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"Code is law." Literally.

The Law is the true embodiment
Of everything that's excellent.
It has no kind of fault or flaw,
And I, my Lords, embody the Law.

--The Lord Chancellor, Iolanthe, Gilbert and Sullivan

[Welcome, 4closureFraud readers! Welcome FDL readers! --lambert]

We can look at the foreclosure crisis as the pre-emininent law enforcement crisis of our time: Elite impunity for crimes committed and still being committed by lenders and servicers (“banksters”) on a massive scale. We can also look the foreclosure crsis as an issue of jurisprudence, where a revolutionary oligarchy seeks to change the nature of law itself.

Let’s start with “Code is law,” a terrific meme successfully propagated by Lawrence Lessig in the '90s. From The Industry Standard:

The single most significant change in the politics of cyberspace is the coming of age of this simple idea: The code is law. The architectures of cyberspace are as important as the law in defining and defeating the liberties of the Net. Activists concerned with defending liberty, privacy or access must watch the code coming from the Valley - call it West Coast Code - as much as the code coming from Congress - call it East Coast Code.

Lessig revised and refined his thinking here in Version 2. From his keynote presentation to the ABA-Tech conference in 2011 starting at 10:36:

The lesson of code is law is not the lesson that we should be regulating code, the lesson of code is law is to find the right mix between these modalities of regulation to achieve whatever regulatory objective a government might be seeking.

I’d like, respectfully, suggest that Lessig has the right meme, but the wrong content backing up the meme. As I hope to show, code is indeed law -- and, increasingly, literally -- but not in the clean, elegant, hip, candy-colored (and triumphal) world of "the Valley" and the Internet, but in the world of huge honkin’ crufty proprietary information systems run by major corporations. Especially those used by banksters (including MERS and LPS).

Is the foreclosure crisis a law enforcement crisis?

Yes. Yves Smith:

The word “predatory” is not adequate to describe Wells’ conduct. The bank is not simply willing to steal from consumers, via blatant, institutionalized violations of its own agreements on mortgages and later on bankruptcy plans. It has absolutely no respect for the law, whether it be contracts or court procedures.

Yes. Abigail Field:

The mortgage settlement signed by 49 states and every Federal law enforcer allows the rampant foreclosure fraud currently choking our courts to continue unabated.

Yes. Barry Ritholtz:

The fraud is rampant, self-evident, easy to prosecute. The only reason it hasn’t been done so far is that this nation is led by corrupt cowards and suffers from a ruinous two-party system.

We were once a great nation that set a shining example for the rest of the world as to what the Rule of Law meant. That is no more, as we have become a corrupt plutocracy. Why our prosecutors cower in front of the almighty banking industry is beyond my limited ability to comprehend.

Maybe so. Now let’s look at law and code together. Here’s an extract from The Honorable Elizabeth W. Magner’s recent decision busting Wells Fargo [PDF], In Re Jones. It starts:

In this case, Wells Fargo testified that every home mortgage loan was administered by its proprietary computer software.

That is, code. I’ve reformatted Magner’s text into a table with two columns, which can be read left to right, top to bottom.

  • Column A (“Code should follow law”) contains content from the world of the judical system: Testimony, evidence, orders, plans, contracts, judgements, “the record,” and last but not least, the note and the mortgage.
  • Column B (“Code is law”) contains content from the world of information systems: Databases, coding, online forms, software manuals, and data entry procedures set up by Wells Fargo.
  • Note especially the key at the bottom of the table.

Table I: Extract from In Re Jones


(A) Code should follow law

(B) Code is law

In this case, Wells Fargo testified that every home mortgage loan was administered by its proprietary computer software.

The evidence established:

1. Wells Fargo applied payments first to fees and costs assessed on mortgage loans, then to outstanding principal, accrued interest, and escrowed costs.

This application method was directly contrary to the terms of Jones’ note and mortgage, as well as, Wells Fargo’s standard form mortgages and notes. Those forms required the application of payments first to outstanding principal, accrued interest, and escrowed charges, then fees and costs.

The improper application method resulted in an incorrect amortization of loans when fees or costs were assessed. The improper amortization resulted in the assessment of additional interest, default fees and costs against the loan.

The evidence established the utilization of this application method for every mortgage loan in Wells Fargo’s portfolio.

2. Wells Fargo applied payments received from a bankruptcy debtor or trustee to the oldest charges outstanding on the mortgage loan ….

rather than as directed by confirmed plans and confirmation orders.

This resulted in the incorrect amortization of mortgage loans postpetition. Again, the improper
amortization resulted in additional interest, default fees and costs to the loan.

3. When postpetition fees or costs were assessed on a loan in bankruptcy, Wells Fargo applied payments received from the bankruptcy debtor to those fees and charges without disclosing the assessments or requesting authority.

The payments were property of the estate, they were applied contrary to the terms of plans and confirmation orders, and in violation of the automatic stay.

This practice resulted in the incorrect amortization of mortgage loans postpetition. Again, the improper amortization resulted in the addition of increased interest, default fees and costs to the loan balance.

The evidence established the utilization of this application method for every Wells Fargo mortgage loan in bankruptcy.

Wells Fargo’s practices led to the following conclusions:

1. Applications contrary to the contract terms of Wells Fargo’s standard form notes and mortgages...

...resulted in an incorrect amortization of the loan.

As a result, monetary defaults claimed by Wells Fargo on the petition date were incorrect.

2. Misapplication of payments received postpetition resulted in incorrect amortization of Wells Fargo loans ….

…. and threatened a debtor’s fresh start, as well as, discharge.

3. Application of postpetition payments to new, undisclosed postpetition fees or costs….

... also threatened a debtor’s fresh start and discharge.

The Partial Judgment on Remand and Accounting Procedures were crafted to remedy the above problems. They were designed to protect debtors from …

incorrectly calculated computed proofs of claim, …

… to verify that loans were …

properly amortized…

… prepetition in accordance with the terms of notes and mortgages, and to ensure that postpetition amortizations were in compliance with the terms of confirmed plans and orders.

Because the evidence established that the problems exposed with the Jones’ loan were…

… systemic, …

Administrative Order 2008-1 and the Partial Judgment on Remand required corrective action on existing …

… loans …

in bankruptcy…

… for past errors, …

as well as, ongoing future…

… performance.

There is nothing in the record supporting Wells Fargo’s assertion that it has corrected its past errors. There is nothing in the record to assure future compliance with the terms of notes, mortgages, confirmed plans or confirmation orders. Therefore, Wells Fargo’s request for judicial notice of compliance is denied.

KEY

rent


accountability


First, this arrangement of Magner’s text makes one possible “theory of the case” clear: The incentives for fraud -- the costs, the fees, and the interest -- are all coded green, and are all in column B; the world of Wells Fargo's proprietary information system. Follow the rents. Every time Wells makes a “mistake,” Wells makes money! After mistakes were incentivized, mistakes were made! (Could Wells Fargo’s home mortgage loan administation system actually have been a profit center?) Now, it is true that this scheme -- if it is a scheme -- does not conform to William Blacks’ “recipe” for optimized accounting control fraud, but it’s a nice little revenue stream all the same, and it falls within Black’s definition: “Control fraud is a term that criminologists use to refer to cases in which the persons controlling a seemingly legitimate entity [here, Wells Fargo's proprietary computer software] use it as a weapon to defraud.”

Proprietary information systems like Wells Fargo’s do not magically appear. These systems are not purchased in shrink-wrapped boxes. They are custom-coded and glued together with immense effort by people in cubes, and they cost money. Lots of money. They are also risky to develop. For these reasons, corporations establish formal processes for systems development, deployment, and maintenance of information systems. These processes are heavy-weight. “Agile” they will not be. Scrums will not figure largely in them. There are many methodologies for such processes, but there will be two common feature shared by all: They will be documented, each step of the process will be documented, and major documents -- for example, accepting a requirements analysis or a decision to deploy -- will be agreed and signed off on at the executive level. CYA is the order of the day. (And if none of that is true, so much the better.)

So, if I were a lawyer and looking to sue Wells Fargo for accounting control fraud (or better, a prosecutor who wanted to see banksters in orange jumpsuits doing the perp walk) I’d make sure to include all software development documentation in my discovery, including all email and conversations with outside contractors and consultants, as well as training materials and documentation for end users. Because, from the 30,000 foot level, Wells Fargo executives signed off on a ton of documents while building a proprietary software system that enabled and incentived fraud, and fraud took place. Lots of fraud. So, the executives either signed off knowingly (book 'em under, say, RICO) or they signed off unknowingly (book 'em under, say Sarbanes Oxley). Like I said, I’m not a lawyer. But the systems development process just could be the banksters’ soft underbelly, and I’d like to see a smart legal team with a penchant for software forensics try to rip it open.

All this is bad (or good) enough. But what if things are worse? What if the appropiate frame were not law enforcement, but jurisprudence? That is, what if the stakes were not "the rule of law," but the nature of law itself, and hence the nature of the State?

Let’s take another look at Table I. Suppose I were a bankster, or a bankster’s lawyer, and I liked the green stuff in column B and wanted to keep what I've taken and take more of it. I might see Magner’s decision as a sort of “one from column A, one from column B” mish-mash that prevents me from doing God’s work. So why not get rid of that Column A entirely? Why not make code, law? That’s a clean solution, since all those pesky accountability issues go away. "Incorrect amortization" would become "incorrect amortization," "misapplication of payments," "misapplication of payments," and so on and so forth. After all, if I were an oligarch, that’s exactly the kind of system I would want, right? Rent extraction without accountability. And there’s… not a precedent, exactly, that’s oldthink legalese, but a prior example, and in the same industry, too: MERS. Christopher Peterson, a law professor at the University of Utah, wrote of the “wholesale transfer of mortgages to a privatized database” [code] in Harpers:

What’s happened is that, almost overnight, we’ve switched from democracy in real-property recording to oligarchy in real-property recording. There was no court case behind this, no statute from Congress or the state legislatures. It was accomplished in a private corporate decision. The banks just did it.

With MERS, code replaced law. Going forward, code is law.

Returning to In Re Jones, this layperson can see two ways forward to the same happy, oligarch-friendly outcome as with MERS. The first: Wells Fargo’s failed, first shot: Just call it good. In a third-world country, such tiresome bureaucratic obstacles as judges are easy to clear away. But Magner wasn't having any: "There is nothing in the record supporting Wells Fargo's assertion that it has corrected its past errors." The second: Suppose Wells Fargo's proprietary system just can't support Judge Magner's order? What happens then? Obama's mortage "settlement" allows a certain percentage of illegal title transfers. From a systems perspective, that suggests that Wells Fargo couldn't build a "Column A-legal" without a huge budget and several years. In a clash like that, who wins? Courts have "no influence over either the sword or the purse" (Federalist 78). Most likely, the Court would back down. Code would become law.

In summary, I've suggested there are two ways to look the foreclosure crisis: 

  1. As a law enforcement problem, where banksters have committed illegal acts; 
  2. and as a jurisprudence problem, where the oligarchs who own proprietary software systems have changed the nature of law itself: Code is law, not metaphorically, but literally. 

In the latter case, what we understood the law to have been, in Civics 101, is then rewritten or crippled to conform to the code. Statutes, rules, regulations become vestigial. Code is the driver. (I can't think another word for this than "revolutionary," even if a revolution is "an overthrow or repudiation and the thorough replacement of an established government or political system by the people governed," and not the people doing the governing.)

That's a rather unpleasant notion. Is there another, prior example of code replacing law? Yes. FISA reform.

Step One: Code the software system:

AT&T provided National Security Agency eavesdroppers with full access to its customers' phone calls, and shunted its customers' internet traffic to data-mining equipment installed in a secret room in its San Francisco switching center, according to a former AT&T worker cooperating in the Electronic Frontier Foundation's lawsuit against the company.

Mark Klein, a retired AT&T communications technician, submitted an affidavit in support of the EFF's lawsuit this week. That class action lawsuit, filed in federal court in San Francisco last January, alleges that AT&T violated federal and state laws by surreptitiously allowing the government to monitor phone and internet communications of AT&T customers without warrants. ... 

Klein's job eventually included connecting internet circuits to a splitting cabinet that led to the secret room. During the course of that work, he learned from a co-worker that similar cabinets were being installed in other cities, including Seattle, San Jose, Los Angeles and San Diego.

"While doing my job, I learned that fiber optic cables from the secret room were tapping into the Worldnet (AT&T's internet service) circuits by splitting off a portion of the light signal," Klein wrote.

The split circuits included traffic from peering links connecting to other internet backbone providers, meaning that AT&T was also diverting traffic routed from its network to or from other domestic and international providers, according to Klein's statement.

The secret room also included data-mining equipment called a Narus STA 6400, "known to be used particularly by government intelligence agencies because of its ability to sift through large amounts of data looking for preprogrammed targets," according to Klein's statement.

Step Two: Rewrite the law to legalize the system retroactively, and immunize everybody:

The Senate today — led by Jay Rockefeller, enabled by Harry Reid, and with the active support of at least 12 (and probably more) Democrats [including Obama], in conjunction with an as-always lockstep GOP caucus — will vote to legalize warrantless spying on the telephone calls and emails of Americans, and will also provide full retroactive amnesty to lawbreaking telecoms, thus forever putting an end to any efforts to investigate and obtain a judicial ruling regarding the Bush administration's years-long illegal spying programs aimed at Americans

In broad outline, although not in the technical detail, the FISA process is identical to that being followed in the foreclosure crisis. We've seen the Step One, the coding, above. Obama's mortgage "settlement" is Step Two:

We've now set a price for forgeries and fabricating documents. It's $2000 per loan. This is a rounding error compared to the chain of title problem these systematic practices were designed to circumvent. The cost is also trivial in comparison to the average loan, which is roughly $180k, so the settlement represents about 1% of loan balances. It is less than the price of the title insurance that banks failed to get when they transferred the loans to the trust. It is a fraction of the cost of the legal expenses when foreclosures are challenged. It's a great deal for the banks because no one is at any of the servicers going to jail for forgery and the banks have set the upper bound of the cost of riding roughshod over 300 years of real estate law.

(With FISA, the immunization was formal; here, it's informal, a Get-Out-Of-Jail-Almost-Free card. The fines are just a cost of doing business.) Readers can no doubt suggest other examples of this play; I would guess it's taking place wherever large-scale proprietary databases are to be found. (Electronic voting systems, for example.)

Step one: Code the system. Step two: Rewrite the law to match the code, and grant immunity. It is, after all, better to ask for forgiveness than permission.

Code is law.

It's really not a matter of regulatory "modalities," as Lessig would have it.

* * *

I'd be very happy if we turned out to face only a law enforcement crisis, and not a crisis in jurisprudence driven by a revolutionary oligarchy. However, if the latter is true, that must mean that the nature of the State, whose legitimacy, at least in the American tradition, depends on "the rule of law," will have changed as well. Such a conclusion could be of interest to a broad range of actors in political economy, from MMTers, who wish to harness "the state" for public purposes, through legacy party advocates, who play "capture the flag" for what they conceive of as "state" power, through the libertarians who want "the state" to be as small as possible, through anarchists, who would wish to know their enemy.

Interesting times!

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letsgetitdone's picture
Submitted by letsgetitdone on

you've ever done. It needs only a few tags:

-- kleptocracy

-- Fascism

-- plutocracy

-- oligarchy

-- The Predator State

Submitted by lambert on

Thanks for the tip on the tags.

You might consider heading over to NC and -- leaving out the flattery, however [blush] justified -- participating in the comment thread there.

For example, I didn't connect to kleptocracy and predation (I was working from the bottom up analytically, not the top down) and that needs to be said.

reslez's picture
Submitted by reslez on

This is the most important thing you've written (so far). Great job exposing it to the NC audience as well. One of those "lightbulb" posts that explains something you realize in retrospect should have been perfectly obvious all along, yet took the skill of the writer to identify and explain.

Submitted by lambert on

I seem to accepting a lot of bouquets over this one.

wuming's picture
Submitted by wuming on

Really good Lambert.

Submitted by lambert on

Now if only some clever lawyer picks up the ball and runs with it...

Submitted by ubetchaiam on

I don't know if you saw this episode or read this book: "The Leaderless Revolution: How Ordinary People Will Take Power and Change Politics in the 21st century." but the main point that struck me was "It's about disillusionment. A fundamental disillusionment with the nature of government. That government whether autocratic or, indeed, democratic is not working, is not solving some problems that are fundamental, that are really very concerning. Whether it's inequality, environmental protection, or indeed, economic volatility. Those three things are real problems, functions of the globalized world. And they're not being sorted out by the current structure."

Which fits into your statement "However, if the latter is true, that must mean that the nature of the State, whose legitimacy, at least in the American tradition, depends on “the rule of law,” will have changed as well.".

"Some clever lawyer" will really have to have a martyr's complex.

letsgetitdone's picture
Submitted by letsgetitdone on

Where are the democratic governments that aren't working? It's really wrong-headed to become disillusioned with "government." This happens periodically, and at bottom, it's why we ended up with the oligarchy in the first place.

The problem isn't with Government per se. It's with creating a Governmental system that defeats the iron law of oligarchy. See the series starting here.

Submitted by jcasey on

..but I have to pile on. This is a genius post. The 1% not only no longer sweats the perp walk for anything that is a crime for the rest of us, they're changing the base assumptions of society, the axioms, the "a priori"s.

Great fuel for the OWS movement.

Brian.Nelson's picture
Submitted by Brian.Nelson on

I haven't heard of bankers committing crimes now. Is there a site that formally accuses them of doing so? If so, what kind of crimes are they committing? Thank you for sharing this interesting information.

Sometimes there are people who will never trust any type of tax man no matter how much time goes by or what they do to earn trust.

CMike's picture
Submitted by CMike on

from your profile page that you signed up here over two and a half years ago. Guess you've been concentrating on the Plantidote posts-- nothing wrong with that.

Anyway, if you're interested I'll tee up a couple of YouTubes that might be worth a few minutes of your time. The first clip starts here at the 6:48 mark if I've done it right. You might watch it through to the 11:07 mark before the conversation turns to a discussion of the New York Fed.

These next three clips are all from the same YouTube video of an outdoors event in L.A. If you would, listen for the context of the four quantities William K. Black cites hereduring the 0:00 to 2:07 segment; 1/70th, over 10,000, over 1000, and 0. If you don't want to listen straight through the entire 15 minutes, pick it up again here at 6:11 through to 9:12 and here at 13:18 through to the end.

Submitted by Fran on

from American Banker. I am posting with no comment.

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Submitted by chadwick newsome on

That's good. That's great. There really has been a revolution and the oligarchs won.

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