Having brought the economy of the United States, and a good part of the world, to the brink of a global depression, the American banking system has now unleashed a second scandal. This one involves an epidemic of cheating and lying in court filings by those handling home repossessions. It has been happening for many years. It has worked very well for the banks. And it would have continued to do so, had a few judges not decided that, in an economy so decisively affected by what happens in the housing market, it might be a good idea if bank representatives were actually telling the truth. What a novel idea.
Evidence increasingly shows that in tens of thousands of cases, the bank employees signing foreclosure documents had no training and possessed no knowledge of the underlying facts. They were just there to sign their names in order to give a veneer of procedural fairness to the process. In one case, an employee of GMAC has admitted under oath that he typically prepared 400 foreclosures a day and that, contrary to what was attested in his sworn statements, he did not know any of the details about the cases. Once again, as with the toxic investment vehicles they created, it appears that much of the ethically challenged banking sector wasn’t really interested in either the truth or in the more far-reaching consequences of their actions. They were interested only in cutting corners and making more money. Their victims this time are not investors and bank shareholders, although many are now beginning to feel unpleasant effects as financial stocks plunge with the deepening extent of the scandal. It is past and future homeowners who are the object of the bank’s miscreancy.
In most states, bank repossessions have stopped while companies like GMAC, Bank of America, JP Morgan Chase and others, along with government regulators and the predictable cast of lawyers, look at fixing the mess that has been created. At this point, any further drag on the housing market may well prompt lawmakers and the Fed to look at another stimulus — perhaps even a second TARP — which will obviously be paid for again with taxpayer money. The previous bailout was made necessary because of widespread banking improprieties. If there is another one, it will be in no small part because the banking industry in America still has a problem with truth and accuracy. It is never a good situation when these virtues are found in short supply, especially in banks. Their absence reflects an industry that still does not get it and prefers to place immediate benefits over ethical conduct and a demand for profits and bonuses ahead of decency and common sense.
It is an industry that continues to be well deserving of the outrage of Americans.
When the SEC filed civil charges against Goldman Sachs last April, we postulated that the end game would be:
…one of those vague and disappointing resolutions for which the SEC has become famous, as discussed here, whereby the defendant company’s shareholders pay a pile of money as a penalty for what management did (but for which it does not admit wrongdoing) along with some tinkering on the corporate governance side to make it look like more was done.
That seems to have been precisely what happened today with Goldman agreeing to pay some $550 million to settle the case — and without admitting or denying the charges, thanks very much. What strikes us even more than the fact of the settlement — where shareholders will have to cough up the half-billion dollars, as opposed to management having to pay anything out of the huge compensation they made when they were making the decisions that resulted in the penalty — is that news of the deal was obviously leaked during the trading day. A huge spike in volume occurred late Thursday while the NYSE was open and before the formal announcement was made. It was too much to be on the basis of speculation or idle gossip (see chart above).
The Goldman case was just one more example of why it often appears to ordinary investors that the market is a rigged game where those with inside information are the only ones who can profit. The timing of the settlement and what occurred just before it will only add to that suspicion.
Someone at the SEC or Goldman talked, and others made quite a lot of money on the knowledge. The idea that there would be an impropriety connected with the timing of the SEC settlement with a company it accused of wrongdoing and lack of disclosure is more than ironic. It is an outrage that needs a closer look and some fast answers from both the regulator and the company.
Ordinary people from Athens to Little Rock have had it with a bloated system where politicians take care of themselves, along with insiders and powerful interests when they run amok, and leave the public to scrimp, sacrifice and struggle to pay more debt.
As we predicted, the stock-lifting EUporia over the European rescue plan that arrived last Monday morphed into market-pounding fear and skepticism by Friday. The Euro currency is pretty much in a shambles, too. It looks like another huge bailout plan, like the initial incarnation of the TARP that was supposed to buy up billions in toxic assets, has been widely rejected as impractical and one that cannot possibly perform as intended. European leaders and central bankers have been left scratching their heads and wondering what hit them after they emerged from their Chamberlain moment, having pronounced their version of economic peace in our time.
The problems of Europe, and indeed, other nations that have too long been on a debt joy ride to fantasyland cannot be solved by either the profligacy of more debt accretion or the draconian paternalism of the IMF. When economies need to grow, you can’t tax them and shrink them into expansion, which is what they need to pay off their debt. The formula devised for Greece, which will see paychecks decimated, pensions slashed and taxes hiked, can have only one outcome — and it is neither pleasant nor a track to the growth that is needed. Nor can you push a country into greater debt for its salvation any more than you can make an addict recover by giving freer access to the source of the substance abuse.
TARP-type bailouts have become a flashpoint not just for the markets but also for the electorate. On this Super Tuesday of U.S. primaries, look to see Washington insiders who have been connected to these massive bailouts take a big hit. By tomorrow, one-time Pennsylvania Republican Senator, turned Democrat, Arlen Specter, will have lost his chance for a sixth term. Rand Paul, who has become a darling of the Tea Party, the quintessential anti-bailout brigade, is likely to receive the Kentucky Republican nod for the Senate. Democratic Senator Blanche Lincoln will probably lose her bid for renomination in Arkansas. Last week, it was three-term Republican Senator Robert F. Bennett of Utah who was turfed out by his party. This is just the opening act for the main event that will come in November, when the full effects of what we have dubbed turbo populism will see some seismic shifts in the political landscape and in the culture of excess that has come to define it.
Ordinary people from Athens to Little Rock have had it with a bloated system where politicians take care of themselves, along with insiders and powerful interests when they run amok, while leaving the public to scrimp, sacrifice and struggle to pay more debt. They know that approach is fundamentally corrupt and cannot be sustained either by precepts of ethics or principles of economics. That is the lesson of the bailout backlash in Europe and the anti-TARP movement in America.
Those in positions of power who ignore it do so at their peril.
Panic makes an encore appearance after Wall Street’s record drop. America’s leaders do not.
The word perilous hardly begins to describe the times. Much of the world’s economy is only beginning to see daylight after the financial storm of generations. Trust in Wall Street and the mechanisms of government is at record lows. In Europe, Athens riots on a daily basis and the rest of Greece approaches economic freefall. The financial health of Spain and Portugal is fragile. The prospect of contagion remains real. Talk of bailouts again abounds. This time it is governments rescuing one another, with the outcome far from clear as to where or when it will end and at what cost. World currencies are gyrating in unsettling ways while an eerily upward creeping Libor rate makes an unexpected comeback. Then, out of the blue, the Dow plunges by nearly 1000-points in a matter of minutes before closing down 347 points. Panic makes an encore appearance on Wall Street.
You might have thought if there were ever a time for leaders to personally take center stage and be seen, it would be today. But President Barack Obama did not appear to offer any reassurance. There were no words from Treasury secretary Timothy Geithner to calm the markets. SEC chairman Mary Schapiro remained incommunicado, as she has for much of her term. Her office issued a press release, which will likely have about the same impact as the commission’s feeble early investigation of Bernie Madoff.
This is not the way to deal with the biggest point drop in the history of the New York Stock Exchange, much less the fragile commodity called confidence. The turmoil on Wall Street and around the world is raising many questions. Answers, not silence, are needed from a nation’s leaders.
Update: May 7, 2010 10:46 AM ET
Well into the trading day and with no explanation yet for the sudden plunge just short of 1000 points yesterday, volatility now at a 52-week high, and mounting financial turmoil in Europe, neither the President, Treasury secretary or Chairman of the SEC has personally appeared before the cameras or the media to provide any clarifying information or reassurance. The heads of the NYSE and NASDAQ are pointing fingers at one another and rumors abound that the record drop was prompted by the liquidation of a hedge fund. World currencies are continuing to experience wild swings and investors, direct and indirect, are beginning to experience a bad case of nerves again. North American stock markets are in the fourth day of a serious slide.
Is anyone getting this in Washington?
Corporate governance at the failed Wall Street giant had all the hallmarks of a disengaged boardroom stacked with cronies and dominated by insiders. Finally, Congress can shed some light on where the board was at Bear Stearns — or if it existed at all.
Former Bear Stearns CEO James Cayne will be making a rare public appearance this week when he testifies before the Financial Crisis Inquiry Commission. Other top executives from the once thriving firm that was a fixture on Wall Street for nearly a century will be giving evidence as well. It will be an ideal opportunity for the Commission to explore the role that questionable corporate governance practices played in Bear Stearns’s failure. We set out our views on that subject in a two-part posting called “Did Bear Stearns Really Have a Board?” in early 2008. They can be viewed here and here. They remain among our most widely-read columns even today. Our comments were quoted in The New York Times reviewed book “Money for Nothing” by John Gillespie and David Zweig.
Corporate governance at Bear Stearns had all the hallmarks of a disengaged boardroom stacked with cronies and dominated by insiders. The most strenuous task of the all-male board seemed to be lifting the rubber stamp embossed with “yes” for gigantic bonuses and anything else management wanted. Only at the very end did the directors even faintly awaken to their duties, after the sudden shock of seeing that no one was at the controls of the engine that was speeding toward catastrophe and realizing that it was too late to retreat to the heavily curtained sleeping car where they long resided.
As we said back in March 2008:
Dig deeper though and you will find a dysfunctional board, overstretched independent directors and an executive chairman whose approach to his duties is novel, to say the least. The first thing that hits you about this Wall Street icon is that it is governed by men. Only men. It was like that at its inception in 1923; it remains a men’s club in 2008. Three of its 12-member board are insiders, as is the executive chairman, James Cayne. (There were actually four insiders until Warren J. Spector, the firm’s president and co-chief operating officer, resigned last fall over the collapse of Bear’s hedge funds.) Best corporate governance practices generally prefer management limited to one or two seats at most. The insider problem in Bear’s boardroom is even more pronounced where all the heavy lifting is done: the company’s executive committee. Composed entirely of the top insiders of the investment bank, company filings confirm that in 2006 (the most recent figures available) the executive committee met on 115 occasions. By contrast, the full board met only six times.
We concluded by suggesting exactly the type of inquiry that is occurring under the Congressional appointed commission headed by Phil Angelides
When such an important financial institution begins to crumble so quickly, leaving the capital markets in turmoil and requiring the intervention of the highest echelons of the federal government, Congress needs to ask some pointed questions. It should start with the Bear Stearns board.
Finally, a window of Congress can shed some light on where the board was at Bear Stearns — or if it existed at all.
Collectively, in their pivotal appearance before Congress, Goldman’s top performers could not muster the sincerity, transparency or gravitas of a used car salesman. It is unlikely to play well on Main Street.
Nothing illustrates the folly and arrogance of Wall Street more than the appearance of the Goldman Sachs executives who testified yesterday before the Senate Permanent Subcommittee on Investigations. Rarely has such a group of men (of Goldman’s seven past and current employees who appeared as witnesses, all were men) so graphically confirmed Main Street’s jaded image of Wall Street. Collectively, the best Goldman had to offer in their fields could not muster the sincerity, transparency or gravitas of a used car salesman. Their failure to give clear answers even extended to a refusal to acknowledge the duty to act in the best interests of clients. To many watching the performance, the only conclusion is that they are so used to acting in their own interests that they are unable to understand a larger sense of duty. This is often what happens when great wealth arrives to youth before maturity and wisdom have made an entrance.
Whatever skills these people were paid their millions for, memory did not seem to be among them, with so many constantly claiming they did not know or could not remember key facts and events. Goldman’s CEO Lloyd Blankfein offered little more in his grasp of details. One might have expected that someone who was paid well in excess of $100 million over the past five years and heads what is widely regarded as the world’s preeminent investment banker would be able to manage the tasks of stringing words together in complete sentences and in persuasive thoughts. As the English language is not yet something Wall Street has learned to monetize or short, those skills do not appear to matter there. They do to Main Street.
If, having played a central role in the worst financial meltdown since the Great Depression and needing the injection of hundreds of billions in public funds to keep it solvent, Wall Street — and especially its most illustrious icons — cannot manage to explain what they do and why in a coherent fashion to the satisfaction of Main Street, if they cannot project a sense of ethics and purpose that goes beyond self- interest, if their values appear disconnected from reality and the value they add to society seems only synthetic and contrived, the need for fundamental reform in both the culture of these institutions and the laws that regulate them is more urgent and far-reaching than anyone has yet imagined.
