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

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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I wonder what the jury was thinking?

In his testimony, Mr. Blankfein at one point provoked laughter from the gallery when a prosecutor asked him why it was unusual that the company was losing money in the middle of the fourth quarter of 2008.

"We generally make money," he said, with a big grin.

-          Wall Street Journal, March 24, 2011

Here is Lloyd Blankfein on the stand grinning about making money, to the approval of the gallery.  I fear my comments yesterday, doubting the wisdom of using such a high-profile witness unnecessarily, may be proven correct.  Sure, the jury was listening; he’s the CEO of the most successful bank on Wall Street.  He reportedly received a $100 million dollar bonus this past year.  But the prosecutors’ job is to keep the focus on convicting Raj Rajaratnam’s of insider trading, and not divert that attention with celebrity witnesses.

And who could blame the jury?  Sure they have all those “secret tape recordings” to wade through, but in walks an all-star of Wall Street.  One of the most influential—and apparently personable—CEOs of the financial world is mere feet away in the courtroom; it is hard to imagine focusing solely on the issues at hand.  If Cal Ripken Jr. testifies at the Barry Bonds perjury trial, will the jury’s focus really be on what he says, rather than who he is and what he accomplished?

It is only natural for the jury to be distracted.  Mr. Blankfein’s presence overshadows the courtroom dynamic of prosecution versus defense.  Although I was not in the courtroom, it also seems as if the jury could take away the conclusion that this is all about making money and Raj, Lloyd and Mr. Gupta are all just trying to get their piece of the pie.

Assisted by David Martin

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Presumably, the prosecution reasons that it is powerful evidence to hear Goldman’s CEO confirm that the phone call “violate[s] Goldman Sachs’ confidentiality policy.”  Bad decision.

Today federal prosecutors called Goldman Sachs CEO Lloyd Blankfein to the stand to testify against Raj Rajaratnam, in what is being called the insider trading case of the century.  As a former federal prosecutor, I have previously commented on the outlook of the case, the government’s strategy for prosecution, and the first round of testimony.  Today, I express my doubts about the wisdom of calling Goldman’s CEO to the stand.

What you want the jury focused on is the substance and atmosphere of the taped conversation between Gupta and Rajaratnam.  The chronology is right out of the movies.  Gupta, a respected Goldman Board member, immediately upon leaving the Board Room, passes along highly confidential knowledge of Goldman’s acquisition plans to Raj.  Federal prosecutors use Blankfein’s testimony to confirm that the information in the call was confidential, and thus was illegally communicated and obtained by Rajaratnam.  Presumably, the prosecution reasons that it is powerful evidence to hear Goldman’s CEO confirm that the phone call “violate[s] Goldman Sachs’ confidentiality policy.”

Bad decision.  The glare of the jury’s scrutiny and hopefully its wrath must remain on Raj.  A high-profile witness, however, has the potential to distract and confuse the jury.  Never underestimate the imagination of a jury, particularly one involved in a long trial.  They will ponder the littlest of details and conjure up all kinds of theories.  You don’t want that, particularly in a case this important.  Sure, it looks powerful to call the CEO of Goldman to the stand, but isn’t that using a sledgehammer to crack a nut?  Any senior executive or compliance officer could have made the same point.  Drawing attention to the content of the illegal conversation rather than the person giving the testimony should have been priority one.

Put it this way: if Goldman Internal Compliance Officer John Doe had testified instead of CEO Blankfein, the New York Times’ headline could have been: Secret Tape Records Gupta’s Guilty Call; instead it was: Blankfein: Gupta Broke Confidentiality.  Doesn’t the first suggestion focus a bit more on the point?  Yet with the company CEO testifying you can bet the jury’s mind was in the same place as the Times’. Who knows what they will make of it, and if the defense is smart they will try to exploit the Blankfein appearance with seeds of conspiracy and anything that may divert the jury from the acts of Raj.

Assisted by David Martin

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$990,000.  Are you kidding me?  Why is this even in the paper?

1) That’s the amount involved in the latest insider trading story coming out of Wall Street – the Journal’s front page – above the fold – headline Feds Accuse P&G Director (The New York Times had it at Former Goldman Director Charged With Insider Trading).

2) The illegal conduct emanated from outside a conference room of Goldman Sachs. Yes, that Goldman Sachs.  As if they didn’t have enough illegal conduct inside the conference room (but more on that later).

3) In the parlance of the securities world Mr. Rajat Gupta was the "tipper".  And get this: a Director of Goldman and Proctor and Gamble.  Yes, a company that actually makes something.  And former Chairman of McKinsey and Co., the Porsche of management consultants.  A top brand of very smart people; not the usual M.O. of an inside trader.  Hmmmm.

The tippee?  None other than the infamous Raj Rajaratnam.

Wow.  This is exciting stuff.  But why?  Why would someone at the pantheon of American business (Gupta) trade a few secrets to a “friend” (Rajaratnam) for peanuts, for tip money?  Something else is going on here.  I don’t know what it is; maybe it's as simple as it sounds, but maybe not.  I’m no conspiracy theorist, but when they ever so stridently tell you to look to the left, you owe it to yourself to at least peek right.

I think the prominence given this tiny transaction, although intriguing, must not let us lose sight of the big picture (in June 2008 the outstanding value of Over the Counter derivatives alone topped $650 trillion – that's TRillion with a T-R – roughly 650,000 times the amount of the alleged violation).  These characters are not the real culprits of Wall Street’s trillion dollar pecidillo.  They must not become the faces of the profoundly selfish conduct of many.  They almost succeeded in destroying the economy.  And for once I am not overstating things.

The politicians, the press and I suppose the people need someone to blame.  Well here they are folks: Rajat Gupta and Raj Rajaratnam.  They did it.  Front page.  And look, we got Goldman too – well sort of.  “Chew on this story for awhile America.  Damn that Ferguson and those liberals in LA who granted him that silly Oscar statue for defaming us.  All the publicity must be refuted with a screenplay of our own.  We can even go international.”

But folks hold your ire.  These are not the guys.  Trust me, they are not the one’s.  They may be interesting and you can bet the media will make them even more so but they are not the guys.

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A light-hearted, but pertinent clip to start this latest entry:

The New York Times reported  earlier this week that scores of high level executives on Wall Street are once again circumventing the spirit of the law in search of a quick buck.

As Mr. Deeds so pointedly asked, “When you were kids, did you dream about becoming a savvy investor one day; who would think with his wallet instead of his heart?”  A central tenet of the financial reform of the past few years was to put executives’ interests closer in line with investor interests to encourage a profitable, but safe, investment climate.

Hedging is a common and financially wise move when betting on the fluctuation of the markets. However, Goldman executives, as reported in the Times, have been hedging against their own company, placing bets on the stock’s stagnation, limiting risk associated with plunges in stock value, and even betting against quick growth.  While this is a wise move for these executives’ personal portfolios, it does not instill confidence in the investor who would like to think those working at an investment bank trust in that bank’s ability to succeed.

For heaven’s sake, Pete Rose received a  lifetime ban for betting for his own team, shouldn’t there be some repercussions for some of the most influential investors in the world betting against – or at least only extremely cautiously for – their own firm?

We call on the SEC today to tighten up these rules.  Close up the loophole allowing financial executives to hedge their deferred compensation.  No doubt they will find another way – but government must stand vigilant in its effort to protect the general investing public and that means proceed by all deliberate measures to ferret out and cease efforts that challenge both the spirit and letter of the law.

Assisted by Zachary Kady

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For the smartest kid on the playground, it has been a tough few months.  First news swirled of Goldman’s clever idea to essentially bet against both the market it created and the investors it had enlisted.  All in the name of bringing “liquidity” to the market (so they said) and mega profits to the Street’s richest firm for yet another “financial innovation”.  However, the new, “we’re tougher than ever” SEC would have none of it and a settlement was reached costing Goldman $550 million (nothing that will rock this giant, but a half a billion dollars is still a lot of money).  On the heels of the settlement, ACA, a private Wall Street insurer, initiated a lawsuit over the same issue.

Perhaps related, perhaps not, Goldman made serious concessions to its critics by divulging the source of some of its revenue.  Specifically, Goldman has implemented new procedures to: (1) disclose the source of its profits; (2) increase transparency; (3) separate and clearly define the responsibilities of traders and investment bankers; and (4) publish a simplified balance sheet in addition to the balance sheet required under minimum accounting standards.  As part of the change Goldman will distinguish profits it earns investing on its own behalf from those earned for investors on investor accounts.  The hope is that this will dispel theories that the firm is making improper trades (or less gently “betting against it’s own customers”).

While the smart kid who seemed to run the schoolyard took a punch on the nose, he may have just learned his lesson.  The extent to which Goldman truly works towards transparency remains to be seen, but this initial good faith offering is a step in the right direction.  We can only hope that in addition to being a market leader in profits, they also want to be a market leader in the area of reform.  If so, others firms on the playground, large and small might just follow.

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Shareholders of Goldman Sachs are flexing their muscle in response to management’s approval of record bonuses and executive compensation. The Wall Street Journal reported on Friday that investors in Goldman Sachs are expressing frustration in analyst meetings and in personal conversations with the Goldman board. Investors’ main concern is that per share earnings are down while executive compensation is up, way up! 2009 per share earnings are projected to be 22% lower than those in 2007, while employee compensation and bonuses will set a new record of at least $717,000 per employee in 2009.

Goldman attempted to allay investors’ frustration with statistics citing its strong, long-term growth. Goldman has generated a return of 159% over the past 10 years compared with negative returns for the S&P 500 average over the same time period. However, Goldman Sachs’ board members seem to forget that the company is owned by its shareholders. The decline in per share returns in the same year as record employee compensation is unacceptable. The investors ought to have proportional rewards for the company’s success.

As Nell Minow, a leading advocate for shareholders’ rights, wrote in a recent CNN op-ed, “It is time for America as investors and as citizens to be ruthless in forcing Wall Street to prove that the return on investment for every dollar spent on executive compensation provides competitive returns”

The lesson:     Shareholders expect more. Plenty of Wall Street banks continue to carry out overly risky investment schemes and engage in business with shady and criminal characters (just see many of the posts on this blog). Following the precedent of disgruntled shareholders speaking up and engaging in discussion with Goldman Sachs, we hope that other investors will heed the call to question the practices of every major financial institution. The general masses can cry foul until the cows come home, but only investors have a vote on change and the protection of sound business practices. A stable, thriving economy will only be achieved with the solid voice of investors reining in the excessive practices of Wall Street. In today’s economy, investors must demand transparency, responsibility, and respect for the shareholders.

Assisted by Zach Kady

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