From today’s New York Times:
On a Thursday evening in mid-January, a group of top Wells Fargo executives sat down for dinner in an upscale surf-and-turf restaurant near the White House. At nearby tables, power brokers ate seafood on ice and sipped cocktails out of copper mugs.
The Wells Fargo executives — including the chief executive, Timothy J. Sloan, and the finance chief, John R. Shrewsberry — enjoyed their crab legs, but they were in Washington on unpleasant business. The Federal Reserve planned to impose tough sanctions on the San Francisco-based bank for years of misconduct and the shoddy governance that allowed it.
The executives’ mission, according to three people directly involved in the negotiations, was to avoid further shaking investor confidence in the bank and its management team.
Officials at the central bank had a different goal, according to people familiar with their thinking. They wanted to send a message to the Wells board that it would be held responsible for the company’s behavior.
After three weeks of frenzied negotiations, a deal was announced on Friday night that represented a milestone in the evolving relationship between regulators and banks. Wells Fargo, one of the country’s largest banks, was banned from getting bigger until it can convince regulators that it has cleaned up its act.
Read the complete article here.
The Securities and Exchange Commission signaled it was taking a harder line on Wall Street’s rampant problem with fraud by extracting its first admission of wrongdoing from Philip Falcone, CEO of Harbinger Capital Partners.
Falcone admitted to market manipulation and as part of a settlement will pay $18 million in fines in addition to being banned from trading for five years. He was accused in June 2012 of manipulating the market by improperly using $113 million in fund assets to pay his own taxes and to favor some customer redemption requests secretly over others.
The deal comes a month after the SEC overruled its own enforcement staff to reject an earlier settlement last month. The original agreement called for a two-year ban from raising new capital and no admission of wrongdoing and did not include an injunction against committing fraud in the future. According to reports the SEC’s new chairwoman Mary Jo White said people were increasingly frustrated with the agency because of its lax oversight and punishments.
The new agreement reflects a wider policy change in the Obama Administration, which has been criticized for failing to go after market manipulators and to tackle the problem of fraud on Wall Street. The DOJ announced last week it was filing criminal charges against two JPMorgan Chase traders who lost $6 billion last year from risky derivatives trading. Monday’s agreement between Falcone and the SEC sets a precedent for future cases including those involving JPMorgan Chase and the hedge fund SAC Capital Advisors.
The news this week for Bank of American keeps getting worse. Today the Justice Department announced it was filing a lawsuit against the bank. The suit alleges that Countrywide Financial, formerly the country’s largest private mortgage lender, generated thousands of fraudulent mortgage loans and then sold them to Fannie Mae and Freddie Mac, the government institutions that underwrites mortgages for millions of American homeowners. The suit further alleges that the practice of streamlining and generating those fake and risky mortgages continued even after Bank of America purchased Countrywide in 2008.
“The fraudulent conduct alleged in today’s complaint was spectacularly brazen in scope,” said Preet Bharara, the United States attorney in Manhattan.
Those transactions became the tipping point of the “subprime” mortgage disaster that led to the Great Recession and the bankruptcy of some of the nation’s largest financial institutions including Countrywide and Lehman Brothers. The Justice Department is seeking $1 billion in damages for the actions of the bank for selling these knowingly “toxic” assets to the Fannie and Freddie, which then became insolvent and required taxpayers bailouts under the TARP program. The financial problems of these two housing lenders also led to thousands of foreclosures on the homes of American families.
The Countrywide case is a new addition to several other lawsuits being pursued by the government against Wall Street firm and financial institutions. For example, last year the Federal Housing Finance Agency sued 17 banks over losses sustained by Fannie Mae and Freddie Mac, and is relentlessly calling on firms like Bank of America to repurchase billions of dollars in the bad loans they fraudulently sold to the government-controlled housing lenders.
Bank of American did not have an immediate comment. The news will be disappointing to its shareholders as it comes in the same week the bank announced that its profits had declined by 95 percent in the third quarter. The new the lawsuit represents yet another obstacle to the financial solvency and longevity of the country’s second largest bank.
The nation’s second largest bank continued its struggle to find stability in the wake of the Great Recession. Bank of America announced a slight $340 million profit in the third quarter of this fiscal year yesterday. The slight profit, however, amounts to 95 percent decrease from last year, signaling that large financial institutions remain weak four years after they almost collapsed.
The precipitous drop in Bank of America’s earnings comes after a settlement last month with the Justice Department and investors over its takeover of Merrill Lynch during the financial crisis. The bank announced the $2.43 billion settlement after accusations by shareholders that it misled investors about the financial health of Merrill. The settlement is the largest securities class-action lawsuit following the financial crisis.
The acquisition of Merrill was not the only one to saddle the bank with financial problems. In 2008 it also purchased the troubled mortgage lender Countrywide Financial. Both Merrill and Countrywide were implicated in trading toxic assets and relying on complex financial instruments for risky investments that created the financial crisis. The Countrywide acquisition occurred as the subprime mortgage bubble was imploding, and it is estimated that the purchase of the troubled mortgage lender cost Bank of America more than $40 billion in losses over four years.
Starting in 2009, Bank of America began cutting its expenses by closing branches, selling billions in assets, and cutting thousands of jobs. The announcement of a slight profit yesterday was therefore touted by the bank as a kind of victory, but the reality is that America’s largest financial institutions remain unstable and continue to struggle in the post-recession economy.
A recent New York Times investigation of Securities and Exchange Commission (SEC) cases involving fraud by some of the nation’s biggest banks discovered dozens of instances over the last decade in which banks were charged with violating anti-fraud laws but were never punished because they “promised” not to violate the law again.
For example, Citigroup agreed last month to pay $285 million to settle civil charges that it defrauded customers during the housing meltdown. They promised not to violate the law again, even though they had made this same promise in settling similar charges in July 2010 and several other instances going back to 2000.
An analysis of enforcement actions during the past 15 years found at least 51 cases in which the SEC concluded that Wall Street firms had broken anti-fraud laws they had agreed never to breach. The 51 cases spanned 19 different firms, including Citigroup, Bank of America, Goldman Sachs, JP Morgan, and Morgan Stanley.
Critics of the SEC and big banks are urging Congress to take action against the agency and force it to do the job it is intended to do as the nation’s watchdog and enforcement agency for financial and banking laws. Sen. Carl Levin (D-MI) is calling for an investigation into the agency’s enforcement practices. When asked why none of the banks had been charged with contempt of the law for repeatedly violating promises not to break anti-fraud laws, the SEC could only respond that it had not brought any contempt charges in the last decade despite repeated violations.
The cozy relationship between banks and politicians is primarily to blame for the failure of both markets and market oversight in this country. If the SEC is unwilling to enforce the law’s it is charged with enforcing, then Congress and the Obama Administration have the duty to force a turnover in that agency and appoint regulators who will do their job. When regulators don’t do their job, private actors are encouraged to make poor and risky economic decisions that adversely impact the rest of us. It’s time Congress put teeth into the regulation the financial and banking industries. Otherwise, it is not a question “if” there will be another financial collapse but “when.” ::KPS::
NYT analysis of repeat Wall Street offenders.