Dirt Diggers Digest - chronicling corporate misbehavior (and how to research it)

Where Healthcare’s Bare Bones are Buried

junk_insurance President Obama may very well have blundered in leaving out the nuances when he pledged during the Congressional deliberations over the Affordable Care Act that “if you like what you have, you can keep it.” Yet it would have been difficult to anticipate in 2009 that only a few years later the opponents of the ACA would succeed in creating an atmosphere in which much of the public has been made to believe that the government can do nothing right and the private sector nothing wrong when it comes to healthcare reform.

It is amazing how little attention is being paid to the insurance companies whose cancellation notices are what created the current furor over Obama’s supposed betrayal. These companies, with the encouragement of penny-pinching employers, created the substandard plans that must now be eliminated to comply with the minimum coverage provisions of the ACA.

One of the original culprits was Aetna, which in 1999—not long after merging with the controversial HMO pioneer U.S. Healthcare, introduced one of the first bare-bones plans under the name Affordable HealthChoices. The plan, put forth as way to reduce the ranks of the uninsured, was rolled out with the support of groups such as the U.S. Chamber of Commerce and the National Federation of Independent Businesses, which were eager to have an alternative to greater government involvement in healthcare coverage.

Affordable HealthChoices was indeed more affordable than conventional insurance, but that was because it was full of holes. At the time of Aetna’s announcement, the Wall Street Journal (5/4/1999) quoted consumer advocate Ron Pollack of Families USA as saying: “The bottom line for anybody who buys [this plan] is, ‘Don’t get sick,’ because if you get sick you are going to wind up with enormous bills.” Some states barred Aetna from selling the plans.

Another proponent of cut-rate coverage was Wal-Mart, which in the early 2000s, was putting its workers in plans with deductibles that were far above the norm and which excluded many kinds of preventive care. In many cases, the plans did not pay for any treatment of pre-existing conditions during the first year of coverage (Wall Street Journal, 9/30/2003). These provisions, along with premium costs that were difficult for many of the company’s low-wage workers to handle, prompted many Wal-Mart employees to turn to taxpayer-funded programs such as Medicaid. Nonetheless, Wal-Mart touted its high-deductible approach as a model for other employers.

Unfortunately, other companies followed Wal-Mart’s lead. By 2006 there were estimates that nearly one million people had enrolled in what were often called mini-medical plans, while millions more were in plans with more extensive benefits but high deductibles. Other major insurers such as WellPoint, UnitedHealth Group, Cigna and Coventry (now owned by Aetna) jumped into the market to sell what Consumer Reports has called “junk insurance.”

These companies targeted their bare-bones offerings not only at parsimonious companies but also at those with no employer coverage who turned to the individual insurance market, especially younger people more inclined to take a chance on getting by with catastrophic benefits.

Mini-meds contributed to the epidemic of bankruptcies among people with serious health conditions and helped drive home the reality that underinsurance was becoming as serious an issue as those who lacked coverage entirely.

This threat was highlighted by Democrats on the Senate Commerce Committee, led by Jay Rockefeller of West Virginia, who held a hearing in late 2010 entitled “Are Mini Med Policies Really Health Insurance?” Sen. Rockefeller took special aim at the mini med offered by McDonald’s, which capped benefits at $2,000 per year. At the hearing several Aetna customers described how they were covered for only a small portion of their expenses when they had major health problems. For example, a woman who had to go to the emergency room when she lost feeling in one of her arms and ran up more than $16,000 in bills received only $500 in coverage from Aetna.

The ACA was designed to reduce the number of people in bare-bones plans, but the law did not call for their complete elimination. Insurers can no longer cap the dollar value of annual benefits, but strange as it sounds, larger employers can offer low-cost plans that exclude categories of coverage such as hospitalization and still qualify under the new law. In other words, the real problem may be that not enough policies are being cancelled.

Whatever falsity was involved in President Obama’s pledge does not begin to compare with the deception practiced by insurance companies and miserly employers when they make holders of bare bones policies think that they have something that deserves to be called coverage.

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

UnitedHealth Group Haunts Obamacare

unitedhealth_100121_mn Kathleen Sebelius’s “hold me accountable” line at the latest House hearing on the botched rollout of Healthcare.gov was a deft political move. It flummoxed Republican interrogators who expected the HHS Secretary to pass the buck.

Yet the line was dismaying in that it continued the Obama Administration’s practice of deflecting most criticism away from the contractors that were responsible for building the portal, at a cost of hundreds of millions of dollars.

Not only have the contractors been shielded, but one of those at the center of the debacle was just chosen to head up the rescue of the project. In the world of government outsourcing, failure is no impediment to getting rehired with even more responsibility.

The anointed company is QSSI, previously an obscure player in the world of healthcare IT. What makes the kid-glove treatment of this firm all the more galling is that QSSI is owned by UnitedHealth Group, also the parent of UnitedHealthcare, one of the two behemoths (the other is WellPoint) of the private health insurance industry.

In other words, one of the large corporations that the Affordable Care Act is propping up (despite their abysmal record) is now profiting from cleaning up the mess that one of its unit caused in trying to create a system designed to help people enroll in plans sold by its own parent company and its competitors.

If this were not bizarre enough, it is worth recalling that this is not the first time a UnitedHealth subsidiary has been involved in a scandal involving a healthcare database. In 2008 the company’s Ingenix unit was the target of allegations that its tool for determining how much patients should be reimbursed for out-of-network medical expenses was seriously flawed. Then-New York Attorney General Andrew Cuomo brought suit against UnitedHealth, calling the widely used Ingenix database part of a scheme to “to deceive and defraud consumers.”

In 2009 UnitedHealth settled with Cuomo by agreeing to spend $50 million to build a new database and then agreed to pay $350 million to settle class action lawsuits that had brought over the issue. Ingenix subsequently changed its name to Optuminsight, which by the way is now the parent of QSSI.

Another UnitedHealth subsidiary, Lewin Group, has generated controversy of another sort: presenting itself as an impartial healthcare consulting company when it is part of a corporation with a big vested interest in the policy options Lewin evaluates. During the Congressional deliberations over healthcare reform in 2009 Lewin produced analyses concluding that the adoption of a public option would result in a mass exodus from private plans and jeopardize their future. A Lewin executive made the alarmist statement that the private insurance industry “might just fizzle out altogether” and helped to sway lawmakers to omit the option from the Affordable Care Act. Like QSSI, the Lewin Group is a unit of Optuminsight.

UnitedHealth is also tied to what is emerging as the new focus of anti-Obamacare rage: reports that insurance companies are cancelling large numbers of policies. This is being portrayed as a betrayal of Obama’s earlier promise that people with coverage would be able to keep it. Yet what is really going on is that insurers are complying with provisions of the ACA that bar them from continuing to sell substandard policies.

Those policies—with huge deductibles and big holes in coverage—were sold not only by fly-by-night companies. Aetna, for example, was pushing these bare-bones plans as early as 1999. UnitedHealth Group made a big push into this market in 2003 when it acquired Golden Rule Financial, which specialized in low-cost individual plans, for $500 million. The spread of such policies was one of the main justifications for healthcare reform.

The repeated appearances of UnitedHealth subsidiaries amid the tribulations of the ACA are reminders that the Obama Administration made a Faustian bargain with the private sector in designing healthcare reform. The question now is whether it can reclaim its soul.

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

The Outsourcing Customer is Always Wrong

The corporate executives who testified at a House hearing on the botched rollout of the federal healthcare portal apparently sprayed themselves with Teflon before heading to Capitol Hill. Blame for the fiasco did not stick to these contractors as Republican members of the Energy & Commerce Committee sought to implicate the Obama Administration and the Democrats focused on defending the Affordable Care Act.

Representatives from four contractors — CGI Federal, QSSI, Serco and Equifax — took advantage of the situation by denying any serious shortcomings on their part. In fact, they each claimed that their individual pieces of Healthcare.gov were working fine and claimed to be puzzled as to why the overall system was not working properly. When pressed, they implied that the federal agency that had commissioned their work — the Centers for Medicare and Medicaid Services — had not given them adequate time for testing. In other words, they acted as if they were innocent bystanders at someone else’s train wreck.

Yet these were companies that received the lion’s share of the lucrative contracts awarded by CMS for the creation of the federal portal. CGI and QSSI alone received a total of $143 million. They were not the people who delivered the Chinese food or emptied the wastebaskets while the real work was being done by others.

These contractors present themselves quite differently when touting their services. On its website, CGI brags: “With deep experience in developing and integrating business, clinical and IT solutions for public and private sector health organizations across Europe and North America, CGI helps clients anticipate challenges and achieve real transformation.” Speaking specifically about health insurance exchanges (HIX), the site says: “Because exchanges must provide many different functions, the soundest approaches bring together expertise and best practices in federal and state health programs, commercial insurance, data exchange, portals, e-commerce over the cloud, and financial management. CGI brings all of this expertise to the table, along with direct experience in developing sustainable HIX programs.”

Similar boasts are made by QSSI, which stands for Quality Software Services Inc.: “Bringing together the most talented personnel in the industry, QSSI collaborates with both the public sector and private sector to maximize performance and create sustainable value for our customers.” The website of QSSI’s parent OptumInsight declares: “We’re making the most of our leadership position in health and human services technology by helping to transform government agencies into efficient, cost-effective programs with decision support, informatics, and program analysis.”

There is a special irony in the presence of QSSI and OptumInsight at the center of this scandal. OptumInsight, which purchased QSSI last year, is a unit of UnitedHealth Group, whose UnitedHealthcare unit is one of the country’s largest health insurance providers.

In other words, one of the for-profit insurers that the Affordable Care Act went to such great lengths to preserve — despite their countless abuses — is closely linked to the mess surrounding the web portal that is supposed to help people in 36 states sign up for the coverage that it and its counterparts will provide.

Last year Iowa Sen. Chuck Grassley and House Energy Chair Fred Upton, both Republicans, raised questions about potential conflicts of interest in the wake of UnitedHealth’s purchase of QSSI, but that issue seems to have been forgotten in the quest to blame the Obama Administration for all the ills of Healthcare.gov. Also largely overlooked is the fact that the Inspector General of the Department of Health and Human Services has criticized QSSI, whose employees have access to sensitive information on individuals, for not sufficiently implementing CMS security protocols with regard to thumb drives.

In his testimony before the House Energy committee, Andrew Slavitt of QSSI’s parent company, said: “We do understand the frustration many people have felt since Healthcare.gov was launched,” yet he in effect denied any responsibility for causing that frustration.

So it goes in the world of outsourcing: the customer is always wrong and the company, whatever its shortcomings, gets off scot free.

GE Dumps Workers as It Dredges the Hudson

DUMP_YRD_SIGN For 30 years, General Electric resisted calls to remove the toxic substances it had dumped into New York’s Hudson River over several decades. Now that the process is well under way, the company is striking back at the state by shutting its cleaned-up plant along the river and moving some 200 jobs to Florida. The workers slated to be laid off feel that they are now being dumped.

The site of the dispute is Fort Edward (about 200 miles north of New York City), where from the late 1940s to the mid-1970s GE produced electric capacitors using insulating material containing polychlorinated biphenyls (PCBs). Vast quantities of PCB-contaminated waste ended up in the river’s waters and riverbed.

By the 1970s PCBs were recognized to be a human carcinogen and their manufacture was banned in the United States. In 1975 the New York State Department of Environmental Conservation ordered GE to cease its PCB dumping and negotiated a path-breaking settlement under which the company would help pay the cost of cleaning up the pollution that had closed the river to commercial fishing and become a national symbol of corporate irresponsibility.

As the projected cost of the clean-up escalated, GE resisted dredging the river’s sediment, which was estimated to contain more than 130 metric tons of PCBs, and instead proposed dubious alternatives such as using bacteria to try to break down the toxic wastes. The company continued this obstruction for years, even after the EPA ordered it in 2001 to pay an estimated $460 million to remove 2.65 million cubic yards of sediment. The legal battle finally ended in 2005, but it took until 2009 for GE to actually begin the dredging. The process is now in its fifth year.

The workers at the Fort Edward plant may not be around to celebrate the completion of the clean-up. A few weeks ago, GE announced that it planned to close the plant and move the operation to Clearwater, Florida. The Fort Edward workers have been represented by the United Electrical (UE) union for the past 70 years, while the Clearwater plant—as you might expect—is non-union.

The Fort Edward move is just the latest of a long series of actions by GE that have weakened the economy of upstate New York. The city of Schenectady, where Thomas Edison moved his electrical equipment operation in 1886, has alone lost tens of thousands of jobs through waves of GE downsizing.

GE also seems to feel no sense of obligation in connection with the economic development subsidies it has received from state and local government agencies in New York. The biggest giveaways have come downstate. In 1987, a year after it was acquired by GE, NBC pressured New York City to give it $98 million in tax breaks under the threat of moving its operations to New Jersey. In 1999 investment house Kidder Peabody, then owned by GE, got its own $31 million package to stay in the city.

There have also been subsidies upstate. For example, in 2009 GE got a $5 million grant and a $2 million tax abatement for its operations in Schenectady. The company’s research center in Niskayuna, New York has received millions of dollars in local tax breaks.

When GE has not received enough subsidies for its satisfaction, the company sometimes tries to reduce its local tax bills by challenging the assessed value of its property. In 2002, for example, it sued to get the value of its turbine plant in Rotterdam, New York reduced from $159 million to $41 million. A compromise ruling gave GE some of what it wanted and forced the town to reimburse the company about $6 million. Not satisfied, the company later brought a new challenge and got the town to negotiate a payment-in-lieu-of-taxes deal.

And, of course, GE is notorious for its dodging in other states and at the federal level, where it also gets subsidized through agencies such as the Export-Import Bank and got TARP-related assistance for its GE Capital unit.

Members of UE Local 332 are vowing to fight the plant shutdown, but they are up against a company that has shown it is willing to go to great lengths to get its way on environmental, labor and tax issues.

The Beltway Bandit Behind the Healthcare.gov Debacle

Healthcare.gov website down A January 2011 article in Canada’s Globe and Mail was headlined “CGI Spies Opportunity in Obama’s Call for Efficiency.” A new story in the same newspaper about the same company has the title “Canadian IT Firm at Centre of Obamacare Foul-Up Furor.”

U.S. critics of the Affordable Care Act are depicting the widespread computer problems that have accompanied the launch of the ACA’s online healthcare exchanges as a major government failure. To be more precise, it is a failure of government contracting. And the contractor at the center of the mess is CGI Group, a Canadian outsourcing corporation that is little known outside information technology circles.

According to a Government Accountability Office report published in June, CGI’s U.S. subsidiary CGI Federal received the largest share (totaling $88 million) of the contracts awarded for the creation of the Healthcare.gov website, the ACA enrollment portal in the 36 states that declined to create their own exchanges. That report, by the way, warned of possible “implementation challenges.”

The glitches in the ACA rollout are shining an unfavorable light on the widespread practice by governments at all levels of contracting out information technology to the private sector. The Washington Post just published a front-page story reporting that the federal government, which spends some $80 billion a year on outside IT services, ends up purchasing “outdated, costly and buggy technology.” This may be an indication of cluelessness on the part of federal IT procurement officials, but it is also a sign that the private sector is all too willing to take taxpayer dollars for inferior products.

It is not yet clear whether CGI tried to use sub-standard technology for Healthcare.gov or whether it just failed to meet the challenges of creating a complex new system. The company and the feds are saying little about the reasons for the glitches, preferring to issue assurances that everything will soon be running smoothly.

The Post notes that “Federal officials have not yet explained why CGI was given the contract or why it was awarded on a sole-source basis.” They might also want to explain why the contract was given to a company linked to some earlier contracting scandals.

CGI has built its U.S. operation in large part by acquiring existing federal contractors. One of those was Stanley Inc., which it purchased in 2010 for about $900 million. Two years earlier, Stanley found itself under fire when it was reported that some of its employees working on a contract with the U.S. State Department had improperly looked at the passport records of several Presidential candidates, including Barack Obama.

Stanley was also involved in a controversy over its labor practices at the 400-worker processing center of the U.S. Citizenship and Immigration Services in St. Albans, Vermont. As it was about to assume control over the facility, which handles citizenship applications, Stanley announced that it would change job classifications at the facility, resulting in a pay decrease of about 12 percent for up to half the workers. Vermont Sen. Bernie Sanders called on the Labor Department to investigate what he charged was a violation of the Service Contract Act.

Stanley’s move also prompted a union organizing drive by the United Electrical workers. UE official Chris Townsend told me at the time that Stanley was employing a variety of union-busting tactics—from hiring the union-avoidance law firm Seyfarth Shaw to forcing workers to watch propaganda videos. Townsend said workers were held in captive-audience meetings for up to one-quarter of their shifts in the period leading up to the elections—this at a time when the backlog of citizenship applications was a serious problem. Despite these obstacles, UE managed to win representation elections covering most of the workers. In 2011 the U.S. Department of Labor announced that Stanley (by then owned by CGI) and several subcontractors would pay nearly $2.9 million in back wages for workers who had been misclassified.

CGI itself has also had its share of scandals, including a 2007 furor over a C$400 million contract it received from the Canadian government at a time when the Public Works Minister was Michael Fortier, who had been an investment banker for CGI during his time working for Credit Suisse. A 2010 report by the Hawaii State Auditor found that what was supposed to be a five-year contract awarded in 1999 by the state department of taxation to a company later purchased by CGI had been repeatedly extended through non-competitive awards, costing the state far more than originally planned.

The federal government long ago chose to depend on contractors for its vast information technology needs. That decision periodically results in debacles like those surrounding the rollout of the ACA exchanges. It remains to be seen whether fiascoes will also mar the actual insurance coverage being provided through the ACA, which also relies on the supposedly efficient private sector.

UPDATE: I subsequently learned that in September 2012 the Toronto Star reported that the government of Ontario had canceled a C$46 million contract awarded to CGI to create a diabetes registry after the company failed to meet deadlines.

Aiming at Government and Hitting Big Business

corporate_flag2-1 The tea party caucus calling the shots in the U.S. House of Representative is gloating about having shut down the federal government while simultaneously claiming that technical problems in the rollout of the Obamacare health exchanges are a sign of the failure of the public sector. On both fronts the truth is a lot more complicated.

What the critics of big government tend to overlook is that the public and private sectors are so intertwined that it is difficult to tell where one ends and the other begins. The tea party crowd may have no concern about the hardships they are imposing on 800,000 furloughed federal workers, yet their shutdown is also threatening the well-being of the much larger number of contractor employees—once estimated at more than 7 million—who often work alongside those directly on the federal payrolls. USA Today quoted someone from the National Federal Contractors Association estimating that 250,000 to 300,000 workers could be affected.

It’s not only a labor issue. The employers of those contract workers are also being affected, some immediately and many more if the shutdown lasts more than a few days. The federal departments and agencies covered by the USASpending website together accounted for some $517 billion in contract spending in FY2012. The Defense Department, of course, was responsible for the bulk of that total ($361 billion), but other departments and agencies also make extensive use of contractors for goods and services; for example, Energy ($25 billion), HHS ($19 billion), Veterans Affairs ($17 billion), NASA ($15 billion) and Homeland Security ($12 billion). Another 15 each spent $1 billion or more.

Many large corporations eat heartily at this contracting trough. Businessweek reminds us that some depend on the feds for more than half of their revenue: Lockheed Martin (80 percent), Booz Allen Hamilton (71 percent) and Raytheon (59 percent), for instance. A Bloomberg story entitled “Businesses Often Opposed to Government Beg for Its Return,” quotes someone from the Aerospace Industries Alliance urging a resolution of the shutdown standoff: “You can’t run a business this way. The uncertainty is killing us.”

Despite the wrong-headed rhetoric on the Right about a government takeover of healthcare, the Affordable Care Act is also an example of the incestuous relationship between the public and private sectors. This begins, of course, with the fact that the ACA is creating millions of new customers for private insurance companies (while also extending Medicaid coverage to more lower-income families).

At the same time, a great deal of the administration of the ACA itself has been placed in the hands of contractors. The blame for the snafus in the new online healthcare exchanges rests with the companies hired to build the websites and the related call centers.

As I wrote about last year, the exchanges have been a goldmine for contractors such as Accenture, Xerox and Maximus. Accenture got a $359 million contract just for the California exchange while Maximus got awards from states such as Minnesota and Connecticut as well as the District of Columbia.

The involvement of companies such as Maximus and Accenture do not bode well for the future of the exchanges. Both companies were involved in a major scandal involving the creation of a $900 million social services enrollment system in Texas, while Maximus has been at the center of contracting controversies in numerous states. In 2007 it had to pay $30.5 million to resolve Medicaid fraud charges related to its contract with the District of Columbia.

Another tainted company, Serco, got a contract worth up to $1.2 billion to help determine which users of the healthcare exchanges are eligible for federal subsidies. The firm’s parent Serco Group is being investigated by British authorities for irregularities relating to its contract to monitor offenders on parole and individuals released on bail. It was recently reported that the UK’s Serious Fraud Office is looking into allegations that some of the people Serco was charging the government for electronically tagging were either still in prison or dead.

What is commonly seen as a crisis of government is actually a pair of crises for the private sector — one in which the corporations feeding off the public sector face an interruption in their revenue stream and another in which some of those contractors failed to deliver, at least initially, on a high-profile project. The tea party contingent needs to face the fact that it is now impossible to take a swipe at Big Government without hitting Big Business.

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?