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

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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At least once a week a new report comes out detailing inadequacies or improprieties by one or more of the companies involved in the housing bubble and financial crisis...  While we read the reports and follow the news, the foreclosures continue, along with the unregulated credit ratings, robo-signings, and predatory lending.  Nothing material about our current practices has changed.

If you listen to candidates for President, regulation is the greatest threat to our democracy.  (Actually it's never just regulation it's overregulation.)  The Chinese owning our debt and growing at five times our rate… nahhh; Al Qaeda gaining nuclear weapons?  Nope.  Okay… steadily declining scores in math and science for high school students?  No, sorry.  It’s regulation.  We need less regulation, more democracy, and more prosperity.  Or maybe just no regulation, absolute democracy, and absolute prosperity.  Hmmmmm...  Can it be that easy?

No.  It's time to look at the facts.  At least once a week a new report comes out detailing inadequacies or improprieties by one or more of the companies involved in the housing bubble and financial crisis.  On Monday we learn Standard and Poor’s refused to downgrade AAA-rated companies despite damning evidence.  By Friday, we’ve forgotten S&P because news surfaces that banks had robo-signers executing their foreclosure agreements.  And early the following week, the focus shifts back to S&P as U.S. credit is downgraded and the DOJ brings suit against the credit rating agency.  Yesterday, as TCO hero Gretchen Morgenson reports, the FHFA released a report detailing the timeline of Fannie Mae’s discovery of abuses by the teams of law firms assigned to oversee foreclosures.

The takeaway: Fannie was aware early of its lawyers improprieties. Shocking.

While we read the reports and follow the news, the foreclosures continue, along with the unregulated credit ratings, robo-signings, and predatory lending.  Nothing material about our current practices has changed.  Dodd-Frank hit an impenetrable political wall and credit rating agencies have indemnified themselves by declaring their ratings “mere opinions”.  The Boston Globe reporting that “Alex Rodriguez is an overrated ball player” is afforded the same protection as credit agencies saying “U.S. credit is no longer the safest investment you can make.”

So while it is important to assess our past failures, at this point we must take the next step. We need substantially more oversight.

Here are a few modest proposals:

• Call the CRAs what they are—oligopolistic pseudo-government agencies—and establish straightforward accountability standards for the ratings they produce.
• Separate investment banking and “plain old banking”, as the venerable Paul Volcker has called for.  This limits the risk to which regular banks are exposed and allows them to engage in simple money storage and loans.
• Limit corporate compensation at institutions that have required infusions of taxpayer money, and require better disclosures to the public as to the risks taken and compensation awarded.
• Most importantly: Actually empower the agencies charged with regulating the industries with the authority and resources to do so.

Now that would truly be news.

Assisted by David Martin

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The New York Times’ Gretchen Morgenson has done it again.  Her article, “Findings That May Get Lost in Arbitration,” doesn’t just expose James G. Kelsoe Jr. and the Morgan Keegan Fund for misleading investors (she already did that in 2007).

Morgenson’s reporting also highlights the failure of both the SEC and the FINRA arbitration process.

The SEC enforcement action came almost four years (what in heaven’s name were they doing for four years?) after a settlement between Morgan Keegan and the Indiana Children’s Wish Fund.  Kelsoe, the Keegan Fund manager, pushed a bad investment — essentially making up the price — on the non-profit foundation, causing it to lose $48,000 and leaving nine terminally ill children with unfulfilled wishes.  Nice guy.  Stealing from a charity.

This belated enforcement action finally punished Morgan Keegan’s blatant misrepresentation of investments which cost investors more than $1 billion.  A leading firm in what they call Wall Street South (same level of greed, just add Southern accents), Morgan Keegan must pay a substantial fine and Mr. Kelsoe has thankfully agreed to a lifetime ban from the securities industry.  Let’s hope, like Pete Rose, the baseball ball player who bet against his own team, Mr. Kelsoe is never reinstated.

End of story?   Happy ending?  Well… not exactly.  Individual defrauded investors must seek a judgment against Morgan Keegan and damages in a FINRA arbitration process to be made whole.  Morgan Keegan attorneys blithely say they will try to block use of the SEC enforcement action as evidence in these individual proceedings.  How do those guys sleep at night?  (“Hi honey, how was your day at work?”  “Awesome, I spent my day beating up on investors who in some cases have lost their entire life savings.  Yep, I argued evidence of fraud by the very same firm, in the very same case should not be used against them.”  “That’s so nice dear, I’m proud of you, now wash up for dinner.”).

First, in those four years, when the SEC was taking its bureaucratic sweet time and dotting every I… crossing every T, they should have required as part of the “settlement” that Morgan Keegan be forbidden from arguing in the context of individual lawsuits against the admissibility of the SEC enforcement action.  Slam that door shut.

Second, any arbitrator worth his or her $600-800 hourly wage should act decisively and allow all credible evidence into the record.  They are perfectly capable of weighing its importance.  Unlike a jury, they are trained and paid handsomely to do just that.  We wish each of these investors well and remind them to send Gretchen Morgenson a nice thank you card.


Assisted by Natasha Duarte

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The next few days will feature a series of Corporate Observer Special Reports on Executive Compensation. Please enjoy Part I, on why Americans put up with staggering executive pay numbers year in and year out.

The Bureau of Labor Statistics concluded that in 2009, income among workers (defined as everyone who is not a CEO) grew by a mere 2.1% while CEO income grew at the robust rate of 27% -- over 10 times that amount.

Let’s begin the story with the the numbers:

First, a macro view: The Bureau of Labor Statistics concluded that in 2009, income among workers (defined as everyone who is not a CEO) grew by a mere 2.1% while CEO income grew at the robust rate of 27% -- over 10 times that amount.

This continues a disturbing trend where CEOs of United States-based companies continue to distance themselves from worker pay. The CEO-to-worker compensation ratio is about 300 to 1 and growing. Think about collecting 300 paychecks every week.

In Europe and Asia, the ratio is far smaller, often less than 100 to 1. For example Albert Meyer, an expert on Executive Pay, invests in Statoil, which pays its top nine executives combined less than half as much as ExxonMobil pays its CEO Rex Tillerson ($8.2m and $21.7m, respectively). Yet since it went public in 2001 Statoil's stock has performed nearly twice as well as that of ExxonMobil.

What’s the impact of all that pay going to the executive suites? Simply put, it results in “the rich get richer and the poor get..." Well, you know.

This disparity was eloquently described by Mr. Meyer, who was featured in a Sunday piece by Gretchen Mortenson:

“Middle-class America experienced a lost decade in their retirement accounts, whereas executives enjoyed record compensation packages through the subterfuge of stock option programs… There has been a massive wealth transfer from middle-class America’s retirement accounts to the bank accounts of the privileged few. The social consequences of this wealth transfer bear scrutiny.”

Illustrating this pay disparity on an individual company basis drives home the point that a crisis could well be brewing.

In a recent CEO pay survey published by the Wall Street Journal, Phillipe Dauman of Viacom headed the list with a 2009 compensation package of $84.5 million for a mere nine months. On an annual basis that level of compensation would top $100 million.

But my favorite example of trouble brewing is the “mere” $20.2m awarded to AT&T CEO Randall Stephenson. Despite AT&T’s poor performance during that period, Mr. Stephenson remained high on the charts for CEO pay. Specifically, while the S&P 500 (of which AT&T is a part of) rose over 26%; AT&T’s stock value dropped roughly $2.00.

The question is why? Why are we so generous to the point of irrationality with our payment to CEOs? I don’t have all the answers, but shareholder groups -- the folks that own AT&T and Viacom -- have to step up and scrutinize these salaries. The Dodd-Frank Act's Accountability and Executive Compensation section explicitly bestows this power upon shareholders.

We must reward those who actually add value to the enterprise and its stock price, not just those sitting in the biggest offices. Common sense tells me this staggering disparity between CEO and worker pay is not a good thing for an economy that must compete in a highly competitive global marketplace.

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17 million

It is not Alex Rodriguez’s annual salary (amazingly he makes a bit more), or the population of New York.  Nope.  But I’d say it’s plenty large.  It represents the total bonuses paid at Fannie Mae and Freddie Mac last year, according to Gretchen Morgenson’s most recent New York Times article.  A drop in the bucket to the days when Franklin Raines was running the show and he alone pulled in nearly $100 million in just 5 years of quasi-government work as the CEO of Fannie Mae.

Okay.  Another number, this one is a bit bigger:

153 billion

The GDP of New Zealand?  Close.  Albert Haynesworth’s annual salary?  Nope.  $153 billion is the amount taxpayers have “invested” in the solvency of Fannie and Freddie.

Main Street, here we go again. You’re asked to pay $153,000,000,000 under the threat that if you don’t the economy will really tank.  Okay.  You do it.  But the next time the “ask” is going to be $500 billion.  And the bonuses maybe $50 million.

One might respond, “We have to maintain the talent and experience base and the current executives aren’t the ones that ran up the massive debt.”  That is partially true, and Freddie Mac’s CEO did not join the company until 2009; however, many of the companies’ high-ranking officers have remained throughout the crisis.  For instance, Ms. Morgenson notes that Michael Williams, the head of Fannie Mae, has remained with the company since 1991.

When the public has the equivalent of a small nation's GDP invested in a single company or two, executives cannot be allowed to receive bonus packages.  I hate to flog a dead horse—and I feel like I’ve addressed this subject ad nauseam—but this constitutes a breach of the public trust, plain and simple.

These days much of my hope for consumer protection has rested with Elizabeth Warren and her Consumer Financial Protection Bureau, but this one is outside of her domain.  Executive compensation is generally an internal issue, but the game changes when public finances are the only thing ensuring the solvency of the operation.   Where is the outrage?

Assisted by David Martin

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Memories are short in Washington and even shorter on Wall Street.  Temporary becomes permanent, and the petulance and arrogance of the rating agencies is soon forgotten.

I was disturbed to read this weekend in another fine piece by Gretchen Morgenson how yet again the rating agencies (Standard and Poor's and Moody's and the like) had obtained another “Get Out of Jail Free Card.”  For decades they avoided liability from their negligence (or worse: stark conflicts of interest with issuing banks), by cleverly claiming their grades given to investment securities (AAA and on down) were opinions to be afforded First Amendment—as in the United States Constitution—protection.  Well, they got away with it until the financial crisis of 2008, when hundreds of billions in mortgage-backed securities with investment-grade ratings were determined to be just about worthless.

Congress responded to this historic immunity nonsense in Dodd-Frank by explicitly requiring that the ratings agencies be subject to expert liability, opening up for the first time liability from investor lawsuits.  How did the ratings agencies respond?  Like a petulant child by refusing to rate asset-backed securities.

Rescuing the rating agencies from the “time out” they deserved, the SEC gave them a free pass.  First temporary, now permanent; a “no action letter” was granted providing agencies with an absolute defense to investor lawsuits.  Last week, Martha Coakely, the Massachusetts Attorney General, in a letter to Mary Shapiro, Chairman of the SEC, wants to know, “Why?”

The party-line, spewed by co-author of the legislation, Barney Frank: this is merely a short-term strategy to wean the markets from reliance altogether from the influence of ratings agencies, we’re just not there yet.

Sadly, this won’t work.  Memories are short in Washington and even shorter on Wall Street.  Temporary becomes permanent, and the petulance and arrogance of the rating agencies is soon forgotten.  I hope General Coakley fights hard for answers and doesn’t back down—this no action response of the SEC is unacceptable.

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The story has a happy ending.  In a jury trial against Countrywide and Bank of America, Michael Winston prevails and the jury awards him $3.8 million.  For Mr. Winston, surely a man of principle, it likely not just about the money.

We applaud Michael G. Winston for his courage and tenacity; and our old friend Gretchen Morgenson for continuing to shine a light on practices in American business that - while not pretty - must be exposed.  Mr. Winston was hired during Countrywide’s heyday as the king of the no-document, sub-prime mortgage.  They did not create the industry, but through their uber aggressive CEO Angelo R. Mozilo, they took full advantage of a milieu that not only allowed for but incentivized funding mortgages at any cost: worry about the consequences later.

The hiring of Mr. Winston was a rather strange choice for this culture of high rollers.  He was a grown up.  A veteran of Motorola, Lockheed and McDonnell Douglas, as reported by Ms. Morgenson, he was tasked with “grooming better managers”.  As he became exposed to this culture from the inside, he began asking questions and more questions, and after thoughtful analysis recommended Countrywide “focus on customer satisfaction, on the quality of the loan portfolio and on building leaders who would focus their people on that.”

Well it turns out that Mozilo and his crew wanted a yes man, a cover from critics; not Jimmy Stewart as Mr. Smith goes to Washington.  Mr. Winston rolled up his sleeves and issued a report concluding Countrywide needed to shift its culture away from short term greed and move to a model of measured sustainability.

But Mozilo and his crew ignored him, froze him out of meetings, and may—in a bizarre scene straight out of the movies—have even been behind an effort to poison Mr. Winston’s team.  These Countrywide guys played hard ball.

And then the moment of truth.  Mr. Winston was asked (perhaps told) to rebut a rating agency analysis of Countrywide’s corporate governance practices.  Here he is 50+ years old.  While he has exemplary credentials, he may not have many more opportunities, particularly if he crosses Bank of America.

Good news, honesty and courage defeat intimidation and fear.  Mr. Winston says no!  For that he is almost immediately fired.

But the story has a happy ending.  In a jury trial against Countrywide and Bank of America, Michael Winston prevails and the jury awards him $3.8 million.  For Mr. Winston, surely a man of principle, it likely not just about the money.  He has followed his moral compass and prevailed.

We thank him for his service, courage and the example he creates for others.  (And of course Gretchen Morgenson for highlighting the story.)

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Today, guest blogger Jeffrey Goldberg rejoins us to interpret the recent increase in small business lending in the context of the economic recovery.

These are the worst economic times in nearly 80 years and the climb out of the Great Recession has been halting and slow.  There is little chance of further government action to spur demand.  The remaining monetary tools available to the Federal Reserve are limited and risky.

In this climate any positive projection from a respected analyst is welcome.  Ian Shepherdson, chief US economist for High Fidelity Economics, offered a dose of economic optimism in a recent New York Times article by Gretchen Morgenson (November 6, 2010).

Shepherdson, who served as top US analyst for HSBC Securities prior to moving over to High Fidelity, sees hope in the improving statistics on commercial and industrial (C&I) bank lending to small businesses (defined by the Federal Reserve as companies with less than $50 million in annual sales).  This time last year, C&I lending was contracting at a rate of nearly $7 billion per week.  This contraction continued into 2010 (C&I loans fell about $68 billion this year through October) but according to Shepherdson the contraction in loan volume is coming to an end and he expects gradual expansion going forward.

Small business, which employs fifty percent of the American work force, has been particularly hard hit throughout the recession and recovery by restrictive bank lending standards.  While large manufacturers have been in recovery for months, small companies have continued to struggle.  In the fall of 2009 loan availability for small business reached its worst level in twenty-three years according to the National Federation of Independent Business,

Driven by improved access to C&I loans for the small business sector, Shepherdson is projecting 3% to 4% annualized GDP growth for the second half of 2011, with better growth in 2012.  In the meantime, he projects continued GDP growth of about 2%, in line with current rates, and no double dip recession.  Dean Maki, chief US economist for Barclays Capital is predicting a 3% annualized growth rate for the current quarter, up from 2% growth in the quarter ending September 30, 2010.

Easing lending standards does not guarantee increased small business borrowing for expansion, hiring and capital purchases.  On November 8 the Fed confirmed that while US banks loosened standards for C&I lending to small businesses beginning in August, total demand for C&I loans has actually declined over the last three months.  According to Ian Shepherdson, more robust small business borrowing is on the horizon for next year, not this year, and the start of a gradual return to more normal post-recession growth rates is six months to a year away.

Guest post by Jeffrey Goldberg

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Finally, a Federal regulatory commission out front (not after the fact) protecting main street from predatory, unsound fiscal practices.

Yesterday I responded to Gretchen Morgenson’s New York Times piece, which calls for scrutiny of soaring banking stocks; because the banks’ actual performance (lackluster) hardly match the robust share value manufactured on Wall Street.  Differing a bit from Ms. Morgenson, I am not ready to panic ; I believe heightened enforcement and regulation will hold greed and rampant speculation to a minimum.  In the 8/22 Wall Street Journal, Brian Baskin calls attention to such an instance.

Mr. Baskin describes the effort by the Commodity Futures Trading Commission (CFTC) to curb a new $50 - $100 billion dollar market for paper: derivatives again, this time on commodities.  These securities are called exchange-traded funds (ETFs) and they are all the rage.  The promoters of this newfangled investment vehicle (read Wall Street fees, broker fees, and no actual product being produced) claim these funds are the only way for small investors to access commodities futures markets.  Please.  The market is for professional speculators, who don’t need to hedge the price of a commodity like natural gas, but rather see an opportunity to make some serious money taking positions contrary to the market. 

Not so fast, says the CFTC’s enforcement staff.  They have been placing new and formidable regulatory curbs on ETFs – enough so that operators of ETFs are getting in trouble with their own investors.  Lawsuits have been filed alleging the ETF operators are failing to abide by the disclosures they made to their investors.  (But that’s a subject for another day). 

As Mr. Baskin details, the CFTC is concerned that rampant speculation causes price inflation.  That means higher prices for end consumers.  The CFTC’s goal is not to eliminate ETFs.  Its goal is to protect main street consumers, and for that reason it is to be applauded.  Finally, a Federal regulatory commission out front (not after the fact) protecting main street from predatory, unsound fiscal practices and another bubble that when it bursts—and it will burst—main street pays the freight.

About time.

(Post was prepared with the assistance of David Martin, University of North Carolina 2010)

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With subpoena power and the threat of jail time (how many hundreds of years did Madoff get?), stepped up enforcement can moderate the rampant speculation and greed to function efficiently as a lubricant to the markets like oil in a car and not sparks in a dry forest.

Well… judges?  The envelope please… (Imagine whispers and hushed speaking voices.)  It’s of course Gretchen Morgenson herself; brilliant, insightful New York Times Columnist and all around contributor to humanity.  She is always honest, informed and on-target (she would have won last year but she was too busy scaling K2 in Nepal).  Ms. Morgenson, who likes to be called Ms. Morgenson, said she was “thrilled” to even be considered and would put this award right up there with her Pulitzer Prize (not).

Why all this *ahem* praise for Ms. Morgenson?  This Sunday she reported on the next impending financial crash, this time involving overinflated bank stocks.  Gosh.  Didn’t we just get off that ledge, abyss?  Or was it a precipice?

(Fill in your word – this blog is interactive).  

Ms. Morgenson’s piece succinctly reports that despite unpromising data coming from the banks, the numbers are just not there: bank stocks are soaring – soaring on air and not cash and profits.  The analysis Ms. Morgenson highlights in her column of smaller, non-money-center banks (which excludes Citigroup, Bank of America, etcetera) illustrates that “the number of financially sound banks is declining.”  Coupling these two facts together, Ms. Morgenson concludes that it is time to “determine whether fundamentals in the industry support this rocket-fueled surge in bank shares.”

Thanks Gretchen, good column as always – but I sense an undertone of panic and fear; a siren signaling a second crisis in the financial sector.  With all due respect to Ms. Morgenson, it’s not time to panic just yet.  To be sure, it is difficult not to doubt everything financial, from soaring bank stocks to the dollar bill with which I buy my Snickers (yes a Snickers).  But we’re seeing plenty of signs of stability and the markets (all of them) seem to be better patrolled by the Feds.  Greed and profit taking will always be there it just needs to be maintained at a moderate level – and not get silly.  To ensure that doesn’t happen, we have the regulators and enforcers.  With subpoena power and the threat of jail time (how many hundreds of years did Madoff get?), stepped up enforcement can moderate the rampant speculation and greed to function efficiently as a lubricant to the markets like oil in a car and not sparks in a dry forest.  So let those bank stocks soar for awhile on greed and speculation.  They will come back down to earth.  In the meantime, a little speculation is good for the sector.

(Post was prepared with the assistance of David Martin, University of North Carolina 2010)

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