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

Heads: the risks pan out, the executives look like geniuses, and they have “earned” their multimillion dollar bonuses and Cuban cigars.  Tails: the uberderivative financial instruments that these “geniuses” have concocted crash, as in the subprime mortgage crisis...

There are simply no negative consequences.  Financial institutions, three years since the beginning of the global financial crisis, are still making incredibly risky investments (*cough* MF Global *cough*).  Why?  Because there’s no disincentive—moral hazard, as it’s called.  Bonuses given to these banks allow and encourage risky investments.  The penalty if they fail?  Oh, a few billion dollars in bailout money, straight from the pockets of taxpayers.  But the bonuses, they shrink in the aftermath, right?  Right?!  Nope.

The combination of bonuses and bailouts creates a “heads I win, tails you lose” scenario for big bank executives.  Heads: the risks pan out, the executives look like geniuses, and they have “earned” their multimillion dollar bonuses and Cuban cigars.  Tails: the uberderivative financial instruments that these “geniuses” have concocted crash, as in the subprime mortgage crisis; lenders and shareholders, and eventually taxpayers are forced to pay to revive the “too big to fail” institutions.  Meanwhile a year after the taxpayer-sponsored recovery, bonuses rise to their highest level in history.  Forget a slap on the wrist, Bank Executive Stevie just got caught with his hand in the cookie jar and his “punishment” was a trip to Costco to buy more.

In yesterday’s New York Times, Nassim Taleb’s OpEd piece touched on an important concern.  To eliminate the moral hazard, either the bonuses or the bailouts must go.  The easier solution for him is the bonuses, which he argues should be eliminated at any institution eligible for a taxpayer bailout.  If you’re “too big to fail,” you’re too big for bonuses.  At a bare minimum, this would eliminate the positive incentive for risk taking.

Of course, the second prong of Taleb’s argument—essentially instatement of the Volcker Rule—would be much more powerful.  Tell the institutions: “You can bank, or you can invest.  But the entities that store taxpayer money cannot also be the biggest gamblers in our financial system.  Period.”

Assisted by Rachel Grossbaum

• Print
• Comments
• Trackbacks
• Share Link

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

• Print
• Comments
• Trackbacks
• Share Link

As unemployment continues at an uncomfortable nine-plus percent, you’d think Wall Street would share the pain and bonuses would be down.  Nope.  They don’t create jobs, they don’t add value. Instead they profit, they leverage, they figure out the spread and increasingly they use more and more risk to accomplish “profits” and bonuses.  But don’t listen to me; consider the recent words of Nobel laureate Paul Krugman:

What’s going on here?  The answer, surely, is that Wall Street’s Masters of the Universe realize, deep down, how morally indefensible their position is.  They’re not John Galt; they’re not even Steve Jobs.  They’re people who got rich by peddling complex financial schemes that, far from delivering clear benefits to the American people, helped push us into a crisis whose aftereffects continue to blight the lives of tens of millions of their fellow citizens.

Paul Krugman Op Ed, October 11th.

Finance a new bridge, a factory, a school that teaches engineering and science for a new generation of students entering the work place.  No; instead, we see newfangled derivative swaps, “quant trading”, a panoply of something called “synthetic derivatives”, and who knows what else?  The derivatives market hit a value of $600 trillion in 2008, and I regret to confirm that “T” in trillion is not a typo.  Sadly those newly minted Ivy League graduates want to make “bank” and they want to do it now.  No time for long term value investing or pedestrian returns of six to eight percent per year.  Heck, for these hot shots 6-8% per month is not enough.  Where will it end?

Wall Street: put people to work, and then collect your bonuses with your heads held high.  And stop trying to destroy any sensible speed limits and caution signs (such as the Volcker Rule).  Regulation keeps cars on the road. Without it we are doomed to repeat the mistakes of the last boom…

• Print
• Comments
• Trackbacks
• Share Link

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

• Print
• Comments
• Trackbacks
• Share Link

What?  After decades of work building up the family store and making the difficult decision to sell, you’re a “winner” when the money you earned disappears overnight?

On the surface, the 2nd Circuit Court of Appeals appears to have made a reasonable decision yesterday in the Madoff case.  By limiting the right to monetary recovery to those that were “net losers”—those whose payout from Bernie Madoff was less than their initial investment—trustee Irving Picard seems to have targeted the true “victims” to receive compensation.  After all, net winners have made money off Madoff’s scheme, so what right should they have to recovery?

It depends.  Say you and your spouse sold your family hardware store for a hard-earned $1 million in 1990.  Hoping to live and retire off that $1 million, you invest in the highly-recommended and reportedly successful Bernard Madoff.  You don’t know Madoff; you have no reason to believe his fund is anything but legitimate.  Over nearly 20 years, you use the interest to pay for your children’s college (and of course, law school), and a house remodel you’ve wanted for years.  Eventually, your total interest earnings eclipse $1 million, so when the $1 million principal unexpectedly evaporates in 2008, you’re considered a “net winner”.

What?  After decades of work building up the family store and making the difficult decision to sell, you’re a “winner” when the money you earned disappears overnight?  Sure, you’ve earned interest, but the funds you’d kept invested were for the future, and you had every reason and right to expect that money to be there.

Tough luck, says Mr. Picard.  His decision seeks to recover less than one-third of the total losses due to the Madoff scheme, ignoring the often massive losses of the so-called “net winners”.  All of these 2,000 or so investors are without recourse, and what’s more: Mr. Picard has filed hundreds of lawsuits seeking to recover funds from those investors.  Sadly, many of these so called “winners” are broke, as most if not all of their money was placed with Madoff.

The 2nd Circuit agrees with Mr. Picard.  I do not.  The division between “net winners” and “net losers” should not be sacrosanct.  Each request should be evaluated on a case-by-case basis.  “Net winners” should be granted the opportunity to prove they had no knowledge of the scheme and implicitly relied on the FBI, SEC and other regulatory entities, who year-in and year-out gave Madoff the seal of approval.  If they can prove they were unwitting victims, the “net” win or gain should only be the amount they received in excess of a standard rate of return.  In other words, their ill-gotten gains (or winnings) are those amounts in excess of the rate they could receive in the market generally.

Assisted by David Martin

• Print
• Comments
• Trackbacks
• Share Link

It looked like consumers might finally be getting a break this summer.  Not from the record heat, but rather from some of those mysterious fees, taxes and surcharges that are added to every airline ticket.  Last week, Congress failed to pass a bill that would continue an array of taxes tacked on to every airfare.  Yes, taxes can go away.  The:

• 7.5% excise tax on all domestic tickets;
• $3.70 tax on each flight segment; and
• $16.30 tax on international flights

-- all are history for now.  How much money is that?  The New York Times reports that the total tax per ticket averaged about $61, or a total of $25 million per day.  So, are consumers the big winners following Congressional inaction?  Nope.

First they took away meals on most flights, next it was those peanuts and pretzels in tiny foil packets.  Now it’s the tax savings.  Rather than cutting prices, the airlines simply added a like amount to everyone’s fare.  Scoundrels aren’t they?  Cynically, airline industry spokeswoman Jean Medina claims consumers’ costs have not increased.  She cleverly avoids the fact (as most spokesmen do) that the airlines have manipulated for themselves a windfall.  Same plane, same crew, same can of soda, just pay me $61 more.  Its outrageous and at a minimum the Department of Justice’s antitrust division should issue some subpoenas to investigate how so many airlines acted in concert to raise prices.  (“Ms. Medina, you are under oath…”)

Our hats are off to the few airlines doing the right thing and passing savings along to consumers: Spirit Airlines, Alaska Airlines, and Hawaiian Airlines (yes, that’s all of them).  But shame on all the other airlines; at a minimum they should throw us some peanuts.  And let’s hope those hard-working civil servants at the Department of Justice have some time to investigate the conduct of an industry that seems to perpetually place consumers at the back of the line.

Assisted by Zachary A. Kady

• Print
• Comments
• Trackbacks
• Share Link

What bank executive said the following to shareholders at a recent meeting?

The bank’s mission is to “find ways to continue to attract deposits, make sound loans and grow in accordance with our historic credit quality standards.”

      A) Jamie Dimon (JPMorgan)
      B) Vikram Pandit (CitiGroup)
      C) Brian Moynihan (Bank of America)
      D) Robert Wilmers (M&T Bank)

What banker increased his bank’s assets from $2 billion to $68 billion in his past thirty years at the head?

      A) Jamie Dimon (JPMorgan)
      B) Vikram Pandit (CitiGroup)
      C) Brian Moynihan (Bank of America)
      D) Robert Wilmers (M&T Bank)

If you guessed Robert Wilmers, raise your hand. (If you had previously heard of Mr. Wilmers, take a bow.)  M&T CEO Robert Wilmers has managed to remain out of the public eye despite running the most honorable bank in the United States for almost three decades. He received some rare attention in Joe Nocera’s aptly-named column, “The Good Banker”.

There is perhaps no more apt nickname.  Wilmers is a good banker with even better morals. He’s old school, valuing bankers’ reputations, which has dropped to “third worst” among the professions, according to Wilmers.  Unlike most executives, Wilmers recognizes the moral hazard of major bank bailouts and the incentive to maximize risk—to the benefit of the big shots, and at the cost of Main Street.

It’s a heads-I-win, tails-you-lose arrangement for Main Street, but Mr. Wilmers sets himself apart as the only banking executive honest enough to point to the problem.  Kudos to Joe Nocera for drawing attention to Wilmers’ perspective, and to CEO Wilmers for standing tall in an era of slinking away ‘neath the shadows of money stacks.

Assisted by David Martin

• Print
• Comments
• Trackbacks
• Share Link

Even for notoriously money-blinded financial behemoths, preying upon veterans and their families defies even the most cynical observer’s imagination.

In the sea of fraud and manipulation following the financial crisis, Bank of America and Morgan Stanley have hit rock bottom (or at least let us hope so).  In today’s New York Times—unfortunately buried within the Business section—lies the story of almost 200 military veterans whose homes were wrongly foreclosed upon by BofA and Morgan Stanley subsidiaries.  Really, guys?  Even for notoriously money-blinded financial behemoths, preying upon veterans and their families defies even the most cynical observer’s imagination.

The Justice Department achieved a total settlement of over $20 million for the victims; this amount is unlikely to make whole these veterans who had their mortgages foreclosed upon by Countrywide and Saxon, a subsidiary of Morgan Stanley.  The settlement leaves just over $120k for each victim, likely a far cry from the value of their mortgage—and that is ignoring the hardship they likely went through as a result.  (What’s more, this is not the Countrywide/BofA partnership’s first lapse in judgment—just ask whistleblower Michael G. Winston.)

This case cries out for punitive damages.

Assisted by David Martin

• Print
• Comments
• Trackbacks
• Share Link

The OCC’s decision to protect the banks and their burgeoning sub-prime mortgage portfolios from scrutiny was a major cause – yes cause – of the 2008 meltdown and Great Recession that followed.

The Corporate Observer has not named a person of the week award for several months so this is kind of special…  Drum roll please.  New York Times columnist Joe Nocera is our Person of the Week.  He joins an illustrious crew including early Madoff reporter Harry Markopolos, Supreme Court Justice Elena Kagan, pharmaceutical whistleblower Cheryl Eckard, and numerous others.  Mr. Nocera is the new op ed columnist at the Times, ostensibly replacing the venerable Frank Rich.  He comes to the column from the business pages where he distilled complicated stories into readable and at times compelling theater.

Mr. Nocera snags the award this week because his column on the continued failure of the Office of the Comptroller of the Currency to objectively regulate the banking industry exposes new levels of absurdity.  Yes absurdity.  Save the rating agencies (and of course good old greed on Wall Street), the OCC’s decision to protect the banks and their burgeoning sub-prime mortgage portfolios from scrutiny was a major cause – yes cause – of the 2008 meltdown and Great Recession that followed.

Based on his street smarts and years of experience, Mr. Nocera does not mince words in his appraisal of the OCC.  The following quote alone earns him the Person of the Week award:

“Calling the Office of the Comptroller of the Currency a “regulator” is almost laughable.  The Environmental Protection Agency is a regulator.  The O.C.C. is a coddler, a protector, an outright enabler of the institutions it oversees.”

Go Joe.  He continues to call out the OCC for brandishing legal preemption ("federal law trumps state law") like King Arthur’s Excalibur, in an effort to defeat hard-working, earnest state attorney generals from designing reforms and bringing fairness to foreclosures.  He reminds his Times readers that the OCC remains steadfast in its defense of “sloppy, callous and often illegal practices” of an unapologetic banking industry.

The CO can’t get enough of his hard-hitting, take-no-prisoners approach.  Charge on Joe.  Keep using that prestigious column to challenge conventional wisdom.

For your efforts to date, we name you our Person of the Week.

• Print
• Comments
• Trackbacks
• Share Link

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.

• Print
• Comments
• Trackbacks
• Share Link

Behind the scenes at the Raj Rajaratnam trial is the story of the wiretaps.  In a recent thoughtful article on the New York Times' Dealbook, Law Professor Peter Henning highlights the raging battle between prosecutors and the defense team over the admission into evidence of hundreds of hours of wiretaps.  Those fuzzy but telling recordings show Raj himself, in effect testifying about the acts that… well… constitute his guilt.  It is his voice, his demeanor, his personality chiding and prodding along a massive fraud, and all that in the first person.  But as Professor Henning points out, this all-important evidence was challenged and nearly disallowed by Judge Holwell.  He was particularly troubled by the government's omission of facts in its application for the warrant to obtain the wiretaps:

"The court is at a loss to understand how the government could have ever believed that Judge Lynch could determine whether a wiretap was necessary to this investigation without knowing about the most important part of that investigation — the millions of documents, witness interviews, and the actual deposition of Rajaratnam himself, all of which it was receiving on a real time basis and all of which was being acquired through the use of conventional investigative techniques."

Prosecutors may have gotten just a bit too greedy in this one.  They need to be conservative and beyond reproach.  Their job is not to win cases, but it is to a higher calling.  As the Supreme Court famously said over a generation ago, they are empowered to do justice.  In some cases that might mean walking away from even the strongest of evidence.  The Constitution and the system demand no less.

So as the trial plugs along for several more weeks, remember that Raj Rajaratnam’s best hope for freedom may rest with an appellate court, years after the trial has completed.  By then, the hundreds of hours of wiretaps will be silent and stored in some dusty, cavernous government warehouse.

• Print
• Comments
• Trackbacks
• Share Link

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

• Print
• Comments
• Trackbacks
• Share Link

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.

• Print
• Comments
• Trackbacks
• Share Link

$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.

• Print
• Comments (1)
• Trackbacks
• Share Link

If Mr. Kroll and his son can remain free from conflicts his venture has a shot at adding value to this deservedly beleaguered market.  We wish him luck.

As reported by Janet Morrissey in the New York Times yesterday, Jules Kroll hopes to create another seismic shift in the business world.  First it was bringing “cloak and dagger” style investigative tools to businesses in an upfront and relatively transparent manner.  No easy trick.  But he pulled it off and spawned a multi-billion dollar industry.  No Fortune 500 company today makes a major move without gathering “business intelligence”.  Now, he wants to add this same methodology to the “green eye shade” accounting world of credit rating agencies, i.e. Moody’s and Standard & Poor's.

The old school approach was to look at the numbers. Dispassionately, objectively and without fear or favor.  A trillion dollars in losses later, and that model seems inextribably broken.  Indeed, Warren Buffet and other major investors have been proclaiming the death of the “rating agency model”.  And who could blame them – these supposed paragons of analysis and near divine insight rated trillions of dollars of sub-prime bonds – in the end worthless bonds – investment grade; a stamp of approval required before pension funds and other institutional investors.  Heck these guys rated Lehman’s paper investment grade, days before its bankruptcy.

Mr. Kroll, as always part showman, part genius, says he “will be looking under the covers” in addition to the numbers.  That should be interesting (think Mark Hurd of HP and other corporate titans brought down by sex scandals).  But the key will not be what happens under the covers.  No, the key is independence.  If Mr. Kroll and his son can remain free from conflicts his venture has a shot at adding value to this deservedly beleaguered market.

We wish him luck. 

• Print
• Comments
• Trackbacks
• Share Link

Despite my utter disdain for Mr. Madoff, and obvious mistrust for this miscreant, his words on this subject - fraud - must be given some weight.

I’ve been mulling what Bernard Madoff said the other day in a prison interview with the New York Times.  He has been mostly silent for over two years since his incarceration, so at a certain level it’s interesting to just hear what is important to the world’s most notorious thief.  Would his first utterances be devoted to sympathy for his son Mark who tragically committed suicide earlier this year; surely a desperate act linked to the legal and emotional turmoil resulting from the crimes of the father?  Or would his short time on the bully pulpit be devoted to an apology to his many victims, including all those charitable foundations that are now either penniless or (at best) have been forced to cut back dramatically on the services they provided to the poor, disabled and others in need?  Nope.  Instead his words, as reported in the Times, focused on JPMorgan Chase, and his contention that “they had to know” about his fraud and Ponzi scheme.

In some ways, I want to shake his hand and buy him a carton of cigarettes (or whatever the currency de jour is of the North Carolina Federal Prison where he will spend the rest of his life).  But this is Bernie Madoff, the Hanibal Lecter of financial criminals.  Turn your eyes for a second, and he has stolen your wallet; turn your back and he has control over your IRA; try to walk away and he’s now gotten your kids' college fund and the proceeds of your life insurance policy.

Nevertheless, despite my utter disdain for Mr. Madoff, and obvious mistrust for this miscreant, his words on this issue - fraud - must be given some weight.  He is by any estimation an expert on the subject.  Wouldn’t it be wonderful to see Mr. Madoff put on the stand by Mr. Picard at a trial of JPMorgan Chase?  Both the direct and cross examination would be fascinating.  I’m confident though that in the end, Madoff’s testimony would be credible.  There is no way he could have been moving billions in cash without raising some suspicions.  But he was a “good” customer and no questions were asked.

Sadly for Madoff’s victims, JPMorgan Chase’s phalanx of high-powered lawyers will likely keep Madoff off the stand and the case will never reach a jury.  (But that, friends, is a story for another day.)

(Full Disclosure and Disclaimer: My firm is counsel to victims of several Ponzi schemes where it is being alleged that a bank, including JPMorgan Chase, is liable for all or some of their losses).

• Print
• Comments
• Trackbacks
• Share Link

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

• Print
• Comments
• Trackbacks
• Share Link

The personal credit card industry has come under intense government scrutiny for good reason.  Between Visa, MasterCard and American Express, Americans spend (or charge) over one trillion—that’s trillion with a “t”—dollars per year.  For years, merchants were forbidden by Visa, MasterCard and American Express from advocating for alternatives to credit payments.  For example, merchants are forbidden from offering (or advertising) discounts if you pay cash (although many do).

Forbidding such a choice helps to maintain higher credit card fees.  Yesterday’s settlement (see the Wall Street Journal story here or the New York Times story here) takes a big step toward creating a level playing field.  All you can really hope for: Visa (#1) and MasterCard (#2) agreed to eliminate restrictions that foreclosed a merchant’s ability to both forbid and advertise alternatives such as discounts for paying cash.

Conspicuously absent from the agreement was American Express.  Fighting American consumers and American law enforcement, “American” Express vowed to fight the proposed changes.  Why?  Simply put, they have the most to lose (they charge higher fees).  Attorney General Eric Holder, my former boss, was strident in his opposition to the company’s position:

Because American Express has refused to change its rules, consumers are being held hostage from receiving the expanded choices and lower prices that they deserve under our settlement… We cannot allow this to stand.

Well said, General.  AmEx, already notorious for charging 25% more in merchant fees than Visa or Mastercard, puts its greed on display.  CEO Kenneth Chenault of AmEx hypocritically calls the government’s case “anticompetitive,” omitting the glaring and obvious truth: AmEx’s standard agreement forbids its merchant clients from soliciting non-credit forms of payment.  Now that’s anticompetitive behavior.

The financial crisis we are still paying for taught us that enhanced corporate disclosure, transparency and consumer protection are more curative if served for breakfast and not for dessert.  Pushing Visa and MasterCard to provide more disclosure and fewer restrictions on merchants is surely a step in the right direction.  As to American Express, let’s hope they do the right thing instead of using our court system to delay justice hoping merely to enhance their own profits.

• Print
• Comments
• Trackbacks
• Share Link

William Goldman at the New York Times writes that the Elizabeth Warren’s brainchild, the Consumer Financial Protection Bureau, is based on the ill-founded belief that consumers are not at fault for their poor investments. I agree that consumers must be more diligent, but to place the blame for sleazy contract terms and other fraudulent behavior solely on the backs of consumers is ludicrous and unfair. The CFPB is essential to our sustained recovery from the financial crisis, which occurred in large part due to under-regulation.

Jim Puzzanghera of the LA Times reports on the concern that the CFPB has much work to do. Without a Senate-confirmed director many fear its efforts will begin to stall. Certainly the Bureau needs a director, but isn’t it enough for now to let Elizabeth Warren run the preliminary operations? It was her idea, after all.

The Supreme Court’s term begins today, as it does on the first Monday in October each year. Let us hope the recent infusion of youth among the Justices will help lead the Court to more forward-thinking decisions.

Assisted by David Martin

• Print
• Comments
• Trackbacks
• Share Link

Last Tuesday, we linked to Elizabeth Warren’s White House Blog post regarding her new position and the Consumer Financial Protection Bureau.  The New York Times has set up a forum for user comments, which are always welcome here at the Corporate Observer as well.

Stanley Chais passed away on Sunday.  The SEC had accused Chais of feeding roughly $1 billion of investor funds into Bernie Madoff’s Ponzi scheme, according to the Wall Street Journal’s Law Blog.

Len Blavatnik, a Russian-born billionaire who lost tens of millions because of JPMorgan’s investment in mortgage-backed securities, has sued the bank.  As the New York Times reports, he is not “someone for whom one’s heart instinctively bleeds.”  However, his goal – paving the way for banks to be held accountable for such criminally negligent behavior – is inspiring.  If only the courts would see it the same way.

Assisted by David Martin

• Print
• Comments
• Trackbacks
• Share Link

Charlie Rose recently interviewed New York Times financial writer Andrew Sorkin on a PBS special that I highly recommend.  Sorkin discusses the true causes of the financial crisis, current causes for concern, Basel III, Elizabeth Warren and more.  Enjoy the link.

• Print
• Comments
• Trackbacks
• Share Link

Paul Volcker – a voice for reasonable regulation on Wall Street

Paul Volcker, for decades a lion in the regulatory community, has had an undeniable impact on the new financial regulations moving across President Obama’s desk.  All proponents of Main Street should applaud him.  Mr. Volcker, former chairman of the Federal Reserve Board under Jimmy Carter and Ronald Reagan, has recently found his voice as lead Economic Advisor to President Obama.  The proof:

The Volcker Rule: A key piece of the financial reform legislation, which President Obama signed into law earlier this week.  The rule will help ensure a dividing line between commercial and investment banks.

Mr. Volcker hoped for a complete separation of traditional banking from investment/hedge fund banking industries.  Recall, this was the way of the world before the drastic deregulation of the 80’s and 90’s.  Unfortunately, today’s political reality would not permit such a stark division of commercial banks and investment banks.  Instead of a complete separation of functions, the bill that President Obama signed into law limits commercial banks to investing just 3% of their capital in investments that do not benefit their customers. In other words: trading for their own account and perhaps contrary to the interests of their customers and the public. And as we now know getting into enough trouble to need a multi-billion dollar bail out. 

Volcker, always a thoughtful proponent of government regulation, was largely cast aside and silenced during the economic booms spurred by deregulation.  In a recent interview with the New York Times, Volcker called the idea of a self-regulating market an illusion which he is happy to see shattered.  

This week, we salute Mr. Volcker for his efforts on behalf of the Main Street and the public.  Despite Wall Street’s kicking and screaming, Volcker’s singular gravitas has successfully stood up to those Gucci-wearing lobbyists of the financial industry.  Although not enough, the Volcker rule is a step in the right direction. It helps Main Street to be sure.  Unless banks find a creative way around it, we should be spared – at least for awhile –  the volatility and cost associated with the unbridled greed of banks we all witnessed the last several years.

Assisted by Zachary Kady

• Print
• Comments
• Trackbacks
• Share Link

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)

• Print
• Comments
• Trackbacks
• Share Link

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)

• Print
• Comments
• Trackbacks
• Share Link

We can thank Krugman and Schapiro for directing attention to these practices, and the next step is to intervene.  Main street has borne enough of the burden caused by the me-first, profit-seeking attitudes of these companies.

In Monday’s New York Times, noted economist Paul Krugman’s Op Ed piece draws attention to the proliferation of high-speed trading by the elite on Wall Street, notably Goldman Sachs.  Using high-speed trading, Goldman Sachs has already made millions trading stocks.  Yes, trading stocks.  Not financing infrastructure or lending to startups developing new or better technologies.  Just trading.  In a related story, SEC Chairwoman Mary Schapiro got it right when she recently called for elimination of the practice of ‘flash’ trading.  While the two concepts are subtly different, the net effect is the same for main street: the short end of the stick.  For every dollar made on Wall Street, main street more often than not loses a dollar.

Disturbingly, the same financial institutions we spent billions of dollars to save from bankruptcy mere months ago are victimizing taxpayers yet again.  We can thank Krugman and Schapiro for directing attention to these practices, and the next step is to intervene.  Main street has borne enough of the burden caused by the me-first, profit-seeking attitudes of these companies.  Identifying and eliminating unfair stock market practices is an essential step toward fairness.

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

• Print
• Comments
• Trackbacks
• Share Link

At best, I fear a muddled effort—this after main street spent trillions to bail out those interests.  At worst, we may see reforms that actually subtly favor these industries.

I was taught not to write using clichés.  But I couldn’t resist.  As the July 29, 2009 New York Times editorial, entitled The Financial Truth Commission cautioned: the important Financial Crisis Inquiry Commission set up by Congress to investigate last year’s near-complete meltdown of the financial system is being led by two veteran politicians who have received significant campaign contributions and have longstanding ties with – you guessed it – the “financial, insurance and real estate interests”.

Those are the interests that main street had to bail out in the first place.  They will now have considerable influence on everything the Commission decides.  At best, I fear a muddled effort—this after main street spent trillions to bail out those interests.  At worst, we may see reforms that actually subtly favor these industries.  There is definitely cause for concern and like the NYT, we will be watching.

Let’s hope that as with the Watergate Commission and the Church committee hearings of the 1970’s, this Commission can rise above politics and act professionally and diligently to create reforms that put our financial and banking system on firm ground.  Only then can folks on main street thrive again.

• Print
• Comments
• Trackbacks
• Share Link