law

American Society / Education / Ethics / law / Management / Political — 0 Comments
25
Nov 11

Cheating

An ongoing cheating scandal in the affluent suburbs of New York City now stains our headlines.   Students in several outstanding academic high schools paid test takers to take their college entrance exams.  Six students were arrested in September, and earlier this week an additional 19 students either surrendered to the police or were arrested.  Students paid these test takers $500 to $3500.  See More Arrests in SAT Cheating Investigation.

It is too easy to blame this behavior on the decline in morality evinced by Wall Street scandals and the behavior of our political class.  A deeper point needs to be addressed.  We have become a society of numbers and meaningless symbols.   How much do you make per year?  What school did you attend?  How much is your house worth?

Hiring by the Numbers

For much of my career, a significant part of my responsibility was the hiring and supervision of attorneys in a large legal department.   At best, hiring is a crap shoot.  Despite a glossy resume, one can never tell why someone is in the job market at any given time, or how that person will actually meet the standards and fit the profile of the job for which they are interviewing.  Usually complicating the decision making process is  the legal department’s need to hire  experienced attorneys with a minimum ten years experience. In this environment a new hire was expected to perform at an extremely competent level with little or no training or supervision, the proverbial “hit the ground running” paradigm.

One of my peers hired strictly by the numbers.  A candidate had to be a graduate of one of the top 41 law schools, and had to have more than a 700 LSAT.  My colleague preferred a candidate to have a background as a prosecutor with US Attorneys’ Office or the Judge Advocate General.

After a while, I broke the code on my colleague’s idiosyncratic requirements.  I discovered that he used the Gourman Report of Graduate Programs.  Dr. Gourman does not reveal his exact methodology or statistics.  Generally, the Gourman Report methodology asks university graduate departments to rate each other, and assess which they think are best in their field.   By definition then, this questionable methodology yields a self-reinforcing cycle of the top programs continuing to nominate each other in a reciprocal and mutual admiration society.  See Caveat Emptor: The Gourman Report for a critique of the report’s methodology.   The same large prestigious universities continue to populate these lists.  Page 1 of the Gourman Report list of law schools had exactly 41 names; my colleague’s law school alma mater happened to be number 41.  Thus, I deciphered my colleague’s “scientific” method of hiring and the inherent folly of using numbers to find good people.  (Soon thereafter, for amusement I confronted him and pointed out that to be really scientific he would have to find the Gourman report related to the year that the candidate graduated law school to really ascertain whether he was hiring a true “top 41” candidate.)

In another example of this folly, we later merged with a company which would only hire candidates who had combined SATs over 1500, LSATs over 700, a top 15 law school degree (thank goodness for Gourman) and experience in a prestigious law firm or prosecutor’s office.

I am still amazed that I was ever hired, promoted or retained after we completed several major mergers.  I fit none of these criteria nor did many of the best attorneys in our legal department.

The Hard Work of Hiring; the Harder Work of Assessing Job Performance

The SATs are primarily predictors of how well one will perform on tests like the SAT’s.  Since they were instituted as a method of evaluation, they have been repeatedly called into question as predictors of college success. Further, how well one performs in college and law school is not a total predictor of how well one performs in that first law job.  At each step, real life intrudes, essential character and temperament inserts itself into the process, and a lawyer has either learned to practice law competently or not.

No short cuts or quantitative formulas exist in making hiring decisions.  Generally, every candidate I interviewed had a good academic and work record.   Intelligence, analytical prowess and certainly test numbers were merely table stakes to get in the door.  Other more important factors determined whether or not an attorney would be successful in a corporate environment.  In evaluating candidates, I tried to ferret out the following:

  • Can they work under pressure, or under attack?
  • Can they take on a project with minimal supervision?
  • Are they willing to put in long hours, including nights and weekends, to accomplish the job?
  • Are they patient and persistent; can they see a project to its conclusion?
  • Are they creative; have they ever displayed ingenuity? Can they work with and lead a team of lawyers and business people?
  • Do they communicate clearly in speech and writing?
  • Can they accept criticism?
  • Do they respect subordinates as well as superiors?
  • Do they display emotional intelligence; can they intuit the atmosphere as well as the facts of a situation?
  • Is integrity clearly a part of their makeup?  Has it ever been tested?

The Education Testing Service and testing results cannot measure any of the above-listed factors.  And in my 32-year corporate career I firmly believe that one cannot be successful on a long-term basis without meeting the above criteria.

Despite conducting rigorous interviews and extensive background checks, an honest hiring supervisor will admit that it is difficult to judge these non-numerical factors.  Further, if a hiring supervisor is correct 50% of the time, he or she has beaten the odds.  I was lucky and was able to hire many attorneys who rose through the corporate ranks and became senior corporate leaders.  Some went to the “best” law schools, some did not. I was also required to ask some of my hires to leave.  While difficult each time, that too is the nature of hiring and corporate management.

Looking for the Easy Way Out

This returns us full circle to the Long Island SAT/ACT cheating scandal.  As a society we look for the easy way out in decision making.   Perhaps those Long Island students were thinking: if I can just achieve a high enough test score, I can attend a prestigious university which will guarantee me access to a great job or graduate program, which in turn will assure my success in life.  Success is more complicated than that.

We have deteriorated to a society of numbers and brands.  The ideal political candidate goes to the right schools, has the right tickets punched on his or her resume, gets elected to the right office and now is the right candidate for higher office.  We fail to delve into the more important factors of character, grace under pressure, emotional intelligence and integrity.  The epiphany, long since necessary for all of us, is that we entrusted our money and our government to Wall Street and Washington charlatans who went to all the right schools, held  all the right jobs and had all the right  connections.  And look what happened.

Given all of this, it is no surprise we now have a group of students on Long Island willing to sell their souls for $3500 or less.

 

GD Star Rating
loading...
  • Share/Bookmark
American Society / law / Political — 0 Comments
24
Aug 11

Storytelling, Narratives, and Truth versus Fiction

Early on I heard lectures on trial presentation from Irving Younger and Judge Herbert Stern.  Their approaches and strategies were similar to winning trials.   Present a clear and concise story.  Maintain constant credibility with jury and judge.   Highlight the “bad facts” presented by one’s opponent.  Defuse these bad facts.  In essence then, trial presentation is a form of advanced storytelling, and a coherent narrative is crucial.   Whoever assembles and presents the best and most credible story at trial wins.

I found these techniques equally valuable in speeches to employees or senior management.  Importantly, the speaker must connect with the audience, be credible, coherent and passionate about his subject.

This brings us to the current plight of President Obama, who addresses the country on almost a daily basis.  The public, however, appears to be tuning him out.  His speeches are articulate and fact filled, but he is not connecting with his audience, the citizenry.

One Man’s Theory

Drew Westen, Professor of Psychology at Emory University, analyzes President Obama’s leadership and speechmaking.  In a recent lead article in the Sunday NY Times, he asks, “What Happened to Obama?”

…watching…his inaugural address, I had a feeling of unease. It wasn’t just that the man who could be so eloquent had seemingly chosen not to be on this auspicious occasion… It was that there was a story the American people were waiting to hear — and needed to hear — but he didn’t tell it.  What Happened to Obama?

Stories matter.  They orient and inform us, transmit knowledge and impart values.   The public was primed for a compelling story from President Obama on how we got into the financial crisis and, even more importantly, how he intended to get us out.  Millions had lost their jobs and many more their savings.  Westen continues with the story he wishes Obama had told:

“I know you’re scared and angry. Many of you have lost your jobs, your homes, your hope. This was a disaster, but it was not a natural disaster. It was made by Wall Street gamblers who speculated with your lives and futures. It was made by conservative extremists who told us that if we just eliminated regulations and rewarded greed and recklessness, it would all work out. But it didn’t work out. And it didn’t work out 80 years ago, when the same people sold our grandparents the same bill of goods, with the same results. But we learned something from our grandparents about how to fix it, and we will draw on their wisdom. We will restore business confidence the old-fashioned way: by putting money back in the pockets of working Americans by putting them back to work, and by restoring integrity to our financial markets and demanding it of those who want to run them. I can’t promise that we won’t make mistakes along the way. But I can promise you that they will be honest mistakes, and that your government has your back again.”  What Happened to Obama?

The failure to identify the malefactors who created the crisis and the inability to create policies that correct those errors plagues the Obama Administration:

A story isn’t a policy. But that simple narrative — and the policies that would naturally have flowed from it — would have inoculated against much of what was to come in the intervening two and a half years of failed government, idled factories and idled hands.  What Happened to Obama?

To paraphrase Professor Westen, a psychologist and not a politician, we needed to know that the new President Obama could “fix the mess.”  Here was an untested politician with little leadership experience and no significant accomplishments, also a person of tremendous political charisma. So far, he has chosen to politicize, compromise and negotiate, but not to lead.  Damningly, Professor Westen concludes:

….Barack Obama stared into the eyes of history and chose to avert his gaze. Instead of indicting the people whose recklessness wrecked the economy, he put them in charge of it. He never explained that decision to the public — a failure in storytelling as extraordinary as the failure in judgment behind it. … He would have offered them a counternarrative of how to fix the problem other than the politics of appeasement, one that emphasized creating economic demand and consumer confidence by putting consumers back to work. He would have had to stare down those who had wrecked the economy, and he would have had to tolerate their hatred if not welcome it.  What Happened to Obama?

Leadership vs. Politics

Whether leading the United States or a corporation, sincere and forceful communication is vital.   President Obama’s speeches feel like the lectures of a learned academic: an academic who is eloquent, but has taught the course too many times and has lost his passion and interest.  He is reading his script, but we cannot tell if he believes it.

Americans thirst for a leader who can bridge the gap between government and their personal needs.   Unfortunately, President Obama is more interested in being a smart politician than a good leader.  In the movie The American President, an emotional aide beautifully describes the public’s need for strong leadership: “They want leadership. They’re so thirsty for it they’ll crawl through the desert toward a mirage, and when they discover there’s no water, they’ll drink the sand.”  The fictional President replies, “…we’ve had presidents who were beloved, who couldn’t find a coherent sentence with two hands and a flashlight. People don’t drink the sand because they’re thirsty. They drink the sand because they don’t know the difference.”

A recent Gallup poll measuring Obama’s approval rating has dropped to a new low.  The American public is catching on to the idea that something has gone terribly wrong. We are starting to understand the difference between the water and the sand.  The basic structure of society is at risk. Will we continue to abide platitudes and mediocrity?  I think we are better than that!   We should be creating and defining and sharing our narrative, and then forcing it on a President and government who do not seem to know what is wrong.

 

 

 

 

 

GD Star Rating
loading...
  • Share/Bookmark
American Society / International Finance / law / The Federal Reserve — 0 Comments
28
Nov 10

How Many Branches of Government?

“The Federal Reserve is an example not just of run-of-the-mill hubris but of the far more profound Pathology of Power.

The rule of law has been supplanted in the U.S. by self-serving propaganda campaigns serving State and financial Elites: this is the Pathology of Power.”  The Federal Reserve and the Pathology of Power

Ben Bernanke is out of control.  “Out of control” is an oft-used phrase, but in this case the term describes an important actor with a limited statutory role who is usurping the power of both the legislative and executive branch.

Back in school we learned that we had three branches of government, the legislative, the executive and the judicial.   Each had checks and balances to ensure that power was not abused.  We now have a fourth branch, the imperial Federal Reserve.  Without our permission, this rogue branch is dictating economic policy for the United States.  Mission creep is taking the Fed from its dual mandates of employment and stable prices to its own self-proclaimed mandate: economic stimulation (in direct contravention of the views of the newly elected Congress and the American public) and dollar devaluation.   In QE2 it also has taken on the role of guardian of stock market prices. See Who Elected Ben Bernanke?

By law the Federal Reserve has two economic mandated goals:  full employment and stable prices.  The US Treasury, part of the executive branch, has a separate and distinct role, and is responsible for maintaining the value of the dollar and debt issuance.  Venturing into the world of quantitative easing the Federal Reserve is usurping the role of the Treasury through debt issuance and the Congressional role of fiscal policy through back door economic stimulus.

Crossing a New Line

Michael Shedlock has long maintained that the Federal Reserve was the least competent part of government.  Dr. Bernanke never saw the economic crisis; however, he maintained that past folly would not stop the Fed from grabbing even more power and bungling any economic recovery.

The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.  Fed Uncertainty Principle

In a recent speech at the European Central Bank, Chairman Bernanke launched into a direct attack on Chinese exchange rate policy:

Federal Reserve Chairman Ben Bernanke put aside traditional central bank niceties and launched a direct attack on the slow pace of China’s steps to strengthen its currency.

In a speech prepared for a conference at the European Central Bank on Friday morning, Bernanke said that China’s decision to undervalue the yuan has essentially thrown a monkey wrench into the global economic recovery. Bernanke Turns Up Heat on China Currency Policy

Dr. Bernanke then tied the Chinese policy to weak employment in the US:

“On its current economic trajectory, the United States runs the risk of seeing millions of workers unemployed or underemployed for many years,” Bernanke said.

The Fed could not rule out the possibility that unemployment “might rise further in the near term,” he said. This could bring an end to the tepid U.S. recovery, he said.

He pointed his finger at China’s slow adjustment of its exchange rate. Bernanke Turns Up Heat on China Currency Policy

Other Areas for Dr. Bernanke’s Deft Policymaking

If Dr. Bernanke is willing to lay the blame of high US unemployment on the Chinese perhaps he should also recommend changes to the US’s legislative regime that makes hiring difficult:

  • Why not dismantle collective bargaining rights?
  • What about those pesky environmental laws?
  • Why do we need all these inefficient workplace mandates such as equal employment opportunity, family and medical leave, veterans’ rights, etc.?
  • Why do we need a minimum wage?
  • What about the newly imposed Obamacare costs?
  • Why not change tax policy which favors overseas profits?

We have a timid, economically naive President and a divided Congress.  Into the breach steps Dr. Bernanke, filled with academic sagacity, theory and dogma.  Remember this is a man who said the subprime crisis was well contained, and who could not detect a housing bubble.

When Congress inquires into outlandish Federal Reserve policies, Chairman Bernanke brandishes as a mighty shield the need for independence. Even an audit of their books is viewed as a mortal threat.  Well Dr. Bernanke, perhaps it would be better to stick with your narrowly defined and legitimate role and jettison the imperial “fourth branch” of government nonsense.

Note to Dr. Bernanke: If you want to be overly political and wield unauthorized power, expect your independence to be severely clipped.  You cannot have it both ways.

GD Star Rating
loading...
  • Share/Bookmark
Economics / International Finance / law / Political / The Federal Reserve — 0 Comments
6
Nov 10

Who Elected Ben Bernanke?

Everyone was focused this week on the mid-term election results.  Instead, we need to focus on another event just as crucial, but less understood by the American public.  Our unelected Federal Reserve Chairman, Ben Bernanke, launched QE2, the outright government purchase of US treasury securities.  The highlights:

-          The Fed is buying $600 billion of Treasuries (in the 5-10 year part of the curve) through mid-2011 and another $250-300 billion via coupon reinvestments, which they were going to do anyway.

-          The key “number” for the markets is that $600 billion figure, which is about $75 billion per month. See Rosenberg Joins Chorus of those Accusing Bernanke of Asset (Read Stock) Price Targeting

In Ben Bernanke’s self-justifying op-ed in the Washington Post, he explained his main goal:

This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion. What the Fed did and Why: Sustaining the Recovery and Supporting Price Stability

Dr. Bernanke remained confident he could reverse this policy at the appropriate time.

Nowhere in the Federal Reserve’s mandate is the elevation of stock prices.  Why not target wages and house prices?  Further, the Fed will be continuing to purchase tainted and suspect mortgage backed securities.  These securities are the heart of the current Foreclosuregate controversy.  The Fed is paying full value for a security that may be worth pennies on the dollar.

Unintended Consequences of the Policy

Focusing on stock prices is a little like ordering dessert before focusing on the nutritional value of the main course.  Before now, profits, dividends, discounted cash flow and future growth prospects determined what happened to a company and its stock price.  Now will we have Federal Reserve whim determine stock prices?  QE2 sets the markets up for another enormous bear market when the Fed stops QE2, or when stock-dislocating events overtake the Fed.

The unintended consequences are both legion and wealth destroying:  a weak dollar with surging import prices; soaring inflation in critical commodities such as oil and grain; compressed profit margins caused by higher input costs; further punishment of savers and retirees; trade wars with other nations whose economies wilt under a weakened dollar; and market-wide unstable speculation.

Karl Denninger in Bernanke’s Folly: The End Game explains that the Fed policy is essentially a gigantic hidden tax on businesses and consumers.   The end result will be a downward spiraling economy with businesses forced to lay off more workers to offset higher input costs – anything but the virtuous cycle Dr. Bernanke so fervently seeks.

The Constitution and the Election

Economic blogs are abuzz with QE2 analysis.  One particular area has been overlooked:  the break down in our political system and Constitutional protections.  Dr. Bernanke has usurped the taxing and budgeting authority of Congress.  QE1 and 2 put the taxpayer squarely on the hook for all Federal Reserve losses.  The Treasury is required to make good on Fed losses. So without writing a bill or holding a hearing, Dr. Bernanke launched his quantitative easing campaign and effectively dismantled the legislative process.  John Hussman warns of the danger of this reckless usurping of Congress’ role:

Now, since standing behind insolvent debt in order to make it whole is strictly an act of fiscal policy, one would think that under the Constitution, it would have been subject to Congressional debate and democratic process. But the Bernanke Fed evidently views democracy as a clumsy extravagance, and so, the Fed accumulated $1.5 trillion in the debt obligations of these insolvent agencies, which effectively forces the public to make those obligations whole, without any actual need for public input on the matter.” See Lessons from a Lost Decade

The Farce of the Mid-Term Elections

Tea Party activists are publicly miserable about out of control federal spending, bank bailouts and economic stimulus.  Before the new Congress convenes, Dr. Bernanke has unilaterally established economic policy for both Congress and the Administration.  Where is the outrage?  The Tea Party is so worried about liberty and free market capitalism, why have they not protested the dubious economic policies of an unelected new economic Czar, Dr. Bernanke? After all Dr. Bernanke and the Federal Reserve Governors have the same methods and goals as the former Soviet State Planning Committee.

More practically, why has Congress not held hearings and asked Dr. Bernanke some pointed questions:

  • Why did QE1 not work?
  • When you stopped QE1 in March of this year the markets fell and the economy retreated.  Is there a reasonable possibility that you can ever stop the QE policy without a market crash?
  • Have we just signed on to perpetual QE? If not, explain your exit strategy.
  • What will be the effect on our trading partners and will your policy lead to a currency war?
  • Please outline other risks in your policy and weigh these against the benefits.
  • How much of QE2 will go into foreign market speculation?
  • QE did not work in Japan for the last 20 years. Why will it work here?

Academic Theory

Dr. Bernanke is an academic theoretician. He taught at Princeton and now heads the Federal Reserve.  He has never run a business in the real world.  Quantitative easing is a theory and like all theories needs to be tested and proven.  We do not approve introduction of a new drug without stringent tests and proofs.  Dr. Bernanke is not playing with one drug; he is playing with our entire economy and political system.  QE1 in the United States and QE in Japan for twenty years  proved to be failures.  Why are we repeating failed strategy?

If he is going to target stock prices, then I still have some underwater stock options from a former employer.  Perhaps the good doctor could salvage my company’s stock too.  When one usurps normal market mechanisms, why not?

GD Star Rating
loading...
  • Share/Bookmark
American Society / Banking / law / Political — 0 Comments
27
Oct 10

Bank Bailout v. Rule of Law

Two years after the financial crisis began we are again at a difficult crossroads that defies credulity.    However, the backdrop is a little different today than in 2008.   We are in the midst of a mortgage foreclosure crisis.  Fraud and other legal wrongs have been alleged at every juncture in the mortgage securitization process, from failing to properly record and convey notes into the REMIC trusts, false affidavits, forged documents and wrongly seized property in foreclosure. See This Magic Moment

Karl Denninger in Market Ticker finds a disturbing nugget in today’s testimony before the Congressional Oversight Panel on TARP Foreclosure Mitigation Programs.  Summing up testimony on the mortgage foreclosure problems, panel member Damon Silvers, Esq., asked:

“We can either have a rational solution to this foreclosure crisis, or we can preserve the capital structure of the banks. Which should we do?”  Statement of Damon A. Silvers from COP Hearing Today: The Money Quote

Lost in Translation

We need to first translate Mr. Silvers’ statement, and then be horrified by it.  I believe he was saying that we can choose, or not choose, to follow the Rule of Law.  In the former “option” we would let the myriad of lawsuits continue, permitting plaintiffs to seek all remedies:  monetary damages for investors in mortgage backed securities, fraud recovery, invalidating the banks’ lien holder interests in properties.  Further, we would permit the states attorneys’ general to pursue their investigations and bring appropriate civil and criminal charges against the loan originators, banks, foreclosure law firms and servicers.  Finally, we would permit the SEC, IRS and Justice to pursue civil and criminal charges against these entities.

Alternatively, Mr. Silvers articulates another “option,” as if the Rule of Law is an inconvenience to be negotiated with, and perhaps set aside, in the service of these selfsame banks’ “capital structure.”  He indeed opens a door in this “option” to provide a global solution to favor the banks, hold them harmless, and provide some type of amnesty for their misdeeds.

What is He Thinking?

The mere articulation of these “choices” boggles the ethical and fiscally responsible citizen’s mind.  We are a society that has criminalized behavior from marijuana use to health care record keeping to all manner of infraction that some citizenry passionately declare as victimless and inappropriate legislation.   Apparently, when it comes to individuals we are happy to prosecute, convict and sentence.  When the fraud is rampant, systemic, costly beyond measure, and perpetrated by financial institutions and allied businesses we dare to even suggest that the perpetrators not be held accountable?

Look at a recent rogues’ gallery in our financial history.  Our law abiding society prosecuted their crimes, and they and their misdeeds were punished.

  • Dennis Kozlowski – Tyco
  • Bernard Madoff – Massive Ponzi scheme
  • Kenneth Lay and Jeffrey Skilling – Enron
  • Bernard Ebbers and Scott Sullivan – WorldCom
  • Joseph Nacchio – Qwest
  • Richard Scrushy – HealthSouth

Mr. Silvers shows us the impressive rationalizing power of the human mind.  In Silvers-think, why should we have prosecuted any of the above individuals?  It only hurt their shareholders and customers.  Many of their shareholders were pension funds or college endowments.  Why should we prosecute?  Given his ethically flexible or negligible morality why would we prosecute anyone?

Playing Fast and Loose with the Rule of Law

As we have pointed out, the Rule of Law with all its inefficiencies is the bedrock of society.  See The Rule of Law: Inefficient is Good. Mr. Silvers even raising the choice of saving the banks or adhering to the Rule of Law is profoundly disturbing, and this from a Harvard-trained lawyer.

At best, the social contract that benefits us all is a fragile one.  We count on voluntary compliance with many laws because if crime became rampant there are not enough police to arrest every law breaker.   Once the contract is broken we invite ever greater escalation of lawlessness.  Today it may be re-taking a foreclosed home or refusal to pay a mortgage, tomorrow it could be widespread refusal to pay taxes or vigilante violence.

Mr. Silvers, I think you know the answer to your question.  If not, perhaps enroll in a remedial jurisprudence class at your alma mater. No one is above the law.

GD Star Rating
loading...
  • Share/Bookmark
American Society / Banking / Corporate Behavior / Justice System / law / Political — 0 Comments
25
Oct 10

The Rule of Law: Inefficient is Good

A critical advantage of our legal system is its inherent inefficiency.  Domestic and international investors happily invest in the United States securities markets because of our financial transparency and adherence to laws.  At the core of it all is a maxim:  no one is immune to the law.  Importantly, within this definition is the corollary that individuals have procedural safeguards and substantive legal rights.

The Rule of Law, however, has a price: expense, time consumption and inefficiency.  In civil law, a complaint must be drafted, filed and served.  A defendant is afforded time to research, draft, file and serve an answer to a complaint.   Both parties appear before a judge who sets a discovery schedule so that each party may learn pertinent facts.  Discovery may consist of written interrogatories, requests for production of documents and depositions.  A judge then sets a briefing schedule for motions to limit introduction of evidence and for dispositive motions to summarily dismiss or resolve the matter in court.  Barring resolution of the case on motion a trial is set.  A trial is held with or without a jury, a verdict reached and a time set aside for post trial motions.  After a final verdict the litigants may appeal to a higher court.  Time from filing a complaint to trial can take as much as two years.  An appeal can take several more years.

The yield from this system is immeasurable: fairness to all parties and an honest result.

Dynamic Tension: Foreclosures and the Rule of Law

Banks and their supporters have woven a public relations campaign to limit the damage from the mortgage foreclosure crisis.  The current spin is that dead beat homeowners are seizing on minor paperwork problems and legal technicalities depriving banks of their right to speedily foreclose on homes.  In her Naked Capitalism blog, Yves Smith exposes the Wall Street Journal’s attempt to disparage the consumer attorneys representing the homeowners:

The lead article in the Journal tonight, “Niche Lawyers Spawned Housing Fracas” telegraphs its bias in its headline: the foreclosure crisis is merely the creation of two bit lawyers who by implication don’t know what they are doing, and are pumping trivial issues up for their own enrichment, with the housing market as collateral damage.

Funny that anyone can think this spin is remotely true. The fact that solo practitioner lawyers could have such an impact on the system is not proof that they are miscreants, as the Journal implies. It is that the foundation of mortgage securitzations is rotten as a result of widespread abuses, first on the origination end, later in the foreclosure process. These small firm players are using the legal equivalent of toothpicks; the fact that their efforts have destablized the foundation of the residential mortgage backed securities market is tangible proof that they were imperiled to begin with. See The Wall Street Journal Runs Inaccurate Piece on Antiforeclosure Lawyers

Ms. Smith goes on to point out that mortgage servicers (GMAC in the article) imposed hidden charges on homeowners, refused to process payments that would have made the homeowner current and other abuses.  The homeowner’s attorney merely did what good attorneys should do, i.e., look carefully at the facts and the law and find abusive practices.  Further, the attorney deposed a GMAC official (a “robo” signer) who admitted that they signed an inaccurate affidavit.  Somehow the Wall Street Journal felt that depositions were part of the bag of legal tricks from the foreclosure attorneys.  The Journal minimized the fact that a false affidavit is a criminal offense. Ms. Smith concludes that banks cannot have it both ways:  they cannot proclaim the sanctity of law and contract and then abuse legal processes to speed through foreclosures. Servicers do not get to be judge, jury and executioner.

The Mills of the Gods Grind Slowly, but they Grind Exceedingly Fine

I have seen our lumbering justice system first hand.  It is slow, expensive, time consuming, detailed, and frustrating.  Sometimes judges can be dismissive, rude and unfair.  On the other hand, corporations are all about efficiency.  How quickly can we get something done?  How little can we spend?  I once sat in an industry forum and the chief attorney for a major computer corporation suggested that employers should lobby Congress to federalize all of employment law, which would divest states of any right to regulate the workplace.  While an intriguing idea, it would have undone the US Constitution and severely undermined our federal system.

The Wall Street Journal should be embracing these safeguards, inefficient though they may be.  Newspaper reporters were once arrested for treason and sedition for publishing anti-government articles. (See the Zenger case and the Alien and Sedition Acts).  Would the Journal want to return to a society where politicians and bureaucrats were judge, jury and executioner?  I don’t think so.

Years ago, when one of my labor cases ended particularly badly, I ranted about the unfair result and poor decision.  My boss pulled me aside in an avuncular manner and reminded me that this is the price we pay to avoid labor anarchy.   Due process and adherence to the rule of law is the price we willingly pay to avoid total anarchy.

Before the Obama Administration or Congress makes another run at overriding state real estate law, they should think long and hard about the long term and fundamental damage their actions could cause. Inefficiency in support of the Rule of Law is good.

GD Star Rating
loading...
  • Share/Bookmark
American Society / Banking / Corporate Behavior / Justice System / law / Political — 0 Comments
13
Oct 10

Postscript to Foreclosuregate

The last blog outlined features of the impending mortgage foreclosure crisis.  Some additional thoughts:

  • No easy fixes: banks fervently hope for a cure all, omnibus federal law that results in a quick resumption of foreclosures.  Why this won’t happen:

-          Federalism – We are a federal republic with distinct areas of sovereign rights divided between the federal and state governments.  Most people do not give this principle a lot of thought, but it is critical.   Real estate is the province of state and local government.  Recording of deeds and liens on real property, filing fees, notarization of documents, certifications and state transfer fees are all state processes.   Sweeping away several hundred years of real property law through federal override legislation will create enormous constitutional issues.

-          State Investigations – The forty state joint attorney general investigations have already asserted state primacy in resolving this matter.  Note – As of this afternoon, all fifty state attorney generals have joined the investigation. Attorneys General Launch Mortgage Probe

-          The Plaintiffs’ Bar – Plaintiffs’ trial lawyers form their own constituency on this issue.   The pro-plaintiff American Association for Justice (formerly the American Trial Lawyers Association) is a formidable lobbying force and a major contributor to the Democratic Party.   Numerous class actions have been launched against the banks and title companies and we should expect more.   These suits will not disappear without a fight.

-          Other Constitutional Issues –

o   Retroactive legislation raises its own constitutional issues, especially trying to divest a party of a long- held, established right.

o   The impact on due process rights – Substantive due process, a little used Supreme Court doctrine, prevents the federal government in the economic realm from trampling on individual property rights.

  • Politics and Greed

-          TARP – Banks have been saved through TARP, the AIG bailout and numerous federal guarantee programs.

-          Bonuses – Wall Street just announced $144b of employee bonuses this year, a record number.

-          HR 3808 – To remedy problematic notarizations (only part of the problem), bank lobbyists tried to force passage of the seemingly innocuous HR 3808, “The Interstate Recognition of Notarizations Act of 2010.”  This measure passed both chambers by unanimous voice votes.  A firestorm of protest arose, and the President took the extraordinary step of a “pocket veto” and, to leave no doubt, a formal veto.  Imagine the reaction to a more comprehensive piece of legislation to save the banks. See HR3808 Now ACTUALLY Vetoed

-          Federalism – I have lobbied on broad pieces of industry-favorable legislation.  Congress has real sensitivity to preempting states rights, making sweeping corrective legislation very unlikely.

  • Other aggrieved parties will not be silent:

-          Mortgage Investors – If the securitization problem was fraudulent, investors in mortgage backed securities have rights under the securities laws to seek redress.   Since these mortgages were sliced, diced and sold internationally this becomes a global issue.

-          Pension Funds – Many of the mortgage investors were pension funds.  There is a fiduciary question whether these were appropriate investments.  Is there a corollary pension fund obligation to seek redress?

-          Fannie Mae and Freddie Mac – These two government agencies may have been defrauded into purchasing mortgages from the Wall Street banks.  These agencies have started subpoenaing files from the banks in order to “put back” the mortgages to the banks.  Since the taxpayer is the ultimate guarantor of these two entities, there will be political pressure to force the losses on the banks.

Faulty Transmission Mechanisms

This has become quite a mess and there is no easy way out. One of my savvy financial friends argues that the banks are the transmission mechanism for the economy and must be saved at all costs. The mortgage crisis demonstrates we have a very faulty transmission mechanism.

I would argue that the recently enacted Dodd-Frank financial reform bill has a mechanism for dealing with these failed behemoths.  It will not be fast or pretty, but our system of laws requires it.  Shortstopping the legal processes and again bailing out the banks will have immeasurably worse political consequences.

Unfortunately, this is not a broken transmission mechanism that you can take for a quick fix to your local AAMCO dealer – “The World’s Leading Transmission Expert.”

GD Star Rating
loading...
  • Share/Bookmark
Banking / Corporate Behavior / Justice System / law / Uncategorized — 0 Comments
12
Oct 10

This Magic Moment

This magic moment, so different and so new,
Was like any other, until I met you.
And then it happened, it took me by surprise…
I knew that you felt it too, I could see by the look in your eyes…
This Magic Moment – Lou Reed

Wise investing is difficult.  Constant spin and deception in the mainstream media only make it harder.   A sudden event that changes everything is, in parlance, a magic moment.    Previously, I discussed how one bank, HSBC, took a $10b write off in 2007.   This was our initial warning, the “magic moment,” that predicted a major financial crisis.  See Watershed Event in the Financial Crisis.   In that case, the smoke-and-mirror financial atmosphere at the time prevented most of us from seeing what was happening.

To make things more frustrating, an old saying on Wall Street goes: “no one rings a bell at the top.”  That means, no one is ever going to alert us to the market’s magic moments.  We have to be smart enough to peer through the smoke, push aside the mirrors, and see clearly what may be right in front of us.  And we can never count on the same set of circumstances to happen twice.  The lack of that bell leads us to an epiphany:  things are never going to be the same again.

We are again approaching a magic moment – “Foreclosuregate”.    JP Morgan, Ally and Bank of America are imposing moratoriums on foreclosures and 40 state attorneys general are on the verge of announcing a joint investigation into the practices of the mortgage servicing industry.  40 States Expected to Investigate Foreclosures. Two major title companies, Old Republic and Stewart, have ordered their agents to stop writing title policies on foreclosed homes.   Stewart Title Clamps Down on Foreclosure Sales. The Wall Street Journal and the New York Times have tried to downplay the issue; they so far dismiss the problem as one of technical defects and paperwork errors.   Why does this remind us of Ben Bernanke”s 2007 assertions that the subprime crisis was “well contained?” Fed’s Bernanke: Subprime Mortgage Problems Contained

Elements of “Foreclosuregate”

First, a disclaimer: although I am an attorney, I worked on only two real estate closings in 35 years of law practice.   I did learn, however,   that real estate transactions are document intensive, detailed and precise.  Disclosures must be crystal clear. All legal formalities must be observed, such as notarizations, fees, stamps, seals, etc.  Documents must be promptly and correctly recorded to protect the buyer and the mortgage holder.    Any shortcuts could harm one’s client, law license and malpractice  premium.

Apparently, in the frenzy of mortgage backed securities, banks and lenders took many such shortcuts.  It is beyond the scope of this blog to detail every bit of malfeasance and poor legal practice during the Roaring 2000’s in the housing market.  But here are some of the pitiful truths fueling the developing crisis:

  • Poor underwriting standards – Individuals who clearly did not qualify received loans.  Stories are legion of low wage workers taking out loans of several hundred thousand dollars.  Interest only and teaser rate loans were used to generate fees for the mortgage broker.  The broker was hoping that the borrower would return in a couple of years, refinance the home based on an inflating house price and generate more fees.
  • Poor Documentation – Mortgages consist of the mortgage itself and an accompanying promissory note.   These documents are usually promptly filed at the county level to perfect a lien on the property.   It appears that this step may have been handled incorrectly or bypassed (See MERS).
  • MERS (Mortgage Electronic Registration System) – MERS is a bank creation to enable financial firms to securitize (create mortgage backed bonds – MBOs) quickly and to avoid county filing procedures and attendant filing fees.  Let’s take a quick look at how and why the banks did this:

In the mid-1990s mortgage bankers decided they did not want to pay recording fees for assigning mortgages anymore. This decision was driven by securitization—a process of pooling many mortgages into a trust and selling income from the trust to investors on Wall Street. Securitization, also sometimes called structured finance, usually required several successive mortgage assignments to different companies. To avoid paying county recording fees, mortgage bankers formed a plan to create one shell company that would pretend to own all the mortgages in the country—that way, the mortgage bankers would never have to record assignments since the same company would always “own” all the mortgages.

They incorporated the shell company in Delaware and called it Mortgage Electronic Registration Systems, Inc.

Even though not a single state legislature or appellate court had authorized this change in the real property recording, investors interested in subprime and exotic mortgage backed securities were still willing to buy mortgages recorded through this new proxy system.  The MERS Edifice Quavers

  • Poor Foreclosure Processes – To foreclose on a property, one needs proof of ownership of the note, supporting affidavits and notarizations.   An affidavit requires personal knowledge of the bank official seeking to foreclose, who then swears that he has reviewed all documents and that they are true.  MERS has thousands of assistant secretaries, who are not employees of the firm, but employees of the bank, seeking to foreclose on their behalf.  Some courts have ruled that MERS has no legal standing to foreclose.  Moreover, many of these assistant secretaries sign thousands of these foreclosure documents each month, and have no personal knowledge of the documents or file.  These individuals have been called “robo  signers” and are arguably acting in violation of court rules.  In addition, it appears that original documents do not exist and have been recreated, raising the issue of forged documents.
  • Poor Securitization Processes -   Real Estate Mortgage Investment Conduits (REMIC) are investment vehicles designed to hold commercial and residential mortgages in trust and issue mortgage backed securities representing an undivided interest in the mortgages. Under IRS regulations and NY Trust law, the mortgages must be contributed on the startup day.   A problem arises if MERS claims to have title to the mortgage:

… all rights to a mortgage loan must be deposited into the trust for it to achieve tax exempt status under federal REMIC law—which does not contemplate the use of a proxy mortgagee. Yet, despite claiming sole ownership of mortgages sold to investors, in documents regularly recorded with county officials these same institutions maintain that MERS is the sole owner of the mortgage. The chain of financial institutions linking originators to securitization depositors collectively want to have their lien and sell it too. The MERS Edifice Quavers

These are just some of the myriad problems arising from the mortgage mess.

Implications

This is not a problem that is going to be resolved quickly.  Banks are vulnerable on a number of fronts:

-          At best, the banks will have a delayed right of foreclosure thereby reducing the value of the mortgage note.

-          Banks could be charged with fraud or required to take back the mortgages from MBS purchasers who were misled as to the value of mortgages and the shoddy securitization practices now imperiling their investment.

-          The banks could owe tax penalties for failing to have the mortgages and notes conveyed to the REMICs on startup date.

-          Plaintiffs’ lawyers have already brought a number of class actions against the banks seeking damages and a stay of foreclosures.

-          State attorneys general will be seeking recording fees, foreclosure stays and other penalties for these practices.

-          Title companies will be forced to pay out policies and seek redress from the banks. .

-          Courts may impose sanctions against the banks and their attorneys and may delay or dismiss foreclosure proceedings.

Mistakenly, the press has focused only on the issue of residential foreclosures.  There are two more issues to be concerned about:  securitized commercial mortgages and MERS procedures were used in that part of the market as well. Second, failure to follow procedures may affect homeowners not in foreclosure.  When an owner has paid off his mortgage and the mortgage and note has been resold and assigned numerous times, how does he know he has a legally binding accord and satisfaction of his mortgage?   The chain of title may have been compromised on a national level.  In fact recently a website encouraging homeowners to demand proof that one’s servicer is holding one’s mortgage note has gone online , Where’s the Note?

The market continues to rally much as it did after the HSBC subprime confession and write down in 2007.   Another financial aphorism goes:  economic facts don’t matter, until they matter.  See It Doesn’t Matter Until It Matters.  Disturbing facts are just entering the public consciousness.  In this volatile, thinly traded market dominated by computer traders, I would rather exit two months early and sell my bank stocks, rather than be five minutes late and thousands of dollars poorer.

Disclaimer:  The Prophet does not have a position in any banks, title insurance companies or other financial institutions and this is not a recommendation to buy or sell any security. Consult your own financial advisor.

GD Star Rating
loading...
  • Share/Bookmark
American Society / Banking / Business / Corporate Behavior / Economics / Executive Compensatio / Financial / investing / law / Management / Media / Political — 0 Comments
13
Sep 10

One Year of Blogging

After one year of blogging on economic, corporate, social and political issues, I thought I would try to make sense out of trends:

  • The rule of law has taken a major hit in the United States.  Some examples of this phenomenon are the unlimited guarantees to Fannie Mae and Freddie Mac, guarantees to banks and favored companies, and Federal Reserve purchases of mortgage backed securities. See Shredding the Social Fabric
  • We have exposed monetarist and Keynesian economic solutions as intellectually bankrupt.   Amazingly, the decision makers who believe in these theories have not been fired.   More amazingly, with all the evidence that we are still mired in a deep recession, we keep trying the same tired strategies.
  • Obama’s economic acumen and performance has been disappointing.  His monomaniacal focus on a health care bill that the country cannot afford hampers new hiring.  Worse, it enriches the insurers and big pharmaceutical companies.  And worst, he has wasted important political capital.   Further, with his tepid financial reform bill he missed a real opportunity to address citizens’ concerns about the excessive power of Wall Street.
  • Congress should be tried for malpractice.   Members of Congress did not read the financial reform or the health care bill.  Nancy Pelosi had the temerity to implore Congress to pass these bills so she and the public could find out what is inside.
  • The Executive Branch and Congress appear to be for sale to the highest corporate bidder.  Industry lobbyists essentially control Congress and the executive branch.
  • Where has leadership gone?  Congress used to produce real leaders: Everett Dirksen, Hubert Humphrey, Robert Taft, William Fulbright, Sam Nunn, Henry Jackson and others.  We may not have agreed with their views, but they were serious, well-respected, independent minded individuals.   We never doubted that these leaders put the country’s interests first.  The Executive Branch also produced great leaders.  Compare past Secretaries of the Treasury– Andrew Mellon, Douglas Dillon and Lloyd Bentsen– to the flawed and unworthy Timothy Geithner.
  • Political clout, not reason and merit, determine current policy.   GM, GE, the banks, municipalities and others were saved from extinction because of campaign contributions and union ties.  Picking winners and losers based on political considerations generates cynicism and undermines the guarantee of equal protection under our laws.
  • Zero interest rate policies encapsulate everything that is wrong with our current system.  We have impoverished the thrifty and the prudent and rewarded the profligate and the incompetent.   On the backs of savers, we have bailed out the banks.  This is particularly heinous because the victims of this policy are the retired and elderly who have watched their savings dwindle and their retirement lifestyles vanish.  An economic policy which encourages savers to speculate in the stock market or buy junk bonds is unconscionable.
  • Promises of better corporate behavior after passage of Sarbanes-Oxley have been false.  Congressional pressure on the Financial Accounting Standards Board to suspend mark to market accounting has created the “extend and pretend” economy.  We no longer properly recognize losses; banks know this and refuse to lend knowing they can obfuscate the true state of their balance sheets.  More damaging, the true financial condition of the banks leads investors to purchase equities essentially under false pretenses.  Many of the bank stocks have declined significantly from their peaks.
  • Culturally, extend and pretend has permeated beyond our financial culture.  BP and the government hid many facts about the Gulf oil spill.     Even now we probably do not know the full extent of the damage and independent researchers have been denied access to information.
  • Corporate Boards of Directors are still not paying attention. In the case of Mark Hurd the violation of corporate financial policies was rewarded with a generous severance package.  (Trust in a corporation is predicated on the integrity of their financial policies.)   His unemployment did not last very long, as Oracle recently named him co-president.  Did character matter to Oracle or its Board?  Does anyone have any shame anymore? Was the HP Board afraid to fire Hurd for cause?
  • We are becoming a divided country.  The government protects the rich and the poor.  The middle class is being economically squeezed by inflation in basic goods, unemployment or the threat of it, rising health care and education costs and diminished retirement savings.   All these things plant the seeds of political upheaval.
  • Finally, blogging serves an important purpose in presenting an alternative viewpoint to mainstream media.  Blogging is the antidote to endless economic cheerleading by paid media and government officials. Blogging has become the new millennium’s populist forum. For example, bloggers steadfastly maintained that we have not emerged from the recession/depression and there were never any “green shoots” of recovery.  The mainstream media now feigns surprise at reports of economic weakness and prognostications of a double dip recession.

Watching the passing parade of economic and political folly is both depressing and exhilarating.  Depressing because we believed there would be a change in business-as-usual Washington.  Exhilarating because the public is awakening to the fact that they have been misled.  And that augers a change in the status quo and perhaps a better tomorrow.

GD Star Rating
loading...
  • Share/Bookmark
American Society / Corporate Behavior / law / Media / Political — 0 Comments
9
Aug 10

Following the Hurd

On Friday, the stock market shook with the news of the announced resignation of Mark Hurd, CEO of Hewlett Packard. The man credited with reinvigorating Hewlett Packard resigned as chief executive of the technology giant after an investigation of his relationship with a female contractor.  That investigation revealed that he violated the company’s business standards.

On Friday, HP expanded that Mr. Hurd, 53 years old, didn’t violate the company’s policy regarding sexual harassment.  He  had however, submitted inaccurate expense reports intended to conceal what the company said was a “close personal relationship” with a female consultant.  See H-P Chief Quits in Scandal

In a memo to all HP employees, acting CEO Cathie Lesjak provided more detail:

“Mark had failed to disclose a close personal relationship he had with the contractor that constituted a conflict of interest, failed to maintain accurate expense reports, and misused company assets.” See H-P’s Hurd Reaches Settlement with Contractor

The Wall Street Journal later learned that Mr. Hurd and the contractor reached a settlement on the sex harassment claim.

Some Thoughts on Corporate Culture

A mystique surrounds CEOs of large, publicly traded corporations.  The CEO of such a corporation is as close to a feudal lord as one can get in 21st century America.  A CEO is surrounded by a myth making machine.   A VP of Public Affairs burnishes the image of the CEO as powerful and successful, minimizes setbacks and trumpets the smallest of victories.  The CEO can access airplanes and limousines, play golf at the best clubs, dine and stay where he or she chooses with little or no oversight.   Backed by corporate political action committee contribution funds, he or she has instant access to Senators, Congressmen and even the White House.   A fawning and largely uncritical cadre of financial media pundits and Wall Street analysts clamor for opportunities to meet and interview a CEO.

Since corporations are a hierarchy and a CEO sits atop the organizational pyramid, subordinates are generally fawning.  Fearing unemployment, few want to tell the CEO (the emperor?) he or she is wearing no clothes, or should be staying clothed at critical moments.

Absolute Power Corrupts

“Power tends to corrupt, and absolute power corrupts absolutely. Great men are almost always bad men.”  Lord Acton

With few to hold up a critical mirror, CEOs eventually start to believe their own press clippings and may even succumb to believing in their own infallibility.   Forgetting that it is often the office and rank that is being saluted, not necessarily the occupant, the tendency is for the CEO to believe they can do no wrong.

Blind spots eventually develop.  As with CEO’s, we have seen it with our more notorious Congressmen who believe that the tax laws do not apply to them, it is alright to have sex with subordinates, or obtain below rate mortgages.  Eventually comes the belief that the “rules do not apply to me.”  To their dismay, they find out often publicly and harshly that rules do apply.

Some Final Thoughts

I am always amazed when stories like Mr. Hurd’s reach headline status:

-          Why do CEOs risk so much for so little?  Mr. Hurd made $24.2 million dollars in 2009 and was slated to make $100m over the next three years.   How much could the dinners and trips have cost Mr. Hurd if he had paid from his own pocket?

-          Companies have strict policies on sex harassment and expense reporting.  Numerous high level executives have been publicly disgraced and lost their positions for such violations.  Mr. Hurd is a very smart man. Why did he not learn from others’ experience?

-          I have lectured on the EEOC Sex Harassment Guidelines.  The best defense in the workplace is to avoid dating any subordinate or contractor.  Once any personal relationship develops and then breaks off, it is difficult to prove that no harassment occurred in this unequal power relationship.

-          Why did HP’s internal audit function not find the expense report abuses and report them? Why did it take the complaint of the contractor for the Board to order an investigation?

-          Why did Mr. Hurd receive over $12m in severance pay when the Board found expense reporting improprieties?  Isn’t that behavior a “for cause” termination? (Note –if Mr. Hurd had a contractual right to severance regardless of this behavior, that itself is problematic.)

Not all CEOs behave like Mr. Hurd.  Certainly, and in my experience, many are ethical and hardworking.  But unfortunately, Mr. Hurd’s tale occurs far too frequently in corporate America.

Outside corporate governance groups have mindlessly over focused on pay practices, staggered voting and other relatively minor issues.   Focus should be on close corporate Board of Director supervision of CEO and senior executive behavior.   Aside from all the logical and obvious reasons for eliminating this behavior is the other external one as well:  the market generally reacts swiftly to this chicanery.  On Friday, HP stock was down a significant 9.7 %.  Following the Hurd can be quite costly.

GD Star Rating
loading...
  • Share/Bookmark