Slouching Towards Wall Street… Notes for the Week Ending Friday, September 18, 2009

Streetballs – Obama Takes Wall Street To The Pavement

 

Settler Trouble – An Opinion On An Opinion

 

And: Dead To Rights – 6’, Granite Headstn, Rvr Vu

 

 

 

Speech Impediment

When all is said and done, much more is said than done.

                             - Anonymous

 

President Obama must be wishing he could trade places with Anonymous.  Anonymous is a world-renowned author of sayings ranging from the fiendishly witty, to the profoundly pithy.  Anonymous is quoted every bit as much as the Bible and Shakespeare, and with no less reverence.  Most important of all, while everyone knows Anonymous and know many of Anonymous’ sayings, no one can name a single thing that Anonymous actually did.  And yet, Anonymous is held in universal high esteem.  Our analysis indicates that Anonymous is universally revered, because he had the good sense to always speak wisely, and leave it at that.

 

President Obama shares certain characteristics with Anonymous.  Both are noted for saying profound things – which stir thought but in the end beget no action.  Both are known for their ability to get crowds nodding in warm agreement at their words, then walking away leaving their listeners to ask “but now what?”  And both are noted for their ability to eloquently support any point of view – so much so that one is often at a loss to know exactly where they stand on an issue.  So many similarities…

 

You notice that you never see the two of them together?  Coincidence…?

 

And so it was in the revered tradition of Anonymous that last week President Obama, true to form, saw a major problem – and said something about it.

 

Before we get into the story, here’s the punch line: the markets ticked up after Obama’s Wall Street speech, because the professionals realized the President is pandering to them.

 

The President has “sought ideas and input from industry leaders, policy experts, academics, consumer advocates, and the broader public. And we've worked closely with leaders in the Senate and House, including Senators Chris Dodd and Richard Shelby, and Congressman Barney Frank, who are now working to pass regulatory reform through Congress.”

 

Translation: The financial system has been assassinated and democratic society around the world is in mortal peril.  Round up the usual suspects.

 

For all the eloquent noise in the President’s talk – much of it worthy of Anonymous himself – there are moments when he managed to address what actually went wrong.  The “loopholes that were at the heart of the crisis. Where there were gaps in the rules, regulators lacked the authority to take action. Where there were overlaps, regulators often lacked accountability for inaction. These weaknesses in oversight engendered systematic, and systemic, abuse.  Under existing rules, some companies can actually shop for the regulator of their choice – and others, like hedge funds, can operate outside of the regulatory system altogether. We've seen the development of financial instruments, like derivatives and credit default swaps, without anyone examining the risks or regulating all of the players. And we've seen lenders profit by providing loans to borrowers who they knew would never repay, because the lender offloaded the loan and the consequences to someone else. Those who refuse to game the system are at a disadvantage.”

 

Many of the key problems of Wall Street are neatly summed up here.  But the conclusions drawn by the President are not unambiguous winners.

 

A Consumer Protection Commission.  Isn’t that fundamentally  every regulator’s brief: to protect the consumer?  Whether it be an individual trading her IRA, who is victimized by her broker – or a Fortune 100 corporation that can not ship its manufactured products across country without paying millions of dollars in bribes to the transport companies – the job of a government regulator is to establish standards and prevent abuses.  There is neither mystery not magic to any of this.  Nor is it sufficient to point fingers at the Great Stone Wall erected by former SEC Chairman Cox, nor to chastise the SEC staffers who prevented their junior reports from investigating Madoff.

 

The plain fact is that, in every aspect of its underlying mission of market integrity and consumer protection, the government of this nation has failed its citizens.  President Obama sailed into office on the mantra of Yes We Can.  Everything he has done since taking office seems to reveal that the real underlying message is – Well, We Might…  Significantly absent from the President’s speech was any hint of playing hardball. 

 

For example: Wall Street executives are forever admonishing their supervisory and compliance personnel “You can’t just impose compliance procedures on our salesmen and traders.  They’ll leave!”

 

In short: any time you throw up a roadblock in front of the wicked, they find a new route.  And Obama publicly caved in to this as well, acknowledging that regulation should not be so harsh as to drive business overseas.

 

So if we’re going to ask the very people who got us into this mess to give us the solutions, if we’re not going to make regulation “onerous” or “burdensome”, but instead reassure the powerful that we will keep their seats warm and cozy for them so they don’t have to go setting up shop in Andorra and Macedonia – then what exactly is it we are going to do, Mr. President?

 

As Peter Tosh sings, “Everybody want to go to Heaven, but nobody want die.”  The pathetic dithering in Washington makes it clear that this country has long since been sold to the highest bidder.  Can it really be that America can not take steps to prevent environmental disaster because it will cost money?  Can it really be that we will not provide medical insurance to 40,000,000 of our citizens unless the insurance companies and medical providers can be guaranteed they will make a profit on it?  The “Greatest Nation on Earth” (are we still allowed to call it that?) has been brought to its knees by its unquestioning embrace of the profit motive, to the exclusion of any notion of proper business practices.

It is our religion, and our fanaticism will be our undoing.

 

Wall Street was satisfied with Obama’s speech, because the biggest players will just continue to get bigger and bigger.  Washington – ably aided and abetted by the press – will go after the SEC, and not Goldman Sachs.  

 

A Consumer Protection Agency?  We love it!  Another layer of bureaucrats to tell the other bureaucrats what new forms need to be filled out.  A systemic risk regulator?  Bring it on!  We’ll keep moving the parts of the puzzle around so it always looks like someone else’s fault – and with senior Wall Street executives whispering in their ear, the Fed and Treasury are not likely to pull any surprises, especially when any adverse outcome will hinder repayment of the TARP Trillions.

 

Those who were terrified that Obama would socialize America were right after all.  Except his redistribution of wealth is going up the ladder, not down.  All because no one in Washington is willing to tell people “this will cost money”.

 

America was once the greatest country on earth.  Right now there is a Greatness vacuum, but America does not have the political will to make the tough economic policy choices that would propel us back to a position of prominence.  As our CEO, Keith McCullough says of many of the ill-advised programs being promulgated by our already-failed government, this is another thing that will end badly.

 

Or, as Peter Tosh sings, “You never miss your water ‘till your well run dry.”

 

 

 

I’ll Be The Judge Of That

 

When one reads of Settlement Expansion in the press, one is likely to think about tension between Israel and the Palestinian Authority.  But we have our own form of unbridled encroachment going on right here in the US, aided and abetted by everyone from the courts, to Congress, to the press.  Despite the widespread acknowledgement that it is contributing to disaster, there has been no sign of a settlement freeze.

 

And then along came Jed.

 

We welcome the recent article by Columbia Law School professor John Coffee (New York Law Journal, 17 September, “The End of Phony Deterrence?  SEC v. Bank of America” – available on the web at topix.com) which asks, “With Southern District Judge Jed Rakoff’s blistering decision on Monday, rejecting the proposed settlement between the SEC and Bank of America Corporation, two key questions come to the fore: (1) Will this decision change SEC enforcement practices, which today invite corporate executives to purchase immunity for themselves with their shareholders’ money? and (2) Who is minding the store at the SEC so as to enable its litigators to shoot themselves in both feet?” 

 

Professor Coffee predicts that the SEC’s conduct in this matter “could haunt the SEC for years.”

 

Too right, we say.

 

This was the Commission that Chairman Schapiro vowed to turn around, bringing a number of cases right off the bat.  Now, it appears she has made such a feast out of low-hanging fruit that she is woozy with excess.  The B of A settlement represents the lowest of all: the shareholders’ cash.

 

Professor Coffee quotes Judge Rakoff’s decision as exposing a “cynical relationship between the parties.”  “The SEC gets to claim that it is exposing wrongdoing.”  Meanwhile, “the Bank’s management gets to claim that they have been coerced into an onerous settlement by overzealous regulators.”

 

When you look at it that way, it really is a win/win.

 

Professor Coffee is onto something deeper than just the BofA fiasco – and for our money, Chairman Schapiro should be bounced for signing off on this.  The fact that President Obama failed to pull her in for a good woodshedding only adds to his aura.  “Yes We Can!” is turning into “Awww – I Couldn’t…”  Next stop is – “Oh s**t!  Did I do that?!”

 

The culture of settlements is a time-honored one in the American practice of law.  Most lawyers, as the saying goes, don’t know how to find the courthouse steps – because their standing practice is always to settle cases.  Indeed, among tort practitioners, lawyers who refuse to settle are often seen as dogs in the manger, standing in the way of the proper flow of the legal give and take.  One of the ingrained characteristics of the American practice of law has been the one-third contingency fee.  We remember going through a number of arbitration and court cases before learning – naïve that we were – that the 33% figure is a convention.  Nothing in the canon of legal ethics or practices points to the figure of 1/3 of damages recovered as a fair – or “standard” – fee for legal representation.  For years, though, it was a given.  Thus did large segments of the legal profession evolve from advocates whose role was to win justice for their clients, to a cartel whose job was to ensure steady income from deep-pocketed corporate defendants.

 

Addressing the SEC’s practice of pushing for settlements, Professor Coffee calls this the “sale of indulgences” by the regulatory agencies, and urges the SEC Inspector General to follow up with a full inquiry into the SEC’s handling of the BofA matter.

 

Professor Coffee cites an SEC policy statement from 2006 that explicitly acknowledges that the Commission’s prior record in such high-profile matters had been weak.  Quoting from the Commission’s statement: “Where the shareholders have been victimized by the violative conduct, or the resulting negative effect on the entity following its discovery, the Commission is expected to seek penalties from culpable individual offenders acting for a corporation.”

 

Judge Rakoff was incredulous, among other aspects of this mess, that the SEC staff’s reason for not digging deeper was their understanding that BofA’s executives and board had relied on guidance of counsel.

 

We have previously observed this widespread lying down before the legal profession.  Congress, in their recent hearings on the BofA / Merrill transaction, accepted Fed Chairman Bernanke’s version of the events with an excess of restraint after Chairman Bernanke testified that he had acted in consultation with the Fed’s lawyers. 

 

Here’s a tip: as Professor Coffee points out, the SEC does not have to prove “scienter” – state of mind or malicious intent – to obtain a finding of negligence in a proxy matter.  The SEC staff were at a loss because BofA might have relied on opinions of counsel – but since they did not waive privilege, the SEC staff could not challenge the opinions (which they were not sure existed in the first place…)  but had they obtained access to the opinions, the SEC could have challenged them in court.  But they never even determined that these opinions existed…

 

We wondered at the time why the SEC did not simply find BofA negligent – thereby forcing them to cough up the opinions of their lawyers – if, indeed, they exist.  Hint to the SEC: you (of all people!) should know that, just because a lawyer says something is legal, doesn’t make it so.  And the regulatory agencies – and Congress – have the right to determine whether an opinion of counsel is valid, or at the very least to challenge it in court.  That the SEC failed to do so in this matter looks to us to be gross negligence.

 

One political problem is, if Chairman Schapiro forced BofA to cough up its legal opinions, would Congress not have to yank Chairman Bernanke back and make him do the same?  And former Secretary Paulson?  The Obama Justice Department hovered perilously close to challenging previous Department legal opinions, as a means to charge individuals with crimes regarding alleged torture of detainees during the Bush administration.  That they have not done so is likely not for fear they will lose, but some smart staffer probably looked out over the halls of Congress and whispered “Pandora’s box”.

 

Where will it end?  Apparently not here, and not today. 

 

As reported in Bloomberg (21 September, “SEC Bid to Speed Probes, Win Esteem Stumbles on Bank of America”) new Director of Enforcement Robert Khuzami exhorted the troops on his first day in his new position to adopt the “four S’s – for strategic, swift, smart, and successful.”  Khuzami says his objective is “to build strong cases, then compel defendants to settle quickly on the commission’s terms or face evidence in court.”  (Emphasis added)

 

Mary Schapiro, the New Broom, apparently is adept at the Old Trick of sweeping under the carpet, and plans to take it to a new level in her term as Chair of the Commission.

 

That bit about facing evidence in court is the only way there will ever be any transparency in the securities industry.  If people knew the real truth about what went on with Madoff, we suspect the outrage would reach to the Capitol building.  His guilty plea enabled him to avoid a trial, and robbed us of the explanation that we are rightfully entitled to.

 

The SEC’s BofA settlement is no less scandalous and should be seen as grounds for serious disciplining and censure of Chairman Schapiro, at the very least.

 

We suspect Chairman Schapiro was nervous about this matter.  Professor Coffee points out that, in a departure from standard SEC practice in such high-profile enforcement cases, the SEC office of the general counsel appears to run from this settlement like the plague.  Professor Coffee points out that, in keeping with standard SEC procedure, given the importance of the BofA case, high-ranking counsel should have signed the Commission’s briefs.  In the event, “the Commission’s two memoranda submitted to Judge Rakoff were signed only by the SEC’s associate regional director.”  Professor Coffee thinks this case might have been “orphaned because no senior official wanted to accept responsibility.”

 

We offer one observation in defense of the SEC’s approach: the days of the Trust Busters are behind us.  Gone is public sentiment for going after the Robber Barons, and the government is not about to slap cuffs onto the hands that feed them so sumptuously.  The world has fallen definitively under the sway of Gordon Gekko’s dictum that Greed Is Good.  Beyond being Good, the excesses of Wall Street have come to be viewed romantically, and greed is seen as being downright virtuous. The free-market capitalist democracy that was America is hurtling towards becoming the world’s leading piratocracy, where government – aided and abetted by a decidedly un-free press – continues to mount vast programs designed to steal from the poor, and give to the rich. 

 

The argument goes that, in a free market system, shareholders stand to reap the benefit of performance and thus, when performance goes negative, they deserve to be wiped out.  Alas, the SEC’s blatant theft of shareholder cash to shield those responsible for this fraud fits right into this Sheriff of Nottingham economy.  The Bush and Obama administrations have made not a single bean about bankrupting this nation to save the jobs – and personal wealth – of incompetent and corrupt senior managements, labor unions, and political cronies.  The American taxpayer – and in their wake, the rest of the world – have transmigrated to a new incarnation as Shareholder of Last Resort. 

 

Meanwhile, New York AG Andrew Cuomo is swinging his bat.  Love him or hate him, his office is bringing actual charges against real people in this miserable affair, and we have hopes that a head or two will roll.  At last, Robin Hood may be on the way. 

 

Professor Coffee’s full and dreary picture of the depths inhabited by this bottom-feeding Agency – the SEC – ends with the observation that the SEC Office of the Inspector General has not seen fit to look into the culture of settlements at the SEC and the way in which investigations are handled and settlements negotiated.

 

We wonder when they will get around to it.

 

 

 

Bid, Ask – Last Sale

 

Last week we wrote about Wall Street’s project to securitize life insurance policies (“And Now It’s Time To Play ‘You Bet Your Life’”).  In a related story, the Wall Street Journal (24 September, “Where Real Estate Is Still Hot”) reports on the burgeoning secondary market in grave sites – people down on their luck are selling their own intended final resting places, seeking to raise quick cash.

 

The Journal reports that many individuals have decided to “trade down”, from a full-out funeral to cremation.  A quick check on-line indicates that cremations go for as little as $1000 – far less than the cost of the traditional funeral, as several websites assure us.  Cremations are also pitched as environmentally friendly.  They use far less wood than caskets, no concrete is poured into the ground, and there are no embalming fluids to leach into the ground.

 

And of course, cremation has a smaller… er… footprint.

 

The Journal article helpfully gives tips on pitfalls to be aware of when buying or selling a gravesite.  Sellers should make sure the cemetery will permit transfer of title, while buyers should obtain verification of the actual owner of record.  (Wouldn’t it be embarrassing to bring Dad’s fancy coffin to your prize plot, only to see the Mahoney family shoveling dirt onto Aunt Sally?  Talk about bait and switch…!)

 

Companies mentioned in the article include such names as Grave Solutions and Caskets-N-More.

 

As this business heats up, will majors get into it?  Will Wal-Mart offer a range of affordable urns?  Will Home Depot produce a DIY casket kit?  Will Toys R Us offer a “Little Chiseler Do-It-Yourself Headstone”?

 

We would not be surprised if the Wall Street firms planning to securitize billions of dollars of viaticals also buy up large quantities of gravesites.  In B-School they call that Vertical Integration.

 


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