Legal War on Wall Street Chicanery Isn’t Finished
May 23, 2011
Three years after Congress promised answers in the big banks’ roles in the financial scandal, there are none – only questions.
However, New York Attorney General Eric Schneiderman is investigating Wall Street’s role in the mortgage quagmire and housing bubble, according to published reports. Mr. Schneiderman wants documents from Bank of America, Goldman Sachs and Morgan Stanley.
Even as a free-market advocate, I remain troubled by several unanswered questions:
- The banks’ roles in the role that led to the housing bubble?
- Regarding securitization details, the merging of countless bad home loans into securities, which were sold to investors – insurance companies, mutual funds and pension funds?
- Were the banks really that incompetent or was it a case of ethics?
- What will be done to prevent the future devastation of investors?
- What will be done to stop all the illegalities, including the robo-signing in the foreclosures of homeowners?
- What about a moral compass to halt the practice of giving multi-million dollars to employees at firms bailed out by taxpayers?
Ostensibly, Mr. Schneiderman is not alone.
“These days the Justice Dept. and the Securities and Exchange Commission are investigating Wall Street with tactics, such as wire taps, usually reserved for professional criminals and terrorists,” blogged Dr. Peter Morici, a business professor at the University of Maryland, and a former Chief Economist at the U.S. International Trade Commission.
“Apparently, those agencies recognize what Treasury and the Federal Reserve simply won’t admit – insider trading, robo foreclosures and peddling dodgy securities to unsuspecting investors are good old fashioned fraud,” he wrote. “Like the corruption tolerated by Third World autocrats, those practices handicap American capitalism in global competition and undermine prosperity.”
He cited the subpoenas for executives at Goldman Sachs and SAC Capital advisors.
“Punitive settlements and convictions-resulting from investigations into insider trading at Galleon and SAC, shoddy mortgage foreclosure practices at Bank of America, and shady marketing of mortgage backed securities at Goldman Sachs-ultimately, would curb cynical behavior and ever bigger paydays on Wall Street, and improve returns for stock investors,” he asserted. “As importantly, it would redirect American capital and talent toward more productive, jobs-creating purposes.”
Dr. Morici indicated stocks aren’t an optimized investment.
“In February 1998, the S&P 500 first closed above 1000-since corporate profits are up about 210 percent but equities less than 35 percent,” he recalled. “Corporate profits rose 6 percent annually but investing in stocks paid a disappointing 2.3 percent a year.”
Why else?
“Buying stocks doesn’t seem to pay, because too much of the profits created by innovators with ordinary investors capital is captured by hedge funds, Wall Street trading desks, private equity houses, aggressive M&A shops, and then paid to Wall Street executives and traders,” he wrote.
Dr. Morici suggested an eye-opening thesis.
“In the drive for ever bigger compensation packages, Wall Street’s best and brightest violate boundaries of ethical behavior and the law,” he explained. “Not all of our problems can be laid on Wall Street’s steps, but its culture of entitlement and sharp practices impose enormous burdens.
“The carnival culture on Wall Street is attracting too many young people to business schools to study economics and finance, instead of pursuing physics and engineering,” he added. “That’s why the best business schools are overwhelmed with applicants from Connecticut and California, while engineering colleges depend on students from China and Asia, who will then return home to compete with American businesses.
He believes that the obscene Wall Street paychecks hurt individual shareholders and pension funds, alike.
“The absence of significant appreciation in equities for more than a decade means that many retirees dependent on IRAs and other defined contributions vehicles can no longer live comfortably, and many baby boomers who have been pushed into such pension vehicles can’t retire,” he wrote. “Their money may be working hard, but only for Wall Street titans and not for them.”
He maintains the financial chicanery costs jobs.
“These days, too much money and talent are directed to financial engineering-efforts to design the next complex derivative-and not enough is going into physics and real engineering-designing electric cars, new materials, and products and services that will define U.S. global competitive success and prosperity for the next 25 years,” he maintained.
“Increasingly, venture capital and stock investors look abroad for the best returns, and this deprives small and moderate sized U.S. companies of capital needed to expand and invest in new ideas and create jobs,” he added.
So, what can Mr. Schneiderman, the Justice Department, and the Securities and Exchange Commission accomplish – while the Treasury Dept. and Federal Reserve appear incoherent?
“Prosecuting Wall Street will do a lot to curb abusive practices and excessive compensation, make stocks and IRAs sensible investments, redirect capital and talent into productive purposes, and get the American growth machine back on track for our children and grandchildren,” concluded Dr. Morici.
Agreed. At one time, my free-market philosophy would have differed on this scandal. But not now. The economic liberty of countless people is at stake.
From the Coach’s Corner, Dr. Morici’s analyses are regularly published in this portal’s Economic Analysis Op Ed section. His short-term forecasts for the U.S. economy are published here.
Here are links on the background of the financial scandal:
Will Goldman’s Scandal Prompt Cultural Changes on Wall Street?
Sen. Cantwell Is Right to Question Risky Derivative Dangers, Geithner
Is it Time to Police Pay at Wall Street Banks?
“There is two things that can disrupt business in this country. One is war and the other is a meeting of the Federal Reserve.”
-Will Rogers
__________
Terry Corbell is a business-performance consultant and profit professional. Click here to see his management services (many are available online). For a complementary chat about your business situation or to schedule Terry Corbell as a speaker, why don’t you contact him today?
Largest Ever – Is GM’s IPO Political or Practical?
Aug. 19, 2010
A leading expert on initial public offerings, Francis Gaskins, is not wowed by General Motors’ IPO – to say the least. That’s despite GM being profitable in the first two quarters of 2010. Its Q2 sales of $33.2 billion led to a $1.3 billion profit.
In filing the IPO, the company is anxious to return to Wall Street by shedding its nickname, “Government Motors.” The manufacturer’s demise resulted in an unpopular bailout and the second-largest industrial bankruptcy in history.
GM’s bid to return to the New York Stock Exchange followed a 700-page document filing at the U.S. Securities and Exchange Commission. GM plans to use the ticker symbol “GM.” It also hopes for a listing on the Toronto Stock Exchange. But the ticker symbol hasn’t been determined.
To fully pay back taxpayers and all stakeholders, GM’s IPO would probably have to raise$70 billion. The government has a 60.8 percent stake in GM after giving the company $50 billion in 2009. The United Auto Workers Union has a 17.5 percent ownership. But $2.1 billion in preferred stock is owned by the government and will not be included in the IPO.
Widely respected for his views, Mr. Gaskins gives the IPO a thumbs-down. He publishes IPOdesktop.com, which is called “Forbes Best IPO Site.” His Twitter account: www.twitter.com/ipodesktop.
His succinct tweet: “No rational reason to value GM’s IPO more than Ford. Implies big loss to taxpayers.”
Far from being a mere harsh critic, Mr. Gaskins is scholarly, one of the nicest people I know, and is even artistic as a violinist — except he doesn’t fiddle around in an IPO analysis.
The Wall Street Journal reports 10 investment banks will implement the IPO – historically, the largest group of financial institutions ever in a U.S. IPO.
The newspaper reports the banks include: Morgan Stanley, J.P. Morgan Chase, Bank of America Merrill Lynch, Citigroup, Goldman Sachs Groups, Barclays Capital, Credit Suisse Group, Deutsche Bank, RBC Capital Markets and UBS.
Each is reportedly providing as much as $500 million in credit.
My recollection is that GM got into trouble following its weak sales, high material costs, and too-high union wages and pension costs. Many taxpayers and pundits criticized the government’s bailout of GM by calling it an administration payback to union supporters without enough consideration for taxpayers.
Now, questions abound over GM management’s expertise and financial reporting, which are among the reasons Mr. Gaskins isn’t confident about the IPO.
“They don’t know what’s happening,” he says.
What about the IPO’s timing? My sense is it appears the government is pushing the deal in advance of the Nov. election so politicians can escape more criticism of the unpopular bailout.
If asked, Mr. Gaskins says he’d tell the government: “I would say don’t do the IPO.”
Translation: If you are an investor, read the 500+ page IPO prospectus and do your due diligence. This IPO appears more political than practical.
P.S. The irony is that GM is now producing some outstanding vehicles, especially Buick. The legendary model’s sales are up 137 percent.
From the Coach’s Corner, to see Mr. Gaskins’ astute analysis on Bloomberg Television: http://bit.ly/dd1LE4.
Disclosures:
- Mr. Gaskins and I are fellow members of Consultants West, www.consultantswest.com, an association of veteran consultants.
- My firm has had multiple GM dealers as valued clients, and has benefited financially by recommendations from GM sales management.
Trends in Human Resources Management – Wharton Study
Some intriguing revelations have to come to light concerning developments in human resources management, according to a Wharton study.
The study considered trends in the human resources management of Fortune 100 firms – in 1999 and again in 2009 – and it provides insights for the future. All the answers led to one conclusion. HR is being accorded higher regard as a profession.
The study: “Who gets the top job? Changes in the attributes of human resource heads and implications for the future.”
It was researched by Dr. Peter Cappelli, a Wharton management professor, and Yang Yang, a Wharton post-doctoral fellow.
As for who gets the top job, 27 percent of the HR managers were women before the decade began. Now, 42 percent of HR managers are women.
The average HR manager is 53 years old. That’s up from 50.
“Why is not completely clear,” said Dr. Cappelli. “It could be a sign that the area has been stagnant as opposed to others.”
Conventional wisdom is that HR managers are required to have a broad business background. That was especially true in 1999 during a period of high employment.
During the Great Recession with dwindling union membership rolls and high unemployment, HR executives tend to have more of a traditional HR background. But Dr. Cappelli indicates it’s expected “top leaders” have general-business acumen to understand the big picture facing their companies.
The data shows they’re hired as HR managers 39 percent of the time from other firms. That’s down from 41 percent in 1999.
However, it also indicates the managers were hired at lower levels and promoted in a short period of time to the top HR spots later.
Preferred Experience
Many had experience working in these companies: Citibank, Dell, Hallmark, Morgan Stanley, Pepsi and Verizon.
“When a new person takes over that top role, the change in his or her attributes is quite likely to say something about the change in the priorities the CEO has for human resources going forward. Looking at how the backgrounds of these top executives have been changing should tell us something very important about trends in how corporate leadership sees the HR function,” according to the researchers.
While HR managers in the Fortune 100 tend to have bachelor’s and master’s degrees, fewer have doctorates.
Nearly 50 percent had international experience – especially in top 60 – a 300 percent increase over 1999 levels.
Twenty percent in 2009 had communications and corporate affairs experience.
Accountability has taken on more importance.
“The adage, ‘You can’t manage what you don’t measure,’ reflects this move to get more serious about control systems, especially where the costs are high,” said Dr. Cappelli.
“While HR lacks the glamour within the business community of fields like strategy, its actions have a profound effect on the lives of employees,” the authors wrote. “Human resources is a crucial point of intersection between the broader society and business,” wrote the researchers.
The study showed just four of the HR managers remained lasted from 1999 to 2009.
The study was funded by PricewaterhouseCoopers.
From the Coach’s Corner, for more on the importance of HR management as a profession, please see this Biz Coach column: If Mergers & Acquisitions Tempt You, Consult HR Pros.
Will Goldman’s Scandal Prompt Cultural Changes on Wall Street?
Updated July 15, 2010 – 3 p.m.
On the same day Congress passed sweeping financial-reform legislation, Goldman Sachs & Co. agreed to pay $550 million to settle fraud charges. The charges accused Goldman of fraud in mortgage investments. That includes $300 million in fines assessed by the Security and Exchange Commission – the largest in SEC history.
The remaining balance of $250 million goes to the victims.
You might recall that Goldman’s mortgage-related investments were designed with participation by a Goldman client, Paulson & Co. Paulson bet those investments would not succeed, and they didn’t.
Goldman is now forced to assess its procedures in such financial mortgage deals. The catalyst was the investments that cost investors nearly $1 billon, but the deal netted Paulson huge sums of money. It was also part of the mega mortgage meltdown that helped to exacerbate the nation’s economic downturn.
“This settlement is a stark lesson to Wall Street firms that no product is too complex, and no investor too sophisticated, to avoid a heavy price if a firm violates the fundamental principles of honest treatment and fair dealing,” said Robert Khuzami, the SEC’s enforcement director.
A federal judge in New York will rule on the settlement.
The case against Goldman gathered steam when a published report added impetus to fraud allegations against Goldman. The Sacramento Bee alleged Goldman secretly worked to dump “billions of dollars in risky mortgage securities and buy exotic insurance” in anticipation of the housing bubble. But the report said Goldman hid its actions from the Securities and Exchange Commission for nine months in 2007 (“Goldman didn’t disclose its subprime mortgage hedges”).
At issue: Opponents eventually proved that Goldman’s gambling was so relevant – investors would not have bought Goldman’s offerings.
The furor over that controversial 2007 mortgage derivatives deal underscores the fear of many Americans that the market is rigged against them because Wall Street is a haven for questionable behavior.
The Security and Exchange Commission’s triumph over Goldman’s handling of the collateralized debt obligation (CDO) in subprime mortgages shows the Wall Street sheriff is back and is flexing some muscles.
Furthermore, Goldman’s failure to disclose that a hedge fund manager, John Paulson, helped select the underlying securities and then bet against them to make more than $1 billion is bad enough.
It’s looked even worse after Bloomberg reported Goldman knew it was under investigation for nine months but failed to disclose the investigation in their financial reports to investors.
Such omissions triggered the shareholder legal action.
The resulting headlines are reminiscent of the financial-greed scandals involving the 1980’s shadowy behavior of convicts Mike Milken and Ivan Boesky, as well as the principals at Enron and Worldcom.
Several questions have arisen:
- Is the SEC action really the tip of the iceberg of upcoming legal challenges?
- Will it lead to a stock market correction?
- Will it end the entitlement attitudes seemingly held by many investment bankers?
- Will it improve the culture in the financial sector?
This case was an ideal situation for New York’s litigious community.
It led to a decline of Goldman shares – 13 percent – as well as the shares of other financial companies trading in CDOs, including Deutsche Bank AG, Morgan Stanley, Bank of America (the parent of Merrill Lynch) and Citigroup.
In addition, a Chicago online publication, ProPublica, reported on questionable bets by Magnetar and allegations of conflicts of interest by the latter three financial firms. Magnetar denied culpability and none of the three banks denied or commented on the allegations.
Indeed, the same day that the SEC acted against Goldman, April 16, a Dutch bank leveled similar charges against Merrill Lynch. Cooperatieve Centrale Raiffeisen-Boerenleenbank BA, or Rabobank, cited Merrill Lynch in a $1.5 billion CDO.
Sadly, regarding Wall Street’s entitlement attitudes and culture, the consequences might not be severe enough to prompt an attitude adjustment.
Not to be cynical, here’s the bottom-line question: Are there enough moral compasses on Wall Street to put a stop to the chicanery? Probably not.
From the Coach’s Corner, for more on Sen. Cantwell’s efforts, see “Sen. Cantwell Is Right to Question Risky Derivative Dangers, Geithner.”
