamian jail, abiding with rats and maggots. Worse--the prison doesn't offer a vegan menu.

Sam was to have testified before a Congressional hearing about his financial dealings. However, a federal prosecutor filed criminal charges against him, and the Bahamian authorities obligingly locked him up before he spilled the beans.

And so many beans to spill. Commentators estimate Sam has one million creditors, primarily investors. 

The mainstream media has portrayed Bankman-Fried as a naive and inexperienced investor who got over his skis. I think that's bullshit.

SBF is no country bumkin. He graduated from the Massachusetts Institute of Technology with a degree in physics.

He certainly grew up in sophisticated surroundings. His Wikipedia bio says he was born "on the campus of Stanford University." (Evidently, Stanford has a maternity ward).

Sam's dad, a professor at Stanford School of Law,  is a tax specialist who got his law degree from Yale. 
Sam's mom, a recently retired Stanford law professor, has three degrees from Harvard, including a law degree.

So what's next for Sam Bankman-Friedman and his crypto empire, which some people describe as a giant Ponzi scheme?

There are two possibilities. If Sam's shenanigans are fully exposed, the public may discover that many influential politicians profited from Sam's activities, which could trigger a political earthquake and multiple indictments.

On the other hand, the full extent of this scandal may never come to light. Sam is in a Bahamian jail awaiting extradition to the United States. Sam might be prosecuted vigorously, but he will likely take a plea deal without ever publicly testifying.

Regardless of how this saga plays out, Americans can learn a lot from Sam Bankman-Fried and the FTX fiasco.

First, people should only invest in financial vehicles they understand. Who really knows what cryptocurrency is or why it has value? And yet, millions of people invested their savings in crypto.

Second, financially insecure people should not invest their meagrer savings in desperate schemes to reverse their fortunes.  Many Americans are approaching their retirement years with inadequate savings and are panicking.

Nevertheless, impecunious people who think they can get rich by investing in cryptocurrency are like the guy who loses heavily at the roulette wheel and places his entire dwindling stake on black. Desperate gambling often leads to disaster.

Finally, FTX's collapse is a reminder that people who have degrees from elite universities aren't necessarily smart.  Sam Bankman-Fried and almost everyone associated with FTX holds a degree from an exclusive school. Yet look what happened?

Sam Bankman-Fried has a degree in physics from M.I.T.

Monday, December 12, 2022

"Let's all pretend we couldn't see it coming" (The US Working-Class Depression) by Dahn Shaulis

How is the working-class Depression of 2020 similar to the other 47 financial downturns in US history? 

Downturns are frequently precipitated by poor economic and cultural practices and preceded by lots of signals: over-speculation, overuse of resources, oversupplies of goods, and exploitation of labor. What I see are many poor practices brought on by corruption--with overconsumption, climate change, growing inequality, and moral degeneration at the root.

The "disrupters" (21st century robber barons) have enabled an alienating and anomic system that is highly dysfunctional for most of the planet, using "algorithms of oppression." And this cannot be solved with data alchemy, marketing, and other forms of sophistry.

Put down your iPhone for a minute and ponder these rhetorical questions:

Warm Koolaid (2016) signified corporate America's use of myths and distractions to sedate the masses. 

    How long have we known about all of this dysfunction? Academics have known about the effects of global climate change and growing US inequality since at least the 1980s. The Panic of 2020 should be a lesson so that we don't have a larger economic, social and environmental collapse in the future.

    Who will hear the warnings and do something constructive for our future? Or is this Covid crisis another opportunity for the rich to cash in on the tragedy?

    The answer lies, in part, to an ignorance of history and science, and oversupply of low-grade information, poor critical thinking skills, and lots of distractions. That's in addition to the massive greed and ill will by the rich and powerful.

    US downturns are baked into this oppressive system. And crises are used to further exploit working families. With climate change and a half century of increasing inequality, these situations are likely to worsen.

    Workers will resist and fight oppression; they always do, but will they have a voice as the US faces another self-induced crisis, as trillions are doled out to those who already have trillions?

    Here are the dates of the largest economic downturns.
    1873–1879 (The Long Depression)
    1893–1896 (The Long Depression)
    1918–1921 (World War I, Spanish Flu, Panic of 1920-21)
    1929–1933 (Stock Market Crash, Great Depression)
    1937–1938 (Great Depression)
    Feb-Oct 1945
    Nov 1948–Oct 1949
    July 1953–May 1954
    Aug 1957–April 1958
    April 1960–Feb 1961
    Dec 1969–Nov 1970
    Nov. 1973– March 1975
    Jan-July 1980
    July 1981–Nov 1982
    July 1990–March 1991
    Mar-Nov 2001
    December 2007 – June 2009 (The Great Recession)
    March 2020-

    We live in an economic system that is unsustainable, unjust, and exploitative. While many of us in academia and the thought industry have known this for decades, those with greater wisdom have known for centuries. Techies and disrupters think it can all be solved with technology, not with profound wisdom. The ultimate in hubris and reductionism. We have to change the system politically, socially, and culturally. We have to be wiser.

    How do we do that, radically change society, when our economic system has driven us in the wrong direction for so long? Some of these lessons can be learned from working-class history, but they have to be applied with wisdom.

    This essay, written by Dahn Shaulis, was originally posted on Higher Education Inquirer.

    Friday, December 9, 2022

    Cazenovia College is closing: Who cares?

     Cazenovia College is closing at the end of the spring semester. According to Inside Higher Ed, the college missed a bond payment due to financial stresses exacerbated by inflation and the COVID pandemic.

    Cazenovia College is a liberal arts college located in the town of Cazenovia in upstate New York. It has about 800 students. The school was founded as a Methodist seminary almost 100 years ago.

    Over the years, Cazenovia has gone through several metamorphoses and name changes. From 1904 until 1931, Cazenovia functioned as both a seminary and a secondary school.  The Methodists withdrew church sponsorship in the 1940s, and the school transitioned into a junior college. In the 1980s, the school became a four-year college and began offering graduate programs in 2019. 

    In short, this plucky little college has done its best to remain relevant and to change with the times. Ultimately, however, Cazenovia couldn't make a go of it.

    Cazenovia is primarily a liberal arts school. For example, the college has majors in Liberal Studies and Individual Studies.  What kind of job will a Cazenovia graduate get with a degree in those fields?

    Like many obscure liberal arts schools around the United States, Cazenvovia's attendance costs can't be justified.  Tuition for this academic year is more than $36,000. Room and board are another $15,000. Who in their right mind would pay $50,000 a year to attend this tiny college with a 6-year graduation rate of only 59 percent?

    But maybe the costs aren't that high.  The U.S. News & World Report points out that Cazenovia's sticker price is below the national average.  According to that source, the net price for federal loan recipients is only about $19,000. 

     That's still high.  When room, board, and living expenses are added, the total cost to attend Cazenovia for federal loan recipients is around $34,000 per academic year--34 grand to attend a college with only 800 students.

    Across the United States, there are hundreds of obscure, expensive colleges struggling to survive. How have they held on for as long as they have? 

    A recent study by the Government Accountability Office offers some clues. According to the GAO report, many schools are making financial aid offers to prospective students that misrepresent the actual costs. Specifically, GAO found that 41 percent of colleges in its study did not include the net price of attendance.  And half the schools reported a net price that did not include key costs.

    For example, many schools include student loans and even Parent PLUS loans as "student aid," thus blurring the line between grants and loans. Unsophisticated families may not realize that the supposedly generous financial aid offer they received from an expensive private school might require them to take on burdensome levels of debt.

    I'm not saying Cazenovia misrepresented the actual cost of attendance. Its financial aid offers may have been perfectly candid and totally in keeping with best practices. 

    If so, it is in the minority. The GAO "estimate[d] most colleges do not provide students all of the information necessary in their financial aid offers to know how much they will need to pay for college."

    Tuesday, December 6, 2022

    Tears and Regret: More than half the people who attended a for-profit college wish they'd studied at a different institution

     "If they gave gold statuettes for tears and regrets," Ronnie Milsap sang in a classic country song, "I'd be a legend in my time."

    Most of us have a few regrets, but no one should regret their college choice. Yet a recent Federal Reserve  Board report shows that many Americans wish they had studied at a different school or chosen another major.

    More than half of those who attended a for-profit institution wish they'd studied at a different college. Fourteen percent of for-profit college attendees reported wishing they had received less postsecondary education or not gone to college at all.

    In addition, many Americans are skeptical about the benefits of their college education.  Most older Americans (82 percent of people ages 60 and older) believe that the benefits of their college education exceed the costs. 

    In contrast, many people in the traditional college-going years (ages 18-29) aren't sure that a college degree is worth the money. Among young Americans, only slightly more than half (56 percent) believe that the benefits of their education exceeded the cost. More than a third of college attendees in the 30-44 age bracket reported that the cost of their education outweighed the benefits.

    The Federal Reserve report also found that a high percentage of people who majored in the humanities or social sciences regret their choice of major. Forty-eight percent of people who majored in the humanities and 46 percent of those who majored in social and behavioral sciences wish they had selected a different academic program.

    For years, high school graduates were told they would never get ahead unless they obtained a college degree--and that the benefits of a college diploma far outweigh the cost.

    Yet, these findings show that many Americans are unhappy about their college experience. A high percentage wish they had attended a different school or chosen another academic major. Perhaps most alarming, more than four out of ten young people think the cost of their college education exceeded the benefits.


    My thanks go to Dahl Shaul and Glen McGhee for calling my attention to the Recent Federal Reserve Board report.

    Saturday, December 3, 2022

    Major Changes Now Allow You to Eliminate Federal Student Loans in Bankruptcy Essay by Steve Rhode


    Are you in default on your federal student loans?  And have you been unemployed for at least 5 of the last ten years? Have you made at least one payment in the past on your loans?


    Do you struggle to make monthly student loan payments after covering other expenses?  Are you 65 or older? Have you responded to letters or calls from your servicer about your past-due balance?

    For as long as we’ve had bankruptcy laws, people in the circumstances like the above could generally access the Bankruptcy Code’s promise of a “fresh start.” The “fresh start” was intended to ensure that honest but unfortunate debtors in dire financial situations were not doomed to spend their lives in poverty. They could file for bankruptcy protection, discharge their outstanding debts, and start fresh on a new lifeExcept for student debtors. In 1978, Congress removed “student loans” from the list of dischargeable debts—unless the debtor proved that requiring repayment after bankruptcy would impose an “undue hardship.”  To prove “undue hardship,” debtors generally had to prove three things: (1) the debtor cannot presently maintain a minimal standard of living if required to repay the student loan, (2) circumstances exist that indicate the debtor’s financial situation is likely to persist into the future for a significant portion of the loan repayment period, and (3) the debtor has made good faith efforts in the past to repay the student loan.

    These highly subjective elements made it very difficult to prevail in litigation.  And even where debtors did prevail at trial, they could expect years of appeals to follow, often resulting in a reversal of the trial court’s decision.  For those and other reasons, only 0.1% of debtors even attempt to discharge their loans. And that is largely because of the cost associated. Most bankruptcy lawyers charge anywhere from $30,000-50,000 to handle a student loan discharge case.

    But thanks to the new guidance by the Departments of Education and Justice, debtors with circumstances like the above (and many others) can finally discharge their federal student loans in bankruptcy. Going forward, the Department will not oppose discharge, and will stipulate to the facts supporting discharge, provided the debtor demonstrates he or she meets certain criteria:


    The debtor’s current financial situation. If the debtor’s monthly income minus necessary expenses do not leave enough money left over to make the monthly payment on the debt. Perhaps most importantly, this will be based on the “Standard” repayment plan—not an income-based repayment plan. The Standard Plan is ten years, meaning, take the balance of your loan, divide it by 120, and if the monthly payment exceeds your income after necessary expenses (food, clothing, health insurance, etc.), you likely meet the standard.


    The debtor’s financial future. This is usually the most challenging part of the test since it relies on accurately predicting the future.  But going forward, the government will stipulate to discharge wherever the debtor is (i) over 65; (ii) did not obtain a degree; (iii) is suffering from some disability or chronic injury that makes employment difficult; (iv) has been unemployed for at least 5 of the last ten years; or (v) has been in repayment for more than 10 years.


    Whether the debtor has made a “good faith” effort at repayment. The government will now stipulate to discharge provided the debtor has made one payment in the past, applied for forbearance, or attempted to work with their servicer on an affordable payment plan. So long as you have not buried your hand in the sand, you can likely meet this prong.

    An important caveat here is that the government will only stipulate to these facts. Even where one or more of these circumstances are present, the Bankruptcy Court will still need to concur with the government and issue an order discharging the debt. But there is an enormous difference between those two things regarding time and cost.

    Takes Less Time

    First, rather than taking five or six years (the average length of time required to litigate a trial and handle any appeals), this can now be accomplished in a matter of months.

    Second, and perhaps more importantly, the cost can be dramatically reduced if it can be done in months instead of years. If lawyers are no longer required to spend ~100 or more hours litigating your case and appeals, they won’t need to charge $30,0000 or $50,0000.  Instead, lawyers could do this economically for a few thousand dollars.

    Some of this probably sounds complicated.  Other parts of it probably sound too good to be true. And implementing this guidance may not be as consistent or predictable as we might like.  But this is the first time the government has opened the door to discharge federal student loans in bankruptcy in more than 40 years.

    That is a huge deal and long overdue.


    This essay was originally posted on November 23, 2022, on the  Get Out of Debt Guy website. 

    Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve here.

    An Iowa bankruptcy court building

    Friday, December 2, 2022

    The Supreme Court will soon rule on legality of Biden's Student-Loan Forgiveness Plan

     Forty million student debtors are waiting anxiously for President Biden's loan forgiveness plan to kick in. Biden wants to knock off $10,000 from everyone's student loans who makes less than $125,000 a year. That won't mean much to people whose loans are in six figures, but it will mean a great deal to people with modest loan balances. 

    Unfortunately for all those millions of college borrowers, the Eighth Circuit Court of Appeals halted Biden's plan.

    President Biden appealed to the Supreme Court, and yesterday the Court agreed to consider his appeal. We should have a Supreme Court decision by early summer of next year.

    I predict that the Supreme Court will strike down Biden's loan-forgiveness scheme as an unconstitutional usurpation of Congressional authority. If that happens, the President and Congress will be under heavy pressure to provide some sort of loan relief that isn't illegal.

    As I have argued repeatedly, Congress should revise the Bankruptcy Code to allow honest debtors to discharge their student loans in bankruptcy. This simple action would do more than anything else to grant loan relief to deserving college borrowers without allowing unworthy student debtors to get a free ride.

    If this is too much of a heavy lift for Congress, it could enact more modest reforms. Here are my suggestions:

    1) Congress should forbid the Department of Education from garnishing the Social Security checks of elderly borrowers who defaulted on their student loans. 

    2) Congress should shut down the for-profit college industry. There is no reason for private investors and hedge funds to profit from young people striving to get their college degrees.

    3) We should end the Parent PLUS program, which has impoverished hundreds of thousands of low-income families who took out federal loans so their children could attend college.

    4) Congress also needs to reform the Grad PLUS loan program, which currently has no cap on the amount of money students can borrow to attend graduate school.  It is ridiculous for people to borrow $100,000 or more to get a master's degree in journalism.

    Will any of these reforms see the light of day? Doubtful. Universities, student-loan servicers, and the banks are all happy with the status quo. As someone remarked after the fall of France during World War II: "Reform was possible only through catastrophe."

    Sadly, it will probably take the catastrophic collapse of the American economy before our politicians will do what needs to be done to clean up the calamitous student-loan program.

    Reform is not possible without a calamity.