Times Can Get Pretty Rough Under Rough Justice

Some people don’t know how to accept defeat. The Obama administration, however, apparently doesn’t know how to accept victory, either – at least not when a win for the government could mean a political loss for the president.

The New York Times recently described how, in 2010, the Justice Department walked away from near-certain wins in two discrimination cases that its attorneys had spent years fighting, opting instead to award large lump sums to claimants who happened to belong to demographic groups targeted by President Obama’s re-election campaign.

The money went to self-described Hispanic and female farmers who claimed that the Agriculture Department discriminated against them when it awarded loans.

The plaintiffs brought individual cases that were generally weak. Poor credit and inadequate business plans, not race or gender, appeared to be the reasons the plaintiffs’ applications for loans had been denied. Lisa A. Olson, the lead government litigator in the case raised by the Hispanic plaintiffs, explained to a federal judge in 2009 that “some of these folks [the plaintiffs] have never made a loan payment in their entire history with U.S.D.A.” That seems like a pretty good reason for the agency not to have granted them further loans.

A succession of courts also failed to find any pattern of bias in the way the Agriculture Department handled loan applications. Finally, in 2010, the Supreme Court refused to review the lower courts’ determination that neither Hispanic farmers nor female farmers could be treated as a class for the purposes of legal action.

That should have effectively put an end to the case, forcing any individuals who felt they had been discriminated against to pursue their separate claims on their own merits. Instead, just about a month after the case was seemingly laid to rest, Obama administration officials announced that the government would settle, and allotted $1.33 billion to be distributed to any Hispanic or female farmers willing to sign forms saying they were victims of discrimination. The terms of the settlement did not require these individuals to provide any formal documentation of the supposed bias.

Hispanic and female farmers were invited to begin submitting claims just six weeks before last year’s presidential election, which Obama won largely on the strength of support from Hispanic and female voters (albeit relatively few who claimed to also be farmers).

The settlements followed the blueprint of a similar settlement that the Clinton administration granted to African-American farmers in 1999. It was “me too” interest-group politics that ignored abundant evidence that the earlier settlement program was severely flawed.

African-American farmers did face significant discrimination at the hands of at least some Agriculture Department officials at one time. Rather than seeking to investigate and make amends for particular cases of discrimination, the government created a broad-reaching settlement program under which any African-American who had at least “attempted” to farm between 1981 and 1996 and claimed he or she was a victim of discrimination could receive a $50,000 check. Because formal documentation of applications and complaints was sparse, the government decided not to require proof that claimants had been discriminated against, or even that they had ever actually applied for loans. This opened the gates to fraud.

The Times’ piece cites strong evidence that many people took advantage of those open gates. In some communities, the number of claims paid to purportedly victimized African-American farmers exceeded the number of farms owned by people of any race. A former high-ranking Agriculture Department official told the newspaper that claims had been filed in the names of children as young as 4 or 5.

The government was not oblivious to the fraud potential. However, as a lawyer who was close to the administration of then-President Clinton told The Times, the administration decided “it was better to err on the side of giving money to people who might not qualify if they went through litigation than to deny money to people who actually deserve it.”

That gets at the heart of the problem. At first it seems like a compassionate, even reasonable proposition, something like a civil corollary to the precept of “innocent until proven guilty.” The flaw is that money, including money used to pay claims to people who haven’t suffered any damages, has to come from someplace. In the case of government settlements, that place is the wallets of other taxpayers.

I wrote about a similar issue in the private sector in 2011, when female Wal-Mart employees and former employees raised what would have been the largest employment discrimination case in U.S. history. The plaintiffs claimed to represent as many as 1.5 million women who had been employed by Wal-Mart, and they sought damages for all of those women, including those who did not think they had actually suffered any discrimination. In an echo of the Clinton administration’s apparent philosophy, a federal judge, allowing the suit to stand, wrote “Rough justice is better than the alternative of having no remedy at all for any class member.” The Supreme Court later blocked the Wal-Mart suit, but “rough justice” has continued to prevail in many cases.

The response to the BP oil spill was another example. In the rush to make sure money changed hands quickly, White House officials decided not to concern themselves with such minor questions as whether the money was collected from those who were actually responsible or given to those who had actually suffered.

More recently, mortgage servicers have been pressed to begin handing out money to anyone who may have been affected by the “robo-signing” scandal. An early version of the settlement would have required borrowers to file some sort of complaint, which could then be reviewed, but regulators decided such a system would take too long and instead chose to automatically assign payouts based on general categories of supposed harm.

As President Obama’s policies continue to soak up taxpayer capital, they have finally cut into his political capital as well. The administration that embraced “rough justice” now has virtually no credibility left when it pleads for more money in order to do the public’s work. The president’s scare tactics surrounding the sequester have done more to highlight his poor stewardship of scarce resources than the supposed obstruction of his Congressional rivals. His Transportation Department’s attempt to implement a more punitive form of “rough justice” last month by intentionally disrupting air traffic through furloughs also backfired when Congress intervened, pushing the department to apply funds to the programs most in need of funding.

While air traffic controllers are back at work, other government employees continue to pay the price of four years of indiscriminate spending. I can only hope, for their sake, that some of them had a second source of income. The lucky ones might have tried to farm at some point, or might have lived in the general vicinity of the BP oil spill, or had a house foreclosed upon.

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About Larry M. Elkin 564 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

Visit: Palisades Hudson

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