Archive for the ‘Banking’ Category

Banks Bite the Hand that Rescued Them

Thursday, February 26th, 2015

moneybags_handoutInvestment bank Morgan Stanley has disclosed that it will pay only $2.6 billion to settle U.S. Justice Department allegations that it deceived investors in the sale of toxic securities in the run-up to the financial meltdown.

I say “only” because the amount is substantially lower than the figures paid by Bank of America ($16.7 billion), JPMorgan Chase ($13 billion) and Citigroup ($7 billion) in similar cases. Thanks to the efforts of groups such as U.S. PIRG, we know that these amounts are less onerous than they appear because the companies are often allowed to deduct the payouts from their corporate income tax obligations.

My colleagues and I at Good Jobs First have been assembling data that does more to put the payouts in perspective. As part of an expansion of our Subsidy Tracker database to the federal level, we obtained information on the massive bailout programs implemented by the Federal Reserve in 2008 to stabilize the teetering financial system by purchasing toxic assets on the books of financial institutions and by serving as a lender of last resort.

These programs, with esoteric names such as the Term Auction Facility, the Term Asset-Backed Securities Loan Facility and the Term Securities Lending Facility, are not as well known as the Treasury Department’s Troubled Asset Relief Program, but the amounts involved are eye-popping. A 2011 paper by James Fulkerson of the University of Missouri-Kansas City estimates that the Fed made bailout commitments worth a total of more than $29 trillion. Yes, that’s trillion with a t.

We’ve been going through the recipient lists the Fed (reluctantly) made public for 11 bailout programs to match the entities to their parent companies. We’re not quite done with that process, but it appears that the totals for a few large banks, including Bank of America, Citigroup and JPMorgan Chase as well as Morgan Stanley, will end up being in excess of $1 trillion each (excluding repayment amounts). Our final figures will be released March 17, both in what we are calling Subsidy Tracker 3.0 and in an accompanying report.

It’s already clear that the settlement amounts paid by the banks (especially in after-tax terms) have been easily absorbed as costs of doing business. The Fed bailout data shows that another reason the banks have been little fazed by their legal expenses is that they received government assistance worth a thousand times more during their time of grave vulnerability in 2008 and 2009 — vulnerability that was largely of their own making due to reckless securitization of subprime mortgages and consumer loans.

After Lehman Brothers collapsed in 2008, the Fed was apparently willing to spare no expense in rescuing the other big financial players. Its efforts ensured the survival of the big banks that are riding high today. Perhaps the top executives of these banks should keep this fact in mind before criticizing the modest regulations put in place to save them (and us) from their excesses.

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New in Corporate Rap Sheets: Entergy, the utility that has bet heavily on nukes and engages in creative billing.

Another Chance to Punish HSBC

Thursday, February 12th, 2015

swissleaksIt’s reassuring that the Justice Department is reportedly pushing a group of big banks, including Citigroup and JPMorgan Chase, to plead guilty to felony counts in connection with their brazen manipulation of the foreign currency market.

Yet Justice also needs to undo the damage done by its ill-advised 2012 decision to enter into a deferred prosecution agreement with HSBC, which was allowed to pay $1.9 billion in settlements  rather than having to plead guilty to charges that it helped drug traffickers and terrorist groups evade money-laundering restrictions. Those practices had been detailed in a 300-page report by the U.S. Senate’s Permanent Subcommittee on Investigations, whose chair at the time, Sen. Carl Levin, called HSBC’s compliance culture “pervasively polluted for a long time.” A subsequent Matt Tiabbi Rolling Stone article about HSBC’s misdeeds quoted former Senate investigator Jack Blum as saying: “They violated every goddamn law in the book.”

The key prosecutor in the 2012 case was Loretta Lynch, the U.S. Attorney for the Eastern District of New York and now President Obama’s choice to succeed Eric Holder as Attorney General. The deal is back in the news in connection with extraordinary revelations about the role of HSBC’s Swiss private banking unit in abetting widespread tax evasion by thousands of wealthy individuals from around the world.

The International Consortium of Investigative Journalists (ICIJ), working in concert with news organizations around the world, adds another major dimension to the misconduct at HSBC. What ICIJ calls its Swiss Leaks project is based on a vast amount of internal bank data that former HSBC technology employee Hervé Falciani provided to tax authorities in various countries in 2010. A French official later re-leaked the data to Le Monde, whose staffers realized they had more information that they could possibility research on their own and so enlisted ICIJ and others, including 60 Minutes in the U.S., to join in the fun.

All this amounts to one of the most remarkable examples ever of collaborative investigative journalism on a global scale. The ICIJ site has links to investigations published not only in Western Europe but also in countries ranging from Ecuador and Argentina to Egypt and India. The geographic diversity stems from the fact that the leaked data relates to more than 100,000 HSBC clients in some 200 countries.

ICIJ takes pains to point out that there may be legitimate reasons for these people to have accounts in Switzerland, but it is clear that a substantial number of the clients were using them to conceal income from tax collectors. They also included individuals involved in unsavory pursuits such as arms trafficking, blood diamonds and bribery.

Some of the governments that received the data from Falciani have already begun bringing cases against individuals, but the revelations are also causing crises for some governments themselves. This is especially so in Britain, where Prime Minister David Cameron is under fire for having chosen a former HSBC executive to serve as a minister.

Even more precarious is the position of HSBC itself, which stands accused of not just allowing rich people to open the secret accounts but also of actively assisting their tax dodging. The Guardian, for instance, is reporting that HSBC contacted clients to market techniques that would allow them to evade a system under which the bank was supposed to collect a sort of withholding tax on the secret accounts on behalf of European Union revenue authorities.

This brings things back to Loretta Lynch, who is not yet confirmed by the Senate but who is already facing pressure from the likes of Elizabeth Warren to come down harder on HSBC this time around. She should give in to those pressures.

Holder’s departure from the Justice Department creates an opportunity to end the shameful practice of letting unscrupulous large companies buy their way out of serious legal jeopardy with payments, which despite growing in size still do little to deter ongoing corporate crime.

Also see my updated Corporate Rap Sheet on HSBC.

The 2014 Corporate Rap Sheet

Wednesday, December 31st, 2014

gotojailThe bull market in corporate crime surged in 2014 as large corporations continued to pay hefty fines and settlements that seem to do little to deter misbehavior in the suites. Payouts in excess of $1 billion have become commonplace and some even reach into eleven figures, as seen in the $16.65 billion settlement Bank of America reached with the Justice Department to resolve federal and state claims relating to the practices of its Merrill Lynch and Countrywide units in the run-up to the financial meltdown.

This came in the same year in which BofA reached a $9.3 billion settlement with the Federal Housing Finance Agency concerning the sale of deficient mortgage-backed securities to Fannie Mae and Freddie Mac and in which the Consumer Financial Protection Bureau ordered the bank to pay $727 million to compensate consumers harmed by deceptive marketing of credit card add-on products.

The BofA cases helped boost the total penalties paid by U.S. and European banks during the year to nearly $65 billion, a 40 percent increase over the previous year, according to a tally by the Boston Consulting Group reported by the Wall Street Journal.

Among the other big banking cases were the following:

  • France’s BNP Paribas pleaded guilty to criminal charges and paid an $8.9 billion penalty to U.S. authorities in connection with charges that it violated financial sanctions against countries such as Sudan and Iran.
  • Citigroup paid $7 billion to settle federal charges relating to the packaging and sale of toxic mortgage-backed securities.
  • U.S. and European regulators fined five banks — JP Morgan Chase, Citigroup, HSBC, Royal Bank of Scotland and UBS — a total of more than $4 billion after accusing them of conspiring to manipulate the foreign currency market.
  • Credit Suisse pleaded guilty to one criminal count of conspiring to aid tax evasion by U.S. customers and paid a penalty of $2.6 billion.
  • JPMorgan Chase paid $1.7 billion to victims of the Ponzi scheme perpetuated by Bernard Madoff to settle civil and criminal charges that it failed to alert authorities about large numbers of suspicious transactions made by Madoff while it was his banker.

Banks were not the only large corporations that found themselves in legal trouble during the year. The auto industry faced a never-ending storm of controversy over its safety practices. Toyota was hit with a $1.2 billion criminal penalty by U.S. authorities for concealing defects from customers and regulators. The National Highway Traffic Safety Administration fined General Motors $35 million (the maximum allowable) for failing to promptly report an ignition switch defect that has been linked to numerous deaths. Hyundai and its subsidiary Kia paid $300 million to settle allegations that they misstated the greenhouse gas emissions of their vehicles.

Toxic dumping. Anadarko Petroleum paid $5.1 billion to resolve federal charges that had been brought in connection with the clean-up of thousands of toxic waste sites around the country resulting from decades of questionable practices by Kerr-McGee, now a subsidiary of Anadarko.

Pipeline safety. The California Public Utilities Commission proposed that $1.4 billion in penalties and fined be imposed on Pacific Gas & Electric in connection with allegations that the company violated federal and state pipeline safety rules before a 2010 natural gas explosion that killed eight people.

Contractor fraud. Supreme Group BV had to pay $288 million in criminal fines and a $146 million civil settlement in connection with allegations that it grossly overcharged the federal government while supplying food and bottled water to U.S. personnel in Afghanistan.

Bribery. The French industrial group Alstom consented to pay $772 million to settle U.S. government charges that it bribed officials in Indonesia and other countries to win power contracts. Earlier in the year, Alcoa paid $384 million to resolve federal charges that it used a middleman to bribe members of Bahrain’s royal family and other officials to win lucrative contracts from the Bahraini government.

Price-fixing. Japan’s Bridgestone Corporation pleaded guilty to charges that it conspired to fix prices of anti-vibration rubber auto parts and had to pay a criminal fine of $425 million.

Defrauding consumers. AT&T Mobility had to pay $105 million to settle allegations by the Federal Trade Commission and the Federal Communications Commission that it unlawfully billed customers for services without their prior knowledge or consent.

The list goes on. Whether the economy is strong or weak, many corporative executives cannot resist the temptation to break the law in the pursuit of profit.

Note: For fuller dossiers on some of the companies listed here, see my Corporate Rap Sheets.

Bankers Gone Wild (Again)

Thursday, November 13th, 2014

get_out_of_jail_freeThere seems to be no end to the chutzpah of the big banks. They brazenly break the law and then pay growing but still quite affordable penalties to get out of their legal jeopardy.

The latest examples have just been reported by the New York Times. The front page of the newspaper has a blood-boiling story on how the likes of JPMorgan Chase, Bank of America and Citigroup intimidate people who have gone through personal bankruptcy into paying back debts that have been discharged in court. Although the debts are not legally collectable, the banks keep the obligations alive on credit reports, meaning that borrowers are faced with a choice between paying and having their credit rating ruined. Such a tactic makes loan sharks look good by comparison.

According to the Times, the practice is being investigated by the Justice Department. Before long we will read of a settlement, and the banks will move on to a new way of cheating their customers.

JPMorgan and Citi are also involved in a settlement just announced by U.S. and European regulators involving another sleazy banking practice: the manipulation of foreign currency markets. The U.S. Commodity Futures Trading Commission ordered five banks to pay more than $1.4 billion in penalties, including $310 million each from JPMorgan and Citi. Britain’s Financial Conduct Authority fined the five banks (which also include HSBC, Royal Bank of Scotland and UBS) another $1.7 billion, including around $350 million each for JPMorgan and Citi. Swiss regulators hit UBS with an additional $138 million penalty.

In foreign exchange markets, the daily setting of rates is known as the fix. Evidence released by regulators made it abundantly clear that traders at the five banks saw to it that the fix was fixed (i.e. manipulated) by colluding rather than competing.

These settlements involved civil charges. The Justice Department is reportedly investigating criminal misconduct by the banks. That’s good news, but there is a strong possibility that these probes will result in something disappointing.

The Justice Department has a long track record of allowing large corporations to evade serious criminal charges by offering miscreants the option to enter into deferred prosecution or non-prosecution agreements that amount to get-out-of-jail-free cards. And even when token criminal charges are enforced, as happened in the Credit Suisse tax case last May and the UBS interest-rate-manipulation case before that, the consequences are hardly devastating.

This failure of corporate prosecution is the subject of a new book called Too Big to Jail by Brandon Garrett, a professor of the University of Virginia School of Law. In an interview with the Corporate Crime Reporter, Garrett says: “There are a number of ways to punish a company. The concern is that none of those ways are being taken seriously enough.” Garrett proposes a system in which corporations plead guilty and are put on probation – hopefully a more rigorous form than the probation BP was on (because of its 2007 case involving an explosion at its Texas City refinery) at the time of the Deepwater Horizon disaster.

Garrett’s notion that having a judge (rather than just a monitor) involved in these cases is laudable, but it is not clear that would be enough to rein in corporate lawlessness.

Note: Garrett has posted a handy list of more than 300 deferred and non-prosecution agreements on his website.

 

Slapping Corporate Wrists a Little Harder

Thursday, May 1st, 2014

moneybagsontherunGovernments will go to ridiculous lengths to punish criminals. States that cling to the death penalty now resort to back-alley methods for obtaining the drugs used in lethal injections, leading to grotesque results such as the recent botched execution of Clayton Lockett in Oklahoma.

When it comes to corporate crime, a very different standard is applied. Prosecutors go out of their way to soften the impact on offenders. Criminal charges are often not filed, and when they are companies are offered deferred prosecution agreements that allow them to pay fines and make promises not to sin again.

Federal prosecutors are now feeling pressure to take a harder line, especially with global banks that may have flouted U.S. laws relating to tax evasion and international sanctions. The New York Times reports that the Justice Department is pushing to get guilty pleas from Credit Suisse, which has faced charges of helping wealthy Americans dodge taxes through secret bank accounts, and BNP Paribas, which is being investigated for violating U.S. economic sanctions against countries such as Sudan and Iran.

Getting a guilty plea from a major bank (rather than from one of its obscure subsidiaries, as happened in the LIBOR-manipulation case involving UBS) would be an important step in affirming that these institutions are not above the law. The problem is that the Justice Department does not seem to want to impose the kind of penalties that normally go along with a criminal conviction.

According to the Times, prosecutors are meeting with banking regulators “about how to criminally punish banks without putting them out of business and damaging the economy.”

We would never hear such a statement made about, say, an illegal gambling ring. There is no concern that going after such an operation would eliminate jobs and harm the economy.

As for banks, even when they are found to have engaged in egregious behavior, they are treated as legitimate institutions that must be preserved. It is true that not every employee may have been involved in criminal misconduct, but that is no reason why the continued survival of the bank in its existing form has to be regarded as an essential component of any resolution of criminal charges.

Corporate crime will not disappear until prosecutors are willing to consider truly punitive penalties for companies that engage in serious misbehavior. By this I mean consequences that go well beyond fines that a company can easily afford (and can often deduct from its taxes).

It’s often said that bringing criminal charges against corporations is pointless, since a company cannot be put in prison. Leaving aside the question of the feasibility of putting corporate executives behind bars, this view fails to acknowledge the other ways in which a firm’s liberty can be restricted.

We see such an example in the current scandal involving Los Angeles Clippers owner Donald Sterling, who is being fined $2.5 million and banned for life by the National Basketball Association for making racist statements but who also may be forced to sell the team. Why is the Justice Department not talking about forcing banks such as Credit Suisse and BNP Paribas to divest themselves of the operations in which the prohibited practices took place? I would prefer to see such criminal enterprises confiscated outright, but that may be too much to hope for.

Prosecutors have to weigh the economic impact of cases that might, for instance, lead to the revocation of a bank’s license to operate, which is considered the corporate equivalent of the death penalty. This is apparently behind the caution being exhibited in the Credit Suisse and BNP Paribas negotiations.

The lesson that prosecutors seem to have taken from the 2002 conviction of Arthur Andersen, the accounting firm that abetted Enron’s frauds, is that putting a company out of business is a big mistake. I don’t understand why.

The demise of Andersen and Enron and Drexel Lambert did not bring about economic calamity. In fact, the economy was probably better off without these corrupt institutions. We might also be better off if today’s miscreants met a similar fate, or at least had to undergo radical restructuring. And that would send a clear message to other corporations that they have to clean up their act.

 

Note: For an analysis of an industry that has a lot to clean up, including widespread wage theft, see the report just issued by the Restaurant Opportunities Center United and other groups on the National Restaurant Association and its members. I contributed the Rogues Gallery section.

J. Ponzi Morgan

Thursday, January 9th, 2014

morgan_madoffIt’s bad enough that for years JPMorgan Chase failed to alert federal authorities about the suspicious transactions being conducted by its customer Madoff Securities in what would later be revealed as a massive Ponzi scheme.

What’s equally damning in the criminal case the bank just resolved with federal prosecutors is that at times JPM seemed to want to get in on Madoff’s action.

The Statement of Facts to which JPM stipulated tells an interesting story about how, beginning in 2006, the bank began investing substantial sums (initially $343 million) of its own money in Madoff feeder funds in addition to issuing derivates tied to those funds and selling them to investors. In 2007 this business seemed so appealing that JPM’s London branch sought to write more than $1 billion in Madoff-linked derivatives.

This move had to be approved by the bank’s chief risk officer, who in 2007 nixed the plan after being told by a colleague that there is a “well-known cloud over the head of Madoff and that his returns are speculated to be part of a Ponzi scheme.” While he was unwilling to risk $1.3 billion under such circumstances, the officer did allow the Madoff exposure to remain up to $250 million.

The JPM London trading desk subsequently became more uneasy about Madoff Securities. It pulled out of the Madoff feeder funds, and in 2008 it filed a report with UK regulators expressing concerns that Madoff’s returns were probably “too good to be true.” JPM failed to do the same in the United States, and that turned out to be an expensive oversight.

JPM’s messy history with Madoff illustrates an interesting point about the relationship between individual white-collar crime and collective corporate crime. There’s long been a tendency to see corruption for self-enrichment (such as embezzlement) as being separate from misconduct by groups of people to enrich corporations (for example, price-fixing conspiracies).

In the case of Madoff and JPM, the two were closely connected. Madoff, who was working through his firm but was essentially running a one-man Ponzi operation, created conditions that were exploited (up to a point) by JPM to enhance the profits of the bank’s derivatives business. Even when that opportunity was deemed too risky by JPM, the bank failed to warn U.S. regulators and went on doing profitable banking business with Madoff.

In other words, the individual fraud being committed by Madoff was a source of profit for JPM, which in a sense became his co-conspirator.

The distinction between individual crime and corporate misbehavior is also a matter of perennial debate when it comes to punishment. Business apologists like to claim that corporations cannot really commit crimes and that only individuals should be prosecuted, knowing full well that such cases are much harder to prove.

What’s needed is a more aggressive approach toward the prosecution of both corporations and the higher-level executives responsible for their misconduct.

The JPM-Madoff case shows the limitations of the current system. No individuals were charged, and the bank was able to take advantage of the kind of deferred prosecution agreement that the Justice Department uses in almost every corporate case. Neither JPM nor the stock market seems to be fazed by the $2.6 billion payout. In fact, this is just the latest in a series of large settlements that JPM has made with prosecutors. Just two months ago, it agreed to pay $13 billion to resolve a variety of federal and state charges relating to the sale of toxic mortgage-backed securities.

Madoff himself was not able to buy his way out of a criminal conviction and prison time (150 years of it). There was a broad consensus that he deserved every penalty that could be imposed, to ensure that he could never defraud again.

We’re still waiting for a system of punishment that provides that kind of definitive treatment for rogue corporations such as J. Ponzi Morgan.

The Rising Cost of Bad Business

Thursday, September 26th, 2013

A New York City Police office stands atEleven billion dollars. That’s the latest figure being leaked about the amount JPMorgan Chase could end up paying to resolve federal charges concerning the sale of toxic mortgage-backed securities in the run-up to the financial crisis. The word is that Attorney General Eric Holder personally rejected a $3 billion offer from the bank.

This is turning out to be an expensive period for JPMorgan. Earlier this month, it and Assurant Inc. had to pay $300 million to settle accusations that they forced homeowners into purchasing overpriced property insurance. A week later, the Consumer Financial Protection Board announced that the company would pay $80 million in fines and refund an estimated $309 million to more than 2 million customers for illegal credit card fees.

That same day, U.S. and UK financial regulators announced that JPMorgan would pay a total of $920 million to settle charges relating to the London Whale trading fiasco, with the bank admitting that it had violated securities laws.

What should we make of these settlements, particularly the eleven-figure one being hammered out with the Justice Department? To begin with, this is more evidence that corporations can no longer get away with paying trivial amounts to resolve criminal and civil charges and must part with amounts that have a noticeable financial impact.

JPMorgan is not alone in this category. Billion-dollar settlements have become almost commonplace in the various cases that have been brought against major banks in connection with toxic securities as well as foreclosure abuses, money laundering and manipulation of the LIBOR interest rate index.

Banks are not the only corporations paying out large settlement sums. Large pharmaceutical producers such as GlaxoSmithKline and Pfizer have also parted with ten-figure sums to resolve allegations relating to illegal marketing, withholding of safety data and defrauding federal healthcare programs. BP paid $4 billion to resolve criminal and civil charges relating to the Deepwater Horizon disaster.

There is a tendency among corporate critics to downplay these settlements because the cases were brought against the companies rather than their top executives. It is indeed frustrating to see CEOs that authorized reckless behavior get off scot free.

Yet the more fundamental question is whether individual prosecutions would be effective in deterring corporate misconduct. The assumption is that seeing some chief executives put on trial would strike fear in C-suites everywhere and cause firms to clean up their act. Some of this would occur, but I am not convinced it would be enough to stop corporate criminality. After all, high-profile cases against individuals have not put an end to insider trading.

Punishment of corporate executives needs to be accompanied by more aggressive actions against the companies they work for. One thing is clear: the new wave of billion-dollar settlements and penalties may be having a more noticeable financial impact, but they are still a manageable cost of doing business for the companies involved, especially in light of the fact that the payments are often, at least in part, tax deductible.

Take the case of JPMorgan Chase. An $11 billion settlement would not go entirely to the Treasury. Reports of the negotiations suggest that $4 billion of the total would take the form of relief to consumers, which means that the payout could be stretched over a long period of time. We’ve already seen considerable foot-dragging by the large banks (including JPMorgan) that agreed last year to a $25 billion plan to address foreclosure abuses.

Even if JPMorgan had to shell out the remaining $7 billion in a single year, it would be only one-third of the more than $21 billion in profits it generated last year. That would hurt but would be far from fatal.

Rather than disparagement of rising monetary settlements, I’d like to see more analysis of how high the penalties would have to go in order to make a real difference in corporate behavior. It is also worth exploring whether the property seizures used by federal prosecutors against individual felons could be applied more aggressively against corporations. The discussion of JPMorgan’s settlement would be a lot more interesting if the company was facing a penalty such as forfeiture of one of its main business units.

Eric Holder & Company deserve some credit for raising the cost of doing bad business, but the price is still far too low.

 

Note: To see my newly updated Corporate Rap Sheet on JPMorgan Chase, click here.

Fannie and Freddie Pay a Price for the Meltdown While the Banks Skate

Thursday, September 5th, 2013

predatory-lending-3Five years ago at this time, the federal government seized control of Fannie Mae and Freddie Mac as the financial meltdown began to unfold. The two mortgage giants have remained in conservatorship ever since and are now the subject of a policy debate over whether they should be radically transformed or obliterated entirely.

Meanwhile, the primary culprits for the housing bubble and collapse – the big Wall Street banks, that is – remain intact. They face some legal entanglements, but they will be able to buy their way out of those cases and continue with business as usual, which for them means profiting from reckless transactions and expecting that taxpayers will eventually pay to clean up the mess.

A major reason for the disparity between the fates of Fannie and Freddie and that of the banks was the success of the rightwing disinformation campaign blaming the financial crisis entirely on the mortgage agencies. According to this warped narrative, it was their role in promoting home ownership among lower-income Americans that brought the system down. In 2011 New York Times columnist David Brooks declared that “the Fannie Mae scandal is the most important political scandal since Watergate. It helped sink the American economy. It has cost taxpayers about $153 billion, so far. It indicts patterns of behavior that are considered normal and respectable in Washington.”

Fannie and Freddie certainly made their share of mistakes. Let’s recall, as conservatives typically fail to do, that while these agencies were created by Congress and ultimately had taxpayer backing, they had been functioning as for-profit entities. Their executives benefited handsomely from the housing bubble.

Yet much more damage was done by purely private-sector players such as Countrywide Financial, which steered low-income families into predatory sub-prime mortgages, as well as the big investment banks, which packaged those doomed mortgages into securities whose risks were not adequately disclosed to investors. In this they were aided by the unscrupulous credit-rating agencies.

Those risks were also not sufficiently disclosed to Fannie Mae and Freddie Mac, which purchased many of the toxic securities. A few years ago, the Federal Housing Finance Agency, which currently oversees Fannie and Freddie, began to bring legal actions against the banks.

In January 2011 Bank of America, which had purchased Countrywide, consented to pay $2.8 billion to settle one such suit brought by FHFA. The amount was considered a bargain for BofA, with one financial analyst calling it a “gift” from the government.

In July 2011 FHFA brought a similar action against a U.S. subsidiary of the Swiss bank UBS, which had been an aggressive marketer of mortgage-backed securities in the years following its acquisition of U.S. investment banks PaineWebber and Kidder Peabody. The case is pending.

And in September 2011 FHFA brought suits against 17 financial institutions, among them Citigroup, Goldman Sachs, JPMorgan Chase and Morgan Stanley. In the Citi complaint, for example, FHFA alleged that the bank “falsely represented that the underlying mortgage loans complied with certain underwriting guidelines and standards, including representations that significantly overstated the ability of the borrowers’ to repay their mortgage loans.” Those cases are pending as well.

At the beginning of this year, Bank of America agreed to pay another $10.3 billion ($3.6 billion in cash and $6.75 billion in mortgage repurchases) to Fannie Mae to settle a new lawsuit concerning the bank’s sale of faulty mortgages to the agency. As part of the deal, BofA also agreed to sell off about 20 percent of its loan servicing business.

Those who depict Fannie and Freddie as the root of all housing evil should explain how it is that they ended up among the main victims of Wall Street’s huge mortgage-backed securities scam and are receiving billions to resolve their legal claims over the matter.

In August President Obama came out in favor of winding down Fannie and Freddie and sharply restricting the role of the federal government in mortgage markets. When will the Administration propose something similarly radical about the big banks?

When Will the Big Banks Be Reined In?

Thursday, August 1st, 2013
Goldman Sachs aluminum

Goldman Sachs aluminum

In case anyone had doubts about the venality of the big U.S. banks, some recent news reports provide indisputable proof.

First, David Kocieniewski of the New York Times wrote a mind-boggling front-page report on how Goldman Sachs has been using a metals storage company to move large quantities of aluminum from one warehouse to another in Detroit. The maneuver, which exploits esoteric rules of the London Metal Exchange, generates millions of dollars in profit for Goldman and pushes up the price of products such as soft drinks sold in aluminum cans.

The creation of paper profits from aluminum shuffling is just one of the various ways that banks manipulate commodity prices. Occasionally they are called to task for their actions. The Federal Energy Regulatory Commission just announced that JPMorgan Chase would pay $410 million in penalties and disgorgement to ratepayers to settle charges that it manipulated electricity markets in California and the Midwest several years ago. The announcement came shortly after the agency ordered the British bank Barclays and four of its traders to pay $453 million in civil penalties in connection with similar abuses in the western United States.

Apparently these banks decided that Enron’s energy market manipulation from a decade earlier was a game plan rather than a cautionary tale.

Another Times piece reports that major banks have in effect blacklisted more than a million low-income Americans because their names appear in databases of supposedly risky customers. The article highlights a Brooklyn woman who ended up on such a list after she overdrew her checking account by all of $40 in 2010 and subsequently was turned down by numerous banks when she tried to open an account. Many of the blacklisted people had to resort to exploitative check-cashing services and payday lenders to conduct their financial transactions. Among the subscribers to ChexSystems, the largest of the databases, were said to be Bank of America, Citibank, JPMorgan Chase and Wells Fargo.

Allow that to sink it. Banks that have been involved in multi-billion-dollar scandals involving the deceptive sale of toxic securities, municipal bond bid rigging, foreclosure abuses and the like decide that it is too risky to take on a customer who once had a two-digit overdraft in her checking account.

For institutions such as these, the only proper response is to play as dirty as they do. A third NYT article reports that the city of Richmond, California is doing exactly that by employing its power of eminent domain to take over occupied homes that are under the threat of foreclosure and instead offer the owners new, more affordable mortgages that reflect the diminished value of the property. The banks, which have dragged their feet on foreclosure reforms, are indignant over the move and are, in the words of the Times, threatening to “bring down a hail of lawsuits and all but halt mortgage lending in any city with the temerity” to consider the tactic.

The need for bold tactics such as eminent domain has been brought about not only by the banks but also by the half-hearted efforts of the Obama Administration to deal with the foreclosure crisis. This is just one of the ways the administration has not held the financial industry fully responsible for the financial meltdown of 2008 and the repercussions that are still with us.

The President himself is spending his time these days lobbying Congress to support the selection of Larry Summers as the next chair of the Federal Reserve. This is the same Summers who, as Clinton’s Treasury Secretary, promoted the financial deregulation that helped usher in the bank recklessness that has done so much harm to the economy.

The Wall Street Journal recently revealed for the first time that Summers has been working as a consultant to Citigroup in addition to his previously reported roles advising a hedge fund, a venture capital firm and a money management company. Obama apparently thinks that someone with this kind of track record is well suited to oversee monetary policy as the head of an agency that is also one of the main banking regulators.

I’m more impressed with the public officials in Richmond, California.

JPMorgan Chase in the Sewer

Thursday, May 9th, 2013

dimonThe business news has been full of speculation on whether JPMorgan Chase Jamie Dimon will go on serving as both CEO and chairman of the big bank, in light of a shareholder campaign to strip him of the latter post. The effort to bring Dimon down a notch—and to oust three members of the board—is hardly the work of a “lynch mob,” as Jeffrey Sonnenfeld of Yale suggested in a New York Times op-ed.

That’s not to say that a corporate lynching is not in order. JPMorgan’s behavior has been outrageous in many respects. The latest evidence has just come to light in a lawsuit filed by California Attorney General Kamala Harris, who accuses the bank of engaging in “fraudulent and unlawful debt-collection practices” against tens of thousands of residents of her state.

In charges reminiscent of the scandals involving improper foreclosures by the likes of JPMorgan, the complaint describes gross violations of proper legal procedures in the course of filing vast numbers of lawsuits against borrowers, including:

  • Robo-signing of court filings without proper review of relevant files and bank records;
  • Failing to properly serve notice on customers—a practice known as “sewer service”; and
  • Failing to redact personal information from court filings, potentially exposing customers to identity theft.

JPMorgan got so carried away with what the complaint calls its “debt collection mill,” that on a single day in 2010 it filed 469 lawsuits.

The accusations come amid reports of ongoing screw-ups in the process of providing compensation to victims of the foreclosure abuses. For JPMorgan, the California charges also bring to mind its own dismal record when it comes to respecting the rights of credit card customers.

In January 2001, just before it was taken over by what was then J.P. Morgan, Chase Manhattan had to pay at least $22 million to settle lawsuits asserting that its credit card customers were charged illegitimate late fees.

In July 2012 JPMorgan Chase agreed to pay $100 million to settle a class action lawsuit charging it with improperly increasing the minimum monthly payments charged to credit card customers.

The credit card abuses are only part of a broad pattern of misconduct by JPMorgan. In the past year alone, its track record includes the following:

In October 2012 New York State Attorney General Eric Schneiderman, acting on behalf of the U.S. Justice Department’s federal mortgage task force, sued JPMorgan, alleging that its Bear Stearns unit had fraudulently misled investors in the sale of residential mortgage-backed securities.  The following month, the SEC announced that JPMorgan would pay $296.9 million to settle similar charges.

In January 2013 JPMorgan was one of ten major lenders that agreed to pay a total of $8.5 billion to resolve charges relating to foreclosure abuses. That same month, bank regulators ordered JPMorgan to take corrective action to address risk management shortcomings that caused massive trading losses in the London Whale scandal. It was also ordered to strengthen its efforts to prevent money laundering. In a move that was interpreted as a signal to regulators, JPMorgan’s board of directors cut the compensation of Dimon by 50 percent.

JPMorgan’s image was further tarnished by an internal probe of the big trading losses that found widespread failures in the bank’s risk management system. Investigations of the losses by the FBI and other federal agencies continue.

In February 2013 documents came to light indicating JPMorgan had altered the results of an outside analysis showing deficiencies in thousands of home mortgages that the bank had bundled into securities that turned out to be toxic.

In March 2013 the Senate Permanent Committee on Investigation released a 300-page report that charged the bank with ignoring internal controls and misleading regulators and shareholders about the scope of losses associated with the London Whale fiasco.

In an article in late March, the New York Times reported that the bank was facing investigations by at least eight federal agencies. Last week, the newspaper revealed a new investigation of JPMorgan by the Federal Energy Regulatory Commission, which was said to have assembled evidence that the bank used “manipulative schemes” to transform money-losing power plants into “powerful profit centers.”

You know a bank is in big trouble when the coverage of its activities includes phrases like “lynch mob,” “sewer service” and “manipulative schemes.“