The Corporate Observer Blog : Consumer Protection, Corporate Abuse : Class Action Lawyer & Attorney : Steven Berk Law Firm

The new darling of tax reformers ranging from Occupy Wall Street’s protesters to Bill Gates is something called the “Robin Hood Tax.”  At its simplest, it is an attempt to place greater monetary burden on the banks and their shareholders.  The beneficiaries would be Main Street (the 99%), either because banks would lessen their trading and thus their size (anything to avoid taxes) or not (and the tax revenues would be used to fund programs that benefit the middle class).  Sounds okay.

But I’m skeptical.  First, I’m confident banks will find ways around any such taxes faster than you can say “Sheriff of Nottingham.”  Second, banks will pass on any additional costs to their depositors (you and me) faster than you can say “Maid Marian.”  It won’t be long before our bank statements look like a cell phone bill, with pages of charges associated with everything we do.  (“Oh Mr. Berk that 33 cents is for your balance inquiry on November 15th.”)  And third, any such tax will divert us from the core problem: Banks are getting bigger and stronger while regulation lags dangerously behind.  This Robin Hood, although dapper in his green tights and equipped with a full quiver of arrows, is no match for the modern arsenal and armies of lobbyists owned by the banks.

Let’s be transparent; banks need to be regulated before they fail, not after.  And regulation must have teeth, not merely words that can be ignored by ambitious CEOs and traders.  (Yes I’m talking to you, Sena-Govenor Corzine.)

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Today, the New York Times' Dealbook featured an article on the federal government's "crackdown" on Ponzi schemes.  The piece uses increasing numbers of FBI Ponzi investigations and CFTC enforcement actions as evidence of the tougher stance.  While the government's strategy appears successful, it targets the wrong folks.  Below is my comment on the piece, also posted at Dealbook's website.

Ho hum.  Nothing new, regulators will go after "low hanging fruit."  The easy targets.  Think about the drug dealer on the corner instead of the kingpin who travels around in a limousine, never soiling his leather-gloved hands in the day-to-day affairs of the criminal enterprise.  The cops can pick up the drug dealer and charge him with possession with intent to distribute the drug du jour, but by the time he appears for arraignment his "replacement" will be on the street -- making sure the "king pin" doesn't lose market share (and a valuable corner).

And so it goes with Ponzi schemes.  The CFTC and the SEC will make a few arrests of the most outrageous of "con men" // "flim flam artists" // "grifters" -- call them what you like.  But it's just a holding action, a finger in the dike.

The efforts of prosecutors instead must be on the "legitimate" financial institutions that assist these schemers.  Madoff didn't deal in cash.  He banked at the eminent JPMorgan Chase.  Sanford had a score of banks at his disposal as he syphoned billions offshore.  Nick Cosmo on Long Island was a Bank of America favorite.  These banks profited by their association with these hoodlums at the expense of the victims.  "Oh Mr. Madoff I see your balance in your account is $35 billion, can we offer you a free toaster?"

These banks knew and if they were held accountable by prosecutors... now that would be a real story.

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Gretchen Morgenson yet again brings attention to a case of Main Street getting the short end of the stick.  She was sanguine in her appraisal.  In case you forgot, this was the case where banks flagrantly failed to comply with the most basic requirements governing mortgage foreclosures:

If you thought this was the deal that would hold banks accountable for filing phony documents in courts, foreclosing without showing they had the legal right to do so and generally running roughshod over anyone who opposed them, you are likely to be disappointed.

Though no details are official, Morgenson reports that banks will only be on the hook for $5 billion in cash reimbursements.  (The remaining $20 billion would come in the form of credits to existing mortgages, which could end up benefiting the banks in the long run.)  Roughly $1,500 would be paid to each debtor who lost his or her home.

First, I know settlements are the product of tough negotiations, but this is frankly an insult.  The States and feds had far more leverage to achieve a much stronger result.  Significantly and inexplicably, the relief fails to differentiate between rightful and wrongful foreclosures, meaning many of the recipients would get money for nothing—even more insulting to the victimized families.

Moreover, the $5 billion cash settlement represents nothing more than a slap on the wrist to the big banks.  Throwing a $50 parking ticket on the Rolls Royce parked in front of the fire hydrant isn’t exactly going to change its owner's parking habits.  But tow the thing, maybe put a few scrapes on its side, and suspend the driver’s license for 90 days.  You can bet it won’t be parked there again.

$5 billion—split among a dozen institutions—is a mere parking ticket.  Consumers need more than money.  They need a fundamental shift in the way banks do business.  Banning executives from the industry, imposing suspensions on others, taking licenses away from banks themselves and dare I say sending a few people to jail, it should all be considered.

It is popular to repeat Cuba Gooding Jr’s scream in the movie Jerry Maguire: “Show me the money!”  But sometimes—and this is one of those times—it is not about the money.

Assisted by David Martin

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You’d think banks would have a lot more to worry about than an unemployed octogenarian.  Perhaps a portfolio of worthless subprime mortgage securities?  Nope.  The government will bail us out.  How 'bout dwindling revenues in the face of a continued economic downtown?  No worries, we’ll just start charging fees for everything our customers do, from debit card transactions to writing checks.  Yeah!  And we'll add toll booths to the drive through lane at all our branches.

What is it that keeps bankers up at night?  The Volcker Rule of course; the simple and elegant solution to excessive risk in the banking industry: no proprietary trading.  Make your money the old fashioned way: good loans and fair services to consumers.  But taking multi-billion dollar debts each night in derivatives and various esoteric currency swaps?  Not anymore.  Not since you took us to the brink of depression and cost American consumers (and their children’s children) a boatload of money and in many ways the jobs of millions who remain unemployed.

So what’s the strategy of the banks?  Make the simple Volcker Rule as complicated as possible.  Leak it through your trade association, the American Banker, and let a phalanx of $1,000/hour lawyers from Davis Polk parse the rules and try to incorporate exception upon exception upon language that must be interpreted with sub-parts to the sub-parts.  And once that is accomplished?  Yep you guessed it.  Throw up your hands and say, “Overregulation.  It’s too complicated.”

It’s actually rather simple.  Banks want to trade instead of loan money because in the short run trading is more profitable.  Those profits result in an increase in the banks’ stock price (thereby increasing the value of options and restricted stock for executives) and in higher bonuses (can you say Porsche Panamera, summers in Nantucket).  But with that short run potential comes immense risk; risk the banks have already shown they cannot handle.

And the answer from Paul Volcker, who is feared because he is respected and beholden to no one, was rather simple too: “No.”

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After the 2008 financial meltdown, former Federal Reserve Chairman and legend Paul Volcker gave the country simple advice: let banks do what they do best—or at least what the public expects them to do—bank.  That is, make loans to support long term growth and prosperity.  But what fun is that when you can trade and invest in esoteric financial instruments?  And in the process, make millions quickly and earn six, seven and eight-digit salaries, like your buddies at hedge and private equity firms.

The problem is twofold.  First, banks may lose big time and again be hat-in-hand looking for a bailout.  Have we forgotten that the bailout of behemoths Citigroup and Bank of America cost taxpayers billions and more seriously, almost took us all over the ledge with them?  Second, banks may become too distracted by the allure of trading profits and shift resources and their best people to the trading side of the bank.

Nevertheless, the banks are not going quietly into the night.  They lust for these potentially lucrative but no doubt volatile revenue streams.  In that fight, they are enlisting the highest-paid and most well-connected lobbyists in the land.  Their strategy seems to support a muddled patchwork of regulation that will not work and will necessarily enable banks to claim they are overregulated.  (Very clever fellas.)

I trust Mr. Volker completely.  He is his own man.  He is owned by no one; it’s time to heed his warning.  Keep it simple.  No trading by banks.  Period.  End of story.

Assisted by Arezu Hadjialiloo

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Far from being penalized, even slapped on the writs, big banks are saving tremendously to the tune of billions by refusing to service distressed properties and loans.

Big banks rolled up their sleeves from say 2000 to 2008 and made home loans like crazy.  They were motivated not by their love of middle class homeowners, but rather safe and large profits.  They could make loans, securitize them and package them to hungry bond investors.  The ability to securitize these loans separated risk from underwriting.  I’ve heard that before, but what does it mean?  Here is an example.

Banker Zach says: “Mr. Jones, I really don’t care if you pay back this loan on overpriced property in Swampland, Florida that you cannot afford.  Lost your job, not my problem.  Land underwater, not my problem.  I’m packaging that loan with thousands of others and selling it all to Mr. Smith.  He might worry about your ability to repay, I don’t.  Next customer please.”

“Steve, this is old news, what do I need to know now?”  Yes, okay, back to my blog post.  Far from being penalized, even slapped on the writs, big banks—specifically Bank of America, JPMorgan, Citigroup, Wells Fargo, and Goldman Sachs—are enjoying the time of their lives.  They are saving tremendously to the tune of billions by refusing to service distressed properties and loans.  “Walk away fellas and don’t look back."  Instead, they are using some of that money wisely to lobby Congress and it’s working.

As it often does, Congress misses the point.  Based on pressure from the banking industry (read: lobbyists) they are devoting attention and resources to taking wild punches and scrutinizing the nascent Consumer Finance Protection Board, and of course our hero Elizabeth Warren.  I’m reminded of Nero.  While Rome burns, the regulators are running in circles fending off attack after attack on their authority from an industry whose hands are dirty.  And Congress is playing the violin.  No one has time to put out the fire.

Enough is enough.  Congress must deal with substance and not engage in a sideshow that only benefits the perpetrators of the root problem: Bank of America, JPMorgan, Citigroup, Wells Fargo, and Goldman Sachs.

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JPMorgan’s purchase of WAMU must be seen through the lens of the financial crisis of September, 2008. That’s the conclusion of official examiner, Joshua Hochberg.

The Deal

Dan Fitzpatrick at the Wall Street Journal (click here for the article) reports that the FDIC called JP Morgan with an offer to sell WAMU six days before it even received the failed bank. That’s a problem, did they call Wells Fargo or a small but robust regional bank, or what about a … a European giant (get the bidding going)? No JPMorgan’s  Chief Executive, James Dimon, got himself an exclusive. And what does he say: I’ll think about it; we “might be willing” to purchase WAMU. Wouldn’t want to play poker with this guy; no doubt he is brutal – beware the check raise. Three days later, JP Morgan – perhaps knowing it has an exclusive drives a hard bargain: it won’t buy WAMU whole, but would certainly purchase the bank out of receivership.

Now here’s the really outrageous part: over the following days, JPMorgan and the FDIC negotiated the terms of the WAMU purchase despite the FDIC’s claims to other banks that terms were non-negotiable. On September 26, 2008, JPMorgan purchased Washington Mutual’s $188 billion in deposits and a coast-to-coast presence from the FDIC for $1.8 billion AND SIX PAGES OF INDEMNIFICATION RIGHTS AGAINST FUTURE LIABILITIES AND LOSSES.

Official Examiner Joshua Hochberg has found no signs of dealing in bad faith. Come on Josh. 

Instead of handing WAMU over to JPMorgan on a silver platter, the FDIC should have run a real auction and forced JPMorgan to compete. Yes compete; against other banks in good faith. 

Tough to understand the FDIC’s decision – particularly from an agency with a good reputation and a cadre of very experienced and sophisticated staffers. 

This should not be swept under the rug. Investors, consumers and competitive banks deserve better.

Assisted by Zach Kady

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