“Round One,” The Banks vs. The Rest of Us

“Round One,” The Banks vs. The Rest of Us

Within a month Federal District Judge Jed Rakoff has launched what may be the beginning of the end for rapacious behavior on the part of our banking sector. Earlier this month he refused once again to rubberstamp an under-the-table deal the Security and Exchange Commission (SEC) made with a “Too Big To Fail” Bank, this time Citi. Unlike earlier deals that came before him, he is apparently not going to agree to any settlement without all the gory details being revealed.

As you may recall from our 11.15.11 OP-ED, Citi has been charged with fraud. With selling their customers a bundle of crappy investment vehicles while at the same time betting against them. Of course the crappy stuff turned out to be crappy and when they failed, Citi’s customers took a hit somewhere north of $700 million bucks and Citi collected on their bet. Judge Rakoff questioned the settlement -$95 million- and the fact that only one individual was charged with criminal behavior. In an earlier case (Bank of America) Rakoff signed off when the SEC upped the penalty. Two other Federal Judges signed off on similar deals with Goldman Sachs and J.P. Morgan Securities, as many judges have over the years.

After mulling over the Citi deal for a couple weeks, Rakoff took a very different tack. This time he rejected the premise that Citi could walk away with a fine and a promise to never do it again. He wants all the gory details out on the table. A path that drew a snarky headline, “Rakoff Cements Status as Populist Firebrand”, on the American Lawyer Magazine website’s report on his ruling. Basically saying that his failure to play “go along to get along” would end any chance of promotion for the judge.  But isn’t that what ethics is all about, doing the right thing without regard for self interest?

An end may be at hand to the age of repeated SEC “Peanuts and a promise” deals for those who pull off massive ripoffs. As Steve Denning noted in a recent Forbes article, What Shall We Do With The Big, Bad Banks, “Over the last 15 years, some 19 large major financial institutions have been found by the SEC to have broken anti-fraud security laws at least 51 times—laws  that they agreed ‘never again to breach’. The group of offenders included Citigroup, Bank of America, JPMorgan Chase, UBS, Goldman Sachs, Wachovia, and AIG. In this period, the Securities and Exchange Commission has never once brought a contempt of court citation against any of the banks for repeated offences.”

The leaders of these behemoths, the Lloyd Blankfeins and Jamie Dimons and their minions who hide behind these “Don’t Ask, Don’t Tell” deals with the SEC, may be called to task if it turns out that they were aware of the double dealings underlying the SEC charges. An outcome sure to be cheered by the State Attorney Generals across the country that have been pursuing the culprits who triggered the financial collapse we are enduring; looking for someone to jail.

Wouldn’t that be nice? Three cheers for Judge Jed Rakoff.

What's Fair

What's Fair

 

A Bloomberg Businessweek focus on wealth inequality (11.16.11) came up with some stunning conclusions. Using Census numbers –and a wide variety of past and present expert opinions– they point to the existing and growing disparity of wealth in America and conclude that it is bad for our economy. The gridlock we are experiencing leads those who are slipping behind to conclude that they have no hope, that they are at the mercy of the rich. The two ends of the economic ladder slip into bitter blame game positions.

Here’s where this game goes wrong for the rich. Income inequality leads to social instability. That leads to the belief that the system (read Stock Market) is rigged in favor of the ultra rich and you lose as much as a generation of investors. They point to the stock market following the crash in 1929. It took until 1954 for it to regain its pre-depression level, more than a quarter century. One wonders how long an extended downturn of that nature might last if we do not find our way out of the gridlock now engulfing us. Unlike the ‘30s, ‘40s, and ‘50s, in the era of the 401k etc. there are lots of middle class folks with a stake in the stock market these days.

We keep hearing that the rich create jobs. But the research shows that jobs are created by small businesses. Those folks are not the rich; they are what’s left of the middle class. They are looking for loans to grow and hire, but the banks that we all bailed out are not lending to small businesses. Instead they are back in the risky games that got us into this mess. Worse, small businesses are paying the high corporate taxes –not the big guys.

Speaking of taxes, it makes no sense for the poor and middle class to shell out a bigger piece of their income than the rich. Everyone seems to understand this except those in DC who hold to the job creation myth, and of course the rich who haven’t been able to do the math. When you talk to the savvy wealthy folks, you find that they favor a more equitable tax system. They understand that you can’t build a healthy economy on the backs of the poor. The smartest investor on the planet, Warren Buffett, figured it out years ago. No matter how big your slice is, you can’t do well if the pie keeps shrinking.

In the meantime, if the rich are not creating jobs with their wealth, what are they doing with their money? Well, their investments seem focused on commodities, where they speculate and drive up prices on food and oil; thanks for high gas prices. And they are driving the luxury market; if it’s expensive, they’re buying. Even the price of first class air travel – would you believe aircraft fitted with showers and private compartments? After all you have to look sharp when you arrive in some exotic locale. And what’s $15,000 or $20,000 for a plane ride. There are some pretty obvious ethical issues in all this. Too bad they don’t seem to matter much in our world where the Lobbyists rule in DC. How many of them do you think work for the middle class and the poor?

Take Off The Kid Gloves

Take Off The Kid Gloves

The Securities & Exchange Commission (SEC) ended its fiscal year in September having filed a record number of cases (735), up almost 10% from their pace (677) last year. They collected nearly $3 billion in penalties both years. Meanwhile the annual Johnson Associates’ “Executive Compensation Study” shows an alarming drop in pay for the folks on Wall Street, as much as 20% - 30%. Alarming perhaps to the Wall Street types, but to those who are trying to make ends meet the Wall Street pay scale, that begins at a hundred grand and can escalate into seven or eight figures, still looks really good. 

Reuters reports that over the last two years the SEC has removed a management layer and restructured their enforcement division. And, they have created a new whistleblower bounty program alongside other incentives to encourage witnesses to cooperate. Given the two record years they have registered, it must be working.

Or is it? It appears that the SEC is still treading softly with the big banks and the individuals behind the misdeeds (AKA CEOs etc.).  A Federal District Judge, Jed Rakoff, doesn’t seem convinced that a proposed settlement with Citibank is tough enough on the bank. Citi is charged with fraud; selling customers crappy financial instruments at the same time the bank was betting they would fail. The very same double dealing that triggered the financial collapse we are enduring.

In a hearing last week Judge Rakoff questioned the SEC on the settlement: $95 million when the investors Citi ripped off lost $700 million. The judge has taken a similar position with several lowball settlements the SEC proposed in the past. Rakoff also questioned why only one individual in this case has been charged with wrongdoing.

We –along with many others, including State Attorney Generals across the country– have been wondering about the SEC slap-on-the-wrist penalty proclivity. A concern the Attorney Generals also direct toward the Justice Department; why has it not zealously prosecuted bankers who triggered the recession? We know who they are and what they did. Instead, after bailing them out we are forced to watch as they go back to the same risky stuff all over again, sure that we will bail them out again when it collapses. All the while taking home eight-figure bucks.

The banks’ reaction to the relatively mild restraints of the Dodd/Frank Act is to pile new fees on their customers. They have grown so accustomed to inflated profits from what are nothing more than risky gambling schemes that when a little of that revenue stream is cut off, they sock it to their customers instead of living lean. In the meantime we have to listen to Jamie Dimon, JPMorgan Chase “Whiner in Chief,” and Goldman Sachs CEO, Lloyd Blankfein (AKA The Artful Dodger) complain. They are so misunderstood and unappreciated after all they do for us, poor babies.

Alan Johnson, managing director of Johnson Associates, the firm that carried out the Wall Street wage study, put the ethical issue very succinctly, “Wall Street executives,” he said, “haven’t gotten the memo at all.”

Not for Sale

Not for Sale

There are –and always have been– so-called “pay for play” print and broadcast deals. That’s why federal law requires them to be labeled “advertising” or “paid programming”. Unfortunately, there is no such law covering internet content. So it should come as no surprise that web based news sites are being targeted by those looking for a plug for one thing or another.

While we understand legitimate efforts to gain media exposure, when there is money involved the ground rules need to be crystal clear.  Apparently, with no legal firewall, some of the slime that inhabits the fringe of every sector of media and marketing will attempt to slip over the ethical wall that protects most all of the world of commerce.  

Hamilton Nolan, who writes for the popular blog Gawker, recently received an email from a marketer suggesting an easy way to earn a little extra money. All he had to do was drop in a website link for one of their clients, only –of course– if it “fits naturally in the context of the article.” In a series of emails this solicitation was identified as coming from a so-called “marketing agency” specializing in this kind of placement. Payment offered began at $130 and escalated quickly to $175. Not bad, as Nolan noted, for five seconds’ work.  

The “agency” claimed to represent a number of “major” clients, Motorola, Dell, and T-Mobile, all of whom denied any connection. The agency also told Nolan that they had writers taking their bucks from a wide range of top ranked internet sites including The Huffington Post. You can guess Huffington’s response; it was mirrored by the other sites where writers and/or editors were said to be on the “take”.

Who knows how many clients these guys really represent? Or how many writers and/or editors at internet sites have succumbed to this siren call? There is always a certain amount of slime on both sides of the ethical wall. Sadly, one cannot exist without the other.

The Return of the Robber-Barons

The Return of the Robber-Barons

At the dawn of the 20th century America experienced unprecedented change. The young were moving off the farms into the cities. Steel, rail, and oil giants wrought permanent change; change that created a chasm between the wealthy few and the vast number of Americans struggling far below.

Into this moment stepped Theodore Roosevelt.  A brash young President who recognized that a nation so divided could never achieve the greatness that would allow its people to thrive. His trust-busting crusade initiated a series of legal restraints on the robber-barons culminating in the Glass–Steagall Acts of 1932 and 1933. These boundaries, along with labor laws and a variety of safety nets, allowed our free enterprise system –and our people– to thrive and grow.

The loosening of those restraints as the 20^th century faded into the 21st brought a return of the practices they were designed to control. A study of the effect of wide spread deregulation was ordered several years ago by Senators Max Baucus and Charles Grassley, then ranking members of the Senate Finance Committee. The Congressional Budget Office delivered the study just last week. Its findings paint a bleak picture: the middle class is fast shrinking while those on the bottom are sinking farther away from those on the top of the pile.

Over the last few decades the top 1% of Americans enjoyed a 275% jump in their income. The bottom 20% not so much, they gained 18%. Do the math, 275% is over 15 times greater than 18%. The report points to the move from progressive income taxes to payroll taxes, easing the tax burden on those with the 275% gain while increasing the tax rate of those who have seen a measly 18% improvement.

As the giants of industry are quick to point out, our corporate taxes are among the highest in the world. However, since most of them have successfully lobbied their way out of paying taxes at the local, state and federal level, the federal tax rate has little or no effect on the corporate titans. Our hefty corporate rate does hit small businesses – the folks who are struggling to stay afloat in the aftermath of the collapse triggered by the bankers’ reckless gambling.

Since everyone agrees that small businesses create jobs, we find ourselves taxing these job creators, while the Fortune 500 (who rang up a net job loss over the last twenty years) pay little taxes, if any. The banks we bailed out are swimming in profits generated from the same risky games that got us into this mess. Weren’t they were supposed to help small businesses who want to grow and create jobs? What happened to that?

Meanwhile the top 1% (the 275% folks) are investing overseas or gambling on commodities (like oil – boosting gas prices and adding to the woes of the poor) all the while giving luxury marketers like Tiffany’s a boost. Sales in Tiffany’s New York flagship store increased 41% in the second quarter ending in July, up 33% thus far for the year. Tiffany’s stores worldwide are booming as well, thank you.

If you missed the ethical issues in this scenario, read it again.

W.T.”Bill” McKibben is a Buffalo based author. © 2011 GLG