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9short articles on Investment Banks & Fraud – Count as 1 for RDP’s & Notes
Realities Behind Prosecuting Big Banks
By ANDREW ROSS SORKIN
New York Times
March 11, 2013, 9:15 pm
Are banks too big to jail?
If there was any doubt about the answer to that question, Eric H. Holder Jr., the nation’s attorney general, last week blurted out what we’ve all known to be true but few inside the Obama administration have said aloud: Yes, they are.
“I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if we do prosecute — if we do bring a criminal charge — it will have a negative impact on the national economy, perhaps even the world economy,” Mr. Holder told the Senate Judiciary Committee. “I think that is a function of the fact that some of these institutions have become too large.”
Mr. Holder continued, acknowledging that the size of banks “has an inhibiting influence.” He said that it affects “our ability to bring resolutions that I think would be more appropriate.”
To put this in the proper perspective, Mr. Holder said, for the first time, that he has not pursued prosecutions of big banks out of fear that an indictment could jeopardize the financial system.
Mr. Holder’s comment raises all sorts of questions. Does this mean that our banks are still too big to fail? Should we prosecute corporations? Should the size of an institution or its systemic importance influence the decision of prosecutors? What’s the right policy?
At a minimum, Mr. Holder’s comments are embarrassingly at odds with the Obama administration’s view that too-big-to-fail was fixed by the Dodd-Frank financial regulation law.
Here’s Timothy Geithner, the former Treasury secretary, with the administration’s official line at a hearing in 2010 right before the Dodd-Frank bill passed: “The reforms will end too-big-to-fail,” he said unequivocally. “The federal government will have the authority to close large failing financial firms in an orderly and fair way, without putting taxpayers and the economy at risk.”
Apparently, Mr. Holder didn’t get the memo…[Dunn cut rest for space reasons]
Is S&P's $1.38B Deal Enough to Keep Credit Raters in Check?
By THE ASSOCIATED PRESS
FEB. 3, 2015
WASHINGTON — More than six years after the financial crisis struck, credit rating giant Standard & Poor's will be paying a hefty $1.38 billion penalty for its role in fueling the subprime mortgage meltdown. But that doesn't mean it can't happen again.
S&P's settlement announced Tuesday with the U.S. government, 19 states and the District of Columbia marks a public chastening of a major credit rating agency accused of knowingly overrating toxic mortgages that ignited the crisis. S&P and its competitors are crucial gatekeepers that can affect a company's or government's ability to raise or borrow money. In the aftermath of the crisis, federal regulators have imposed some changes on how the rating agencies conduct business.
Yet the fundamental conflict of interest at the heart of the rating agencies' business remains intact: They continue to be paid by the companies whose securities they rate.
"This doesn't fix anything," said Janet Tavakoli, the president of Tavakoli Structured Finance and a former investment banker. "This is just a traffic ticket."
Tavakoli cites a number of problems, including payments that companies and banks make to the agencies for ratings, as well as flawed statistical methods. The government should go further and strip the big rating agencies' national licensing for rating complex securities, she suggested.
The process for companies and rating agencies is akin to having a pitcher choose the umpire, critics of the industry say, and it puts pressure on the agencies to award better ratings in order to secure repeat business.
That's exactly what the government asserts S&P did in ratings on billions of dollars of securities that it issued from 2004 through 2007. The settlement resolves a court fight that began with a Justice Department lawsuit two years ago. S&P was accused of failing to warn investors that the housing market was starting to collapse in 2006 because doing so would hurt its ratings business.
Half the amount New York-based S&P is paying, or $687.5 million, will go to the 19 states and the District of Columbia.
Under the agreement, S&P acknowledged that it issued and confirmed positive ratings despite knowing that those assessments were unjustified and in many cases based on packages of mortgages that it knew were likely to default.
"On more than one occasion, the company's leadership ignored senior analysts who warned that the company had given top ratings to financial products that were failing to perform as advertised," Attorney General Eric Holder said at a news conference Tuesday.
S&P also agreed to retract its earlier allegation that the government had brought the action in retaliation for its downgrade of the United States' credit rating in 2011, a concession that Holder said was personally important to him.
The three big rating agencies — S&P, Moody's Investors Service and Fitch Ratings — have been blamed for helping fuel the 2008 crisis by giving strong ratings to high-risk mortgage securities. The ratings made it possible for banks to sell trillions of dollars' worth of those securities. Some investors, such as pension funds, can only buy securities that carry high credit ratings. …
S&P "got off pretty light considering they helped bring down the world's financial system," said James Cox, a Duke University law professor and securities market expert.
There's no guarantee, say critics like Cox, after the SEC changes and legal action that rating agencies' "slouchy practices won't return."
They see proof in a $77 million settlement signed last month by S&P with the SEC and two states that covers alleged misconduct in 2011 and 2012 — well after the financial crisis and after the new SEC rules for agencies began.
S&P's agreement represents one of the government's key efforts to hold accountable market players deemed responsible for contributing to the worst financial crisis since the Great Depression…. [Dunn cut rest]
BofA to Pay $16.7 Billion to End U.S. Mortgage Probes
By Tom Schoenberg, Hugh Son and David McLaughlin
Bloomberg News
Aug. 21, 2014
Bank of America Corp. agreed to pay almost $16.7 billion to end federal and state probes into mortgage bond sales, the harshest penalty yet related to loans that fueled the 2008 financial crisis.
The settlement, which includes $9.65 billion in cash and $7 billion in consumer relief, resolves civil investigations by government prosecutors, the U.S. said today.
“This constitutes the largest civil settlement with a single entity in history, addressing conduct uncovered in more than a dozen cases and investigations,” Attorney General Eric Holder said at a press conference today in Washington. “The size and scope of this multibillion-dollar agreement go far beyond the ‘cost of doing business.’”
The agreement cements Bank of America’s status as the firm punished hardest for faulty mortgage practices. It eclipses Citigroup Inc.’s $7 billion settlement in July and JPMorgan Chase & Co.’s $13 billion accord in November. Bank of America’s settlement also comes on top of its $9.5 billion deal in March to resolve related Federal Housing Finance Agency claims.
Reduce Profit
Bank of America expects the settlement to reduce third-quarter pretax profit by about $5.3 billion, or 43 cents a share after tax, the company said today in a statement. The lender reported an $11.4 billion profit for all of last year…
The government said Bank of America and its Merrill Lynch and Countrywide Financial units sold billions of dollars of mortgage securities backed by toxic loans and misrepresented the risks to investors.
“It’s kind of like going to your neighborhood grocery store to buy milk advertised as fresh, only to discover that store employees knew the milk you were buying had been left out on the loading dock, unrefrigerated, the entire day before, yet they never told you,” Associate Attorney General Tony Westsaid during the press conference… [Dunn Cut rest for space reasons]
Citigroup to Pay $7 Billion in Mortgage Probe
ByAndrew Grossman and @A_Grossman
Biography
Christina Rexrode
Wall Street Journal
@chris_rexrode
Biography
Andrew Grossman
@A_Grossman
Biography
Christina Rexrode
@chris_rexrode
Biography
Wa
July 14, 2014
WASHINGTON—As the seeds of the financial crisis were being sown, a Citigroup Inc. trader sent an internal email warning about the poor quality of mortgages the bank was packaging into securities and selling to investors.
"We should start praying," the trader wrote in the email.
On Monday, the bank agreed to pay $7 billion, including a $4 billion civil penalty to the Justice Department, $500 million to the Federal Deposit Insurance Corp. and several states, and $2.5 billion earmarked for "consumer relief," to settle the U.S. government's allegations it knowingly sold shoddy mortgages ahead of the crisis.
The settlement doesn't absolve Citigroup or its employees from facing any possible criminal charges, Attorney General Eric Holder said. He declined to say whether the government was pursuing criminal charges.
Citigroup, in a statement of facts, admitted to repeatedly brushing aside warnings from both inside and outside the bank that many of the loans it had packaged had serious problems and concealing that information from investors.
Mr. Holder said the bank sold mortgage-backed securities with widespread defects and described Citigroup's conduct as "egregious."
"The bank's activities contributed mightily to the financial crisis that devastated our economy in 2008," Mr. Holder said. "Taken together, we believe the size and scope of this resolution goes beyond what could be considered the mere cost of doing business."
The Justice Department said that when a third-party "due diligence vendor" turned up a significant portion of mortgages that were found to be low-grade, such as missing key documents or made to borrowers with poor credit, the bank often chose not to reject the loans. Instead, Citigroup engaged in a sleight of hand, in which it reclassified the loans as better-performing, the Justice Department said, and then misrepresented their quality to investors… [Dunn Cut rest for space reasons.]
Tentative Deal Hands JPMorgan Chase a Record Penalty
By BEN PROTESS and JESSICA SILVER-GREENBERG
New York Times
October 19, 2013
JPMorgan Chase and the Justice Department have reached a tentative $13 billion settlement over the bank’s questionable mortgage practices leading up to the financial crisis, people briefed on the talks said on Saturday. It would be a record penalty that would cap weeks of heated negotiating and underscore the extent of the bank’s legal woes.
The deal, which the Justice Department took the lead in negotiating and which came together after a Friday night call involving Attorney General Eric H. Holder Jr. and JPMorgan’s chief executive, Jamie Dimon, would resolve an array of state and federal investigations into the bank’s sale of troubled mortgage investments. That type of investment, securities typically backed by subprime home loans, was at the heart of the financial crisis.
While the deal would put those civil cases to rest, it would not save JPMorgan from a parallel criminal inquiry from federal prosecutors in California, the people briefed on the talks said. Under the terms of the preliminary deal, the people said, the bank would also have to assist prosecutors with an investigation into former employees who helped create the mortgage investments.
The $13 billion deal, which could still fall apart over issues like how much wrongdoing the bank is willing to acknowledge, would represent something of a reckoning for Wall Street, whose outsize risk taking in the mortgage business nearly toppled the economy in 2008. It might also provide a measure of catharsis to the investing public, which suffered billions of dollars in losses from buying bad mortgage securities.
For the Justice Department, often criticized for being soft on big banks, the deal suggests that the Obama administration’s crackdown on Wall Street has gained some momentum in recent months.
It comes less than three months after federal prosecutors and the F.B.I. in Manhattan announced a criminal indictment of the hedge fund SAC Capital, which was accused of permitting a “systematic” insider-trading scheme to unfold from 1999 to 2010. The hedge fund, according to people briefed on the case, is currently negotiating a plea deal that would force it to plead guilty to criminal misconduct and pay more than $1 billion in penalties.
The cost to JPMorgan, the nation’s biggest bank, goes beyond the bottom line. The settlement would deal a reputational blow to the bank and Mr. Dimon, who steered JPMorgan through the crisis without a quarterly loss or major government scuffle. Now Mr. Dimon’s tenure is engulfed in turmoil, the consequence of fighting a multifront battle with federal authorities scrutinizing everything from a $6 billion trading loss in London last year to the bank’s hiring of well-connected employees in China.
In the mortgage case, the size of the penalty underpins its importance. The $13 billion penalty, according to one of the people briefed on the talks, would include about $9 billion in fines and $4 billion in relief for struggling homeowners.
…A $13 billion penalty would be more than half what JPMorgan earned in profits last year… [Dunn Cut rest for space reasons]
SEC charges Goldman Sachs with civil fraud in subprime deal
By Greg Gordon | McClatchy Newspapers
Posted on Friday, April 16, 2010
WASHINGTON — The Securities and Exchange Commission charged Goldman Sachs & Co. and one of its executives with fraud today in a risky offshore deal backed by subprime mortgages that cost investors more than a $1 billion.
The SEC also contends that Goldman allowed a client, Wall Street hedge fund Paulson & Co., to help select the securities. Paulson in turn bought insurance against the deal and when the securities later tanked, losing almost all of their value, Paulson made a $1 billion profit.
The civil fraud charges were the first to be filed against Goldman, the Wall Street investment banking titan at the center of multiple inquiries into the causes of the global financial meltdown… [Cut some for space reasons.]
The Goldman executive, vice president Fabrice Tourre, 31, was principally responsible for structuring the ABACUS deal known as 2007-AC1, a so-called synthetic package in which investors did not buy any actual securities. Instead, they bet on the performance of a specified bundle of home loans to marginally qualified borrowers.
The complaint, filed in U.S. District Court for the Southern District of New York, charges Tourre with making “materially misleading statements and omissions” to investors.
Robert Khuzami, the SEC’s enforcement chief, was asked on a conference call whether anyone higher up in Goldman might face charges.
“We charged those that we felt appropriate, based on the evidence and the law,” Khuzami replied.
The complaint alleged that Paulson, one of the world’s largest hedge funds, paid Goldman to put together a deal in which Paulson would select certain of the mortgage securities and then take short positions, or bet against them.
The marketing materials for the investment, known as a collateralized debt obligation, all represented that the mortgage-backed securities were selected by ACA Management LLC, a third party.
“The product was new and complex, but the deception and conflicts are old and simple,” Khuzami said in a statement. “Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party.”
The deal, one of about two dozen similar bundles in the ABACUS series, closed on April 26, 2007. Paulson paid Goldman about $15 million for structuring and marketing the deal. Within six months, 83 percent of the mortgage-backed securities in the bundle had been downgraded and 27 percent were placed on negative watch by Wall Street ratings agencies, the complaint said.
By the following Jan. 29, it said, 99 percent of the portfolio had been downgraded, costing investors more than $1 billion. It said Paulson’s contrary bets yielded a profit of about $1 billion.
Khuzami said that Paulson was not charged because it did not mislead investors….
The complaint quoted Tourre as saying a Jan. 27, 2007 email to a friend, written in French and English: “More and more leverage in the system, The whole building is about to collapse anytime now … Only potential survivor, the fabulous Fab[rice Tourre] … standing in the middle of all of these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!”…