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September 10, 2008

White Collar Crime Review - Sept 10

Now that I'm teaching a class on white collar crime, I hope to periodically post collections of links about white collar crime, elite deviance and abuses of power.

Fannie Mae - Freddie Mac Bailout

The government announced the takeover of these two institutions, which own or guarantee between $5 and $6 billion in mortgages. They were GSEs - government sponsored entities - so they already had some government involvement, but now it is total. (Everything you might want to know is collected in the links here.) This raises questions about free markets and whether how much this will cost taxpayers, which in turn raises questions about 'socialism for the rich' (ie when there are profits, private parties and people keep them, but when things go badly the taxpayers foot the bill). Several people quoted below make this claim and going forward we'll need to keep an eye on who has benefited from this takeover. 

Watch a segment on CNBC Europe that discusses the socialism in the U.S. The guest in Jim Rogers, who managed the famed hedge fund with George Soros.

There's also a powerful discussion by NYU professor Nouriel Roubini, Comrades Bush, Paulson and Bernanke Welcome You to the USSRA (United Socialist State Republic of America).  Roubini was the subject of a New York Times magazine profile - "Dr Doom" - which noted his correct, if early, predictions about the current economic crisis. His comments include (my editing to convey key points):

The now inevitable nationalization of Fannie and Freddie is the most radical regime change in global economic and financial affairs in decades. For the last twenty years after the collapse of the USSR, the fall of the Iron Curtain and the economic reforms in China and other emerging market economies the world economy has moved away from state ownership of the economy and towards privatization of previously stated owned enterprises. This trends was aggressively supported the United States that preached right and left the benefits of free markets and free private enterprise.Today instead the US has performed the greatest nationalization in the history of humanity.

Socialism is indeed alive and well in America; but this is socialism for the rich, the well connected and Wall Street. A socialism where profits are privatized and losses are socialized with the US tax-payer being charged the bill of $300 billion. This biggest bailout and nationalization in human history comes from the most fanatically and ideologically zealot free-market laissez-faire administration in US history. These are the folks who for years spewed the rhetoric of free markets and cutting down government intervention in economic affairs. But they were so fanatically ideological about free markets that they did not realize that financial and other markets without proper rules, supervision and regulation are like a jungle where greed – untempered by fear of loss or of punishment – leads to credit bubbles and asset bubbles and manias and eventual bust and panics.

The ideologue “regulators” who literally held a chain saw at a public event to smash “unnecessary regulations” are now communists nationalizing private firms and socializing their losses: the bailout of the Bear Stearns creditors, the bailout of Fannie and Freddie, the use of the Fed balance sheet (hundreds of billions of safe US Treasuries swapped for junk toxic illiquid private securities), the use of the other GSEs (the Federal Home Loan Bank system) to provide hundreds of billions of dollars of “liquidity” to distressed, illiquid and insolvent mortgage lenders, the use of the SEC to manipulate the stock market (restrictions on short sales), the use of the US Treasury to manipulate the mortgage market (Treasury will now for the first time outright buy agency MBS to manipulate and prop up this market), the creation of a whole host of new bailout facilities (TAF, TSLF, PDCF) to prop and rescue banks and, for the first time since the Great Depression,to bail out non-bank financial institutions, and a whole range of other executive and legislative actions (including the recent bill to provide a public guarantee to mortgage for banks willing to reduce their face value).

Like scores of evangelists and hypocrites and moralists who spew and praise family values and pretend to be holier than thou and are then regularly caught cheating or cross dressing or found to be perverts these Bush hypocrites who spewed for years the glory of unfettered wild west laissez faire jungle capitalism (and never believed in any sensible and appropriate regulation and supervision of financial markets) allowed the biggest debt bubble ever to fester without any control, have caused the biggest financial crisis since the Great Depression and are now forced to perform the biggest government intervention and nationalizations in the recent history of humanity, all for the benefit of the rich and the well connected. So Comrades Bush and Paulson and Bernanke will rightly pass to the history books as a troika of Bolsheviks who turned the USA into the USSRA. Fanatic zealots of any religion are always pests that cause havoc and destruction with their inflexible fanaticism; but they usually don’t run the biggest economy in the world. But these laissez faire voodoo-economics zealots in charge of the USA have now caused the biggest financial crisis since the Great Depression and the nastiest economic crisis in decades. So let them be shamed in public for their hypocrisy and zealotry that has caused so much financial and economic damage.

Roubini appears in this thoughtful panel discussion about the bailout and the problems that continue to face the U.S. 

Keep an eye on this issue as well - the fired executives of Fannie and Freddie who got their businesses and taxpayers into this mess "are eligible for as much as $24 million in severance, retirement benefits and deferred compensation."  While one of the executives apparently will not be seekign the full severance due to him, Mr Mudd "has hired Robert B. Barnett, a high-profile Washington lawyer, to represent him in any negotiations with the government. His legal fees, according to Mr. Mudd’s employment agreement with Fannie Mae, will be paid by the company."

See also, A Con Game in Pinstripes(Steve Pearlstein, Washington Post 9/5/08 D1)

In recent weeks, Merrill Lynch, Goldman Sachs, Deutsche Bank, Citigroup, J.P. Morgan Chase, Morgan Stanley, UBS and Wachovia have reached settlements with state regulators under which they agreed to pay more than $500 million in fines and penalties. They have also agreed to buy back more than $50 billion in so-called auction-rate securities from retail investors who had been misled into believing that those securities were as safe as shares in money-market funds.

On Wednesday, a federal grand jury in Brooklyn indicted two former brokers at Credit Suisse on charges of lying to corporate clients about how $1 billion of their money had been invested. The investors thought it was in securities backed by federally guaranteed student loans. In fact, it was put in riskier mortgage-backed auction-rate securities that earned higher fees for the brokers and their firms, prosecutors said. The alleged fraud may have caused losses to the clients of as much as $500 million.

Earlier this summer, two executives from Bear Stearns were charged with nine counts of fraud for allegedly telling investors in a conference call that their hedge funds were in fine shape while, in private e-mails, they fretted over recent losses and, in one case, had just pulled their own money out of the funds. A month after the call, the funds collapsed, costing investors $1.6 billion.

Now comes word from the Bloomberg News Service that the Justice Department has launched a criminal investigation of J.P. Morgan Chase and other banks following civil allegations that they conspired to overcharge local governments for hedging on the interest rate risks in their bonds. One such government customer, Jefferson County, Ala., which claims it was overcharged by as much as $100 million in financing a new sewerage system, is now on the brink of bankruptcy.

What is so telling about these stories -- and, rest assured, there will be many more before we're finished -- is that they come only a few years after these same companies reached similar settlements for defrauding many of the same investors during the telecom and dot-com boom. While the fraud back then had more to do with bogus research and accounting and manipulation of initial public offerings, it is clear that they sprang from the same slimy ethical culture that has produced the current credit crisis. Wall Street has become a fundamentally corrupt enterprise in which the motto is: "We'll do anything for a fee."

I refer not to the narrow legal definition of "corrupt," but to the general instinct to mislead clients, double-cross and collude with counterparties, and pull the wool over the eyes of investors. It is the kind of corruption grounded in the attitude that it's all just a game in which the only rules are "buyer beware" and "heads I win, tails you lose." In a corrupt business culture like that of modern-day Wall Street, cynicism is rampant, candor and accountability are first casualties, and a man is measured by the size of his bonus rather than the depth of his integrity. It's not so much immoral as amoral.

New Marketing Code for Student Lenders

As part of resolving an investigation by the NY Attorney General's office, seven student loan companies have agreed to a new code of conduct for marketing. (Interesting it is the NY Attorney General - where are the feds?)  According to the New York Times,

Those companies are Campus Door, EduCap, GMAC Bank, Graduate Loan Associates, Nelnet, NextStudent and Xanthus Financial Services.An eighth lender, My Rich Uncle, has agreed to the marketing code voluntarily even though the attorney general’s office did not find fault with its marketing.

Some of the companies sent solicitations to students that looked as if they had come from the federal government, according to the attorney general’s office. Others advertised interest rates not available to most borrowers. Some offered prizes and ran contests to lure student borrowers.

Representatives of EduCap, Nelnet and GMAC Bank denied any wrongdoing but each said they welcomed the new code. 

The code of conduct, which Mr. Cuomo said he hoped other lenders would adopt, would ban using logos and return addresses that resemble those used by the federal government; sending false checks or rebate offers; offering free iPods or other gifts to lure borrowers; making misleading statements about loan terms and benefits, and providing examples of loan costs that are available to a small percentage of borrowers.

In developing the code and persuading lenders to adopt it, Mr. Cuomo’s office is pursuing a similar strategy to one followed in addressing questionable ties between college financial aid offices and student loan companies uncovered in investigations last year. Benjamin Lawsky, special assistant to the attorney general, said the office’s investigation was continuing and expanding to include other potential conflicts of interest on college campuses.

“Numerous vendors do millions of dollars of business on college campuses, and we have found that they often pay to play,” Mr. Lawsky said. “The question then becomes, are students getting the best deals or, as we found in the student loan industry, are universities entering into financial arrangements that benefit them at the expense of students?”

See also, New York Plans to Sue Student Loan Company (Goal Financial and eStudentLoan.com)

Justice Dept's Guidelines on Monopolies Criticized

The Washington Post story has a subtitle explaining that "Majority of Federal trade Commission Says Policy Would Weaken Enforcement."  Note that this is a bi-partisan majority of a federal agency that is making the criticism. The story explains:

The Justice Department issued a report yesterday establishing how and when it will crack down on misbehaving monopolies, but its approach was immediately assailed as too lax and the work of an administration willing to allow big business to run roughshod over consumers.

A bipartisan majority of the Federal Trade Commission characterized the report as "a blueprint for radically weakened enforcement" against monopolies that engage in predatory pricing and other illegal tactics.

Sen. Herb Kohl (D-Wis.), chairman of the Senate Judiciary Committee's antitrust subcommittee, called the report an assault on the Sherman Act, the basis for much U.S. law on monopolies. "If followed, the Justice Department's interpretation of this fundamental law written nearly 120 years ago . . . could make it virtually impossible to prevent many forms of abusive conduct by dominant firms, such as predatory pricing and tying" goods to a sale, Kohl said in a statement. "This report represents another anti-competition and anti-consumer decision by this Antitrust Division."

...a bipartisan majority of the Federal Trade Commission -- Pamela Jones Harbour, an independent; Democrat Jon Leibowitz and Republican J. Thomas Rosch -- disputed the notion that the report protects consumers or reflects a consensus of judicial opinion. "The final report's descriptions and conclusions . . . cannot be said to represent the consensus or even the prevailing view of the myriad stakeholders," the FTC group said.

The group took issue with a number of findings in the report, including many of the threshold tests that would determine whether the Justice Department can take action against a firm engaging in monopoly tactics. "In almost every case, the Department adopts standards that are tougher -- and in some cases much tougher -- than existing standards," the FTC group said. Those tougher standards would make it far less likely for the Justice Department to act against a market bully, officials said. "As an inevitable consequence," the FTC group said, "dominant firms would be able to engage in these practices with impunity."

Meatpacker Violates Immigration and Child Labor Laws

What's notable is that the owner actually got charged, though we'll have to see if the charges stick. From the New York Times

The state [Iowa] charges were the first to be brought against owners and senior managers at the plant, Agriprocessors, since the May 12 raid. Federal prosecutors convicted nearly 300 workers, most of them illegal immigrants from Guatemala, on document fraud charges, with the majority sentenced to five months in prison. Advocates for immigrants had criticized federal prosecutors for punishing the workers but not the managers.

In all, 9,311 criminal misdemeanor charges involving 32 under-age workers were filed against the company, Agriprocessors Inc., and its owner, Aaron Rubashkin, and his son Sholom, who was the top manager of the packing plant in Postville, Iowa. The complaint charges that the plant employed workers under the legal age of 18, including seven who were under 16, from Sept. 9, 2007, to May 12. Some workers, including some younger than 16, worked on machinery prohibited for employees under 18, including “conveyor belts, meat grinders, circular saws, power washers and power shears,” said an affidavit filed with the complaint.

The managers are blaming the workers for lying about their age. 

The two-page affidavit claims that Aaron and Sholom Rubashkin were “frequently present” in the slaughterhouse where under-age employees were working, and that they “possessed shared knowledge that Agriprocessors employed undocumented aliens” and that “many of those workers were minors.”

The complaint also charges that under-age workers were not paid for all the overtime they worked and were forced to work before 7 a.m. and after 7 p.m., a violation of child labor laws. Agriprocessors managers “participated in efforts to conceal children when federal and state labor department officials inspected the plant,” the complaint says.

Closing comment - hell of a week. 

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