Sticking It To The Taxpayer
The U.S. Attorneys office has sued Deutsche Bank for tricking a government insurance program into backing mortgage loans that carried much more risk than the firm let on. Most of the loans have been defaulted on, costing “We the People” $400 million. If you think Deutsche Bank was alone in ripping off the taxpayer I have a bridge I would like to sell you between Brooklyn and the island of Manhattan. Time Magazine reported that when there wasn’t direct fraud, investment banks were using complex mortgage derivatives to make their home loan deals look safer than they were.
Deutsche Bank is being sued under the False Claims Act, which was crafted to collect from companies that defraud the government, and by default the taxpayer. It is our belief that the financial wizards of smart with their financial engineering are nothing more than magicians. Their seemingly endless illusions are different incarnations of the same trick, whereas they get people to believe that there is little to no risk, when it is exceedingly prevalent.
Party Like It’s 1999
A popular and extraordinarily shady means of doing business on Wall Street during the 1990’s was the practicing of “spinning.” This nefarious practice involved securities firms handing out “hot” IPO shares to certain preferred executives in return for investment banking business.
An example of this presented in the Wall Street Journal via the Securities and Exchange Commission: June 1999 Phone.com chooses CSFB to lead it’s IPO. Mid 1999 Phone.com CEO opens brokerage account with CSFB, gaining $1.3million in various “hot” IPO’s. November 1999 Phone.com chooses CSFB for additional financing and merger work, paying CSFB $76.1 million in banking fees.
CSFB settled the allegations in 2003 without admitting or denying wrongdoing. Back in 2003 the ten largest investment houses agreed to “refrain” from spinning. This was a part of New York Attorney General Eliot Spitzer’s ridiculous regulatory settlement which led to not a single executive, analyst, investment banker, or broker to face any criminal charges in manifestly deceiving and ripping off the public.
This “refrain” was coupled with a ban on using untruthful stock research to also win investment-banking business. Pop open a big bottle of the bubbly Wall Street, the “refrain” has expired and from the look of things nothing new is going to be passed anytime soon; Wall Street can delay rules like this for years. With a bevy of new technology IPO’s like Pandora, Facebook and Twitter coming soon to a brokerage firm near you. I have a sinking suspicion that certain executives and bankers will be partying like it’s 1999. Bond Rigging UBS has agreed to fork over $60.2 million to settle charges it rigged bids on at least 100 municipal-bond transactions that generated “millions of dollars in ill-gotten gains.
“ This settlement involves 25 states and is part of criminal and civil investigations into a conspiracy by investment firms and municipal advisers to overcharge state and local governments and by default once again, the taxpayer for investment products. The conduct of UBS has threatened the tax-exempt status of $16.5 billion of municipal bonds. From Bloomberg, ”Our complaint against UBS reads like a how to primer for bid-rigging and securities fraud,” stated Elaine Greenberg, chief of the SEC’s Municipal Securities and Public Pensions Unit.
She concluded, “They used secret arrangements and multiple roles to win business and defraud municipalities through the repeated use of illegal courtesy bids, last looks for favored bidders and money to bidding agents disguised as swap payments.”
Regulators have also identified more than a dozen other firms as unindicted co-conspirators in the case against CDR, according to court records. Treason JPMorgan Chase agreed to pay another parking ticketesque fine to settle claims it overcharged military service members on their mortgages. Over 6,000 active-duty military personnel were either overcharged, interest rates unfairly changed, or homes wrongly foreclosed upon. I am believer that an attack on active-military personnel whether it be violent, or financial is an act of treason and should be prosecuted as such.
Ireland Gets the Horns
One of my favorite authors Michael Lewis did a great investigative piece for Vanity Fair, entitled Irish Eyes are Crying, which showed how Merrill Lynch literally sticks it to the entire populace of Ireland. Merrill Lynch and two troubled banks duped Ireland’s finance minister Brian Lenihan to sign off on having the citizens of Ireland foot the bill in over 106 billion pounds in property losses by Goldman Sachs, German and French banks. The deal made whole all of these private bondholders that should have taken a major haircut.
Merrill Lynch, months before AngloIrish, Bank of Ireland, and Allied Irish went under, a research analyst for Merrill Lynch published a report warning of the dire fiscal situation of the banks. His honest report was instantly pulled by the powers that be at Merrill, when they subsequently edited the report to a benign state. Six months later mother Merrill put out dubious research report that stated, “All of the Irish banks are profitable and well capitalized.”
Merrill Lynch was paid quite handsomely for the report. Lewis reflects on the actions of Wall Street and Lenihan, “That had been the strangest consequences of the Irish bubble: to throw a nation which had finally clawed its way out of centuries of indentured servitude back into it.” No Surprise Here Bernard Madoff in a jailhouse interview stated that the investment firms he ran his ponzi scheme through were aware of what he was up to. He spoke of the “willful blindness” and their failure to examine discrepancies between his regulatory filings and other information that was available to them.
“They had to know,” Madoff stated to the New York Times.
“But the attitude was sort of…if you’re doing something wrong, we don’t want to know. I’m reading more know about how suspicious they were than I ever realized at the time.”
Using and Abusing Their Clients Again
Merrill Lynch settled with the Securities and Exchange Commission over charges that the firm misused customer order information to make proprietary trades and charged their clients undisclosed trading fees.
Merrill’s proprietary traders “had improper access” to customer order information “and misused it to place trades on the firm’s behalf,” stated Scott Friestad, associate director of the SEC Division of Enforcement.
Merrill Lynch also charged customer’s undisclosed mark-ups and markdowns by filling customer orders at prices less favorable to the client than the prices at which Merrill bought or sold the securities in the market. They say nothing is certain in life but death and taxes. I will take issue with that. It is a life certainty, that no matter what these big firms do, in the end, they will neither admit nor deny wrongdoing, pay a fine and walk away.
We Can Do Anything The Senate Permanent Subcommittee on Investigation issued a damning report on Goldman Sachs and their involvement in the financial crisis. They were accused of misleading clients and manipulating markets. Chairman of the committee, Senator Carl Levin, accused Goldman of profiting at clients’ expense as the mortgage market crashed.
Levin stated, “In my judgment, Goldman clearly misled their clients and they misled Congress.” Senator Tom Coburn stated, “Blame for this mess lies everywhere, from federal regulators who cast a blind eye, Wall street bankers who let greed run wild, and members of Congress who failed to provide oversight. It shows without a doubt the lack of ethics in some of our financial institutions who embraced known conflicts of interest to accomplish wealth for themselves, not caring about the outcome for their customers.”
Some of the case studies from the real estate bubble years, demonstrated that the runaway mortgage securitization machine churned out abusive loans, toxic securities, and big fees for lenders and Wall Street. Some of the internal emails by Wall Street executives were eerily reminiscent of the dot com era correspondence where they described mortgage-backed securities that were behind the collateralized debt obligations (CDO) as “crap” and “pigs.”
Investment banks, the report stated, “Charged $1 million in fees to construct, underwrite and sell a mortgage backed security and $5 million to $10 million per CDO.”
This is one of the reasons why the mortgage brokerage business was booming. Wall Street was packaging together in what amounted to a financial bomb. Another problem was the people who were supposed to sniff out the explosive investment stuff, S&P and Moody’s; were being paid by the same firms crafting the toxic paper.
The committee also pointed out that, “the firm used net short positions to benefit from the downturn in the mortgage market.”
In other words, Goldman designed, marketed and sold CDO’s in a method that created conflicts of interest with their clients, while simultaneously creating huge profits “from the products that caused substantial losses for its clients.”
Gee, thanks Congress. Tell us all something we don’t know already. I can only imagine what the head of Goldman Sachs Lloyd Blankfein was thinking while this was taking place. Maybe something like this…
“What are you going to about it you Senate fools! You made us too big to fail. I could take a leak on the Senate floor and all you are going to do is condemn my actions. We are omnipotent!”
The very same Senate committee report also stated that the major credit ratings agencies were on the take and sold their souls to the Wall Street investment banks. The report stated that they repeatedly sacrificed the accuracy of their reports to maintain a competitive edge. Rather than actually do their job and assess risk, the two major credit rating agencies S&P and Moody’s gave their seal of approval to whatever piece of toxic paper Wall Street threw their way.
The report stated that by “repeatedly debasing their standards, these agencies helped banks sell shoddy securities to unsuspecting investors, inflating the value of assets that turned out to be worth far less.”
You would think if the referee of all things credit were caught being on the take they would be relieved of their duties. Nope. They are still in business.
Gandel Stephen Mortgage Fraud: Will Wall Street Finally Have To Pay For Its Misdeeds Time 5/5/11 Smith Randall Rule To Prevent Abuse of IPO’s Is Delayed Wall Street Journal 5/3/11 Selway William & Braun Martin UBS Agrees To Pay $160.2 Million in U.S. Municipal Bond-Rigging Probe Bloomberg 5/4/11 Editor Bank To Pay $56m in Mortgage Case Bloomberg 4/22/11 Lewis Michael When Irish Eyes Are Crying Vanity Fair 2/1/11 Henriques Diana From Prison, Madoff Says Banks Had To Know Of Fraud New York Times 2/15/11 Skinner Liz Merrill Ponies Up $10m To Settle Clearly Inappropriate Actions Investment News 1/25/11 Editor Rating Agencies Repeatedly Caved To Banks Demands And Helped Cause Crisis, Report Finds Huffington Post 4/14/11 Drawbaugh Kevin Goldman Sachs Accused By Senate Panel Of Misleading Clients, Manipulating Markets Reuters 4/14/11