Posts Tagged: banks

Banking / Financial / Justice System — 0 Comments
15
Apr 11

Untimely News That’s Unfit to Print

In the The Very Late News, we examined the media’s late and lazy reporting on important stories related to the 2008 financial crisis.  Today the New York Times does it again with Financial Crisis, No Prosecutions of Top Figures. The lead reporter, Gretchen Morgenson, has a weekly column in the Times.  She is no neophyte on issues of financial fraud.  Why has it taken the New York Times three years from the onset of the crisis to report the lack of prosecution of Wall Street criminal conduct?

A Lame Apology

Morgenson asks the hot question:  why has there been no prosecution of high profile executives?  But instead of hitting hard, she opines on the “complexities of pursuing legal cases in times of panic.”   In a meeting between the Fed’s Tim Geithner and Andrew Cuomo, Geithner never suggested “any lack of diligence or a slowdown” in ongoing investigations.  He did not have to.  He was the perfect third base coach.  All he needed to do was run through the signs: “bunt, take, hit – Do Not Prosecute.” Mr. Cuomo did not miss the “don’t prosecute” sign.

The remainder of the Times article explains why federal prosecutors chose not to bring an action.  I recommend it in its entirety for a treatise on federal and state prosecutorial delay, obfuscation and denial.  The article begins and ends with Andrew Cuomo, but where were the other government prosecutors?

Coincidence

Also today, the Times reports on the 650 page Senate Permanent Subcommittee report: “Wall Street and the Financial Crisis: Anatomy of a Financial Collapse.”  From Senator Carl Levin, head of the subcommittee:

“The report pulls back the curtain on shoddy, risky, deceptive practices on the part of a lot of major financial institutions” …“The overwhelming evidence is that those institutions deceived their clients and deceived the public, and they were aided and abetted by deferential regulators and credit ratings agencies who had conflicts of interest.” See Naming Culprits in the Financial Crisis

Will we be prosecuting these offensive deceptive practices?

Banks and Bonds

Ironically, today’s Times also reports that Barry Bonds was convicted of one count of obstruction of justice.  The investigation of steroid use in baseball started in 2002.  After nine years of investigation, huge prosecutorial resources  and 25 government witnesses, the government could not prove that Mr. Bonds used steroids.

Too bad Mr. Bonds is a baseball player rather than a Wall Street bank.  Perhaps if his name were Ernie Banks instead of Barry Bonds, he could have confused the prosecutors, who might have overlooked the offense.  We don’t want to rattle or hurt the Banks.

Dual Standard of Justice

Bonds stole no money, yet the full force of Congress and federal prosecutors pursued him for years.  Banks that stole billions and nearly destroyed the economy were deemed too fragile to prosecute.  These “fragile” banks were back in business with near record bonuses in 2009 and 2010.  We have a dual standard of justice that weakens all  respect for law.

 

 

 

 

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27
Dec 10

Life Lessons From It’s a Wonderful Life

One of the pleasures of the season is the classic film “It’s a Wonderful Life.”  The story is a virtual cinematic Rorschach test.  Each viewer can find a personally resonant message: the love of a good woman, the evil of greed, the importance of community, faith or thrift.  Angel Clarence helps our hero George Bailey realize that every life is precious, we are all connected to each other and each of us makes a difference.  These are certainly valuable lessons.  However, some of the film’s equally important lessons in George’s story are sometimes overlooked.

Should We Ever Question Authority? Young George Bailey’s boss, the pharmacist Mr. Gower, learns of his son’s death and accidentally puts poison in a prescription.  Realizing this dangerous mistake, George disobeys Mr. Gower and does not deliver the prescription.   He returns to the pharmacy and receives physical abuse from the distraught and distracted Mr. Gower.  Ultimately George convinces his boss that the prescription is lethal, and Mr. Gower is forever in George’s debt.

Should We Work in a Family Business and Delay College? After high school, George must work in the family building and loan and save money before going to college.  George has the opportunity to learn the savings and loan (S & L) business directly from this father. The experience is probably an education and valuable apprenticeship that George could not replicate in college or an MBA program.

How do We Lead in a Crisis? Just as George is preparing to leave for college, his father dies unexpectedly.  The evil and greedy Mr. Potter convinces the S & L board to close the business.  The directors rebuff Potter, but inform George that the business will stay open only if he agrees to succeed his father.  George must weigh his college career and dreams of adventure against his father’s dream of providing decent housing for his community.  Further, George knows that leaving for college now would mean loss of employment for his uncle and others.  Displaying leadership and courage, George gives up college and assumes the leadership of the savings and loan.

What Skills Get Us Through a Business Crisis? On his wedding day and in the taxi to leave on his honeymoon, George witnesses a run on his S & L bank.    Potter calls in the bank’s loan, imperils the business and threatens to close it permanently if it cannot remain open until the close of that very day.

At the gated door of the savings and loan, George calmly speaks to his angry depositors.  George opens the doors and invites everyone inside.  First, he reasons with the crowd, explaining that each depositor is invested in the other’s home, and there is little actual cash on hand.  Second, he points out their depositor agreements require sixty days notice before a withdrawal.  Third, when the depositors still demand their money he does not panic.  Rather, with his new bride Mary by his side, he begins to negotiate with his depositors.   Fourth, the new Mrs. Bailey devises a creative solution.  To allay the concerns of the depositors she waves $2000 of wedding gift money.  Fifth, while George agrees to give the first depositor all his money, he does not permit the man to close his account:  “Your account’s still here. That’s a loan.”   Sixth, he finally turns the tide, and convinces the next few depositors to withdraw only a small fraction of their accounts,  that is, only what they need immediately.  Everyone makes it through the business day, even though the bank has but $2 left in the safe.  This one scene is a veritable training film of management ethics, courage, improvisation, knowledge of customer base, negotiating skill and emotional intelligence.

Should One Change Jobs for More Money? Recognizing that George represents a long-term threat, Potter makes him a spectacular job offer.  Potter offers George almost tenfold per year with the promise of travel to New York and Europe.  Overwhelmed by the offer, George is on the verge of accepting.  But he realizes that this is another of Potter’s evil plans to destroy the savings and loan and keep more community neighbors in substandard rental housing.   Ever his father’s son, the principled George turns down the offer and speaks truth to power, berating Potter for unethical business practices.

Clearly, George has compared his current and prospective work environments and considered intangibles such as respect, responsibility, ethics and the reputation of the employer.  For George, success and job satisfaction is not defined by money alone.

How Do Managers Make Difficult Personnel Decisions? Uncle Billy loses $8,000 on his way from the S & L to deposit the funds at Potter’s bank.  George has witnessed Uncle Billy’s drinking and forgetfulness.  Banking requires sobriety and attention to detail.  Should George have terminated Uncle Billy years before?  George suffers the consequences of this personnel decision, and sets up the arrival of Clarence the Angel in the climactic scenes of the movie.

Do Big Bad Banks Get Away with Bad Behavior? Potter winds up in possession of the lost $8000 and he never returns it to Uncle Billy, George or the savings and loan. In fact, he swears out an embezzlement complaint against George.  Potter is never punished for his misdeeds.

How Important Is Family and Community? Faced with ruin George panics and flees. But Mary recognizes the enormous social capital that she and George have built up in their small town.  She gets on the phone and gets help.   Her former boyfriend authorizes up to $25,000 to help George.  Both rich and poor citizens and even the bank examiner contribute to save George, Mary and the savings and loan.

The overarching quote and lesson in this film, in business and in life, explicitly and elegantly stated, is “Remember George: no man is a failure who has friends.”  The unrecognized good that we do during our lifetime returns to us in ways that we may never expect.

Happy Holidays to All!

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21
Mar 10

The Vocabulary of Deception

A staple of politics and advertising is deceptive messaging.  Wall Street turned deceptive vocabulary into an “art form.”  Why should we care?  In the world of politics we have seen that distorting vocabulary can lead to a Goebbels or a Hitler.  In the world of advertising it can lead to the mass use of a harmful product or service.  Wall Street deception can be harmful to the finances for your health, home and retirement.

The Failure of Financial Media

A legal education teaches that every word means something.  Precision in language from the start of law school through the last day practicing as an attorney is pounded into the law student’s brain.  As young associates, we are taught there is no such thing as “boilerplate language.”   Even on a pre-printed Blumberg legal form in 8-point type, every word means something.  Ultimately, a judge in a court of law determines meaning and heaven help the lawyer who misses or is unaware of meaning.

Unfortunately, our mass media is guilty of imprecision in financial reporting.   Worse, CNBC, Fox Business and the print media uncritically repeat Wall Street phraseology and vocabulary.  We should examine some oft repeated Wall Street terminology and consider the implications:

  • Window Dressing – A misrepresentation to leave a favorable impression.  CNBC reports that portfolio managers buy stocks that outperform weekly, monthly, or annually to demonstrate to their clients how well they performed.  If these managers are so prescient why didn’t they buy Apple, Google or the next big winner at the beginning of the reporting periods?
  • Creative Accounting – “A process whereby accountants use their knowledge of accounting rules to manipulate the figures reported in the accounts of a business.”  Examples are manipulated depreciation schedules, and artificial transactions such as sales leasebacks, timing of asset sales, etc.  Perhaps perfectly legal, but also perfectly deceptive.
  • Creative Financing - The subprime crisis exposed a host of these techniques.  Examples include lending 125 per cent of the value of a property, lending or gifting down payments to unqualified buyers, or packing subprime loans with improper supporting paperwork with knowledge that the loan cannot be repaid.
  • Whisper Numbers – Unofficial pre-earning forecasts, sometimes with the “guidance” of the company involved.  Bloomberg, CNBC and others report the whisper number with the intent of offering trading opportunities for insiders.  Experts believe this has an inordinate effect on stock prices.
  • Off Balance Sheet Liabilities – An asset, debt or financing activity not on the company’s balance sheet.  Enron was the poster-child for the pernicious effect of such vehicles.  Lately, this technique was used to boost the regulatory required capital of financial companies.

The goal of each practice is to camouflage the true economics  of the transaction.  Read or stated superficially, the language is at first harmless until the inevitable financial implosion.

Repo 105 and Lehman

Anton Valukas, the court-appointed examiner for the bankrupt Lehman estate, reported on the fraud and incompetence at Lehman before its collapse.   One particularly egregious practice was “Repo 105”:

A repo agreement is a short-term sale of securities (collateral) with a promise to buy it back later at a slightly higher price — in other words, a collateralized loan. With Repo 105, it seems that Lehman would sell the securities before the end of a quarter and promise to buy them back early the next quarter, and book the transaction as a sale, not a loan. The effect was to reduce the apparent amount of Lehman’s leverage at the end of the quarter — which is when the published balance sheet snapshot is taken.  See A Few Words on Lehman

While engaging in these transactions, the highly leveraged and insolvent Lehman was attacking its critics, the evil short sellers and proclaiming its solvency.

The Extend and Pretend Sham

Congress and the Administration have almost institutionalized and blessed financial chicanery by suspending mark to market accounting.  Our nineteen largest banks strong-armed their regulators and self-performed stress tests to “reassure” the public of their solvency.  What a surprise that they all passed.  Instead of striving for accuracy and precision we settled for “extend and pretend.”

Words Do Mean Something

Deceptive and soothing Wall Street and Washington phraseology is again leading millions of investors down a path to financial ruin.  Will you be surprised?

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10
Mar 10

Are We a Socialist Country?

Europeans and Russians are socialists.  Americans are staunch capitalists.  Maybe all it took was a financial crisis to reveal the slide toward socialism in America.  During the Cold War, faced with a military threat from the Soviet Union, Americans would rather have died than become socialists:  better dead than red.  Unwittingly, we now invite socialism into our lives.  Ironically Wall Street firms and large industrial corporations, the purported bastions of capitalism, have paved the way to socialism.  A left-leaning Administration has been only too happy to oblige.

The Slippery Slope

The road to hell is paved with good intentions.  I do not think any of the pillars of our economy intended that the country become socialistic.   Each entity was merely maximizing its own position, seeking to enhance shareholder value.   When financial crisis hit, our formerly capitalistic businesses could not rush to Washington fast enough to seek support, bailouts and guarantees from the government.   The government was only too happy to oblige with the passage of TARP and then an alphabet soup of government support and guarantee programs.  In one short crisis period from summer 2008 to spring 2009, the government ignored 200 years of American economic and constitutional history to save a group of greedy and profligate bankers and industrial corporations.   The end result: we privatized profit and socialized losses.

A Factual Progression

Here are the events that have taken us on the path to socialism:

  • The Federal Reserve’s active role in the forced sale of Bear Stearns to JP Morgan
  • The Government seizure of Fannie Mae and Freddie Mac
  • TARP:  Government purchase of troubled assets from private financial institutions
  • Goldman Sachs and Morgan Stanley become banks by expedited process  to obtain government guarantees
  • Government seizure of AIG and complete payback to private institutions for credit derivative losses
  • Federal Reserve intervention in broker mergers, with guarantees against losses (Washington Mutual with JP Morgan, Wachovia with Wells Fargo)
  • Federal Reserve intervention with $1.3 trillion in loans to companies outside the financial sector (GE).
  • Government removal of management at GM and Chrysler
  • Restrictions on executive pay for banks receiving bailout funds
  • Government restrictions on foreclosures unless there has been a Home Affordable Modification Program review.
  • Administration desperation to pass comprehensive health insurance program.   See Timeline:Global  Economy in Crisis

How Did We Get Here?

We invited the devil in the door.  Banks claimed that they could not withstand loan and derivative losses.  Unemployed Americans wanted extensions in unemployment benefits and stimulus programs.  Nobody wanted to see the stock market crash and their portfolios and retirement plans decimated.  Big business wanted the profit opportunity in universal health care coverage.  Insurance companies did not want to hurt their policy holders.  Auto workers wanted to maintain their rich union contracts.  The litany goes on.

Once we were a brave, independent and self-reliant nation.  Now when adversity strikes our first inclination is to blame others and call Washington for a bailout or a handout.  I do believe in the concept of welfare.  Welfare was meant for the truly dire circumstance, the impoverished citizen. Welfare was not meant for auto workers to maintain above market wages and job guarantees, banks to get paid in full for risky derivative bets, GE or GM, homeowners who falsified their income disclosures to remain in McMansions or every insurance policy to be paid in full.

Capitalism is about freedom, risk and failure.  Without failure there can be no progress.  The slide toward socialism is an escape from freedom and ultimately an end to progress.

My European immigrant grandfather lived through the Depression, World War Two, and into the 1980’s.  He once told me he was most proud that he never went on relief (welfare).  We should return to the ways of our forbearers, regain our mettle and become too proud to ask for a handout or bailout.   Our freedom and that of our children depend on it.

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27
Jan 10

We Can Handle the Truth

“You can’t handle the truth!” Col. Nathan R.Jessep in A Few Good Men

After his election President Obama had the opportunity to educate the public on the causes of the financial crisis and the necessary steps to help us emerge from it.  Over this past year, he has squandered this chance, and in so doing has created the political backlash that is occurring today.

Policy Making and the Truth

With great fanfare, we inaugurated President Obama against the backdrop of the greatest financial crisis since the Great Depression.  In any new Administration, policy making is never easy and advisors at times seem to operate in virtual echo chambers, hearing only themselves.  They presented Obama with a range of options: nationalize the banks; let them fail and let the bankruptcy courts sort it all out; continue the Bush/Paulson bailout policies.  From the beginning, Obama advisors took the middle of the road policy to continue the bailouts.  As voters and participants in a democracy, we can now see the missing piece in this scenario. President Obama owed the public an explanation of this policy choice.  My guess is that his advisers warned against candor.  I would further conjecture these advisers felt that candor would have made the crisis worse.  Elites always worry about scaring the masses. This was confirmed at today’s Congressional hearings on AIG.  AIG was viewed by both Timothy Geithner and Henry Paulson, as the “end of the financial world as we knew it.”  The Administration and we are now suffering the consequences of this subterfuge.

Back to the Future

President Obama could have made a few simple points that would have educated the public, built a consensus for his policy choice and left open future policy options if the bailout approach failed.

President Obama could have made these simple and direct points:

  • We are facing the greatest financial crisis since the Great Depression
  • We got into this problem by borrowing too much, and producing and saving too little
  • At the center of this crisis are the large money center banks and Wall Street investment firms
  • Using inappropriate levels of borrowing and creating non-transparent products, derivatives, which could not be accurately valued or traded, these banks and firms gambled with our money.
  • Banks, however, are the transmission mechanism for getting money into the economy through check clearing, making loans and other services.
  • We are going to provide enough support for the banks to continue their necessary and transparent functions.
  • There will be a consequence to any bank for needing this ad hoc and unusual government support.
  • Shareholders and creditors of the banks must share in some of the losses.
  • Bank employee bonuses will be severely limited or eliminated until the banks recover.
  • The government will take part ownership in the banks until they return to financial health.
  • I have asked my Attorney General to investigate whether these institutions committed any crimes.  I will ask him to hold indictments in abeyance until we are on our way to recovery.
  • Let me assure you that the government will punish wrongdoing.

We Build Prisons of our Own Making

We know this fictional address to the public did not take place.  The Obama Administration now owns the policies of failed bailouts.  The recovery is precarious and now the government asserts that the health of the stock market hinges on re-appointing Ben Bernanke as Federal Reserve Chairman.  The Massachusetts senatorial election was a wakeup call that the middle class is “mad as hell and isn’t going to take it anymore.” See The President Wakes Up and Smells the Election Results.

In tonight’s State of the Union Address, President Obama scratched the surface of candor. He stated that he hated helping the banks, but that failure to do so would have led to greater unemployment, business closure and lost homes.  President Obama, it is not too late for complete candor. It is not too late to commence investigations and prosecutions.

Col. Jessep was wrong: the American public can handle the truth!

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