While watching the single biggest trash talking moment in movie history, “I DRINK YOUR MILKSHAKE!” I had an epiphany. After years of covering Wall Street scandals with little to know repercussions from the offenders; I transposed that entire Milkshake drinking attitude portrayed in an Oscar winning performance by Daniel Day Lewis to Wall Street. In particularly the way the big banks and investment houses have treated investors over the past fifteen years. A simple skimming of our archived articles, is a an enlightening yet frightening trip down memory lane in regards to the complete neglect and disrespect shown to the individual investor by Wall Street.
Let the Drinking of the Milkshake commence…
The Securities and Exchange Commission filed a settled enforcement action against Banc of America Investment Services for failing to disclose to clients that in selecting investments for discretionary mutual fund accounts it favored funds affiliated with one of its preferred providers. This is commonly called shelf-space agreements. These agreements put the investor at a disadvantage because the broker has a financial incentive for pushing one fund over another rather than dutifully inform the client of all suitable options. This often occurs with big brokerage firms and banks because they seldom if ever accept the duties of a fiduciary. The SEC found that Banc of America made material misrepresentations and omissions to clients who had given them discretion to select mutual funds for them. Linda Chatman Thomsen director of SEC Enforcement stated, “Banc of America’s selection of mutual funds for wrap fee clients was compromised when it favored its own proprietary funds over non-affiliated funds. By using a method to select funds that was at odds with information it provided to clients, Bank of America violated its duty of loyalty to its clients.
Banc Of America…We Buy For You What Is Good For Us.
Wachovia, who most recently purchased A.G. Edwards, agreed to pay up to 143.9 million to settle a government investigation into its nefarious relationship with telemarketers that Office of the Comptroller alleges caused harm upon thousands of customers many of which were elderly. Part of the settlement stipulates that Wachovia pay up to $125 million in restitution to customers wronged by their practices. Wachovia set up scheme involving remotely created checks, which are checks that do not have an accountholder’s signature. The OCC stated that the “bank profited from these activities in the form of fees collected from and balances maintained at the bank by the payment processors and telemarketers.” When pressed for information on the suit, Wachovia executives said they been unaware of the thefts. However, newly released documents show that Wachovia was rotten to the core with executives having full knowledge of the scheme. Documents show that Wachovia had long known about allegations of fraud and that the bank solicited business from companies it knew had been accused of telemarketing crimes. Documents also show that Wachovia was alerted by federal agencies about the fraud but continued on with business as usual with companies that helped steal $400 million from unsuspecting victims.
Wachovia…Boiler Rooms and Coke Deals
Not to be outdone by the Swiss bankers, federal prosecutors are investigating Wachovia as part of a broad probe of alleged laundering of drug proceeds by Mexican and Colombian money-transfer companies. Wachovia has built up its ties to casas de cambio or money-exchange houses, which dot the U.S.-Mexican border to facilitate cross-border transfers. In 2005 Wachovia introduced the Dinero Directo card to ease and facilitate cross-border remittances despite the concerns of U.S. law enforcement that the firms being used were facilitators for drug money laundering operations.
From the popular crowd, to the dog-house faster than you can say subprime is what happened to Charles Schwab’s YieldPlus bond fund. This once popular fund was decimated by terrible investment choices in the subprime markets. In order to boost yields the fund mangers started stuffing the portfolio with mortgage-backed securities, in fact half the portfolio was mortgage backed paper. That is all well and good if you are putting together a speculative fund, unfortunately for Chucks’ customers; the YieldPlus fund was sold as super-safe alternative to cash. The YieldPlus fund is down big and investors are starting to sue, alleging they were being misled. I doubt we will see any cartoon caricatures discussing the YieldPlus fiasco in the next Charles Schwab “Ask Chuck” commercials.
James Barker saw no way out. In September 2003, the superintendent of the Erie City School District in Pennsylvania watched helplessly as his buildings began to crumble. The 81-year-old Roosevelt Middle School was on the verge of being condemned. The district was running out of money to buy new textbooks. And the school board had determined that the 100,000 resident community 125 miles north of Pittsburgh couldn’t afford a tax increase. Then J.P.Morgan Chase made Barker an offer that seemed too good to be true.
JPMorgan Chase…Have I Got a Derivatives Deal For You
Playing the role of the white knight riding in to save the day J.P.Morgan told the school board that all they had to do was sign documents he said would benefit them if interest rates increased in the future, and the bank would give the district $750,000.
The school board agreed to the deal.
What the “white knight” didn’t tell them was that the bank would get more in fees than the school district would get in cash…$1 million. The complex “deal of the century” placed taxpayer money at risk, was linked to four variables involving interest rates. Three years later, as the white knight J.P. Morgan’s predictions went down the proverbial toilet, the Erie school board paid $2.9 million to the benevolent knight to get out of the deal.
“That was like a sucker punch,” Barker said. “It’s not about the district and the superintendent. It’s about resources being sucked out of the classroom. If it’s happening here, it’s happening in other places.”
Like taking candy from a baby during the past four years in Pennsylvania alone, banks have pitched at least 500 deals totaling $12 billion according to records on file with the state Department of Community and Economic Development. The large majority of these transactions have been made without public bidding, which means that the banks and advisors privately arranged the deals. Bloomberg reports that the Pennsylvania deals show that school districts routinely lose when making these derivative deals. The winners of course, are the investment banks who garner fees that are as much as five times higher than typical rates and overpay advisors as much as ten-fold. That means that banks often underpay the school districts on upfront amounts, the school’s advisers are another issue. They are conflicted, when the banks are paying their fees.
J.P. Morgan pulled the same deal on city of Birmingham, Alabama, this time, rather than schools they targeted the sewer system. The $2.2 billion in debt the county financed through Morgan and the mechanisms that J.P. Morgan put in place disintegrated. The county paid $120 million in fees, which was six times the prevailing rate, and the county ended up $277 million deeper and debt.
UBS…The Toxic Avenger
The Swiss banking giant has taken some serious body blows on its mortgage investments. In order to ease some of its pain, UBS decided to dump its toxic waste paper on its clients. In a lawsuit a German client of UBS alleges that the company sold it $500 million in complex investments that UBS’s now defunct hedge fund Dillon Read Capital used as a toxic waste dump for all its radioactive subprime paper. The client lost $275 million.
This past month on a slow news weekend several of the cable news networks covered a story out of Eunice, Louisiana, where two fast-food workers at a Sonic eatery spit into customers drinks. Would you go back to a restaurant where employees spit into customers drinks? (If you answered yes to this please cancel your subscription and move to San Francisco.) Of course not; poor service, in this case, disgusting service should not be rewarded with further patronage. However, if we do continue to patronize such businesses they have no incentive to change their ways. If a restaurant serves horrible food, yet people keep going, why change the chef? If a dry cleaner returns your clothes dirty, yet you keep going why start cleaning the clothes. The same attitude needs to be taken up with the major investment banks. They have, as I have chronicled over the years not only Drunk Investors Milkshakes, but Spit in Their French Fries. Until investors start changing who they do business with, the big firms will have no incentive to change and will keep doing business as usual.