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Posts Tagged ‘Bank of America’

Bank of America Settles with US Justice Department for $17 Billion

Posted by Steve Markowitz on August 21, 2014

The Wall Street Journal reported that mega-bank, Bank of America, has agreed to pay a $17 billion fine for its role in the mortgage crisis that led to the 2008 financial meltdown. This is only a piece of the nearly $60 billion the bank paid during the last five years to settle legal problems.

Those who cheer the huge Bank of America fine are missing the larger picture. Certainly many banks used dubious tactics and business practices that help lead to the 2008 economic meltdown. However, willing partners included the US government that pressured banks into giving mortgages to individuals who could not afford them, and the Federal Reserve whose easy money policies were major factors in creating the housing bubble. These issues, along with banker greed and borrowers, were significant factors in creating the bubble and subsequent meltdown.

How did the government respond to those largely responsible for creating economic calamity? First they bailed out large banks and other companies. Then they bailed out some individuals who borrowed too much money.

Perhaps the biggest problem relating to the huge monetary settlements between large banks and the Department of Justice is that the penalties are not placed on the perpetrators of wrongdoing. No executive or bank employee has been charged criminally by the DOJ. This is not by accident. Further, the current fines will be paid by shareholders including pension funds who had nothing to do with creating the problem.

The Department of Justice understands the misplaced logic behind the large penalties imposed on banks today. However, this populist action not only protects those in the private sector responsible for the bad behavior, but deflects attention from the government’s own role in creating the economic problems.

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Moody’s Cuts 15 Banks’ Ratings

Posted by Steve Markowitz on June 21, 2012

This morning’s financial news from Europe included an item that Spanish banks would require nearly $80 billion (US) to shore up their capital bases.  However, that was just the start of a bad day that saw the Dow Jones Industrial Average have its largest one-day drop of the year, 250 points.

After US equities markets closed, the news got worse with Moody’s Investors Service issuing downgrades to 15 large banks credit ratings with the largest hits being taken by giants Citigroup and Bank of America.  The two notch downgrade to these banks place then just two levels above the junk category.  In addition, Moody’s downgraded to a lesser extent the ratings of 13 other banks including Morgan Stanley, JPMorgan Chase, Goldman Sachs, Credit Suisse, Deutsche Bank, UBS, HSBC, Barclays, BNP Paribas, Credit Agricole, Societe Generale, Royal Bank of Canada, and Royal Bank of Scotland.  In other words, Moody’s is expressing concerns about a large portion of the West’s banking system.

In announcing the downgrades, Moody’s explained that: “The risks of this industry became apparent in the financial crisis.  These new ratings capture those risks.”  The downgrades are more than a black eye to these banks as the move could further damage them should customers decide to move investments to higher-rated banks creating a negative feedback loop.  In addition, the downgrades may raise the cost of borrowing for the banks further straining their already financial conditions.

As this Blog has proffered since the early days of financial crisis, a problem of excess debt cannot be solved by still more debt.  However, this is precisely the strategy that Western governments including that of the United States have taken since the 2008 meltdown.  Moody’s downgrades of today were therefore predictable.  It is also very predictable that more downgrades are to come.

Progressive governments worldwide have overspent for years on nonproductive programs including massive entitlements.  The reckless spending was financed by borrowing from future revenue potentials, a Ponzi scheme perpetuated by various bubbles fed by government interventions including artificially low interest rates.  Instead of allowing the growing economic imbalances to rebalance themselves in the market, governments continued and continue treating symptoms with still larger interventions creating even greater market imbalances.  The results of this ill advised strategy include the crises now occurring in European banks, European sovereign debt problems, today’s US and worldwide bank downgrades and the exploding US debt.

While the world jumps from crisis to crisis in increasing frequency, it is not possible to determine when it will hit a tipping point.  Generally, market inequities and imbalances can continue longer than logic would deem possible, especially when governments work together at interventions.  However, in the long run, the laws of the market, i.e. supply and demand, are infallible and will have their day.

Posted in Banks | Tagged: , , , , , , , | 3 Comments »

US Department of Justice/Bank of America Countrywide Settlement Settles Nothing

Posted by Steve Markowitz on December 23, 2011

Yesterday, US Attorney General Eric Holder announced the Department of Justice’s settlement with Bank of America over an issue involving its Countrywide Financial division.  The lawsuit involved allegations that Countrywide’s mortgage practices led to increased costs for customers from the African-American and Hispanic communities.

In his announcement, Holder stated that Bank of America will pay $335 million to settle the allegations.  While this settlement makes for great press in time when banks are an easy target, it settles very little.  If Countrywide was guilty of discriminatory lending practices, then criminal laws were broken, yet no executive from Countrywide has been charged with a crime or is being prosecuted.  In fact, Attorney General Holder went out of his way in his announcement to not accuse Countrywide of criminal behavior when he made the statement below, emphasis added:

“… We resolved the government’s allegations that Countrywide and its subsidiaries – which are now owned by Bank of America – engaged in discriminatory mortgage lending practices…. These discriminatory acts allegedly included widespread violations…. These allegations represent alarming conduct….”

Countrywide was an independent company until purchased by Bank of America in August of 2007 when it was already in deep financial trouble.  The crimes that were committed relating to the settlement occurred prior to the acquisition by Bank of America.  The people responsible for the crimes have long since departed Countrywide after earning millions.  It is also ironic that the $335 million penalty paid for by shareholders of Bank of America, not those of Countrywide.  Couple this with the fact that no Countrywide executives is being prosecuted shows that justice is not being served by the settlement.  This miscarriage of justice does little to stop similar illegal corporate behavior in the future.

Prior to being purchasing by Bank of America, Countrywide gave special mortgage rates to politicians and other connected Washingtonians including former Senator Thomas Dodd.   Incredibly, it was Dodd along with Barney Frank that helped write the new financial regulations that large banks now are supposed to be following.  That just doesn’t pass the smell test.

Eric Holder has proven to be an ineffective and incompetent Attorney General.  However, the Department of Justice’s lame settlements with large corporations have been ongoing long before Holder became AG.  The Attorney General position long ago became politicized.  This, along with the incestuous relationship between big government, big corporations, and big labor, guarantees that the wealthy and powerful will not be taken to task for illegal behavior perpetrated on society.

President Obama’s class warfare rhetoric concerning profits and the wealthy deflects from the real issues facing the Country.  Profits themselves are not the problem.  The problems are illegal corporate behavior and the incestuous relationship between the powerful and Washington that may lead to increased profits.  Obama ignores these issues since they would get too close to home for many in the Administration and their political buddies in Congress.  So much for hope and change.

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US Banks’ Earnings Significantly Up

Posted by Steve Markowitz on November 22, 2011

Federal Deposit Insurance Corporation (FDIC) released a report on U.S. banks earnings that indicates overall profit levels are the highest they have been in four years.  While the  government may trumpet this as a sign that their interventions and bailouts have succeeded, a broader look says otherwise.  Here are some of the figures released:

  • The banking industry earned $35 billion in the last quarter, up from $24 billion in last year’s Q3.
  • The FDIC currently considers about 11% of U.S. banks as financially problematic, marginally down for the same period last year.
  • The very large banks made the bulk of the earnings increase.
  • These very large banks accounted for about $30 billion of the industry’s $35 billion in earnings for the third quarter.

The FDIC’s fugues are telling and indicate that the very large banks like Bank of America, Citigroup, JPMorgan Chase and Wells Fargo, the very banks bailed out by the U.S. taxpayers, are now making most of the banking profits.  In addition, these banks are not making the profits by lending money in the quantity needed, but rather by taking nearly interest free money from the government and then loaning that money back to the government at a huge profit.  Ludicrous.

It has become evident through hindsight that the bailouts of the large banks benefited the banks themselves, not the overall economy.  A question remaining is whether the bailouts were the result of mistaken policy or the government’s purposeful attempt to assist fellow elitists in the banking industry.

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Bank of America Pays $8.5 billion to Settle Claims

Posted by Steve Markowitz on June 29, 2011

Bank of America today announced an agreement requiring it to pay $8.5 billion to purchasers of certain mortgage-backed securities.  These investor lost money on securities purchased prior to the U.S. housing market meltdown.  BofA’s payment was the result of its 2008 purchase of mortgage lender Countrywide, the poster child bad boy of the mortgage industry.

While $8.5 billion is a huge number, it pales in comparison to the losses suffered by those who purchased the mortgage-backed securities.  The settlement was with 22 investors who original purchased $105 billion in securities and covered other investors who purchased bonds valued at $424 billion.

BofA paying only pennies on the dollar for the losses incurred shows a perverse problem with large public corporations and the government’s bailout of banks.  This settlement does not incentivize BofA or any other company from inappropriate behavior in the future.  In fact, it does just the opposite.  Also, it does not penalizes the high-level employees at BofA that sold the junk in the first place.  They have moved on or retired after making huge bonuses on the sales.

There are those that conclude that the large public companies and banks need more governmental regulations in order for society to be protected from future acts of fraud.  This knee-jerk reaction will fail and will likely make matters worse.  Thousands of governmental employees already charged with protecting investors proved that the government is incapable of doing so.

Fraudulent behavior by employees of large public corporations can only be controlled internally by the companies themselves and their boards.  Penalties for fraudulent behavior must include criminal prosecution of the individuals involved and their board members, not just the corporations as an entity.  In addition, bailing out any firm must be removed as a tool available to the government.

Only through the fear of failure, i.e. total loss for shareholders, and criminal prosecution of fraudulent employee behavior can large public corporations work to optimize the public good in today’s fast-moving capitalistic system.

Posted in Banks, Capitalism | Tagged: , , , , , | 1 Comment »

Moody’s Again Threatening U.S. Credit Rating

Posted by Steve Markowitz on June 5, 2011

Moody’s Investors Service (Moody’s) last week indicated it may reconsider America’s debt rating next month, which currently stands at a pristine Aaa rating, for a possible downgrade.  Their stated concern is America’s huge $14 trillion dollar federal debt and the Country’s need to barrow more via raising the current debt ceiling.

Treasury Secretary Tim Geithner gave an optimistic view of negotiations between the White House and Congress on increasing the ceiling stating:  “I am confident two things are going to happen this summer.  We’re going to avoid a default crisis, and we’re going to reach agreement on a long-term fiscal plan.”  While Geithner’s view is likely pervasive in Washington, let us not forget that this same financial genius didn’t even know how to properly calculate his personal Federal tax bill.

Moody’s has had challenges properly evaluating debt in the past.  Only a few days before the cataclysmic financial meltdown of 2008, this firm rated many bonds based on the housing market (i.e. mortgages) as Aaa quality.  While Moody’s is currently focusing on the potential for political gridlock in Washington, the real problem is the exploding U.S federal debt, not negotiations to raise the debt ceiling, as the chart shows.

Adding insult to injury, last week another division of Moody’s made negative comments relating American’s biggest banks ratings.  Their concern is that the new financial regulations included in the Dodd-Frank FinReg bill may make it more difficult for the government to rescue of the large banks, should there be a future systemic meltdown in the financials system.

The backs mentioned in Moody’s warning are Bank of America, Wells Fargo, Citigroup, Goldman Sachs, J.P. Morgan, Morgan Stanley, Bank of New York Mellon and State Street Corporation.

Investors and politicians would do well to look beyond Moody’s warnings that focus and rely on governmental bailouts for the banks to receive high ratings.  Governments change the rules with political winds.  In addition, banks that were deemed too big to fail in 2008 are even larger today.  That offers their managers comfort, real or not, that the government will not allow them to fail in the future.  That belief will lead to riskier behavior on the banks part and more danger in the future for investors.

Posted in Bailouts, Banks, Debt, Deficits | Tagged: , , , , , , , , , , , , , , , | Leave a Comment »

The Avoidable Financial Crisis

Posted by Steve Markowitz on February 1, 2011

The Financial Crisis Inquiry Commission was formed in 2009 to study the crisis that hit financial markets over two and a half years ago.  The Commission interviewed 700 witnesses that included bank executives, governmental officials and representatives from the rating agencies.  They have released their findings that are critical of many and concluded that the crisis was avoidable.

CNNMoney has reported on the following findings by the Commission.  Each finding is followed by comments, questions and/or conclusions referred to as “Issue”.

“Federal authorities, who failed to curb reckless behavior on Wall Street, bear much of blame for the turmoil that erupted in 2008 and 2009.”

Issue – This conclusion should surprise to no one.  Bureaucrats have proven many times that they are incapable of oversight over an extended period.  What starts as a good idea degenerates into a governmental boondoggle that puts more governmental workers on the dole.

“The crisis was also the product of “dramatic failures of corporate governance and risk management at many systemically important financial institutions,” according to one of the report’s nine conclusions.”

Issue – As long the large financial institutions run by executives with no long-term skin in the game they will make reckless decisions that benefit themselves via short-term bonus compensation plans.

“The commission faults policies under both Presidents Bush and Obama, as well as actions taken by the Federal Reserve under Alan Greenspan and the current chairman, Ben Bernanke.  Tim Geithner, the current Treasury Secretary who was president of the New York Fed during the crisis, and his predecessor, Henry Paulson, were also named in the report.”

Issues – Politicians like Bush and Obama, as well as those in the Congress, are incapable of foreseeing even the potential systemic problems within the financial system.  They are but politicians focused on elections.

Assuming that the professionals like Greenspan, Bernanke, Geithner and Paulson did not have more nefarious motivations, the fact that these financial elites did not see the train wreck coming should give pause to any expectation that their kind will see the next crisis coming.

The Commission faulted the shadow banking system including Lehman Brothers and Bear Stearns, and Goldman Sachs, Merrill Lynch and Citibank, as well as AIG.  “The commission also faults the lending practices of commercial banks such as Countrywide, now owned by Bank of America, Wachovia and JP Morgan Chase.”

Issue – While Lehman Brothers and Bear Stearns were destroyed by the crisis, governmental bailouts undoubtedly saved the remaining institutions and many of those that live off of them.  In other words the taxpayers bailed out the scoundrels that created the crisis.

“The report also criticizes the three main credit rating agencies – Moody’s, S&P and Fitch — as “essential cogs in the wheel of financial destruction””.

Issue – These for profit agencies are still in business.  Why?

“The Commission said: “As our report shows, key policy makers – the Treasury Department, the Federal Reserve Board, and the Federal Reserve Bank of New York – who were best positioned to watch over our markets were ill prepared for the events of 2007 and 2008”“.

Issue – Given that the Treasury Department, Federal Reserve Board, and Federal Reserve Bank of New York with all of their resources and brain-power were “ill prepared”, it is unreasonable to expect the government and their bureaucrats to protect the people from future crises.

Fannie Mae and Freddie Mac, two government-sponsored enterprises, were “the kings of leverage,” the report says.  By the end of 2007, the companies had a combined leverage ratio of 75 to 1.”

Issue – These enterprises became the “the kings of leverage,” because of their backing by the government and their executives being compensated based on short-term results.

In addition, the Congress forced these lending agencies to promote the government’s activist social programs that included giving mortgages to those that could not afford to pay them back.

*****

You would think that with such a damming report that those in government would suggest a change in direction.  However, instead of admitting that government oversight only helps to keep honest people honest, the government is adding even more bureaucrats and regulations in the promise that the next time it will work.  How many times must this solution fail?

There are action that the government could take that would lessen the likelihood of similar systemic problems occurring again.  They include:

1. “Too big to fail” must not protect companies from failure.  Companies that fail must be left to go out of business, period; no exceptions.  Their owners, shareholders, employees and customers must share the pain of being involved with a failed business.  The fear of this draconian endgame is the best protector that society has towards bad business practices.

2. Anti-trust laws currently on the books must be enforced.  Companies that approach the level of being “too big to fail” must be broken into smaller pieces.

3. Make it easier to prosecute corporate managers, individually, for illegal behavior made at the corporate level.  While there are those that will claim this may limit corporations’ ability to attract managers, so be it.  The damage done to our economy as a result of immoral and illegal, behavior by professional mangers demands this action.

4. Term limits.  The professional politician class must be eliminated.  Our Country must be run by the People, as our Founders envisioned.

5. Conflicts of interests must be eliminated between government employees and the private sector by restricting those that can work at both sides of related positions.  Allowing Henry Paulson, a former head of Goldman Sachs to manage Treasury enabled him to decide which banks failed and which ones receive the benefits of the government’s bailout.  How ludicrous!

Those that continue proffering the thesis that only the goventment can protect the People from scoundrels are either ignoring history or are attempting to protect some parochial interest.  Even assuming that the lawmakers and bureaucrats had the best of intentions and the intellectual skills, which they do not always have, the dynamics of a complex economy and the resourcefulness of the greedy will always be one step ahead of the regulators.

Only the free market can govern and control reckless behavior.  The government’s role should be to insure that the market remains truly free and that must start with no bailouts for those that fail.

 

Posted in Bailouts, Free Markets, Governmental Intervention | Tagged: , , , , , , , , , , , , , , , , , , , , , , , , , | 1 Comment »

Banks, The Failure of Bailouts

Posted by Steve Markowitz on October 21, 2009

There are two types of banks in the United States.  banksCommercial banks serve the needs of individuals and most businesses and are a prime source of capital for smaller businesses that drive job growth in this country.

Investment banks have gained in power over the years with the issuance of various types of collateralized debt.  Some refer to these banks as “the shadow banking system”.  While the US government bailed out both types of banks, the contrast in the health of each shows that this effort has not been successful. Read the rest of this entry »

Posted in Bailouts, Banks, Governmental Intervention | Tagged: , , , , , , , , , , , , , , , | Leave a Comment »

US Pay Czar to Set Salaries

Posted by Steve Markowitz on October 12, 2009

The Obama Administration has extensively used what is referred to as “Czars” to help manage various aspects of the government.  The advantage for the President of the Czars is that they do not have to be approved by Congress or report to congressional committees.  This is a convenient way for the President to appoint people into positions of power without having congressional oversight.

450px-Kenneth_FeinbergOne of the positions amongst the approximately three dozen Czars that Obama has appointed is the “Pay Czar”.  Currently, this position is held by Kenneth Feinberg whose job is to oversee the compensation packages for the most highly paid executives at seven firms.  These companies are AIG, Bank of America, Citigroup, General Motors, GMAC Financial, Chrysler, and Chrysler Financial, firms that received government bailout money.

The fact that compensation needs to monitored for high paid executives at companies that that would have failed without the government bailouts indicates the lunacy of our current economy.  Had the government not given these companies money we would not be arguing how much to pay their executives.  That would have been monitored by the most efficient mechanism available; the market controlled by supply and demand.  These failed companies would have either gone out of business or would have cut the pay of all employees, including the executives, until they again become successful. Read the rest of this entry »

Posted in Compensation, Czars | Tagged: , , , , , , , , , , , | 2 Comments »

Judge Nixes Bank of America Bonus Deal

Posted by Steve Markowitz on September 22, 2009

ml_brandIn September 2008 Bank of America purchased Merrill Lynch, a major investment bank who was in severe financial distress.  Because of its dubious finances, Merrill was forced into this $50 billion shotgun marriage.  This marriage had the backing (shotgun pointed) of Treasury Secretary Paulson and Fed Chairman Bernanke.

xbmhd_logoAfter the merger, it became public knowledge that Merrill employees were given $3.6 million in bonuses paid with Bank of America management’s consent.  As a result, huge bonuses were paid to people who brought down Merrill at the s Bank of America shareholder’s expense. Read the rest of this entry »

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