Putting Strings on Bank Mergers

The U.S. financial system has survived a decade without another meltdown like that caused by the proliferation of toxic securities in the late 2000s. The credit belongs to tougher regulation, not to a moral conversion on the part of the large banks. Those institutions still exhibit significant ethical deficits even as they grow larger.

That’s why new legislation on bank mergers being introduced by Sen. Elizabeth Warren and Illinois Rep. Chuy Garcia makes sense. The Bank Merger Review Modernization Act would require regulatory agencies to apply more rigorous standards when deciding whether to approve proposed deals.

Those standards would include a quantitative risk metric, consideration of the impact on market concentration for specific banking products, Community Reinvestment Act ratings and approval by the Consumer Financial Protection Bureau.

Those measures are all fine, but I would also suggest that regulators be required to consider the full track record of each party when it comes to compliance with a broad range of laws regulations.

I say this having compiled a large quantity of documentation of bank misconduct in my work on Violation Tracker. I am continuously amazed at the number and variety of cases in which banks have been involved as well as the eye-popping penalties they have paid to buy their way out of legal jeopardy.

The Violation Tracker penalty total for the financial services industry now stands at $305 billion (since 2000), and that number will increase by about $8 billion next week when we post an update that for the first time will include cases brought by the New York State Department of Financial Services and the Manhattan District Attorney’s Office.

Those agencies have brought several dozen major cases against large banks, especially foreign-based ones, for violations of international economic sanctions, money-laundering regulations and rules regarding the manipulation of foreign exchange markets.

Warren and Garcia express specific concern about the combination of SunTrust and BB&T, which are merging to form a new “Too Big to Fail” bank they are naming Truist.

There is good reason for the banks to shed their old identities. According to Violation Tracker, SunTrust has racked up more than $1.5 billion in penalties. These include a 2014 case in which the Consumer Financial Protection Bureau, the Department of Housing and Urban Development, and the attorneys general of 49 states and the District of Columbia required the company to address mortgage servicing misconduct by providing $500 million in loss-mitigation relief to underwater borrowers. It also required SunTrust to pay $40 million to approximately 48,000 consumers who lost their homes to foreclosure. At the same time, SunTrust had to pay $418 million to resolve a related case brought by the Justice Department for originating and underwriting loans that violated its obligations as a participant in the Federal Housing Administration insurance program.

As if that was not enough, SunTrust had to pay another $320 million as part of the resolution of a DOJ criminal case alleging that it misled numerous mortgage servicing customers who sought mortgage relief through the federal Home Affordable Modification Program.

BB&T has paid more than $130 million in penalties, most of which came from a 2016 case in which it agreed to pay $83 million to the Justice Department to resolve allegations that it violated the False Claims Act by knowingly originating and underwriting mortgage loans insured by the Federal Housing Administration that did not meet applicable requirements.

Why, one might ask, should corporations with such blemished records be allowed to merge and become the country’s sixth largest bank, whose combined resources will allow it to capture additional market share? It might be worth exploring whether, in addition to the kind of safeguards being proposed by Warren and Garcia, banks with a substantial record of misconduct could be barred from participating in mergers, or at least be required to take additional steps to make amends to the customers and communities they have harmed.

Business Success and Economic Failure

familydollarWhat does it say that an all-out takeover battle is being waged for a chain of no-frills stores selling cheap merchandise at outlets typically located in the most downscale parts of town? The answer is that deep-discount retailing, which entered the mainstream during the recession of the late 2000s, remains a lucrative business as much of the country struggles with stagnating income levels.

The focus of the current bidding war is Family Dollar Stores, the second largest chain of deep discounters, also known as dollar stores. A couple of months ago, Dollar Tree, the third largest chain, announced plans for an $8.5 billion purchase of Family Dollar, which had been targeted by several corporate raiders such as Carl Icahn, who bought a 9 percent stake in the firm.

Family Dollar’s management seemed willing to throw in its lot with Dollar Tree and create a combined company with about 13,000 stores that could not only neutralize Icahn but also challenge the current leviathan of the industry, Dollar General with its 11,000 stores.

Dollar General, which long had its eye on Family Dollar, did not take kindly to the prospect of being relegated to second place. It launched its own fatter bid for Family Dollar, and after being rebuffed, it is now going hostile. It has announced a tender offer under which Family Dollar investors could sell their shares for $80 each, well above the $74.50 that Dollar Tree said it would pay.

As interesting as this may be to analysts of mergers & acquisitions, the takeover battle is not the most significant story here. First, there is the alarming fact that it is taken for granted that the marriage of two giant dollar-store chains can receive antitrust approval. The original Dollar Tree-Family Dollar deal has been promoted by the two companies with the argument that it was likely to be blessed by the Federal Trade Commission. Dollar General argues that its promise to sell off 1,500 outlets would make its deal palatable to the federal regulators. Why shouldn’t any combination among the three chains be considered unacceptable? And what about the even more controversial possibility, as has been widely rumored, that Wal-Mart might try to take over one of the dollar chains to shore up its faltering small-store strategy? Are we to assume that would get approved as well?

At the same time, there has been surprisingly little discussion of how these companies operate. For example, there’s the matter of their labor practices. Dollar General, Family Dollar and Dollar Tree are not often mentioned alongside Wal-Mart, yet they are also low-paying, non-union employers that have been involved in numerous wage & hour controversies. The dollar stores, whose outlets have much smaller staffs than those at Supercenters, have mainly been accused of improperly denying overtime pay to so-called store managers and assistant managers who spend most of their time on non-managerial tasks such as stocking shelves and unloading trucks. Family Dollar, for instance, fought one such case all the way to the U.S. Supreme Court, where it lost and finally had to pay a $33 million judgment.

And then there’s the issue of the basic business model of the dollar stores. This is a sector that to a great extent profits from economic desperation. Although a small portion of its customers are middle-class people looking for a bargain, most are lower-income individuals who cannot afford to shop at the likes of Wal-Mart, much less non-discount chains.

The deep-discount chains were supposed to have shrunk once the economy was in recovery. Their continued growth is a symptom of ongoing wage stagnation, and their business success is a sign of a broader economic failure.

Trust-Busting Shows New Signs of Life

varney2“Everywhere you look, powerful forces are driving American industries to consolidate into oligopolies—and the obstacles are less formidable.” That’s the way a February 25, 2002 front page story in the Wall Street Journal began, and for the following seven years those obstacles grew yet more feeble.

With a few notable exceptions, such as the Federal Trade Commission’s long-running effort to block Whole Foods from acquiring its rival Wild Oats Markets, major mergers have sailed through. Last fall the Bush Justice Department issued a policy paper on antitrust that was so soft on anti-competitive practices that three FTC commissioners took the unusual step of issuing a public statement denouncing it.

Now the Obama Administration is repudiating the policy. Christine Varney (photo), head of the Justice Department’s Antitrust Division, gave identical speeches to the Center for American Progress and the U.S. Chamber of Commerce heralding the change of course. She made a telling comparison to the late 1930s, arguing that today, as then, the tightening of competition policy is part of the way government should respond to an economic crisis.

She reinforced this principle by separately stating that the Antitrust Division would work with federal agencies to prevent contractors from unlawfully profiting from stimulus projects funded by the $787 billion Recovery Act signed by the President in February.

Varney’s declarations were all the more significant in that they were soon followed by the announcement of a record antitrust fine – the equivalent of about $1.5 billion – imposed by the European Commission on Intel for unfairly dominating the computer chip market.  During the Bush Administration U.S. officials had declined to go after Intel.

It would be a wonderful thing for the United States to rejoin Europe and take the enforcement of competition laws seriously. Varney is talking a good line now, but the Obama Administration has to make up for an overly tolerant stance toward certain oligopolies—above all in banking policy, where Treasury Secretary Timothy Geithner has accepted the notion that the likes of Citigroup and Bank of America are too big to fail and, rather than cutting them down to a reasonable size, wants to go on propping them up with taxpayer funds. And in the health care arena, the Administration seems to take it for granted that the giant health insurance carriers, who use their power to deny as much care as possible, will go on playing a central role.

At a time when an increasing number of Americans recognize the shortcomings of giant corporations, the federal government cannot afford to be seen to support any oligopolies. And if it really wanted to promote competition, the Justice Department should go after the biggest antitrust scofflaw of them all: Wal-Mart.

The Many Sins of Ken Lewis

lewisIt always helps to put a face on one’s adversary in a protest campaign, and whether he likes it or not, Kenneth Lewis’s mug has become the lightning rod for criticism of the ongoing bailout of Big Finance. This post is being written on the eve of the most challenging day in Lewis’s 40 years as a banker. There is a chance that the shareholders of Bank of America, where Lewis has been chairman and chief executive since 2001, will oust him from the board or take away his chairmanship.

Lewis’s scalp is being sought by many. The Service Employees International Union, which has made removal of Lewis the centerpiece of its “Bad for America” campaign against BofA, this week joined forces with Moveon.org to press the issue. Major institutional investors such as the California public pension funds CALPERS and CALSTRS announced they had voted their millions of shares against Lewis. Muckraking filmmaker Robert Greenwald issued a video to further the crusade.

Those calling for Lewis’s ouster have mainly been focusing on his recent misdeeds: his still unclear role in the takeover of failing Merrill Lynch and the fat bonuses received by Merrill employees just before that deal took effect; his decision to jack up interest rates on credit card accounts; and BofA’s role in corporate organizing against the Employee Free Choice Act.

Yet Lewis has a lot more to answer for. In fact, his entire career, which has been spent exclusively at BofA and its predecessor companies, symbolizes what has gone wrong with the U.S. banking system over the past three decades.

When Lewis graduated from Georgia State University in 1969, he went straight to work as a credit analyst for a regional financial institution called North Carolina National Bank (NCNB). He rose through the ranks and eventually came to the attention of Hugh McColl, a brash ex-Marine who took over as chief executive of NCNB in 1983 and set out to transform the bank.

McColl launched an aggressive campaign to become a financial superpower. Taking advantage of the weakening of longstanding restrictions on interstate banking, he engineered a series of takeovers, first in Florida and then among big players in Texas crippled by the 1980s real estate meltdown in the Lone Star State. In 1989 McColl was rebuffed in his attempt to acquire Citizens and Southern, Georgia’s largest bank, which instead merged with Virginia-based Sovran Financial.

Two years later, after C&S/Sovran was hit with a sharp increase in its volume of bad loans, the combined company could not resist a new takeover effort by McColl. The deal turned NCNB into one of the country’s most powerful “superregional” banks, an achievement that McColl celebrated by grandiosely changing his company’s name to NationsBank.

As McColl made his various conquests during the 1980s, it was usually Ken Lewis who was sent in as a viceroy to run the newly acquired institution and integrate it into McColl’s empire. As Fortune once put it, “Lewis achieved stardom in the late 1980s and early 1990s by parachuting in to impose consistent sales and expense practices on the hodgepodge of banks that NCNB was acquiring.”

By 1993 Lewis was president of NationsBank and McColl’s heir apparent as the two men continued their relentless consolidation drive, which culminated in the 1998 purchase of California’s Bank of America and the adoption of its name. Three years later, McColl stepped down and Lewis took the reins, using them to carry out what was widely seen as a reckless deal to acquire Boston’s Fleet Bank.

BofA also got itself involved in a series of scandals—such as the one involving the Italian company Parmalat—which seemed to be an outgrowth of a need by the behemoth bank to increase revenues any way possible. It was later tied to the misdeeds of the major corporate villains of the early 2000s, paying, for example, $69 million to settle a lawsuit over its role as an underwriter for Enron and $460 million to settle an action brought by investors in WorldCom. The controversies continue into the present, not to mention the dubious business practices that would force taxpayers to provide $35 billion in capital infusions.

The history of BofA over these past few decades, including Lewis’s own trajectory, epitomizes the dangerous consolidation of power and spread of venality that have overtaken much of the banking industry. Removing Lewis would not be a matter of slaughtering a sacrificial lamb but rather a long overdue move against one of those most responsible for the financial mess we are in.

McCains: Is this Bass for You?

John McCain and his wife Cindy must be thinking a lot about beer these days. Earlier this week, while speaking to the National Federation of Independent Business, the presumptive Republican nominee had a slip of the tongue and said “I will veto every beer” (when he meant to say “bill”). This came amid intense rumors, which turned out to be true, that Belgian-Brazilian brewing giant InBev intended to make a takeover bid for iconic American beer company Anheuser-Busch (A-B). InBev sells scores of beer brands such as Bass, Beck’s and Stella Artois.

For McCain this is not just an abstract issue of globalization. His wife Cindy McCain controls Hensley & Co., one of the largest A-B distributorships in the United States, and together with her children holds some $1 million in A-B stock.

The mayor of St. Louis, where A-B is based, is opposing a foreign takeover of the beer giant, and concern about the deal has been expressed by Missouri’s two U.S. Senators—one a Democrat and the other a Republican. There are even signs of a grassroots and netroots movement to keep A-B out of foreign hands.

At this point, it’s difficult for me to get too worked up about the prospect of a takeover. InBev is claiming it won’t downsize A-B, and the Teamsters union, which represents more than 8,000 of the company’s workers, would hopefully be in a position to enforce that commitment. Moreover, the beer industry has been embroiled in an international consolidation wave for years. The second most prominent U.S. brand, Miller, was swallowed by South Africa Breweries back in 2002. The merged company, SABMiller, is in the process of combining its U.S. operations with those of Molson Coors, itself the merger of another famous U.S. brand with a Canadian brewer. A-B has struggled precisely because it has not played the merger game.

Observers are wondering where John McCain will position himself on the issue—or whether he will sidestep it entirely. His wife, who insists her finances are completely separate from his, could benefit from the deal by selling her shares at a handsome premium. On the other hand, distributorships such as hers may not want to give up the comfortable relationship they have with A-B.

No matter what, the deal will focus new attention on Cindy McCain’s business dealings. At least some of this will presumably mention the controversial history of her late father, who left her the business. According to a 2000 article by John Dougherty and Amy Silverman in SF Weekly, James Hensley received a wholesale liquor license in the mid-1950s, despite the fact that he and his brother Eugene were convicted of violating federal liquor laws in 1948. Like many other beer distributorships, Hensley & Co. was a frequent contributor to political candidates, including John McCain.

So how does the Christian Right feel about the prospect of having a beer dealer—and daughter of a reputed bootlegger—as First Lady and of having a President whose political career was launched by the proceeds of that business?