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

As if things aren’t bad enough in Washington.  Over the past weeks, the trading profits of members of congress have been regular news fodder. In recent days, the focus has shifted slightly to the profits of Wall Street firms – particularly hedge funds – that profit off of “insider” information gleaned hours ahead of publication from private meetings with powerful members of congressmen. Click here for the Journal’s take on the story and here for another reaction from The Atlantic.

Leveraging off government action to make money has been around since the days of George Washington.  In more recent times, Wall Street banks know that a government announcement on particular policies can drastically and immediately affect stock movement.  And when you can trade rapidly through a high speed modem – that spells “ka-ching”, big money.  One of the latest games takes the form of lunches, meetings, and panel discussions organized by firms who will earn a commission on trades resulting from the information provided at these soirees.

The leading firm is JNK Securities, which most notably organized a meeting between high powered banks and congressmen known to be influential on the healthcare debates of 2009.  In that meeting, the investors were told that a government-run health plan was highly unlikely – an important signal that investments in private insurers like AETNA were good bets. AETNA shares rose 6% in the following days.

Some congressmen defend the meetings as important opportunities to discuss the ramifications of proposed legislation on the business community. They also say the investors point out loopholes or inefficiencies in the laws. (Yeah, right… and is that bridge over in Brooklyn still for sale?)

On the other hand, some law makers like Louise Slaughter, a democrat from New York, are seeking to curb the practice insofar as lawmakers’ information directly results in Wall Street trades.  Ms. Slaughter’s bill is supported by a majority of House members as well as Senator Lieberman. Importantly, the bill would treat banks like lobbyists – requiring them to disclose these types of activities.

Thanks to Senator Lieberman, Representative Slaughter, and all other likeminded congressmen for taking a stand. 

Assisted by Zachary A. Kady

• Print
• Comments
• Trackbacks
• Share Link

As a former SEC attorney myself, I know how difficult it can be to work with limited staff, time, and money to reign in the fraud and deceit that seems to run rampant in Gotham…  Excuse me, I meant Wall Street.  But resources aside, some cases demand a full court press.

The bloggers are a blogging and twitter is atwitter with talk of Judge Rakoff’s refusal to approve a proposed settlement between the SEC and Citigroup for “alleged” fraud.  Specifically, Citigroup is accused of selling junk securities to investors only so it could turn around and short, or bet against, its own customers when the securities tanked.  According to the New York Times, investors lost $700 million while Citigroup made $160 million from the deal.  This is not just aggressive business-as-usual but the kind of fraud you’d expect from some boiler room shop manned by ex-cons.  It’s surely not something you’d expect from one of our nation’s largest banks.  (Who, by the way, survived only after receiving $30 billion from you and me – taxpayers, that is.)

Rakoff’s decision is hailed by some as a triumph of reason over “business as usual,” but derided by others as capricious overreaching by a judge who should defer to an agency’s discretion to settle such matters.  I’m firmly with Judge Rakoff on these facts.  It was the right case to make a statement.

Business as usual has to change.  Companies like Citigroup should not be allowed to simply sweep improper conduct under the rug with no admission of guilt and a penalty that Judge Rakoff appropriately described as pocket change.  As I pointed out in this interview, somebody must be held responsible.  Somewhere on Wall Street sit a couple of bankers who decided it would be a smart idea to bet against their customers and worse, to sabotage their customers’ investments.  Those people must be held accountable and the company they work for should admit wrongdoing.  Who are they?  In this case, taxpayers are entitled to know.

On the other hand, agencies like the SEC do not have unlimited resources.  As a former SEC attorney myself, I know how difficult it can be to work with limited staff, time, and money to reign in the fraud and deceit that seems to run rampant in Gotham…  Excuse me, I meant Wall Street.  But resources aside, some cases demand a full court press.  This is one that shocks the conscience.

Judge Rakoff was correct that Citigroup is a recidivist and repeat offender and I look forward to watching the effects of this potential “new era” trickle out to the rest of Wall Street.  There is a new sheriff in town and his name is Jed Rakoff.  Will he enlist others?

Assisted by Zachary A. Kady

• Print
• Comments
• Trackbacks
• Share Link

Yesterday’s effort by 1,000 riot police officers to clear protestors from Frank Ogawa Plaza in Oakland—and today's follow-up in New York's Zuccotti Park—will do little to diminish the movement.   In fact, it may instead strengthen forces on the ground, and those safely participating in their homes and offices by emailing and blogging away.

Occupy Wall Street has been a catalyst following the financial crisis of 2008, the ascendancy of the Tea Party, and perhaps most egregiously, the bonuses and big checks retuning to Wall Street.  Millions were fed up.  Occupy Wall Street provides a spark, a newfound legitimacy and passion for progressive goals.  1000, 10,000, even 100,000 riot police will not diminish that spark.

• Print
• Comments
• Trackbacks
• Share Link

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

It happens so fast.  One day they are here (Lehman Brothers, now MF Global), the next day they are gone.  Poof.  How is it that these multi-billion dollar institutions, with thousands of employees, simply disappear in a day?

Ok, fine.  Business is bad, lay off a few folks, reduce bonuses, no more free soda and snacks in the refrigerator, “folks we need to tighten our belts.”  But all those steps are skipped.  First stop, bankruptcy.  Close the doors, auction off the artwork, and will the last person in the office please turn off the lights?

Is this a failure of regulation?  Hardly.  The problem is one word: greed.  Add a little leverage and a high tolerance for risk and you are ready to destroy a company.

Take the case of Senagovenor Corzine and MF Global.  After being defeated in his effort to remain Governor of New Jersey (which cost him, say, $50 million), he heads back to Wall Street mad as hell.  His legacy cannot be one of a defeated-incumbent-turned-lobbyist for the Chinese Dairy Industry or some such obscure posting.  Nope, he’s going to show them.  He is going to transform MF Global into the most profitable and powerful firm on the Street.

How?  A five year strategic plan?  A new vision for a new century?  Nope.  Just start trading.  Or rather betting, and big time.

"Let’s see, hmmmmm where could we make a few billion?  Fred, you head up our equity desk, what do you think?”  “Well Senagovenor, how bout Baseball cards?”  "Baseball cards, you’re killing me.  Besides the Honus Wagner rookie card, baseball cards are worthless until they can be securitized.  Anyone else?”  "How bout Ming Dynasty porcelain?  The Chinese are entering the market and prices are sure to skyrocket."   "Same problem.  No derivative market to hide our big bets.  Fellas, come on, we need something where we can make some money fast.  Nancy, you’ve worked in the mailroom for six days, what do you think?"  “European debt, Senagovenor, sir.   Nearly a trillion or more.  And no way Merkel let’s them fail.”

"Let’s hear it for Nancy in the mailroom.  This is brilliant.  I did this at Goldman, but now we can leverage the heck out of our bets – maybe even borrow some cash from our customers to really expose ourselves, oops I mean position ourselves for some real profits.  My old friends will see I am still brilliant and at the top of my game..."

A faint voice is heard from the corner of the room, “Sir this is Louis from legal.  I don’t think the regulators are going to buy this, especially borrowing from customer accounts.”  "Thanks Louis, but don’t you worry, I will have those regulators eating out of my hand."

And so it goes.  Wall Street profits come from trading which means risk, and in the case of MF Global it results in doubling down on a bad bet that destroyed a company.  Poof.

• Print
• Comments
• Trackbacks
• Share Link

New York’s Attorney General is investigating large banks in connection with their role in the financial crisis.  Can you say “déjà vu”?  (Or since it’s New York, the Yogi Berra version: “déjà vu all over again.”)

Perhaps Eric Schneiderman is the new Elliot Spitzer (well, hopefully not completely) or the ever-ambitious Andrew Cuomo, but if past is pattern, this latest effort at “cleaning up” Wall Street will not amount to much.  A mere two years after the second-worst financial crisis in U.S. history, speculation is back, lobbying efforts by the financial services industry are in full swing, and money is still flowing to CEOs and other executives.  Citigroup CEO Vikram Pandit recently received a $16.5 million retention bonus; this despite the company’s plummeting stock, which reached such lows ($4.00/share) that earlier this month the company “reverse-split” its stock.  Essentially this entails combining every ten shares into one, changing nothing for the stockholder but artificially inflating the stock price tenfold.  Just another day on Wall Street.

Gretchen Morgenson—a friend of the blog—highlighted Schneiderman’s efforts earlier this week.  But even from her powerful pulpit, the industry is not likely to take notice or even care.  They will simply cook up some newfangled synthetic toxic derivative 2.0 hedging the risk of global climate change (otherwise known as: hot air).

Hopefully, Schneiderman can prove me and probably countless other doubters wrong.  Good luck, but Main Street, don’t hold your breath.

Assisted by David Martin

Berk Law is currently litigating multiple cases alleging certain banks aided and abetted Ponzi scheme operators.  Read more about those and other current cases at www.berklawdc.com.

• Print
• Comments
• Trackbacks
• Share Link

Just like so-called “amateurism” in college athletics, the “unbiased, mere opinions” bestowed by credit rating agencies are largely a façade.

Often what we say is different from what we do.  Day-to-day life provides us plenty of examples: “amateurism” in college athletics, the “reality” of reality shows, and Fox News’ “unbiased” political coverage being just a few that come to mind.  Yesterday, Second Circuit U.S. Court of Appeals Judge Reena Raggi fell victim to a lesser-known fallacy: the “mere opinions” of the credit rating agencies (CRAs).

In her decision handed down yesterday, Judge Raggi gave rating agencies such as Moody’s and Standard & Poor’s a huge victory.  She did so by agreeing with the agencies that they offer “mere opinions” on the solvency of an institution’s debt.  Hmmm...  So Moody’s is no different than “Consumer Reports" or Zagat’s?  Who knew?

Just like so-called “amateurism” in college athletics, the “unbiased, mere opinions” bestowed by CRAs are largely a façade.  Debt-issuers pay these agencies to rate their creditworthiness (yes, you read that right—they are paid by the very same people that they supposedly objectively rate); the interest rate on any debt is intimately tied to this rating.  In other words, the securities market could not function without these CRAs.

Do you think Fannie Mae would have enthusiastically paid Moody’s to rate its credit if Moody’s raters had thoroughly investigated the bundles of subprime debt amassed by Fannie?  Hey Fannie, thanks for the payment, but we’ve determined that without Federal Government takeover you will be unable to repay your loans…  Here’s your D rating.  What’s more: the ratings agencies are integral to the proper functionality of the market.  Without ratings there would be next-to-nothing on which to assume risk or base interest rates.

Although credit rating agencies serve as de facto underwriters for the debt instruments they rate, Judge Raggi relies upon the 2nd Circuit Decision in SEC v. Kern to distinguish their conduct from “those who take ‘steps necessary to the distribution’ of securities”.  That "distinction" is a complete fiction.  Of course CRAs are necessary to the markets.  Indeed, without them there would be no debt market.

Forget the law?  How convenient.  Chalk up another one (on an ever-growing chalkboard) for big business and the financial industry.  Don't blink, next thing you know “insider trading” may well be regarded as a proper mechanism for distributing risk.

Assisted by David Martin

• Print
• Comments
• Trackbacks
• Share Link

While hardly a long shot, we predicted this result way back in March:

Mr. Dowd and his cast of subordinates (when you represent a billionaire facing prison you can’t possibly bill enough hours) will try mightily to argue the technicalities of what constitutes criminal insider trading -- but my money is on the government and its young team of prosecutors.

Raj was just a bit too greedy, a bit too brazen, and in the end a bit too careless. While his was a clear case of insider trading (as noted by Juror Lauren, “there was just a lot of evidence”), many who walk the rarified halls of Wall Street are behaving in ways that are not too dissimilar. Where precisely is the line between aggressive fact gathering and illegal insider trading? It’s difficult to determine because in many cases it is a matter of degree not substance. The advent of social networking tools will only complicate matters.

As a former Federal Prosecutor, I can tell you though -- deterrence matters. Long jail sentences have a chilling effect. The threat of jail will change behavior. Prosecutors need to keep at it. Stay on the front pages, bring more cases and demonstrate that while there are shades of gray around corporate conduct -- there is a line that if crossed means you too may be on your way to jail; and when that line is blurry you best stay well to the
legal side.

• Print
• Comments
• Trackbacks
• Share Link

Attorneys across town and in New York at DOJ have brought suit against Deutsche Bank and its subsidiary, MortgageIT, alleging reckless lending, violations of the false claims act, and various common law claims including breach of fiduciary duty, negligence, and gross negligence.   Finally.

A copy of the complaint can be found here, courtesy of the WSJ law blog.

The DOJ complaint alleges that Deutsche Bank lied to HUD about the ability of its customers to repay loans in order to receive FHA (Federal Housing Authority) insurance. Specifically, the complaint alleges that, although Deutsche Bank knew its mortgages were not eligible for FHA insurance under HUD rules, its underwriters lied by falsely certifying they had conducted the required due diligence. Thus, Deutsche Bank wrongfully obtained insurance from the federal government on thousands of mortgages.

Naturally, Deutsche Bank packaged and resold those loans. The story is all too familiar. Thousands of borrowers defaulted as Deutsche Bank rightfully expected they would. But the bank didn’t care because risk was separated from underwriting. By selling off the insured loans, Deutsche Bank at once guaranteed its profits regardless of investors’ ability to repay, and placed a multi-million dollar burden on the FHA to pay out under its duties as a credible insurer. According to the Complaint, HUD has paid $386 million in FHA insurance claims and costs arising out of Deutsche Bank’s approval of risky mortgages and falsification of documents.

Lying to the government instead of actually doing the proper due diligence, handing out insured loans with no regard to the borrower’s ability to repay ; A Better symbol of the myopic corporate greed that plagued Wall Street for the past decade cannot be found. Imagine the thought process: “Will these borrowers be able to repay the loans?” “Heck, who cares, we’ll just have the government (taxpayers) insure them while we make a few hundred million in a week. “

With this conduct, DOJ was handed a softball. The conduct involved FHA directly and as they say was “ a no brainer”. Criminal yes, but no “perp” walks. No individuals who will bear responsibility. The sanction will be against a faceless corporation. The American public who foot the bill deserve more.

Assisted by Zachary Kady

• Print
• Comments
• Trackbacks
• Share Link

Reports over the weekend claim Professor Warren went to the Hill (as in Capitol Hill) to find the votes she needed for her nomination to be the first head of the Consumer Finance Protection Board ("CFPB").  She came up well short of the mark.  Wall Street fears her more than inflation and will easily have the votes to block her nomination from ever reaching the Senate floor for a vote. (Sad, but the subject of another story.)

So now speculation begins on her “replacement”.  Reports over the past week claim the White House has discussed—or has in fact offered—the position to the following government officials: former Michigan Governor Jennifer Granholm, Illinois Attorney General Lisa Madigan, Massachussetts Attorney General Martha Coakley, Chairwoman of the FDIC Sheila Bair and Federal Reserve Governor Sarah Raskin.  Notice anything?  Hmmm.  Yep.  They are all women.  To be fair, I left out a few names but there is no doubt the short list is dominated by women.

The interesting question is why?  A few attempts at an answer:

First try.  For all intents and purposes a woman heads the CFPB now, and so in the strange ways of Washington a woman must be her replacement.  Think Supreme Court.  When Sandra Day O’Connor retired, her “replacement” from the beginning was presumptively going to be a woman. And so began the ill-fated effort to confirm Harriet Miers.  Why Harriet Miers?  Well she was no Sandra Day O’Connor, but she was a woman.

Second try.  Although in its infancy—heck it’s not even out of the womb—the CFPB will be known as an agency suitable for a woman to hold the reigns.  Yes, it is the most important new government agency since the Securities and Exchange Commission’s birth in the wake of the stock market’s crash of 1929 and the Great Depression.  But by design, or implicit discrimination, this one can be handled by a “lady”.  It’s not Treasury or Defense, neither or which has ever been led by a woman.  Those positions are reserved for those macho men who understand high finance and bombs and tanks. (I know little Tim Geithner is no Anderson Silva but you get the picture). It’s on par instead with HHS and Education, where women seem to be slotted regularly in both Democratic and Republican Administrations (Kathleen Sebelius (Obama), Margaret Spellings (Bush), Donna Shalala (Clinton)... you get the point).

Protecting consumers—what a quaint notion.  Sort of like baking cookies and balancing the family check book.  This implicit relegation to second-tier status must be nipped in the bud.  Whether a man or more likely a woman “replaces” Elizabeth Warren, the attitude must be there is a new sheriff in town (think Javier Bardem and No Country for Old Men) and those macho men like Jamie Dimon, Brian Moynihan and Lloyd Blankfein better take notice.

• 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

The confluence of budget cuts to regulators like the SEC and CFTC, which were no Batman and Robin even at full strength, coupled with a likely skeleton staff at the new consumer finance protection agency spells disaster sooner rather than later.

Sadly Mr. Ferguson's prediction, made during an interview with Andrew Ross Sorkin of the New York Times, that another financial meltdown is ten years away is overly optimistic.  I fear the confluence of budget cuts to regulators like the SEC and CFTC, which were no Batman and Robin even at full strength, coupled with a likely skeleton staff at the new consumer finance protection agency -- thanks to the tea party's misguided efforts to demand budget cuts no matter the harm to Main Street -- spells disaster sooner rather than later.

Moreover, on Wall Street the beat goes on, with new "synthetic derivatives" being created on a daily basis.  These instruments merely line the pockets of lawyers and bankers and traders -- while substantively increasing one thing and one thing only: volatility and risk.

Finally, world events will no doubt add to market turbulence.  Even if every government in the Middle East miraculously survives this latest wave of popular uprising, tensions will remain high.  All that is needed is a nuclear scare in Iran or Pakistan and US markets could be thrown into a another tailspin.

With all due respect to Mr. Ferguson, my prediction is 3-5 years.

• 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

If they say it’s not about the money, it’s about the money.

Match the profession with the corresponding average salary¹:

Job:                                                                              Salary:

A. Clinical Lab Scientist                                           1. $40,754

B. Firefighter                                                               2. $39,570

C. Paramedic                                                             3. $58,876

D. Average Goldman Sachs employee                 4. $45,638

E. Social Worker (w/ Masters Degree)                  5. $43,564

F. College Professor                                                 6. $498,246

G. High School Teacher                                           7. $55,135

H. Nurse                                                                      8. $56,268

What’s the only match you can be sure of?  Yep.  The Goldman employee.  Over ten times the salary of a social worker, firefighter, and even a college professor.  An average Goldman employee makes more than the seven other cited professions combined.

The magnitude of this disparity is telling and chilling.  It tells us what we value and who holds the power in our society.  And thanks to the hard-working folks on Main Street who bailed out Wall Street including Goldman (ok indirectly – but bailed out nonetheless) to the tune of $700 billion “the beat goes on”.

High School teachers and nurses will never claim top salaries, but they deserve some recompense for funding the current pay scale on Wall Street.  Why not base pay on job creation instead of gambling (oops I mean “trading”).  How ‘bout a little shame fellas?

Eliminate over-complex financial instruments and temper the inherent cronyism that governs its hiring policies.  As long as connections trump merit and massive salaries eliminate accountability, financial institutions will be ruled by greed and greed alone.  Isn’t it time for a little fairness to creep into the equation?

(ANSWERS: A8; B4; C2; D6; E1; F3; G5; H7)

¹ Statistics according to www.payscale.com and this article from Bloomberg.

• Print
• Comments
• Trackbacks
• Share Link

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.

• Print
• Comments
• Trackbacks
• Share Link

In 2010, we had plenty of opportunities to come to the keyboard in hopes of shining a light on hypocrisy, pleading for fairness, particularly on behalf of consumers and investors and just plain venting about our corporate culture that has too often lost its way. As 2011 nears, we thought a wish list for the coming year would be fun.

1.       Elizabeth Warren Officially Named Head of the CFPB

There’s no hiding it, we have a crush on Elizabeth Warren (click here and here for past blogs). Her leadership and influence were essential to the creation of what we hope will be an engaged and powerful consumer finance protection agency. While we were delighted when President Obama chose Professor Warren to lead the formation of this new agency, we hope in 2011 he shows the courage to name her the Director. Will there be a battle in the Senate over her nomination? You bet. But we say bring it on; she is uniquely qualified for the post. Professor Warren has the knowledge, intelligence, creativity and passion to get the job done. That scares corporate America. But a tough fight, played out on the evening news and on You Tube will be good for the nation.

2.       The SEC Gets the Money it Was Promised and Opens Its Whistleblower Office

The passage of the Dodd-Frank bill was merely the strategy for restoring confidence in the American financial system. Implementation requires funding. Hard working, honest citizens have the right and deserve an opportunity to report corporate fraud without fear of retaliation. To be meaningful, this right must be backed up by resources ready to investigate and provide a response up or down. Unfortunately, congress’ recently imposed budget freeze has temporarily stalled funding for a new, independent whistleblower office at the SEC. For now, whistleblower claims will be handled by the enforcement division, the same division that missed Madoff. That same enforcement staff is unlikely to effectively handle the many complaints the office is likely to receive. (click here) Hopefully in 2011, congress and the SEC can work together to give whistleblowers an effective means to spot, prosecute, and curtail corporate fraud.

3.       A Stronger, More Active CFTC Enforcement Division

Dodd-Frank greatly expanded the powers of the CFTC enforcement division. The change turned what was once a poor man’s SEC, into a regulatory power house. Several trillion dollars are under management and supervision of this agency. As a threshold matter they must write thousand of rules and regulations. We hope that process steams along at a good pace. We also hope that the hiring of David Meister as new head of the enforcement division (click here) will help continue this trend through 2011.

4.       Banks like JP Morgan Chase and Bank of America are Held Accountable for their Roles in Massive Ponzi Schemes and Other Fraud

We’ve mentioned it time and again, some of the largest banks have played surprisingly important roles in support of massive Ponzi schemes. Investors lost billions. (Click here,  here, here for our blogs). Our firm, Berk Law (www.berklawdc.com) is currently litigating four cases against both Bank of America and JP Morgan Chase for their roles in fraudulent investment schemes across the country. (Click here, here, here, and here for blogs on JP Morgan Chase) We hope 2011 will bring justice for thousands of investors who have lost much of their life’s savings.

5.       A Favorable Ruling for Consumers in AT&T v. Concepcion

Just a few weeks ago, the Supreme Court heard oral arguments to determine the enforceability of mandatory arbitration clauses, which ban class actions completely (“whether brought in court or before the arbitrator”). This ban is not only unfair to a consumer holding a valid claim but it also a fast one on consumers. We hope for a ruling upholding the California court’s decision invalidating such contracts under the doctrine of unconscionability. Click here for our blog on the case and here for the scotusblog entry.

6.       Wall Street Makes Billions of Dollars

Seriously. Prosperity on Wall Street should be encouraged. What should be discouraged are the risky, unfair, and myopic practices of the past decade. Investing in sound businesses and long-term plans will help lift the American economy, stabilize the investment world, and restore confidence to investors who will invest more comfortably in sustainable portfolios. Click here for a blog about responsible investing.

7.       An Active SEC Enforcement Unit to Stomp Out Fraud Before It Hurts Investors

The SEC must bring more cases. While the new whistleblower office (if it ever gets funding) will be critical, a hungry first rate staff must be priority one.

     8.       The Risks of Indoor Tanning Get the Attention They Deserve

Enough is enough. Teens, mostly girls, should not continue to tan and essentially fry themselves with reckless abandon. They dramatically increase their risk of cancer. Tanning, like cigarettes and alcohol, is a personal choice, but at present the risks are largely ignored or downplayed by the industry. We’ve said it before and we’ll say it again, indoor tanning causes cancer (click here and here). In moderation, maybe, but we ask simply that the risks are published so that consumers can make an informed decision. Click here for our series on indoor tanning.

9.       Foreclosure Proceedings Gain an Air of Legitimacy and Homeowners are Treated Fairly

The gap between risk and lending simply grew too large. In many cases it just didn’t exist.   What incentive did a bank have to ensure the reliability of its loan if it was simply going to sell the loan the next day as part of a massive securitization? Click here. The still-ongoing mortgage crisis is a microcosm of the irresponsibility, greed, disorganization, and shoddy oversight pervasive in the banking world. Hopefully 2011 will put back the link between risk and lending. (because if we don’t, I fear more bad paper and a huge risk.)

    10.   A Political Climate that Puts the True Needs of Main Street First

With a decidedly angry republican opposition taking power in the House in January, the potential for political stagnation is as high as ever. Sure, deliberation and substantive arguments are what the founders intended for Congress. We simply hope that the interests of Main Street don’t take a backseat to partisan rivalries and that we can continue to move towards respectable reform.

11.   Last, But Certainly Not Least, a Washington Capitals Stanley Cup Victory 

Hey, we’ve got to have some local pride. Life’s good inside the beltway, unless of course you’re a sports fan. McNabb and the ‘skins just didn’t pan out, John Wall’s not going to win a title alone, and it’s not looking like anyone in the NL East has a shot besides Philly. So, put on your Ovechkin jersey because DC’s going to have to be a hockey town. We’re in first place as of today – let’s keep it that way. Maybe you’ll catch me downtown at the Verizon center for a game. I’ll be the guy making sure the refs, the owners, and the league play by the rules – after all, this is The Corporate Observer.

Assisted by Zachary Kady

• Print
• Comments
• Trackbacks
• Share Link

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

• 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

According to a June 7^th Businsessweek article, one hedge fund group has spent $1.4 million lobbying congress in the first quarter of 2010.  That’s a lot of lobbying.

They are not alone.  Managed Funds Association, an industry trade association, whose members include Bank of America Merill Lynch, Bank of New York, Barclays Capital, Citi, Goldman Sachs & Co., JP Morgan Chase & Co., and many more have increased its spending by over half a million dollars from the same quarter last year. Why?

Surely not to protect consumers; nor to put more strident controls and oversight on a financial services industry that brought us within an eyelash of a worldwide depression. 

 No.  Their singular goal is to stop reform that Main Street so desperately needs. The newly passed Senate and House financial reform bills, presently in reconciliation proceedings, signal the beginning of a material shift towards proper regulation of the casino, Wall Street has become.  These reforms include a new Consumer Financial protection Agency, increased rewards for whistleblowers, and the end of predatory lending practices like zero-down sub-prime mortgages.  Wall Street wants none of that reform.

As we’ve reported before, Wall Street doesn’t get it – or perhaps more correctly – they do get it. They realize memories are short and lobbying dollars can make a difference.  A big difference; so they are playing the game.   And playing it well.

The only way Main Street can complete must be through their role as the collective customers and shareholders of Citibank, Bank of America and Goldman Sachs.  They must vote with their feet and demand that management of these firms limit spending on lobbying and finally recognize the need for regulation and stability in the financial markets.  Proxy battles, sharp attention to management spending and accountability can be a very  

And the government must step up enforcement under current regulations and rules.  They can no longer take a laissez faire approach to the Captain’s of Wall Street.  It’s time for Eric Holder, Mary Shapiro and Sheila Baird (check FDIC) to roll up their sleeves and go after every single violation.  Zero tolerance.  That’s what Wall Street might understand.  That’s what will begin to foster change, stability and growth.

Assisted by Zachary Kady

• Print
• Comments
• Trackbacks
• Share Link

Greed continues unabated and unapologetically on Wall Street.

Wall Street bonuses are skyrocketing. The rate increased to a staggering 31% at Goldman Sachs, JPMorgan Chase announced $9.3 billion in bonuses.   Bank of America has joined in the fun too; dishing out $4.4 billion – yes billion – to investment banking employees, with top employees receiving $5 million a pop. In total for 2009, New York City bank employees were paid a whopping 20.3 billion.

How bout a box of chocolates or simply a thank you for Main Street?  They made it possible with a no strings attached bailout just last year. Think what America could do with $20.3 billion. Schools, a new bridge or two, heck let’s pay off some of that mounting debt to the Chinese.

As troubling as the sheer size of these bonuses, is their source.  The fancy name for it is proprietary trading. Most of us would call it gambling.  Yes trading is gambling.  But generally when you are Goldman Sachs or JPMorganChase, you don’t lose.  Others do though – the fellas on the other side of the trade – that’s why they call it a trade.

All this “proprietary trading” can be an unstable and a risky way to run a bank.  Eventually the music stops and someone loses.  Those losses are multiplied by derivatives upon derivatives and those tidy trading profits can soon vanish turning into colossal losses.  But fear not, Main Street can be scared into at least one or two more bailouts.  

Perhaps more troubling though is when the major Banks are busy at the poker table, with all their chips deployed, little attention is paid to innovative financing for existing and new companies trying to compete in the world economy.  Face it, proprietary trading does not produce value outside of Wall Street; the only beneficiaries are the banking employees themselves. This circular system keeps billions of dollars in the hands of Wall Street bankers, and none of it in the hands of the American people.

The services offered on Wall Street are vital to all Americans, and the work that employees do should be fully compensated. But right now, Wall Street rewards its employees for engaging in selfish transactions that benefit none but their own.

So what do we propose?

Let’s restructure Wall Street bonuses to incentivize banking employees to produce profit on transactions that create jobs, build infrastructure, and reward innovation:  not financial innovation but real world innovation.  How about putting some of that creativity and energy into financing clean coal plants or schools designed to retrain our work force.  Those endeavors deserve a bonus.

Assisted by Jessica Begen

• Print
• Comments
• Trackbacks
• Share Link

“Bank of America” implies a bank that reflects the American spirit; a spirit based on cooperation and unity. America is a nation of citizens who lean on each other, lend a hand, and particularly in hard times, work together toward a common good.

Sadly, the real Bank of America fails to reflect these core values. Without remorse, it casts out loyal customers and strands Americans who suffer its exorbitant fees. How dare such an organization call itself the Bank of America.

Bank of America has repeatedly lied to its shareholders, embraced the worst practices of subprime lending, and supported Ponzi schemes that victimize innocent investors. And now this…

Bank of America fired Customer Advocate Jackie Ramos. Why was Ramos fired? She was doing her best to help others in a time of need. She was being an American.

Specifically, Ramos was fired for approving modification programs or lowering interest rates for customers who could not afford their charges. In short, for helping customers.

Bank of America must shed its name. Until it changes its mission and works for—rather than against—the American ideal, it does not deserve to tout itself as America’s bank.

Please visit our blog to select what name you think best suits Bank of America. Here are some suggestions that readers have submitted:

• Bank of Shame
• Bank of the Few
• Bank of Greed

Assisted by Jessica Begen.

• Print
• Comments
• Trackbacks
• Share Link

Bank of America’s chief executive, Kenneth D. Lewis, announced his sudden resignation last week. Lewis has been under a cloud of suspicion following allegations that Bank of America misinformed shareholders of details related to its merger with Merrill Lynch.

Lewis’ personal career at Bank of America is a classic American rags-to-riches tale. He began working as a low-level loan officer, eventually moving up to become the bank’s President as the bank grew to be one of the world’s largest.

As President, Lewis’ agenda: growth and profits. From Fleet to Countrywide to the venerable Merrill Lynch, he surely was successful on expanding upon the nationwide platform created when upstart Nation’s Bank purchased Bank of America. But what about compliance? What about nurturing a culture of measured risk and thorough analysis? Looking back on Lewis’ reign, after a $40 billion government bail out, and the debacle surrounding Bank of America’s failure to disclose (or perhaps worse) billions of bonuses to Merrill executives, he leaves despite expansion with a mixed record to be sure.

Main Street hopes that Ken Lewis enjoys retirement and the $100 million he is expected to receive in stock and compensation – money that cannot be touched by payment czar Kenneth Feinberg. 

Perhaps he can use that money and business acumen to start a foundation –that trains bankers in compliance and business ethics … might be a nice start.

Assisted by Jess Begen and Zach Kady

• Print
• Comments
• Trackbacks
• Share Link

Securitization of life settlements is yet another dangerous development for Main Street. Is this really what we need right now?

It just doesn't stop. Despite repeated lessons and tales from the brink (the collapse and near collapse of Lehman Brothers and Bear Stearns to name just a few), Wall Street is at it again. What now, you ask? Wall Street is securitizing life insurance policies. What the heck is that?

A recent New York Times article details "life settlements"--which have Wall Street executives' mouths watering. The premise is this--elderly people sell their life insurance policies for fractions of what they are worth to banks. Wall Street then repackages these policies into bonds, grabs fees and sells them, netting dealers even more fees--and creating another speculative industry. This time betting on when grandma will die. And what's next derivatives on these bonds.

Securitization of life settlements is yet another dangerous development for Main Street. Industry sources explain that insurance companies are able to maintain premium rates based on the profit they make from policy lapses. If life settlements are securitized and traded, Wall Street will pay the premiums and the insurance companies will be out the easy profits from the millions of policies a year that lapse. Ultimately they will be forced to raise premiums to continue earning profits. Who, then, will suffer the true consequences? Main Street, once again.

Is this really what we need right now? In a time when the economy is inching towards a recovery from a crisis caused by precisely what is presented here: the opportunity for a new overaggressive and under-regulated speculative market? And who is going to be able to regulate these new instruments of greed so that Main Street does not become the victim?

We have a better idea for Wall Street.

Go back to basics. Finance renewable energy products, figure out an innovative way to finance new infrastructure--so sorely needed. Maybe even come up with a new micro-loan product that works for hard working Americans who want to start small businesses.

Let's let the securitization of life insurance policies die a peaceful death.

Assisted by David Martin and Jessica Begen.

• 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