Bank of America Returns to the Scene of the Crime

BofAHome buyers beware: Bank of America is returning to the home loan market. According to the Wall Street Journal, BofA is “girding for a new run at the U.S. mortgage business.”

It apparently wants to reclaim a share of the fat profits that rivals such as Wells Fargo have been enjoying from a mortgage refinancing boom sparked by low interest rates. Those profits are particularly tantalizing given the other recent news about BofA: it reported a 63 percent decline in fourth-quarter net income.

Ironically, that plunge in earnings was caused by BofA’s previous screw-ups in none other than the mortgage market, specifically the billions of dollars it has had to pay Fannie Mae to settle charges that it sold the housing finance agency large quantities of faulty mortgage loans it had originated.

In the most recent settlement with Fannie earlier this month, BofA agreed to pay $10.3 billion while also agreeing to sell off about 20 percent of its loan servicing business. The New York Times front page article on the settlement was headlined: “Big Bank Extends Retreat from Mortgages.”

If two major newspapers are to be believed, in the course of just one week BofA went from retreat to advance. By all rights, BofA should not be allowed to perform this about-face.

BofA, including two companies it acquired in 2008, has done so much harm in both the mortgage market and the mortgage-backed securities market, that banishment would be the most appropriate punishment.

Let’s look back at the record. In July 2008 BofA completed the acquisition of the giant mortgage lender Countrywide Financial, which was becoming notorious for pushing borrowers, especially minority customers, into predatory loans and was growing weaker from the large number of those loans that were going into default. Later that year, amid the financial meltdown, BofA was pressured to take over the teetering investment house Merrill Lynch.

Merrill came with a checkered history. 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. In 2003 it paid $80 million to settle allegations relating to dealings with Enron. 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. 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.”

In 2011 BofA agreed to pay $315 million to settle a class-action suit alleging that Merrill had deceived investors when selling mortgage-backed securities. The following year, 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 2012 BofA announced that it would pay $2.43 billion to settle the litigation.

The Countrywide acquisition also came back to haunt BofA. In 2010 it agreed to pay $108 million to settle federal charges that Countrywide’s loan-servicing operations had deceived homeowners who were behind on their payments into paying wildly inflated fees. Four months later, Countrywide founder Angelo Mozilo reached a $67.5 million settlement of civil fraud charges brought by the SEC. As part of an indemnification agreement Mozilo had with Countrywide, BofA paid $20 million of the settlement amount.

In May 2011 BofA reached a $20 million settlement of Justice Department charges that Countrywide had wrongfully foreclosed on active duty members of the armed forces without first obtaining required court orders. And in December 2011 BofA agreed to pay $335 million to settle charges that Countrywide had discriminated against minority customers by charging them higher fees and interest rates during the housing boom. In mid-2012 the Wall Street Journal reported that “people close to the bank” estimated that Countrywide had cost BofA more than $40 billion in real estate losses, legal expenses and settlements with state and federal agencies.

BofA faced its own charges as well. In 2010 it agreed to pay a total of $137.3 million in restitution to federal and state agencies for the participation of its securities unit in a conspiracy to rig bids in the municipal bond derivatives market. In 2011 BofA agreed to pay $2.8 billion to Fannie Mae and Freddie Mac to settle charges that it sold faulty loans to the housing finance agencies.

BofA was one of five large mortgage servicers that in early 2012 consented to a $25 billion settlement with the federal government and state attorneys general to resolve allegations of loan servicing and foreclosure abuses. Six months later, an independent monitor set up to oversee the settlement reported that BofA had not yet completed any modifications of first-lien mortgages or any refinancings.

Earlier this month, BofA was one of ten major lenders that agreed to pay a total of $8.5 billion to resolve claims of foreclosure abuses. Finally, as noted above, BofA agreed to pay $10.3 billion in a new settlement with Fannie Mae.

BofA claims that it has cleaned up its act, but it is difficult to believe that a bank so closely identified with predatory lending and investor deception has truly changed its ways.

 

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

Jack Lew’s Citigroup Baggage

LewFor the past four years, the presence of Timothy Geithner as Secretary of the Treasury has been a blight on the Obama Administration.

In keeping with his weak performance as president of the Federal Reserve Bank of New York, Geithner has allowed Wall Street culprits to enjoy lavish assistance from taxpayers as they avoid any serious consequences for having brought on the financial crisis from which the country is still trying to recover.

Now that Geithner is departing, Obama had a chance to take Treasury in a new direction. His choice of White House chief of staff Jack Lew for the post is not a good sign. As a deficit hawk, Lew will reinforce the president’s regrettable inclination to take seriously the wrong-headed notion that the country has a spending problem.

Yet perhaps even more troubling is Lew’s background, particularly the fact that he is a veteran of one of the leading financial-sector miscreants: Citigroup. Unfortunately, it is not unusual for presidents to turn to Wall Street for their Treasury secretaries. Ronald Reagan brought in Don Regan from Merrill Lynch; Bill Clinton got Robert Rubin from Goldman Sachs; and George W. Bush turned to Goldman again when he chose Hank Paulson to be his third Treasury head. The difference is that Lew is the first Wall Street veteran to be chosen for Treasury since the financial meltdown of 2008 exposed the pernicious behavior of the giant banks.

While Lew is not a Wall Street lifer and is not coming straight from the private sector, his time at the bank (2006-2009) was not long ago. Moreover, he was personally involved in some of Citi’s dubious practices. In 2010 the Huffington Post reported that when Lew served as chief financial officer of Citi’s Alternative Investments operation his portfolio included investments put together by hedge fund manager John Paulson that made a killing by correctly betting that the housing market would tank. This was the same Paulson who helped Goldman Sachs put together a similar notorious deal that led to SEC charges and a $550 million settlement.

Actually, Lew’s dealings with Paulson are just the beginning of why it wrong for Obama to be selecting a veteran of Citigroup to such an important position in his administration. It is well known that Citi was bailed out by the federal government to the tune of $45 billion while also getting loss protection for some $300 billion in toxic assets. What some may have forgotten is the absolutely abysmal track record of Citi before and after the bailout, including the following:

It was the merger of Citibank and Travelers Group—technically illegal when it was announced in 1998—that played a key role in bringing about the disastrous policy of financial deregulation.

Citi gave a boost to predatory lending and subprime mortgages when it purchased Associates First Capital. In 2001 Citi had to pay $215 million to settle charges brought by the Federal Trade Commission in connection with Associates’ abusive practices.

In the wake of revelations that it helped Enron conceal its massive accounting fraud, Citi had to pay $2 billion to settle lawsuits brought by Enron investors. It later paid another $2.65 billion to settle lawsuits brought by investors in WorldCom, another perpetrator of accounting fraud, alleging that Citi failed to perform due diligence when underwriting the company’s bonds.

In 2010 the SEC announced that Citi would pay a $75 million penalty to settle allegations that it misled investors about its exposure to subprime mortgage-related assets. The following year, Citi paid $285 million to the SEC to settle charges that it defrauded investors in a $1 billion collateralized debt obligation tied to the U.S. housing market.

The settlement amount in the latter SEC case, which was far below the $700 million in losses suffered by the defrauded investors, was roundly criticized by the federal judge, Jed Rakoff, who was overseeing the case. Judge Rakoff also challenged the SEC’s willingness to let Citi get off without admitting guilt in the matter, calling the deal “neither reasonable, nor fair, nor adequate, nor in the public interest.” He rejected the settlement, but the SEC filed an appeal, which is not yet fully resolved.

Citi 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. That same month, U.S. attorney’s office in Manhattan announced that Citi would pay $158 million to settle charges that its mortgage unit fraudulently misled the federal government into insuring thousands of risky home loans. In August 2012 Citi agreed to pay $590 million to settle lawsuits charging that it deceived investors by concealing the extent of its exposure to toxic subprime debt. And just this month, Citi was one of ten major lenders that agreed to pay a total of $8.5 billion to resolve claims of foreclosure abuses.

Lew, of course, was not personally responsible for all these offenses, but his association with this rogue bank is strong enough to disqualify him from a top economic policy position.

Note: This history draws from my new Corporate Rap Sheet on Citigroup, which was just posted here.

The Goldman Sachs Rogue Money Machine Keeps Humming

While Congress and the Obama Administration were busy with their fiscal cliff negotiations on New Year’s Eve, Goldman Sachs quietly submitted a batch of filings to the SEC about its own tax initiative. The rogue investment banking firm said it would accelerate the payment of $65 million in stock awards to ten executives, including CEO Lloyd Blankfein, so that they would be subject to 2012 tax rates rather than the expected higher 2013 levels.

Goldman is not the only firm to use the calendar as a form of tax avoidance. Wal-Mart did the same for its shareholders by speeding up the payment of dividends—a boon worth an estimated $180 million for the controlling Walton Family.

Yet there is something particularly galling about this behavior on the part of Goldman, which played such a large role in the financial crisis that, much more than the federal deficit and debt on which Washington is fixated, brought about our current economic problems. Despite facing various federal prosecutions and investor lawsuits, Goldman continues to reward its top people lavishly while begrudging a bit of extra money to Uncle Sam. That is the same the federal government which provided $10 billion in bailout aid and virtually interest-free borrowing to help Goldman get through the crisis (and declined to bring criminal charges against it).

I came across the news about the timing of Goldman’s stock awards just as I was finishing my first Corporate Rap Sheet of the new year, which is about none other than Goldman. I thought I would use this week’s Dirt Diggers to summarize the sordid track record of the firm.

Goldman Sachs, once lionized as the premier “money machine” of Wall Street has in the past few years become synonymous with greed and duplicity. A firm that long prided itself on putting the interests of its clients first was revealed to have repeatedly sold securities that it fully expected to plunge in value. Rolling Stone reporter Matt Taibbi’s depiction of Goldman as “a giant vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money” and Greg Smith’s reference to Goldman as “toxic and destructive” in a New York Times op-ed announcing his departure from the firm are two of the most frequently quoted phrases about the financial crisis.

Goldman’s reputation was beginning to unravel even before the financial crisis:

  • In 2003 it paid $110 million as its share of a global settlement by ten firms with federal, state and industry regulators concerning alleged conflicts of interest between their research and investment banking activities.
  • In 2005 the SEC announced that Goldman would pay a civil penalty of $40 million to resolve allegations that it violated rules relating to the allocation of stock to institutional customers in initial public offerings.
  • In 2006 Goldman was one of 15 financial services companies that were fined a total of $13 million in connection with SEC charges that they violated rules relating to auction-rate securities. In another case relating to auction-rate securities brought by the New York State Attorney General, Goldman was fined $22.5 million in 2008.

When the crisis erupted in 2008, Goldman gave in to pressure from federal regulators to convert itself into a bank holding company and received a $5 billion capital infusion from Warren Buffett’s Berkshire Hathaway. Goldman also received $10 billion from the federal government’s Troubled Assets Relief Program (TARP). During this period, Goldman profited from subprime mortgages through its ownership of Litton Loan Servicing, which it sold in 2011 in the wake of numerous abuse allegations.

The forced restructuring of Wall Street took place largely under the direction of Treasury Secretary Hank Paulson, who resigned as Goldman’s CEO in 2006 to take the post at the request of President George W. Bush. Although Paulson was required to liquidate his sizeable Goldman holdings before moving to Treasury, his actions during the 2008 crisis were widely criticized as working to the benefit of his former firm. Chief among these was the allegation that he allowed Lehman Brothers to collapse while taking pains to bail out insurance giant A.I.G., which had extensive dealings with Goldman and which used its federal support to pay off its obligations at 100 cents on the dollar. In the case of Goldman, this amounted to $12.9 billion.

Goldman soon became the leading symbol of the excesses that led up to the financial meltdown. The Taibbi quote was the most colorful of many unflattering depictions of the firm. Blankfein initially responded to the criticism by making the far-fetched claim that Goldman was doing “god’s work.”  When that did not go over well, he issued an apology for the firm’s mistakes and vowed to spend $500 million to help thousands of small businesses recover from the recession. That did little to rectify the situation.

In April 2010 the SEC accused Goldman of having committed securities fraud when it sold mortgage-related securities to investors without telling them that the investment vehicle, called Abacus, had been designed in consultation with hedge fund manager John Paulson (no relation to Hank Paulson), who chose securities he expected to decline in value and had shorted the portfolio. The Goldman product did indeed fall in value, causing institutional customers to lose more than $1 billion and Paulson to make a bundle. Paulson was not charged, but the SEC did name Fabrice Tourre, the Goldman vice president who helped create and sell the securities.

In July 2010 the SEC announced that Goldman would pay $550 million to settle the Abacus charges. The settlement also required Goldman to “reform its business practices” but did not oblige the firm to admit to wrongdoing. In January 2011 Goldman announced that an internal review of its policies in the wake of the SEC settlement had found that only limited changes were necessary. Others apparently saw matters differently:

  • In November 2010 FINRA fined Goldman $650,000 for failing to disclose that two of its registered representatives, including Fabrice Tourre, had been notified by the SEC that they were under investigation.
  • In March 2011 the SEC announced that it was bringing insider trading charges against former Goldman director Rajat Gupta. He was accused of providing illegal tips, including one about Warren Buffet’s $5 billion investment in Goldman in 2008, to hedge fund manager Raj Rajaratnam. (Gupta was later convicted and sentenced to two years in prison.)
  • In April 2012 the SEC and FINRA fined Goldman $22 million for failing to prevent its employees from passing illegal stock tips to major customers.
  • In July 2012 a federal appeals court rejected an effort by Goldman to overturn a $20.5 million arbitrator’s award to investors in the failed hedge fund Bayou Group who had accused Goldman of helping to perpetuate a Ponzi scheme.
  • That same month, Goldman agreed to pay $26.6 million to settle a suit brought by the Public Employee’s Retirement System of Mississippi accusing it of defrauding investors in a 2006 offering of mortgage-backed securities.

Some good news for Goldman came in August 2012, when the Justice Department decided it would not proceed with a criminal investigation of the firm’s actions during the financial crisis and the SEC dropped an investigation of the firm’s role in a $1.3 billion subprime mortgage deal.  All in all, Goldman has emerged largely unscathed from these controversies. Its reputation may be in tatters, but its rogue money machine keeps humming.

The full Corporate Rap Sheet for Goldman can be found here.

The 2012 Corporate Rap Sheet

Monopoly_Go_Directly_To_Jail-T-linkCorporate crime has been with us for a long time, but 2012 may be remembered as the year in which billion-dollar fines and settlements related to those offenses started to become commonplace. Over the past 12 months, more than half a dozen companies have had to accede to ten-figure penalties (along with plenty of nine-figure cases) to resolve allegations ranging from money laundering and interest-rate manipulation to environmental crimes and illegal marketing of prescription drugs.

The still-unresolved question is whether even these heftier penalties are punitive enough, given that corporate misconduct shows no sign of abating. To help in the consideration of that issue, here is an overview of the year’s corporate misconduct.

BRIBERY. The most notorious corporate bribery scandal of the year involves Wal-Mart, which apart from its unabashed union-busting has tried to cultivate a squeaky clean image. A major investigation by the New York Times in April showed that top executives at the giant retailer thwarted and ultimately shelved an internal probe of extensive bribes paid by lower-level company officials as part of an effort to increase Wal-Mart’s market share in Mexico. A recent follow-up report by the Times provides amazing new details.

Wal-Mart is not alone in its behavior. This year, drug giant Pfizer had to pay $60 million to resolve federal charges related to bribing of doctors, hospital administrators and government regulators in Europe and Asia. Tyco International paid $27 million to resolve bribery charges against several of its subsidiaries. Avon Products is reported to be in discussions with the U.S. Justice Department and the Securities and Exchange Commission to resolve a bribery probe.

MONEY LAUNDERING AND ECONOMIC SANCTIONS. In June the U.S. Justice Department announced that Dutch bank ING would pay $619 million to resolve allegations that it had violated U.S. economic sanctions against countries such as Iran and Cuba. The following month, a U.S. Senate report charged that banking giant HSBC had for years looked the other way as its far-flung operations were being used for money laundering by drug traffickers and potential terrorist financiers. In August, the British bank Standard Chartered agreed to pay $340 million to settle New York State charges that it laundered hundreds of billions of dollars in tainted money for Iran and lied to regulators about its actions; this month it agreed to pay another $327 million to settle related federal charges. Recently, HSBC reached a $1.9 billion money-laundering settlement with federal authorities.

INTEREST-RATE MANIPULATION.  This was the year in which it became clear that giant banks have routinely manipulated the key LIBOR interest rate index to their advantage. In June, Barclays agreed to pay about $450 million to settle charges brought over this issue by U.S. and UK regulators. UBS just agreed to pay $1.5 billion to U.S., UK and Swiss authorities and have one of its subsidiaries plead guilty to a criminal fraud charge in connection with LIBOR manipulation.

DISCRIMINATORY LENDING. In July, it was announced that Wells Fargo would pay $175 million to settle allegations that the bank discriminated against black and Latino borrowers in making home mortgage loans.

DECEIVING INVESTORS. In August, Citigroup agreed to pay $590 million to settle a class-action lawsuit alleging that it failed to disclose its full exposure to toxic subprime mortgage debt in the run-up to the 2008 financial crisis. The following month, Bank of America said it would pay $2.4 billion to settle an investor class-action suit charging that it made false and misleading statements during its acquisition of Merrill Lynch during the crisis. In November, JPMorgan Chase and Credit Suisse agreed to pay a total of $417 million to settle SEC charges of deception in the sale of mortgage securities to investors.

DEBT-COLLECTION ABUSES. In October, American Express agreed to pay $112 million to settle charges of abusive debt-collection practices, improper late fees and deceptive marketing of its credit cards.

DEFRAUDING GOVERNMENT. In March, the Justice Department announced that Lockheed Martin would pay $15.9 million to settle allegations that it overcharged the federal government for tools used in military aircraft programs. In October, Bank of America was charged by federal prosecutors with defrauding government-backed mortgage agencies by cranking out faulty loans in the period leading to the financial crisis.

PRICE-FIXING. European antitrust regulators recently imposed the equivalent of nearly $2 billion in fines on electronics companies such as Panasonic, LG, Samsung and Philips for conspiring to fix the prices of television and computer displays. Earlier in the year, the Taiwanese company AU Optronics was fined $500 million by a U.S. court for similar behavior.

ENVIRONMENTAL CRIMES. This year saw a legal milestone in the prosecution of BP for its role in the 2010 Deepwater Horizon drilling accident that killed 11 workers and spilled a vast quantity of crude oil into the Gulf of Mexico. The company pleaded guilty to 14 criminal charges and was hit with $4.5 billion in criminal fines and other penalties. BP was also temporarily barred from getting new federal contracts.

ILLEGAL MARKETING. In July the U.S. Justice Department announced that British pharmaceutical giant GlaxoSmithKline would pay a total of $3 billion to settle criminal and civil charges such as the allegation that it illegally marketed its antidepressants Paxil and Wellbutrin for unapproved and possibly unsafe purposes. The marketing included kickbacks to doctors and other health professionals. The settlement also covered charges relating to the failure to report safety data and overcharging federal healthcare programs. In May, Abbott Laboratories agreed to pay $1.6 billion to settle illegal marketing charges.

COVERING UP SAFETY PROBLEMS. In April, Johnson & Johnson was ordered by a federal judge to pay $1.2 billion after a jury found that the company had concealed safety problems associated with its anti-psychotic drug Risperdal. Toyota was recently fined $17 million by the U.S. Transportation Department for failing to notify regulators about a spate of cases in which floor mats in Lexus SUVs were sliding out of position and interfering with gas pedals.

EXAGGERATING FUEL EFFICIENCY. In November, the U.S. Environmental Protection Agency announced that Hyundai and Kia had overstated the fuel economy ratings of many of the vehicles they had sold over the past two years.

UNSANITARY PRODUCTION. An outbreak of meningitis earlier this year was tied to tainted steroid syringes produced by specialty pharmacies New England Compounding Center and Ameridose that had a history of operating in an unsanitary manner.

FATAL WORKFORCE ACCIDENTS. The Bangladeshi garment factory where a November fire killed more than 100 workers (who had been locked in by their bosses) turned out to be a supplier for Western companies such as Wal-Mart, which is notorious for squeezing contractors to such an extent that they have no choice but to make impossible demands on their employees and force them to work under dangerous conditions.

UNFAIR LABOR PRACTICES. Wal-Mart also creates harsh conditions for its domestic workforce. When a new campaign called OUR Walmart announced plans for peaceful job actions on the big shopping day after Thanksgiving, the company ignored the issues they were raising and tried to get the National Labor Relations Board to block the protests. Other companies that employed anti-union tactics such as lockouts and excessive concessionary demands during the year included Lockheed Martin and Caterpillar.

TAX DODGING. While it is often not technically criminal, tax dodging by large companies frequently bends the law almost beyond recognition. For example, in April an exposé in the New York Times showed how Apple avoids billions of dollars in tax liabilities through elaborate accounting gimmicks such as the “Double Irish with a Dutch Sandwich,” which involves artificially routing profits through various tax haven countries.

FORCED LABOR. In November, global retailer IKEA was revealed to have made use of prison labor in East Germany in the 1980s.

Note: For fuller dossiers on a number of the companies listed here, see my Corporate Rap Sheets. The latest additions to the rap sheet inventory are drug giants AstraZeneca and Eli Lilly.

Corporate Power and the Second Obama Administration

The corporate lobby is dumbfounded. After spending billions of dollars to defeat President Obama and take Republican control of the Senate, business interests have nothing to show for their efforts.

By all rights, Thomas Donohue of the U.S. Chamber of Commerce, which went all-out for Republican candidates, should be handing in his resignation. The Big Business-loving editorial page of the Wall Street Journal should be exhibiting a bit of contrition.

Instead, Donohue issued a press release reiterating the Chamber’s laissez-faire position: “It is the private sector that drives economic growth and jobs, and it is the government’s responsibility to work on a bipartisan basis to pass policies that will unleash the private sector and help put Americans back to work.”  The Journal warns Obama not to “consider his reelection to be a mandate to repeat his first-term record of rejecting all GOP ideas and insisting on his priorities.” God forbid that a President returned to office with a resounding victory should seek to promote his own priorities.

Even with the election is over, conservatives cannot let go of their caricature of Obama as a radical leftist who refuses to compromise. This may have something to do with the fact that many of them are radical rightists who refuse to compromise.

After Obama was first elected in 2008, the Journal predicted that he would “seek middle ground with business on thorny issues.” You wouldn’t know it from the campaign, but that was often what happened during the past four years.  Far from being the Bolshevik envisioned in the fevered imagination of his critics, Obama led Democrats in pursuing an agenda that was solidly middle-of-the-road or, in some respects, conservative, by earlier standards. Let’s recall that Obama:

  • Promoted and got enacted a healthcare reform plan that preserves the private insurance industry;
  • Enacted a stimulus plan that, among other things, funneled billions into subsidies, grants and contracts for large corporations;
  • Helped rescue the auto industry through a plan that forced workers to make major contract concessions and that took a hands-off approach to the management of companies such as General Motors and Chrysler that received tens of billions in federal aid;
  • Occasionally talked tough but ultimately did little to prosecute the financial institutions that were responsible for the near meltdown of the economy through predatory lending and reckless speculation;
  • Enacted a financial reform bill that allowed venal megabanks such as Citigroup to remain in existence and then did little to challenge Republican efforts to stonewall implementation of its consumer protection provisions;
  • Abandoned, in the face of Republican opposition, the pro-union Employee Free Choice Act and cap-and-trade legislation;
  • Continued the practice of allowing corporate criminals to escape real punishment through deferred prosecution agreements;
  • Continued to promote the myth of “clean coal” and adopted a weak or inconsistent position on dangerous energy practices such as offshore drilling and fracking;
  • Went along with the wrong-headed notion that corporate income tax rates are too high;
  • Claimed to be reducing the influence of corporate lobbyists but chose as a senior advisor someone who also serves as a strategist for clients such as military contractor Pratt & Whitney and Keystone XL pipeline developer TransCanada;
  • Declined to directly criticize large profitable companies that have refused to rehire adequate numbers of U.S. workers; and
  • Chose executives from union-unfriendly offshore outsourcers such as General Electric to advise him on job creation.

The list could go on. By any reasonable assessment, this record could be considered business-friendly or at least not overly hostile. The problem is that business groups are comparing the reality of Obama to a fantasy of token regulation, minimal taxation, vanished unions—in other words, totally unfettered corporate power—and thus feel frustrated.

Unfortunately, left to its own devices, a second Obama Administration is likely to go on trying to placate corporate interests and the Right by promoting policies that will never satisfy them but will dilute critical progressive goals.  Wouldn’t it be great if the President felt he needed to try that hard to satisfy the other end of the political spectrum?

Dealing with a Rigged System

Bill Clinton may have stolen the show at the Democratic convention, but it was the speaker preceding him who had the more powerful message.

Declaring that “the system is rigged,” Elizabeth Warren delivered perhaps the most candid statement ever made at a mainstream U.S. political event about corporate domination of American life.

While both speeches were meant to make the case for the reelection of Barack Obama, they took two starkly different approaches that highlighted a tension within the Democratic Party as intense as the one between it and the Republicans.

Clinton, basking in the nostalgia many people feel for the relative prosperity of the 1990s, did a good job in contrasting the GOP’s ideology of “you’re on your own” to a Democratic philosophy of “we’re in this together.” His call for a shared prosperity was based on a vision of “business and government actually working together to promote growth.” He insisted that “advancing equal opportunity and economic empowerment is both morally right and good economics.”

While Clinton derided the Republican narrative that every successful person is completely self-made as an “alternative universe,” he is living in a fantasy world of his own. That’s one in which corporations that have pursued self-interested policies that put the economy on the brink of disaster and ravished the living standards of most of the population are suddenly going to get religion about economic justice.

Clinton captured the absurdity of the Republican argument against Obama’s re-election: “We left him a total mess. He hasn’t cleaned it up fast enough. So fire him and put us back in.” Yet the “we” in that statement actually includes more than George W. Bush and Republican members of Congress. The mess was caused primarily by the big banks, whose orgy of speculation was ushered in by the bipartisan financial deregulation of the Clinton era.

A more accurate rebuttal of the GOP’s bogus rugged individualism was provided by Warren: “Republicans say they don’t believe in government. Sure they do. They believe in government to help themselves and their powerful friends.” The Massachusetts senatorial candidate, refusing to kowtow to the sector that many Democrats turn to for campaign contributions, added: “Wall Street CEOs—the same ones who wrecked our economy and destroyed millions of jobs—still strut around Congress, no shame, demanding favors, and acting like we should thank them.”

Unlike Clinton, Warren acknowledged that contemporary big business is rife with corruption. She repeatedly depicted the economic system as being “rigged” and referred to the “rip-offs” perpetrated by the big banks. And in a rare linkage between conventional and corporate crime, she called for a society in which “no one can steal your purse on Main Street or your pension on Wall Street.”

This gets to the dilemma for Democrats. Do they ignore corporate crime, as Clinton chose to do, and make the far-fetched claim that government partnership with business will suddenly result in broad-based prosperity rather than widening inequality? If instead they follow Warren’s lead and highlight the venality of corporations, what kind of solution can they offer?

The Consumer Financial Protection Bureau championed by Warren is a good start. As Warren noted in her speech (without naming the culprit), the CFPB recently brought an enforcement action, the agency’s first, against Capital One for deceptive marketing of credit cards.

Yet the Obama Administration overall has shown little stomach for taking tough action against corporate criminals. Obama does not hesitate to talk about how bad things were when he took office, yet his Justice Department has done little to prosecute the banksters who created the crisis.

“President Obama believes in a level playing field,” Warren dutifully declared. “He believes in a country where everyone is held accountable.” But belief is not enough. If he is reelected, Obama will have to take on corporate misconduct and stonewalling on job creation in a much more aggressive way.

After Clinton finished his speech at the convention, Obama came out on stage to embrace him and share in the enthusiastic response of the audience. Yet in a second Obama term, he would do better to align himself with Warren’s call to show that “we don’t run this country for corporations, we run it for people.”

Liar’s LIBOR

Mainstream economics would have us believe that interest rates are determined by the “invisible hand” of the market, except on those occasions when the Federal Reserve or other central banks intervene to modulate borrowing costs. One of the benefits of the current scandal embroiling the British bank Barclays is that it reveals the flimsy and fishy nature of one of the key rate-setting mechanisms of the global financial system.

That mechanism is the British Bankers’ Association’s London Interbank Offered Rate, an interest rate index that has been around since the 1980s. While LIBOR’s primary function is to represent what it costs big banks to borrow from one another over the short term, it has become the linchpin of hundreds of trillions of dollars of financial transactions ranging from complex interest-rate swaps to adjustable-rate home mortgages.

One would think that something so crucial to the efficient functioning of capitalism would be determined in a rigorous way. LIBOR rates, it turns out, are assembled in a remarkably arbitrary manner. They are based on figures submitted each day by major banks on what they think they would have to pay at that time to borrow in ten different currencies for 15 different periods of time. The upper and lower ends of the range are removed before the actual index is calculated by Thomson Reuters on behalf of the bankers’ association, but the figures are still based on what the banks decide to report as their perceptions.

While there has been debate since the beginning about the use of perceptions rather than actual transactions, serious questions about the integrity of LIBOR date back to the early stages of the financial meltdown in 2008. In April of that year the Wall Street Journal noted growing concerns that banks, whose individual LIBOR figures are made public, were adjusting those submissions downward to disguise the fact that their increasingly shaky condition was forcing them to pay higher rates for short-term loans.

The Journal then published its own analysis concluding that banks such as Citigroup and J.P. Morgan Chase, to avoid looking desperate for cash, had been reporting significantly lower borrowing costs to LIBOR than what other indicators suggested should have been the case.

By 2011, LIBOR discrepancies had moved from the realm of financial analysis to that of government oversight. The Swiss bank UBS disclosed that its LIBOR submissions were being reviewed by U.S. and Japanese regulators, and there were reports that other institutions were involved in the probes. It soon emerged that a group of megabanks were being investigated in various countries for colluding to manipulate the LIBOR rate. This, in turn, prompted a wave of lawsuits filed by institutional investors as well as by municipal governments whose interest rate swaps became less beneficial because of artificially low LIBOR rates.

Barclays is the first bank to be penalized for LIBOR shenanigans. The $453 million it is paying to U.S. and U.K. regulators to settle the case is more an embarrassment than a serious financial burden. Moreover, no executives or traders were charged, despite the smoking-gun emails quoted in the UK Financial Services Authority’s summary of the case. And, in an arrangement that is standard operating procedure for corporate miscreants these days, Barclays negotiated a deal with the U.S. Justice Department that allows it to avoid a criminal conviction.

It was satisfying to see the bank’s CEO Robert Diamond (phot0) forced to resign after the revelation of evidence suggesting that senior executives knew very well what was going on with the LIBOR manipulation. (Diamond, an American, also had to step down as a co-host of a fundraising event in London for Mitt Romney.) Yet we then had to put up with the ridiculous spectacle of Diamond testifying to a parliamentary committee that regulators were partly to blame.

The highlight of the hearing was when Labour MP John Mann told Diamond: “Either you were complicit, grossly negligent or incompetent.” After a pause, Diamond asked. “Is there a question?”

There is no question that the big banks are corrupt and that an interest-rate-setting system that depends on honest reporting by representatives of those institutions has no legitimacy.

A Cost of Doing Dirty Business

The Justice Department’s announcement of a $26 billion federal-state legal settlement with the country’s five largest mortgage servicers is filled with words like “unprecedented,” “landmark” and “historic.” It claims that the deal “provides substantial financial relief to homeowners and establishes significant new homeowner protections for the future.”

All of this hyperbolic language cannot disguise the fact that the settlement is just the latest in a series of efforts by the Obama Administration to give the appearance of being tough on corporate misconduct while actually letting the malefactors off easily. It is disappointing that so many state attorneys general gave into pressure to go along with the deal.

The $17 billion of the total that the servicers will be required to spend on direct relief (mortgage balance reductions and cash payments) will aid only a fraction of the homeowners victimized by abusive mortgage and foreclosure practices. Like earlier efforts by the Administration to deal with the housing debacle, it will do nothing for most of those who have been dispossessed in one of the most egregious cases of corporate lawlessness this country has ever seen.

The size of the settlement pool is meager in connection with the $200 billion multi-state tobacco settlement of 1998, for instance, and it will not present much of a financial burden for the five big servicers. Those companies—Bank of America, Citigroup, J.P. Morgan Chase, Wells Fargo and Ally Financial (formerly GMAC)—have combined assets of about $8 trillion. In other words, they are being asked to give up only about one-third of one percent of their total resources to resolve a crisis that has left so many with no resources at all.

Actually, the impact on the banks is even smaller than the absolute numbers would suggest. Many of the home loans that will be adjusted have already been written down in value by the financial institutions, so they are not really conceding anything. Meanwhile, those who have lost their homes to foreclosure will receive pitiful payments of about $2,000 each. There may be other pitfalls in the fine print of the settlement, which as of this writing has not yet been posted on the website created to publicize the deal.

The one good thing that can be said about the settlement is that, thanks to the insistence of New York Attorney General Eric Schneiderman, it does not release the banks from culpability for all mortgage-related offenses, and it allows the state AGs to continue pursuing any criminal charges. This leaves the door open for cases such as the one taking place in Missouri, in which a foreclosure servicing company called DocX is being charged with forgery. Yet it remains to be seen how aggressive federal and state agencies will be in pursuing such cases if the settlement gives the impression that the book has been closed on foreclosure abuses.

That impression was reinforced by the announcements of bank regulators such as the Federal Reserve and the Office of the Comptroller of the Currency that they have reached their own settlements with mortgage servicers.

Foreclosure abuses did not simply force people out of their homes in an unjust way. They exposed the imbalance of power between individuals and giant corporations when it comes to the application of the law. Capitalism is supposed to be based on the sanctity of contracts and the clear identification of ownership rights. Revelations that financial institutions were able to carry out foreclosures based on shoddy documentation, robo-signing and the like showed that, when it comes to the rule of law, not everyone is playing by the same rules.

Housing and Urban Development Secretary Shaun Donovan would have us believe that the settlement “forces the banks to clean up their acts and fix the problems uncovered during our investigations.” It can just as easily be said that the deal signals to large financial institutions that they can go on mistreating their customers and that the worst consequence would be modest financial penalties that can be written off as a cost of doing dirty business.

Good Cop or Bad Cop Obama?

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.

Fighting for the Right to Be a Weak Regulator

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.