October 2009

Big Business

Hero: Judge Jed Rakoff

By Team at October 28, 2009 - 9:44am

Meet Judge Jed Rakoff. He's one of the good guys. He's a federal judge who recently ruled against a corrupt deal that sought to stick it to the little guy shareholders so that the fatcats could walk away with their excessive Wall Street bonuses. Dan Collins tells the story in the Huffington Post:

The guy with the wings and the sword also wears robes: He's federal Judge Jed Rakoff. The shock waves from Rakoff's scathing denunciation last month of a proposed settlement between the Securities and Exchange Commission and the Bank of America are still rippling through Wall Street and Washington.

Bank of America CEO Ken Lewis is on his way out, and New York Attorney General Andrew Cuomo is pressing an investigation into the deal in which the bank purchased ailing Merrill Lynch last December without telling its shareholders that executives of the tottering brokerage were paid $3.6 billion in bonuses shortly before the takeover was announced. A congressional panel is also probing the deal.

The common-sense wisdom of Rakoff's ruling resonated with a public infuriated with billion-dollar bonuses and bailouts. The SEC signed off on an agreement in which the bank agreed to pay $33 million (in shareholder money) for concealing the bonus payments from the shareholders. In effect, the victims were being punished, a topsy-turvy outcome fairly typical of the SEC's handling of wrongdoing by large corporations in cases like these.

"Oscar Wilde once famously said that a cynic is someone 'who knows the price of everything and the value of nothing,'" Rakoff wrote.

The proposed consent judgment in this case suggests a rather cynical relationship between the parties: the S.E.C. gets to claim that it is exposing wrongdoing on the part of the Bank of America in a high-profile merger; the Bank's management gets to claim that they have been coerced into an onerous settlement by overzealous regulators. And all this is done at the expense, not only of the shareholders, but also of the truth.

Rakoff's ruling may well mark the dawn of a new era in corporate accountability, since the judge has pressed for the names of the bank executives responsible for hiding the bonus payments.

These people have no shame. We need more Jed Rakoff's and we need them now. With Phil Angelides' Financial Crisis Inquiry Commission, we have a golden opportunity to drain the swamp. Will they drain it and clean up Wall Street? Or, will Wall Street's tentacles of influence corrupt the Commission? Time will tell.

Big Business

Four Vexing Questions

By Team at October 28, 2009 - 9:27am

In an Ideas piece in Slate, former New York Governor Eliot Spitzer tackles concludes that while we already know many of the causes of the financial collapse, the Financial Crisis Inquiry Commission should answer four unanswered questions. The first:

The first structural issue that Phil Angelides and his colleagues should investigate is what corporate boards knew about the state of corporations they governed and why they did so little to protect them. The commission should inquire about what information board members received about risk and leverage and how accurate that information was. We need to understand exactly what the boards of Citi, Lehman, Merrill, Goldman, and Bank of America were told. Tracing the information flow will also permit us to understand whether the risk analysis was wrong from its inception, ignored by those up the chain, or filtered as it went up the chain.

In other words: what did the fat cats know and when did the fat cats know it? Corporate boards have a responsibility to their shareholders across America and the world. When corporate boards shirk their responsibilities, it's not just their shareholders who hurt. Bad corporate governance impacts the entire economy and causes pain for millions of people. It's time for answers and sunlight from these corporate boards. Spitzer's second question:

Second, the Angelides commission should dig into the corporate-compensation process. What, exactly, did compensation consultants and compensation committees say and do—and why? My one investigative experience in this area revealed a veritable swamp of conflicts and aberrant information flow. (Anybody with time to spare and a desire to read a horrifying tale of corporate failure should read Dan Webb's report about Dick Grasso's pay package.) The commission should dissect the actual e-mail traffic, determine what metrics were used by the comp consultants, and examine what information went to the comp committees of each of the companies that received any federal assistance. I would give long odds that they discover a welter of conflicts of interests—e.g., compensation consultants whose livelihoods depend on the good wishes of the CEO whose compensation package they are determining.

The American taxpayer forked over hundreds of billions of dollars to these fatcats. And, they continued to take lavish bonuses. We deserve to know the nature of how these bonuses and other compensation structures. After all, our money flowed into these structures, and, if they are corrupt, we deserve to know about it. Spitzer's third question:

Third, the rating agencies must bare their souls to the world. We know that there is an inherent conflict of interest in the way ratings agencies are compensated, but we do not yet know whether their straight analytical skills were right, wrong, or somewhere in between. Examining their actual financial models might reveal that they were as sophisticated as possible—or that they were unforgivably sloppy.

The rating agencies are the equivalent of the Good Housekeeping Seal of Approval. They are designed to provide independent analysis of risk. While Spitzer isn't alleging corruption, he wonders if their models are solid, or, just plain sloppy. If we're putting credence in these ratings, we need to know that they are based on sound modeling. Spitzer's final question:

Fourth, the commission must put the New York branch of the Fed under its microscope. The New York Fed was at the center of every major transaction during the meltdown, and it was the essential supervisor of the organizations and the credit markets beforehand. How did the New York Fed evaluate the risk, leverage, and stability of all the debt that accrued over the prior years. And what did New York Fed officials tell bank officials prior to and during the meltdown? The Fed has managed to avoid scrutiny for years. That should be permitted no longer. This record is too essential. Former New York Fed boss Geithner and Fed Chairman Bernanke misunderstood the impact that the sub-prime defaults would have on the broader credit markets: Was that a consequence of bad analytical work within the Fed? This question has enormous implications for how we respond, and it affects which institution should be vested with the so-called "systemic risk" regulator power.

We put a lot of faith in our regulatory bodies. Did they fail us? And, how, exactly, did they fail us in the lead up to the collapse? These are just a few unanswered questions and we deserve answers from Phil Angelides and his Financial Crisis Inquiry Commission.


New TV Ad in NY-23 Exposes Wall Street Agenda in the Adirondacks

By Tom Matzzie at October 27, 2009 - 11:25pm

The policies Doug Hoffman supports created America’s financial crisis. That's the message of Accountable America's new TV ad on the air starting this week in the 23rd district of New York.

Hoffman is the darling of the Club for Growth, the right-wing group funded by some of Wall Street's biggest fat cats. The Club for Growth’s agenda boils down to one idea: stop consumer protections in the name of “deregulation.”

They don’t want to see the Financial Truth Commission "name names" and hold people accountable like the 9/11 Commission. That is why many of the Club for Growth’s biggest supporters voted against setting up the Commission.

Doug Hoffman has yet to call for tough investigations into the banks who created the financial crisis. Nor has he called for new regulations to protect consumers and end corporate greed. Hoffman doesn’t want to upset his Wall Street friends, so, he's singing their tune by supporting Bush-style tax cuts and deregulation designed to help the richest banks.

In a new ad airing in New York's 23rd District this weekend, Accountable America exposes Doug Hoffman’s Wall Street agenda. Check out the ad and, if you like what you see, make a contribution to support work like this ad.


Judges Siding With Home Owners?

By Team at October 27, 2009 - 11:04pm

The New York Times reports on a story about a New York judge who wiped away the mortgage debt of a homeowner after the bank failed to prove their claim.

One surprising smackdown occurred on Oct. 9 in federal bankruptcy
court in the Southern District of New York. Ruling that a lender, PHH
Mortgage, hadn’t proved its claim to a delinquent borrower’s home in
White Plains, Judge Robert D. Drain wiped out a $461,263 mortgage debt
on the property. That’s right: the mortgage debt disappeared, via a court order.

So the ruling may put a new dynamic in play in the foreclosure mess:
If the lender can’t come forward with proof of ownership, and judges
don’t look kindly on that, then borrowers may have a stronger hand to
play in court and, apparently, may even be able to stay in their homes

It seems that in all the tumult of the foreclosure crisis that a lot of banks haven't been playing by the rules.