Financial Crisis

Convictions Without Consequences

get_out_of_jail_free In the years following the financial meltdown, corporate critics complained that the big banks were not facing serious legal consequences for their misconduct. They were being allowed to essentially buy their way out of jeopardy through financial settlements under which they admitted no wrongdoing.

In 2012 the Justice Department gave in to the pressure and extracted a guilty plea, but it was made by an obscure subsidiary of a foreign bank, Switzerland’s UBS, to resolve a charge of felony wire fraud in connection with the long-running manipulation of LIBOR benchmark interest rates. The plea seemed to do little to impede UBS’s operations. The bank dodged one serious consequence when it received an exemption from the Labor Department from a rule that should have disqualified it from continuing to serve as an investment advisor for pension funds.

Things would be different, critics said, when a criminal conviction involved a parent company. Last year, that happened when another Swiss bank, Credit Suisse, pleaded guilty to conspiracy charges of assisting U.S. taxpayers in dodging taxes by filing false returns with the Internal Revenue Service. Subsequently, Credit Suisse applied for its own exemption from the Labor Department; a decision is pending but is likely to go in the bank’s favor.

Now, at last, the Justice Department has gotten major two major U.S. banks — Citicorp and JPMorgan Chase — to plead guilty to something, which turned out to be felony charges of conspiring to manipulate foreign exchange markets. Two foreign banks — Barclays and Royal Bank of Scotland — also agreed to guilty pleas in the case.

The four financial institutions will together pay criminal fines of just over $2.5 billion. Additional fines were assessed by their regulator, the Federal Reserve.

It’s not clear they will suffer much more than those easily affordable financial penalties. Along with likely exemptions from the Labor Department, the banks have already been granted waivers from SEC rules barring criminals from engaging in the securities business. The banks will be on probation for three years, but keep in mind that BP was on probation at the time of the Gulf of Mexico disaster.

A somewhat higher hurdle may be faced by UBS, which the Justice Department announced has entered a new guilty plea (this time by the parent company) after being found to be in breach of the 2012 non-prosecution agreement it signed when the Japanese subsidiary pleaded guilty.

While newly designated criminals such as Citibank and JPMorgan can claim they will never break the law again, UBS is already found to have violated its commitment to be law-abiding by participating in the foreign exchange conspiracy and engaging in other forms of misconduct.

Taken together, all these developments illustrate the farce that is law enforcement when large corporations are involved. For years they were freed from serious consequences through the use of deferred- and non-prosecution agreements. The size of the financial settlements they had to pay rose into the billions, but these were still affordable costs of doing business.

Now corporations are starting to plead guilty to felony charges, but the practical implications of those convictions are being undermined by regulatory agencies. Having a criminal record is not pleasing to corporations, but if they can continue to do business as usual, they will learn to live with that stigma.

When street crime was on the rise a few decades ago, public officials fell over themselves to enact harsh punishments. Now is the time for a serious discussion of how to get tough on crime in the suites.

—————

New in Corporate Rap Sheets: Peabody Energy. The “Exxon of Coal” fights CO2 regulation and pushes climate denial.

Uncle Sam’s Favorite Billionaires

Inequality is becoming so pronounced that presidential hopefuls of all ideological persuasions are acknowledging that something needs to be done. One issue they should consider is the extent to which the federal government itself contributes to the problem.

It’s clear that the federal tax code is structured in a way that favors wealthy individuals and corporations. But it turns out that Uncle Sam is also providing direct financial assistance to the billionaire class. The extent of that assistance can be estimated from the data my colleagues and I at Good Jobs First assembled for Subsidy Tracker 3.0, which we released recently.

We compiled 164,000 company-specific entries for federal grants, allocated tax credits, loans, loan guarantees and bailout assistance provided through 137 programs overseen by 11 cabinet departments and six independent agencies. These were added to 277,00 state and local awards in the database. Since 2000 the grants and allocated tax credits have amounted to $68 billion; the face value of the loans and bailouts, which we tally separately, have run into the trillions.

Along with the release of Tracker 3.0, we published a report called Uncle Sam’s Favorite Corporations that described the extent to which large corporations dominate federal subsidies. Some of those companies are owned in whole or in part by the country’s wealthiest individuals and families.

I subsequently matched the big federal subsidy recipients to the companies linked to members of the Forbes 400 list of the richest Americans. This exercise was an extension of an analysis my colleagues and I performed on state and local data for our December 2014 report Tax Breaks and Inequality.

Of the 258 companies controlled by a member of the Forbes 400, 39 have received federal grants and allocated tax credits. Their awards total $1.3 billion. The richest of the billionaires linked to these firms is Warren Buffett, whose Berkshire Hathaway conglomerate accounts for $178 million of the subsidies.

Two of the other companies are worth examining more closely, because they have also been embroiled in controversies over their business practices.

At the top of the list is Ocwen Financial, which received $434 million in subsidies through a provision of the Home Affordable Modification Program (a part of the TARP bailout) that provided incentives to mortgage servicers to revamp loans to homeowners whose properties were underwater or otherwise unsustainable.

Ocwen, which made extensive use of that program, was founded by William Erbey (photo), whose net worth was estimated at $1.8 billion in the most recent Forbes list, published when he was still chairman of the company. Subsequently, Erbey had to step down as part of a settlement the company reached with New York State financial regulators to resolve allegations of improper foreclosures and other abusive practices. Ocwen also had to provide $150 million in assistance to those whose homes had been foreclosed. It is also paying a smaller amount under a settlement with California regulators.

While Erbey is no longer running Ocwen, he may still be a major shareholder. As of last year’s proxy statement, he held the largest stake in the company (15 percent); this year’s proxy is not out yet.

The second largest subsidy recipient linked to a member of the Forbes 400 is SolarCity, which has received $326 million in grants and allocated tax credits, mostly through Section 1603 of the Recovery Act, which provides cash payments to companies installing renewable energy equipment. The chairman of SolarCity is Elon Musk, better known for his role in the electric car company Tesla Motors (which, by the way, got a $465 million federal loan and later repaid it). Musk, whose cousins Lyndon and Peter Rive are the top executives at SolarCity, has a net worth estimated by Forbes at $11.6 billion. Tesla Motors has business dealings with SolarCity.

It was recently reported that SolarCity is being investigated by Oregon prosecutors in connection with allegations that it used solar panels made by federal prisoners in renewable energy projects at two state university campuses for which it received $11.8 million in state tax credits designed to promote local employment.

Assuming the allegations turn out to be accurate, it is difficult to know where to begin in stating all that is wrong with this situation. A company chaired by the 44th richest person in the country that has received hundreds of millions of dollars in federal subsidies used prisoners paid less than a dollar an hour to install solar panels so that it can collect millions more in state subsidies.

Subsidies, whether federal or state, are by no means the largest contributor to inequality, but policymakers should try to find some way to limit their use by billionaires, especially those linked to shady business practices.

Uncle Sam’s Favorite Corporations

UncleSam_WebTeaser It’s said that the partisan divide is wider than ever, but there is one subject that unites the Left and the Right: opposition to the federal business giveaway programs popularly known as corporate welfare.

These programs include cash grants that underwrite corporate R&D, special tax credits allocated to specific firms, loan guarantees that help companies such as Boeing sell their big-ticket items to foreign customers, and of course the huge amounts of bailout assistance provided by the Treasury Department and the Federal Reserve to major banks during the financial meltdown. The costs to taxpayers is tens of billions of dollars a year.

Back in 1994 then-Labor Secretary Robert Reich gave a speech arguing that it was unfair to cut financial assistance to the poor while ignoring special tax breaks and other benefits enjoyed by business. Reich inspired a strange bedfellows coalition led by public interest advocate Ralph Nader and then-House Budget chair John Kasich (now governor of Ohio). Ultimately, the effort was stymied, as every business subsidy’s entrenched interests lobbied back. The subsidy-industrial complex emerged largely unscathed.

Nonetheless, the anti-corporate welfare movement has continued up to the present, with the latest battled being waged mainly by some Tea Party types against the Export-Import Bank.

Throughout these two decades of subsidy analysis and debate, the focus has been on aggregate costs, either by program, by industry or by type of company. Except for bailouts, very little analysis has been done of which specific corporations benefit the most from federal largesse.

My colleagues and I at Good Jobs First have just completed a project which will allow those on all sides of the debate to identify the companies enjoying corporate welfare. Today we are releasing Subsidy Tracker 3.0, a expansion to the federal level of our database which since 2010 has provided information on the recipients of state and local economic development subsidy awards.

We have collected data on 164,000 awards from 137 federal programs run by 11 cabinet departments and six independent agencies. Much of the data, covering the period from FY 2000 to the present, is extracted from the wider range of content on USA Spending, which also covers non-corporate-welfare money flows such as federal grants to state and local governments and federal contracts. We also tracked down about 40 other sources from a variety of lesser known reports and webpages. Farm subsidies are excluded as they are already ably covered by the Environmental Working Group’s agriculture database.

Our data does not cover the full range of federal business assistance, given that most tax breaks are offered as provisions of the Internal Revenue Code that any qualifying firm can claim. We include only the small number of tax credits (mostly in the energy areas) that are allocated to specific firms. But we’ve got plenty of company-specific grants, loans, loan guarantees and bailouts.

Today we are also releasing a report, Uncle Sam’s Favorite Corporations, that analyzes the federal data. While we don’t endorse or critique any of the wide-ranging programs themselves, we do find some remarkable patterns among the recipients.

The degree of big business dominance of grants and allocated tax credits is comparable to what we previously found for state and local subsidies. A group of 582 large companies account for 67 percent of the $68 billion total, with six companies receiving $1 billion or more.

At the top of the list with $2.2 billion in grants and allocated tax credits is the Spanish energy company Iberdrola, whose U.S. wind farms have made extensive use of a Recovery Act program designed to subsidize renewable energy.

Mainly as a result of the massive rescue programs launched by the Federal Reserve in 2008 to buy up toxic securities and provide liquidity in the wake of the financial meltdown, the totals for loans, loan guarantees and bailout assistance run into the trillions of dollars. These include numerous short-term rollover loans, so the actual amounts outstanding at any given time, which are not readily available, were substantially lower but likely amounted to hundreds of billions of dollars. Since most of these loans were repaid, and in some cases the government made a profit on the lending, we tally the loan and bailout amounts separately from grants and allocated tax credits.

The biggest aggregate bailout recipient is Bank of America, whose gross borrowing (excluding repayments) is just under $3.5 trillion (including the amounts for its Merrill Lynch and Countrywide Financial acquisitions). Three other banks are in the trillion-dollar club: Citigroup ($2.6 trillion), Morgan Stanley ($2.1 trillion) and JPMorgan Chase ($1.3 trillion, including Bear Stearns and Washington Mutual). A dozen U.S. and foreign banks account for 78 percent of total face value of loans, loan guarantees and bailout assistance.

Other key findings:

Foreign direct investment accounts for a substantial portion of subsidies. Ten of the 50 parent companies receiving the most in federal grants and allocated tax credits are foreign-based; most of their subsidies were linked to their energy facilities in the United States. Twenty-seven of the 50 biggest recipients of federal loans, loan guarantees and bailout assistance were foreign banks and other financial companies, including Barclays with $943 billion, Royal Bank of Scotland with $652 billion and Credit Suisse with $532 billion. In all cases these amounts involve rollover loans and exclude repayments.
A significant share of companies that sell goods and services to the U.S. government also get subsidized by it. Of the 100 largest for-profit federal contractors in FY2014 (excluding joint ventures), 49 have received federal grants or allocated tax credits and 30 have received loans, loan guarantees or bailout assistance. Two dozen have received both forms of assistance. The federal contractor with the most grants and allocated tax credits is General Electric, with $836 million, mostly from the Energy and Defense Departments; the one with the most loans and loan guarantees is Boeing, with $64 billion in assistance from the Export-Import Bank.
Federal subsidies have gone to several companies that have reincorporated abroad to avoid U.S. taxes. For example, power equipment producer Eaton (reincorporated in Ireland but actually based in Ohio) has received $32 million in grants and allocated tax credits as well as $7 million in loans and loan guarantees from the Export-Import Bank and other agencies. Oilfield services company Ensco (reincorporated in Britain but really based in Texas) has received $1 billion in support from the Export-Import Bank.
Finally, some highly subsidized banks have been involved in cases of misconduct. In the years since receiving their bailouts, several at the top of the recipient list for loans, loan guarantees and bailout assistance have paid hundreds of millions, or billions of dollars to U.S. and European regulators to settle allegations such as investor deception, interest rate manipulation, foreign exchange market manipulation, facilitation of tax evasion by clients, and sanctions violations.

Banks Bite the Hand that Rescued Them

Investment 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.

—————-

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

What Did the Rescue of Merrill Lynch Get Us?

Ken Lewis, John Thain Five years ago at this time, only a week after the dramatic federal seizure of Fannie Mae and Freddie Mac, the next big financial bombshell landed: the takeover of brokerage behemoth Merrill Lynch by Bank of America.

Much of the current commentary on the fifth anniversary of the financial meltdown is focusing on the collapse of Lehman Brothers, with plenty of speculation on what might have happened if the feds had not let Lehman go under. But just as significant is what did occur in the wake of the shotgun marriage of Merrill and BofA.

To put things in context, let’s review the checkered history of Merrill in the years leading up to the crisis. In 1998 it had to pay $400 million to settle charges that it helped push Orange County, California into bankruptcy four years earlier with reckless investment advice. In 2002 it agreed to pay $100 million to settle charges that its analysts skewed their advice to promote the firm’s investment banking business (plus another $100 million the following year). In 2003 it paid $80 million to settle allegations relating to dealings with Enron. In 2005 industry regulator NASD (now FINRA) fined Merrill $14 million for improper sales of mutual fund shares.

Merrill, whose charging bull logo served as a symbol of Wall Street’s drive, was a key player in the issuance of the flawed subprime-mortgage-backed securities at the center of the meltdown. In an early indicator of the problem of toxic assets, Merrill announced an $8 billion write-down in 2007. Its mortgage-related losses would climb to more than $45 billion.

BofA participated in the federal government’s Troubled Assets Relief Program (TARP), initially receiving $25 billion and then another $20 billion in assistance to help it absorb Merrill, which reported a loss of more than $15 billion in the fourth quarter of 2008. It later came out that while Merrill was racking up losses it paid out $10 million or more to 11 top executives. It was also belatedly revealed that Federal Reserve chairman Ben Bernanke and then-Treasury Secretary Henry Paulson had pressured BofA to conceal the extent of the financial mess at Merrill until after shareholders approved the acquisition. In the wake of that revelation, BofA shareholders stripped chief executive Kenneth Lewis of his additional post as chairman. Lewis later resigned from the CEO position as well.

In 2009 BofA agreed to pay $33 million to settle SEC charges that it misled investors about more than $5 billion in bonuses that were being paid to Merrill employees at the time of the firm’s acquisition. In 2010 the SEC announced a new $150 million settlement with BofA concerning the bank’s failure to disclose Merrill’s “extraordinary losses.” At the same time, New York Attorney General Andrew Cuomo filed civil fraud charges against Lewis personally, as well as BofA’s former chief financial officer Joseph Price for “duping shareholders and the federal government.”

In 2011 FINRA fined Merrill $3 million for misrepresenting loan delinquency data when selling residential subprime mortgage securities and later that year fined it $1 million for failing to properly supervise one of its registered representatives who was operating a Ponzi scheme.

In December 2011 BofA agreed to pay $315 million to settle a class-action suit alleging that Merrill had deceived investors when selling mortgage-backed securities. June 2012 court filings in a shareholder lawsuit against BofA provided more documentation that bank executives knew in 2008 that the Merrill acquisition would depress BofA earnings for years to come but failed to provide that information to shareholders. In September 2012 BofA announced that it would pay $2.43 billion to settle the litigation.

The legal entanglements continue. Just last month, the Justice Department filed a civil suit charging BofA and Merrill of defrauding investors by making misleading statements about the safety of $850 million in mortgage-backed securities sold in 2008. And in recent weeks BofA has had to agree to pay out about $200 million to settle cases involving past racial and gender discrimination by Merrill.

So what did the rescue of Merrill accomplish? It kept alive an investment operation that played a major role in the bringing about the near-collapse of the financial system and whose top people got paid handsomely as their recklessness threatened the survival of their own firm. And all this was taking place amid an atmosphere in which racial and sexual discrimination were apparently running rampant.

BofA may have thought it was building its empire when it gave in to pressure to rescue Merrill, but instead it took on vast new financial and legal liabilities. Perhaps the only good thing about the takeover was that it provided a deep-pocketed target for the lawsuits filed by the victims of Merrill’s abuses. Unfortunately, those lawsuits seem to have done little to change the ways of Merrill, BofA or any of the other big financial players. Perhaps a few more Lehmans would have done more to clean up the system.

Note: This post draws from my newly updated Corporate Rap Sheet on Bank of America, which can be found here.

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

predatory-lending-3 Five 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?

Violating the Norm at Deutsche Bank

Layout 1 Corporate annual meetings and the publication of company annual reports usually come off like clockwork. Deutsche Bank, however, has found itself in the awkward position of having to call an extraordinary general meeting and delay the issuance of its annual financial documents until after that event.

These unusual measures are symptoms of the disarray of the giant German financial institution as it copes with a series of legal complications stemming from its own ethical shortcomings.

The special meeting was necessitated by a court ruling that invalidated votes that had been taken at last year’s scheduled shareholder gathering. That ruling came as the result of a legal challenge brought by the heirs of German media tycoon Leo Kirch, who blame the bank for forcing his company into bankruptcy.

There’s a silver lining in this for Deutsche Bank management, since the delay in the publication of the annual report (and the 20-F filing with the U.S. Securities and Exchange Commission) means that it will have more time before it needs to give more details about the various legal messes it is in.

It’s not easy keeping track of them all. Deutsche Bank’s reputation has been tarnished in a variety of ways. This is not to say that the bank’s image started off spotless. It did, after all, actively collaborate with the Nazi regime, helping appropriate the assets of financial institutions in conquered countries.

The sins were not all in the distant past. In 1999 Deutsche Bank acquired New York-based Bankers Trust, which was embroiled in a scandal over its diversion of unclaimed customer assets into its own accounts; it had to pay a $60 million fine and plead guilty to criminal charges.

Deutsche Bank itself was then the subject of wide-ranging investigations of its role in helping wealthy customers, especially those from the U.S., engage in tax evasion. The bank was featured in an investigative report on offshore tax abuses issued by a U.S. Senate committee and was eventually charged by federal prosecutors. In 2010 it had to pay $553 million and admit to criminal wrongdoing to resolve allegations that it participated in transactions that promoted fraudulent tax shelters and generated billions of dollars in U.S. tax losses.

That did not put an end to Deutsche Bank’s tax evasion woes. It is currently reported to be the subject of an investigation by German prosecutors of tax dodging through the use of carbon credits. In December, the bank’s German offices were raided by some 500 police officers seeking evidence for the probe.

Deutsche Bank is also widely reported to be under investigation for its role in the manipulation of the LIBOR interest rate index. There has been speculation that the bank’s co-chief executive, Anshu Jain, might lose his job over the issue. Lower-level employees of the bank have already been disciplined.

There’s more. Deutsche Bank is one of the firms that were sued by the U.S. Federal Housing Finance Agency for abuses in the sale of mortgage-backed securities to Fannie Mae and Freddie Mac (the case is pending). Last year, the U.S. Attorney for the Southern District of New York announced that Deutsche Bank would pay $202 million to settle charges that its MortgageIT unit had repeatedly made false certifications to the U.S. Federal Housing Administration about the quality of mortgages to qualify them for FHA insurance coverage.

In January Deutsche Bank agreed to pay a $1.5 million fine to the U.S. Federal Energy Regulatory Commission to settle charges that it had manipulated energy markets in California in 2010.

Deutsche Bank’s misconduct goes beyond the realm of finance. The bank is being targeted by labor activists in Las Vegas, where it owns two casinos. Members of UNITE HERE have been picketing the bank’s Cosmopolitan casino over management’s insistence on weakening standard industry work rules during negotiations on the union’s first contract at the site. As part of its organizing drive, UNITE HERE created a website called Deutsche Bank Risk Alert to highlight the negative issues surrounding the casino’s parent. It has not lacked for content.

Note: This piece draws from my new Corporate Rap Sheet on Deutsche Bank, which can be found here.

UBS’s Ill-Fated Quest for Financial Glory

UBS UBS seems to be in the news these days more often in connection with its legal problems than in its role as a major financial services company.

This is a result both of some dubious cases brought against it and numerous instances of serious misconduct on the part of the Swiss company. UBS, after all, a corporation that not long ago had to pay $1.5 billion to settle charges that it helped manipulate the LIBOR interest rate index.

In the dubious category is a case brought by a group of its U.S. customers who tried to collect damages from the bank after it had revealed their secret accounts and they had to pay hefty penalties to avoid tax evasion charges for unreported income. A U.S. appellate court in Chicago recently upheld a lower court’s dismissal with a ruling that was, in more than one sense, dismissive. U.S. Circuit Court Judge Richard Posner wrote that UBS “has no duty to treat [the plaintiffs] like children or illiterates, and thus remind them that they have to pay taxes on the income on their deposits.” Posner went on to state: “This lawsuit, including the appeal, is a travesty. We are surprised that UBS hasn’t asked for the imposition of sanctions on the plaintiffs and class counsel.”

This is not to say that UBS was blameless. The lawsuit came after a former UBS banker turned whistleblower had revealed how the bank actively assisted wealthy Americans seeking to hide income from the IRS. Federal prosecutors targeted UBS, which in 2009 had to pay $780 million and sign a deferred prosecution agreement to settle criminal charges of having defrauded U.S. tax authorities.

The feds then pressured UBS to hand over account information on more than 50,000 U.S. customers. UBS and the Swiss government, seeking to retain the country’s tradition of bank secrecy, resisted but in the end agreed to spill the beans on a smaller group of depositors. Using that information, the IRS went after a bunch of those tax dodgers, some of whom then foolishly thought they could use the courts to get UBS to cover their tax bills.

UBS recently prevailed in another lawsuit filed in response to a different instance of its misconduct. In 2004 the U.S. Federal Reserve fined the bank $100 million for violating U.S. trade sanctions by engaging in currency transactions with parties in countries such as Iran and Libya. Based on that, a group of Americans who had been injured in Hamas and Hezbollah attacks while in Israel sued UBS in 2008 under the Anti-Terrorism Act, arguing that the bank was liable for damages in light of its dealings with Iran, which is said to back those groups. The U.S. appeals court in New York has just upheld a dismissal of the case, though it ruled that the trial judge was wrong in holding that the victims lacked standing to bring the action in the first place.

UBS’s success in these two cases pales in comparison to the damage that its reputation has suffered both from the larger matters that prompted them and from a series of other scandals that have embroiled the company through most of the 15 years since it was created from the merger of two of Switzerland’s three big banks: Swiss Bank Corporation and Union Bank of Switzerland.

After the deal was completed, UBS’s chief executive at the time, Marcel Ospel, set out on an ambitious mission to make the company the world leader in investment banking. It was an ill-fated quest.

When UBS sought to increase its U.S. presence with the acquisition of brokerage house PaineWebber, it inherited a slew of legal problems relating both to PaineWebber’s own deceptive practices in the sale of limited partnerships and those the U.S. firm in turn took on when it bought Kidder Peabody, including a scandal in which a trader fabricated $350 million in trading profits to hide what were actually huge losses.

UBS’s U.S. operation was later caught up in the controversy over conflicts of interest between research and investment banking (UBS paid $80 million as its share of the settlement) and was sued by several U.S. state governments relating to its sale of auction-rate securities. UBS settled the actions by agreeing to pay a total of $150 million in penalties to the states and buy back more than $18 billion of the securities.

After getting bailed out to the tune of some $65 billion by the Swiss government during the financial meltdown in 2008, UBS had to pay $160 million to settle federal and state charges relating to bid-rigging in the municipal securities market. Just after that, UBS was sued by the Federal Housing Finance Agency in an action seeking to recover more than $900 million in losses suffered by Fannie Mae and Freddie Mac from mortgage-backed securities purchased through UBS. (The case is pending.)

UBS faced criticism in 2011 after it came to light that a young trader named Kweku Adoboli working in the bank’s London offices had racked up more than $2 billion in losses. Adoboli was later found guilty of fraud and sentenced to seven years in prison, while UBS was fined £29 million by British regulators for supervisory failures.

And late last year, there was the resolution of the LIBOR manipulation case. In addition to the $1.5 billion in penalties, a Japanese subsidiary of UBS pleaded guilty to a charge of felony wire fraud in U.S. federal court. (By having a foreign subsidiary take the fall, UBS shielded its U.S. operations.) The repercussions of the LIBOR case did not disappear. During a subsequent hearing on the matter in the British Parliament, several former UBS executives were accused of “gross negligence and incompetence.” So much for the dream of financial glory.

Note: This piece draws from my new Corporate Rap Sheet on UBS, which can be found here.

Prosecuting Ratesters and Banksters

DOJ_S&P The U.S. Justice Department’s action against Standard & Poor’s is a welcome, if long overdue, step in the prosecution of the rating agencies, which were some of the key culprits in the financial meltdown of 2008 and the ensuing economic slump.

There are both encouraging and disheartening aspects of the case. DOJ is making use of a law enacted in the wake of the savings & loan scandals of the 1980s—the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA)—which permits it to seek penalties up to the amount of the losses suffered as a result of the alleged violations. During the period covered by the complaint, federally insured financial institutions suffered an estimated $5 billion in losses from the collateralized debt obligations that S&P is charged with giving inflated ratings. In other words, S&P may very well face a multi-billion-dollar hit.

On the other hand, despite the statement by Attorney General Eric Holder (photo) that the firm’s conduct was “egregious,” this is a civil rather than a criminal case, which means that no S&P executives will go to prison and S&P will be able to return to business as usual after it absorbs the financial blow. This is a repeat of the approach taken in the cases filed against the big banks.

At the press conference announcing the case, the head of DOJ’s civil division, Stuart Delery, noted that FIRREA allows prosecutors to seek civil penalties even though many of the underlying offenses are criminal in nature, including mail fraud, wire fraud and bank fraud. This, Delery emphasized, means that DOJ will have a lower burden of proof in making its case.

That’s convenient for prosecutors, but it lets S&P off a very large hook. Why couldn’t DOJ have brought civil and criminal charges?

Another limitation of this case, along with previous ones filed by DOJ, is that the rating agencies and the banks and investment houses that exploited their inflated ratings to peddle toxic assets are not being prosecuted at the same time. The use of separate cases means that the collusion between the groups—which can be called banksters and ratesters—is less likely to come to light.

A more aggressive approach was taken in a private suit filed back in 2008 against both a major investment house—Morgan Stanley—and the leading rating agencies—S&P and Moody’s. The case, which is still making its way through federal court, alleged that Morgan worked closely with the agencies to be sure that the large package of risky mortgage-backed securities it was selling to institutional investors received a better rating than it deserved. The plaintiffs allege that Morgan paid the agencies three times their usual fee to, in effect, guarantee that the securities would be highly rated.

To try to get around the clear implication of conflict of interest and collusion, the agencies fell back on the far-fetched claim that their ratings are a form of speech covered by the First Amendment, while Morgan tried to pin the blame on the agencies. As Gretchen Morgenson of the New York Times noted in a piece about the case last July, documents that emerged in the case showed that Morgan bullied the agencies to raise the grade they attached to the securities.

It is no surprise to learn of Morgan’s behavior. The investment house has a long history of arrogance and insistence on getting its own way. It also has a long record of cutting corners when it comes to the protection of the interests of its customers, as can be seen in the frequent fines it has paid to industry and government regulators. For example, in 2007 Morgan had to pay $7.9 million to settle SEC fraud charges relating to its failure to get retail investors the best prices possible on more than 1 million over-the-counter transactions. In 2009 Morgan was fined $3 million and ordered to pay more than $4.2 million in restitution to resolve charges that its brokers persuaded employees of Eastman Kodak and Xerox to take early retirement based on misleading investment projections.

Morgan, which once dealt exclusively with the country’s largest corporations, later got caught up with predatory lending by purchasing Saxon Mortgage Services. In 2011 Saxon had to pay $2.35 million to settle charges that it violated federal law by foreclosing on the homes of active duty military personnel without first obtaining required court orders. Last month, Morgan agreed to pay $227 million to settle other charges of loan servicing and foreclosure abuses by Saxon (which it no longer owns).

The inescapable conclusion is that the investment houses, the banks and the rating agencies all have a high degree of culpability for reckless and fraudulent practices. Prosecuting them together as criminal co-conspirators will be the only way to bring some justice to the financial sector.

Note: This piece draws from my new Corporate Rap Sheet on Morgan Stanley, which can be found here.

Will Breuer’s Departure Finally Expose Banksters to Criminal Liability?

breuer President Obama’s choice of former prosecutor Mary Jo White to head the Securities and Exchange Commission is, despite her more recent work defending white-collar miscreants, being touted as a sign that the federal government will get tougher on corporate misconduct. Yet perhaps the more important issue, given that the SEC can bring only civil cases, is who will be chosen to replace Lanny Breuer as head of the Justice Department’s Criminal Division.

Breuer is planning to leave his post at the beginning of March. The announcement of his departure comes right after a PBS Frontline documentary called “The Untouchables” made him the symbol of the Obama Administration’s failure to bring criminal prosecutions of executives at the big banks responsible for the reckless practices that led to the financial meltdown of 2008 and the resulting economic slump from which the country is still struggling to recover.

Frontline’s Martin Smith put Breuer on the spot, confronting him with claims by sources from within the Criminal Division that when it came to Wall Street there were “no subpoenas, no document reviews, no wiretaps” and that at indictment approval meetings “there was no case ever mentioned that was even close to indicting Wall Street for financial crimes.” Smith also criticized Breuer for not working more closely with whistleblowers.

Near the end of the program, Smith asked Breuer about a speech he had given before the New York Bar Association in which he seemed to be saying that concern over the financial impact on individual banks influenced his decision not to pursue criminal prosecutions—implying that they are too big to prosecute. Amazingly, Breuer stood by that position.

Throughout the interview, Breuer insisted that he was pursuing justice against the banks, pointing several times to the civil cases that DOJ has filed. There have indeed been quite a few such cases brought by DOJ, the SEC and others. In the past few issues of this blog I’ve recounted the ones brought against Citigroup, Bank of America and JPMorgan.

I don’t want to leave out Wells Fargo, which is the smallest of the four giant institutions that now dominate U.S. commercial banking but has a record that is no less checkered.

In the same way that Bank of America assumed a slew of legal problems from its acquisition of Merrill Lynch and Countrywide Financial, and JPMorgan Chase did the same with regard to Bear Stearns and Washington Mutual, Wells Fargo has had to deal with numerous cases relating to the past sins of Wachovia, which it took over in 2008.

These have included: a $4.5 million fine imposed by industry regulator FINRA for violations of mutual fund sales rules; a $40 million settlement of SEC charges that the Evergreen Investment Management business Wells Fargo inherited from Wachovia misled investors about mortgage-backed securities; a $160 million settlement of federal charges relating to money laundering by customers; a $2 billion settlement with the California attorney general of charges relating to foreclosure abuses; an $11 million settlement with the SEC of charges that it cheated the Zuni Indian Tribe in the sale of collateralized debt obligations; and a $148 million settlement of federal and state municipal securities bid rigging charges.

Wells Fargo also had problems of its own making. In 2009 it had to agree to buy back $1.4 billion in auction-rate securities to settle allegations by the California attorney general of misleading investors. In 2011 it agreed to pay $125 million to settle a lawsuit in which a group of pension funds accused it of misrepresenting the quality of pools of mortgage-related securities. Soon after that, the Federal Reserve announced an $85 million civil penalty against Wells Fargo for steering customers with good qualifications into costly subprime mortgage loans during the housing boom. And then Wells Fargo agreed to pay at least $37 million to settle a lawsuit accusing it too of municipal bond bid rigging.

Wells Fargo was one of five large mortgage servicers that in February 2012 consented to a $25 billion settlement with the federal government and state attorneys general to resolve allegations of loan servicing and foreclosure abuses. In July 2012 the Justice Department announced that Wells Fargo would pay $175 million to settle charges that it engaged in a pattern of discrimination against African-American and Hispanic borrowers in its mortgage lending during the period from 2004 to 2009. In August 2012 Wells Fargo agreed to pay $6.5 million to settle SEC charges that it failed to fully research the risks associated with mortgage-backed securities before selling them to customers such as municipalities and non-profit organizations.

In October 2012 the U.S. Attorney for the Southern District of New York filed suit against Wells Fargo, charging the bank with engaging in a “longstanding practice of reckless underwriting and fraudulent loan certification” for thousands of loans insured by the Federal Housing Administration that ultimately defaulted. And in January 2013 Wells Fargo was one of ten major lenders that agreed to pay a total of $8.5 billion to resolve claims of foreclosure abuses.

The sad truth is that settlements such as these are regarded by Wells Fargo as simply affordable costs of doing business. The same goes for Citi, BofA and JPMorgan. And unless Breuer gets replaced with someone tougher on financial crime, these banks have nothing to worry about.

Note: This piece draws on my new Corporate Rap Sheet on Wells Fargo, which can be found here.