Archive for January, 2012

Good Cop or Bad Cop Obama?

Thursday, January 26th, 2012

Barack Obama, bad cop, used the State of the Union address to talk tough about fighting white-collar crime, announcing new initiatives to investigate financial industry fraud and the abusive lending that led to the mortgage meltdown. Unfortunately, the administration of Obama the “good” cop has spent the past three years allowing the perpetrators of those same offenses to escape serious punishment.

The latest indication of the administration’s weak enforcement record came in a report issued just a day before the State of the Union by the Office of the Special Inspector General for the Troubled Asset Relief Program, known inside the Beltway as SIGTARP. Not only have the feds failed to put the financial fraudsters behind bars—they can’t even control the industry’s bloated executive pay packages.

Soon after he took office in 2009, Obama made headlines by denouncing banking industry bonuses as “shameful.” He went on to impose $500,000 limits on the cash compensation of senior executives at firms that had received “exceptional assistance” from the Treasury, meaning that they had gotten the fattest bailouts during the 2008 financial crisis. The firms in that category were AIG, Bank of America and Citigroup as well as General Motors and Chrysler, along with the finance affiliates of those automakers.

The impact of the move was diminished somewhat after it soon came to light that AIG was giving out scores of seven-figure bonuses to the employees of the unit that caused the collapse of the company and necessitated a massive federal intervention. The Obama Administration and Congress responded to the uproar by creating a “compensation czar” under the auspices of the Treasury Department to oversee executive pay practices at the designated firms.

Kenneth Feinberg, the Washington lawyer named as czar, challenged the pay deals these firms had already made with their top officers and had successes such as getting outgoing Bank of America CEO Kenneth Lewis to forgo all of his pay for 2009. In October of that year, the Obama administration said that it would impose a plan devised by Feinberg to cut pay of top earners at the designated firms by about 50 percent. For more than a year there was a steady stream of news articles about the tough measures being meted out by Feinberg until his resignation in September 2010.

According to the new SIGTARP report, much of this was no more than Kabuki theatre. It found that the efforts of Feinberg in what is formally known as the Office of the Special Master (OSM) were less than draconian: “The Special Master could not effectively rein in excessive compensation at the seven companies because he was under the constraint that his most important goal was to get the companies to repay TARP [funds].” The report admits that OSM did bring about some pay reductions, but the idea of a $500,000 pay ceiling was rendered meaningless by its decision to approve “total compensation packages in the millions.”

The largest of those packages was received by AIG CEO Robert Benmosche: $10.5 million in total pay, including $3 million in cash, or six times the purported ceiling. This outsized compensation was going to the company that probably did the most to cause the crisis and that will end up costing the government more than any other bailed out firm.

Many others at the designated firms also broke through the flimsy ceiling. Overall, SIGTARP found, OSM approved 68 pay packages in excess of $1 million in 2009, 71 in 2010 and the same number in 2011. In the latter years there were fewer pay packages for OSM to review, since Citigroup and Bank of America had repaid the special assistance that triggered the oversight of their compensation practices. There have been reports that they took the step precisely to escape that oversight. Given how lenient Feinberg had been in allowing exceptions, it is not clear why they bothered.

Along with the depiction of OSM as a pushover, what is perhaps most telling about the SIGTARP report is the appended response from the Treasury Department. Despite all evidence to the contrary, Treasury claims that “OSM has succeeded in achieving its mission.” It also tries to rewrite history by claiming that the $500,000 limit was not a ceiling at all, but simply “a discretionary guideline.” And it insists that OSM allowed the firms to exceed the maximum only for good reasons, even though SIGTARP pointed out that those reasons were not documented.

Like Feinberg, President Obama has tried to project an image of being tough on corporate abuses while repeatedly caving in behind the scenes. It remains to be seen whether Obama, facing pressures from the Occupy movement and the threat of losing his re-election bid, finally gets serious about prosecuting financial crime or continues the charade.

Money-Back Guarantees for Corporate Subsidies

Wednesday, January 18th, 2012

“Job creators” are a fickle bunch. We’re told that they won’t create an adequate number of jobs unless they feel more “certainty” about government policies (risk-taking, apparently, is passé). And when they aren’t seeking reassurance they are asking for bribes.

These aren’t bribes in a technical sense, but rather “incentives” in the form of special tax breaks and other forms of financial assistance. Many state and local officials are convinced that providing these incentives—more accurately, subsidies—is the only way to bring new jobs to their jurisdiction. The total annual cost is some $70 billion.

It should come as no surprise that, even when they are bribed, many purported job creators fail to deliver. My colleagues and I at Good Jobs First just published a report called Money-Back Guarantees for Taxpayers that evaluates states on their oversight of subsidy programs. This report focuses on the enforcement of the performance standards we evaluated in our previous study, Money for Something.

Here are the highlights of the new report:

Many subsidy programs—about one-third of the ones we looked at—operate essentially on the honor system. Violating Ronald Reagan’s principle of “trust, but verify,” they do not check that the data on job creation and other performance measures reported by companies receiving subsidies are accurate.

It’s encouraging that three-quarters of the programs have provisions for penalizing non-compliant companies, whether through recapture of funds already paid out (clawbacks) or the recalibration or termination of future benefits. The problem is that many of these penalty provisions—nearly half, in fact—are far from iron-clad. In many cases the implementation of the penalties by agencies is optional, or else companies can escape punishment by claiming one of various exemptions. These range from a downturn in general economic conditions to “acts of God.” Some can get off if they simply made a “good faith effort.”

What good are penalties if they are filled with loopholes? Imagine if the criminal code had such provisions. A person caught robbing a bank could cite the poor economy as justification, or a repeat offender could get off by claiming to have really tried to go straight.

Then there’s the issue of transparency about the enforcement process. In our report, we treated the willingness of state agencies to disclose data about their oversight as an indication of whether they took enforcement seriously. We were disappointed with the results.

Only 21 programs in a dozen states publish aggregate enforcement data (i.e., without company names or other deal specifics); only 38 programs disclose the names of companies deemed to be out of compliance; and only 14 disclose the names of companies which have been penalized (and the dollar amounts). By the way, we have lists of all those disclosure sites.

The fact that a state adopts strong enforcement procedures does not guarantee that any given subsidy program or deal is a good use of taxpayer funds. Some programs may simply offer too much assistance to companies, so that benefits will never outweigh costs. For such programs, abolition rather than accountability is the correct policy, especially in times of severe budgetary stress. Some states have been doing exactly that, though in the case of Michigan any fiscal relief is being erased by simultaneous moves to lower tax rates for all businesses.

Yet as long as a program is in operation, taxpayers have a right to demand both strong performance requirements (including job creation and job quality standards) and aggressive enforcement of those requirements. When a company is given subsidies without strings, that is a handout rather than economic development.

It would be interesting to hear what Mitt Romney has to say about this. As I reported in this blog previously, some companies acquired by Bain Capital while Romney was at the buyout firm subsequently received subsidies (or continued to enjoy special tax breaks they had already been awarded). Does Romney, who has been speaking out against regulation, believe that subsidy recipients, such as those firms that helped build his fortune, should also have fewer rules to comply with?

If we are going to bribe “job-creators,” we should at least make sure they fulfill their employment promises or provide a full refund.

Romney Bites the Government Hand that Has Fed His Fortune

Thursday, January 12th, 2012

Occupy Wall Street may be getting less attention in the corporate media these days, but the movement’s message about the brutal and inequitable nature of contemporary U.S. business is front and center in an unlikely arena: the debate among the Republican contenders.

In recent days, Newt Gingrich and Rick Perry have assailed the business track record of Mitt Romney, using terms such as “vulture capitalism,” “looting” and “job killing” to describe his activities at buyout firm Bain Capital in the 1980s and 1990s.

Showing how frustrated personal ambition can outweigh ideology, Gingrich and Perry are espousing views far from their usual reactionary postures. It is the hypocrisy of frontrunner Romney, however, that is of greater significance. While being attacked from the faux Left by Gingrich and Perry, Romney has been veering to the Right. In his victory speech after the New Hampshire primary, he attacked President Obama for supposedly promoting “the politics of envy” and “resentment of success.” Channeling Ronald Reagan, he vowed that “the path I lay out is not one paved with ever increasing government checks and cradle-to-grave assurances that government will always be the answer.”

Yet a look at Romney’s record at Bain shows not only Gordon Gekko-like business buccaneering, but also a willingness to embrace those very government checks and assurances he is now repudiating. Companies acquired and managed by Bain during Romney’s tenure showed no hesitation in taking taxpayer handouts in the form of state and local economic development subsidies.

A comparison of the 1999 Bain portfolio obtained by the Los Angeles Times to the information in the Subsidy Tracker database my colleagues and I at Good Jobs First created (as well as other sources), yields examples such as the following:

Steel Dynamics Inc. In 1994 this company, among whose financial backers at the time was Bain, got a $77 million subsidy package—including grants, property tax abatements, tax credits and reimbursement for training costs—for its steel mill in DeKalb County, Indiana (Fort Wayne Journal Gazette, June 23, 1994).

GS Industries. In 1996 American Iron Reduction LLC, a joint venture of GS Industries (which had been taken private by Bain in 1993) and Birmingham Steel, sought some $20 million in tax breaks in connection with its plan to build a plant in Louisiana’s St. James Parish (Baton Rouge Advocate, April 6, 1996). As the United Steelworkers union noted recently, GS Industries later applied for a federal loan guarantee, but before the deal could be implemented the company went bankrupt.

Sealy. A year after the 1997 buyout of this leading mattress company by Bain and other private equity firms, Sealy received $600,000 from state and local authorities in North Carolina to move its corporate offices, a research center and a manufacturing plant from Ohio (Greensboro News & Record, March 31, 1998). In 2004 Bain and its partners sold Sealy to another private equity group.

GT Bicycles. In 1997 GT, then owned by Bain and other investors, decided to move its manufacturing operations to an enterprise zone in Santa Ana, California. Being in the zone gave the company, which was later purchased by Schwinn, special tax credits relating to hiring and the purchase of equipment (Orange County Register, July 9, 1999).

Since Romney arranged to share in Bain’s profits after he left the firm in 1999, it is legitimate to look at cases of subsidy grabbing by Bain companies after that time. Some of these involved firms that had been acquired during Romney’s tenure but which didn’t get their subsidies until after he departed. For example:

Stream International. In 2000, this operator of call centers, then controlled by Bain, agreed to open a facility in Kalispell, Montana, but only if local officials provided $4 million in grants and tax breaks (The Missoulian, February 8, 2000). U.S. Senator Max Baucus also arranged for a $500,000 grant from the federal Economic Development Administration (AP, March 4, 2000). Later that year, Stream got Silver City, New Mexico to provide tax credits, subsidized training and subsidized rent for another call center (Albuquerque Tribune, July 12, 2000).

Alliance Laundry Systems. In 2000 this maker of washing machines, purchased by Bain in 1998, received a $560,000 grant from the state of Florida in connection with its plan to move a commercial laundry from Cincinnati. (Tallahassee Democrat, June 8, 2000). In 2004 the company received $1.25 million in assistance (including a low-cost loan of $1 million and a $250,000 grant) from the state of Wisconsin. Bain sold the company to a Canadian pension fund in 2005.

Romney’s ongoing profit participation also makes it legitimate to look at subsidies that have gone to companies acquired by Bain after Romney moved into public life:

Burger King Corporation.  In 2005—while owned by Bain, TPG and Goldman Sachs—Burger King let it be known that it was considering moving its headquarters from the Miami area to Houston. After local and state officials put together a $9 million subsidy package, the company agreed to stay in South Florida but move to a new building.  Two years later, Burger King dropped the idea of a new headquarters altogether and had to repay $3 million of the package (which came from a Quick Action Closing Fund grant) to the state as a result. Bain and its partners sold off their remaining interest in Burger King in 2010.

Quintiles Transnational Corp. When Bain and other private equity firms bought this pharmaceutical services company in 2007 they inherited a $25 million subsidy package that the company had negotiated with North Carolina officials in 2006. The package included an up-front $2 million grant from the One North Carolina Fund, a $2 million matching grant from Durham County, and the promise of up to $21.4 million over 12 years from a performance-based Job Development Investment Grant.

AMC Entertainment. After being promised more than $40 million in subsidies, this movie chain (bought in 2004 by Bain and other private equity firms) agreed to move its headquarters from downtown Kansas City, Missouri to a nearby suburb across the state line in Kansas. The deal was criticized as an egregious case of taxpayer-financed sprawl.

And finally, what about Staples, whose early backing by Bain is frequently cited by Romney as the best example of his business acumen? The chain has long been making use of economic development subsidies, including the period when Romney was still at Bain. In 1996, for example, it chose Hagerstown, Maryland as the site for a distribution center after getting a $4.2 million subsidy package (Baltimore Sun, April 16, 1996).

It’s quite possible that Romney’s recent anti-government comments, like much of what he says, are not meant to be taken too seriously. But as long as he is spouting free-market rhetoric, he needs to be reminded about the extent to which his ascent (and that of the rest of the 1% ) has been propelled by public money.

Fighting for the Right to Be a Weak Regulator

Thursday, January 5th, 2012

The conservatives fulminating about the Consumer Financial Protection Bureau and President Obama’s recess appointment of Richard Cordray to head it may feel outmaneuvered at the moment.  But if history is any guide, the bureau will not be too big a threat to the financial powers that be.

The federal government is filled with regulatory agencies whose main mission seems to be to protect the interests of the largest companies they are charged with regulating. There’s always the possibility that the CFPB will be the exception to the rule of regulatory capture, but the fledgling entity would have to clear some high hurdles.

Cordray and his colleagues would do well to study the track record of the federal agency that has supposedly served as a financial watchdog for the past seven decades: the U.S. Securities and Exchange Commission. The CFPB is getting off the ground just as the SEC is embroiled in a dispute that reveals its cozy relationship with the big banks and its feckless approach to enforcement.

Back in October, as part of its belated and half-hearted response to the chicanery that led to the financial meltdown of 2008, the SEC announced that giant Citigroup had agreed to pay $285 million to settle charges that it had misled investors about a $1 billion issuance of housing-related collateralized debt obligations that Citi knew to be of dubious value and had bet against with its own money. As is typical in such SEC cases, Citi neither admitted nor denied doing any wrong.

That would have been the end of a typical case if the judge overseeing the matter, Jed Rakoff the Southern District of New York, had not done something remarkable. He declined to rubberstamp the settlement and raised a host of questions about the size of the settlement—which was well below the estimated $700 million lost by investors—and the failure of the SEC to get Citi to admit guilt.

Rakoff (illustration), who had questioned settlements in several other SEC cases, rejected the deal the agency made with Citi and ordered a trial on the matter. In his November  28 order (which I retrieved, along with other case documents, from the PACER subscription database), Judge Rakoff called the amount of the settlement “pocket change to any entity as large as Citigroup” and said it would have little deterrent effect. He also pointed out that the SEC’s decision to charge Citi with mere negligence and allow it to avoid admitting guilt “deals a double blow to any assistance the defrauded investors might seek to derive from the S.E.C. litigation in attempting to recoup their losses through private litigation, since private investors not only cannot bring securities claims based on negligence.” In other words, Rakoff was accusing the agency of protecting the interests of the big bank.

Calling the deal “neither reasonable, nor fair, nor adequate, nor in the public interest,” Rakoff thundered:

An application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous. The injunctive power of the judiciary is not a free roving remedy to be invoked at the whim of a regulatory agency, even with the consent of the regulated. If its deployment does not rest on facts – cold, hard solid facts, established by admissions or by trials -it serves no lawful or moral purpose and is simply an engine of oppression.

Finally, in any case like this that touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth. In much of the world, propaganda reigns, and truth is confined to secretive, fearful whispers. Even in our nation, apologists for suppressing or obscuring the truth may always be found. But the S.E.C., of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges; and if fails to do so, this Court must not, in the name of deference or convenience, grant judicial enforcement to the agency’s contrivances.

Instead of using Rakoff’s powerful order as leverage to extract a larger settlement from Citi, the SEC went on the attack against the judge. It appealed Rakoff’s order to the federal court of appeals, arguing that its enforcement process would be crippled if it had to hold out for admissions of guilt. Rakoff fired back with a charge that the agency had misled the appeals court and had withheld key information from him.

As the pissing match continues, one could only imagine the satisfaction felt by Citi at being able to sit on the sidelines and watch its regulator do battle with the judiciary to preserve its ability to handle financial misconduct with kid gloves. The SEC has suddenly become aggressive—not in fighting fraud but in defending its right to be a weak regulator. Richard Cordray, take heed.