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

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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What is Goldman up to nowadays?  Oh, just raising compensation by 3.5% despite a projected 13.5% decrease in revenue.  Do they call that a lack-of-performance-based raise?

For years the public mostly turned a blind eye to Wall Street’s corporate practices, including the lucrative (and ludicrous) bonuses and salaries paid to top executives, largely for speculative trading.  Wall Street produces no products.  But so long as their companies made enough to pay out such exorbitant amounts, we rationalized, what was the problem?  The financial collapse should have served as ice water poured on our snoozing faces.  Incentivized by a pay structure that valued risk, we were all led to the brink of disaster.  It was only the infusion of $450 billion in taxpayer money that saved us from The Great Depression, Part II.  So why on earth are Wall Street’s top companies set to pay a record $144 billion in compensation this year?

I feel like a broken record.  Yes, the majority of TARP loans have been repaid and we are on the slow road to recovery, but we cannot become complacent.  The next step must change the paradigm.  It must tighten regulation and oversight of corporate compensation.  And that applies to all companies—even the unassailable Goldman Sachs, which was saved by the rescue of AIG, its principal insurer.  What is Goldman up to nowadays?  Oh, just raising compensation by 3.5% despite a projected 13.5% decrease in revenue.  Do they call that a lack-of-performance-based raise?

This is why we need regulations sooner rather than later.  SEC Chair Mary Schapiro (no stranger to compensation issues) at last has detailed a timeline for the regulations that will soon govern the entire industry.

Most of the Commission’s timeline occurs before the New Year, but that is not soon enough.  We propose a more immediate solution to the compensation problem: redirect any salary or bonus that is based on purely speculative trading towards public infrastructure.  Instead of paying millions of dollars to each executive that nearly ran our economy into the ground, let’s use the excess to modernize transportation systems, fix bridges and pay teachers.

It won’t happen but it should.  Let’s hope the SEC gets in gear and moves quickly to enact effective rules to protect the public from another crisis.

Assisted by David Martin

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Nice work FINRA.  On the one hand you pay yourselves like captains of industry, but when the going gets tough you hide behind immunity reserved for lunch bucket civil servants making less than $80,000 per year.  And yes there is more.

If we could all be so lucky.

The Financial Industry Regulatory Authority released a report on its own internal investigation into excessive compensation for Mary Schapiro during her time as CEO of the Authority.  To be kind, the report was a joke and a self-serving cover up that demands further scrutiny.

As a threshold matter, let’s make something clear: FINRA is a government regulator.  It is the largest so-called “independent” securities regulator, overseeing almost 5,000 brokerage firms, and is designated overseer of the NYSE and the NASDAQ.  Yet as investors across the board were losing a nice chunk of their nest eggs in the financial markets (earned the hard way and put aside for college tuition and retirement), Mary Schapiro was raking in a base salary of $2.5 million and earning million-dollar-plus bonuses.  Try to challenge that salary.  You can’t.  FINRA will assert governmental immunities to thwart any challenges to its decision making or salary structure and they will win – trust me I tried.

Nice work FINRA.  On the one hand you pay yourselves like captains of industry, but when the going gets tough you hide behind immunity reserved for lunch bucket civil servants making less than $80,000 per year.  And yes there is more.  When Ms. Schapiro left FINRA, she received a parting payment of $9 million.  Yes $9 million.  As in, “Thanks Mary you did a great job.”  A great job?

During her tenure, the markets nearly imploded and investors lost trillions.  I don’t know Mary Schapiro.  When I was at the SEC, I would see her now and again in the hallways.  I have nothing against her personally, but the payments she received as President of FINRA are nothing short of an outrage.  A true public outrage.  But the internal report and investigation, paid for by FINRA after a feisty California securities broker-dealer called Amerivet demanded an explanation, was far from expressing outrage.  Indeed, it defended every aspect of Ms. Schapiro’s pay and her performance.  Relying on studies of executive salaries at leading investment firms, Ms. Schapiro was being—well if anything—underpaid.

And where did lucky Mary go?  To the chairmanship of the Securities and Exchange Commission, where else?  We commend Amerivet for its courage.  They are fighting an uphill battle to be sure.  But they are on to something and they should not let go.  These enormous salaries and benefits can only lead to abuse.

As to FINRA: are you fish or fowl?  If you are a private actor, accepting private sector dollars without any of the risks, don’t wrap yourselves around governmental immunity when the going gets tough.  And if you truly are a government regulator, stop taking enormous private sector salaries.  You can’t have it both ways.

Assisted by David Martin

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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)

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