Posts Tagged ‘Wall Street Corruption’
by Matt Taibbi
November 10, 10:07 AM ET
Federal judge Jed Rakoff, a former prosecutor with the U.S. Attorney’s office here in New York, is fast becoming a sort of legal hero of our time. He showed that again yesterday when he shat all over the SEC’s latest dirty settlement with serial fraud offender Citigroup, refusing to let the captured regulatory agency sweep yet another case of high-level criminal malfeasance under the rug.
The SEC had brought an action against Citigroup for misleading investors about the way a certain package of mortgage-backed assets had been chosen. The case is very similar to the notorious Abacus case involving Goldman Sachs, in which Goldman allowed short-selling billionaire John Paulson (who was betting against the package) to pick the assets, then told a pair of European banks that the “designed to fail” package they were buying had been put together independently.
This case was similar, but worse. Here, Citi similarly told investors a package of mortgages had been chosen independently, when in fact Citi itself had chosen the stuff and was betting against the whole pile.
This whole transaction actually combined a number of Goldman-style misdeeds, since the bank both lied to investors and also bet against its own product and its own customers. In the deal, Citi made a $160 million profit, while its customers lost $700 million.
Goldman, in the Abacus case, got fined $550 million. In this worse case, the SEC was trying to settle with Citi for just $285 million. Judge Rakoff balked at the settlement and particularly balked at the SEC’s decision to allow Citi off without any admission of wrongdoing. He also mocked the SEC’s decision to describe the crime as “negligence” instead of intentional fraud, taking the entirely rational position that there’s no way a bank making $160 million ripping off its customers can conceivably be described as an accident.
“Why should the court impose a judgment in a case in which the SEC alleges a serious securities fraud but the defendant neither admits nor denies wrongdoing?” And this: “How can a securities fraud of this nature and magnitude be the result simply of negligence?”
Rakoff of course is right – the settlement is nuts. If you take Citi’s $160 million profit on the deal into consideration, what we’re talking about then is a $125 million fine for causing $700 million in damages. That, and no admission of wrongdoing.
Just imagine a mugger who steals $70 from some lady’s wallet being sentenced to walk free after paying back twelve bucks. Magritte himself could not devise a more surreal take on criminal justice.
It gets worse. Over the last decade, Citi has repeatedly been caught committing a variety of offenses, and time after time the bank has been dragged into court and slapped with injunctions demanding that they refrain from ever engaging the same practices ever again. Over and over again, they’ve completely blown off the injunctions, with no consequences from the state – which does nothing except issue new (soon-to-be-ignored-again) injunctions.
In this current case, this particular unit at Citi had already been slapped with two different SEC cease-and-desist orders barring it from violating certain securities laws. Here’s a summary from Bloomberg:
The commission already had two cease-and-desist orders in place against the same Citigroup unit, barring future violations of the same section of the securities laws that the company now stands accused of breaking again. One of those orders came in a 2005 settlement, the other in a 2006 case. The SEC’s complaint last month didn’t mention either order, as if the entire agency suffered from amnesia.
The SEC’s latest allegations also could have triggered a violation of a court injunction that Citigroup agreed to in 2003, as part of a $400 million settlement over allegedly fraudulent analyst-research reports. Injunctions are more serious than SEC orders, because violations can lead to contempt-of-court charges.
But the SEC avoided the issue of the 2003 injunction by charging Citi with a different type of fraud. But, as Bloomberg points out, it probably wouldn’t have mattered much if they had accused Citi of violating the 2003 injunction, since the bank had already done that once and not been punished for it:
In December 2008, the SEC for the second time accused Citigroup of breaking the same section of the law covered by the 2003 injunction, over its sales of so-called auction-rate securities. Instead of trying to enforce the existing court order, the SEC got yet another one barring the same kinds of fraud violations in the future.
So to recap: a unit of Citigroup, having repeatedly violated the same laws and having repeatedly violated the SEC’s own cease-and-desist orders and injunctions, is dragged into court one more time for committing a massive fraud.
And what does the SEC do? It doesn’t even bring up Citi’s history of ignoring the SEC’s own order, slaps the bank with a fractional fine, refuses to target any individuals, allows the bank to walk away without an admission of wrongdoing, and puts a cherry on the top by describing the $160 million heist not as a crime, but as unintentional negligence.
BRING OUT THE SOFT CUSHIONS! The SEC gets rough with Citigroup.
Imagine a car thief who, when caught driving a stolen Lexus, tells the police he simply stepped into the wrong car and drove off by mistake. Now imagine he tells the same story when, two years later, he’s caught screaming over the GW bridge in a stolen Mercedes.
Then, two years after that, he’s caught on the Cross-Bronx Expressway blasting the stereo in a boosted 7-series BMW. Cops ask him for an explanation. “I must have gotten in the wrong car by mistake,” he says, shrugging. And the cops buy the story and send him home without a charge.
That’s roughly what we’re dealing with with this SEC action. To extend the metaphor just a little further – let’s say that BMW wasn’t even the only car he accidentally drove away that day, but the cops didn’t bother with the others. In the latest Citi case, the $700 million fraud was just one of many dicey CDOs marketed by that unit of Citi. But the SEC chose to address just that one case in its settlement.
Rakoff quite correctly took issue with all of this. From Jonathan Weil’s Bloomberg piece:
“What does the SEC do to maintain compliance?” Additionally, [Rakoff] asked: “How many contempt proceedings against large financial entities has the SEC brought in the past decade as a result of violations of prior consent judgments?” We’ll see if the SEC finds any.
Rakoff gained some notoriety a few years ago when he rejected as inadequate an SEC settlement with Bank of America, which was accused of misleading shareholders about the size of the bonuses paid out by Merrill Lynch, the investment bank BofA was in the process of acquiring. Rakoff dismissed the original $33 million fine as “half-baked justice,” although he eventually approved a $150 million fine.
The amazing thing about the wave of corruption that has overtaken the financial services industry is that most of it couldn’t happen without virtually every player at every level signing off on these deals. From the ratings agencies to the law firms to the accounting firms to the regulators to the bank executives themselves, everybody had to be on board in order for a lot of these fraud schemes to work.
Judges are a part of that picture, and too often, members of the bench sign off on dirty deals made between banks and regulators when the law says that such settlements must be “fair, reasonable, adequate and in the public interest.”
It’s great that Rakoff is behaving as any decent human being would and rejecting these disgusting settlements. But equally disturbing is the fact that more judges haven’t done the same thing. Are people with backbones really that rare?
By Matt Taibbi
August 17, 2011 8:00 AM ET
Imagine a world in which a man who is repeatedly investigated for a string of serious crimes, but never prosecuted, has his slate wiped clean every time the cops fail to make a case. No more Lifetime channel specials where the murderer is unveiled after police stumble upon past intrigues in some old file – “Hey, chief, didja know this guy had two wives die falling down the stairs?” No more burglary sprees cracked when some sharp cop sees the same name pop up in one too many witness statements. This is a different world, one far friendlier to lawbreakers, where even the suspicion of wrongdoing gets wiped from the record.
That, it now appears, is exactly how the Securities and Exchange Commission has been treating the Wall Street criminals who cratered the global economy a few years back. For the past two decades, according to a whistle-blower at the SEC who recently came forward to Congress, the agency has been systematically destroying records of its preliminary investigations once they are closed. By whitewashing the files of some of the nation’s worst financial criminals, the SEC has kept an entire generation of federal investigators in the dark about past inquiries into insider trading, fraud and market manipulation against companies like Goldman Sachs, Deutsche Bank and AIG. With a few strokes of the keyboard, the evidence gathered during thousands of investigations – “18,000 … including Madoff,” as one high-ranking SEC official put it during a panicked meeting about the destruction – has apparently disappeared forever into the wormhole of history.
Under a deal the SEC worked out with the National Archives and Records Administration, all of the agency’s records – “including case files relating to preliminary investigations” – are supposed to be maintained for at least 25 years. But the SEC, using history-altering practices that for once actually deserve the overused and usually hysterical term “Orwellian,” devised an elaborate and possibly illegal system under which staffers were directed to dispose of the documents from any preliminary inquiry that did not receive approval from senior staff to become a full-blown, formal investigation. Amazingly, the wholesale destruction of the cases – known as MUIs, or “Matters Under Inquiry” – was not something done on the sly, in secret. The enforcement division of the SEC even spelled out the procedure in writing, on the commission’s internal website. “After you have closed a MUI that has not become an investigation,” the site advised staffers, “you should dispose of any documents obtained in connection with the MUI.”
Many of the destroyed files involved companies and individuals who would later play prominent roles in the economic meltdown of 2008. Two MUIs involving con artist Bernie Madoff vanished. So did a 2002 inquiry into financial fraud at Lehman Brothers, as well as a 2005 case of insider trading at the same soon-to-be-bankrupt bank. A 2009 preliminary investigation of insider trading by Goldman Sachs was deleted, along with records for at least three cases involving the infamous hedge fund SAC Capital.
The widespread destruction of records was brought to the attention of Congress in July, when an SEC attorney named Darcy Flynn decided to blow the whistle. According to Flynn, who was responsible for helping to manage the commission’s records, the SEC has been destroying records of preliminary investigations since at least 1993. After he alerted NARA to the problem, Flynn reports, senior staff at the SEC scrambled to hide the commission’s improprieties.
As a federally protected whistle-blower, Flynn is not permitted to speak to the press. But in evidence he presented to the SEC’s inspector general and three congressional committees earlier this summer, the 13-year veteran of the agency paints a startling picture of a federal police force that has effectively been conquered by the financial criminals it is charged with investigating. In at least one case, according to Flynn, investigators at the SEC found their desire to bring a case against an influential bank thwarted by senior officials in the enforcement division – whose director turned around and accepted a lucrative job from the very same bank they had been prevented from investigating. In another case, the agency farmed out its inquiry to a private law firm – one hired by the company under investigation. The outside firm, unsurprisingly, concluded that no further investigation of its client was necessary. To complete the bureaucratic laundering process, Flynn says, the SEC dropped the case and destroyed the files.
Much has been made in recent months of the government’s glaring failure to police Wall Street; to date, federal and state prosecutors have yet to put a single senior Wall Street executive behind bars for any of the many well-documented crimes related to the financial crisis. Indeed, Flynn’s accusations dovetail with a recent series of damaging critiques of the SEC made by reporters, watchdog groups and members of Congress, all of which seem to indicate that top federal regulators spend more time lunching, schmoozing and job-interviewing with Wall Street crooks than they do catching them. As one former SEC staffer describes it, the agency is now filled with so many Wall Street hotshots from oft-investigated banks that it has been “infected with the Goldman mindset from within.”
The destruction of records by the SEC, as outlined by Flynn, is something far more than an administrative accident or bureaucratic fuck-up. It’s a symptom of the agency’s terminal brain damage. Somewhere along the line, those at the SEC responsible for policing America’s banks fell and hit their head on a big pile of Wall Street’s money – a blow from which the agency has never recovered. “From what I’ve seen, it looks as if the SEC might have sanctioned some level of case-related document destruction,” says Sen. Chuck Grassley, the ranking Republican on the Senate Judiciary Committee, whose staff has interviewed Flynn. “It doesn’t make sense that an agency responsible for investigations would want to get rid of potential evidence. If these charges are true, the agency needs to explain why it destroyed documents, how many documents it destroyed over what time frame and to what extent its actions were consistent with the law.”
How did officials at the SEC wind up with a faithful veteran employee – a conservative, mid-level attorney described as a highly reluctant whistle-blower – spilling the agency’s most sordid secrets to Congress? In a way, they asked for it.
On May 18th of this year, SEC enforcement director Robert Khuzami sent out a mass e-mail to the agency’s staff with the subject line “Lawyers Behaving Badly.” In it, Khuzami asked his subordinates to report any experiences they might have had where “the behavior of counsel representing clients in… investigations has been questionable.”
Khuzami was asking staffers to recount any stories of outside counsel behaving unethically. But Flynn apparently thought his boss was looking for examples of lawyers “behaving badly” anywhere, including within the SEC. And he had a story to share he’d kept a lid on for years. “Mr. Khuzami may have gotten something more than he expected,” Flynn’s lawyer, a former SEC whistle-blower named Gary Aguirre, later explained to Congress.
Flynn responded to Khuzami with a letter laying out one such example of misbehaving lawyers within the SEC. It involved a case from very early in Flynn’s career, back in 2000, when he was working with a group of investigators who thought they had a “slam-dunk” case against Deutsche Bank, the German financial giant. A few years earlier, Rolf Breuer, the bank’s CEO, had given an interview to Der Spiegel in which he denied that Deutsche was involved in übernahmegespräche – takeover talks – to acquire a rival American firm, Bankers Trust. But the statement was apparently untrue – and it sent the stock of Bankers Trust tumbling, potentially lowering the price for the merger. Flynn and his fellow SEC investigators, suspecting that investors of Bankers Trust had been defrauded, opened a MUI on the case.
A Matter Under Inquiry is just a preliminary sort of look-see – a way for the SEC to check out the multitude of tips it gets about suspicious trades, shady stock scams and false disclosures, and to determine which of the accusations merit a formal investigation. At the MUI stage, an SEC investigator can conduct interviews or ask a bank to send in information voluntarily. Bumping a MUI up to a formal investigation is critical, because it enables investigators to pull out the full law-enforcement ass-kicking measures – subpoenas, depositions, everything short of hot pokers and waterboarding. In the Deutsche case, Flynn and other SEC investigators got past the MUI stage and used their powers to collect sworn testimony and documents indicating that plenty of übernahmegespräche indeed had been going on when Breuer spoke to Der Spiegel. Based on the evidence, they sent an “Action Memorandum” to senior SEC staff, formally recommending that the agency press forward and file suit against Deutsche.
Breuer responded to the threat as big banks like Deutsche often do: He hired a former SEC enforcement director to lobby the agency to back off. The ex-insider, Gary Lynch, launched a creative and inspired defense, producing a linguistic expert who argued that übernahmegespräche only means “advanced stage of discussions.” Nevertheless, the request to proceed with the case was approved by several levels of the SEC’s staff. All that was needed to move forward was a thumbs-up from the director of enforcement at the time, Richard Walker.
But then a curious thing happened. On July 10th, 2001, Flynn and the other investigators were informed that Walker was mysteriously recusing himself from the Deutsche case. Two weeks later, on July 23rd, the enforcement division sent a letter to Deutsche that read, “Inquiry in the above-captioned matter has been terminated.” The bank was in the clear; the SEC was dropping its fraud investigation. In contradiction to the agency’s usual practice, it provided no explanation for its decision to close the case.
On October 1st of that year, the mystery was solved: Dick Walker was named general counsel of Deutsche. Less than 10 weeks after the SEC shut down its investigation of the bank, the agency’s director of enforcement was handed a cushy, high-priced job at Deutsche.
Deutsche’s influence in the case didn’t stop there. A few years later, in 2004, Walker hired none other than Robert Khuzami, a young federal prosecutor, to join him at Deutsche. The two would remain at the bank until February 2009, when Khuzami joined the SEC as Flynn’s new boss in the enforcement division. When Flynn sent his letter to Khuzami complaining about misbehavior by Walker, he was calling out Khuzami’s own mentor.
The circular nature of the case illustrates the revolving-door dynamic that has become pervasive at the SEC. A recent study by the Project on Government Oversight found that over the past five years, former SEC personnel filed 789 notices disclosing their intent to represent outside companies before the agency – sometimes within days of their having left the SEC. More than half of the disclosures came from the agency’s enforcement division, who went to bat for the financial industry four times more often than ex-staffers from other wings of the SEC.
Even a cursory glance at a list of the agency’s most recent enforcement directors makes it clear that the SEC’s top policemen almost always wind up jumping straight to jobs representing the banks they were supposed to regulate. Lynch, who represented Deutsche in the Flynn case, served as the agency’s enforcement chief from 1985 to 1989, before moving to the firm of Davis Polk, which boasts many top Wall Street clients. He was succeeded by William McLucas, who left the SEC in 1998 to work for WilmerHale, a Wall Street defense firm so notorious for snatching up top agency veterans that it is sometimes referred to as “SEC West.” McLucas was followed by Dick Walker, who defected to Deutsche in 2001, and he was in turn followed by Stephen Cutler, who now serves as general counsel for JP Morgan Chase. Next came Linda Chatman Thomsen, who stepped down to join Davis Polk, only to be succeeded in 2009 by Khuzami, Walker’s former protégé at Deutsche Bank.
This merry-go-round of current and former enforcement directors has repeatedly led to accusations of improprieties. In 2008, in a case cited by the SEC inspector general, Thomsen went out of her way to pass along valuable information to Cutler, the former enforcement director who had gone to work for JP Morgan. According to the inspector general, Thomsen signaled Cutler that the SEC was unlikely to take action that would hamper JP Morgan’s move to buy up Bear Stearns. In another case, the inspector general found, an assistant director of enforcement was instrumental in slowing down an investigation into the $7 billion Ponzi scheme allegedly run by Texas con artist R. Allen Stanford – and then left the SEC to work for Stanford, despite explicitly being denied permission to do so by the agency’s ethics office. “Every lawyer in Texas and beyond is going to get rich on this case, OK?” the official later explained. “I hated being on the sidelines.”
Small wonder, then, that SEC staffers often have trouble getting their bosses to approve full-blown investigations against even the most blatant financial criminals. For a fledgling MUI to become a formal investigation, it has to make the treacherous leap from the lower rungs of career-level staffers like Flynn all the way up to the revolving-door level at the top, where senior management is composed largely of high-priced appointees from the private sector who have strong social and professional ties to the very banks they are charged with regulating. And if senior management didn’t approve an investigation, the documents often wound up being destroyed – as Flynn would later discover.
After the Deutsche fiasco over Bankers Trust, Flynn continued to work at the SEC for four more years. He briefly left the agency to dabble in real estate, then returned in 2008 to serve as an attorney in the enforcement division. In January 2010, he accepted new responsibilities that included helping to manage the disposition of records for the division – and it was then he first became aware of the agency’s possibly unlawful destruction of MUI records.
Flynn discovered a directive on the enforcement division’s internal website ordering staff to destroy “any records obtained in connection” with closed MUIs. The directive appeared to violate federal law, which gives responsibility for maintaining and destroying all records to the National Archives and Records Administration. Over a decade earlier, in fact, the SEC had struck a deal with NARA stipulating that investigative records were to be maintained for 25 years – and that if any files were to be destroyed after that, the shredding was to be done by NARA, not the SEC.
But Flynn soon learned that the records for thousands of preliminary investigations no longer existed. In his letter to Congress, Flynn estimates that the practice of destroying MUIs had begun as early as 1993, and has resulted in at least 9,000 case files being destroyed. For all the thousands of tips that had come in to the SEC, and the thousands of interviews that had been conducted by the agency’s staff, all that remained were a few perfunctory lines for each case. The mountains of evidence gathered were no longer in existence.
To read through the list of dead and buried cases that Flynn submitted to Congress is like looking through an infrared camera at a haunted house of the financial crisis, with the ghosts of missed prosecutions flashing back and forth across the screen. A snippet of the list:
PARTY MUI # OPENED/CLOSED ISSUE
Goldman Sachs MLA-01909 6/99 – 4/00 Market Manipulation
Deutsche Bank MHO-09356 11/01 – 7/02 Insider Trading
Deutsche Bank MHO-09432 2/02 – 8/02 Market Manipulation
Lehman Brothers MNY-07013 3/02 – 7/02 Financial Fraud
Goldman Sachs MNY-08198 11/09 – 12/09 Insider Trading
One MUI – case MNY-08145 – involved allegations of insider trading at AIG on September 15th, 2008, right in the middle of the insurance giant’s collapse. In that case, an AIG employee named Jacqueline Millan reported irregularities in the trading of AIG stock to her superiors, only to find herself fired. Incredibly, instead of looking into the matter itself, the SEC agreed to accept “an internal investigation by outside counsel or AIG.” The last note in the file indicates that “the staff plans to speak with the outside attorneys on Monday, August 24th , when they will share their findings with us.” The fact that the SEC trusted AIG’s lawyers to investigate the matter shows the basic bassackwardness of the agency’s approach to these crash-era investigations. The SEC formally closed the case on October 1st, 2009.
The episode with AIG highlights yet another obstacle that MUIs experience on the road to becoming formal investigations. During the past decade, the SEC routinely began allowing financial firms to investigate themselves. Imagine the LAPD politely asking a gang of Crips and their lawyers to issue a report on whether or not a drive-by shooting by the Crips should be brought before a grand jury – that’s basically how the SEC now handles many preliminary investigations against Wall Street targets.
The evolution toward this self-policing model began in 2001, when a shipping and food-service conglomerate called Seaboard aggressively investigated an isolated case of accounting fraud at one of its subsidiaries. Seaboard fired the guilty parties and made sweeping changes to its internal practices – and the SEC was so impressed that it instituted a new policy of giving “credit” to companies that police themselves. In practice, that means the agency simply steps aside and allows companies to slap themselves on the wrists. In the case against Seaboard, for instance, the SEC rewarded the firm by issuing no fines against it.
According to Lynn Turner, a former chief accountant at the SEC, the Seaboard case also prompted the SEC to begin permitting companies to hire their own counsel to conduct their own inquiries. At first, he says, the process worked fairly well. But then President Bush appointed the notoriously industry-friendly Christopher Cox to head up the SEC, and the “outside investigations” turned into whitewash jobs. “The investigations nowadays are probably not worth the money you spend on them,” Turner says.
Harry Markopolos, a certified fraud examiner best known for sounding a famously unheeded warning about Bernie Madoff way back in 2000, says the SEC’s practice of asking suspects to investigate themselves is absurd. In a serious investigation, he says, “the last person you want to trust is the person being accused or their lawyer.” The practice helped Madoff escape for years. “The SEC took Bernie’s word for everything,” Markopolos says.
At the SEC, having realized that the agency was destroying documents, Flynn became concerned that he was overseeing an illegal policy. So in the summer of last year, he reached out to NARA, asking them for guidance on the issue.
That request sparked a worried response from Paul Wester, NARA’s director of modern records. On July 29th, 2010, Wester sent a letter to Barry Walters, who oversees document requests for the SEC. “We recently learned from Darcy Flynn… that for the past 17 years the SEC has been destroying closed Matters Under Inquiry files,” Wester wrote. “If you confirm that federal records have been destroyed improperly, please ensure that no further such disposals take place and provide us with a written report within 30 days.”
Wester copied the letter to Adam Storch, a former Goldman Sachs executive who less than a year earlier had been appointed as managing executive of the SEC’s enforcement division. Storch’s appointment was not without controversy. “I’m not sure what’s scarier,” Daniel Indiviglio of The Atlantic observed, “that this guy worked at an investment bank that many believe has questionable ethics and too cozy a Washington connection, or that he’s just 29.” In any case, Storch reacted to the NARA letter the way the SEC often does – by circling the wagons and straining to find a way to blow off the problem without admitting anything.
Last August, as the clock wound down on NARA’s 30-day deadline, Storch and two top SEC lawyers held a meeting with Flynn to discuss how to respond. Flynn’s notes from the meeting, which he passed along to Congress, show the SEC staff wondering aloud if admitting the truth to NARA might be a bad idea, given the fact that there might be criminal liability.
“We could say that we do not believe there has been disposal inconsistent with the schedule,” Flynn quotes Ken Hall, an assistant chief counsel for the SEC, as saying.
“There are implications to admit what was destroyed,” Storch chimed in. It would be “not wise for me to take on the exposure voluntarily. If this leads to something, what rings in my ear is that Barry [Walters, the SEC documents officer] said: This is serious, could lead to criminal liability.”
When the subject of how many files were destroyed came up, Storch answered: “18,000 MUIs destroyed, including Madoff.”
Four days later, the SEC responded to NARA with a hilariously convoluted nondenial denial. “The Division is not aware of any specific instances of the destruction of records from any other MUI,” the letter states. “But we cannot say with certainty that no such documents have been destroyed over the past 17 years.” The letter goes on to add that “the Division has taken steps… to ensure that no MUI records are destroyed while we review this issue.”
Translation: Hey, maybe records were destroyed, maybe they weren’t. But if we did destroy records, we promise not to do it again – for now.
The SEC’s unwillingness to admit the extent of the wrong doing left Flynn in a precarious position. The agency has a remarkably bad record when it comes to dealing with whistle-blowers. Back in 2005, when Flynn’s attorney, Gary Aguirre, tried to pursue an insider-trading case against Pequot Capital that involved John Mack, the future CEO of Morgan Stanley, he was fired by phone while on vacation. Two Senate committees later determined that Aguirre, who has since opened a private practice representing whistle-blowers, was dismissed improperly as part of a “process of reprisal” by the SEC. Two whistle-blowers in the Stanford case, Julie Preuitt and Joel Sauer, also experienced retaliation – including reprimands and demotions – after raising concerns about superficial investigations. “There’s no mechanism to raise these issues at the SEC,” says another former whistle-blower. Contacting the agency’s inspector general, he adds, is considered “the nuclear option” – a move “well-known to be a career-killer.”
In Flynn’s case, both he and Aguirre tried to keep the matter in-house, appealing to SEC chairman Mary Schapiro with a promise not to go outside the agency if she would grant Flynn protection against reprisal. When no such offer was forthcoming, Flynn went to the agency’s inspector general before sending a detailed letter about the wrongdoing to three congressional committees.
One of the offices Flynn contacted was that of Sen. Grassley, who was in the midst of his own battle with the SEC. Frustrated with the agency’s failure to punish major players on Wall Street, the Iowa Republican had begun an investigation into how the SEC follows up on outside complaints. Specifically, he wrote a letter to FINRA, another regulatory agency, to ask how many complaints it had referred to the SEC about SAC Capital, the hedge fund run by reptilian billionaire short-seller Stevie Cohen.
SAC has long been accused of a variety of improprieties, from insider trading to harassment. But no charge in recent Wall Street history is crazier than an episode involving a SAC executive named Ping Jiang, who was accused in 2006 of enacting a torturous hazing program. According to a civil lawsuit that was later dropped, Jiang allegedly forced a new trader named Andrew Tong to take female hormones, come to work wearing a dress and lipstick, have “foreign objects” inserted in his rectum, and allow Jiang to urinate in his mouth. (I’m not making this up.)
Grassley learned that over the past decade, FINRA had referred 19 complaints about suspicious trades at SAC to federal regulators. Curious to see how many of those referrals had been looked into, Grassley wrote the SEC on May 24th, asking for evidence that the agency had properly investigated the cases.
Two weeks later, on June 9th, Khuzami sent Grassley a surprisingly brusque answer: “We generally do not comment on the status of investigations or related referrals, and, in turn, are not providing information concerning the specific FINRA referrals you identified.” Translation: We’re not giving you the records, so blow us.
Grassley later found out from FINRA that it had actually referred 65 cases about SAC to the SEC, making the lack of serious investigations even more inexplicable. Angered by Khuzami’s response, he sent the SEC another letter on June 15th demanding an explanation, but no answer has been forthcoming.
In the interim, Grassley’s office was contacted by Flynn, who explained that among the missing MUIs he had uncovered were at least three involving SAC – one in 2006, one in 2007 and one in 2010, involving charges of insider trading and currency manipulation. All three cases were closed by the SEC, and the records apparently destroyed.
On August 17th, Grassley sent a letter to the SEC about the Flynn allegations, demanding to know if it was indeed true that the SEC had destroyed records. He also asked if the agency’s failure to produce evidence of investigations into SAC Capital were related to the missing MUIs.
The SEC’s inspector general is investigating the destroyed MUIs and plans to issue a report. NARA is also seeking answers. “We’ve asked the SEC to look into the matter and we’re awaiting their response,” says Laurence Brewer, a records officer for NARA. For its part, the SEC is trying to explain away the illegality of its actions through a semantic trick. John Nester, the agency’s spokesman, acknowledges that “documents related to MUIs” have been destroyed. “I don’t have any reason to believe that it hasn’t always been the policy,” he says. But Nester suggests that such documents do not “meet the federal definition of a record,” and therefore don’t have to be preserved under federal law.
But even if SEC officials manage to dodge criminal charges, it won’t change what happened: The nation’s top financial police destroyed more than a decade’s worth of intelligence they had gathered on some of Wall Street’s most egregious offenders. “The SEC not keeping the MUIs – you can see why this would be bad,” says Markopolos, the fraud examiner famous for breaking the Madoff case. “The reason you would want to keep them is to build a pattern. That way, if you get five MUIs over a period of 20 years on something similar involving the same company, you should be able to connect five dots and say, ‘You know, I’ve had five MUIs – they’re probably doing something. Let’s go tear the place apart.’” Destroy the MUIs, and Wall Street banks can commit the exact same crime over and over, without anyone ever knowing.
Regulation isn’t a panacea. The SEC could have placed federal agents on every corner of lower Manhattan throughout the past decade, and it might not have put a dent in the massive wave of corruption and fraud that left the economy in flames three years ago. And even if SEC staffers from top to bottom had been fully committed to rooting out financial corruption, the agency would still have been seriously hampered by a lack of resources that often forces it to abandon promising cases due to a shortage of manpower. “It’s always a triage,” is how one SEC veteran puts it. “And it’s worse now.”
But we’re equally in the dark about another hypothetical. Forget about what might have been if the SEC had followed up in earnest on all of those lost MUIs. What if even a handful of them had turned into real cases? How many investors might have been saved from crushing losses if Lehman Brothers had been forced to reveal its shady accounting way back in 2002? Might the need for taxpayer bailouts have been lessened had fraud cases against Citigroup and Bank of America been pursued in 2005 and 2007? And would the U.S. government have doubled down on its bailout of AIG if it had known that some of the firm’s executives were suspected of insider trading in September 2008?
It goes without saying that no ordinary law-enforcement agency would willingly destroy its own evidence. In fact, when it comes to garden-variety crooks, more and more police agencies are catching criminals with the aid of large and well-maintained databases. “Street-level law enforcement is increasingly data-driven,” says Bill Laufer, a criminology professor at the University of Pennsylvania. “For a host of reasons, though, we are starved for good data on both white-collar and corporate crime. So the idea that we would take the little data we do have and shred it, without a legal requirement to do so, calls for a very creative explanation.”
We’ll never know what the impact of those destroyed cases might have been; we’ll never know if those cases were closed for good reasons or bad. We’ll never know exactly who got away with what, because federal regulators have weighted down a huge sack of Wall Street’s dirty laundry and dumped it in a lake, never to be seen again.
Read the entire article HERE.
Last Modified: 26 Feb 2011 17:21 GMT
Hats off to Matt Taibbi for staying on the Wall Street crime beat, asking in his most recent report in Rolling Stone: “Why Isn’t Wall Street in Jail?”
“Financial crooks,” he argues, “brought down the world’s economy — but the feds are doing more to protect them than to prosecute them.”
President Barack Obama’s new chief of staff Bill Daley from JP Morgan Chase
True enough, but that’s only part of the story. The Daily Kos called his investigation a “depressing read” perhaps because it suggests that the Obama Administration is not doing what it should to reign in financial crime. Many of the lawyers he calls on to act come from big corporate law firms and buy into their worldview.
Kos should be more depressed by the failure of the progressive community to focus on these issues, and not pressing the government to do the right thing.
There is much more to this story. It’s also more about institutions than individuals, more about a captured system that enables and covers up crime and, then, deflects attention away from the deeper problem.
You could see that when television host Bill Mahrer pressed Taibbi to name the biggest Wall Street crooks, on his weekly political comedy show, he didn’t fully understand what we are really up against.
Here are ten of well-planned but flawed factors that help explain the procrastination and rationalisation for inaction. The government is not just to blame either. Several industries working together, through their firms associations, and well-paid operatives, collaborated over years to financialise the economy to their own benefit.
Personalising bad guys makes for good TV without offering a real explanation.
When financial institutions and services became the dominant economic sector, they, effectively, took over the political system to fortify their power. It was a done incrementally, over years, with savvy, foresight and malice.
First, many of those who might be charged with financial crimes and fraud invested in lobbying and political donations to insure that tough regulations and enforcement were neutered before the housing bubble they promoted took off.
After hundreds of bankers were jailed in the wake of the Savings and Loan crisis, financial fraudsters pushed for weakened regulations, guaranteeing that their colleagues wouldn’t be jailed in when the next crisis hit.
In effect, their deregulation strategy also deliberately “decriminalised” the environment to make sure that practices that led to high profits and low accountability would be permissible and permitted. What was once illegal soon became “legal”.
Former New York Federal Reserve Chief and current Secretary of the Treasury Timothy Geithner has close ties with JP Morgan and Goldman Sachs
The cops and watchdogs were taken off the beat. Anticipating and then dissolving restraints, they engineered a low-risk crime scene in the way the Pentagon systematically prepares its battlefields. This permitted illicit practices, to be encouraged by CEOs in a variety of control frauds to keep profits up so that the executives could extract more revenue.
Today’s proposed Republican cutbacks of the funding of regulatory bodies aims to undercut recently passed financial reforms. One Commissioner of the Commodity Futures Trading Commission said if the budget is slashed, “there would essentially be no cop on the beat…we could once again risk another calamitous disintegration.” He added, according to a New York Times report, “the process will mean nothing, squat, diddley … if we get cut we’re going to be in a world of hurt.”
Second, the industry invented, advertised and rationalised exotic financial instruments as forward looking “innovation” and “modernisation” to disguise their intent while enhancing their field to maneuver.
This was part of creating a shadow banking system operating below the radar of effective monitoring and regulation. Where is the focus on controlling the out of control power of the leverage-hungry gamblers at unregulated hedge funds?
Third, the industry promulgated economic theories and ideologies that won the backing of the economics profession which largely did not see the crisis coming, making those who favored a crackdown on fraud appear unfashionable and out of date.
As economist James Galbraith testified to Congress: “…the study of financial fraud received little attention. Practically no research institutes exist; collaboration between economists and criminologists is rare; in the leading departments there are few specialists and very few students. Economists have soft-pedaled the role of fraud in every crisis they examined, including the Savings & Loan debacle, the Russian transition, the Asian meltdown and the dot.com bubble. They continue to do so now.”
Fourth, prominent members of the financial services industry were appointed to top positions in the government agencies that should have cracked down on financial crime, but instead looked the other way. The foxes were indeed guarding the chicken coop guiding institutions that tolerated if not enabled an environment of criminality.
Alan Greenspan and Ben Bernanke were repeatedly warned by underlings at the Federal Reserve Bank about pervasive predatory practices in the mortgage and Subprime markets and they chose to do nothing. Now Greenspan acknowledges pervasive fraud but decries the lack of enforcement while Bernanke wants to run a Consumer Protection Agency after ignoring consumer complaints for years. Even as the FBI denounced “an epidemic of mortgage fraud” in 2004, their white-collar crime units were downsized.
Fifth, the media has been complicit, seduced, bought off and compromised. The housing bubble mushroomed in the very period that the media was forced to downsize. Dodgy lenders and credit card companies pumped billions into advertising in radio, television and the internet almost insuring that there would no undue media investigations.
Financial journalists increasingly embedded themselves in the culture and narrative of Wall Street by hyping stocks and CEOs. The “guests” routinely chosen by media outlets to explain the crisis were often part of it.
Bill Clinton signs into law the Gramm-Leach-Bliley Financial Services Modernization Act, November 12, 1999. Under the 1999 Financial Services Modernization Act, effective control over the entire US financial services industry (including insurance companies, pension funds, securities companies, etc.) had been transferred to a handful of financial conglomerates and their associated hedge funds.
Foxes guarding the chicken coop
“Many of the ‘experts’ whom I read or see on TV seem clueless, [and] full of hot air. Many of their predictions turn out wrong even when they seem so self-assured and well-informed in making them,” writes Jim Hightower,
His advice: “Don’t be deterred by the finance industry’s jargon (which is intended to numb your brain and keep regular folks from even trying to figure out what’s going on).”
Sixth, politicians and corporate lawyers fashioned settlements of abuses that were exposed rather than prosecutions. The government benefited by getting large fines while businessmen avoided jail.
Financial executives were often rewarded with bonuses and huge compensation for practices that skirted or crossed the line of criminality.
Intentional violations of the spirit and letter of laws were justified because “everyone does it” by high priced legal firms that often doubled as lobbyists. Conflicts of interest were sneered at. Judges, dependent on industry donations for reelection looked the other way.
Seventh, as the economy changed and industries that were once separated began working together, laws were not updates. Financial institutions worked closely with Insurance companies and real estate firms. Yet law enforcement did not recognised this new reality.
Financial crime was still seen almost entirely under the framework of securities laws that are designed to protect investors, not workers or homeowners who suffered far more in the collapse. Cases are framed against individuals with a high standard of proving intent, not under other kinds of laws used to prosecute organised crime and conspiracies.
By defining crimes narrowly, prosecutions became few and far between.
“Cases against Wall Street executives can be difficult to prove to the satisfaction of a jury because of the mind-numbing volume of emails, prospectuses, and memos involved in documenting a case,” Reuters news agency reported.
Convicted financial criminal Sam Antar who appears in my film Plunder is contemptuous of how government tends to proceed in these cases, in part because they don’t seem to understand how calculated these crimes and their cover-ups are. “Our laws—innocent until proven guilty, the codes of ethics that journalists like you abide by limit your behavior and give the white-collar criminal freedom to commit their crimes, and also to cover up their crimes,” he said.
“We have no respect for the laws. We consider your codes of ethics, and your laws, weaknesses to be exploited in the execution of our crimes. So the prosecutors, hopefully most prosecutors, are honest if they’re playing by the set of the rules; they’re hampered by the illegal constraints. The white-collar criminal has no legal constraints. You subpoena documents, we destroy documents; you subpoena witnesses, we lie. So you are at a disadvantage when it comes to the white-collared criminal. In effect, we’re economic predators. We’re serial economic predators; we impose a collective harm on society, time is always on our side, not on, not on the side of justice, unfortunately.”
Eighth, even as the economy globalises, and US financial firms spread their footprint worldwide, there was little internationalisation of financial rules and regulations.
Today, even as the French and the Germans propose such rules, Washington still opposes a tough global regime of codes of conduct.
Overseas, in Greece and England, and other parts of Europe, there has been an indictment of American corporate predators, especially Goldman Sachs. They are being denounced as “financial terrorists” and discussed in terms of their links to various elite business formations like the Bilderberg Group.
Ninth, With the exception of softball inquiries by a financial crisis inquiry commission, there has been no intensive investigations in the United States even like the tepid 9/11 Commission.
While Senator Carl Levin of Michigan did spend a day aggressively grilling Goldman Sachs on one deceptive practice, their defense was more telling about the real nature of the problem: “everyone did it”.
The case for criminality has still not achieved critical mass as an issue to become a dominant explanation for why the economy collapsed. In fact, it is still being sneered at or ignored.
Finally, tenth, a big problem in my countdown, are the progressive critics of the crisis who also largely ignore criminality as a key factor and possible focus for an organizing effort.
They treat the crisis as if they are at a financial seminar at Harvard, focusing on the complexities of derivatives, credit default swaps and structured financial products in language that ordinary people rarely can penetrate. They argue that banks should not be too big to fail, but rarely they are not too big to jail.
Few progressive activist groups stress the immorality of these practices, much less their criminality after all these years! There is little active solidarity even in the progressive community with the newly homeless or jobless.
Where is the active empathy, compassion and the caring for the victims of the financial crimes?
A populist response to the crisis has been muted. There is little pressure from below on the Administration and Justice Department—which has now created a financial crimes task force—to take real action. It is as if this crime crisis within the financial crisis does not exist.
Curiously, as they refuse to discuss the pervasive fraud that did occur, the Obama administration is considering a “global settlement” of all housing fraud to get the issue off the table. They a proposing a $20bn dollar deal to bury the problem.
By all means, workers should rally to protect their jobs and pensions as they have in Wisconsin, but they should realise that it is the banks who are ultimately to blame for the financial pressures behind the attack on them. Pension funds have lost billions because of Wall Street scams. State governments have taken a big hit.
Why have the unions and leftist groups been mostly silent on these issues?
Even after the markets melted down, even after Wall Street bonus scandals and bailout disgraces, Wall Street has hardly been humbled. It is still spending a fortune on PR and political gun slinging with 25 lobbyists shadowing every member of Congress to scuttle real reform.
Its arrogance is evident in an email the Financial Times reported was “pinging around” trading desks. It reads in part:
“We are Wall Street: It’s our job to make money. Whether it’s a commodity, stock, bond, or some hypothetical piece of fake paper, it doesn’t matter. We would trade baseball cards if it were profitable… Go ahead and continue to take us down, but you’re only going to hurt yourselves. What’s going to happen when we can’t find jobs on the Street anymore? Guess what: We’re going to take yours… We aren’t dinosaurs. We are smarter and more vicious than that, and we are going to survive.”
Perhaps it’s not surprising, that in an act of preemptive anticipation, some years ago, Wall Street firms began financing the construction and administration of privatised jails. They know how to profit from incarceration too.
When will we call a crime a crime? When will we demand a jail-out, not just more bail-outs. Unless we do, and until we do, the people who created the worst crisis in our time will, in effect, get away with the biggest rip-off in history.
Read the entire article HERE.
Blankfein, 56, received 78,111 shares on Jan. 26, according to a filing yesterday with the U.S. Securities and Exchange Commission. At the closing price of $161.31 that day, the shares would be valued at $12.6 million. New York-based Goldman Sachs also raised Blankfein’s base salary to $2 million this year from $600,000, according to a separate filing.
Goldman Sachs, the fifth-largest U.S. bank by assets, reported 2010 earnings dropped 38 percent from a record in 2009 as revenue from trading stocks and bonds fell from an all-time high. The firm set aside 39 percent of revenue to pay employees in 2010, up from 36 percent in 2009, the lowest ratio ever.
Chief Financial Officer David Viniar, President Gary Cohn, and Vice Chairmen J. Michael Evans and John S. Weinberg each also received 78,111 restricted shares, according to separate filings. For 2009, Blankfein was awarded 58,381 restricted stock units, the amount given to those four deputies.
The firm also raised the base salary for those four executives to $1.85 million each, according to the filing. Each had been paid $600,000 previously.
Banks have been raising base salaries in response to increased pressure from regulators on bonuses. Regulators including the Federal Deposit Insurance Corp., the Federal Reserve and the Securities and Exchange Commission are drafting rules on pay meant to limit practices considered risky.
Citigroup Inc. boosted CEO Vikram Pandit’s base salary to $1.75 million from $1 after the bank’s first profit for a year under his watch. James Gorman, Morgan Stanley’s top executive since last January, was awarded deferred stock and options valued at about $7.4 million for his 2010 performance.
Blankfein’s latest bonus falls far short of the Wall Street record that he set with his $67.9 million bonus in 2007. The shares vest over three years and can’t be sold for five years.
Michael Sherwood, co-CEO of Goldman Sachs International in London, received 89,270 shares, worth $14.4 million. Gregory Palm and Esta Stecher, the firm’s general counsels, each received 38,684 shares, worth $6.24 million.
The filings don’t include any cash bonuses. Blankfein didn’t receive cash bonuses for 2009 and 2008, after getting about $27 million in cash bonuses for each of 2007 and 2006. Stephen Cohen, a spokesman for the firm, declined to comment.
?Read the entire article HERE.
By Barry Ritholtz – December 31st, 2010, 10:00AM
The Big Picture
On the last day of the year, I like to think back about the truths I learned this year. Some were revealed accidentally, others were the work of challenging data analysis. We happened upon some Truths during deep contemplation, and occasionally stumbled across them accidentally.
And of course, there was Wikileaks.
Regardless of your method, with a little digging, truth seekers were regularly rewarded. When you find it, often, it is not pretty; the Truth will destroy long held, cherished myths. But if you are an investor, you must go through this process on a regular basis.
If you can identify where the masses’ subjective view of reality is wrong, and then time when they begin to realize this, there are good investment returns to be had. A bonus of this process is some small measure of personal enlightenment.
In 2009 and 2010, I learned that Corporate America took over the political process via their exhaustive lobbying efforts. What was once a Democracy is now a Corporatocracy. Just because I personally despised this result did not prevent me from profiting from it. Hardware, software, and research all cost money. I can promise you it is much easier to fight the powers that be when you have an unlimited Amex card — and cold hard dollars fiat printed Fed money — to help you.
Exactly how far has the takeover gone? The corrupt US Supreme Court provided a sympathetic venue for the creation of corporate rights never envisioned by the Founding Fathers; Congress has become a wholly owned subsidiary of America, Inc. The White House talks a good game of smack, but genuflects in order to beg for job creation.
Politicians do the bidding not for the people, but for the corporate establishment. Those people who want to blame the barking, snarling government for all the woes of the world do not want you to look further up the leash to see who is giving the commands. These corporate apologists pretend to be philosophers, but in reality they are mere Fellatrix, bought and paid for by their lords and masters.
Fearing a corporate takeover of the nation isn’t nearly as radical as it sounds. Thomas Jefferson reviled the idea of big corporations: “I hope we shall…crush in its birth the aristocracy of our moneyed corporations, which dare already to challenge our government to a trial of strength and to bid defiance to the laws of our country.” Jefferson knew the influence bankers could have on a nation’s soul, and he was horrified by it.
No less a figure than Dwight D. Eisenhower — five-star Army general, Supreme Commander of the Allied forces in Europe during World War II, responsible for planning and supervising the successful invasion of France and Germany, who then became the 34th President of the United States from 1953 until 1961 — warned that “we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex.” He knew it was not just the military, but the entire existing corporate structure that sought to take advantage of their influence in order to thwart legitimate competition, skew Federal contracts, and exempt themselves from taxation and regulation.
What might Eisenhower have said about the bailouts, and enormous decrease in banking competition?
The surprising thing about this anomaly is that there are enormous incentives to find the objective truth. Often, it seems like the reality gets buried under a mountain of conflicting interests, with power and money and influence on one side and We, the people on the other.
However, the credit crisis and collapse has taught us one very important lesson: If you continually search for that nugget of reality, if you are willing to roll up your sleeves and sift through the vast mounds of horse shit that Wall Street and Washington regularly serve up, there is indeed, a pony somewhere in there.
That is your job in 2011: Go find the pony . . .
Find the original article HERE.
Following the initial movie preview is the interview with Charles Ferguson. In this interview, INET’s Executive Director Rob Johnson talks to Charles Ferguson, the director of the new documentary film “Inside Job,” about corruption in academia, the failure of both political parties in dealing with the financial crisis, and the potential for change.
By SEWELL CHAN
Published: December 16, 2010
New York Times
WASHINGTON — When Pimco, the huge bond manager, approached investors recently to raise money for a new fund that would buy soured mortgage securities from ailing banks, it promoted its expertise by listing several former top Bush administration officials and Alan Greenspan, the former Federal Reserve chairman.
In a confidential presentation to investors, Pimco listed as either consultants or employees an all-star constellation of former federal officials, including Mr. Greenspan; Joshua B. Bolten, who was White House chief of staff under George W. Bush; and Neel T. Kashkari, who ran the Wall Street bailout program for the Treasury department.
Those former officials, as well as others hired by Pimco, helped set national economic policy during the run-up to the financial crisis of 2008, which was prompted by the collapse of the housing market.
Now investment firms like Pimco are looking to profit by buying distressed mortgage debt from banks, which are under pressure to raise cash and hold more capital.
While Pimco did not create shoddy mortgages or contribute to the crisis, its presentation to investors, which was prepared in October, suggests that former senior officials are now poised to help investors benefit from the disastrous financial developments that occurred while they held power in Washington.
The presentation, a copy of which was obtained by The New York Times, also reflects Washington’s revolving door where officials leave government to pursue lucrative opportunities working with industries they once dealt with while in public office.
“This highlights the all-too-close relationships between our largest financial institutions and the people who acted as their regulators,” said Joshua Rosner, managing director of Graham Fisher & Company, which advises institutional investors, after the presentation was described to him. “The ‘too big to fail’ concept is not just about assets. It’s also about relationships.”
Mr. Greenspan, who led the Fed for 18 years until his retirement in January 2006, has been criticized for not using the central bank’s regulatory powers to crack down on subprime mortgage lending. He has been a paid adviser to Pimco since May 2007.
Reached at his consulting firm, Mr. Greenspan expressed surprise on learning that he was listed as a “special consultant to Pimco” in a marketing presentation.
“Pimco has never asked me to assist in the marketing of any of their products, and I never have,” he said. “I am a consultant to them on global economic and financial issues.”
Another special consultant was Mr. Bolten, a former Goldman Sachs executive who worked in the White House for the eight years of the Bush administration.
As the chief of staff from 2006 to 2009, Mr. Bolten was intimately involved in economic policy. He helped lure Henry M. Paulson Jr., a fellow alumnus of Goldman Sachs, to serve as Treasury secretary, and was Mr. Paulson’s main liaison to the White House in 2008, when the Treasury worked frantically with the Fed to avert a collapse of the capital markets.
Mr. Bolten, who is now a visiting professor in the Woodrow Wilson School of Public and International Affairs at Princeton University, did not respond to phone calls and e-mails requesting comment.
The presentation also names two other Bush administration officials who are now executives at Pimco.
One is Mr. Kashkari, who was the assistant Treasury secretary charged with managing the Troubled Asset Relief Program, which Congress set up to rescue the financial services industry. The other is Richard H. Clarida, who was the top economist at the Treasury in 2002 and 2003. He is now an executive vice president at Pimco’s New York office, as well as a professor of economics at Columbia University. Neither responded to requests for comment.
Officials at Pimco, which is based in Newport Beach, Calif., and is a subsidiary of the German insurer Allianz, declined to comment, saying their lawyers believed that rules set by the Securities and Exchange Commission prohibited them from discussing the investment offering.
Harold P. Reichwald, a banking and finance lawyer at Manatt, Phelps & Phillips in Los Angeles, who does not have a relationship with Pimco, said the use of policy experts was not surprising for the kind of investment Pimco was offering.
“It’s not surprising that an issuer would surround itself with people with expertise in the field,” he said. “I think good practice would dictate that if you’re going to name individuals in a prospectus, which is essentially a selling document, that you would clear it with them in advance.”
While some large Wall Street banks have been thriving in recent months after getting a lifeline from the government, other financial institutions, including smaller banks, have been teetering.
The Federal Deposit Insurance Corporation has seized and closed nearly 300 banks in the last two years. And some big banks are trying to get out of the business of servicing residential mortgages, an expensive and time-consuming task to which banks that focus on originating loans are not well-suited.
The presentation estimates that banks in the United States and Europe need to raise more than $550 billion in capital, partly because of pressure from regulators to strengthen their balance sheets, and partly in anticipation of new international bank capital standards known as Basel III.
In essence, the Pimco fund — known as Bravo, short for Bank Recapitalization and Value Opportunities — intends to buy a wide variety of distressed assets, including pools of nonperforming loans bundled into securities, at a discount, among other strategies. Pimco is believed to be trying to raise hundreds of millions of dollars for the fund.
Read the entire article HERE.
“I thought I was prepared,” says documentary filmmaker Charles Ferguson — prepared for what he’d learn about the “bad behavior” among Wall Streeters that led to the global financial meltdown.
Not so much.
“I had grossly underestimated the level of extraordinarily unethical and even fraudulent behavior that had occurred on such a large scale,” Ferguson tells All Things Considered host Melissa Block, in a conversation airing Friday.
Investment banks selling defective securities — even designing securities to be defective, so they could make a profit betting against them?
“If somebody had told me in the fall of 2008 that this had gone on on a huge scale — tens of billions of dollars — I would have said, ‘No, that’s just too extreme. People don’t do that. And if you do do it, you would go to jail.’ They did do it, and nobody’s gone to jail.”
The movie, opening Oct. 8, includes a testy exchange between Ferguson and former Bush adviser Glenn Hubbard, who’s now the dean of Columbia Business School — and, Ferguson argues, part of an academic culture that has allowed the financial services industry to corrupt the study of economics itself.
“Very prominent professors of economics, often people who’ve also held high government posts, are paid to testify in Congress,” Ferguson explains. “They are paid to be expert witnesss in both civil and criminal trials. They’re often paid to write papers that praise the financial services industry, and argue on behalf of deregulation of the industry. They make millions, in some cases tens of millions of dollars, doing this. And this is usually not disclosed.”
That analysis might be why Hubbard, when Ferguson asks him whether he’s got ties with financial services firms, responds with a cool one-word answer: “Possibly.”
“You don’t remember?” Ferguson presses.
“This isn’t a deposition, sir,” Hubbard replies. “I was polite enough to give you time — foolishly, I now see. But you have three more minutes. Give it your best shot.”
Ferguson says meeting Hubbard and other powerful figures in the industry was a eye-opening experience.
“These people were not used to being challenged,” he says. “They’d never been questioned about this issue before. They clearly expected to be deferred to — by me, and I think by everybody.”
Read the entire article HERE.