September 2013 Archives

The Rising Cost of Bad Business

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Corporate Sponsorship of Rick Perry’s Partisan Job Piracy

perry_cash “If you want to live free — free from overtaxation, free from overlitigation, free from overregulation … move to Texas.” That’s the pitch Texas Gov. Rick Perry just made to business executives in Maryland in the latest of his brazenly partisan job-poaching trips to states led by Democratic governors. In advance of the trip, Perry ran ads that explicitly criticized Maryland’s Martin O’Malley, claiming to business owners that “unfortunately, your governor has made Maryland the tax and fee state.”

In an earlier trip to Missouri, Perry’s meddling in another state’s policymaking was even more direct. Arriving amid a debate over a veto by Gov. Jay Nixon of a regressive tax-cut bill, Perry gave a speech in which he appealed to legislators: “Grow Missouri! Override that veto!” (The override failed.)

My colleagues and I at Good Jobs First have just published a report questioning whether Perry’s partisan job piracy is being financed in part with taxpayer dollars. Many of the dues-paying members of TexasOne, the entity paying for Perry’s trips, are municipal economic development corporations, which receive a portion of local sales tax receipts.

It turns out that an even larger share, roughly half, of TexasOne’s budget comes from the payments made by businesses. Corporations enjoying the benefits of Perry’s laissez-faire policies in Texas are bankrolling him to spread that gospel to Blue States while he tries to steal their jobs and simultaneously raises his personal political profile on the national stage.

The cozy relationship between Perry and Texas big business is nothing new. As Texans for Public Justice has shown in a long series of reports, Perry has perfected the art of crony capitalism during his dozen years in the governor’s office. Companies whose executives and investors have been among the most generous contributors to Perry’s races show up on lists of the largest state contractors and the recipients of state economic development subsidies, and they tend to get favorable treatment from regulatory agencies run by Perry appointees.

This pattern extends to the companies participating in TexasOne. For example, Shell Oil ($50,000 in annual payments to TexasOne) received a $2 million subsidy award (for its Motiva refinery joint venture) from the Perry-controlled Texas Enterprise Fund. Road-builder Williams Brothers Construction ($25,000 a year to TexasOne according to one source; $100,000 a year according to another) has received hundreds of millions of dollars in contracts from the Texas Department of Transportation.

The Public Utility Commission of Texas, whose members are appointed by the governor, awarded huge contracts to a group of companies to build transmission lines from wind farms in the western part of the state to the major population centers in central Texas. One of these contracts, worth $1.3 billion, was awarded to Oncor Electric Delivery (a $25,000 member of TexasOne).

On the regulatory front, a prime example is Contran Corporation, which is currently paying $100,000 a year to TexasOne. Contran is the holding company controlled by Dallas billionaire Harold Simmons, a heavy contributor to Perry’s state races. Contran ponied up $1 million for the super PAC that backed Perry’s 2012 presidential race. Earlier, the Texas Commission on Environmental Quality, whose members are also appointed by the governor, awarded a franchise for a low-level nuclear waste dump to a subsidiary of Contran called Waste Control Specialists.

In 2011, after Waste Control was granted controversial permission to store nuclear material brought in from other states, a Dallas Morning News editorial (January 11, 2011) declared: “Far too much about this process stinks of the influence that one very rich person wields as a million-dollar campaign contributor to Gov. Rick Perry.”

Major contributors to TexasOne include large corporations such as AT&T and Capital One with business interests that extend far beyond the borders of Texas. Some of these, such as Verizon, are headquartered in states targeted by Perry’s partisan job-poaching trips.

It is unclear whether these companies realize the potential problems they could face by helping to sponsor Perry’s attack on governors in states where they have a significant presence. They could alienate their political allies in those states and might also incur the wrath of their residents.

We’ve seen how consumer-oriented companies can risk losing customers if they are identified as financial backers of controversial groups or causes. Dozens of large companies ended their membership in the American Legislative Exchange Council (ALEC) when it became identified with heated issues such as minority voter suppression and stand-your-ground gun laws.

For companies serving national markets, bankrolling high-profile and partisan interstate job piracy could also become risky business.

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?