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February 10, 2008

Getting Tough on Corporate Crime? Paul's Talk on YouTube (plus some comments on subprime wrongdoing)

Back in 2004, I had the opportunity to write a piece with Jeffrey Reiman, A Tale of Two Criminals: We’re Tougher on Corporate Criminals, But They Still Don’t Get What They Deserve. It grew out of several invited lectures I gave, including a  Distinguished Visiting Faculty Lecture at Eastern Kentucky University. The folks there recorded the lecture and have just posted it on YouTube.

If the embedded player doesn't work, here's the link for the playlist (six parts of about 10 minutes each). And just to make sure it's accessible - Part 1, Part 2, Part 3, Part 4, Part 5 and Part 6.

Many thanks to Carole Garrison and EKU multimedia for making this happen.

 

SUBPRIME FINANCIAL SCANDAL 

Subprime Primer - very funny, direct, sometimes crude but helpful short explanation (stick figures in 45 powerpoint slides). Worth checking out.

On the first page of the Tale of Two Criminals article, I added a box, "Questions we should be asking" and included this:

Why, soon after the S & L crisis, did Congress go on a wave of “cavalier” financial deregulation, creating a “paradox of increasing financial deregulation coming on the heels of the most catastrophic experiment with deregulation in history” [Calivita, Pontell & Tillman, Big Money Crime: Fraud and Politics in the Savings and Loan Crisis]. This question is especially important in light of complaints - discussed in the final section - that the Sarbanes-Oxley reform legislation goes too far, it's unnecessarily rigorous and should be relaxed.

While Sar-Box "reform" is still an issue - it is such a hassle to make sure there's no fraud - what we have seen is massive problems with subprime lending and a host of financial products (CDOs, etc) related to them.  Forbes magazine asks: Credit Crisis: Where was the SEC? (via Financial Armaggedon). A few snippets:

Investment banks, mortgage brokers and ratings agencies are all being blamed for the subprime mortgage bubble and its sudden and stunning demise. But little has been said about the watchdogs at the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority, the regulators who oversee the activities of the banks. They have the power to stop fraud in the business of selling the complex credit derivatives, and they have jurisdiction over whether the complex securities sold by the banks met suitability requirements for the investors who bought them. Yet time and again, they've failed to do so...

Washington and Wall Street have been hesitant to clamp down on the over-the-counter market, the source of much profit-making. Last year, as the subprime market began its collapse, the President's Working Group, which includes the Treasury Department, the Federal Reserve, the SEC and the Commodities Futures Trading Commission, recommended against tighter oversight of the over-the-counter market, in the context of vetoing tighter regulation of hedge funds, saying the industry can self-police...

Leaving it up to Wall Street hasn't proven very effective, however. "The decision by the President's Working Group to recommend no detailed regulation of the over-the-counter market was wrong," says David Ruder, a former SEC chairman and now law professor at Northwestern University.

Thepriceofeverything blog comments on the ability to self-police: "After the dotcom research fiasco (where $10bn was paid in settlement, mysteriously without any acknowledgment of blame) and now subprime, with the apparent connivance of the ratings agencies, expecting Wall Street and the City to show moral leadership is like expecting brothel-keepers to advocate chastity."

Fortune Magazine cover - "What Were They Smoking" 

In an earlier piece I did with Jeff, Getting Tough on Corporate Crime, Enron and a year of Corporate Financial Scandals, we noted a huge conflict of interest with brokerage houses making millions in fees from companies and having supposedly independent analysts tout them to the public as stocks that should be bought:

brokerage firms came under fire because their high-profile analysts enthusiastically endorsed stocks publicly that they were disparaging privately (in emails), all because their firms derived underwriting fees or other business from the troubled companies. Salomon Smith Barney telecoms analyst Jack Grubman admitted that “The bank supported ‘pigs’ [i.e., stocks in poorly performing firms] in supposedly objective research notes to ensure that [those firms] granted Salomon investment banking business.”  And Merrill Lynch internet analyst Henry Blodgett described some stocks as a “piece of shit” while recommending them to small investors. 

Now, we see some different conflicts of interest with the ratings agencies like Moody's and S & P. They didn't catch all the problems with the bonds and financial products built off subprime loans, and gave the products the top AAA rating. (Imagine you paid Equifax for your credit score and they were dependent on your satisfaction for you to continue pay...)

Moody's and S & P are now being investigated by New York State Attorney General Andrew Cuomo (where is the SEC? Indeed, with Enron and earlier frauds, then NY Attorney general Spitzer did most of the work.) The ratings agencies are going to change the system they use and decide whether to put warning labels on their ratings. Barry Ritholtz, a NY hedge fund manager, suggests this:

WARNING: THESE BONDS HAVE BEEN RATED AAA BY A MAJOR RATING FIRM. THESE RATING FIRMS HAVE PROVEN THEMSELVES TO BE CLUELESS, MONEY-LOSING INCOMPETENTS IN EXCESS  OF A TRILLION DOLLARS IN LOSSES. THEY WERE PAID HANDSOMELY BY THE BOND UNDERWRITER, AND ARE HOPELESSLY COMPROMISED. PURCHASERS OF THESE BONDS ARE ADVISED TO  IMMEDIATELY  KILL THEMSELVES, THUS SPARING THEIR LOVED ONES EMBARRASSMENT IN THE FUTURE. ALSO, THESE BONDS MAY LOSE VALUE. I JUST WET MYSELF MERELY THINKING ABOUT THIS PAPER. WHILE PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RETURNS, YOU SHOULD BE AWARE THAT PAST PERFORMANCE ALSO SUCKED. DONT BLAME US IF YOU LOSE ANY MONEY, AS WE HAVE NO IDEA WHAT THE F$#@ WE ARE DOING ANYWAY. REALLY, YOU ARE ON YOUR OWN.

Ouch. While you're over at Barry's blog, check out his posting on "occupancy fraud" and the attempt to shift blame for the problems onto individuals: "Zero adult situation across the entire process, and now, wild ass covering and blame shifting."

Looks like we're in good shape - do nothing about this mess, undo Sar-Box soon and wait for the next massive fraud that will take everyone by surprise.  

 

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