This is my translation of a Dutch-language article which appeared today in Belgian daily De Tijd. Let’s see if this news is picked up in the U.S.

Citibank Belgium never should have recommended the controversial Lehman Brothers investments to its customers. So states the writ of the Brussels public prosecutor on the case.

The collapse of Lehman Brothers lost more than 4,000 Citibank customers, 128 million euros. The public prosecutor accuses Citibank of a “conflict of interest". "The bank had apparently instructed a higher-level committee to work toward the wholesale transfer of ordinary savings account money to Lehman Brothers."

According to the prosecutor, this is the reason Citibank used "misleading" advertising and many other “tricks” to systematically sway customers to exchange their savings for Lehman products, concealing the bank’s true risks, returns and capital guarantees. The court now demands that Citibank pay back the full 128 million euros, plus interest and fees.

Political reactions
MP Hans Bonte (SP.A) is very pleased that the Brussels public prosecutor also came to the conclusion that Citibank sold investments of the now bankrupt Lehman Brothers in an "unfair and irresponsible manner.” "That is what we have charged for months and years," said the Socialist opposition figure. The most important thing for him now is that all victims be identified and if possible obtain compensation.

Better would be if Citibank itself took on its responsibility and reimbursed customers who lost their savings, Bonte said in reaction to the news.

He believes that the Government should draw lessons from the case. According to Bonte, it is clear that something wrong with the supervision of the banks by the Banking, Finance and Insurance Commission (CBFA). Immediately he called for legislation on the appeals claim, so that a lawsuit could be filed in this case for the 4,000 victims.

Commerce Minister Vincent Van Quickenborne (Open VLD) called on Citibank again to choose an efficient settlement instead of letting it come to a possibly long and damaging process. The Minister also notes that the victims who have yet to take civil action be informed of the impending trial, so they also can take part in the civil action.

He recalls that he last year he ordered the Economic Inspectorate investigate the way Lehman Brothers products were advertised and sold by Citibank . This dossier was turned over to the prosecutor in December.

Although the analysis of the Economic Inspectorate showed that there are about 4,000 potential victims, there are only 1300 who have reported to the Inspectorate or the prosecutor. At the request of the Minister, the prosecutor and Economic Inspection examined how the remaining 2700 known victims can be informed about their rights before the start of legal proceedings. They have now been notified by letter.

The trial starts in December. Van Quickenborne hopes that as many people as possible can file civil claim to be compensated for their loss. He immediately repeated his "resolute" call to Citibank to not let it go so far and to choose an efficient settlement.

Source

Parket snoeihard voor Citibank – De Tijd

Related posts:

• Citibank has cut all lending in Denmark
• Lehman pension shortfall is a foreshadowing
• Lehman Brothers to post $3 bln loss; sets $6 bln stock sale
• Lehman missed out on $5 billion from Korea
• Dick Fuld feels horrible about Lehman collapse

After I published the recent story on the case against servicing agent MERS in the Kansas Supreme court, I noticed a lot of chatter about some mortgage servicing line items in Wells Fargo’s earnings report. So I wanted to quote a few blurbs from the Kansas Appeals Court and Supreme Court decisions as background for another post on future mortgage service revenue streams in banking.

The Appeals Court case had a narrow focus as to whether MERS was a ‘necessary party’ in this particular foreclosure case. The finding was that MERS was not. The Kansas Supreme court agreed that MERS was not “contingently necessary.” They went further in concluding that the fact that MERS neither possessed the promissory note or had authority to assign it may mean it cannot file suit.

However, because this is not a comprehensive judgment as to MERS’ role as nominee, clarification is needed. Given the number of foreclosures in the US, I expect this case is going to the Supreme Court.

Here are the facts.

Landmark National Bank v. Boyd A. Kessler summary

My summary of the case is as follows:

A homeowner based in Kansas came into economic difficulty, causing him to fall behind on his mortgage and file for bankruptcy on 13 April 2006. While he could have exempted his house in discharging his personal liabilities in bankruptcy, the homeowner opted instead to surrender the house.

Three months after he filed, on 27 Jul 2006, the bank with his primary mortgage decided to foreclose. It did not inform MERS (the central repository which tracks changes in mortgage ownership and servicing rights). Nor did it inform the bank holding the secondary mortgage.

On 6 September 2006, the district court then entered a default judgment and ordered a sale on 29 September 2006. Notice of the sale went out into newspapers and a couple picked up this foreclosed property on the cheap on 14 November 2006. So far, so good.

Except that very day, a full seven after the bankruptcy filing, the secondary bank filed a petition to set aside the district court opinion, arguing that MERS was a “contingently necessary party.” It wanted the money it was owed. And on 16 January 2007, MERS joined the bank in filing.  By 1 February 2007, the district court denied the petition to vacate the original default judgment.

The case was appealed to both the Kansas Appeals and Kansas Supreme Courts

Here are some of the issues:

• Is MERS as a mortgage servicing registry a “contingently necessary party” in this particular or any bankruptcy involving a property in its database?
• In what instances can MERS act as a nominee for the mortgagees in court to enforce a foreclosure?
• If MERS can act as a nominee, does MERS have to produce the original mortgage promissory note in order to foreclose?
• If MERS can act as a nominee, can a homeowner sue MERS or the mortgage servicing agent for the original lenders’ alleged predatory lending?
• Is the mortgage servicing agent a nominee or agent of the mortgagee or even a principal? If so, what are the obligations of the servicing agent to help affect a mortgage loan modification?

All of these questions arise because of the convoluted process we have for mortgages as a result of the mortgage-backed security market.  These questions have only become acute because the rise in foreclosures has made them a serious issue.

Excerpts from the Kansas Appeals Court decision

• A party is not contingently necessary in a mortgage-foreclosure lawsuit when that party is called the mortgagee in a mortgage but is not the lender, has no right to the repayment of the underlying debt, and has no role in handling mortgage payments.
• In a mortgage-foreclosure lawsuit, a district court does not abuse its discretion when it denies a motion to intervene that is filed by an unrecorded mortgage holder or its agent after the mortgage has been foreclosed and the property has been sold
• What is MERS’s interest? MERS claims that it holds the title to the second mortgage, not the real estate. So it does, but only as a nominee. In terms of the roles that we’ve discussed in the mortgage business, MERS holds the mortgage but without rights to the debt. The district court found that MERS was merely an agent for the principal player, Millennia. While MERS objects to its characterization as an agent, it’s a fair one.
• MERS had no right to the underlying debt repayment secured by the mortgage; MERS did not even act as the servicing agent to receive the payments and remit them to the lender. MERS’s right to act to enforce the mortgage was strictly limited: if "necessary to comply with law or custom," MERS could foreclose the mortgage or enter a release of the mortgage. MERS certainly could not act at odds to its principal, the lender. Its role fits the classic definition of an agent: one "’authorized by another to act for him, or intrusted with another’s business.’" In re Tax Appeal of Scholastic Book Clubs, Inc., 260 Kan. 528, 534, 920 P.2d 947 (1996) (quoting Black’s Law Dictionary 85 [4th ed. 1968]).
• Kansas law does require through K.S.A. 58-2309a that a mortgage holder promptly release a mortgage when the debt has been paid; MERS could be required as a matter of law to file a mortgage release after a borrower proved that the debt had been paid. Other than that, however, it is hard to conceive of another act that MERS—instead of the lender—would be required to take by law or custom.
• We do not attempt in this opinion to comprehensively determine all of the rights or duties of MERS as a nominee mortgagee. As the mortgage suggests may be done when "necessary to comply with law or custom," courts elsewhere have found that MERS may in some cases bring foreclosure suits in its own name.

Excerpts from the Kansas Supreme Court decision

• K.S.A. 60-219(a) defines which parties are to be joined in an action as necessary for just adjudication:

  "A person is contingently necessary if (1) complete relief cannot be accorded in his absence among those already parties, or (2) he claims an interest relating to the property or transaction which is the subject of the action and he is so situated that the disposition of the action in his absence may (i) as a practical matter substantially impair or impede his ability to protect that interest or (ii) leave any of the persons already parties subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations by reason of his claimed interest."

• The relationship that MERS has to Sovereign is more akin to that of a straw man than to a party possessing all the rights given a buyer. A mortgagee and a lender have intertwined rights that defy a clear separation of interests, especially when such a purported separation relies on ambiguous contractual language. The law generally understands that a mortgagee is not distinct from a lender: a mortgagee is "[o]ne to whom property is mortgaged: the mortgage creditor, or lender." Black’s Law Dictionary 1034 (8th ed. 2004). By statute, assignment of the mortgage carries with it the assignment of the debt. K.S.A. 58-2323. Although MERS asserts that, under some situations, the mortgage document purports to give it the same rights as the lender, the document consistently refers only to rights of the lender, including rights to receive notice of litigation, to collect payments, and to enforce the debt obligation. The document consistently limits MERS to acting "solely" as the nominee of the lender.
• The Missouri court found that, because MERS was not the original holder of the promissory note and because the record contained no evidence that the original holder of the note authorized MERS to transfer the note, the language of the assignment purporting to transfer the promissory note was ineffective. "MERS never held the promissory note, thus its assignment of the deed of trust to Ocwen separate from the note had no force."
• "MERS does not take applications, underwrite loans, make decisions on whether to extend credit, collect mortgage payments, hold escrows for taxes and insurance, or provide any loan servicing functions whatsoever. MERS merely tracks the ownership of the lien and is paid for its services through membership fees charged to its members. MERS does not receive compensation from consumers." 270 Neb. at 534.

My reading of these statements is that MERS is a nominee and not much more. This should limit its ability to act on behalf of a mortgagee in foreclosure.  How much and in what ways due process is at stake has yet to be decided in the courts, the reason I expect this case to receive a look from the Supreme Court.

Sources

Landmark National Bank v. Boyd A. Kessler, Kan 2009, No. 98,489 – Kansas Courts Documents

See my post “Why mortgages aren’t modified and what a ruling stopping foreclosures means” for the Appeals Court decision.

Related posts:

• Wow, judges now nixing lenders’ foreclosure claims entirely in court
• Why mortgages aren’t modified and what a ruling stopping foreclosures means
• Habeas Corpus and the Supreme Court
• Why pro-choice Dems have nothing to like about John McCain
• Chrysler dissident lenders lose fight and disband

In August, the Kansas Supreme Court issued a ruling against a mortgage tracking service which may prove very costly to banks in foreclosure, leading to massive writedowns. It could be a life saver for many trapped in the foreclosure process. The case goes to the core of the functioning of massive markets in securitization and derivatives and has wide-ranging importance.

The service, MERS (Mortgage Electronic Registration System), is a privately-owned registry set up in 1997 by Fannie Mae, Freddie Mac and several large banks including JPMorgan Chase, Citigroup and Bank of America. In foreclosure, MERS is often the party which files on behalf of the lenders behind the mortgage against homeowners. The Kansas ruling effectively blocks MERS from bringing legal action on the lenders’ behalf in certain foreclosure situations, potentially putting the kibosh on  MERS’ legal authority on the more than 60 million mortgages it holds and subjecting the lenders to huge losses.

This is a complicated but important case I want to break down for you below.

Securitization at fault

The crux of the case has to do with mortgage-backed securities and the process of securitization. In a bygone era, almost all mortgages were held as loans on the books of the originating banks.  In this case, if a mortgage went past due, it was a matter to be worked out between an individual homeowner and an individual mortgage holder.

However, when the mortgage-backed securities (MBS) market took off, mortgages were sliced and diced into tranches and packaged into securities and sold on to investors.  These same securities were then sliced and diced and packaged with other securities into collateralized debt obligations (CDOs). CDOs were often then sliced and diced further still into CDOs-squared – that is CDOs of CDOs.

Often times, the underlying mortgages in these instruments were high-risk, sub-prime mortgages. But the ratings agencies could still give them AAA ratings, which made them eligible for investment by risk-averse investors like teachers’ pension funds or municipalities. So, these securities were then sold on to investors around the world into remote places like small towns in Norway and banks in Germany. However, when the housing market fell, the value of these securities plummeted; and they fell much more than the house prices as the securities are derivatives and leveraged against the value of the underlying asset. The result was a financial crisis of epic proportions.

Making matters more complicated for the homeowner, the originating lender is often not the servicing agent of a mortgage. Payment from the homeowner and to investors who are the ultimate owners of the security is handled by a mortgage servicer who collects a fee for its work.

What this has meant is that there is considerable distance between a homeowner and a mortgage holder, such that in the event of foreclosure, it is not a matter of picking up the telephone and calling Mr. Smith at the local Bank. Often times, there is a byzantine web of originating bank, mortgage holder (if loan is sold), mortgage servicer, MBS pooling/securitizing agent, and investors. Needless to say, the average person doesn’t have a clue as to who to call in order to get relief to avoid foreclosure. The obvious port of call is the mortgage servicer, who is the one party with whom a homeowner has ongoing contact.

Mortgage Servicer

Below is a research report written by the National Consumer Law Center just this past month on why consumers in jeopardy of suffering foreclosure cannot get loans modified.

It starts:

The country is in the midst of a foreclosure crisis of unprecedented proportions. Millions of families have lost their homes and millions more are expected to lose their homes in the next few years. With home values plummeting and layoffs common, homeowners are crumbling under the weight of mortgages that were often only marginally affordable when made.

One commonsense solution to the foreclosure crisis is to modify the loan terms. Lenders routinely lament their losses in foreclosure. Foreclosures cost everyone—the homeowner, the lender, the community—money. Yet foreclosures continue to outstrip loan modifications. Why?

Once a mortgage loan is made, in most cases the original lender does not have further ongoing contact with the homeowner. Instead, the original lender, or the investment trust to which the loan is sold, hires a servicer to collect monthly payments. It is the servicer that either answers the borrower’s plea for a modification or launches a foreclosure. Servicers spend millions of dollars advertising their concern for the plight of homeowners and their willingness to make deals. Yet the experience of many homeowners and their advocates is that servicers—not the mortgage owners—are often the barrier to making a loan modification.

See the problem?  This is exactly why loan modifications are not happening in large enough numbers.  This goes to incentives – mortgage servicers are not incentivized to make modifications. In fact the incentives go the other way – foreclosure.

Servicers have four main sources of income, listed in descending order of importance:

• The monthly servicing fee, a fixed percentage of the unpaid principal balance of the loans in the pool;
• Fees charged borrowers in default, including late fees and “process management fees”;
• Float income, or interest income from the time between when the servicer collects the payment from the borrower and when it turns the payment over to the mortgage owner; and
• Income from investment interests in the pool of mortgage loans that the servicer is servicing.

Overall, these sources of income give servicers little incentive to offer sustainable loan modifications, and some incentive to push loans into foreclosure. The monthly fee that the servicer receives based on a percentage of the outstanding principal of the loans in the pool provides some incentive to servicers to keep loans in the pool rather than foreclosing on them, but also provides a significant disincentive to offer principal reductions or other loan modifications that are sustainable on the long term. In fact, this fee gives servicers an incentive to increase the loan principal by adding delinquent amounts and junk fees. Then the servicer receives a higher monthly fee for a while, until the loan finally fails. Fees that servicers charge borrowers in default reward servicers for getting and keeping a borrower in default. As they grow, these fees make a modification less and less feasible. The servicer may have to waive them to make a loan modification feasible but is almost always assured of collecting them if a foreclosure goes through. The other two sources of servicer income are less significant.

If servicers’ income gives no incentive to modify and some incentive to foreclose, through increased fees, what about servicers’ expenditures? Servicers’ largest expenses are the costs of financing the advances they are required to make to investors of the principal and interest payments on nonperforming loans. Once a loan is modified or the home foreclosed on and sold, the requirement to make advances stops. Servicers will only want to modify if doing so stops the clock on advances sooner than a foreclosure would.

Worse, under the rules promulgated by the credit rating agencies and bond insurers, servicers are delayed in recovering the advances when they do a modification, but not when they foreclose. Servicers lose no money from foreclosures because they recover all of their expenses when a loan is foreclosed, before any of the investors get paid. The rules for recovery of expenses in a  modification are much less clear and somewhat less generous.

In addition, performing large numbers of loan modifications would cost servicers upfront money in fixed overhead costs, including staffing and physical infrastructure, plus out-of-pocket expenses such as property valuation and credit reports as well as financing costs. On the other hand, servicers lose no money from foreclosures.

This is a very important document for anyone looking to do a loan modification. I strongly suggest you read it, download it and act upon it.

By the way, the largest servicers are:

• Bank of America: $2.1 trillion, up from $530 billion a year earlier (via its acquisition of Countrywide – this is WHY bank of America bought Countrywide)
• Wells Fargo: $1.8 trillion, up from $1.5 trillion a year earlier
• JPMorgan Chase: $1.5 trillion, up from $795 billion a year ago (thanks in large part to its acquisition of Washington Mutual)
• CitiMortgage (a division of Citigroup): $792 billion, down from $799 billion a year earlier. Citi is hurting i everywhere)
• ResCap: $391 billion, down from $449 billion in the first quarter of 2008.

As you can see, consolidation has meant the big are getting bigger. Despite a recession, servicing fees are increasing, not decreasing.

You should DEFINITELY read my post “How refinancing helps the likes of Bank of America and Wells Fargo” because this demonstrates why these banks are going to rack up monster fees in mortgage servicing.

Landmark National Bank v. Boyd A. Kessler, Kan 2009, No. 98,489

That brings us to the Kansas case. According to the Kansas City Business Journal, the case can be summarized as follows:

A Ford County man went into bankruptcy in 2006. He had taken out two mortgages on the same property, one to Landmark National Bank and one to Millennia Mortgage Corp. Landmark foreclosed on its mortgage. Millennia had sold its mortgage, which eventually landed at Sovereign Bank, though that transaction never was recorded in Ford County.

Neither MERS nor Sovereign received notice when Landmark filed its foreclosure. That’s because the notice went to Millennia, still registered in Ford County, which is like telling someone that a stranger’s car is about to be towed.

Landmark won a default judgment, essentially wiping out Sovereign’s mortgage. MERS and Sovereign sued to set aside the judgment, arguing that MERS should have received notice. They lost at trial and on appeal.

Supreme Court justices had a difficult time accepting what MERS was and why it would be entitled to receive notice of a foreclosure when it was not a lender and had no stake in the property behind the mortgage. In addition, the court found, the original mortgage required notice only to the lender, not MERS.

This case was decided on 28 August 2009 in favor of the homeowner Boyd Kessler (Document and link below). The issue was predatory lending.  But there was more wrong here. MERS does facilitate liquidity in the MBS market, but it does a lot of other things that could harm consumers

• MERS also acts as a “corporate shield,” protecting lenders from legal action in cases of predatory lending.
• MERS can foreclose even though it is not the financial party with interest
• Because MERS is a distant intermediary, foreclosure can proceed without even producing an original mortgage note
• With MERS in control, consumers cannot access publicly available information to adequately determine who the holders of their note are.

If MERS is blocked from filing suit in many cases, there will be large losses accumulating at the holders of these notes. Expect to hear more about this very important case.

Landmark Bank v. Kessler, Kansas Appeals Court (MERS), 2008

Sources

Landmark National Bank v. Boyd A. Kessler, Kan 2009, No. 98,489 – Kansas Courts Documents

Why Servicers Foreclose When They Should Modify and Other Puzzles of Servicer Behavior (pdf) – National Consumer Law Center

The Mortgage Machine Backfires – Gretchen Morgenson, NY Times

The Next Financial Crisis Hits Wall Street, as Judges Start Nixing Foreclosures – Counterpunch

60 Million Fatally Flawed Mortgages – The Classic Liberal

Landmark Decision Promises Massive Relief for Homeowners and Trouble for Banks – Peace Options

Related posts:

• What are the legal rights of lenders and homeowners in foreclosure?
• Wow, judges now nixing lenders’ foreclosure claims entirely in court
• How refinancing helps the likes of Bank of America and Wells Fargo
• McCain repackages bailout proposal and labels it his own
• Subprime good, prime bad

Back in March when the US Government felt compelled to bail out out Citigroup, Tracy Alloway over at FT Alphaville noticed a curious thing – Citigroup had effectively been nationalized.

No, they were not seized by government, but Citi was controlled by government.  The Feds had 36% of shares outstanding, which in many cases is considered to be a controlling interest for a government (for instance, until the Open Skies Treaty pushed the level to 49%, foreign carriers could not take more than a 25% stake in any airline as this is considered a threat to national security).  That matters because of Banamex.

From Alphaville on 2 Mar:

Does the US government’s 36 per cent stake in Citi violate Mexican ownership laws? Have we got our countries confused? No.

Citi owns Banamex, a Mexican bank with circa 1,200 branches and 2.6m checking accounts. And Latin American finance blog Inca Kola sees a fight brewing over the Southern subsidiary:

The nub of the issue revolves around Mexican law, which states in crystalline manner that foreign governments cannot own more than 10% of any bank that operates inside Mexico. It’s as clear as a bell and on the statute. So as Banamex is a wholly owned subsidiary of Citigroup (C paid $12.1Bn or so back in 2001 for the bank) if the US Gov’t takes its 36% stake in Citigroup then it will be a larger-than-10% shareholder of Banamex, something against Mexican law. Won’t it?

Mexico’s National Banking and Securities Commission is therefore investigating, while Banamex is saying that the North American Free Trade Agreement will (somehow) protect it.

The next day Bloomberg reported that Mexican law makers had decided to pursue a bill to force Citi to disgorge itself of Banamex because of it was a government –controlled entity.  Then this story disappeared from the mainstream press. 

Now, as background, after the recession of 1991, Citicorp was bailed out by Prince Waleed of Saudi Arabia because it was in danger of failing. Low interest rates and the money from Prince Waleed did the trick and Citi experienced a remarkable recovery – and eventually the broader economy did as well. In fact, recovery was enough that Alan Greenspan attempted to raise rates fairly rapidly (this was before policy asymmetry at the Fed because the norm). The result was the Tequila Crisis and the near bankruptcy of Mexico (see my post “1995” for more.)

Banamex , the 2nd largest Mexican bank, was made insolvent due to the Tequila crisis. And what do you know, Citi swooped in to buy it lock, stock and barrel. Spain’s BBVA later took over the re-privatized Bancomer that had been nationalized after the Latin American Debt crisis in 1982 (also induced by rising rates in the US).

These incursions into Mexico have caused outrage. Why should foreigners own the two largest banks in the country? So, the topic of Nationalized Citibank has been percolating for a while in Mexico. And it has just resurfaced.

From Breakingview.com:

Mexico’s high court is set to decide this week whether to hear a case brought by a contingent of Mexican senators that Citi must offload Banamex because a foreign government owns more than 10 percent of its stock. They want the court to decide whether the finance ministry had the constitutional right to decree in March that the United States government’s 34 percent slice of Citi was acceptable because it was intended to be short term.

So Citi is hardly up against a wall just yet — and it reckons any decision to force a sale would breach the North American Free Trade Agreement anyway. But if push comes to shove, the bank should be prepared to put up more of a fight than it did for Phibro.

Quite frankly, America is used to treating Mexico – all of Latin America, really – like its poor cousin. This displays a lack of respect that many there find galling.  If Citi is forced to disgorge itself of Banamex, it will be interesting to see not how Citi reacts, but how the Obama Administration reacts since he wants to present a new American image on the world stage.

By the way, below is a hilarious video of ‘Nationalized Citibank’ that captured the mood in America back in March when the bailout happened.

Related posts:

• Does Obama have the legal authority to take over Citi?
• Citi: looking for as much as a 40% stake from the government
• Will Mexico suffer contagion?
• Citigroup and Redecard: shedding international assets
• Is Mexico imploding?

In my recent post on greed, I wrote about how for the last generation corporations have been trying to get out of as many of their expensive obligations to workers as they can reasonably get away with.  The list of obligations includes but is not limited to pensions, health care and job security.

One can debate whether they are being pulled into this unwillingly by competition from overseas or being pulled by the lure of large bonuses from cost cuts which boost shareholder returns. Either way, evidence that ordinary Americans are increasingly worried that corporations are looking to slough off their commitments onto workers comes from a case in Houston.

The Guardian reports:

Was it a sudden spate of marital disharmony? Or were there mercenary motives at play? A US judge has thrown out a case brought by Continental Airlines against nine pilots accused of getting "sham" divorces in order to collect large payouts from an employee pension fund.

The Houston-based international carrier smelt a rat when a spate of its cockpit crew members dissolved their marriages between 2005 and 2007, only to remarry shortly after their spouses had obtained up to $900,000 under a loophole permitting lump sum pension payouts to divorced partners of staff members.

Continental fired the pilots and sued, claiming it had been duped into distributing between $10m and $11m under false pretences. But at a federal court in Texas, a judge has sided with the pilots, ruling that, irrespective of its employees’ motives, Continental cannot hold itself up as an arbiter of marital authenticity.

Are these pilots greedy or are they worried that Continental will dispose of its pension obligations in bankruptcy court much as other American airlines did post 9/11?

• Basics of the Pension Benefit Guaranty Corporation (pdf)
• PBGC Assumes Pensions of Aloha Airlines
• Effect of United Airlines pension termination on PBGC deficit (pdf)

Continental plans to appeal.

Related posts:

• Lehman pension shortfall is a foreshadowing
• Pensions: $400 billion hole to reduce U.S. corporate earnings
• Another writedown risk: Chapter 7 Bankruptcy
• Muncipalities can tear up contracts
• Judge stops BofA deal with the SEC

After the arrest of suspects based in Colorado and New York in an alleged ‘varsity level’ terrorist plot, the spectre of terrorism in the United States has re-emerged as an issue, one that also has economic overtones because of the fragility of recovery. President Obama is following his predecessor George W. Bush in restricting civil liberties in order to meet this threat. As a result, Obama is looking to extend three specific provisions of the USA Patriot Act that are due to expire.

1. Roving wiretaps (part of Title II, section 206). The first of the three provisions is the one on roving wiretaps which allows the government to target an individual under the same wiretap authorization when the individual switches telephone numbers. This order has been used 140 times from 2004 to 2009.
2. Property seizure (part of Title II, section 215). The second provision allows the government to seize “any tangible things” relevant to an ongoing terrorist investigation. This provision is controversial because it grants access to business records, library records, and medical records, which are constitutionally-protected.This order has been used 250 times between 2004 and 2009.
3. Lone wolf provision (part of Title II, Section 207). This allows the government to gain a wiretap on any individual believed to be a terrorist threat irrespective of whether they are connected to known foreign terrorist groups or foreign governments. This provision has never been used to date.

While I understand the rationale for these provisions – protecting Americans from potential terrorists, I question them. They are an abridgement of constitutionally-protected civil liberties and they are in direct contradiction to Obama’s pledges to roll back the Patriot Act.  More importantly for Obama politically, they tie him more directly to the policies of his predecessor as the bank bailouts did, reducing his ability to be perceived as a change agent. Neo-conservatives support the provisions while small-government Libertarians like Ron Paul oppose the Patriot Act. Many democrats also voice concerns.

Below is a video explaining a number of these issues and a few links highlighting why this issue is important in terms of politics and civil liberties.

Battle Looms Over the Patriot Act – NY Times
USA PATRIOT Act – Wikipedia
Did Obama Break His Campaign Promise to Scrap the Patriot Act? – Huffington Post
The Unpatriot Act, 25 Jul 2003 – Ron Paul
Obama Strays from Dems on Wiretapping – The D.C. Writeup
Editorial: Reining in the Patriot Act – Philadelphia Enquirer

Related posts:

• Obama confounds civil libertarians
• Barack Obama: Great story about his mother
• Geraldine Ferraro: what is she really saying?
• Democratic Race: Supreme Court implications
• The Obama as terrorist theme gains traction among some

Bloomberg News editor-in-chief Matt Winkler wrote an Op-Ed in the Wall Street Journal yesterday explaining why he is after the Federal Reserve to come clean about it’s secret lending program during the height of the financial crisis.

Bloomberg has filed a lawsuit against the Federal Reserve to force the Fed to reveal the name of the banks it lent money to in this operation, something I first blogged about last November.  Last month, Bloomberg won its case in District Court. The Fed is now considering whether to appeal.

At issue is transparency in our financial system.  In the Op-Ed, Winkler puts it thus:

The law doesn’t allow the government to get away with secrecy based on a mere claim that some sort of damage would result if it released the information in question. To prevail, the Fed must “provide evidence that if the requested information is disclosed, competitive harm would be ‘imminent,’” Judge Preska wrote. The Fed must show that competitors would use against a bank the fact that it received federal dollars—that running to the government trough for sustenance would become a competitive disadvantage.

That isn’t an easy test, and with hundreds of billions poured into financial institutions, it shouldn’t be. What’s more, the Fed didn’t come close to meeting this test. All it offered in court were sworn statements from Fed employees speculating that borrowers might be labeled as losers. They said nothing about how competing banks might use the information.

The issue at stake here is understanding the financial crisis and its aftermath. The information Bloomberg is seeking is vital to that, and it belongs to all Americans. Bloomberg isn’t alone in saying so. Dow Jones, the New York Times, the Associated Press, Gannett Newspapers, Hearst, Advance Publications, and the Reporters Committee for Freedom of the Press have all expressed support for Bloomberg’s efforts and may join a friend-of-the-court brief if the decision is appealed.

Below is a Bloomberg News video in which Winkler discusses the case with Betty Liu. In his opening remarks, Winkler says the Fed was taking on an unprecedented role and that this requires transparency.

I agree because the Fed has been politicized through these actions. Its independence is now threatened because of it as the Federal Reserve Transparency Act of 2009 attests.

Related posts:

• Bloomberg wins Freedom of Information lawsuit against Fed
• Bloomberg News sues the Fed under Freedom of Information Act
• Latest update on Bloomberg suit against Fed
• Bloomberg News vs. Fed: Judgment against Fed attached
• Fed continues to stonewall in Freedom of Information Act suit

Below is a good video analysis by Jess Bravin of the Wall Street Journal on the BofA-Merrill Lynch saga.  Bravin discusses the recent rejection by Judge Jed Rakoff of the out-of-court settlement between the SEC and Bank of America (BAC) in which BofA was to pay a miniscule $33 million fine.

Rakoff’s decision to scupper this settlement stems from his understanding that BofA shareholders are the ones who have allegedly been harmed by BofA’s actions. Yet they are also the ones to pay the fine.  The SEC deal did not seek charges against bank management or lawyers. Management and attorneys were the alleged perpetrators of the false and misleading proxy statements that led to shareholder approval of the acquisition of Merrill Lynch. Bravin says Rakoff believes this may have been the result of collusion.

The settlement is a perfect example of regulatory capture and demonstrates why the financial system has failed.

Related articles

Andrew Cuomo’s Most Recent Letter To Bank Of America – Zero Hedge

Related posts:

• Judge stops BofA deal with the SEC
• Mea Culpa: I was too bullish on the BofA-Merrill deal
• BofA CEO confirms government coerced him into Merrill deal
• BofA CEO Lewis investigated by SEC
• BofA saga continues as John Thain calls Lewis a liar

Now that President Obama has signalled his willingness to punish the Chinese for dumping on tires, a whole host of other industries are likely to file their own ‘copy-cat’ complaints.

Reuters says:

President Barack Obama’s decision to restrict tire imports from China after union workers complained of a surge could lead to copycat cases in areas such as steel, clothing, paper, machinery and consumer goods, trade experts said on Monday

"It’s a target-rich environment," said Lewis Leibowitz, a lawyer who represents the Consuming Industries Trade Action Coalition, which opposed relief in the tires case.

"There’s almost anything you can hit. And even within import categories that have gone down, there may be smaller product categories that have gone up," Leibowitz said.

However, the question of which industries could qualify for relief is complicated by the fact that overall U.S. imports from China have fallen in 2009 because of the global and U.S. economic downturn, he said.

Obama’s decision late Friday to restrict the tire imports was the first time the United States had used a special import safeguard provision against China known as Section 421.

It triggered an angry response China, which said it planned to challenge the action at the World Trade Organization and begin new anti-dumping investigations against U.S. products.

Beijing agreed to the anti-surge measure when it joined the World Trade Organization in 2001 and former President Bill Clinton’s administration relieved heavily on that commitment to help persuade a reluctant Congress to approve the pact.

Given that the WTO ruled against China on tires, it stands to reason that some grievances in other industries filed in the WTO against the Chinese would also likely be successful.  How can the President not slap tariffs on these products as well, given his actions in this first test case?  Clearly, what works for tires should also work in steel, clothing, paper, and elsewhere. If I were an American exporter in any of these industries, I would be lawyering up right now.

My hope is that we can get a comprehensive and equitable bilateral trade resolution with China to avoid more tariffs on either side.

Related posts:

• Should we expect a protectionist China?
• China: we “will take steps to protect the interests of our domestic industries”
• China launches retaliatory investigation into U.S auto subsidies
• Murder-Suicide in Chimerica
• China cutting overcapacity

Via CNBC:

Bernie Madoff, the man who orchestrated the biggest Ponzi scheme in history, is heard on tape in 2005 talking to executives at Fairfield Greenwich about how to get around the SEC. Ron Geffner, a former SEC enforcement attorney, discusses the tape with CNBC’s Scott Cohn.

Self-regulation in action.  Note that this tape was uncovered due to a subpoena by the State of Massachusetts, not by the SEC.

Question: How did Fairfield Greenwich escape with an $8 million settlement?

(Embedded video below)

Related posts:

• Bernie Madoff goes to jail immediately
• The bezzle is shrinking
• French investor commits suicide over Madoff
• Ms. Watkins, why does Charlie have lit dynamite?
• S.E.C. complicit in Madoff fraud, whistleblower says

Below is a copy of the actual judgment in the Bloomberg News vs. Fed FOIA case.  The case is: Bloomberg LP v. Board of Governors of the Federal Reserve System, U.S. District Court, Southern District of New York (Manhattan), No. 08-9595.

Hat tip Barry Ritholtz and Zero Hedge.

Bloomberg FOIA Lawsuit Decision

Related posts:

• Bloomberg wins Freedom of Information lawsuit against Fed
• Bloomberg News sues the Fed under Freedom of Information Act
• Bloomberg News is still after the Fed for more disclosure
• Fed continues to stonewall in Freedom of Information Act suit
• Lawsuit: steering mortgage applicants could mean more writedowns

This just in from Bloomberg:

The Federal Reserve must make public reports about recipients of emergency loans from U.S. taxpayers under programs created to address the financial crisis, a federal judge ruled.

The case is: Bloomberg LP v. Board of Governors of the Federal Reserve System, U.S. District Court, Southern District of New York (Manhattan), No. 08-9595. I have written a number of posts on this topic, following the case since November of last year.

• Bloomberg News sues the Fed under Freedom of Information Act
• Fed continues to stonewall in Freedom of Information Act suit
• Latest update on Bloomberg suit against Fed

Reuters reported that Chief District Judge Loretta Preska of the federal court in Manhattan wrote a 47-page opinion today which said the Federal Reserve failed to demonstrate that disclosure would cause banks to suffer “imminent competitive harm” due to their using the Fed’s lending programs. "The board essentially speculates on how a borrower might enter a downward spiral of financial instability if its participation in the Federal Reserve lending programs were to be disclosed. Conjecture, without evidence of imminent harm, simply fails to meet the board’s burden,” she said in her opinion.

Monday’s ruling comes as lawmakers and investors demand greater disclosure in how the government manages a series of programs designed to lift the economy out of its deepest recession in decades. The case arose when two Bloomberg News reporters submitted requests under the federal Freedom of Information Act (FOIA) about actions the Fed took to shore up the financial system in 2007 and early 2008, including an expansion of lending programs and the sale of Bear Stearns Cos to JPMorgan Chase & Co. After the Fed resisted the request, Bloomberg sued to compel disclosure. Preska concluded the Fed "improperly withheld agency records in response to a FOIA request by conducting an inadequate search," she wrote. FOIA obliges federal agencies to make government documents available to the public, subject to various exemptions. Bloomberg News and the Fed did not immediately return requests for comment.

Consider this a major win for transparency and the rule of law. The Federal Reserve has been acting in the shadows in concert with the executive branch without proper oversight from elected officials in Congress. Had they stuck to their dual mandate concerning economic growth and inflation most people would not have become alarmed. However the Federal Reserve has been taking on a quasi-fiscal role that demands much more transparency. And now we are going to get it.

Related posts:

• Bloomberg News sues the Fed under Freedom of Information Act
• Bloomberg News is still after the Fed for more disclosure
• Fed continues to stonewall in Freedom of Information Act suit
• Latest update on Bloomberg suit against Fed
• Bloomberg News vs. Fed: Judgment against Fed attached

Thank goodness someone has some sense. Manhattan Federal District Court Judge Jed Rakoff refused to approve Monday’s Bank of America’s deal with the SEC be cause it may be unfair to the public to accept the settlement.

Bank of America was accused by the SEC of lying to shareholders about its role in bonuses at Merrill Lynch.  Yet, inexplicably, the SEC decide to settle the case for $33 million, allowing Bank of America to release a statement saying it had not admitted any wrong doing.

Bank of America believes that the settlement, which it entered into without admitting or denying the SEC’s allegations, represents a constructive conclusion to this issue.

This deal is a travesty and has now been stopped.

"Despite the public importance of this case, the proposed consent judgment would leave uncertain the truth of the very serious allegations made in the complaint," Rakoff wrote in his two-page order.

"The proposed consent judgment in no way specifies the basis for the $33 million figure or whether any of this money is derived directly or indirectly from the $20 billion in public funds previously advanced to Bank of America as part of its ‘bailout,’" the judge added.

SEC spokesman John Nester declined immediate comment. Bank of America did not immediately return requests for comment.

The Wall Street Journal, citing company emails and people familiar with the situation, added that the Charlotte, North Carolina bank’s loss projections for Merrill bulged by nearly $2 billion two days before the takeover was approved by shareholders.

The bank’s executives, however, decided that the losses were not severe enough to be disclosed publicly before the vote, the paper said.

Good thing we have Judge Rakoff on our side because the SEC has not done right by taxpayers supporting Bank of America with tens of billions or by Bank of America shareholders who have lost considerable sums due to the events associated with the credit crisis.

Source

Judge won’t approve Bank of America, SEC settlement – Reuters

Related posts:

• Judge Rakoff says BofA-SEC deal suggests collusion
• SEC charges BofA of lying to investors over Merrill but settles
• Mea Culpa: I was too bullish on the BofA-Merrill deal
• Merrill – Bank of America deal
• BofA CEO confirms government coerced him into Merrill deal

Bank of America’s story in the BofA-Merrill saga has always sounded dubious at best.  Ken Lewis has always claimed he was doing what was right by shareholders and America, that Gentle Ben and Hammering Hank coerced him into the Merrill deal, that Merrill’s CEO John Thain was not completely above board.

All of this should be looked at with great suspicion, especially in light of the SEC’s charges against BofA for lying to investors about Merrill’s bonuses.  The Washington Post reports:

The Securities and Exchange Commission on Monday charged Bank of America with lying to investors about its plan to pay billions of dollars in bonuses to employees of Merrill Lynch.

Bank of America, which bought the ailing investment bank this year, agreed to settle the charges and pay a $33 million penalty, according to the SEC. The company did not admit or deny wrongdoing.

The agency alleged that Bank of America violated securities law by telling investors in a November 2008 filing that bonuses would not be paid without its consent.

"In fact, Bank of America had already contractually authorized Merrill to pay up to $5.8 billion in discretionary bonuses to Merrill executives for 2008," the SEC said in a statement. "The disclosures in the proxy statement were rendered materially false and misleading by the existence of the prior undisclosed agreement allowing Merrill to pay billions of dollars in bonuses for 2008."

This case represents one of the highest profile instances so far of legal fallout from the financial crisis. The Bank of America settlement involves a company in which the U.S. government owns a large stake, having provided tens of billions of dollars in emergency relief.

Bank of America bought Merrill Lynch for $50 billion under heavy pressure from the U.S. government.

"Bank of America believes that the settlement, which it entered into without admitting or denying the SEC’s allegations, represents a constructive conclusion to this issue," said a Bank of America spokesman, Scott Silvestri. "This is an important step forward for Bank of America and allows us to focus our energies on enhancing stockholder value by continuing to execute our strategies for the long-term success of our business."

He would say that, wouldn’t he?  Let’s rewind a bit, shall we?  Lewis claimed that John Thain gave out bonuses to Merrill employees in an unauthorized way.  He fired Thain and made his name mud in public.  At the time, I said:

As for John Thain, the man has been pilloried publicly, in particular because of the bonus scandal and the office re-design.  But, let me ask you this: was BofA going to underpay its vaunted Merrill money-makers in a one-off bonus round and risk their exiting the company?  No.  If you went to a Fortune 500 company with a new CEO, what would you guess the average amount spent for office renovations would be?

Now we learn the truth: BofA may have authorized $5.8 billion in bonuses all along as I suspected.  BofA will now pay a penalty to avoid having to admit guilt or admitting the allegations. Whether they admit guilt, one should certainly be suspicious.

In my view, Ken Lewis seems to have been self-dealing and empire building throughout this. Clearly he saw Merrill as a jewel in the crown he has been building for years.  When the deal started to go pear shaped, he started pointing his finger at others. I do not see him looking out for his investors. Is anyone going to take the blame for this public relations disaster and black eye at BofA?  Will Ken Lewis resign?  Doubtful.

And it is pretty pathetic that Bank of America gets off with a mere slap on the wrist after the billions in money taxpayers have ponied up for that organization.  There should be absolutely no deal.  We deserve to know exactly what happened.  If BofA has a reasonable defense – fine.  If not, force wrongdoers to resign and suffer the legal ramifications.

But, of course, that’s not going to happen.

Related posts:

• BofA saga continues as John Thain calls Lewis a liar
• Mea Culpa: I was too bullish on the BofA-Merrill deal
• Ken Lewis points the finger at Bernanke and Paulson
• Merrill – Bank of America deal
• BofA CEO confirms government coerced him into Merrill deal

Back in the 1970s, a Japanese car would be laughed off the road in America as a cheap poor man’s vehicle. But thins changed. Remember the Datsun 240Z? That was a car that showed us the Japanese were for real.  Datsun became Nissan and spawned Acura Infiniti, steadily moving up the chain toward even the luxury category.  Eventually Nissan, Toyota and Honda became car brands of merit in the United States – along with their luxury spin-offs Acura, Lexus, and Infiniti.

Today, it is ‘cheap Chinese knockoffs’ that are the common refrain if one thinks of Chinese products in America.  But, perception lags reality because this is changing…drastically.  In fact, when it comes to patents and copyright, the Chinese are now suing the Americans in order to enforce Chinese companies’ intellectual property.  It is the Americans who are selling the knockoffs and the Chinese who own the legal rights they are trying to protect. Wal-mart and Best Buy have gotten caught up in the fray.

The Sydney Morning Herald reports.

Best Buy, Wal-Mart Stores and other companies were sued over dashboard mounts for navigation devices in a rare instance of a Chinese company trying to enforce patent rights in a US court.

Changzhou Asian Endergonic Electronic Technology, based in Changzhou, China, claims the retailers are infringing its patent on a design for the dashboard mounts by selling products made by a rival. It wants cash and a court order to prevent further use of the design. The patent was issued in March.

The closely held company is trying to build a market in the US and filed the complaint to deal with ”the typical Chinese knockoff,” said Changzhou Asian lawyer Chad Nydegger. The company also is suing the manufacturer in China, accusing it of infringing two Chinese patents, he said.

The complaint, filed July 2 in US District Court in Texarkana, Texas, reflects the rising use of the US patent system by Chinese companies. US patent applications by residents of mainland China, which excludes Hong Kong and Macau, surged 12-fold between fiscal years 2000 and 2008, according to the US Patent and Trademark Office.

”The Chinese are becoming sophisticated enough to take advantage of the patent system in the US,” said Brian Nester, a lawyer with Fish & Richardson in Washington who often represents South Korean companies in US patent fights. ”You will see more Chinese companies filing suit in the US.”

You might say what is good for the goose is good for the gander because the United States is famous for trying to protect patents, copyright and intellectual property abroad.  I do know that U.S. diplomats also lobby on behalf of American firms wishing to protect their valuable patents and copyrights.  Now the Chinese government is assisting its companies as well.

”The Chinese government is taking steps to assist companies into enforcing their patent rights both inside China and elsewhere,” Nydegger said. ”My client’s view is China is starting to emerge as a first-world country. There’s been a significant influx of technology and they are starting to make improvements — they are becoming innovators, not just copiers.”

As for the case at hand, look at it as a test case, a beach head for future Chinese legal rights in the U.S.

This may be the case of a Chinese company ”dipping a toe in the water” to see how the US legal system deals with intellectual property issues, said lawyer Robert Krupka of Kirkland & Ellis in Los Angeles, who has represented Japanese companies in US courts.

”They’re very carefully picking and choosing their battles,” he said. ”This is a licensing play, not a real desire to go to court.”

How this case is decided will set a precedent that will be an important step for the Chinese as they seek industrialised first-world status going forward.

Related posts:

• Chinese to start settling trade in Yuan
• Tariffs: Other industries may line up for sanctions against China
• Chinese stock market bubble inflating
• China wants all of Repsol’s Latin American oil assets
• Who is the Rio executive arrested by the Chinese?

Reuters is reporting that the ratings agencies are about to get into some serious legal problems.  You see,during the bubble years, the ratings agencies gave a gold-standard AAA rating to what now seems to be dubious investment vehicles.  Now, investors are angry and they are starting to sue.

Calpers, the biggest U.S. public pension fund, has sued the three largest credit rating agencies for giving perfect grades to securities that later suffered huge subprime mortgage losses.

The California Public Employees’ Retirement System said in a lawsuit filed last week in California Superior Court in San Francisco that it might lose more than $1 billion from structured investment vehicles, or SIVs, that received top grades from Moody’s Investors Service Inc, Standard & Poor’s and Fitch Inc.

SIVs are complex packages of loans and debt, including subprime mortgages and collateralized debt obligations, pooled by investment banks and which then issue debt to investors.

By giving these securities their highest ratings, the agencies "made negligent misrepresentations" to the pension fund, Calpers said. Such ratings, which typically accompany investments with almost no risk of loss, "proved to be wildly inaccurate and unreasonably high."

Calpers seeks unspecified damages.

The ratings agencies deny these claims. ""The claim is without legal or factual merit, and we will take action to have it dismissed," a McGraw-Hill spokesman said.  McGraw-Hill, you will recall, is the same company that created a bit of a stir when it refused to release a book critical of the ratings agencies written by blogger Barry Ritholtz (see my February article “McGraw Hill drops book critical of its own subsidiary”).  The book was picked up by another publisher and has gone on to become widely read and critically acclaimed.

It does make you wonder about the ratings agencies.  Just last week I mentioned that they were up to their old ways again, rating assets from tarnished investment pools Aaa.  While some find their ratings defensible, the conflicts of interest inherent in the ratings agencies’ business models has led others to call for an investigation of ratings practices.  Apparently, these calls have borne fruit. The Financial Time reports:

The Securities and Exchange Commission has created a new group of examiners to oversee credit rating agencies, which came under sharp criticism for their role during the financial crisis.

The SEC has already adopted a number of measures to increase transparency at credit rating agencies, which are paid by the issuers they rate. But greater oversight is needed with officials expected to conduct both routine and special examinations of their activities, Ms Schapiro is set to tell a Congressional oversight hearing on Tuesday.

‘’I also have directed the Commission staff to explore possible new regulations in this area, including limiting the potential for rating shopping,’’ Ms Schapiro said in prepared testimony to the House Financial Services subcommittee on capital markets.

These investigations are long overdue.  The conflicts between the rating agencies consulting business and ratings business are exactly the types of conflicts we saw with audit firms during the tech and telecom bubble in the 1990s.  And this led to disaster at firms like Enron as the Enron auditor Arthur Andersen looked the other way.

Moreover, as it stands today, audited firms actually pay for their ratings, making the ratings agencies revenue stream dependent on the firms they audit. My hope is that conflicts like this can be stopped.  So, I welcome the SEC investigation and look forward to seeing substantive changes.

Meanwhile, it may take legal action like the one being initiated by Calpers to affect real change because, to date, few substantive regulatory changes have been made despite a crisis which is more than two years old.

Related posts:

• McGraw Hill drops book critical of its own subsidiary
• Lawsuits: Rating agencies are next
• S&P cuts ratings of big U.S. banks
• S&P cuts HBOS counterparty credit ratings
• Hungary cut to a notch above junk by S&P

I listened to the first day of the Sonia Sotomayor confirmation hearings for a spot as a US Supreme Court justice. I was very impressed.  The three who impressed me the most were Al Franken (D-MN), Arlen Specter (D-PA), and Sotomayor herself.

Franken was very well-spoken, even inspirational in his commentary after his introductory remarks.  Specter showed himself to be the hard-nosed pit bull of a legislator that we have come to love/hate.  The man is clearly knowledgeable about the issues and jurisprudence in a way that would leave you satisfied with the abilities of our legislators.

Sotomayor, as she described herself, is the epitome of what we should be looking for: someone who decides cases based on the law and nothing more.  If the GOP wants to get Sotomayor on so-called judicial activism, they have a very difficult struggle in front of them.

Below is some Bloomberg Television commentary about the hearings.  If and when I get other footage, I will post it.

Update 1935ET: Here is the transcript of her opening statement via Swampland’s Jay Newton-Small.

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It is refreshing to read the foreign press because they have decidedly different takes on issues.Whether you agree or not, it is important to hear those views.

The Swiss are very negative on the U.S. and their tax fight against UBS. This has them dredging up pass legal skirmishes. Here’s an article from the Swiss daily Tagesanzeiger – a media outlet that is not considered a establishment paper – about Marc Rich.  Remember him?  He’s the wealthy man living in exile who created a scandal when he was pardoned by U.S. President Bill Clinton at the urging of Rich’s ex-wife.  Here’s what the paper had to say (my translation):

U.S. law takes precedence: thanks to this principle and massive financial penalties, the United States has also forced Marc Rich on his knees.

The American oil dealer Marc Rich, living in Zug, got into the crosshairs of the U.S. authorities in the beginning of the eighties. The United States accused him of profiting from untaxed income of 100 million U.S. dollars at his Swiss company, and therefore claimed 48 million U.S. dollars in tax payments.

Request denied

Rich denied the claim. Then a district court judge in New York asked Marc Rich & Co. AG to submit all business documents concerning the oil deals. There were hundreds of thousands of pages. Rich refused. The judge, therefore, punished him with a fine of 50,000 dollars per day. For a full year, the oil dealer transferred a check on Monday and Friday to the U.S. – a total that came to over 20 million U.S. dollars in the U.S.. Only then was Rich ready to deliver the documents to the court.

And as a result, he fell into the crosshairs of the Swiss judiciary. The Office of the Attorney General seized all the remaining documents. An investigation into Rich was opened because of the economic news agency.

100 million U.S. dollars blocked

In the U.S. as well, the then-Attorney General Rudi Giuliani stepped into action, bringing charges against Rich and blocking his assets in the U.S. (real estate, pension funds, etc.). Their value was estimated at around 100 million U.S. dollars.

But that was not enough. Banks which had been associated with Rich in business were put under pressure. They were warned not to receive any money from Rich or to pay out money to him – including his own. Beside U.S. companies, non-American banks with branches in the U.S. became entangled in the wider net of the judge’s ban. "It was this pressure which forced him to capitulate," said "Weltwoche» journalist Daniel Ammann, who in October will publish a biography of Marc Rich ( "The King of Oil," St. Martin’s Press, New York). Under these conditions, Rich could no longer do business transactions. He signed to pay a re-imbursement in U.S. court, although he has always denied the allegations.

According to Ammann, Marc Rich is said to have paid 200 million U.S. dollars, which for 1984 was a huge sum. Did the U.S. win? Ammann: "In the Rich case, the U.S. has not won. They were not not able to get Rich before a court and never were able to obtain the desired documents. But they got the money. "The Americans could have gone through the legal route. This way was just too slow," said Ammann. He calls this attitude of the U.S. in his book "legal isolationism."

While you might abhor Rich and think the Swiss banking system is built on a bunch of tax dodging, this account regarding “legal isolationism” has the ring of truth to it.  Certainly, these same issues are at play in the detention of enemy combatants at Guantanamo Bay.  I would argue they are also at play in the Swiss tax law cases as well. And despite the Obama’ Administration’s claims to break from the past, don’t expect a change in America’s sense of “legal isolationism” any time soon.

Source

Wie die USA den Ölhändler Marc Rich weichklopften – Tagesanzeiger

Related posts:

• UBS is too big for Switzerland
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• Judge stops BofA deal with the SEC
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The video linked below is a must-see piece of journalistic skepticism. The duo at Bloomberg News are discussing the recent alleged theft of trading code by a former Goldman employee Sergey Aleynikov who moved to a hedge fund called Citadel Teza, a hedge fund now being sued by Citadel and founded by Misha Malyshev, who left Citadel in February.  Their commentary is incredulous.  Their tone seems to ask: “Is the Government working for Goldman now?”

Here are a few gems:

• “What is Goldman Sachs doing with this trading code that could manipulate the markets?”
• “And Goldman got on the phone to the Justice Department and got them so fast to nail this guy, it’s almost – you wonder if they have a red line to the government.”
• “It is amazing within one day of Goldman calling they had FBI agents at his driveway doing surveillance.  The next day they arrested him…”
• “It’s interesting that the prosecutor from the testimony that I’ve read, it almost sounds as if he’s working at Goldman Sachs.”

More here

Related

Goldman Sachs Loses Grip on Its Doomsday Machine: Jonathan Weil – Bloomberg

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This comes via the Sydney Morning Herald:

A year ago, after Stern Hu had survived 20-odd rounds of negotiations and won Rio Tinto and Australia an extraordinary 87 per cent price increase for its iron ore contracts, I asked him if he was being too aggressive.

He said he had no qualms with driving as hard a bargain as he could on price. But he had misgivings about whether Rio Tinto should risk its integrity in China by claiming "force majeure" to wriggle out of long-term contracts to chase higher prices elsewhere.

"We acted in accordance with the letter of the contracts, but not the spirit," he said.

One of the ironies and tragedies of Mr Hu’s incarceration, together with his senior staff, is that he is widely known in China and at Rio Tinto for his integrity and quietly spoken good judgment.

He is reputed to know exactly how far to push China without breaking the relationship.

He is said to understand how relationships work, the importance of face, and almost everything that is worth knowing about the Chinese steel industry and the government and industry bureaucracy that tries to manage it.

It was notable that Chinese steel managers spoke up for Mr Hu yesterday even though he stands accused of one of the most serious crimes.

More here

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• Should we expect a protectionist China?
• China detains Rio executive on suspicion of espionage
• China cutting overcapacity
• China’s skyscrapers will be ten times New York
• China: we “will take steps to protect the interests of our domestic industries”

The U.S. has been using the weakness of the UBS banking franchise to shake down the organization for the names of American clients suspected of using the bank to dodge taxes in the United States. As far as the Swiss government is concerned, this would set a bad precedent in the Swiss banking community where Swiss banking secrecy is part and parcel of the attractiveness to foreign clients.  As a result, the government has moved to prevent UBS from handing over names to the IRS.

The Swiss government is arguing that handing over the client details would breach its national bank secrecy rules.

UBS is refusing to release data on 52,000 Americans that hold Swiss bank accounts to US tax authorities who accuse them of tax evasion.

Switzerland’s largest bank, UBS faces a court hearing in Miami on 13 July.

In a case brought under civil law, it stands accused by the US of hiding close to $15bn (£9.33bn) in assets in secret accounts.

‘International conflict’

Back in February, UBS did hand over the details of 250 US clients to American authorities to avoid a criminal case, but it is continuing to refuse to pass on data on the further 52,000.

Back on the first of the month, included in the daily links was an article in the Swiss daily Le Temps, which indicated the precedent set by UBS with the U.S. tax authorities was furthering the passing of data by Credit Suisse to French tax authorities. Clearly, as the economy has faltered, governments are looking to maximize revenue and are cracking down on suspected cases of tax evasion. Below is my translation of the publicly available bits of the French-language article on Credit Suisse:

Fearing retaliation, the [Credit Suisse] group is requiring its customers allow it to transmit their identity to the French tax authorities. The measure applies to all holders of French-traded securities.

Fifteen days after the signing of a new tax treaty between Switzerland and France on 11 June, Credit Suisse is taking unusual steps to avoid falling into the focus of the French tax authorities. Fearing new prosecutions of customers not reporting.. the bank plans to close the accounts of customers who do not have the ‘smell of holiness’ with the French tax authorities.

Clearly, things are getting out of hand as far as the Swiss government is concerned because Switzerland is losing its status among wealthy private clients.  In fact, Bank of America, through its acquisition of Merrill Lynch, recently dethroned UBS as the top dog in Private Banking.  UBS has been shrinking in share due to its financial woes and the uncertainty about bank secrecy. This is why the Swiss are fighting back now.

I should also point out that the Germans are getting in on the more aggressive policing of tax dodging. It seems as if everyone is using this economic crisis to try and pry open Swiss banking secrecy laws.  The 13 July hearing in Miami regarding UBS is the next important date in this effort.

Related posts:

• Swiss citizens think a large Swiss bank will fail
• Credit Suisse and UBS have hands out for more capital
• UBS reports Tuesday: brace yourself
• FDIC Friday Night: Silverton Bank is seized
• SunTrust Bank receives insured deposits of Omni National Bank

"In many ways the effect of the crash on embezzlement was more significant than on suicide. To the economist embezzlement is the most interesting of crimes. Alone among the various forms of larceny it has a time parameter. Weeks, months, or years may elapse between the commission of the crime and its discovery. (This is a period, incidentally, when the embezzler has his gain and the man who has been embezzled, oddly enough, feels no loss. there is a net increase in psychic wealth.) At any given time there exists an inventory of undiscovered embezzlement in – or more precisely not in – the country’s business and banks. This inventory – it should be called the bezzle. It also varies in size with the business cycle."

-John Kenneth Galbraith, The Great Crash

Well, it seems history is repeating itself because the bezzle is shrinking again as many frauds are now uncovered.  Witness the latest in South Africa:

Hundreds of investors have been fleeced of up to 10 billion rand ($1.5 billion) in what could be South Africa’s biggest corporate fraud, a private investigator and lawyer said on Thursday.

Barry Tannenbaum, a South African businessman living in Australia, lured investors with the promise of 200 per cent annual returns linked to pharmaceutical imports, and forged AIDS drug orders to reassure funders when money started to dry up.

The scheme is still unravelling but lawyers and investigators believe hundreds of investors including top businessmen from South Africa, the United States, Germany and Australia, were involved, losing up to 10 billion rand.

To my mind, the fact that so many frauds are being uncovered speaks to an economic climate of laxity of regulation which was not only manifest in the U.S.  This was a global phenomenon as the above story attests.  Paul Kedrosky has a nice post out called “More Good News: A Bear Market for Ponzis.”  Definitely worth a read.

My question is this:  now that we see what kinds of blatant thievery was being perpetrated while regulators were sleeping at the wheel, do we have enough political will to make the necessary changes? 

To date, the answer to this question seems to have been no.  The Obama Administration will tell you the answer is yes because they are making sweeping regulatory changes – in part, by giving the Fed more power as the systemic risk regulator.  But, as I see it, the Fed hasn’t really been knocking the ball out of the park.  Why would we give them more power?  A gift to the Fed – To “SiRR,” with love?

Here’s the video:

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We have just learned that Fiat has successfully completed its deal with Chrysler.  This means that the bankrupt ‘Old Chrysler’ will now have far fewer cash and assets available for creditors and that it will be liquidated with large or total losses likely for creditors.  Dissident creditors tried to get their case heard by the Supreme Court.  But this was rejected, paving the way for the Fiat deal. 

Key to why things turned out as they did is the use of section 363 of the bankruptcy code, which allows a company to sell assets without creditor approval and before a re-organization plan can be submitted.  The sale produces cash available to creditors in the eventual liquidation of the company. The sold assets can continue to operate as before, but in a re-organized fashion.  This is exactly what the Obama Administration wanted for Chrysler. So, in the case of the government versus bondholders count round one to the government.

Now, it’s time to turn to General Motors. This is a very important case because GM is such a big player in so many arenas. Think of Chrysler as a  test run of GM, the real US auto emergency.  A bankrupt GM that does not receive the same quick section 363 treatment that Chrysler received would be a very nasty  shock to the U.S. and global economy. 

The problem is that General Motors is a whole different case altogether.  And I am not so sure the government is going to be successful here. Here’s why. While the Chrysler deal involved a sale of the principal assets, the GM bankruptcy looks more like a stealth re-organization which violates the spirit of section 363. Back in 2004, Daniel Glosband, a bankruptcy expert at the law firm Goodwin Proctor reflected on this issue at the site FindLaw. (emphasis added below)

Advantages of a Section 363 sale include speed, transfer of assets free and clear of encumbrances and interests, transfer of restricted contracts and avoidance of exposure to claims under fraudulent transfer laws. For a seller, the Section 363 process eliminates director and officer exposure for the sale and limits exposure for breach of representations and warranties. Cosmic balance, however, requires a few clouds to accompany the silver linings.

Traditionally, the sale of a business in chapter 11 was accomplished through a plan of reorganization that identified and dealt with each class of creditors and equity holders. The sale plan was described to the affected creditors and equity holders in a prospectus-like disclosure statement and put to a vote. Bankruptcy law required acceptance of the plan by specified majorities of affected parties, a cumbersome process that lasted for several months and sometimes several years. Initially, courts were skeptical of Section 363 sales that circumvented the protective reorganization plan process. Early cases required the debtor to prove that a sale outside of a reorganization plan was necessary, for example by showing that the debtor’s business had insufficient cash flow to survive the full plan process. Lately, however, the Section 363 sale, which can be completed in as little as two to three months, has become the preferred method for sales of distressed businesses.

Clearly, if the courts decide that the government is trying to circumvent the normal Chapter 11 process by invoking section 363, you are going to have a problem.  The Obama people are going to argue that GM is dependent on government monies to exist and that it cannot ‘survive the full plan process.’  But, creditors are going to contest this case and they may have more success than they did at Chrysler.

Stay tuned.

As for Fiat, the last paragraph of the FindLaw article describes quite well why their stock has popped on the news of a successful Chrysler deal.

The goal of the purchaser at a Section 363 sale is to take advantage of the financial distress of the seller and the power of the Bankruptcy Code to make a safe, profitable investment. While a Section 363 sale is a complex exercise with risks for the unwary, it can be an efficient avenue for a well-prepared buyer to acquire a financially troubled business.

Related posts:

• GM gets the green light on its section 363 bankruptcy
• The case of the dissident Chrysler bondholders
• Opel and Fiat spells bankruptcy for Chrysler and GM
• Obama ready to put Chrysler into bankruptcy
• Chrysler: bulls make money, bears make money, pigs get slaughtered

This case is going to the Supreme Court of the United States.  It will be a landmark ruling when the issue is decided. Take a look at what David Boies has to say about the issue.

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Here is the SEC press release regarding the fraud and insider trader alleged to have been perpetrated at Countrywide Financial, now a part of Bank of America (emphasis added):

SEC Charges Former Countrywide Executives With Fraud

Former CEO Angelo Mozilo Additionally Charged With Insider Trading

FOR IMMEDIATE RELEASE
2009-129

Washington, D.C., June 4, 2009 — The Securities and Exchange Commission today charged former Countrywide Financial CEO Angelo Mozilo and two other former executives with securities fraud for deliberately misleading investors about the significant credit risks being taken in efforts to build and maintain the company’s market share. Mozilo was additionally charged with insider trading for selling his Countrywide stock based on non-public information for nearly $140 million in profits.

The SEC alleges that Mozilo along with former chief operating officer and president David Sambol and former chief financial officer Eric Sieracki misled the market by falsely assuring investors that Countrywide was primarily a prime quality mortgage lender that had avoided the excesses of its competitors.

Excerpts
of E-Mails From
Angelo Mozilo

The SEC’s enforcement action alleges that from 2005 through 2007, Countrywide engaged in an unprecedented expansion of its underwriting guidelines and was writing riskier and riskier loans, which these senior executives were warned might ultimately curtail the company’s ability to sell them. Countrywide was required to disclose these important trends to its investors in the Management Discussion and Analysis portion of its SEC filings, but failed to do so.

“This is the tale of two companies,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Countrywide portrayed itself as underwriting mainly prime quality mortgages using high underwriting standards. But concealed from shareholders was the true Countrywide, an increasingly reckless lender assuming greater and greater risk. Angelo Mozilo privately described one Countrywide product as ‘toxic,’ and said another’s performance was so uncertain that Countrywide was ‘flying blind.’”

Rosalind Tyson, Director of the SEC’s Los Angeles Regional Office, added, “Angelo Mozilo had access to detailed and alarming information about Countrywide’s operations. He knew that Countrywide was gambling with increasingly risky mortgages and he kept those details from investors while he was actively taking his own chips off the table.”

---

Additional Materials

• Litigation Release No. 21068
• SEC Complaint

---

According to the SEC’s complaint, filed in federal district court in Los Angeles, Countrywide’s annual reports for 2005, 2006, and 2007 misled investors in claiming that Countrywide “manage[d] credit risk through credit policy, underwriting, quality control and surveillance activities.” Its annual reports for 2005 and 2006 falsely stated that the company ensured its “access to the secondary mortgage market by consistently producing quality mortgages.” The annual report for 2006 also falsely claimed that Countrywide had “prudently underwritten” its Pay-Option ARM loans.

The SEC alleges that Mozilo, Sambol, and Sieracki actually knew, and acknowledged internally, that Countrywide was writing increasingly risky loans and that defaults and delinquencies would rise as a result, both in loans that Countrywide serviced and loans that the company packaged and sold as mortgage-backed securities.

According to the SEC’s complaint, Countrywide developed what was internally referred to as a “supermarket” strategy that widened underwriting guidelines to match any product offered by its competitors. By the end of 2006, Countrywide’s underwriting guidelines were as wide as they had ever been, and Countrywide made an increasing number of loans based on exceptions to those already wide guidelines, even though exception loans had a higher rate of default.

The SEC’s complaint alleges that Mozilo believed that the risk was so high that he repeatedly urged that Countrywide sell its entire portfolio of Pay-Option loans. Despite these severe concerns about the increasing risks that Countrywide was undertaking, Mozilo, Sambol, and Sieracki hid these risks from the investing public.

The SEC further alleges that Mozilo engaged in insider trading of Countrywide stock that he owned. Mozilo established four executive stock sale plans for himself in October, November, and December 2006 while he was aware of material, non-public information concerning Countrywide’s increasing credit risk and the expected poor performance of Countrywide-originated loans. From November 2006 through August 2007, Mozilo exercised more than 5.1 million stock options and sold the underlying shares for total proceeds of nearly $140 million, pursuant to written trading plans adopted in late 2006 and early 2007.

The SEC’s complaint alleges that each of the defendants violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and aided and abetted violations of Sections 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. The complaint further alleges that Mozilo and Sieracki violated Rule 13a-14 under the Exchange Act. The SEC’s complaint seeks permanent injunctive relief, officer and director bars, and financial penalties against all of the defendants and the disgorgement of ill-gotten gains with prejudgment interest against Mozilo and Sambol.

# # #

For more information, contact:

Rosalind R. Tyson
Regional Director, SEC’s Los Angeles Regional Office
(323) -965-3893

Michele Wein Layne
Associate Regional Director-Enforcement, SEC’s Los Angeles Regional Office
(323) 965-3850

John McCoy
Regional Trial Counsel, SEC’s Los Angeles Regional Office
(323) 965-3890

http://www.sec.gov/news/press/2009/2009-129.htm

Related posts:

• Countrywide: California sues too
• Ex-Countrywide CEO is the new Ken Lay
• Former Countrywide head Mozilo is charged by the SEC
• Florida sues Countrywide
• More reason BofA is crazy to take on Countrywide